Lending discrimination is when a lender receives a mortgage application and bases their decision on factors other than creditworthiness, such as race, color, sex, religion or national origin. Despite federal laws prohibiting it, lending discrimination continues to make the dream of homeownership more costly and harder to achieve for people of color and other marginalized groups.
What is lending discrimination?
Lending discrimination is the illegal act of basing a decision to offer a mortgage on:
- National origin
- Marital status
- Familial status
- Enrollment in public assistance programs
- Physical or mental handicap
Although discrimination on the basis of gender identity and sexual orientation isn’t specifically prohibited, LGBTQ borrowers may be protected under the sex discrimination statutes in federal law.
There are two federal laws that specifically prohibit lending discrimination: the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). The factors listed above are considered “protected classes” under federal law.
Lenders are not allowed to:
- Steer you away from applying for a loan based on your protected class.
- Charge higher interest rates or fees based on your protected class.
In addition, a loan officer or lender may not:
- Ask you whether you are divorced or widowed.
- Ask if you’re married if you don’t live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin).
- Ask about your spouse unless you need their income to qualify for the loan or live in a community property state.
- Ask about your plans for starting or raising a family.
- Ask if you receive alimony, child support or separate maintenance payments unless you need the income to qualify for the loan.
- Base the loan on your age unless you’re too young to sign a contract (typically under 18).
Understanding the different types of lending discrimination
There are three types of lending discrimination: overt, disparate treatment and disparate impact.
Overt discrimination is usually obvious, such as when a lender won’t consider the income of a woman on maternity leave until she returns to work.
Disparate treatment may come down to a feeling that you’re being treated differently. “If you feel like you’re not being treated like a valued customer, that’s another form of discrimination,” said Hermond Palmer, vice president of housing programs at the National Foundation for Credit Counseling (NFCC). He added: “They’re making you feel like you’re obligated or they’re doing you a favor.”
Disparate impact is unintentional discrimination that can occur when a lender’s policy has a bigger impact on a particular protected class. For example, a lender might make the business decision not to offer loans under $100,000. However, if a disproportionate number of minority borrowers can’t qualify for loan amounts above $100,000 in the area where the lender operates, the policy may be considered discriminatory.
5 steps to take to protect yourself from lending discrimination
1. Ask questions
One of the best weapons or tools you can use to combat lending discrimination is to ask questions, Palmer said. “If you don’t understand it, don’t sign it,” he said. Additionally, make sure you receive loan offers in writing; lenders are required to provide you with a loan estimate within three business days of receiving your mortgage application.
2. Learn the basics of mortgages before you apply
A little knowledge goes a long way, and learning mortgage and real estate terms before you apply for a mortgage is worth the effort. “You’ve got to do a little research to know what to expect, and then have a basis of comparison,” Palmer said. By doing some homework ahead of time, you’ll have an idea of whether you’re being charged a higher interest rate than is normal for someone with your credit score, assets and income, he added.
3. Comparison shop for your mortgage
Computer-generated pricing systems may unintentionally discriminate against minority borrowers, who tend not to rate shop as often as white borrowers, according to a recent study by researchers at the University of California, Berkeley. “The way the algorithm prices mortgages to you is betting that you’re going to accept a higher-priced mortgage if you are a Latinx or African American,” said Adair Morse, associate professor of finance at the Haas School of Business at UC Berkeley.
4. Shop for your mortgage with online lenders
Choosing an online comparison site may not only get you a more competitive rate, but it could also reduce the number of denials based on race or other similar factors. “We’re eliminating the human involvement, whether intentionally or not, that can lead to discrimination,” Morse said. As a result, the study showed financial technology (fintech) lenders’ decisions to reject or approve a loan were not based on a borrower’s minority status.
5. Don’t be pressured into a loan you don’t want
Lenders shouldn’t steer you into a product that doesn’t fit your financial needs. “I had a situation where a person was trying to intimidate me,” Palmer recalled when he inquired about a refinance and the lender insisted he take out an interest-only loan. “Because I stuck to my guns, I was not one of the people that got caught up, unfortunately, in the Great Recession,” he said. If the terms of your loan don’t make sense or you feel undue pressure, listen to that gut instinct. Palmer also recommended that borrowers contact a HUD-certified housing counseling agency for guidance. A housing counselor can coach you through the process and help you make the decision that’s best for you.
What to do if you’re a victim of lending discrimination
Lending discrimination is a serious offense. If you believe a lender has discriminated against you, here are ways to get help:
- Speak to your lender’s manager.Seek out the manager or owner of the company to get their attention if you aren’t getting anywhere with your loan officer.
- Contact the Attorney General’s office in your state. Your state’s attorney generalcan tell you if there are additional equal opportunity laws where you live, and advise you on your rights.
- File a complaint with the Consumer Financial Protection Bureau. The CFPB investigates lending discrimination complaints. You can also check to see if a lender has outstanding lending discrimination claimson record with the agency.
- File a housing discrimination complaint with your local HUD Fair Housing and Equal Opportunity (FHEO) office. You can call the FHEO office in your region, file a complaint onlineor find a HUD-certified counselor to discuss your situation.