What Is Lending Discrimination?
If you are gearing up to purchase a home, you should be aware of lending discrimination and the many laws that exist to help protect you against it. You might also be aware that politicians are hard at work modifying the rules surrounding lending discrimination in general, and the coming changes will undoubtedly affect mortgage lending.
In May, for example, President Donald Trump signed into law a bipartisan plan to roll back Obama-era Dodd-Frank rules, actually making it easier for banks for discriminate against minority and marginalized communities when lending.
“Dodd-Frank stopped a lot of very abusive practices. The interest rates and the high fees, how loan originators were compensated — a lot of the abusive practices that really drove the [housing] crisis were addressed in the law, and one of the biggest changes was that it established the CFPB [Consumer Financial Protection Bureau],” said Melissa Stegman, a senior policy counsel at the Center for Responsible Lending.
What is lending discrimination?
Lending discrimination happens when a lender makes an adverse action against someone based on a protected class. Protected classes are groups protected from discrimination under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).
The ECOA prohibits lending discrimination based on:
- national origin
- physical or mental handicaps
The FHA expands that protection to include familial status and forbids discrimination in any part of transactions related to residential real estate. According to the Equal Employment Opportunity Commission, every U.S. citizen is a member of some protected class.
When someone is discouraged to apply for a mortgage based on their race, for example, that’s against the federal laws. If all else is equal but a Hispanic or black borrower pays a higher APR on a personal loan than a white borrower under the same lender, that’s lending discrimination.
What is HMDA?
The rollback, dubbed the Economic Growth, Regulatory Relief and Consumer Protection Act, included a provision that amended the decades-old Home Mortgage Disclosure Act (HMDA), which requires financial institutions to maintain, report and publicly disclose loan information about mortgages.
In 2010, Dodd-Frank put the CFPB in charge of enforcing HMDA, and in 2015 the bureau finalized a rule that expanded the act to require additional information from lenders like mortgage loan underwriting and pricing data (for example: ethnicity, race and loan type and purpose, etc.). But, lenders didn’t have to follow most of the new rule until 2018 and 2019.
According to a Pew Research Center analysis of 2015 HMDA data, minority applicants were approved for mortgages at a lower rate than white applicants with comparable applications. The analysis revealed 27.4% of black applicants and 19.2% of Hispanic applicants were denied mortgages, compared with about 11% of white and Asian applicants.
How will the rollback affect HMDA?
The provision in the rollback reduced the number of lenders required to disclose more detailed lending data to the federal government. Now, lenders that originate fewer than 500 mortgage loans or 500 HELOCs in the preceding two years will not be required to report more-detailed lending data.
According to a letter penned by The Center for Responsible Lending, the National Community Reinvestment Coalition, and the National Consumer Law Center sent to Congress March 1 2018, the rollback means about 85 percent of banks and credit unions are exempt from the HMDA reporting requirement essential to identifying abuses and trends in lending discrimination.
“If [lenders] don’t have to report the data anymore, I think it’s just going to be that much more difficult for borrowers to be able to prove that [discrimination] can be a problem,” Stegman said.
Under the leadership of a Trump-appointed acting director, the CFPB is making some other changes that could loosen the reins on lending. Mick Mulvaney, the CFPB acting director, also stripped enforcement powers for the Office of Fair Lending and Equal Opportunity in February 2018.
How to avoid discrimination when shopping for a mortgage
It can be tough to identify (and even tougher to prove) if you’ve been discriminated against in the mortgage process.
“You would need strong data, through HMDA, to be able to identify if a lender is giving loans at higher rates to you, all things else being equal,” Stegman said. “Someone who is an individual applying for a loan would have no idea that that trend exists.”
Though it may be difficult for an individual to prove discrimination without access to trend data, it’s still important to understand signs of discrimination so you know what to look out for.
Learn to identify unfair lending practices
According to the law, lenders may ask you for most of the information that could identify you as a protected class except for your religion, but they can’t legally use that information to discriminate against you in lending.
Examples of lending discrimination include but are not limited to:
- A lender or loan officer discouraging someone from applying for a mortgage based on a protected class or because they get public assistance
- A lender imposing unfair terms such as a higher interest rate, additional fees, a different repayment term or larger down payment on a loan because the applicant falls under a protected class.
- A lender asking about a borrower’s plans for having a family
- A lender requiring a borrower to add a cosigner on a loan even though they meet the requirements
- A lender discouraging a borrower from purchasing a home because of the racial or religious makeup of the area
- A lender or loan officer offering you different terms on the phone than they do in person
- A lender denying a borrower a loan without an explanation
“The best way to try to avoid discrimination is to talk to many different lenders,” says Tendayi Kapfidze, LendingTree’s chief economist.
Comparing the offers you get from different lenders may be your best defense against discrimination, because you can see if one lender is offering you significantly different terms than other lenders. That may not only be an indication of lending discrimination, but it gives you a good chance at accepting the best terms offered to you. In addition, using a marketplace like LendingTree allows you to potentially compare multiple offers in minutes.
What you can do if you’ve experienced lending discrimination
If you get approved for a loan but feel you didn’t get the best terms, you can try to negotiate. Fees on the mortgage, such as those charged for origination, application and processing, may be negotiated.
You may ask the lender for what’s called a rate sheet — a list of mortgage rates issued by the lender. The rate sheet is an internal document so you may or may not be allowed to see it, but it’s worth a try to see where your offer stands compared with comparable borrowers. If you reject the loan terms, you also have the right to know the specific reason you were offered less favorable terms than you applied for.
If you are denied, you have the right to know why. The lender must give you the specific reason you were rejected if you ask within 60 days. It’s not enough to tell you you failed to meet their minimum standards. They must be specific, like telling you your income was too low to qualify for a mortgage.
Regardless of being approved or denied, if you feel you’ve been discriminated against you can also:
- Complain to the lender.
- Check with your state’s attorney general office to see if any laws have been broken. Your state may have its own equal opportunity laws, as many states do.
- Sue the lender. If you win, you can recover the money you spent in the legal battle and may be awarded punitive damages if the discrimination is found willful. If you can find others with the same claim, you may file a class-action lawsuit with a group.
- File a complaint regarding a violation of the ECOA with the CFPB and one regarding an FHA violation to the U.S. Department of Housing and Urban Development (HUD). HUD complaints must be filed within one year.
Minority-focused lending programs
While there are no federally funded mortgage programs established to help specific minority groups achieve homeownership, there are several federal, state and nonprofit programs available to assist low-income Americans in qualifying for mortgages. The programs offer government-backed loans that carry less strict income and credit requirements for qualification.
These loans may be beneficial to members of minority ethnic groups who historically have had lower homeownership rates and earned lower median income than non-Hispanic whites.
Here are a few loans you may want to consider if you are finding it difficult to qualify for a mortgage or saving up a down payment.
FHA loans are backed by the Federal Housing Administration, so the lender won’t experience a loss if you default on the mortgage. Because they carry less risk, the loans carry competitive rates, and require lower down payments and closing costs than conventional loans.
FHA loans allow borrowers with FICO credit scores as low as 580 to make a down payment of as little as 3.5% of the purchase amount. Borrowers with lower credit scores may qualify to put down as little as 10% of the purchase amount. FHA loans may be insured by the the FHA, but buyers must typically pay the cost of mortgage insurance.
The United States Department of Agriculture guarantees home loans for qualified low-income Americans purchasing homes in rural areas. The loans generally require no down payment and borrowers may receive rates as low as 1%.
Generally, the home must be located an area with a population of 35,000 or less to be eligible for a USDA loan. Borrowers must earn an adjusted income below the low income limit for the area where the home is located.
The Department of Veterans Affairs (VA) backs mortgage loans for service members, veterans and eligible surviving spouses. VA guarantees a portion of VA home loans, so buyers can receive more favorable terms. VA loans require no down payment or primary mortgage insurance. To be eligible for a VA loan, applicants must meet credit and income requirements, have a valid Certificate of Eligibility (COE) and demonstrate an ability to meet the monthly mortgage payments if approved.
The VA also offers a Native American Direct Loan program for to help eligible Native American Veterans finance a home purchase or build on Federal Trust Land, or reduce the interest rate on a VA loan.
Good Neighbor Next Door program
If you serve your community as a law enforcement officer, firefighter, emergency medical technician or teacher, the FHA offers housing loans through its Good Neighbor Next Door program.
The program helps those employed full time in one of the aforementioned professions reduce the costs associated with homeownership. Qualified borrowers receive a 50% discount off the listing price of available homes in a HUD revitalization area. Borrowers must agree to live in the home as their sole residence for a minimum of three years. Find more about the program here.