What Is Lending Discrimination?
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), adding “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 loans in the area where the lender operates, the policy may be considered discriminatory.
5 steps to take to protect yourself from lending discrimination
1. 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 can help educate you to look out for red flags. “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.
2. ask probing questions
One of the best tools you can use to combat lending discrimination is to ask questions, Palmer said. “If you don’t understand it, don’t sign it.” Lenders should provide you with a loan estimate within three business days of receiving your mortgage application. Use these loan estimates to compare the rates, fees and loan terms each lender is offering.
If the rate or fees you’re quoted seem unusually high, start asking questions:
- Why is this rate so high?
- Can I see your rate sheet?
- Can you waive or negotiate any of these fees?
- Why is this rate so different from your online rates?
A loan officer should provide detailed answers about the rates and costs they quote. For example, the rate quote on a loan estimate might be different from a generic online quote if you have a low credit score, you decide to buy a condo instead of a single-family home or the loan amount is under $100,000. No matter what, clarify anything you don’t understand.
3. shop with multiple lenders 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.
The bottom line: Don’t accept the first rate offer you’re quoted. Shop with at least three to five different lenders to ensure you get your best deal.
4. include online lenders in your mortgage search
Having online-only lenders in the mix when you shop around might limit the possibility of being denied a loan because of race or other similar factors. “We’re eliminating the human involvement which, whether intentionally or not, can lead to discrimination,” Morse said of online lenders.
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,” Palmer 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.
Mortgage loans are harder to get and more expensive for minorities
Aspiring Hispanic-white and Black homebuyers were denied mortgages at a higher rate than non-Hispanic white borrowers, according to the 2019 Mortgage Market Activity Trends Report. The report is based on data collected from the Home Mortgage Disclosure Act (HMDA) and compiled by the Consumer Financial Protection Bureau (CFPB).
The report also showed that a larger share of Hispanic-white and Black borrowers ended up with higher-priced loans compared to non-Hispanic white applicants. A higher-priced loan is a mortgage made at an annual percentage rate (APR) 1.5 percentage points above the average prime offer rate (APOR) for similar loans on first mortgages. For second mortgages, the APR must exceed the APOR by 3.5 percentage points.
The table below shows the denial rate and higher-priced mortgage trends from the 2019 report:
|Race||Denial rate for all purchase loans||Incidence of higher-priced purchase mortgages|
|Black or African American||15.9%||22.3%|
|Source: Consumer Financial Protection Bureau (based on 2019 HMDA data)|
The difference in denial rates among racial groups may be due in part to factors such as credit score, credit history, DTI ratio and combined loan-to-value (CLTV) ratio, according to the CFPB report. Lenders weren’t required to report these factors under HMDA rules until 2018. The factors may suggest that low credit scores, heavier debt loads and low down payments may lead to higher denial rates for minority borrowers.
Choosing government-backed purchase loans may contribute to a larger percentage of higher-priced loans. In 2019, 60.6% of Blacks and 48.8% of Hispanic whites took out nonconventional (FHA-insured or VA-backed) loans to buy a home.
In 2019, 36.5% of loans backed by the Federal Housing Administration (FHA) were higher-priced due, in part, to higher FHA mortgage insurance costs. The costs include both an upfront and annual mortgage insurance premium.
How the Home Mortgage Disclosure Act (HMDA) helps track lending discrimination
The Home Mortgage Disclosure Act (HMDA) requires lenders to disclose data about the mortgages they make. The data is reviewed by public officials to ensure lenders are meeting the needs of their communities. It’s also used to spot lending patterns that may be used in mortgage discrimination cases. HMDA lenders provide detailed information from a loan application that includes:
- The type, purpose and characteristics of each mortgage application.
- The census-tract information for each property.
- The pricing of the loan.
- The race, ethnicity, sex, age and income of each applicant.
- The approval or denial status of the application.
The CFPB uses HMDA data to determine if lenders are discriminating, intentionally or unintentionally, against borrowers. The CFPB could sue a lender if discrimination violations are suspected. The CFPB tracks enforcement actions on its website.
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 general can 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 claims on 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 online or find a HUD-certified counselor to discuss your situation.