The law bans discrimination in lending based on race, gender and many other factors, but this is no guarantee that it won’t happen. In fact, Black and nonwhite Hispanic borrowers from 2005 to 2020 paid interest rates that were nearly 0.5 of a percentage point higher than non-Hispanic whites, according to a 2020 report by the Federal Reserve Bank of Atlanta.
Racial disparities have also been identified in the federal government’s business lending programs. Businesses in majority-white areas of Los Angeles received Paycheck Protection Program loans during the pandemic at 1.5 times the rate of businesses in majority-Black areas, according to a May report by Reveal from The Center for Investigative Reporting.
If you think you have been unfairly denied a loan or have received less favorable loan terms than you deserved for any reason, you can take action. Here’s what to do about it and some ways to identify discriminatory lending practices.
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What Is Lending Discrimination?
Lending discrimination occurs when a credit decision is based on factors other than the applicant’s creditworthiness. Two federal laws specifically protect borrowers from discriminatory lending practices:
— The Fair Housing Act. This law was passed in 1968 and forbids lenders from discriminating against a renter or homebuyer based on race, color, religion, sex, national origin, disability or familial status.
— The Equal Credit Opportunity Act. This law, enacted in 1974, prohibits lenders from discriminating against applicants based on factors such as race, color, religion, origin, sex, marital status, age and receipt of public assistance.
What lenders can do, though, is analyze the activity on your credit reports and use your credit scores that are derived from that data. In fact, FICO scores were developed to offset human bias.
“The concept of credit scoring was introduced to replace subjective human judgment with data and fact-based credit scores that are applied consistently, regardless of race or ethnicity or other protected factors,” says Sally Taylor, scores vice president at FICO.
Lenders may also review the information on your credit application, such as your income and employment, as well as your assets and household expenses. Using credit scores and application details, lenders should have everything they need to make swift, objective decisions based entirely on the numbers.
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What Are the Types of Lending Discrimination?
When you’re shopping for a credit card or loan, be aware of three basic types of lending discrimination:
— Overt discrimination. A lender openly discriminates against someone based on prohibited factors, and it is usually obvious. The lender may not offer loans to people born outside the U.S., for example.
— Disparate treatment. This happens when you feel you are not receiving the same treatment as other customers and occurs either intentionally or unintentionally. One group may receive better interest rates than another, for instance. They could be “making you feel like you’re obligated or they’re doing you a favor,” says Hermond Palmer, vice president of housing programs at the National Foundation for Credit Counseling. Disparate treatment also includes redlining, which is denying mortgages to otherwise creditworthy applicants based on race or where they want to buy.
— Disparate impact. Even a neutral lending policy or practice can result in an adverse effect on a protected class of people, and that too can be a form of discrimination. For example, one race of people may receive better loan offers than other races. Kerry Mitchell Brown, equity strategist, cultural architect and founder and principal of KMB, says, “Based on the type of job the person has or the area they live in, they can be considered high risk.”
What Lenders Can and Can’t Ask You
You can expect lenders to ask a lot of questions, but that doesn’t mean they can quiz you about anything. Your lender can ask you questions to identify objective markers of credit risk.
Questions about job history, income, assets and debts, and credit history are all fair game. A lender’s questions about your involvement in a lawsuit or a divorce — either one could affect your financial situation — as well as your ethnicity are also legal. Lenders collect ethnic information to enable the government to track how different groups are treated when it comes to credit.
Other questions are illegal under lending discrimination laws. You can’t be asked about family planning or health issues, including disabilities. A lender may not ask if you are pregnant or plan to start a family, for instance.
A lender may consider your marital status if you are relying on income from your spouse or former spouse, for example. The lender may also ask about dependent-related expenses. Information about marital status and dependents can also be used to qualify you for first-time homebuyer or other special loan programs with income limitations.
How Can You Protect Yourself From Discrimination?
You can take steps to reduce the potential for lending discrimination, including:
— Familiarize yourself with the lending process. Education is one of the best ways to empower yourself. Long before you apply, take the time to understand how the credit product you want works. What are average fees, interest rates and terms on loans or lines of credit for someone with a credit rating similar to yours?
— Prepare questions and supporting documents. If you are denied credit or approved but believe you deserve better terms, get ready to ask questions. What is the reason for the high annual percentage rate or the low loan amount? Collect supporting documents to address any issues that could arise.
— Get your credit up to speed. Because lenders rely heavily on your credit report and credit score, review them before you search for any credit product. FICO scores range from 300 to 850, and higher numbers indicate lower credit risk. Scores below 620 are considered subprime, according to the Consumer Financial Protection Bureau. A lender turning you down or offering higher rates if your credit is unsatisfactory is not discrimination. You can increase your credit score by paying bills on time and reducing revolving debts.
— Shop around. If you’re seeking flexible lending standards, consider a community bank or credit union, Brown says. Smaller lenders that cater to your demographic can make you feel more welcome, help you build your credit and give greater access to credit products. Wherever you go, though, make sure you get several quotes to ensure that the deal is the best you can get.
— Do not sign anything until you are satisfied. Avoid making rushed credit decisions, and don’t skip reading contracts. Only sign a contract when you are confident that you have been treated equitably.
What to Do if a Lender Has Discriminated Against You
If you suspect that you have been a victim of lending discrimination, start by reaching out to your state attorney general’s office and filing a complaint. You may also go a step further and submit a complaint at the federal level with the Consumer Financial Protection Bureau.
If you have a complaint about a mortgage, you can contact the Department of Housing and Urban Development and request an investigation.
Still not satisfied? You may consider filing a lawsuit against the lender for discriminatory practices.
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