Denying loans or treating applicants unfairly based on personal characteristics like race, gender or national origin should be a thing of the past, but unfortunately, unjust practices continue to plague the mortgage industry.
— In October, the Consumer Financial Protection Bureau and the Justice Department ordered Fairway Independent Mortgage Corp. to pay a $1.9 million penalty and offer $7 million in loan subsidies for allegedly discriminating against majority-Black neighborhoods in Birmingham, Alabama. The agencies charged Fairway with favoring white borrowers in its placement of loan offices, marketing campaigns and referral processes and ignoring evidence that it was neglecting Black customers.
— That same month, the Justice Department sued Rocket Mortgage along with an appraisal management company and an individual appraiser for allegedly reducing the appraised value of a refinance applicant’s home based on her race and for retaliating when she reported the incident.
— In November, the CFPB ordered Townstone Financial to pay a $105,000 penalty for allegedly discouraging Black homebuyers from applying for mortgages.
What Is Lending Discrimination?
Lending discrimination occurs when a lender treats people differently based on characteristics that they share with a protected group. Lending discrimination might take the form of refusing a loan, discouraging someone from applying for a loan or charging a higher interest rate.
Lending discrimination based on protected characteristics is illegal under the Equal Credit Opportunity Act, and mortgage discrimination based on protected characteristics is prohibited by the Fair Housing Act.
The characteristics that are protected from lending discrimination at the federal level are race, color, religion, national origin, sex, sexual orientation, gender identity, marital status, age, income from public assistance programs and exercising a person’s rights under the Consumer Credit Protection Act.
There are three types of lending discrimination: overt, disparate treatment and disparate impact. Overt discrimination is obvious and intentional — if, for instance, a lender states that people in a protected class should not apply or will be charged higher rates. Disparate treatment means dealing with people differently based on their protected characteristics. It can be intentional or unintentional — for instance, if a loan officer unthinkingly recommends Federal Housing Administration loans to minority applicants regardless of their qualifications.
Disparate impact refers to the effect of a lender’s policies on a protected group of people, even if that result in unintentional. For example, if people of color in a particular neighborhood tend to buy less expensive homes than white homebuyers there, a lender’s decision to market only jumbo loans could favor white borrowers.
What Is Housing Discrimination?
Housing discrimination restricts access to housing based on protected characteristics. It encompasses many unjust actions including refusing to rent or sell a home, harassment, changing the terms or conditions of a sale or rental, charging a different rental or sale price, refusing to provide maintenance or services, limiting a tenant’s privileges or restricting where a person can live.
Housing discrimination is nearly always illegal at the federal level under the Fair Housing Act. There are also state laws that prohibit housing discrimination.
Historically, neighborhood covenants explicitly barred people of color from living in certain areas. Although discriminatory covenants are no longer enforced, their legacy continues to harm the communities that were targeted, and other forms of housing discrimination persist.
“There are still some people who act as landlords who won’t rent to single women or won’t rent to people with children or don’t want to rent to older people,” says Haily Kolberg, corporate counsel at A&D Mortgage.
What Is Redlining?
Redlining is the illegal practice of refusing to serve borrowers in specific locations based on the protected characteristics of people who live there.
The term “redlining” refers to maps created in the 1930s by the Home Owners’ Loan Corp., a New Deal program that appraised properties and refinanced mortgages. Appraisers working for this agency drew red lines around areas where Black people or immigrants lived to indicate that lenders would regard mortgages for properties in those locations as risky investments.
Today, redlining often takes the form of failing to market or perform community outreach to people in certain locations. Lenders may also engage in redlining by failing to offer mortgage products that are suitable for a community — for example, by offering only single-family mortgages when multiunit properties are more common in the surrounding area.
“A lender is expected to tailor their mortgage programs around the demographic and housing characteristics and economic characteristics of the neighborhoods it serves,” says Anna DeSimone, author of “Closing the Gap In Homeownership: Re-writing the Rules Against Mortgage Discrimination.”
Digital Redlining
Using technology in marketing or in the mortgage application process to exclude protected classes of people is known as digital redlining.
An entirely online application process could result in digital redlining if it prevents people in communities without widespread internet access from applying for a loan, or if people in some protected classes have less comfort or familiarity with online applications and are therefore discouraged from applying.
Digital redlining can also occur if a lender shows consumers online ads using an algorithm that targets certain groups of people over those in a protected class. This could happen by design or when a lender uses a “black box” algorithm without having a way to determine which consumers are favored.
“You can’t use digital technologies to go after customers in your marketplace without understanding what the algorithms are that is choosing the selected recipients,” DeSimone says.
Reverse Redlining
Reverse redlining is the practice of targeting a community with predatory loans. Rather than refusing to issue loans to residents of an underserved area, a lender that engages in reverse redlining will offer expensive, risky or unsuitable loans. Reverse redlining often involves high-pressure tactics designed to convince borrowers that no one else will lend to them or that they’re being offered a rare opportunity to own a home.
Red Flags for Discrimination
There are several warning signs that might indicate a lender is discriminating.
If you notice a big difference between how a lender treats you in an initial phone call or email and how they react when they see you in person, that’s a sign the lender might be inappropriately taking into account characteristics they didn’t observe at first — such as race or gender identity.
A lender that asks a lot of intrusive questions that aren’t found on standard mortgage applications, such as questions about your family or where you come from, might try to judge your application based on those answers.
It may make sense to suspect discrimination if one lender tries to dissuade you from applying while other lenders are happy to work with you, or if a lender provides poor customer service to you but seems attentive to other applicants.
There’s potentially reason to be concerned if a lender doesn’t seem interested in serving your community. For example, if most people in your community speak a language other than English but the lender doesn’t have applications available in that language, or if the lender makes it hard to get in touch with a loan officer in your area, the lender might be discriminating.
It’s also a bad sign if a lender is pressuring you to make an immediate decision or making promises that are too good to be true.
And you may want to be wary of lenders whose Community Reinvestment Act rating is “needs to improve” or “substantial noncompliance.” Lenders are required to provide their record under the Community Reinvestment Act to any customer who requests it.
“If you find in an institution that the people working there can’t really speak to where to get this information, they don’t know what it’s about, that’s also perhaps a red flag,” says Michael T. Pugh, president and CEO of the Local Initiatives Support Corp.
How to Protect Yourself
Guard against discrimination by getting multiple quotes. You can more easily find a lender that offers fair rates if you compare information from different lenders. Also, check current interest rates to make sure quotes are in line with published offers for your area.
If you’re concerned about lenders judging you based on in-person interactions, you could work with a lender that allows an online application process.
It could be helpful to meet with a HUD-certified housing counselor, who can help you evaluate loan estimates and flag loans that appear unsuitable for you.
Finally, consider applying for a loan from a community development financial institution. CDFIs are banks, credit unions or other organizations whose goal is to help historically underserved communities access financial services. “They not only focus on getting access to capital for important things like the purchase of their home, but they’re also conduits to help with technical assistance and financial skill building,” Pugh says.
How to Report Discrimination
If you’ve had a bad experience with a lender, you may want to start by contacting someone in a leadership position at the company.
“If a customer feels that he or she has been mistreated, I always urge them to first make sure that they reach out to the CEO or a critical member of the managing team for that financial institution, make them aware of the issue to ensure that they don’t have a bad actor that could be within the organization doing something that doesn’t align with the values of the institution itself,” Pugh says.
Ideally, the lender will resolve the issue and make things right. If it doesn’t, or if you believe your civil rights were violated, you can report the incident to federal agencies:
— Report housing discrimination to the Department of Housing and Urban Development online or by calling (800) 669-9777.
— Contact the Consumer Financial Protection Bureau with complaints about lenders online or at (855) 411-2372.
— Notify the U.S. Department of Justice of civil rights violations online or at (855) 856-1247.
When making a report, be prepared to provide the name of the company, the name of the person you spoke to, the date of the interaction and as much of what was said as you can remember. If you were given conflicting information or treated differently on different occasions, try to document that as well.
“Keeping details of the conversation and what felt differently from place to place is the most helpful thing to provide someone who’s going to be looking into it,” Kolberg says.
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What Is Lending Discrimination? originally appeared on usnews.com
Update 11/25/24: This story was previously published at an earlier date and has been updated with new information.
