For potential homeowners looking to lock in a well-deserved home loan, the idea of getting some help from a bank or mortgage lender sounds simple enough. There’s some research to be done, some paperwork to go over, and lots of credit history to go over. But if the homeowner-to-be has been saving and working hard at taking care of their credit, they shouldn’t have too much to worry about, right?
Well, sometimes lending discrimination plays a role in the process, keeping individuals from landing a home loan they’ve been lined up for. In fact, lending discrimination isn’t unheard of and can be quite common among certain groups of people, including minorities. Bank of America, for example, saw itself at the center of a settlement in 2017 with the National Fair Housing Alliance over charges of lending discrimination. The major financial institution contributed more than $400,000 towards fair housing efforts in South Carolina following a claim from Hispanic-American mortgage borrowers.
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:
- Sex
- Age
- Race
- Religion
- Color
- 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.
Learn to identify unfair lending practices
According to the law, lenders may ask clients for most of the information that could identify the client as a protected class except for your religion, but they can’t legally use that information to discriminate in lending. Discriminatory lending can lead to costly bankers professional liability insurance claims.
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
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