Fair Lending Practices

Fair lending is a cornerstone of ethical mortgage origination. Federal laws including the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) prohibit discrimination in mortgage lending. MLOs must understand these laws and actively prevent discriminatory practices.

Protected Classes Under Fair Lending Laws

Fair Housing Act (1968)

Prohibits discrimination in residential real estate transactions based on:

• Race
• Color
• Religion
• National Origin
• Sex (includes sexual orientation and gender identity as of 2021)
• Familial Status (families with children under 18, pregnant women)
• Disability

Equal Credit Opportunity Act (1974)

Expands protections to include:

• All Fair Housing Act protected classes, PLUS:
• Marital Status
• Age (provided applicant has capacity to contract)
• Receipt of Public Assistance (Social Security, welfare, food stamps)
• Good Faith Exercise of Rights under the Consumer Credit Protection Act

Exam Tip: Remember that ECOA applies to ALL credit transactions, not just mortgages. The Fair Housing Act specifically covers residential real estate.

Types of Prohibited Discrimination

1. Overt Discrimination

Direct, intentional discrimination based on protected class:

• "We don't make loans to people from that country"
• "Your neighborhood is too risky for lending"
• "Single mothers are too risky"

This type is rare today but still occurs and carries the severest penalties.

2. Disparate Treatment

Treating applicants differently based on protected characteristics, even without explicit statements:

3. Disparate Impact

Facially neutral policies that disproportionately harm protected groups:

• Requiring minimum lot sizes that exclude affordable housing
• Loan programs unavailable in certain zip codes
• Marketing only in certain neighborhoods or languages

Steering

Steering is the illegal practice of directing borrowers toward or away from specific products, lenders, or neighborhoods based on protected characteristics.

Types of Steering

1. Product Steering - Directing qualified borrowers to subprime products based on race

   • Example: Minority borrowers who qualify for prime loans are placed in subprime products

2. Geographic Steering - Discouraging borrowers from certain neighborhoods

   • Example: Showing only homes in certain neighborhoods based on race

3. Lender Steering - Directing borrowers to certain lenders based on protected class

   • Example: Sending minority applicants to subprime lenders

Indicators of Steering

• Similar applicants receiving different product recommendations
• Minority applicants disproportionately in subprime products
• Failure to offer best available products to all applicants
• Commission structures that incentivize steering

Redlining and Reverse Redlining

Redlining

Redlining is refusing or limiting mortgage services to residents of certain geographic areas, typically minority neighborhoods.

Historical context:

• Named for the practice of drawing red lines on maps around minority neighborhoods
• These areas were deemed too risky for lending
• Outlawed by the Fair Housing Act but effects persist
• Modern redlining may be more subtle but remains illegal

Reverse Redlining

Reverse redlining is the predatory practice of TARGETING minority neighborhoods for subprime, high-cost, or abusive loan products.

Examples:

• Marketing high-cost refinance products only in minority areas
• Aggressive lending in areas with elderly or unsophisticated borrowers
• Offering predatory products where prime products should qualify

Important: Both redlining (avoiding areas) and reverse redlining (targeting areas for abuse) are illegal forms of discrimination.

Pricing Discrimination

Pricing discrimination occurs when borrowers with similar credit profiles receive different rates or terms based on protected characteristics.

Forms of Pricing Discrimination

Detecting Pricing Discrimination

Regulators examine:

• Rate spreads between demographic groups
• Loan officer discretion patterns
• Compensation structures that incentivize overcharging
• Statistical analysis of pricing data

Predatory Lending Indicators

Predatory lending involves unfair, deceptive, or abusive practices that harm borrowers. Many predatory practices have discriminatory impact.

Common Predatory Practices

1. Excessive Fees and Points - Charging fees far above market norms
2. Loan Flipping - Repeatedly refinancing with high costs and no benefit
3. Equity Stripping - Making loans borrowers cannot repay to seize equity
4. Balloon Payments - Large final payments borrowers cannot afford
5. Prepayment Penalties - Trapping borrowers in bad loans
6. Packing - Adding unnecessary products (insurance, etc.)
7. Negative Amortization - Payments that don't cover interest

Red Flags for Predatory Lending

• Loans based primarily on equity, not ability to repay
• Targeting elderly or unsophisticated borrowers
• High-pressure sales tactics
• Failure to disclose material terms
• Falsifying application information
• Unusually high fees or rates for the credit profile

Penalties for Fair Lending Violations

Violations of fair lending laws carry severe consequences:

Individual MLO Penalties

Company Penalties

• Multi-million dollar settlements
• Consent orders with strict oversight
• Required policy changes
• Mandatory fair lending training
• Injunctive relief
• DOJ pattern or practice lawsuits

Compliance Best Practices

For MLOs

1. Treat all applicants equally regardless of protected characteristics
2. Offer the best available products to all qualified borrowers
3. Document decision-making to show consistent treatment
4. Avoid assumptions based on neighborhood or appearance
5. Report concerns about discriminatory practices
6. Complete fair lending training regularly

Warning Signs to Watch For

• Pressure to place borrowers in certain products based on demographics
• Different documentation requirements for different groups
• Marketing that targets or excludes certain areas
• Compensation tied to product type rather than borrower benefit
• Colleagues making statements about "those neighborhoods" or similar

Ethical Responsibility: Even if you personally don't discriminate, you have an obligation to report discrimination you observe. Silence makes you complicit in violations.