IV. Fair Lending — Fair Lending Laws and Regulations NOTE: Further information regarding the technical Fair Lending Laws and Regulations requirements of fair lending are incorporated into the sections ECOA V 7.1 and FCRA VIII 6.1 of this manual. Introduction The Fair Housing Act (FHAct) prohibits discrimination in all This overview provides a basic and abbreviated discussion of aspects of “residential real-estate related transactions,” federal fair lending laws and regulations. It is adapted from including but not limited to: the Interagency Policy Statement on Fair Lending issued in March 1994. • Making loans to buy, build, repair, or improve a dwelling; Lending Discrimination Statutes and Regulations • Purchasing real estate loans; The Equal Credit Opportunity Act (ECOA) prohibits discrimination in any aspect of a credit transaction. It • Selling, brokering, or appraising residential real estate; or applies to any extension of credit, including extensions of • Selling or renting a dwelling. credit to small businesses, corporations, partnerships, and trusts. The FHAct prohibits discrimination based on: The ECOA prohibits discrimination based on: • Race or color; • Race or color; • National origin; • Religion; • Religion; • National origin; • Sex; • Sex; • Familial status (defined as children under the age of 18 living with a parent or legal custodian, pregnant women, • Marital status; and people securing custody of children under 18); or • Age (provided the applicant has the capacity to contract); • Handicap. • The applicant’s receipt of income derived from any The Department of Housing and Urban Development’s public assistance program; or (HUD) regulations implementing the FHAct are found at 24 • The applicant’s exercise, in good faith, of any right CFR Part 100. Because both the FHAct and the ECOA under the Consumer Credit Protection Act. apply to mortgage lending, lenders may not discriminate in mortgage lending based on any of the prohibited factors in The Consumer Financial Protection Bureau’s Regulation B, either list. found at 12 CFR part 1002, implements the ECOA. Regulation B describes lending acts and practices that are Under the ECOA, it is unlawful for a lender to discriminate specifically prohibited, permitted, or required. Official staff on a prohibited basis in any aspect of a credit transaction, interpretations of the regulation are found in Supplement I to and under both the ECOA and the FHAct, it is unlawful for a 12 CFR part 1002. lender to discriminate on a prohibited basis in a residential real-estate-related transaction. Under one or both of these The Dodd–Frank Wall Street Reform and Consumer laws, a lender may not, because of a prohibited factor: Protection Act of 2010 further amended the ECOA and covers: • Fail to provide information or services or provide different information or services regarding any aspect of • Data collection for loans to minority-owned and the lending process, including credit availability, women-owned businesses (awaiting final regulation); application procedures, or lending standards. • Legal action statute of limitations for ECOA • Discourage or selectively encourage applicants violations is extended to five years (effective July 21, 2010); with respect to inquiries about or applications for and credit. • A disclosure of the consumer’s ability to receive a • Refuse to extend credit or use different standards copy of any appraisal(s) and valuation(s) prepared in in determining whether to extend credit. connection with first-lien loans secured by a dwelling is to be provided to applicants within 3 business days of receiving the • Vary the terms of credit offered, including the application (effective January 18, 2014). amount, interest rate, duration, or type of loan. FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.1 IV. Fair Lending — Fair Lending Laws and Regulations • Use different standards to evaluate collateral. expresses — but does not act on — a discriminatory preference: • Treat a borrower differently in servicing a loan or invoking default remedies. Example: A lending officer told a customer, “We do not like to make home mortgages to Native Americans, but the law • Use different standards for pooling or packaging a loan says we cannot discriminate and we have to comply with the in the secondary market. law.” This statement violated the FHAct’s prohibition on A lender may not express, orally or in writing, a statements expressing a discriminatory preference as well as preference based on prohibited factors or indicate that it Section 1002.4(b) of Regulation B, which prohibits will treat applicants differently on a prohibited basis. A discouraging applicants on a prohibited basis. violation may still exist even if a lender treated applicants Comparative Evidence of Disparate Treatment. Disparate equally. treatment occurs when a lender treats a credit applicant A lender may not discriminate on a prohibited basis because differently based on one of the prohibited bases. It does of the characteristics of not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate • An applicant, prospective applicant, or borrower. against a person beyond the difference in treatment itself. • A person associated with an applicant, prospective Disparate treatment may more likely occur in the treatment of applicant, or borrower (for example, a co-applicant, applicants who are neither clearly well-qualified nor clearly spouse, business partner, or live-in aide). unqualified. Discrimination may more readily affect applicants in this middle group for two reasons. First, if the applications • The present or prospective occupants of either the are “close cases,” there is more room and need for lender property to be financed or the characteristics of the discretion. Second, whether or not an applicant qualifies may neighborhood or other area where property to be financed depend on the level of assistance the lender provides the is located. applicant in completing an application. The lender may, for Finally, the FHAct requires lenders to make reasonable example, propose solutions to credit or other problems accommodations for a person with disabilities when such regarding an application, identify compensating factors, and accommodations are necessary to afford the person an equal provide encouragement to the applicant. Lenders are under no opportunity to apply for credit. obligation to provide such assistance, but to the extent that they do, the assistance must be provided in a nondiscriminatory Types of Lending Discrimination way. The courts have recognized three methods of proof of lending discrimination under the ECOA and the FHAct: Example: A non-minority couple applied for an automobile loan. The lender found adverse information in the couple’s • Overt evidence of disparate treatment; credit report. The lender discussed the credit report with them and determined that the adverse information, a • Comparative evidence of disparate treatment; and judgment against the couple, was incorrect because the • Evidence of disparate impact. judgment had been vacated. The non-minority couple was granted their loan. A minority couple applied for a similar Disparate Treatment loan with the same lender. Upon discovering adverse information in the minority couple’s credit report, the lender The existence of illegal disparate treatment may be established denied the loan application on the basis of the adverse either by statements revealing that a lender explicitly information without giving the couple an opportunity to considered prohibited factors (overt evidence) or by discuss the report. differences in treatment that are not fully explained by legitimate nondiscriminatory factors (comparative evidence). The foregoing is an example of disparate treatment of similarly situated applicants, apparently based on a Overt Evidence of Disparate Treatment. There is overt prohibited factor, in the amount of assistance and evidence of discrimination when a lender openly discriminates information the lender provided. on a prohibited basis. If a lender has apparently treated similar applicants Example: A lender offered a credit card with a limit of up to differently on the basis of a prohibited factor, it must $750 for applicants aged 21-30 and $1500 for applicants over provide an explanation for the difference in treatment. If the 30. This policy violated the ECOA’s prohibition on lender’s explanation is found to be not credible, the agency discrimination based on age. may find that the lender discriminated. There is overt evidence of discrimination even when a lender IV – 1.2 FDIC Consumer Compliance Examination Manual – March 2021 IV. Fair Lending — Fair Lending Laws and Regulations Redlining is a form of illegal disparate treatment in which ensure their effective implementation. While these procedures a lender provides unequal access to credit, or unequal apply to many examinations, agencies routinely use statistical terms of credit, because of the race, color, national origin, analyses or other specialized techniques in fair lending or other prohibited characteristic(s) of the residents of the examinations to assist in evaluating whether a prohibited basis area in which the credit seeker resides or will reside or in was a factor in an institution’s credit decisions. Examiners which the residential property to be mortgaged is located. should follow the procedures provided by their respective Redlining may violate both the FHAct and the ECOA. agencies