People use credit for many aspects of life, like buying a car, financing an education, or purchasing a home. Obtaining credit should be based on legitimate factors such as your expenses, debt, income, or your credit history; it should not be based on arbitrary factors such as your race, religion, sex, or other personal characteristics. Lending discrimination occurs when a creditor takes certain protected personal characteristics into account to deny credit or to impose unfair terms or conditions on loans. The federal Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating on the basis of race, religion, sex, familial status, national origin, age, and applicant's use of public assistance.
The ECOA entitles you to an equal opportunity to obtain credit, but it does not entitle you to the credit itself. Factors such as your credit history, expenses, debt, and income determine a denial or approval. The ECOA applies to banks, financial institutions, credit card companies, or anyone else engaged in granting credit and requires creditors to engage in certain policies and practices. For example, when you apply for credit, a creditor may not ask you to reveal your race, sex, national origin, religion, or whether you receive public assistance income. However, you could voluntarily reveal these demographics for the purposes of obtaining a real estate loan.
Buying a home is a significant purchase, but lending discrimination can be an obstacle to successful home ownership. Fortunately, there are statutory protections against mortgage discrimination. Because the ECOA applies to all credit transactions, it directly applies to mortgages as well. The Fair Housing Act, another federal law that is relevant to mortgage lending, prohibits lenders from discriminating on the basis of race, religion, color, national origin, sex, familial status, or disability in housing sales or loans.
Federal law acknowledges three types of lending discrimination under the ECOA and the FHA. They are:
Overt discrimination exists when a lender openly treats an applicant differently on a prohibited basis. For example, a woman on maternity leave sued a credit union for discrimination based on sex and familial status for rejecting her home renovation loan because they would not consider her income until she returned to work.
Disparate treatment happens when a lender treats an applicant differently based on one of the protected characteristics (such as race or gender). This type of discrimination can be obvious and blatant, or it can be subtle. The lender does not issue an actual denial, but disparate treatment creates barriers, making borrowing more difficult. For example, let's say Bank A requires evidence of one month of verified income for a mortgage. Jake, a disabled mortgage applicant, must provide more extensive income documents than Jennifer, a non-disabled person, in a similar situation. Proving disparate treatment does not require showing that the lender was motivated by prejudice. It only requires that the lender did not have a nondiscriminatory justification for the difference in treatment.
Disparate impact occurs when a lender applies a neutral policy to all credit applicants, but the policy disproportionately affects individuals belonging to a certain group based on their race, sex, age, or other protected characteristic. The policy is not intentionally discriminatory, but the policy's effect results in discrimination. For example, a car dealership has a policy of marking up finance rates on the car loans. The policy is used for all applicants, but has a disparate impact on African American and Hispanic customers who ultimately pay more for the credit than their white counterparts with similar credit ratings.
Were you denied credit even though you qualify for it? Did a creditor treat you differently over the phone than in person? If you suspect that you are a victim of lending discrimination, you might want to talk to an attorney about filing a complaint. An attorney experienced in discrimination issues understands the different types of lending discrimination and can help you assert your rights.
