Private Lenders Need to Be Aware of How the Fair Housing Act Can Impact Their Success.

The Fair Housing Act was designed to protect against discrimination and unfair practices in the process of purchasing residential real estate, including applying for and acquiring a reasonable loan. For private lenders, it’s essential to understand how the Fair Housing Act and the Equal Credit Opportunity Act (ECOA) protect consumers, how you can inadvertently violate these acts and what the consequences could be.

Fair Housing Act

Protected classes

Enacted as part of the Civil Rights Act of 1968, the Fair Housing Act prohibits discrimination in residential real estate-related transactions based on race, color, national origin, religion, sex, familial status (such as pregnant women or families with children under the age of 18) and handicap.

The ECOA builds on the Fair Housing Act, prohibiting discrimination in credit transactions based on race, color, national origin, religion, sex, marital status, age (as long as the applicant is capable and old enough to enter into a contract), applicant’s receipt of income from a public assistance program and applicant’s exercise in good faith of any right under the Consumer Credit Protection Act.

Both the Fair Housing Act and the ECOA apply to private lending and ensure that everyone—including United States citizens, registered aliens (green card holders) and undocumented residents—has the same lending opportunities. Discrimination may be overt or subtle and can occur at any stage of the lending process, from the marketing of loan products to the servicing of the loan.

This is where it can get tricky. A private lender probably would never intentionally refuse to make a loan based on the color of someone’s skin or their religion, but the discrimination doesn’t have to be intentional and can be as seemingly innocent as providing additional instruction to one applicant that isn’t provided to an applicant in a class protected by the Fair Housing Act and ECOA.

Other potential violations include steering an applicant toward an inferior (or subprime) loan product; using different standards to evaluate collateral; imposing different terms and conditions to loans such as interest rates, points, fees and duration; and providing inferior servicing.

Couple and real estate agent discussing together at home

Disparate treatment

When determining whether there has been a violation of the Fair Housing Act and the ECOA, the courts use three tests: disparate treatment, comparative evidence of disparate treatment and evidence of disparate impact.

Disparate treatment occurs when a lender makes a lending decision based on one or more of the prohibited factors, such as religion or age. For example, a lender can’t offer $10,000 in credit to applicants between 21 and 30 years of age and $15,000 in credit to applicants over 30.

The discrimination doesn’t even have to be acted upon to be a violation of the Fair Housing Act and ECOA. A private lender can’t tell an applicant, “I don’t like to make loans to (Muslims/Baptists/etc.), but the law says I have to.” Even if you do lend money to the categorized applicant, treating him or her no differently than you would any other customer in the way you offer guidance and assistance throughout the process, you’ve violated the fair housing laws simply by making the comment.

Comparative Evidence

You don’t have to intend to treat an applicant any different than anyone else to violate the Fair Housing Act and ECOA. The simple fact that an applicant was treated differently can be evidence of discrimination.

Comparative evidence of disparate treatment usually occurs when an applicant is neither clearly well-qualified nor clearly unqualified for a loan. Teetering on the brink, that person’s application could go either way, and if you treat him or her any differently than anyone else, even unintentionally and without prejudice, you have violated fair lending laws.

For example, assume two applicants fail to clearly qualify because of negative credit issues. If you propose solutions to the first applicant and fail to do so for the second applicant, who happens to be a member of a protected class, the second applicant could likely prove comparative evidence of disparate treatment, regardless of your intentions or motivations. Even giving the first applicant encouragement through the process and not giving the second applicant the same encouragement is a violation.

As a private lender, you’re not obligated to provide extra assistance or propose solutions as issues come up during the process, but to the extent that you do so for one applicant, you need to do so for all applicants. In fact, it’s a good idea to have a written policy in place detailing what assistance you will (and won’t) provide and how you will handle cases that don’t clearly qualify for a loan. Have an attorney review your policy and stick to it.

The Equal Credit Opportunity Act

Disparate impact

Even if you treat all applicants equally and have a fair and neutral policy in place, you can violate the Fair Housing Act and ECOA through disparate impact. This occurs when you treat all applicants the same, but your practices disproportionately affect people in a protected class. For example, a policy to not extend loans for an amount less than $100,000 for single-family homes may disproportionately exclude minorities and other applicants who have lower incomes and lower home values than the rest of the applicant pool.

However, it’s not enough to prove a disparity exists for a protected class to be found in violation of the Fair Housing Act and ECOA. The court will consider whether the disparity is justified because of a “business necessity,” such as profitability. If you can show your business can’t be profitable making loans for less than $100,000, for example, the court may allow you to continue the practice.

Or not. Demonstrating a business necessity may not be enough to get you off the hook for a violating fair housing laws if the court determines an alternative policy or practice could avoid the adverse effects to your business while at the same time have a less discriminatory effect.

Consequences

Applicants who suspect they may not have been treated fairly are encouraged by the Department of Housing and Urban to file a claim with HUD or with a fair housing agency. That agency will refer the case to the Office of Fair Housing and Equal Opportunity (FHEO) for investigation. If the FHEO finds discrimination has occurred, you’ll have the opportunity to work with the other party to come to a voluntary resolution. In cases where a settlement can’t be reached, the case will go to court.

Either way, the penalties can be quite steep. Bank of America, which purchased Countrywide Home Loans in 2008, had to pay $335 million for discriminatory subprime loans Countrywide made to Hispanics and African-Americans in the run-up to the housing crisis.

As a private lender, you probably won’t face a $335 million penalty, but the amount awarded against you for fair lending violations could severely cripple your business.