Fair Lending

Discrimination

The FHA prohibits discrimination in residential real estate–related transactions based on

• race or color.
• national origin.
• religion.
• sex.
• familial status.
• handicap.

The ECOA prohibits discrimination in credit transactions based on

• race or color.
• national origin.
• religion.
• sex.
• marital status.
• age.*
• applicant's receipt of income from a public assistance program.
• applicant's exercise, in good faith, of any right under the Consumer Credit Protection Act.

*Age is a prohibited factor provided the applicant has the capacity to enter into a contract.

Disparate Impact

A lender's policies, even when applied equally to all its credit applicants, may have a negative effect on certain applicants. For example, a lender may have a policy of not making single family home loans for less than $60,000. This policy might exclude a high number of applicants who have lower income levels or lower home values than the rest of the applicant pool. That uneven effect of the policy is called disparate impact.

Disparate Treatment

Illegal disparate treatment occurs when a lender bases its lending decision on one or more of the prohibited discriminatory factors covered by the fair lending laws, for example, if a lender offers a credit card with a limit of $750 for applicants age 21 through 30 and $1,500 for applicants over age 30. This policy violates the ECOA's prohibition on discrimination based on age.

Predatory Lending

Fair lending laws also contain provisions to address predatory lending practices. Some examples follow:

• Collateral or equity "stripping": The practice of making loans that rely on the liquidation value of the borrower's home or other collateral rather than the borrower's ability to repay.
• Inadequate disclosure: The practice of failing to fully disclose or explain the true costs and risks of loan transactions.
• Risky loan terms and structures: The practice of making loans with terms or structures that make it more difficult or impossible for borrowers to reduce their indebtedness.
• Padding or packing: The practice of charging customers unearned, concealed, or unwarranted fees.
• Flipping: The practice of encouraging customers to frequently refinance mortgage loans solely for the purpose of earning loan-related fees.
• Single-premium credit insurance: The requirement to obtain life, disability, or unemployment insurance for which the consumer does not receive a net tangible financial benefit.

Unfair and Deceptive Practices

The OCC took the lead among the federal bank regulatory agencies in developing an approach to address unfair and deceptive marketing practices. These practices are often an element in predatory lending. The OCC has taken a number of enforcement actions against banks that were found to have engaged in abusive practices and, in one landmark case, required a bank to pay over $300 million in restitution to its customers.