For newcomers breaking into the lending industry, the sheer number of laws in place to regulate lender practices can seem uncountable. Whether it’s an LO learning about the Home Mortgage Disclosure Act (HMDA), a servicer reading about the Equal Credit Opportunity Act (ECOA), a debt collector studying how to avoid Unfair, Deceptive or Abusive Acts or Practices (UDAAP), or a vice president simply researching updates to fair lending concepts in general, there are many powerful regulations on the books designed to check and monitor lending practices across the board. And while learning them back to front may feel like an insurmountable task, many of them were created with the same goal in mind: to ensure that all lending customers are treated equally under the law and given the same opportunities and consideration as anyone else. All of the industry’s acts mentioned above are utilized every day across the country to ensure that no mortgage-related company, from processing to servicing, can engage in discriminatory behavior against a protected customer class.
There are three types of discrimination that can adversely affect a potential or current mortgagee when it comes to fair lending. The first is overt discrimination, where a lender/LO can blatantly offer favorable terms to a customer due to their gender, race, etc., or withhold said terms from another customer for the same reason. This is the most obvious form of discrimination and, as such, typically the form that is employed the least. As fair lending laws have become stricter and stronger in protecting classes that are commonly discriminated against, even the most abusive, bad faith lenders rarely participate in overt discrimination, as this would attract regulatory attention and swiftly bring the hammer of the CFPB down upon them. Sadly, these offenders have taken to couching discriminatory tendencies in a more hidden manner and that’s where the other two forms of discrimination come in: disparate treatment and disparate impact. Both of these types of inequity sound similar but are often very different, both in action and intention.
Disparate impact is a particularly insidious form of discrimination, where a neutrally enforced policy that a lender uses for all customers may be subtly geared towards negatively impacting a protected class of people. This is perhaps the most difficult form of discrimination to pinpoint, as it sometimes occurs without the lender even purposely intending to favor one group of people or another. For example, say that a bank covers a wide area of a major city, which includes both high-income and low-income neighborhoods. The bank’s lending policy has ‘set’ stipulations via which it lends, including such guidelines as a borrower’s minimum income and the bank’s minimum loan amount. This may seem reasonable on its face and the policy does apply to everyone, so no particular customer or group of customers is directly targeted or excluded in any way. However, due to the low-income neighborhood’s lower property values, the bank’s minimum loan amount may exclude people living there from being able to apply for a mortgage. Again, the creators of the policy may not even realize the scope of the impact it has on the affected group, but then again, they may be fully aware, and the policy could be an attempt to covertly attract higher-income clients while excluding a poorer swath of the population. Either way, the policy has a disparate impact on its potential customers and is discriminatory.
While disparate impact might conceivably result from an LO’s unconscious bias or a company’s well-meaning but flawed policy, disparate treatment is usually a conscious decision to favor or disfavor one group of customers or another. Simply put, disparate treatment is the inconsistency of policy or offer products that do not apply equally across all classes and cannot be justified by any non-discriminatory explanation. It could be a credit card company offering a higher line of credit to one customer than another simply because they are 10 years older. It could be a borrower offered unfavorable interest rates for a loan simply because he’s “from the wrong part of town”. It could be a loan officer prioritizing a loan package for a borrower with a surname of Smith over a borrower with a surname of Gonzales. It could be a debt collector using predatory tactics against a female customer while following the rules on collection calls with men because women “are easier to scare into paying”. These are all grossly illegal and manipulative examples of disparate treatment. Redlining is one of the most infamous and duplicitous forms of disparate treatment in lending, with biased lenders denying mortgages to qualified candidates simply based on their race or location.
While overt discrimination is so obvious to regulatory examiners that it is generally shut down swiftly, disparate impact and disparate treatment are often more difficult to weed out. Disparate impact adversely and negatively affects a protected group or class even though a policy or practice is prima facie applied equally to all customers or applicants. Disparate treatment stems from inappropriate administration of such a policy, which benefits certain customers while unfairly injuring others. Whatever the methodology, all three forms of discrimination are illegal and any servicer or lender engaging in any of these behaviors is a long way from proper compliance within the law.
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