What is Fairness in Lending, and Why Do I Care?

November 24, 2015 by Eric Wolfe

What is Fairness in Lending, and Why Do I Care?Fairness in lending has been legally mandated in some form since the passage of the Civil Rights Act of 1968, which prohibits discriminatory lending practices, especially in residential lending.  The recent great recession produced some new laws about predatory lending which also fall under the fairness umbrella. Read on to learn more about fair lending rules and how they could affect you—or maybe already have.

What’s Fair is Fair

The Civil Rights Act of 1968 established that lenders may not base decisions about the sale, rental, or financing of dwellings or other housing-related options based on race, gender, national origin, religion, color, familial status, age (provided the borrower is old enough to enter a contract), or disability. This means the decision to make or refinance a loan, to provide an appraisal, or the determination of loan terms cannot differ along these spectrums. In 2010, this was also extended to apply to pregnant women or those on maternity leave after many expectant mothers were forced to return to work before being approved for loans. In fact, even if most of an individual’s income is provided by a federal assistance program like Social Security or Disability, they cannot be denied for a loan if they meet the other qualifications.

Predatory Lending

After the market crash of 2008, fair lending laws were restructured to contain provisions against predatory lending practices. These include: the practice of equity “stripping,” in which the loan is given based not on the applicant’s ability to pay but on the value of the asset they’re funding; risky terms or structures which make it next to impossible for the borrower to get out of debt; and “flipping,” or refinancing loans only for the purpose of obtaining fees. These rules also extend to the practices banks use to market their loans and credit offerings.

Practical Application

All of this sounds great, but how does it apply to everyday situations for those applying for housing loans? For starters, if a credit card company only offers credit limits in excess of $2,000 for its borrowers over the age of 25, they would be in violation of fair lending laws, because they’d be discriminating based on age. It’s also illegal to deny somebody a loan if they receive a monthly disability stipend but aren’t earning income from a job.

These laws exist to ensure everyone has fair and equal access not only to borrowed capital, but also to the resources they have to live on. Just as a lender can’t choose to deny you for discriminatory reasons, anyone selling a home can’t choose to deny you based on these same factors.


Written by: Eric Wolfe, Compliance Coordinator at Royal United Mortgage LLC
Published: 11/24/2015

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