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FOS Blog

20 Apr

Common Fair Lending Pitfalls to Avoid

Common Fair Lending Pitfalls to Avoid

Commonly noted fair lending violations at lending institutions involve redlining, credit pricing for applicants with public assistance income sources, and discrimination against women on maternity leave.

Redlining remains an issue that plague many banks and lending institutions. The Fair Lending Examination Procedures from the Federal Reserve defines redlining as “a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located.” Major enforcement actions from regulators prove banks must remain vigilant in combating and addressing this issue.

When considering applicants, who participate in Section 8 Housing, lenders should be cognizant not to exclude Housing Choice Vouchers as a source of income or accept them only for certain types of mortgage loans. Both of these scenarios may violate Regulation B. For customers, who receive other forms of Public Assistance, such as Temporary Aid to Needy Families, Food Stamps, and Social Security Supplemental Income, et cetera, the lender should also be careful during the loan underwriting process not to exclude the customers’ income which is derived from these public assistance sources. Best practices indicate that banks should monitor the level of discretion given to lending personnel over credit pricing. Among these practices, banks should mitigate pricing risk by having an established system for monitoring credit pricing and maintaining clear written policies to not only guide lenders, but also serve as an accountability tool.

One area of Fair Lending that banks should pay particularly close attention is discrimination against women on maternity leave. Refusing to approve a loan because a woman is pregnant or on maternity leave violates The Fair Housing Act’s prohibition on discrimination based on sex and familial status. HUD guidance says this remains a problem that can be expensive for institutions based on reporting data, customer complaints, and recent enforcement actions it has undertaken. One recent case involved a $5 million settlement by Wells Fargo with HUD in 2014 alleging that the bank discriminated against six women, who were pregnant, had given birth, or were on maternity leave when they applied for a loan.

Bases of Violation:

  • Sex – Pregnancy
  • Familial Status – Pregnancy, securing legal custody of person under 18, and maternity or paternity leave status
  • Disability – Medical complications related to pregnancy

HUD Common Violations:

  • Lender saying it cannot close on or approve the loan due to maternity leave status
  • Lender saying it cannot use maternity leave-related income to underwrite the loan
  • Lender requiring applicant to report back to work before it will close on the loan
  • Lender requiring loan applicant to provide written explanation of their plans for additional children over the next three years

Lending personnel should take care to avoid these common Fair Lending pitfalls.