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Credit Discrimination: 6.4.2.3 Other Factors That May Disfavor Protected Classes

A potential issue is whether credit scoring systems give more points to homeowners. According to FICO, one of the categories of factors used to derive FICO scores is the types of credit in use. A good mix may be one that includes a mortgage loan.121 The question is whether FICO’s scoring models explicitly give more points to mortgage holders, which would mean homeowners are favored over renters. Black people have lower rates of homeownership than White people.122

Credit Discrimination: 6.4.2.4 Industry’s Response

In response to these concerns, the credit scoring industry and its proponents have consistently maintained that their systems are not discriminatory.140 Moreover, they point out that credit scoring actually reduces discrimination against protected groups. They note that the human—and potentially discriminatory—element in credit evaluation has been replaced by a system that is blind to race and other prohibited bases.

Credit Discrimination: 6.4.4 Disparate Impact Litigation Challenging Credit Scoring

In the mid-2000s, there were a handful of credit discrimination cases challenging credit scoring.156 A class action challenged that Fannie Mae’s use of credit scores in its Desktop Underwriter automated underwriting system has a disparate impact on Black consumers in violation of ECOA and the FHA.157 The plaintiff’s discrimination claims under the FHA and the ECOA survived a motion to dismiss.158 However, the court did express skepticism about the

Credit Discrimination: 6.4.5.1 Overview

The prior discussion of credit scoring and potential discrimination focused on the disparate impact created by the scoring systems themselves. However, the potential for discrimination does not stop there. Even assuming a credit scoring system that does not disproportionately affect people of color, credit scoring does not immunize a lender from discrimination. Lenders have found numerous ways to disfavor applicants of color when they are using a scoring model.

Credit Discrimination: 6.4.5.3 Overrides

The Office of Comptroller of the Currency (OCC) raised a concern that because the credit scores of a large percentage of applicants fall in a gray area, lenders will continue to use subjective or “human” underwriting to review these applications. The OCC expressed concern that decisions to override the credit scores in these situations may undermine the objectivity and/or integrity of credit scoring and lead to discriminatory results.169

Credit Discrimination: 5.1.1 The Special ECOA Requirements

As a fundamental principle, the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), and other credit discrimination statutes set forth a general rule against discrimination in every aspect of a credit transaction. In addition, the ECOA has specific prohibitions and procedural requirements that creditors must follow in the various stages of a credit transaction. The FHA and federal Civil Rights Acts do not contain equivalent specific prohibitions and requirements but nevertheless apply broadly to all stages of a credit transaction.

Credit Discrimination: 5.2.1 Introduction

Before discussing discrimination specific to each stage of the credit transaction, it is helpful to understand some principles about the general rule against discrimination embodied in the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), the Civil Rights Acts, and other credit discrimination statutes.

Credit Discrimination: 5.2.2 What Is “Discrimination” Under the General Rule?

The term “discriminate” is defined by Regulation B as treating an applicant less favorably than other applicants.2 Consequently, the ECOA prohibits treating an applicant less favorably than other applicants on a prohibited basis at any stage of the credit transaction, ranging from application procedures to terms of the transaction to the subsequent handling of defaults.

Credit Discrimination: 5.3.1 Overview

The first stage of a credit transaction in which discrimination may take place occurs prior to the actual application—i.e., when the creditor takes various actions to encourage or discourage persons from seeking credit from that creditor.13 While most of the Equal Credit Opportunity Act (ECOA) applies only to “applicants,”14 Regulation B does include a pre-application prohibition forbidding creditors from discouraging prospective applicants on a prohibited basis.

Credit Discrimination: 5.3.2.1 The ECOA Standard

Regulation B specifically prohibits any oral or written statement to prospective applicants in advertising or otherwise that would discourage, on a prohibited basis, a reasonable person from pursuing an application.20 Similarly, the ECOA’s general rule against discrimination prohibits advertising and other marketing that discriminates on a prohibited basis as to who is encouraged to apply.21

Credit Discrimination: 5.3.2.2 The FHA Standard

The Fair Housing Act (FHA) explicitly prohibits discrimination in advertising with respect to the sale or rental of a dwelling.35 This prohibition applies to all written and oral notices or statements36 and thus should apply to marketing discrimination.

Credit Discrimination: 5.3.2.3 Other Guidance

An examination procedures guide from the Federal Financial Institutions Examination Council (FFIEC) describes the following scenarios as potential indicators of disparate treatment in marketing:44

Credit Discrimination: 5.3.3.1 Steering

Even if an applicant from a protected group can get past the marketing discrimination and through the creditor’s door, pre-application discrimination may still take place in the creditor’s office. One means of discouraging applicants on a prohibited basis is a practice called “steering.” Steering occurs when a loan officer refers prospective applicants away from one type of product or market (for example, a prime product) to another (for example, a subprime product).86

Credit Discrimination: 5.4.1 General

The next stage of the credit transaction involves the procedures for application for credit.107 In general, under the Equal Credit Opportunity Act (ECOA), there can be no differences in the application procedures if those differences are on a prohibited basis.108 The Fair Housing Act’s (FHA) general rule against discrimination also prohibits such discrimination in housing financing.

Credit Discrimination: 5.4.2.2 The Home Mortgage Exception

Applications must be in writing when credit is used to purchase or refinance the applicant’s principal residence and when the residence is taken as security for the loan.112 This requirement assists federal supervisory agencies in their enforcement of the ECOA and the FHA.113