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
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
Many studies have shown that, from 2000 to 2009, subprime lenders provided the greater share of lending in neighborhoods of color.47 This pattern appeared to hold true even in middle-class and higher-income areas, indicating that the segmentation of the market into prime and subprime was correlated more strongly with race than with income.48
A good example of how the dual market for credit develops can be found by contrasting the cases of two lenders in the Washington, D.C. area—Chevy Chase Federal Savings Bank and Capital City Mortgage Corp. Chevy Chase, a metropolitan D.C. bank, and its subsidiary, B.F.
Another form of potential marketing discrimination occurs when lenders use direct marketing to send solicitations, including pre-approved credit offers, to potential applicants.
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
Sometimes, differential encouragement at the pre-application stage can be very subtle and may be discovered only through the use of paired testers.
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.
A caveat exists regarding the application process in that Regulation B permits creditors to take either oral or written applications for credit.
Discrimination in the application process may involve allegations that a lender requested more—or different—types of information from or about protected class applicants, or provided disparate levels of assistance. The challenged conduct must be shown to be the result of disparate treatment or disparate impact.117 Most credit discrimination appears to occur in the context of applicants who are marginally qualified.
One type of discrimination in the application process involves how much and what types of information a creditor requires from an applicant. Requiring too much personal or hard to obtain information may discourage applicants from completing their applications.
There are a number of special Equal Credit Opportunity Act (ECOA) requirements and prohibitions concerning requests for information, especially information relevant to the prohibited bases. These requirements specify that various types of information may not be requested or may be requested only in certain situations.
An important aspect of the general rule regarding prohibited requests for information is the definition of the term “applicant” because the prohibitions cover only those information requests made about “applicants.”139 Regulation B defines an applicant as including “any person who requests or who has received an extension of credit” and “any person who is or may become contractually liable regarding an extension of credit.”140 Regulation B defines “contractually liable” as being expressly ob
Regulation B’s specific prohibitions on seeking information are constrained to “requests” for information or “inquiries” about an applicant.156 Thus, the regulation only prohibits active steps by the creditor to obtain prohibited information about the applicant.
In 1999, the Federal Reserve Board (FRB) proposed removing the prohibition on seeking information about an applicant’s race, color, religion, national origin, and sex for non-mortgage credit products.159 This change was made in response to comments from the Department of Justice (DOJ) and other federal financial enforcement agencies that the enhanced ability to obtain data on race and ethnicity would aid fair lending enforcement, particularly with respect to small business lending.160
With certain special exceptions set out later in § 5.5.3, infra, the current Regulation B prohibits creditors from requesting the race, color, religion, or national origin of the applicant or any other person in connection with a credit transaction.174 For example, if the director of a day care center serving Black families applies for
A creditor generally may not request the sex of the applicant as required information.181 There are five exceptions.
A creditor may not request any information about the applicant’s birth control practices, intention or capacity to bear children, or intention to rear children.190 A creditor, however, may request information about the applicant’s present dependents (such as the number of dependents and their ages) and related financial obligations for these present dependents, as long as this information is not solely requested from a group protected by the statute.191 For example, a creditor would violate
Whether a creditor may ask about an applicant’s marital status will depend on the type of credit account being sought. If an account is joint between husband and wife, or the credit account is secured by property, the creditor may seek information about the applicant’s marital status.192
In situations in which creditors may request an applicant’s marital status, creditors may categorize the applicant only as unmarried (which includes single, divorced, and widowed persons), married, or separated.206 These terms are to be defined by applicable state law.207 The creditor may explain that the category “unmarried” includes single, divorced, and widowed persons but is not required to do so.208
Creditors also may ask for certain information that indirectly discloses the applicant’s marital status. Examples of such permissible indirect inquiries include:209
With enumerated exceptions, a creditor may not make any inquiry about an applicant’s spouse or former spouse.212 This prohibition applies not only to inquiries directed to the applicant but also to inquiries directed to a credit reporting agency, other creditors, or other sources.
With the exceptions of home mortgages and special purpose credit programs,226 a creditor is likely to be limited in the information it may seek about an applicant’s public assistance status. Whether a creditor may ask about the applicant’s public assistance status depends on what kind of credit evaluation system it uses. If the creditor utilizes a credit scoring system, it may not consider—and therefore presumably may not ask about—public assistance status.227
The major exception to the Equal Credit Opportunity Act’s (ECOA) prohibitions on prohibited inquiries is in the area of home mortgages. Both Regulation B and the Home Mortgage Disclosure Act (HMDA)231 require lenders to collect certain information regarding the residential real estate-related loans that they make.