5 Common Fair Lending Violations and How to Avoid Them

Do you feel like lending standards are too rigid? Are you worried you might be a victim of a fair lending violation? You are not far from the first. 

A recent study revealed that 49% of Americans use credit cards to pay their bills. This means lenders have plenty of room to increase their rates and fees. Therefore, you must learn what to watch out for when determining fair lending violations.

In this article, we discuss the common lending violations and how to avoid them. Read further to know more.

1. Redlining

Lenders are required by law to treat all applicants equally without regard to race, religion, gender, marital status, or other factors. However, some lenders engage in discrimination practices, such as “redlining.”

Redlining is the practice of refusing to lend money to people who live in certain geographic areas, usually because the area is predominantly minority or low-income. 

2. Disparate Treatment

Lenders are prohibited from basing their credit decisions on race, color, religion, national origin, sex, marital status, age, or whether a consumer receives public assistance. They are also prohibited from using any of these factors to determine a consumer’s creditworthiness. 

3. Disparate Impact

This occurs when a lender offers different terms or conditions to other groups of people based on their protected characteristics, such as race or gender. This can happen accidentally, for example, if a lender offers different interest rates to other groups of people based on credit score. It can also occur deliberately, for example, if a lender only provides loans to people of a certain race. 

4. Steering

There are numerous fair lending violation examples when it comes to fair lending practices, but some of the most egregious have to do with the steering. This is when a lender leads a borrower to a particular type of loan based on factors other than creditworthiness.

For example, a lender might steer a borrower with poor credit to a subprime loan with unfair and predatory terms. Or, a lender might try to steer a black or Latino borrower to a “minority loan” with higher interest rates and fees. This is not only illegal, but it’s also unfair and unethical. 

5. Predatory Lending

Predatory lending is a term used to describe lenders’ unfair, deceptive, or fraudulent practices during the loan origination process. Some common fair lending violations include steering consumers into higher-cost loans, inflating appraisals, and charging excessive fees. 

Don’t Be a Victim of Fair Lending Violations 

To avoid being the victim of a fair lending violation, borrowers should shop around to compare offers from different lenders.

Borrowers should know their rights under the Equal Credit Opportunity Act. They should also keep records of all lenders’ communications and discriminatory document treatment.

If you believe you have been the victim of a fair lending violation, you can file a complaint with the Consumer Financial Protection Bureau (CFPB). Read on regulatory solutions for more info. 

Conclusion 

To avoid common fair lending violations, you should always be aware of the lending practices in your state and be transparent about your financial situation. It is also essential to understand the different types of loans available and the terms and conditions attached to each one. If you have any questions, ask your lender before signing any paperwork.

For more advice on financial management and how to avoid common lending mistakes, check out our other blog posts!