One of the most significant issues in the credit market is discrimination. In practice, not every American has the privilege of enjoying equal access to the many benefits which the market has to offer. Discrimination occurs in a number of areas such as mortgage transactions and the home-buying process. It has been found that people do not always receive equal treatment from real estate professionals, such as lenders, insurance brokers, appraisers, agents, and others (Turner 2). The United States Federal Laws prohibit this act, with a number of laws instituted for the sake of promoting equal and fair lending practices in the US credit market. This paper focuses on this issue and explains a number of aspects of issues such as the regulations and the types of discrimination.
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Discrimination is an act involving the adverse or unfair treatment of an individual property buyer, mortgage or loan applicant, or renter based entirely on their affiliation with a specific racial, social or ethnic group (O’Hara 210). In the housing business, discrimination is likely to occur in the event of a leasing agent, or a realtor showing more properties to a white applicant than to a black one, though they may both have mutual housing needs.
Actual discrimination cases in the mortgage business happen when an applier is not given a loan or charged higher rates for the loan. If by any chance, the applicant is offered a contract which is to some extent less advantageous, such as higher closing costs or down payments, only due to their social, racial, or ethnic affiliations, it is discrimination. Discrimination in credit provision is considered to be illegal on the grounds of civil rights, as well as the bank laws (Seidman 197).
Discrimination is said to start even at the earliest stages of the credit lending procedure. Therefore, it may occur in the pre-application stage during inquiries by prospective borrowers. There is a likelihood that a member of a minority group may be provided with lesser information by lending officers (O’Hara 210). In addition to that, they may find themselves being given higher quotes for interest rates. This will all constitute lending discrimination at the pre-application stages.
At the subsequent stages of the loaning process, discrimination occurs in a number of ways such as minorities being charged higher rates. Possible causes of discrimination occur in a number of areas that involve lending. Such areas include credit card lending, mortgage lending, and small business lending (O’Hara 210).
There are various consequences, which arise as a result of these discriminatory actions in lending markets. For instance, real-estate related discrimination has adverse impacts on African Americans and other minority groups (O’Hara 211). It levies significantly higher costs for searching for properties. In addition to that, it is the source of racial segregation; something which is associated with the infliction of much pain in people. It restricts their ability to access quality education, reduces their employment chances, and also mars their ability to amass and acquire properties (such as houses).
Consequently, this ends up increasing the income and wealth gap between colored people and their white counterparts. This situation increases the poverty rates for the non-white groups and also lowers their income levels (O’Hara 211).
Types of Lending Discrimination
Discrimination in lending practices has been established to take a number of forms. A very clear understanding of the distinctions is essential since each form will have to be measured or remedied differently. The federal regulators have categorized potential infringements of the equal lending regulations into three distinguishable forms of discriminatory practices. These include blatant or overt discrimination, disparate treatment, and lastly, disparate impact (GAO 24).
In order for examiners, lender, and people, in general, to clearly understand the discrimination forms above, the Interagency Task Force on Fair Lending provided a policy statement which illustrated all three discrimination forms by the use of hypothetical case instances. The case illustrations clearly showed lending activities, which are a definite infringement of the fair lending laws.
Blatant or overt discrimination
this form of discrimination takes place when an individual or a group of individuals is openly discriminated by a given lender on the basis of the certain protected factors under FHA and ECOA, such as race, sex, marital status, age, and others. This form of discrimination is very easy to identify and will include an outright denial by a given lender to attend to an applicant or refusal to approve an application on protected grounds (GAO 24).
This discrimination form happens when a number of appliers, who are alike in several aspects except for particular protected characteristics such as, race, sex, age, and so forth, are treated differently on the basis of those characteristics. This form of discrimination usually ranges from overt discrimination to much more subtle differences in treatment. It does not necessarily have to be prompted by a conscious intention or prejudice. Compared with blatant discrimination, disparate discrimination is somehow harder to detect and will most probably call for the application of elaborate comparative-file analysis or any other strategy which has the potentiality of discovering treatment disparities among appliers who are alike. Applicants most likely to face this form of discrimination are those who are not distinctly qualified or unqualified (GAO 24).
Disparate or adverse impact
This is the other form of discrimination that is said to occur when an apparently unobjectionable practice or policy is employed equally to every credit applicant, but with the outcome that it has a disharmonious adverse effect on the applicants in a protected group. It ought to be the scenario that the practice or policy in question is not excused by business-related essentiality and the sureness that there are no other less discriminatory options. While comparing the three forms of discrimination, this is the most difficult to detect; a process that involves several steps (GAO 24).
A number of federal laws have been developed in order to regulate lending discrimination. Some of the applicable laws include the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) (Hopkins 4).
Fair Housing Act
The FHA was instituted for the purpose of eradicating discrimination when it came to the selling, leasing, or renting of houses on the basis of specific, protected traits or characteristics. It is applicable to every structure which is occupied or will in future be occupied as a residential property as well as the piece of land to be traded for the building’s construction. Therefore, it covers homes, condominiums, trailer parks, apartment buildings, and any other structure which is used as residential places. The statute forbids people from practicing any form of discrimination in every aspect of residential property related dealings.
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Some of the covered aspects include: obtaining loans for the purposes of repairing, building, refurbishing, or buying a residence; real-estate buying loans; brokering, appraising, or selling of residential properties; and so on (Hopkins 4).
Equal Credit Opportunity Act
This law was enacted in the year 1974 with the objective of eradicating the practice of discrimination in credit dealing against women. Other protected classes have been included following the several subsequent amendments enacted. Each and every organization whose activities include credit extension to customers are affected by this statute. The entities include credit card companies, banks, and other lending institutions in the United States. It completely prohibits any kind of discrimination when it comes to selling, financing, or renting out of residential properties or real estate (Hopkins 4).
The above-discussed statutes are known to differ when it comes to the protected classes which they are intended to cover (Hopkins, p. 4). For instance, while ECOA does not forbid discriminating borrowers on the basis of familial statuses, such as children and handicap, FHA protects the same. However, it covers public assistance depending on the marital status, age, income, and claim retaliation under the CPA (Consumer Protection Act) that are not addressed by the FHA statute. Another key distinction between the two statutes is that FHA extends to encompass activities before the actual application, which are not covered by the ECOA.
In other words, FHA covers both post and pre-application practices. Pre-application activities will include the solicitation and marketing processes. On the basis of ECOA, it is illegal for a borrower to be discriminated by a lender on forbidden grounds in all aspects of the credit dealing, and under the two statutes, it is not allowed for any given lender to discriminate on illegal grounds in any residential property or mortgage deal. Still, under the two statutes, any lender ought not to, because of given protected characteristics (Hopkins 4), commit any of the following acts:
- Decline to give out information, services or detail, or offer dissimilar information pertaining to a given aspect of the lending transaction, including the availability of credit, lending standards, as well as the application procedures
- Discourage or discriminately encourage prospective borrowers with regard to any inquiries or credit application process
- Decline extending credit or employ somehow different standards when it comes to the determination of whether a credit is to be extended
- Intentionally change credit terms he or she offers borrowers, which include the principal amount, rate of interest, time period for the credit as well as the loan type
- Employ varied standards for the evaluation of the loan collateral
- Attend to a client differently in the process of servicing the loan or determining the course of action to be taken in the event of defaulting
- Apply varied standards when it comes to packaging or pooling of the loans in secondary markets.
Given the illegality associated with the act of lending discrimination, it is evident that the federal government has been committed to curbing it. The FHA and ECOA statutes are some of the statutes which have been instituted for the purposes of eradicating discriminatory practices. Any act which involves unfair treatment of an individual property buyer, mortgage or loan applicant, or renter based entirely on their affiliation with a specific racial, social or ethnic group is considered to be discriminatory, therefore, absolutely illegal.
The acts are classified into three categories as forms of discrimination, which are blatant or overt discrimination, disparate discrimination, and lastly, disparate impact. This paper provides a very detailed explanation of this illegal act of discrimination. Any reader would be able to understand what it really is about, and also understand the remedies which are available.
GAO (General Accounting Office). Fair Lending: Federal Oversight and Enforcement Improved But Some Challenges Remain. Illustrated Ed. USA: DIANE Publishing Company. 1996. Print.
Hopkins, Brad. The Law of Lending Discrimination. USA: Drake University Law School & Iowa Civil Rights Commission, 2010. Print.
O’Hara, Phillip Anthony. Encyclopedia of Political Economy, Volume 1. New York, NY. Routledge. 2001. Print.
Turner, Margery Austin, & Felicity Skidmore. Mortgage Lending Discrimination: A Review of Existing Evidence. The Urban Institute. 1999. Web.