VIDEO: What is Fair Lending
In this Compliance Clip (video), Adam briefly explains what is fair lending and differences between the two main fair lending laws, Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA). This video is actually an introduction to the program Fair Lending for Lenders which is available at our store. This video provides a lot of valuable information into understanding what fair lending is so feel free to share this video to your lending team.
Video Transcript
The following is a transcript of this video:
What is Fair Lending
This Compliance Clip is going to talk about what Fair Lending is. What we're going to do for this Clip is a little bit different, but you'll see that the question we have is this: What is Fair Lending?
For our answer, instead of just giving you a unique answer for this Compliance Clip, what we're actually going to do is give you the introduction to our Fair Lending for Lenders. This is a program that runs about an hour forty-two minutes long. We're going to share with you the first 10 minutes of our Fair Lending for Lenders Program, which really outlines what fair lending is and answers the question, what is for lending. So without further ado, here's that Clip from our Fair Lending for Lenders program.
Fair Lending Overview
Moving on, let's talk about our first topic. This is an overview of fair lending. We're going to talk about history and overview of fair lending. As we begin, we need to understand and answer the question of “What is fair lending”? Being in baking, being a lender in the mortgage industry wherever you are located, you probably have an understanding of what fair lending is. But in basic simple terms, fair lending is the process of treating all applicants equally during the entire lending process. So that's what we're talking about. When we talk about fair lending, it is making sure we're treating everybody fairly in the same way when it comes to any aspect of a credit transaction. The problem if we don't have fair lending is we have discrimination and discrimination occurs when a protected class is treated less favorably than a non-protected class.
We'll talk about what protected classes are in a few minutes, but protected classes are the categories of human beings that are protected by law under fair lending laws. We cannot discriminate against protected classes and there's actually quite a few different protected classes depending on which law we're looking at. We'll go over all of that in detail. So that is fair lending.
It's important to understand that fair lending is a hot topic. This is something that your institution's regulators would look at on a regular basis. Your investors look at this, this is a big deal. It's a hot topic in regards to regulatory compliance. So it's so important that you get this right and you take this extremely, extremely seriously because there could be some major fines and repercussions if we don't do that. We'll talk about that a little bit later in this video.
Fair Lending Laws
When it comes to fair lending laws, there are two main fair lending laws we talk about when it relates to fair lending. The first law that was enacted was the Fair Housing Act, referred to sometimes in your manual or in this program as FHA, and the second is Equal Credit Opportunity Act or ECOA. These are the two main fair lending laws that we refer to. Frankly, we’ll talk more about the ECOA. We'll explain that in a few minutes as well.
Fair Housing Act
The Fair Housing Act, this was the first of the two fair lending laws that was enacted in the late 1960s, in 1968. In fact, it was enacted right after, I believe, the Martin Luther King riots. So this was one of the first fair lending laws that came into effect years and decades ago.
Fair Housing Act prohibits discrimination only for certain types of credit transactions. Not every time a credit transaction or loan is covered under the Fair Housing Act. What it covers is loans to build by repair or improve a dwelling, loans where you're purchasing real estate, or if you're purchasing real estate loans, it covers selling brokering or praising residential real estate, and it covers selling or renting a dwelling. As you can see here, the Fair Housing Act applies to what? It applies to fair what? Fair housing. It's not rocket science, but we're talking about mortgages. That's what we're talking about in relation to lending. Of course, if renting a dwelling is covered, selling or brokering and those types of things are covered, we're talking about mortgages. That's how it relates to us as lenders and processors. That's the Fair Housing Act.
The Fair Housing Act prohibits discrimination based on protected classes. The Equal Credit Opportunity Act also prevents discrimination based on protected classes but the Fair Housing Act and theEqual Credit Opportunity Act define protected classes differently. What we have here on this slide are the protected classes that are covered under the Fair Housing Ac. The Fair Housing Act prohibits discrimination based on race or color, national origin, religion, gender familial status, or handicap. These are the protected classes under the Fair Housing Act. Now I will say the first four – race or color, national origin, religion, and sex – those are all the exact same when it comes to the Equal Credit Opportunity Act but the Fair Housing Act has two unique ones that are not covered under ECOA. They are familial status or handicap.
We're going to talk about all these in detail but I do want to spend just a second talking about familial status. When we're doing a mortgage loan, a loan secured by a dwelling, that's covered under the Fair Housing Act, we have to make sure that we're not discriminating based on familial status and that refers to children under 18 that are living at home. You've probably seen the show 27 Kids and Counting? Just kidding! It's not that number. It's like 19 Kids and Counting, something like that with the Duggar family. Basically, you cannot discriminate somebody just because they have a lot of kids living at home. They can't be the sole reason you do not. You cannot discriminate based on the number of kids living at home. You can't make them jump through more hoops than you would another applicant. You can't make them go through greater, more challenging processes or treat them differently in any way.
Handicap. That's another one that's covered under the Fair Housing Act and it's not actually covered under ECOA. Handicap could be a number of things. I've seen many people that are wheelchair bound and that person, for example, would be covered under the Fair Housing Act. My mother-in-law is wheelchair bound at this stage of her life. She has a great quality of life but she is wheelchair bound. You may say, look, we're not going to give you a loan on a home that you have to go up three steps to get inside. In fact, my home is like that. You have to go up about, I think, it's about six steps in order to come in our front door. My mother-in-law has been in our house once because my brother-in-law and I both were able to lift her in her wheelchair and bring her in so she can see our home when we first purchased it. But you cannot discriminate on somebody because of handicap because there are ways to get around. For example, my mother-in-law lives in a house that is two stories. She sleeps upstairs and they've installed a chairlift that takes her upstairs. So you cannot discriminate based on handicap. That's the biggest thing to understand there.
Equal Credit Opportunity Act
The Equal Credit Opportunity Act. This was enacted in 1974 and this prohibits discrimination in all aspects of a credit transaction and includes all types of credit. This is more encompassing than the Fair Housing Act because it covers all types of credit, not just dwellings, and it prohibits discrimination in all aspects of credit. So the second somebody walks into your office or to your building to inquire about a loan to when they paid off the loan and you release the mortgage, anything and everything in between is covered by the Equal Credit Opportunity Act.
Maybe you're a commercial lender and maybe you like it being a commercial lending because regulations generally don't apply to you. Well, guess what, the Equal Credit Opportunity Act does apply to you because it includes all types of credit, including commercial and business purpose loans. Regulators in the past seemed to have focused more on consumer credit but that is changing. The Equal Credit Opportunity Act absolutely applies to commercial and business purpose loans and this is changing. The regulators are constantly saying that one of their primary focuses is fair lending for commercial and business purpose loans.
The Consumer Financial Protection Bureau has said this and in fact, they're implementing a new rule that is going to require financial institutions to collect and report data for small business loans. Once they have this data, they're going to be able to evaluate business loans and commercial loans at a much greater extent. All that means is down the road, over the next decade, fair lending for commercial and business loans is going to change significantly. It's going to be a huge risk in organizations and this may be why you're watching this fair lending training today.
As far as protected classes under the Equal Credit Opportunity Act, some are the same, of course, we've got a few that match the Fair Housing Act, which include race or color, religion, national origin, and sex. Beyond that, the Equal Credit Opportunity Act has several more that are not covered under the Fair Housing Act but are covered under ECOA. These include marital status, age, receipt of income from any public assistance program, or a good faith exercise of rights under the Consumer Credit Protection Act. So this is what ECOA covers. They cover all of these things.
We will talk about marital status, age, receipt of income from public assistance and, race, color, religion, national origin, and sex. But the one thing I want to talk about here is a good faith exercise of rights under the Consumer Credit Protection Act. All this really means is if somebody complains against you or your bank and cites a potential fair lending violation under their rights under the Consumer Credit Protection Act, you are prohibited from retaliating against them by denying a loan just because they exercise their rights under a law. That's what they're saying there. We'll talk about everything else in a little bit, but that is an overview of ECOA.
Just to be clear, as I mentioned previously, what we have are two for lending laws, but ECOA actually encompasses a lot of what is covered under the Fair Housing Act. Therefore, what we tend to focus on when we train on fair lending is the Equal Credit Opportunity Act. We're going to spend most of our time talking about ECOA and not a lot of time today on this program talking about the Fair Housing Act.
Fair Lending for Lenders Class
As you can see, that was our clip from Fair Lending for Lenders and that answers the question of what is fair lending. That entire program does run an hour and forty-two minutes which is much longer than the 10-minute clip you just saw. In fact, the program just starts with history and overview for lending, that it really takes a deep dive into fair lending from the perspective of lenders. Sometimes financial institutions provide training for lenders on fair lending. That's just a high level overview but this 1 hour 42-minute class that really does take a deep dive. If you're interested in this program, we can actually offer it to you at a one little price to train your entire lending team. You can include your processors in this or whatever you want for just one little price based on the size of your institution. In order to deliver it, we can actually set you up with a couple of different options. We can provide you with the actual video and an MP4 format for you to download and distribute a way that works for you. Or we can provide you with a portal on our site, such as compliancecohort.com/your-bank-name and your credit union name, your mortgage company name, whatever you want. We can actually do a private portal or give you the download, whatever works for you, but we make it really easy to have that. If you're interested in more information on that, you can go to compliancecohort.com/store.
Again, that was different for a Compliance Clip but we wanted to share with you that introduction to Fair Lending for Lenders because it really does provide a lot of valuable information into understanding what fair lending is. That's it for this Compliance Clip.