Journalists, businessmen, politicians, and regulators are paying increasing attention to the subject of discrimination in lending, with particular emphasis on mortgage lending. It sometimes seems as though the main issues in anti-discrimination efforts have shifted from education and labor markets to the credit markets.
Two different federal laws deal with discrimination in lending: the Fair Housing Act (FHAct) and the Equal Credit Opportunity Act (ECOA). These fair lending laws prohibit lenders from discrimination in credit transactions on the basis of race, color, national origin, religion, sex, and other specified grounds.(1) But the laws provide little practical guidance for enforcement, particularly with regard to the role of the banking regulatory bodies. Congress left to these agencies and to the courts the job of working out the specifics of how to define and promote the laws' purpose--fair lending.
While discrimination has been discussed widely in the popular and professional press, an overview of the two fair lending laws and their enforcement is difficult to find. Section 1 describes these laws, their origins, and the interpretations that the courts and enforcement agencies have given some of their provisions. Section 2 discusses the three major methods of enforcement of the laws: 1) complaints from aggrieved parties leading to investigations by enforcement agencies, (2) civil court actions, and (3) examination by the federal banking agencies.(2) When it comes to their part of enforcing the fair lending laws, the banking agencies follow procedures long used in carrying out their responsibilities for bank safety and soundness. Specifically, they employ periodic fair lending examinations of all banks.(3) Yet the examination of every institution, whether or not the agency suspects discrimination, is strikingly different from the practices of the federal agencies responsible for other areas of anti-discrimination law enforcement. Section 3 discusses the enforcement of other anti-discrimination laws. The absence of periodic exams in other areas of anti-discrimination law enforcement naturally leads one to ask whether routine use of exams for banks is the most efficient means of enforcing the fair lending laws. The concluding section raises briefly some issues that bear on this question.
1. THE FAIR LENDING LAWS
The Fair Housing Act (FHAct) was passed as part of the Civil Rights Act of 1968, which Congress enacted following urban unrest in many U.S. cities in 1965, 1966, 1967, and after Rev. Martin Luther King, Jr.'s assassination in early 1968. According to a Supreme Court opinion, Congress intended the FHAct to contribute to the elimination of ghettos by reducing discriminatory housing practices (Trafficante v. Metropolitan Life Insurance Company, 409 U.S. 205
, cited in Board of Governors, Consumer Compliance Handbook
The FHAct prohibits discrimination in many activities of the residential real estate industry besides lending. The act prohibits discrimination by race, color, religion, sex, handicap, familial status (if a household includes children), and national origin.(4,5) It prohibits the refusal to sell, rent, or negotiate for the sale or rental of housing for discriminatory reasons. Varying the terms of sale or rental in a discriminatory manner is prohibited, as is falsely claiming that housing is not available for inspection, sale, or rental. The act also prohibits real estate brokerage organizations, such as multiple-listing services, from discriminating in their terms of access to the organization.
Section 805, the fair lending portion of the FHAct, makes discrimination unlawful in several aspects of home finance. Specifically, it prohibits discrimination in the making or purchasing of loans, the proceeds of which are for purchasing, constructing, improving, repairing, or maintaining a dwelling. The prohibition applies to any person or entity whose business includes engaging in residential real estate-related credit transactions. …