It can be painful and embarrassing when a mortgage lender turns you down. It hurts even more if the rejection was due to mortgage discrimination.
Mortgage lending discrimination is one type of housing discrimination banned by the the Fair Housing Act. Mortgage lending protection also falls under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA). Despite the protections offered by these acts, housing discrimination remains very real.
According to the National Fair Housing Alliance's (NFHA) 2023 Fair Housing Trend Report, in the prior year there were 33,007 cases of housing discrimination. Fortunately, you can take steps to protect yourself from this kind of discrimination.
What is mortgage lending discrimination?
The Fair Housing Act protects against housing discrimination based on sex, race, color, religion, national origin, family status or disability.
According to the NHFA, disability is the most common cause of discrimination. Racial discrimination is the second-most common basis for fair housing complaints.
The main point here is that discrimination happens when housing professionals make decisions based on personal characteristics instead of finances. However, the Fair Housing Act is there to protect you from mortgage discrimination.
It covers activities related to buying or renting a home, as well as access to mortgage funding.
Protection against mortgage discrimination relates to both lending itself as well as to services necessary to obtain a mortgage -- such as the appraisal process and availability of homeowner's insurance.
Other forms of mortgage discrimation exist, too, including so-called "disparate impact", where a lender's policies can have a negative impact on certain applicants even if the policy is applied to all applicants. This might include, not making mortgages with amounts less than $60,000, for example, which could exclude a number of applicants who have lower incomes or home values from access to credit.
Another form would be "disparate treatment"; this is where a lender bases its decision to grant credit or not based on one or more of the prohibited factors covered by fair lending laws. For example, a lender offers lower credit amounts to younger borrowers and higher credit amounts to older applicants. This would violate ECOA rules regarding discrimination based on age.
Related: What to Do if Your Mortgage is Denied
Legitimate reasons for being declined for a mortgage
Of course, just because you're declined for a mortgage doesn't necessarily mean you were a victim of discrimination.
Legitimate reasons for declining a loan application include:
- Poor credit history
- High debt-to-income (DTI) ratio
- Unstable job history
- Low appraised home value relative to loan
- Unverifiable credentials or documentation
If you feel none of these conditions applies to your situation, you may have reason to suspect home loan discrimination. However, before it comes to that there are steps you can take to reduce the chance of being a victim of lending discrimination.
Avoiding mortgage lending discrimination
Here are some steps you can take to deny lenders even the opportunity to discriminate against you:
- Make your financial credentials hard to resist. Discrimination often occurs in borderline cases. The stronger your financial credentials, the harder it is for a lender to make a case for turning you down. Before applying for a mortgage, check your credit history, pay down debt and try to maintain a steady job history.
- Apply online for greater anonymity. Online applications are a great way of taking your personal characteristics out of the equation to some degree. The focus should be on your financial qualifications.
- Talk to multiple lenders. There are a few bad lenders out there who practice racial discrimination or other ugliness. But you can thwart them by getting several quotes from other sources. Lending is a highly competitive business. You'll find that most want your business if you qualify for a loan.
- Try prequalification or mortgage preapproval. Many lenders have prequalification or preapproval programs. This can allow you to discover any potential objections to your application before you have your house picked out and a deal in the balance.
- Save a copy of your application. A record of exactly what information you put forward can help you challenge a loan denial. This could prove handy if you suspect the real reason was discrimination.
Related: How to Get Preapproved for a Mortgage
Fighting back against home loan discrimination
If you suspect you were declined for a mortgage because of discrimination, there are steps you can take to fight back:
Get the reason in writing. Lenders must by law issue an "Adverse Action" notice if they deny your loan. And under ECOA, financial institutions must provide a written statement of adverse action reasons if you make the request in writing within 60 days of being notified. If the reasons don't add up, you will have a stronger basis for challenging the rejection.
You lender must issue you an Adverse Action Notice within 30 days after
- receiving a complete credit application
- obtaining an incomplete credit application
- taking action on an existing credit account
Lenders have 90 days to issue the notice after making a counteroffer to an application for credit if you don't accept it. For instance, if you apply for a $200,000 loan but the lender approves only $150,000 and you don't accept that loan.
Under the FCRA, if the lender denies your application because of your credit report, it must notify you that you can obtain a free copy of your consumer credit report within 60 days. You also have the right to dispute your report with the consumer reporting agency.
Determine what agency regulates your lender. If you get no satisfaction from the lender, go forward with a complaint to the appropriate agency. Besides addressing your problem, this can help cut down on discrimination against future mortgage applicants.
Related: Mortgage Discrimination: A Guide to Understanding Your Rights & Taking Action
Mortgage discrimination is still an unfortunate reality. However, just remember that the law is on your side, and online tools give you access to a wider range of options for avoiding the bad apples.
This article was revised by Keith Gumbinger.
