Fair Lending
AdvancedFair lending refers to laws and practices, especially in the United States, that require lenders to treat credit applicants equally and prohibit discrimination based on characteristics such as race, sex, religion, national origin, age or marital status.
In the United States, fair lending is based mainly on the Equal Credit Opportunity Act and the Fair Housing Act. These laws make it illegal to discriminate in any part of a credit transaction, including advertising, application processing, loan terms and pricing.
Discrimination can be direct, such as refusing loans to members of a particular group, or indirect, where a seemingly neutral policy has a disproportionately negative effect on a protected group without a valid business reason. A well-known historical example is redlining, where lenders refused to lend in certain neighbourhoods based largely on their racial composition.
For example, a lender charging higher interest rates to borrowers of one ethnic group than to others with similar credit profiles would violate fair lending laws.
Regulators examine lenders for fair lending compliance, and violations can lead to large penalties. The growing use of algorithms and artificial intelligence in lending decisions has raised new concerns about hidden discrimination. Many other countries have equality and anti-discrimination laws that apply to lending.
For worked examples and full lessons, visit notesbysara.org.