Equal Credit Opportunity Act and Foreclosure

Lenders who provide mortgage loans on a discriminatory basis may face liability under the Equal Credit Opportunity Act, which prohibits discrimination in credit. The Equal Credit Opportunity Act (ECOA) prohibits a wide array of discriminatory lending on the basis of several factors. These include race, color, religion, national origin, sex, and marital status. Violations of the ECOA may also be violations of the Fair Housing Act.

Redlining and reverse redlining are practices that are prohibited by the ECOA. These include offering different credit terms (or restricting lending products) to certain areas based on racial criteria. Red lining is when a mortgage lender marks off certain neighborhoods or communities for reduced lending or higher cost loans on the basis of religition or other discriminatory standards. In effect, the bank draws a "red line" around such communities and potential loan applicants from these areas are denied credit.

Reverse redlining works in the opposite manner. A mortgage company or bank would establish lending practices that encouraged many more loans to flow into a certain area or demographic. This may be part of a classic pump and dump scheme, where lenders attempt to inflate the value of homes and provide funds to borrowers who can not pay the loans back. The lender then forecloses and is able to take the properties. Both redlining and reverse redlining are financially injurious to both borrowers and lenders, which is why the practice is somewhat uncommon.

Borrowers may have a very difficult time showing they have been the subject of discrimination in a foreclosure case. If they suspect this, however, it may be worth their while to consult an attorney who specializes in such laws. This is because liability under the ECOA may result in lenders being responsible for actual damages suffered by borrowers, punitive damages up to $10,000, and lawyer costs. Some attorneys may work on contingency if a special case of discrimination is presented. It may be best at least to consult with an attorney before raising this defense in an answer to a foreclosure complaint.

The statute of limitations for violations of the Equal Credit Opportunity Act is two years. If borrowers took out their mortgage more than two years ago, this law may not apply to their mortgage. Again, the best course of action in the case of suspected discriminatory lending would be for homeowners to consult with an attorney who specializes in this area of lending law.

The Home Mortgage Disclosure Act (HMDA) requires financial institutions to publicly release information related to ECOA lending. These reports are provided to the public online and provide information on the percentage of loans given to minorities by different lenders in various cities across the nation. The general public is able to look up zip codes, how many applications each bank took in the area, the demographics of various groups, and the interest rate offered to each group. This can be a starting point for borrowers researching potential discriminatory or predatory lending practices.

Although violations of the Equal Credit Opportunity Act may be somewhat uncommon in the mortgage lending industry, homeowners may want to make themselves more familiar with the law. However, the housing market boom of the past decade had been more a result of all markets being artificially inflated and anyone who could operate a pen was given a loan. This makes actual discrimination more unlikely, as the Federal Reserve set up the markets for bad investment and banks simply took advantage of any borrower coming through the door.
Nick publishes daily articles on the ForeclosureFish website, which aims to educate homeowners on how they can stop foreclosure while they still have time and options available. Visit the site today to learn more about preventing the loss of a home and recovering from a financial hardship, and download an e-book explaining the basics of the foreclosure process: http://www.foreclosurefish.com