What are the two primary fair lending laws

This Toolkit contains resources to help financial institutions reduce the risk of violations of the Equal Credit Opportunity Act and other fair lending laws. In particular, this Toolkit includes resources to help institutions implement a fair lending compliance program.

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Credit licensees must comply with the responsible lending conduct obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 (National Credit Act).

The key concept is that credit licensees must not enter into a credit contract with a consumer, suggest a credit contract to a consumer or assist a consumer to apply for a credit contract if the credit contract is unsuitable for the consumer.

As a credit licensee, you must decide how you will meet the responsible lending obligations.

On 25 September 2020, the Government announced proposed reforms to the responsible lending obligations contained in Ch 3 of the National Credit Act. The proposed reforms will amend the obligations that apply before entry into a credit product or the provision of credit assistance. ASIC’s guidance relating to the current responsible lending obligations will be reviewed and updated when the proposed reforms are finalised.

Conduct

Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) sets out ASIC’s views on the responsible lending obligations, and steps you can take to minimise the risk of non-compliance with these obligations.

The responsible lending obligations involve:

• making reasonable inquiries about a consumer’s financial situation, and their requirements and objectives
• taking reasonable steps to verify a consumer’s financial situation
• making a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is 'not unsuitable' for the consumer
• if a consumer requests it, being able to provide the consumer with a written copy of the preliminary assessment or final assessment (as relevant).

ASIC's public hearings on responsible lending

In 2019, ASIC held public hearings to help us update our regulatory guidance on the responsible lending obligations: see RG 209, Consultation Paper 309 Update to RG 209: Credit licensing: Responsible lending conduct (CP 309) and read more about the hearings.

Disclosure

Information sheet 146 Responsible lending disclosure obligations: Overview for credit licensees and representatives (INFO 146) sets out your credit disclosure obligations under the National Credit Act and related regulations.

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The FHA prohibits discrimination in residential real estate–related transactions based on

• race or color.
• national origin.
• religion.
• sex.
• familial status.
• handicap.

The ECOA prohibits discrimination in credit transactions based on

• race or color.
• national origin.
• religion.
• sex.
• marital status.
• age.*
• applicant's receipt of income from a public assistance program.
• applicant's exercise, in good faith, of any right under the Consumer Credit Protection Act.

*Age is a prohibited factor provided the applicant has the capacity to enter into a contract.

Disparate Impact

A lender's policies, even when applied equally to all its credit applicants, may have a negative effect on certain applicants. For example, a lender may have a policy of not making single family home loans for less than $60,000. This policy might exclude a high number of applicants who have lower income levels or lower home values than the rest of the applicant pool. That uneven effect of the policy is called disparate impact.

Disparate Treatment

Illegal disparate treatment occurs when a lender bases its lending decision on one or more of the prohibited discriminatory factors covered by the fair lending laws, for example, if a lender offers a credit card with a limit of $750 for applicants age 21 through 30 and $1,500 for applicants over age 30. This policy violates the ECOA's prohibition on discrimination based on age.

Predatory Lending

Fair lending laws also contain provisions to address predatory lending practices. Some examples follow:

• Collateral or equity "stripping": The practice of making loans that rely on the liquidation value of the borrower's home or other collateral rather than the borrower's ability to repay.
• Inadequate disclosure: The practice of failing to fully disclose or explain the true costs and risks of loan transactions.
• Risky loan terms and structures: The practice of making loans with terms or structures that make it more difficult or impossible for borrowers to reduce their indebtedness.
• Padding or packing: The practice of charging customers unearned, concealed, or unwarranted fees.
• Flipping: The practice of encouraging customers to frequently refinance mortgage loans solely for the purpose of earning loan-related fees.
• Single-premium credit insurance: The requirement to obtain life, disability, or unemployment insurance for which the consumer does not receive a net tangible financial benefit.

Unfair and Deceptive Practices

The OCC took the lead among the federal bank regulatory agencies in developing an approach to address unfair and deceptive marketing practices. These practices are often an element in predatory lending. The OCC has taken a number of enforcement actions against banks that were found to have engaged in abusive practices and, in one landmark case, required a bank to pay over $300 million in restitution to its customers.