Background and Summary of the Fair Housing Act

FINANCING OF HOUSING
SALE OR RENTAL OF HOUSING
ENFORCEMENT OF THE ACT
INTERFERENCE, COERCION, AND INTIMIDATION
UNLAWFULLY DISCRIMINATORY LENDING PRACTICES

6-1477

The Fair Housing Act (FHA) is title VIII of the Civil Rights Act of 1968, as amended (42 USC 3601 et seq). It regulates many practices, but perhaps most critically relevant to banks, the FHA makes it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, or sex. The Equal Credit Opportunity Act of 1974 (ECOA), as amended, prohibits discrimination with respect to any aspect of a credit transaction on the basis of sex, race, color, religion, national origin, marital status, age, receipt of public assistance, or the exercise, in good faith, of rights granted by the Consumer Credit Protection Act. Anyone who provides loans for housing is subject to both acts and is, therefore, prohibited from discriminating on any of these bases. There are a few situations in which the FHA and ECOA diverge, however.

Neither the FHA nor Regulation B is intended to supplement or supplant creditors’ independent judgment about what constitutes creditworthiness or sound economic practice in the credit marketplace. Financial requirements on loans will vary from place to place and transaction to transaction. What is forbidden is the imposition of different requirements and the use of standards that have a disparate effect on different borrowers.

6-1478

FINANCING OF HOUSING

Section 805, which applies to the financing of housing, makes it unlawful for a bank to deny a loan or other financial assistance for the purpose of purchasing, constructing, improving, repairing, or maintaining a dwelling because of the race, color, religion, national origin, or sex of: (1) the loan applicant, (2) any person associated with the loan applicant, (3) any present or prospective owner of the dwelling, (4) any lessees, or (5) any tenants or occupants. It is also unlawful to discriminate in fixing the amount, interest rates, duration, or other terms of the credit.

6-1479

SALE OR RENTAL OF HOUSING

Section 804 prohibits the following with respect to the sale or rental of housing if based on race, color, religion, sex, or national origin:

rejecting a bona fide offer or refusing to negotiate
discriminating against any person in the terms or conditions of a contract or in the provision of services
making any oral or written statement or advertisement that indicates an intent to discriminate
stating falsely that a dwelling is not available
inducing or attempting to induce, for profit, the sale or rental of property by making false statements about prospective neighbors

Because the caption of section 804 indicates that the section concerns itself with the sale and rental of housing, the conclusion might be reached that it has no application to financing housing. Section 804(a), however, makes it unlawful to “refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or to otherwise make unavailable or deny a dwelling” (emphasis added) on a prohibited basis. In United States v. City of Parma, 374 F. Supp. 730 (N.D. Ohio, 1974), a case dealing with the city’s zoning practices, the court characterized this language as being “as broad as Congress could have made it” and as “catchall phraseology which may not be easily discounted or de-emphasized.” In the case of Laufman v. Oakley Building and Loan Company, 408 F. Supp. 489 (S.D. Ohio, 1976), the court specifically held that, although section 804 generally applies to sales and rentals and section 805 to extensions of financial assistance in connection with housing, transactions involving sales or rentals and loans or other financial assistance in connection with housing are subject to both. The court went on to say that the same conduct may also be prohibited by both. Consequently, a bank’s practices in the area of housing lending should be examined to ensure that they do not “otherwise make unavailable or deny” housing, even though no act or practice specifically violates any prohibition of the FHA.

Section 810 allows a person to file a discrimination complaint with the Department of Housing and Urban Development (HUD). HUD will investigate the complaint and may attempt to resolve the grievance through conference, conciliation, or persuasion.

6-1480

FINANCING OF HOUSING

Sections 810 and 812 provide that aggrieved persons may sue anyone who they feel has discriminated against them, regardless of whether they filed a complaint with HUD. Section 813 provides that the attorney general of the United States may sue for an injunction against any pattern or practice that denies civil rights granted by the FHA.

6-1481

INTERFERENCE, COERCION, AND INTIMIDATION

Section 817 makes it unlawful to coerce, intimidate, threaten, or interfere with any person in the exercise of, or because they have exercised, rights granted by certain other sections of the FHA, including sections 804 and 805. The courts have interpreted this provision broadly. It has been held to prohibit racial redlining by a financial institution, Laufman v. Oakley Building and Loan Company, and, in connection with a court-approved settlement, to prohibit appraisal practice rules issued by a professional real estate appraisers’ association that result in its members providing low appraisals based on racial considerations, U.S. v. American Institute of Real Estate Appraisers, 442 F. Supp. 1072 (N.D. Ill., 1977).

6-1482

UNLAWFULLY DISCRIMINATORY LENDING PRACTICES

Like the other civil rights statutes, the FHA was broadly written and has been accorded “a sweep as broad as its language” in the courts. A wide variety of lending practices have been found illegal under the act, including some that are not specifically mentioned in the act itself.

6-1483

Redlining

In Laufman v. Oakley Building and Loan Company, redlining was held by the courts to be prohibited by the FHA if done for the purposes of racial discrimination. Redlining is the practice of denying loans for housing in certain neighborhoods even though the individual applicant may be eligible for credit. The term “redlining” refers to the presumed practice of mortgage lenders of drawing red lines around portions of a map to indicate disfavored neighborhoods.

Redlining is not unlawful, however, when based on economic considerations, such as whether an area lies on a fault line or a flood plain. The following excerpt from The Appraisal of Real Estate, published by the American Institute of Real Estate Appraisers, addresses this distinction.

“Redlining” can be a rational response to a real risk which exists in an area. For instance, property located in a flood plain, in a slide area or in close proximity to a geologic fault may present a level of risk that would be unacceptable to a mortgage lender or insurer. Redlining practices are said to gain an impropriety, however, when the perceptions of risk upon which they are based are unrealistic, inaccurate or arbitrary, or when the boundaries of the affected area are overbroad so that the practices result in negative decisions being made with respect to whole neighborhoods which may contain sound properties and which might otherwise be stable and viable. The term “racial redlining” refers to the practice of basing loan, insurance, or investment criteria on the racial characteristics of the people who live in a particular neighborhood, presumably because of a perception of risk arising from the racial or social composition of the population or changes in this composition. Racial redlining has been held to be unlawful by the Courts and by several federal agencies which have regulatory authority over lending institutions, including the Federal Reserve Board and the United States Department of Housing and Urban Development. In addition, the major secondary market organizations which purchase home loans (FHLMC and FNMA) have stipulated that the racial composition of areas must not be considered in appraisals for home loans submitted for purchase by these organizations.

This does not mean that a lending institution is expected to approve all housing loan applications or that it must make all loans on identical terms. However, denying loans or granting loans on more stringent terms and conditions must be justified on the basis of economic factors such as the following:

an applicant’s income or credit history
the condition, use, or design of the proposed security property (or of nearby properties that clearly affect the value of the proposed security property) provided such determinants are strictly economic or physical
the availability of neighborhood amenities or city services
the need of the bank to hold a balanced real estate loan portfolio, with a reasonable distribution of loans in various neighborhoods, types of property, and loan amounts

Each of the above factors must, however, be applied without regard to race, color, religion, national origin, sex, or marital status of prospective borrowers or residents of the neighborhood.

6-1484

Excessively Low Appraisals

Making excessively low appraisals of property is closely akin to redlining if based on racial considerations. This practice, which forces minority loan applicants to make large downpayments, was held to violate section 805(a) and section 817 in the U.S. v. American Institution of Real Estate Appraisers. The logic of this decision would also apply to banks that lend on the basis of such appraisals.

6-1485

Arbitrary, Subjective, and Nonreviewable Rental Criteria

The use of arbitrary, subjective, and nonreviewable rental criteria to justify an otherwise unexplained racial (or sexual, religious, etc.) imbalance in clientele was found to be illegal under section 804(a) in the case of U.S. v. Youritan Construction, Co., 370 F. Supp. 643 (N.D. Cal., 1973). In Youritan, the resident manager had instructed the rental agents to use differing procedures when approached by a black applicant than when approached by a white applicant. For example, white applicants were told that no credit check was necessary, whereas black applicants were told that a lengthy one would be necessary. White applicants were told that there were vacancies when black applicants were told there were none. The court’s rationale would clearly apply to lenders who use such standards in their housing lending.

6-1486

Racially Exclusive Image

Creation and exploitation of a racially exclusive image, even though there may be little evidence of discrimination against an individual applicant, has been repeatedly found to be an illegal employment practice. It was also held to violate the FHA in U.S. v. Real Estate Development Corp., 347 F. Supp. 776 (N.D. Miss., 1982). One indicator of such an image might be the absence of the required fair housing poster from the lobby of a bank office. Another example is the use of advertising that portrays applicants as being of a particular race. The use of only white people in advertisements may suggest that only white applicants are sought.

6-1487

Expressing an Intent to Discriminate

Making or printing a statement that expresses an intent to discriminate in the sale or rental of a dwelling is unlawful under section 804(c). In Holmgren v. Little Village Community Reporter, 342 F. Supp. 512 (N.D. Ill., 1971), the court applied this prohibition to newspaper advertisements soliciting tenants and home buyers who spoke certain languages.

6-1488

Discouraging Applications

The ECOA prohibits a creditor from discouraging or denying applications for credit on prohibited bases, for example, by refusing to return black applicants’ telephone calls, by providing black applicants with insufficient information to complete an application, or by using interview scripts designed to discourage applications.

Read together, FHA and the ECOA produce a strong statutory prohibition against prescreening or discouraging applicants by housing sellers or lenders, even to the point of ensuring that their advertising policies do not have that effect. Consequently, a bank would be well advised to ensure that its advertising policies do not have the effect, even inadvertently, of illegally prescreening applications for credit. For example, selective use of ethnic media may have the effect of discouraging applications from those who are of another ethnic background. The secretary of HUD has issued regulations that financial institutions must follow in determining the kinds of advertising practices that should be followed or avoided.

6-1489

Acts Having Negative Impact on Nonminorities

Discriminatory acts that have a negative impact on nonminorities, such as white people, are illegal, and such people have standing to sue, according to the Supreme Court in Trafficante v. Metropolitan Life Insurance Co. 409 US 205 (1972). Two tenants of an apartment complex, one white and one black, brought suit under section 810(a) for loss of social and business advantages because of the owner’s policy of discriminating against nonwhites. They also claimed that they were “stigmatized” by policies that made the complex in which they lived a “white ghetto.” In another case, a white plaintiff who was refused a standard mortgage because the property was in an integrated neighborhood was permitted to recover damages under sections 804(a) and (c) and 817 in Harrision v. Heinzeroth Mortgage Co., 430 F. Supp. 893 (N.D. Ohio, 1977).

Excessively Burdensome Standards

Use of excessively burdensome qualification standards for the purpose, or with the effect, of denying housing to minority applicants is illegal under section 804(a), as the court held in U.S. v. Youritan Construction Co., 370 F. Supp. 643 (N.D. Cal., 1973). In Youritan, the rental agents required security deposits and credit checks for black applicants but not for whites.

6-1490

More Onerous Terms or Conditions

Imposing on minority loan applicants more onerous interest rates or other terms, conditions, or requirements is explicitly prohibited under section 805. The phrase “terms or conditions,” as used in the act, covers many types of discriminatory practices. For instance, in Williams v. Matthews Co., 499 F.2d 819 (8th Cir., 1974), the court ruled that it was illegal for a developer to follow a policy of selling lots in a subdivision only to persons having construction contracts with “approved” builders since all the “approved” builders were white and no one would break the segregation barrier by building a house for a black family in a white subdivision. As a further development in the interpretation of the “terms or conditions” language of section 805, the application of different standards or procedures in administering foreclosures, late charges, penalties, reinstatements, or other collection procedures is also unlawful, as the court held in Harper v. Union Savings Association, P-H ¶ 15,203 (N.D. Ohio, 1977).

6-1491

Terms and Availability of Insurance

Discrimination in the terms or availability of insurance is a subject on which the FHA and the ECOA may seem to diverge somewhat. The ECOA does not prohibit a creditor who sells or participates in selling insurance from discriminating in the terms and availability of insurance. Nor does it prohibit discrimination regarding the availability or terms of credit on the basis that insurance is unavailable, except when the insurance has been denied because of age. However, when dealing with insurance for housing credit, discrimination prohibitions apply. The Department of Justice has taken the position that the FHA is violated when insurance required for housing credit is denied, or made more difficult to obtain, on a basis prohibited by the FHA.

This does not mean that a bank or other financial institution cannot require insurance, particularly casualty insurance, in connection with its mortgage loans. However, if, because of unlawful discrimination by the bank, the insurance is unavailable or available on more onerous terms and this adversely affects the terms or availability of credit, then, the bank has violated the FHA. If, on the other hand, the bank merely requires that the customer obtain insurance, and an independent insurance company that is approached by the customer discriminates unlawfully regarding the terms or availability of insurance, then the bank would not be liable for the insurance company’s action.

6-1492

Racial Steering

Racial steering, or deliberately guiding potential purchasers to or away from certain areas because of race, is illegal and violates section 804(a). In Zuch v. Hussey, 394 F. Supp. 1028 (E.D. Mich., 1975), the court said:

Unlawful steering or channeling of a prospective buyer is the use of a word or phrase or action . . . which is intended to influence the choice of a prospective property buyer on a racial basis. . . . . Where choice influencing factors such as race are not eliminated freedom of choice in the purchase of real estate becomes a fantasy. . . . . It is the freedom of choice in the purchase which the Fair Housing Act protects. Accordingly, any action . . . which in any way impedes, delays, or discourages on a racial basis a prospective home buyer from purchasing housing is unlawful.

6-1493

Practices That Discriminate Against Women

Lending practices that discriminate against women, prohibited under FHA as well as ECOA, include the following:

discounting or disregarding the income of a working wife or single woman
refusing to grant a loan, or granting a loan on different terms and conditions, because of sex
requiring more or different information from a woman applicant than a man (for example, about birth control arrangements or a family plan)
subjecting a woman applicant to a different or more extensive credit check than that which is usually required for men
refusing to include alimony or child support as income when evidence is provided of a history of consistent payment and indicates that payments are likely to continue
basing any aspect of a lending decision on general presumptions about women (for example, that women of childbearing age are poor risks)
treating single working parents differently from married working parents
requiring a cosigner for women but not for men