How Fair Lending Laws Work
Regulation B, or the Equal Opportunity Credit Act, prohibits discrimination of a protected class in any aspect of lending — from marketing to underwriting to collections.
A protected class is a list of groups that have received statutory protection from discrimination.
Today, these are:
Race.
Color.
Religion.
National origin.
Sex (including sexual orientation and gender identity).
Marital status.
Age.
Receipt of income from any public assistance program (e.g., federal, state or local government assistance program such as unemployment insurance, Social Security Disability Insurance, etc.).
Applicant’s exercise of any right under the Consumer Credit Protection Act.
So, on the face of it, Reg B, as it’s often called, is fairly straightforward. Don’t discriminate based on one of these factors.
Question: Is this ad legal?
We’ll answer in a bit.
First, let’s talk about the three forms of discrimination:
- Overt discrimination. Don’t be an idiot and openly discriminate based on a protected class (“Get qualified for our exclusive women only empowerment credit card!”). Gender is a protected class.
- Disparate Treatment. Don’t treat two customers differently based solely on a protected class (“Bill is married and stable and spends his weekends gardening with his wife so gets a 0% APR card. John is still on the d’apps and won’t settle down and might make impulsive trips and spend more money than he has and so we’re going to give him a 10% APR even though he has the same credit score as Bill). Marital status is a protected class.
- Disparate Impact. We’ve done everything right but, for some reason, 90% of our customers are below the age of 40. We dig further and realize it’s because we require customers to download an app to apply for our credit card and that deters older applicants. Age is a protected class.
Since most creditors don’t intend to discriminate (note: “most”, and yes, a few decades ago that statement would have been less factual — in the 70’s and 80’s, redlining was a common form of indirect discrimination where creditors would pick specific zip codes to target their loans. While location is not a protected class, many of these creditors excluded zip codes, and neighborhoods, that were largely minority), let’s take a look at some subtle examples.
Age.
Age might be a clear indicator of credit risk. After all, if you are twenty-two, fresh out of college, working your first entry level job, getting your first credit card to pay for your first suit, you simply don’t have enough of a track record to prove that you are a good borrower.
And, conversely, if you have been in the job market for 30 years and have a mortgage and a family, you are likely to be considered a more stable credit risk .
So can creditors simply say: You must be have been working for at least ten years before you can qualify for our credit card?
Answer: No.
This qualification would count as a proxy for age. In other words, even though the creditor isn’t saying “You must be 30 years old or older”, they are, in a way, saying exactly that by requiring ten years of work experience.
So, must creditors ignore the length of your credit history altogether?
No. There are other factors they can use which might be less of a direct proxy to age.
For example, they can consider your income or your credit score which takes into account how long your credit lines have been open.
Marketing.
Targeted marketing, today, is a big driver of customer acquisition for many companies. After all, this is why Facebook is a seven billion trillion dollar company. They share your personal details (male, late 30s, urban, college educated, likes dogs and tennis) with advertisers who can then pick and choose to market to exactly their ideal customer rather than wasting their time and resources marketing to everyone.
But, as we learned above, fair lending laws apply to even the marketing aspect of your lending product.
So, if you’re a fintech lender doing BNPL or credit cards, you shouldn’t be using any of the protected classes as criteria in your paid ads. You can use substitutes (such as income or the amount of the loan being applied for) but be careful not to use a proxy (recent college graduates) and certainly don’t do paid ads targeting or excluding a protected class.
So the answer to the ad above?
Yes, now we know that it is *not* legal. It is both excluding a group based on age (those who are not millennials) and it is likely targeting a specific person based on the fact that they are a millennial (targeted marketing).
Eligibility.
One word on eligibility. You *can* set certain eligibility criteria based on a protected class. For example, it is common to say you must be 18 years old to apply for a credit card because that is the legal age to consent to a legal document in most states.
Eligibility and underwriting are different concepts. Eligibility is like being allowed into the party in the first place. You need to be a certain age for you to be even considered a credit applicant. However, once you’re inside the party, creditors must treat all applicants the same way.
Disparate Impact.
One of the areas that trips up most lenders is disparate impact. They do everything right, carefully scrub their marketing and underwriting practices, and still, they find themselves in the awkward position of having mostly white, young male borrowers. What gives?
Well, it’s likely some very neutral looking feature of their credit practices is causing the skew.
For example, when smart phones first became a thing, many companies started using Two-Factor Authentication to verify applicants by sending a text message to their smart phone.
Initially, this practice deterred older applicants as the internet or the use of the computer might have done a decade earlier.
But, over time, the use of a smart phone has become ubiquitous and so the practice of requiring a smart phone to apply is probably less impactful on a particular demographic.
As with other areas of fair lending though, there are nuances here which is why fair lending laws ebb and flow as the topic of the day for regulators but are always, always there. So be aware!
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While we hope you found this post helpful, please note that the information in this post is not intended to be legal or regulatory advice.
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