Why this article is important: A new CFPB federal rule shaves down the definition for what lender actions qualify as mortgage discrimination. But here in California, anti-discrimination laws continue to provide the broad protections.
Prohibition against mortgage discrimination
Supervision and enforcement of the Equal Credit Opportunity Act (ECOA) is with the Consumer Financial Protection Bureau (CFPB). [15 United States Code §§1691(a)(1); 1691b]
The goals ECOA pursues include three different consumer mortgage protections, the:
- prohibition of discriminatory mortgage origination practices; [15 USC §1691(a)]
- requirement of MLOs to give notices and reasons for denial of a mortgage application; and [15 USC §1691(d)]
- guarantee for home mortgage applicants to receive a copy of their appraisal reports. [15 USC §1691(e)]
Discrimination under the ECOA
Discriminatory mortgage origination practices take many forms, including:
- treatment of non-White mortgage applicants more or less favorably than White applicants;
- placing additional or fewer burdens on non-White applicants;
- requiring a spouse’s signature on a mortgage application when an applicant individually qualifies for a mortgage; [Anderson v. United Finance Company (1982) F2d 1274]
- discouraging mortgage applicants based on their race, color, sex, or other prohibited basis; and [12 CFR §1002.4(b)]
- using the marital status of a mortgage applicant to evaluate their creditworthiness. [12 CFR §1002.5(d)]
A mortgage originator may not:
- treat co-applicants differently based on the existence, absence or likelihood of a married relationship; [12 CFR §1002.6(b)(8)]
- make any inquiries into whether a mortgage applicant derives their income from alimony or child support; [12 CFR §1002.5(d)(2)]
- inquire whether the applicant intends to bear children;
- base credit decisions on the likelihood of diminished income due to childrearing costs; or [12 CFR §§1002.5(d)(3), 1002.6(b)(3)]
- deny a mortgage based on an applicant’s receipt of income from a public assistance program, such as welfare or social security. [15 USC §1691(a)(2)]
For a consumer in contact with an MLO, discrimination is rarely overt and not typically observable. Usually, MLOs are not transparent enough for the consumer to see the discrimination. Discrimination typically takes the form of an MLO denying a mortgage to a non-white homebuyer without a valid reason or applying different standards to non-white and White homebuyers.
However, the CFPB has now narrowed its view of what qualifies as discrimination under the ECOA by changing its regulations.
A narrowed scope for discrimination
Beginning July 21, 2026, discouragement is defined in the ECOA specifically as any oral or written statement discouraging an applicant from applying for a mortgage. However, it does not include any acts or practices which may in effect discourage individuals from applying for a mortgage.
For example, consider a mortgage originator who chooses to distribute advertisements in an affluent neighborhood but does not distribute advertisements in a neighborhood primarily home to low-income households. Under the 2026 rule, these acts do not constitute prohibited discouragement under the ECOA, contrary to case law. [12 §CFR 1002.4(b)]
To be considered prohibited discouragement under the federal ECOA, the oral or written statement now needs to be directed at the applicant or prospective applicant specifically. Further, any statement directed at one group encouraging its members to apply for credit does not constitute discouragement against members of any group excluded from the targeted statement. [12 §CFR 1002.4(b)]
For example, a mortgage advertisement presented in Spanish does not constitute a prohibited discouragement against English speakers.
Disparate impact
Prior to when the law takes effect on July 21, 2026, any disparate impact of mortgage applicants or potential applicants based on a prohibited activity is unlawful under the ECOA, whether the discriminatory effects are due to the MLO’s conscious intent to discriminate or not.
The new rule removes the disparate impact test from the ECOA. Therefore, even when an activity may end up having a disparate impact on potential or actual mortgage applicants, it is not automatically prohibited.
For example, consider a mortgage company which maintains dozens of branches across a region, but very few are located in minority neighborhoods. With fewer ways to access credit, the placement of branch offices has a disparate impact on minority applicants. Under the new rules, this type of practice is acceptable.
As disparate impact will no longer be considered unlawful under the ECOA, the amended law focuses enforcement on intentional discrimination only. [12 CFR §1002.6(a)]
Redlining under the old and new laws
Consider a recent cased settled by LA-based lender, City National Bank, which avoided making mortgages and mortgage services available in majority-Black and Latino neighborhoods in Los Angeles from 2017 to 2020 in violation of the ECOA.
According to the Justice Department’s complaint, during 2017 through 2020, the bank:
- maintained only three of its 37 branches in minority neighborhoods;
- generated applications from their existing customers instead of marketing or advertising in minority neighborhoods;
- failed to provide adequate staff resources to serve the mortgage lending needs of residents from minority neighborhoods; and
- failed to act on internal reports indicating fair lending and redlining risk.
Related article:
Redlining practices cost LA-based lender $31 million in settlement
As a result of this conduct, the bank achieved disproportionately low numbers of mortgages and mortgage applications from non-White areas compared to similarly situated lenders.
Under the Justice Department’s consent order filed with the U.S. District Court for the Central District of California, City National Bank agreed to:
- provide at least $29.5 million for a loan subsidy fund for residents of majority-Black and Latino neighborhoods in Los Angeles;
- open one new branch in a majority-Black and Latino neighborhood and have at least four mortgage loan originators (MLOs) serving majority-Black and Latino neighborhoods; and
- conduct a research-based study identifying the financial needs for residents in majority-Black and Latino Census tracts within Los Angeles.
But this was all under the old ECOA rules no longer enforced — federally.
State law protects against discrimination
Under the revised rules, the ECOA no longer covers discriminatory systems, acts or practices which may have a discriminatory effect, as prohibited in the case above.
Going forward, homeowners and tenants experiencing discrimination will find relief from California’s more protective state laws.
Editor’s note — When federal and state law are in conflict, the state may provide more — but may not allow less — protection than the federal law. [Calif. Civil Code §51]
Related article:
In California, licensed real estate brokers and any MLOs have a duty to advise their agents and employees of all anti-discrimination rules, including:
- Department of Real Estate (DRE) regulations;
- the Unruh Civil Rights Act;
- the California Fair Employment and Housing Act; and
- the California Housing Financial Discrimination Act (Holden Act). [DRE Reg. §2725(f)]
Under the California Housing Financial Discrimination Act, MLOs and other lenders need to make financing available to qualified creditworthy mortgage applicants to:
- buy, build, repair, improve or refinance an existing mortgage on a one-to-four unit, owner-occupied residence; or
- improve one-to-four unit residences which are not owner-occupied. [Health & S C §35805(d)]
MLOs violate California public policy when they indicate a discriminatory preference by denying or approving financing to creditworthy mortgage applicants based on the applicant’s protected status. [Health & S C §35811]
In a community which is composed mainly of residents of a certain race, color, religion or other protected class, an MLO or lender may not:
- refuse to fund a mortgage based on the demographics of that community; or
- appraise real estate in that community at a lower value than comparable real estate in communities predominantly composed of non-minority residents. [Health & S C §§35810, 35812]
Failure to provide financing in identified communities is called redlining, a practice the FHA initiated in the 1930s and later disavowed. But the economic damage intended was done.
The California-specific prohibitions and requirements under the Housing Financial Discrimination Act apply to all institutions which make, arrange or buy mortgages funded to buy, build, repair, improve or refinance one-to-four unit, owner-occupied housing located in California.
This includes MLOs or lenders offering consumer mortgage services, whether endorsed by the California Department of Real Estate (DRE) or licensed by the Department of Financial Protection and Innovation. [Health & S C §35805]
Related article:
State and Federal Fair Housing Laws: Identifying the Explicit and the Implicit, Pt II
