Government to Bad Lenders: 'We're Coming for You'

NEW YORK (MainStreet) -- The federal government has had it with discriminatory lenders, so much so that it’s using the new Consumer Financial Protection Bureau as a means to keep bad lenders in line.

Discriminatory lending can take its toll on specific demographic groups in society, creating an uneven playing field that favors some consumer sectors over others.

For instance, a 2011 study from the Wharton School of Business at the University of Pennsylvania entitled “What’s In a Picture? Evidence of Discrimination from Prosper.com” found that African-Americans were discriminated against by peer-to-peer lending groups.

“We find evidence of significant racial disparities in a new type of credit market known as peer-to-peer lending,” study researchers reported.

“Loan listings with blacks in the attached picture are 25% to 35% less likely to receive funding than those of whites with similar credit profiles,” according to the study. “Despite the higher average interest rates charged to blacks, lenders making such loans earn a lower net return compared to loans made to whites with similar credit profiles because blacks have higher relative default rates. These results provide insight into whether the discrimination we find is taste-based or statistical.”

In December, Bank of America was forced to pay over $335 million to settle claims of discriminatory lending against Latino and African-American borrowers at its Countrywide mortgage ending unit. The U.S. Department of Justice said Countrywide charged over 200,000 minority borrowers higher fees and mortgage interest rates compared to white borrowers with the same consumer credit profiles.

“The department’s action against Countrywide makes clear that we will not hesitate to hold financial institutions accountable, including one of the nation’s largest, for lending discrimination,” Attorney General Eric Holder said in a statement. “These institutions should make judgments based on applicants’ creditworthiness, not on the color of their skin. With today’s settlement, the federal government will ensure that the more than 200,000 African-American and Hispanic borrowers who were discriminated against by Countrywide will be entitled to compensation.”

What can the Consumer Financial Protection Bureau do to keep a lid on discriminatory lending practices?

For starters, the CFPB has issued a compliance bulletin this week that holds lenders accountable for what the bureau calls “disparate impact” lending practices that, while may seem above board, but actually is hiding discriminatory lending.

“Disparate impact occurs when a lender’s practices or policies are facially neutral but have discriminatory effects,” the CFPB said in its Compliance Bulletin released today. “Sometimes these practices meet a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. But sometimes they do not.”

The CFPB says it will “monitor” potentially unlawful lending practices and will target widely sought consumer loans and credit linked to credit cards, mortgages, student loans and auto loans. The bureau says it can go after toxic lenders under the U.S. fair lending laws.

The agency also has created a “tips and warning signs” web page that educates lenders on discriminatory lenders.

“We want consumers to avoid the marketplace’s silent pickpocket—discrimination,” CFPB Director Richard Cordray said in a statement. “We cannot afford to tolerate practices, intentional or not, that unlawfully price out or cut off segments of the population from the credit markets. That’s why the CFPB is educating consumers about their fair lending rights and pursuing lenders whose practices are discriminatory.”

Discriminatory lenders operating in the shadows won’t like it, but the federal government is about to flip the switch and spotlight toxic lending procedures.

Uncle Sam’s message to discriminatory lenders is clear – clean up your act, or we’ll clean it up for you at your expense.