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AOF Financial Services

Lesson 12Financial Services and Society

Student Resources

Resource Description

Student Resource 12.1 Scenario Activity: Fair Questions for Fair Lending

Student Resource 12.2 Reading: Equal Credit Opportunity Act

Student Resource 12.3 Note-Taking Guide: Equal Credit Opportunity Act

Student Resource 12.4 Reading: Financial Services and Society

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AOF Financial ServicesLesson 12 Financial Services and Society

Student Resource 12.1

Scenario Activity: Fair Questions for Fair LendingStudent Name:_______________________________________________________ Date:___________

Directions: Imagine that you are a loan officer for a local bank. Customers come to you to borrow money for education, to buy homes or cars, to grow their businesses, and to pay off other debt. In general, when people engage in these activities, they contribute to a healthy economy and add value to their communities. The bank has money to lend but exists to make money. To succeed as a loan officer, you must ensure that the people to whom you lend money will make their payments on time and not default on (fail to repay) their loans. Every loan carries some level of risk. Your job is to determine which borrowers qualify as worthwhile risks.

In your opinion, which of the following factors should loan officers be able to consider when evaluating prospective borrowers?

Factors: Yes No

Age

Sex

Race

Religion

Educational background

Marital status (single, married, divorced, widowed)

Receipt of alimony or child support

Plans to bear or raise children

Occupation

Annual income

Public assistance (welfare) status

Physical handicaps

Neighborhood in which applicant wishes to buy or improve a home

Racial makeup of neighborhood in which applicant wishes to buy or improve a home




Reading: Equal Credit Opportunity ActThe issue of equal credit opportunity arose several decades ago when women began entering the workforce in great numbers. Despite their earnings, many were denied credit. In many cases, they needed a male cosigner before they could get loans or credit cards.

That changed in 1974 when Congress passed the Equal Credit Opportunity Act (ECOA) banning credit discrimination for gender or marital status. It was later amended to include race, color, religion, national origin, and age. The ECOA says all consumers should have an equal chance to obtain credit. This doesn’t mean everyone who applies for credit will get it. Income, expenses, debt, and credit history are considered.

The law says a creditor may not:

Disregard income because of your gender or marital status

Refuse to consider regular alimony and child support, or public assistance income

Consider the race of people in the neighborhood where you want to buy a house

Consider whether a phone is listed in your name

Getting Credit in Your NameA good credit history is the main requirement for getting more credit. If you pay for everything in cash or have never had a checking account or charge card in your own name, this can be difficult to show. Under the ECOA, though, any accounts that you have held jointly with someone else can count toward your credit history. It is best if your name is actually on the account but even if it isn't, you can offer documentation that you paid the bills or otherwise managed the credit.

A more direct way to establish a credit history is to open accounts. Start small—a checking account or a credit line at a local store. As you demonstrate your ability to manage this credit, you can apply for more.

If You Are Turned Down or Suspect Discrimination Find out why your application was rejected. The creditor must tell you if you ask within 60 days.

Acceptable reasons include: your income was low or you haven’t been employed long enough. Unacceptable reasons: you didn’t meet our minimum standards or you didn’t receive enough points on our scoring system. Indefinite and vague reasons are illegal.

If you suspect discrimination, let the lender know you’re aware of the law. The creditor may find an error or reverse the decision.

Check with your state attorney general to see if the creditor violated state laws.

Report violations to the appropriate government agency. If you’re denied credit, the creditor must give you the name and address of the agency to contact.




Note-Taking Guide: Equal Credit Opportunity ActStudent Name:_______________________________________________________ Date:___________

Directions: Use the following note-taking guide as a way to organize your notes after reading Student Resource 12.2, Reading: Equal Credit Opportunity Act. Remember, notes should consist of a combination of key words and short sentences. You should refrain from full descriptions and lengthy explanations.

Equal Credit Opportunity Act

Key words you identified in the reading:

Big ideas:

Questions you still have:

Getting Credit in Your Name


Big ideas:




If You Suspect Discrimination


Big ideas:





Reading: Financial Services and Society

The primary purpose of financial services companies is to make a profit for their shareholders. Sometimes this profit motive can conflict with the need of society to provide opportunities to everyone. Because of these conflicting goals, it is sometimes necessary to put laws in place to protect the needs of individuals.

Fair lending practices are incorporated into federal and state laws that make it illegal for lenders to discriminate based on race, color, religion, age, gender, or national origin. The Home Mortgage Disclosure Act, the Equal Credit Opportunity Act, the Federal Fair Housing Act, the Housing Financial Discrimination Act, and other laws set out fair lending practices. The Consumer Financial Protection Bureau was established in 2011 to provide information about financial decisions in order to make markets for consumer financial products and services work for everyone.



There are many laws intended to give everyone an equal opportunity to get financial services. That doesn’t mean it always happens, though. In 2008, a company offering mortgages was sued in Massachusetts for charging minority borrowers more than similarly situated white borrowers.



The term redlining was coined in the late 1960s to describe the practice of marking a red line on a map to delineate the area where banks would not invest. These areas were most frequently inner-city neighborhoods.

Although in the United States informal discrimination and segregation have always existed, the practice later called "redlining" actually began with the National Housing Act of 1934, which established the Federal Housing Administration (FHA). The federal government contributed to the early decay of inner-city neighborhoods by withholding mortgage capital and making it difficult for these neighborhoods to attract and retain families able to purchase homes.

In 1935, Home Owners’ Loan Corporation (HOLC) looked at 239 cities and created "residential security maps" to indicate the level of security for real estate investments in each surveyed city. Such maps defined many minority neighborhoods as ineligible at all to receive loans because those living there were considered bad credit risks and were therefore assumed to have a higher possibility of default on the loans. The maps were based on assumptions about the community, not accurate assessments of an individual's or household's ability to satisfy standard lending criteria.

The policy effectively meant that people in urban areas could not secure mortgage loans at all.



Although open redlining was made illegal in the 1970s through community reinvestment legislation, the practice continued in less overt ways.

ShoreBank, a community-development bank in Chicago’s South Shore neighborhood, was a part of the private-sector fight against redlining. Founded in 1973, ShoreBank sought to combat racist lending practices in Chicago's African American communities by providing financial services, especially mortgage loans, to local residents. Many sources characterize ShoreBank's efforts as overwhelmingly inspirational and successful. In 1992, then-presidential candidate Bill Clinton called ShoreBank “the most important bank in America.”



Predatory lending describes the practices some lenders use that deceive borrowers into agreeing to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against. Other types of predatory lending include payday loans and credit cards with unreasonably high interest rates.

Predatory lending often occurs on loans backed by collateral, such as a car or house, so that if the borrower defaults on the loan, the lender can repossess or foreclose, and profit by selling the repossessed or foreclosed property.

Twenty-five states have passed antipredatory lending laws.



A payday loan (also called a paycheck advance or payday advance) is typically between $100 and $500 and is due in two weeks. On a two-week loan, fees average $15 for each $100 lent.

Though payday lending is primarily regulated at the state level, Congress passed a law in 2007 that caps lending to military personnel at 36% APR. The Defense Department called payday lending practices predatory, and military officers cited concerns that payday lending ruined low-paid enlisted men and women's finances.

Some federal banking regulators and legislators seek to restrict or prohibit the loans for all borrowers because the high costs are viewed as a financial drain on the working and lower-middle class populations who are the primary borrowers. Lenders argue that these loans are often the only option available to consumers with bad credit or who cannot get a bank loan, credit card, or other lower-interest alternatives.



Who are the financially excluded groups? Regardless of the level of exclusion, some groups of people are at much greater risk than others. Those with the lowest incomes are twice as likely to be without a bank account as the average.

People from low-income and ethnic minority communities have very low levels of engagement with banking. Also at risk of exclusion are people with a history of bad debt, who often have their accounts closed if they fail to reduce their overdraft and then find it difficult to open another account.

Where there are considerable numbers of unbanked or underbanked people, check cashers and other fringe banking services tend to fill the void.

Over time, more people have been able to take advantage of banking services. The data shown in this graph reflect that financial exclusion is becoming less widespread.

Graph source: http://www.fdic.gov/bank/analytical/fyi/2003/110503fyi.html


http://www.fdic.gov/bank/analytical/fyi/2003/110503fyi.html


The Housing Financial Discrimination Act of 1977, or Holden Act, is intended to prevent discrimination in housing accommodations such as real estate that are meant to be used as a residence, will be occupied by the owners, and will be no more than four units. Lenders also can’t deny loans because of conditions in a neighborhood.

A lender is not allowed to discriminate on the availability of financial assistance for the purpose of improvements, rehabilitation, purchasing, construction, or refinancing. A lender cannot utilize inconsistent appraisal practices in determining whether the loan is granted to individuals due to their race, color, religion, sex, age, or national origin.

The Equal Credit Opportunity Act says a lender must let a loan applicant know within a certain time whether it will grant the loan.



As a consumer, it’s your job to protect yourself. The first step is knowing your rights under the law. The second is recognizing predatory business practices when you encounter them.

• Shop around for the best rates and terms. They vary!

• Don’t sign a contract or loan document that’s blank or has untrue information on it.

• Make sure the terms on paper are what you agreed to.

• Don’t get talked into lying about your income or assets.


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