The government's consumer watchdog agency plans to step up scrutiny of lenders, it announced Wednesday, hoping to root out discriminatory practices that adversely affect consumers' access to credit.
"The Consumer Bureau is still in its infancy, but we will not be silent on discriminatory lending practices," Consumer Financial Protection Bureau Director Richard Cordray said in a speech Wednesday, underscoring that discrimination in lending doesn't have to be intentional to be harmful. "Our twin goals here are to protect consumers and empower them to be able to protect themselves."
The CFPB plans to monitor financial institutions for potential fair lending violations in all consumer credit products—auto loans, mortgages, credit cards, student loans—and enforce consumers' rights under the Equal Credit Opportunity Act, which bars lenders from basing their credit decisions on race, color, religion, sex, or marital status, among other things.
The watchdog agency will also be looking for signs of "disparate impact" in lending, which occurs when a lender's practices or policies aren't discriminatory themselves but have discriminatory effects. The CFPB cited the discretion loan officers have to set borrowers' lending fees as an example of a practice that can result in certain demographics—for instance, African-Americans or women—paying more than a similarly situated white or male borrower.
"This subtle but powerful form of discrimination creates damages that are no less direct than the kind of overt and blatant discrimination that, we hope and assume, is increasingly a relic of a bygone era," Cordray said.
The impact of such practices has been particularly visible in minority communities, experts say, which felt the brunt of the fallout from the financial crisis. According to some estimates, African-Americans saw their household median wealth drop more than 50 percent between 2005 and 2009. Hispanic households fared even worse, losing 66 percent in median wealth. And yet, these are the demographics that tend to be victimized by discriminatory lending, experts argue.
"We're very happy the CFPB is making this a priority," says Debbie Bocian, senior researcher at the Center for Responsible Lending. "Across financial products there has clearly been a precedence of financial institutions targeting their worst and most expensive products in communities of color, whether those are subprime mortgages or payday loans."
While the CFPB reaffirmed its commitment to identifying and pursuing discriminatory lending practices, there's only so much the agency can do on its own, Cordray warned. Consumers themselves must play a role in identifying and alerting authorities of potential discrimination.
"Whether they are applying for an auto loan, student loan, or home loan, consumers need to know their rights and they need to know what red flags to look for that may indicate their rights are being violated," he said. "We want consumers to be able to recognize when they may be victims of discrimination."
To help educate consumers, the CFPB has outlined consumers' rights under the Equal Credit Opportunity Act and provided tips on how consumers can protect themselves and identify warning signs of discrimination.
"We want consumers to avoid the marketplace's silent pickpocket—discrimination," Cordray said, noting that equal access to credit is a key part of pulling the economy out of the doldrums. "We cannot afford to tolerate practices, intentional or not, that unlawfully price out or cut off segments of the population from the credit markets."