What is Fair Lending? Program Essentials, Rules, and More

In today’s regulatory and social climate, fair lending isn’t just a compliance requirement — it’s a cornerstone of trust, risk management, and long-term success for financial institutions.

But how has fair lending evolved over the years, and what does it mean for financial institutions (FIs) today? Let’s take a closer look.

Related: Fair Lending Risk Assessments: Everything You Need to Know

Table of Contents

• What is fair lending?
• Laws and regulations shaping fair lending compliance
• Types of lending discrimination
• Common fair lending risk areas
• Why fair lending matters
• Key components of a fair lending program
• Technology and fair lending

What is fair lending?

Fair lending is an institution’s legal and ethical responsibility to ensure individuals have equal access to credit and financial services, regardless of protected characteristics, such as race, color, national origin, religion, and marital status.  

The concept of fair lending originated with the Fair Housing Act of 1968 (Title VIII of the Civil Rights Act), which aimed to eliminate housing discriminatory practices, including redlining — when minority neighborhoods were marked in red to indicate high lending risk. These activities led to widespread segregation and denied homeownership opportunities to communities of color.

Later in 1974, The Equal Credit Opportunity Act (ECOA) was passed, prohibiting discrimination in all credit transaction areas based on race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or the exercise of consumer rights. While it overlaps with the FHA, which focuses on discrimination based on race, color, religion, sex, familial status, and disability, ECOA extends protections by including age and public assistance status.

More than 50 years later, these laws remain the foundation of fair lending compliance, as regulators and lenders alike aim to provide equitable access to lending opportunities.

Related: What is A Real-World Example of Fair Lending Discrimination?

Laws and regulations shaping fair lending compliance

In addition to the FHA, there are several federal laws that govern fair lending, including:

• Reg B – The Equal Credit Opportunity Act (ECOA): A key fair lending law since the 1970s, ECOA prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, or the receipt of public assistance. Lenders must give notice when they deny a loan and can't make a spouse co-sign unless the spouse is directly involved in the business.
• Fair Credit Reporting Act (FRCA): While not a core fair lending law, FCRA plays a critical supporting role in ensuring fair and transparent lending decisions. It governs how consumer credit data is collected, used, and disclosed. Violations — particularly related to adverse action notices or inaccurate data use — are often uncovered during fair lending or broader compliance examinations and may be cited alongside ECOA or other violations.
• Home Mortgage Disclosure Act (HMDA): HMDA requires lenders to collect and report mortgage application and origination data to assess whether they are meeting community housing needs, identify potential discriminatory lending patterns, and support fair lending enforcement.
• Community Reinvestment Act (CRA): The CRA requires banks to serve the entire community's credit needs, including those in low- and moderate-income neighborhoods. While the 2023 final rule, which aimed to modernize the CRA, is currently in flux as several agencies seek to rescind it, FIs should continue to follow CRA requirements in place before the 2023 rule was enacted.

While the lending industry is regulated on the federal level, every U.S. state has usury, mortgage disclosure, and fair lending laws, and varies in its approach to lending enforcement actions. Staying up-to-date with state mortgage lending regulations relevant to your financial institution and its locations and services is crucial for compliance.

Related: 7 Ways to Analyze Your Data for Redlining Compliance Risk

Types of lending discrimination

Fair lending discrimination occurs when a person or a group of people is treated less favorably than others during the crediting process. Regulators recognize three types of discrimination:

• Overt discrimination: The clearest form of bias, overt discrimination occurs when a lender openly discriminates against an applicant based on protected characteristics, such as gender, race, or age. For example, if a lender explicitly states they do not provide loans to individuals of a certain race, that is overt discrimination.
• Disparate treatment: This form involves treating applicants differently based on a protected characteristic, even if the policy appears neutral. For example, a lender may require additional documentation from minority applicants but not others with similar financial profiles.
• Disparate impact: Not all discrimination is intentional. When a neutral policy disproportionately impacts a protected group, regardless of intention, disparate impact occurs. If a lender implements a minimum loan amount requirement, it could unintentionally exclude applicants from some communities.

Disparate impact in 2025

Understanding these types of discrimination in an evolving regulatory environment is crucial. In April 2025, President Trump signed an Executive Order directing federal agencies to stop using disparate impact theory to enforce civil rights and fairness laws.

It’s important to note that while the Order changes enforcement priorities, it doesn’t change any existing laws, including the FHA, which specifically cites disparate impact as discrimination.

Lenders should continue fair lending analysis despite changes in federal guidance. Courts can still apply disparate impact theory, many state laws uphold it, and the long statute of limitations means current practices could face future enforcement. Continue to perform ongoing analysis to help your FI ensure compliance and manage risk now and in the future.

Related: Stay updated on the latest regulatory news with updates delivered straight to your inbox.

Common fair lending risk areas

Risks can occur at any stage of the fair lending process and extend beyond mortgage products. Areas such as indirect auto lending, small business credit, and fintech channels are increasingly scrutinized.

Below are some of the most common fair lending risks:

• Pricing: Similarly situated individuals should be offered similar pricing. Consider both the overall pricing of your products and the individual charges for each applicant. If there are differences, it could signal unfair treatment and lead to regulatory issues.
• Marketing and Outreach: One of the top takeaways from the 2024 Interagency Fair Lending Webinar is the importance of being intentional in marketing and outreach activities. These risks include excluding Black and Hispanic communities, failing to promote mortgage products in key areas, using non-diverse or mismatched imagery in advertising, and neglecting outreach events in minority neighborhoods. Targeted digital ad campaigns, particularly those that rely on algorithmic audience tools, have also drawn regulatory scrutiny.
• Steering: Your institution must have clear, objective, and consistently applied standards to avoid steering applicants to specific products based on prohibited characteristics.
• Underwriting: Underwriting risk occurs when the criteria or judgment used to evaluate applicants (e.g., credit scores, income, DTI, collateral) are applied inconsistently, include subjective elements, lack adequate controls and documentation, or result in different outcomes for similarly situated applicants.
• Redlining: Redlining is the risk that a financial institution avoids lending or offers less favorable terms in minority or underserved communities.
• Servicing and loss mitigation: These risks stem from the poor management of loans after origination, including errors in payment processing, communication, or record-keeping. Mishandling borrower assistance efforts can result in financial losses, regulatory penalties, and reputational damage.
• Third-party relationships: Vendor relationships are crucial to a financial institution's growth, but they can also pose operational, financial, and cyber risks, in addition to compliance risk if vendors aren’t following fair lending laws.

 Related: Fair Lending 101: Pricing is Only One Piece of the Puzzle 

Why fair lending matters

Regulators expect lenders to proactively monitor and assess their business practices, products, and services for potential discrimination. Even if fair lending enforcement actions enter a relatively quiet period, scrutiny can shift quickly, resulting in fines, cease-and-desist orders, lawsuits, and other regulatory consequences. Poor fair lending practices can also erode customer trust, leading to reputational damage and potential financial losses.  

Fair lending compliance is more than following regulations to avoid penalties — it’s about proactively identifying and mitigating risk to promote equitable access to lending services while supporting your institution’s strategic growth and future success. By including this area in your institution’s larger risk management strategy, you can ensure fair lending risk is continually managed, monitored, and mitigated.

Related: ERM 101: What’s Your FI’s Risk Appetite?

Key components of a fair lending program

A fair lending compliance management system (CMS) is a structured framework that helps FIs manage fair lending compliance and adhere to regulatory requirements, industry standards, and internal policies.

While the CMS provides the overarching structure and governance, the fair lending program focuses on the controls that are critical to compliance, such as

• Policies and procedures: Policies outline clear guidelines for managing fair lending risk areas and processes, while procedures provide step-by-step guidance for implementing those policies.
• Training: Compliance is a team effort. Regular training is not only a regulatory requirement, but it also ensures that all team members, from frontline employees to compliance officers, understand their roles in identifying and mitigating fair lending risk.  
• Risk assessments: A crucial part of the risk management lifecycle, risk assessments should be updated when there are significant changes to your FI’s internal or external environment. Fair lending risk assessments typically address redlining, underwriting policies and procedures, marketing and outreach, and brand locations and operations.
• Data analysis: Reviewing and analyzing your FI’s data (e.g., pricing, underwriting, marketing reviews) regularly is critical to ensuring your institution is exam-ready, following regulations, and adhering to industry best practices.
• Complaint management system: Complaints are a data goldmine, helping your FI gain valuable insights into areas of potential noncompliance. A complaint management system can help you uncover the root causes of issues and prevent future complaints.
• Corrective action plans: Identifying fair lending risk is just the first step. FIs must act on findings, with the board ensuring management follows through.

The role of technology in fair lending compliance

Navigating fair lending risk with an equipped team and the right technology is crucial in today’s constantly evolving risk environment. From streamlining data analysis to ensuring compliance with regulations, lending compliance software can save financial institutions valuable time and money, allowing their teams to focus more on strategic initiatives and other risk management areas.

Discover more tips to build a strong fair lending program in our free guide.