What Is Steering in Lending and How to Avoid It?

Steering in lending occurs when a lender or mortgage broker improperly influences a borrower’s choice of loan products or lenders. This practice can limit consumer choice and potentially lead to less favorable financial outcomes for the borrower. It is a subtle form of discrimination that can affect where individuals live or the financial terms they secure.

Understanding Steering in Lending

This practice often benefits the lender or broker, rather than prioritizing the borrower’s financial well-being. It limits competition within the lending market and reduces the range of choices available to consumers.

Borrowers may incur higher costs, such as increased interest rates or excessive fees, or obtain unsuitable loan products. For instance, a loan originator might direct a client to a product that generates more income for them, even if a more appropriate option exists. Steering can also occur unintentionally if a loan originator is unfamiliar with certain products, leading them not to offer viable options.

Common Scenarios of Steering

Steering can manifest in various lending situations, impacting borrowers’ ability to secure favorable terms. One common scenario involves directing borrowers to products with higher fees or interest rates, even when they qualify for lower-cost alternatives. This can occur if the higher-cost product offers increased compensation or incentives to the loan originator.

Other examples of steering include:
Encouraging borrowers to use an affiliated lender or service provider without disclosing the business relationship or exploring other competitive options.
Falsely telling borrowers they do not qualify for a particular loan product, pushing them towards a less desirable one.
Presenting only a limited selection of loan options, despite a wider range being available, or using misleading information to influence a borrower’s decision.

The real cost of mortgage steering can amount to tens of thousands of dollars over the life of a loan.

Legal Protections Against Steering

Several federal laws and regulations aim to ensure fair lending practices and protect consumers from steering. The Equal Credit Opportunity Act (ECOA) prohibits discrimination in credit transactions based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance. While ECOA does not explicitly define “steering,” its provisions promote fair lending by requiring transparency and prohibiting discriminatory practices.

Similarly, the Fair Housing Act makes it illegal to discriminate in the sale, rental, or financing of dwellings based on race, color, religion, sex, familial status, national origin, or disability. This act specifically prohibits steering that guides prospective homebuyers or renters toward or away from certain neighborhoods due to protected characteristics. The Dodd-Frank Wall Street Reform and Consumer Protection Act enhanced consumer protections. It established the Consumer Financial Protection Bureau (CFPB) with the authority to issue rules preventing mortgage originators from steering consumers into risky or high-cost loans by banning compensation structures that incentivize such practices.

What to Do if You Suspect Steering

If you suspect you have been subjected to steering, reviewing your loan options and communications is a good first step. Look for patterns such as being consistently pushed towards higher-cost products, or if a limited number of options were presented despite your qualifications. Document all interactions, including dates, names of individuals involved, and details of the conversations.

Gather all relevant documentation, such as loan offers, disclosure forms, and any correspondence related to the loan application process. Comparing these documents with offers you may have received from other lenders can help identify discrepancies. This information will be useful if you decide to file a complaint.

You can report suspected steering to several regulatory bodies. The Consumer Financial Protection Bureau (CFPB) accepts complaints regarding various financial products and services, including mortgages. You can file a complaint online through their website, and the CFPB will forward it to the company for a response within 15 days, with a final response within 60 days.

For housing discrimination concerns, including steering in real estate, you can file a complaint with the Department of Housing and Urban Development (HUD) through their website, email, or phone. State attorneys general offices and state banking regulators also investigate consumer complaints related to lending practices. When filing a complaint, provide detailed information about what happened, why you believe it was discriminatory, and include any supporting evidence.