Yes, we believe there may be fair lending issues associated with offering favorable loan terms only to customers who buy one of the developer’s new homes, since the basis for qualifying for the incentive would be the geographic location of the property securing the loan.

It appears that this incentive would violate the Illinois Fairness in Lending Act, which prohibits financial institutions from denying or varying “the terms of a loan on the basis that a specific parcel of real estate offered as security is located in a specific geographical area.” We believe that you would be violating this prohibition if qualifying for the three-year, interest-free balloon loan depends on the geographic location of the property securing the loan — such as the property’s location in a particular subdivision.

Additionally, offering favorable loan terms based on the location of property securing a loan may create risks of violating federal fair lending laws. The Equal Credit Opportunity Act prohibits discrimination in credit transactions on the basis of an applicant’s membership in certain protected classes (including race, color, religion, national origin, sex, marital status, or age), and the federal banking agencies consider policies that have a disparate impact on protected classes as a potential violation of fair lending laws. Additionally, the agencies’ fair lending examination procedures state that examiners may treat geographic discrimination as potential illegal redlining. Although individuals residing outside of a particular subdivision are not a protected class, providing favorable loan terms based on residing within a particular subdivision could have a disparate impact on a protected class and could potentially be treated as redlining.

For resources related to our guidance, please see:

• Illinois Fairness in Lending Act, 815 ILCS 120/3 (“No financial institution, in connection with or in contemplation of any loan to any person, may: (a) Deny or vary the terms of a loan on the basis that a specific parcel of real estate offered as security is located in a specific geographical area.”)

• Equal Credit Opportunity Act, 15 USC 1691(a) (“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction — (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under this chapter.”)

• FFIEC Interagency Fair Lending Procedures, page 30 (“It is true that neither the Equal Credit Opportunity Act (ECOA) nor the Fair Housing Act (FHAct) specifically uses the term ‘redlining.’ However, federal courts as well as agencies that have enforcement responsibilities for the FHAct, have interpreted it as prohibiting institutions from having different marketing or lending practices for certain geographic areas, compared to others, where the purpose or effect of such differences would be to discriminate on a prohibited basis. Similarly, the ECOA would prohibit treating applicants for credit differently on the basis of differences in the racial or ethnic composition of their respective neighborhoods.”)