Seven Fair Lending Risks Every Lender Must Address

Cassandra Wayman is Fair Lending Compliance Analyst with Ncontracts, Brentwood, Tenn.

Fair lending may not be dominating regulatory headlines in 2025, but for lenders, the risks remain urgent and evolving. While federal enforcement priorities are shifting, the underlying laws haven’t changed, state-level oversight is intensifying, and borrowers are increasingly aware of lending equity issues.

For lenders, fair lending represents far more than regulatory compliance — it’s a business-critical issue that influences reputation, customer trust, and market positioning. Understanding and proactively managing these risks is essential for long-term success.

The State-Federal Intersection in Fair Lending

State regulators aren’t just filling the federal enforcement void; they’re expanding it. For example, Massachusetts recently secured a $2.5 million settlement over artificial intelligence-driven underwriting violations. New Jersey is actively investigating redlining using demographic lending data, and New York continues to pursue unfair practices cases with substantial settlements.

For lenders, this enforcement shift adds complexity. Unlike federal agencies with consistent guidance, state actions vary widely — one state might focus on AI governance while another targets pricing practices or disclosure requirements.

What Fair Lending Risk Means for Lenders

Fair lending risk emerges when lending practices exclude or disadvantage borrowers based on protected characteristics such as race, ethnicity, gender, age, national origin, or marital status. This risk spans the entire lending lifecycle, from marketing to origination to servicing.

Even unintentional disparities can trigger regulatory scrutiny, costly litigation, or damage borrower trust. For lenders, where community relationships and brand credibility drive referrals and repeat business, these impacts can persist for years.

Top Fair Lending Risks to Consider Now

1. Redlining Risk

Redlining occurs when lenders avoid serving — or provide less favorable terms to — majority-minority or underserved neighborhoods. Branch locations, marketing reach, or underwriting standards can inadvertently create this exposure.

What lenders can do: Regularly evaluate your Reasonably Expected Market Area (REMA), analyze application and approval patterns by geography, and determine whether your marketing and physical presence reach diverse communities effectively.

2. Marketing & Outreach Risk

Marketing often creates the critical first touchpoint for credit access. Risks can emerge through language barriers, non-inclusive imagery, geographically limited campaigns, or digital algorithms that unintentionally exclude protected populations.

What lenders can do: Audit campaigns for demographic reach and inclusivity, ensure materials reflect community diversity, and request detailed reports from marketing vendors to identify potential blind spots in targeting algorithms.

3. Steering Risk

Steering happens when borrowers are systematically directed toward or away from specific loan products or channels based on protected characteristics rather than objective financial factors. Loan officer discretion, unclear referral processes, or third-party practices all contribute to this risk.

What lenders can do: Establish clear, documented product referral standards, implement comprehensive fair lending training, and regularly analyze loan data for disparities in product mix.

4. Underwriting Risk

Bias can infiltrate underwriting, whether it’s manual or automated. Subjective criteria such as “good character” and inconsistent exception handling introduce risk. AI-powered underwriting tools can embed bias if not carefully monitored, as demonstrated by the recent $2.5 million Massachusetts settlement with a lender over AI-driven discrimination.

What lenders can do: Eliminate subjective underwriting criteria where possible, track and review exceptions systematically, and analyze approval patterns for statistical disparities. Before deploying AI tools, establish comprehensive governance frameworks, including bias testing and ongoing monitoring, to ensure adherence with compliance standards.

5. Pricing Risk

Pricing disparities among similarly situated borrowers represent one of the most scrutinized fair lending risk areas. These often result from inconsistent policies, excessive discretion, or compensation structures that incentivize subjective decision-making.

What lenders can do: Standardize pricing methodologies, monitor systematically for rate and fee disparities, and align compensation structures to minimize discretionary variations. Be sure to document objective justifications for any exceptions.

6. Servicing Risk

Fair lending obligations extend throughout the loan lifecycle. Servicing risk manifests through disparities in payment processing, loss mitigation options, collections practices, or foreclosure procedures. Third-party servicing relationships add complexity but don’t reduce lender accountability.

What lenders can do: Establish comprehensive servicing oversight, including complaint pattern analysis, processing time monitoring, and loss mitigation tracking across demographic groups. Ensure rigorous third-party oversight continues through regular performance testing.

7. Compliance Management System Risk

As lending operations become increasingly complex through vendor relationships and the rise of AI and other technology, inadequate compliance management systems create systemic exposure. Regulators expect demonstrable oversight capabilities, including training, monitoring, independent testing, and board engagement.

What lenders can do: Scale compliance management capabilities to match operational complexity, leverage automation for routine monitoring and reporting, and ensure senior leadership maintains active fair lending oversight.

Moving Forward: From Compliance to Strategic Advantage

Lenders who view fair lending solely as a compliance cost miss its strategic value. Strong fair lending practices expand market reach, strengthen community relationships, and differentiate institutions in competitive markets.

The enforcement landscape will continue evolving, but the underlying risks remain constant. Lenders who proactively build fair lending excellence into their operations — backed by robust data analysis, clear governance, and consistent oversight — position themselves to capture opportunities while managing regulatory risk, regardless of shifting enforcement priorities.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)