The Federal Fair Housing Act (which you linked to) isn't meant to force bad loans, but that is an inevitable consequence. Briefly, the Act has provisions such as the following (http://www.hud.gov/offices/fheo/lending/index.cfm):
The Fair Housing Act makes it unlawful to engage in the following practices based on race, color, national origin, religion, sex, familial status or handicap (disability):
- Refuse to make a mortgage loan
- Refuse to provide information regarding loans
- Impose different terms or conditions on a loan, such as different interest rates, points, or fees
- Discriminate in appraising property
- Refuse to purchase a loan or set different terms or conditions for purchasing a loan
The problem is that creditworthiness is correlated with some of the forbidden factors. For example, a bank denying loans to applicants with low incomes will, as a side-effect, disproportionately deny loans to African-American applicants, simply because African Americans have lower incomes on average than other ethnic groups. In order to avoid penalties for discrimination, banks must therefore lend to people whose credit doesn't justify the loan. (Of course, this was never the intent of the Act, but it's called the Law of Unintended Consequences for a reason.)
The Fair Housing Act makes it unlawful to engage in the following practices based on race, color, national origin, religion, sex, familial status or handicap (disability):
The problem is that creditworthiness is correlated with some of the forbidden factors. For example, a bank denying loans to applicants with low incomes will, as a side-effect, disproportionately deny loans to African-American applicants, simply because African Americans have lower incomes on average than other ethnic groups. In order to avoid penalties for discrimination, banks must therefore lend to people whose credit doesn't justify the loan. (Of course, this was never the intent of the Act, but it's called the Law of Unintended Consequences for a reason.)