Compliance
Examination Handbook
IV. Fair Lending Laws and Regulations
Fair Lending Laws and Regulations
1Introduction
This overview provides a basic and abbreviated discussion of
federal fair lending laws and regulations. It is adapted from the
Interagency Policy Statement on Fair Lending issued in March
1994.
Lending Discrimination Statutes and Regulations
The Equal Credit Opportunity Act (ECOA) prohibits
discrimination in any aspect of a credit transaction. It applies
to any extension of credit, including extensions of credit to
small businesses, corporations, partnerships, and trusts.
The ECOA prohibits discrimination based on:
- Race or color;
- Religion;
- National origin;
- Sex;
- Marital status;
- Age (provided the applicant has the capacity to contract);
- The applicant’s receipt of income derived from any public
assistance program; or
- The applicant’s exercise, in good faith, of any right under
the Consumer Credit Protection Act.
The Federal Reserve Board’s Regulation B, found at 12 CFR
Part 202, implements the ECOA. Regulation B describes
lending acts and practices that are specifically prohibited,
permitted, or required. Official staff interpretations of the
regulation are found in Supplement I to 12 CFR Part 202.
The Fair Housing Act (FHAct) prohibits discrimination in
all aspects of "residential real-estate related transactions,"
including but not limited to
- Making loans to buy, build, repair or improve a dwelling;
- Purchasing real estate loans;
- Selling, brokering, or appraising residential real estate; or
- Selling or renting a dwelling.
The FHAct prohibits discrimination based on:
- Race or color;
- National origin;
- Religion;
- Sex;
- Familial status (defined as children under the age of 18
living with a parent or legal custodian, pregnant women,
and people securing custody of children under 18); or
- Handicap.
The Department of Housing and Urban Development’s (HUD)
regulations implementing the FHAct are found at 24 CFR Part
100.
Because both the FHAct and the ECOA apply to mortgage
lending, lenders may not discriminate in mortgage lending
based on any of the prohibited factors in either list.
Under the ECOA, it is unlawful for a lender to discriminate
on a prohibited basis in any aspect of a credit transaction,
and under both the ECOA and the FHAct, it is unlawful for
a lender to discriminate on a prohibited basis in a residential
real-estate-related transaction. Under one or both of these
laws, a lender may not, because of a prohibited factor:
- Fail to provide information or services or provide different
information or services regarding any aspect of the
lending process, including credit availability, application
procedures, or lending standards.
- Discourage or selectively encourage applicants with respect
to inquiries about or applications for credit.
- Refuse to extend credit or use different standards in
determining whether to extend credit.
- Vary the terms of credit offered, including the amount,
interest rate, duration, or type of loan.
- Use different standards to evaluate collateral.
- Treat a borrower differently in servicing a loan or invoking
default remedies.
- Use different standards for pooling or packaging a loan in
the secondary market.
A lender may not express, orally or in writing, a preference
based on prohibited factors or indicate that it will treat
applicants differently on a prohibited basis.
A lender may not discriminate on a prohibited basis because of
the characteristics of
- An applicant, prospective applicant, or borrower.
- A person associated with an applicant, prospective
applicant, or borrower (for example, a co-applicant, spouse,
business partner, or live-in aide).
- The present or prospective occupants of either the property
to be financed or the neighborhood or other area where
property to be financed is located.
Finally, the FHAct requires lenders to make reasonable
accommodations for a person with disabilities when such
accommodations are necessary to afford the person an equal
opportunity to apply for credit.
Types of Lending Discrimination
The courts have recognized three methods of proof of lending
discrimination under the ECOA and the FHAct:
- Overt evidence of disparate treatment
- Comparative evidence of disparate treatment
- Evidence of disparate impact.
Disparate Treatment
The existence of illegal disparate treatment may be
established either by statements revealing that a lender
explicitly considered prohibited factors (overt evidence) or
by differences in treatment that are not fully explained by
legitimate nondiscriminatory factors (comparative evidence).
Overt Evidence of Disparate Treatment. There is overt
evidence of discrimination when a lender openly discriminates
on a prohibited basis.
Example: A lender offered a credit card with a limit of up
to $750 for applicants aged 21-30 and $1500 for applicants
over 30. This policy violated the ECOA’s prohibition on
discrimination based on age.
There is overt evidence of discrimination even when a lender
expresses—but does not act on—a discriminatory preference.
Example: A lending officer told a customer, "We do not like
to make home mortgages to Native Americans, but the law
says we cannot discriminate and we have to comply with
the law." This statement violated the FHAct’s prohibition
on statements expressing a discriminatory preference as
well as Section 202.5(a) of Regulation B, which prohibits
discouraging applicants on a prohibited basis.
Comparative Evidence of Disparate Treatment. Disparate
treatment occurs when a lender treats a credit applicant
differently based on one of the prohibited bases. It does not
require any showing that the treatment was motivated by
prejudice or a conscious intention to discriminate against
a person beyond the difference in treatment itself. It is
considered by courts to be intentional discrimination because
no credible, nondiscriminatory reason explains the difference
in treatment on a prohibited basis.
Disparate treatment may more likely occur in the treatment
of applicants who are neither clearly well-qualified nor
clearly unqualified. Discrimination may more readily affect
applicants in this middle group for two reasons. First, if the
applications are "close cases," there is more room and need
for lender discretion. Second, whether or not an applicant
qualifies may depend on the level of assistance the lender
provides the applicant in completing an application. The
lender may, for example, propose solutions to credit or other
problems regarding an application, identify compensating
factors, and provide encouragement to the applicant. Lenders
are under no obligation to provide such assistance, but to
the extent that they do, the assistance must be provided in a
nondiscriminatory way.
Example: A nonminority couple applied for an automobile
loan. The lender found adverse information in the couple’s
credit report. The lender discussed the credit report with them
and determined that the adverse information, a judgment
against the couple, was incorrect since the judgment had
been vacated. The nonminority couple was granted their loan.
A minority couple applied for a similar loan with the same
lender. Upon discovering adverse information in the minority
couple’s credit report, the lender denied the loan application on
the basis of the adverse information without giving the couple
an opportunity to discuss the report.
The foregoing is an example of disparate treatment of
similarly situated applicants, apparently based on a prohibited
factor, in the amount of assistance and information the lender
provided.
If a lender has apparently treated similar applicants differently
on the basis of a prohibited factor, it must provide an
explanation for the difference in treatment. If the lender’s
explanation is found to be not credible, the agency may find
that the lender intentionally discriminated.
Redlining is a form of illegal disparate treatment in which
a lender provides unequal access to credit, or unequal terms
of credit, because of the race, color, national origin, or other
prohibited characteristic(s) of the residents of the area in
which the credit seeker resides or will reside or in which the
residential property to be mortgaged is located. Redlining may
violate both the FHAct and the ECOA.
Disparate Impact
When a lender applies a racially or otherwise neutral policy
or practice equally to all credit applicants, but the policy
or practice disproportionately excludes or burdens certain
persons on a prohibited basis, the policy or practice is
described as having a "disparate impact."
Example: A lender’s policy is not to extend loans for single
family residences for less than $60,000. This policy has been
in effect for ten years. This minimum loan amount policy
is shown to disproportionately exclude potential minority
applicants from consideration because of their income levels
or the value of the houses in the areas in which they live.
Although the precise contours of the law on disparate impact
as it applies to lending discrimination are under development,
it has been clearly established the single fact that a policy or
practice creates a disparity on a prohibited basis is not alone
proof of a violation.
When an Agency finds that a lender’s policy or practice has a
disparate impact, the next step is to seek to determine whether
the policy or practice is justified by "business necessity." The
justification must be manifest and may not be hypothetical or
speculative. Factors that may be relevant to the justification
could include cost and profitability. Even if a policy or
practice that has a disparate impact on a prohibited basis can
be justified by business necessity, it still may be found to be
in violation if an alternative policy or practice could serve the
same purpose with less discriminatory effect. Finally, evidence
of discriminatory intent is not necessary to establish that a
lender’s adoption or implementation of a policy or practice that
has a disparate impact is in violation of the FHAct or ECOA.
These procedures do not call for examiners to plan
examinations to identify or focus on potential disparate
impact issues. The guidance in this section is intended to help
examiners recognize potential disparate impact situations if
they happen to encounter them. Guidance in the Appendix
tells them how to obtain relevant information regarding
such situations and how to evaluate and follow up on it, as
appropriate.
General Guidelines
These procedures are intended to be a basic and flexible
framework to be used in the majority of fair lending
examinations conducted by the FFIEC agencies. They are
also intended to guide examiner judgment, not to supplant it.
The procedures can be augmented by each agency, which can
supply such additional procedures and details as are necessary
to implement them effectively.
Although these procedures will apply to most examinations,
each agency may continue to use for limited numbers of
examinations the distinct approaches it has developed that are
appropriate for select classes of institutions. Such approaches
include, for example, the statistical modeling that some of the
agencies use in selected examinations to assist in determining
whether race or national origin was a factor in credit decisions.
For a number of aspects of lending—for example, credit
scoring and loan pricing—the "state of the art" is more
likely to be advanced if the agencies have some latitude
to incorporate promising innovations. These interagency
procedures provide for that.
Any references in these procedures to options, judgment, etc.,
of "examiners" means discretion within the limits provided
by that examiner’s agency. An examiner should use these
procedures in conjunction with his or her own agency’s
priorities, examination philosophy, and detailed guidance for
implementing these procedures. These procedures should not
be interpreted as providing an examiner greater latitude than
his or her own agency would. For example, if an agency’s
policy is to review compliance management systems even in
small banks, an examiner for that agency must conduct such
a review rather than interpret Part II of these interagency
procedures as leaving the review to the examiner’s option.
The procedures emphasize racial and national origin
discrimination in residential transactions, but the key
principles can be applied to other prohibited bases and to
nonresidential transactions.
Finally, these procedures focus on analyzing lender
compliance with the broad, nondiscriminatory requirements of
the ECOA and the FHAct. They do not address such explicit
or technical compliance provisions as the signature rules
or adverse action notice requirements in sections 202.7 and
202.9, respectively, of Regulation B.
Part I—Examination Scope Guidelines
Background
The scope of an examination encompasses the loan product(s),
market(s), decision center(s), time frame, and prohibited basis
and control group(s) to be analyzed during the examination.
These procedures refer to each potential combination of
those elements as a "Focal Point." Setting the scope of an
examination involves, first, identifying all of the potential
focal points that appear worthwhile to examine. Then, from
among those, examiners select the focal point(s) that will form
the scope of the examination, based on risk factors, priorities
established in these procedures or by their respective agencies,
the record from past examinations, and other relevant
guidance. This phase includes obtaining an overview of an
institution’s compliance management system as it relates to
fair lending.
When selecting focal points for review, examiners may
determine that the institution has performed "self-tests" or
"self-evaluations" related to specific lending products. The
difference between "self tests" and "self evaluations" is
discussed in the Streamlining the Examination section of the
Appendix. Institutions must share all information regarding
"self-evaluations" and certain limited information related to
"self-tests." Institutions may choose to voluntarily disclose
additional information about "self-tests." Examiners should
make sure that institutions understand that voluntarily sharing
the results of self-tests will result in a loss of confidential
status of these tests. Information from "self-evaluations" or
"self-tests" may allow the scoping to be streamlined. Refer to
the Streamlining the Examination section of the Appendix for
additional details.
Scoping may disclose the existence of circumstances—such
as the use of credit scoring or the amount of residential
lending—which, under an agency’s policy, call for the use of
regression analysis or other statistical methods of identifying
potential discrimination with respect to one or more loan
products. Where that is the case, the agency’s specialized
procedures should be employed for such loan products rather
than the procedures set forth below.
Setting the intensity of an examination means determining the
breadth and depth of the analysis that will be conducted on the
selected loan product(s). This process entails a more involved
analysis of the institution’s compliance risk management
processes, particularly as it relates to selected products, to
reach an informed decision regarding how large a sample
of files to review in any transactional analyses performed
and whether certain aspects of the credit process deserve
heightened scrutiny.
Part I of these procedures provides guidance on establishing
the scope of the examination. Part II — Compliance
Management Review — provides guidance on determining
the intensity of the examination. There is naturally some
interdependence between these two phases. Ultimately the
scope and intensity of the examination will determine the
record of performance that serves as the foundation for
agency conclusions about institutional compliance with
fair lending obligations. The examiner should employ these
procedures and the organization of these guidelines to arrive
at a well-reasoned and practical conclusion about how to
conduct a particular institution’s examination of fair lending
performance.
In cases where information already in the possession of an
agency provides examiners with guidance on priorities and
risks for planning an upcoming examination, such information
may expedite the scoping process and make it unnecessary
to carry out all of the steps below. For example, the report
of the previous fair lending examination may have included
recommendations for the focus of the next examination.
The scoping process can be performed either off-site, on-site,
or both, depending on whatever is determined most feasible.
In the interest of minimizing burdens on both the examination
team and the lender, requests for information from the
institution should be carefully thought out so as to include only
the information that will clearly be useful in the examination
process. Finally, any off-site information requests should be
made sufficiently in advance of the on-site schedule to permit
institutions adequate time to assemble necessary information
and provide it to the examination team in a timely fashion.
(See the Appendix on "Potential Scoping Information" for
guidance on additional information that the examiner might
wish to consider including in a request).
Examiners should focus the examination based on:
- An understanding of the credit operations of the institution;
- The risk that discriminatory conduct may occur in each
area of those operations; and
- The feasibility of developing a factually reliable record of
an institution's performance and fair lending compliance in
each area of those operations.
Understanding Credit Operations
Before evaluating the potential for discriminatory conduct,
the examiner should review sufficient information about the
institution and its market to understand the credit operations
of the institution and the representation of prohibited basis
group residents within the markets where the institution does
business. The level of detail to be obtained at this stage should
be sufficient to identify whether any of the risk factors in the
steps below are present. Relevant background information
includes:
- The types and terms of credit products offered,
differentiating among residential, consumer and other
categories of credit.
- The volume of, or growth in, lending for each of the credit
products offered.
- The demographics (i.e., race, national origin, etc.) of the
credit markets in which the institution is doing business.
- The institution’s organization of its credit decision-making
process, including identification of the delegation of
separate lending authorities and the extent to which
discretion in pricing or setting credit terms and conditions
is delegated to various levels of managers, employees or
independent brokers or dealers.
- The types of relevant documentation/data that are available
for various loan products and what is the relative quantity,
quality and accessibility of such information. (i.e., for
which loan product(s) will the information available be
most likely to support a sound and reliable fair lending
analysis.)
- The extent to which information requests can be readily
organized and coordinated with other compliance
examination components to reduce undue burden on the
institution. (Do not request more information than the
exam team can be expected to utilize during the anticipated
course of the examination.)
In thinking about an institution’s credit markets, the examiner
should recognize that these markets may or may not coincide
with an institution’s CRA assessment area(s). Where
appropriate, the examiner should review the demographics for
a broader geographic area than the assessment area.
Where an institution has multiple underwriting or loan
processing centers or subsidiaries, each with fully independent
credit-granting authority, consider evaluating each center
and/or subsidiary separately, provided a sufficient number of
loans exist to support a meaningful analysis. In determining
the scope of the examination for such institutions, examiners
should consider whether:
- Subsidiaries should be examined. The agencies will hold a
financial institution responsible for violations by its direct
subsidiaries, but not typically for those by its affiliates
(unless the affiliate has acted as the agent for the institution
or the violation by the affiliate was known or should have
been known to the institution before it became involved
in the transaction or purchased the affiliate’s loans). When
seeking to determine an institution’s relationship with
affiliates that are not supervised financial institutions, limit
the inquiry to what can be learned in the institution and do
not contact the affiliate.
- The underwriting standards and procedures used in the
entity being reviewed are used in related entities not
scheduled for the planned examination. This will help
examiners to recognize the potential scope of policy-based
violations.
- The portfolio consists of applications from a purchased
institution. If so, for scoping purposes, examiners
should consider the applications as if they were made to
the purchasing institution. (For comparison purposes,
applications evaluated under the purchased institution’s
standards should not be compared to applications evaluated
under the purchasing institution’s standards.)
- The portfolio includes purchased loans. If so, examiners
should look for indications that the institution specified
loans to purchase based on a prohibited factor or caused a
prohibited factor to influence the origination process.
- A complete decision can be made at one of the several
underwriting or loan processing centers, each with
independent authority. In such a situation, it is best to
conduct on-site a separate comparative analysis at each
underwriting center. If covering multiple centers is not
feasible during the planned examination, examiners should
review one during the planned examination and others in
later examinations.
- Decision-making responsibility for a single transaction may
involve more than one underwriting center. For example,
an institution may have authority to decline mortgage
applicants, but only the mortgage company subsidiary may
approve them. In such a situation, examiners should learn
which standards are applied in each entity and the location
of records needed for the planned comparisons.
- Any third parties, such as brokers or contractors, are
involved in the credit decision and how responsibility is
allocated among them and the institution. The institution’s
familiarity with third party actions may be important, for
a bank may be in violation if it participates in transactions
in which it knew or reasonably ought to have known other
parties were discriminating.
If the institution is large and geographically diverse, examiners
should select only as many markets or underwriting centers
as can be reviewed readily in depth, rather than selecting
proportionally to cover every market. As needed, examiners
should narrow the focus to the MSA or underwriting center
that is determined to present the highest discrimination risk.
Examiners should use LAR data organized by underwriting
center, if available. After calculating denial rates between
the control group and minorities for the underwriting
centers, examiners should select the centers with the highest
disparities. If underwriting centers have fewer than five black,
Hispanic, or Native American denials, examiners should not
examine for racial discrimination. Instead, they should shift
the focus to other loan products or prohibited bases.
Evaluating the Potential for Discriminatory Conduct
Step One: Develop an Overview
Based on his or her understanding of the credit operations
and product offerings of an institution, an examiner should
determine the nature and amount of information required
for the scoping process and should obtain and organize
that information. No single examination can reasonably be
expected to evaluate compliance performance as to every
prohibited basis, in every product, or in every underwriting
center or subsidiary of an institution. In addition to
information gained in the process of Understanding Credit
Operations above, the examiner should keep in mind the
following factors when selecting products for the scoping
review:
- Which products and prohibited bases were reviewed during
the most recent prior examination(s) and, conversely, which
products and prohibited bases have not recently been
reviewed?
- Which prohibited basis groups make up a significant
portion of the institution’s market for the different credit
products offered?
- Which products and prohibited basis groups the institution
reviewed using either a voluntarily disclosed self-test or a
self-evaluation?
Based on consideration of the foregoing factors, the examiner
should request information for all residential and other loan
products considered appropriate for scoping in the current
examination cycle. In addition, wherever feasible, examiners
should conduct preliminary interviews with the lender’s key
underwriting personnel. Using the accumulated information,
the examiner should evaluate the following, as applicable:
- Underwriting guidelines, policies, and standards.
- Descriptions of credit scoring systems, including a list of
factors scored, cutoff scores, extent of validation, and any
guidance for handling overrides and exceptions. (Refer
to Part A of the Credit Scoring Analysis section of the
Appendix for guidance.)
- Applicable pricing policies and guidance for exercising
discretion over loan terms and conditions.
- The institution’s corporate relationships with any finance
companies, subprime mortgage or consumer lending
entities, or similar institutions.
- Loan application forms.
- HMDA/LAR or loan registers and lists of declined
applications.
- Description(s) of databases maintained for loan product(s)
to be reviewed, especially any record of exceptions to
underwriting guidelines.
- Copies of any consumer complaints alleging discrimination
and loan files related thereto.
- Descriptions of any compensation system that is based on
loan production or pricing.
- Compliance program materials (particularly fair lending
policies), training manuals, organization charts, as well as
record keeping and any monitoring protocols.
- Copies of any available marketing materials or descriptions
of current or previous marketing plans or programs.
Step Two: Identify Compliance Program Discrimination
Risk Factors
Review information from agency examination work papers,
institutional records and any available discussions with
management representatives in sufficient detail to understand
the organization, staffing, training, recordkeeping, auditing and
policies of the institution’s fair lending compliance systems.
Review these systems and note the following risk factors:
C1. Overall institution compliance record is weak.
C2. Prohibited basis monitoring information is incomplete.
C3. Data and/or recordkeeping problems compromised
reliability of previous examination reviews.
C4. Fair lending problems were previously found in one or
more bank products.
C5. The size, scope, and quality of the compliance
management program, including senior management’s
involvement, is materially inferior to programs
customarily found in institutions of similar size, market
demographics and credit complexity.
C6. The institution has not updated compliance guidance to
reflect changes in law or in agency policy.
Consider these risk factors and their impact on particular
lending products and practices as you conduct the product
specific risk review during the scoping steps that follow.
Where this review identifies fair lending compliance system
deficiencies, give them appropriate consideration as part
of the Compliance Management Review in Part II of these
procedures.
Step Three: Review Residential Loan Products
Although home mortgages may not be the ultimate subject of
every fair lending examination, this product line must at least
be considered in the course of scoping every institution that is
engaged in the residential lending market.
Divide home mortgage loans into the following groupings:
home purchase, home improvements, and refinancings.
Subdivide those three groups further if an institution does a
significant number of any of the following types or forms of
residential lending, and consider them separately:
- Government-insured loans
- Mobile home or factory housing loans
- Wholesale, indirect and brokered loans
- Portfolio lending (including portfolios of Fannie Mae/
Freddie Mac rejections)
In addition, determine whether the lender offers any
conventional "affordable" housing loan programs and whether
their terms and conditions make them incompatible with
regular conventional loans for comparative purposes. If so,
consider them separately.
If previous examinations have demonstrated the following,
then an examiner may limit the focus of the current
examination to alternative underwriting or processing centers
or to other residential products that have received less scrutiny
in the past:
- A strong fair lending compliance program.
- No record of discriminatory transactions at particular
decision centers or in particular residential products.
- No indication of a significant change in personnel,
operations or underwriting standards at those centers or in
those residential products.
- No unresolved fair lending complaints, administrative
proceedings, litigation or similar factors.
Step Four: Identify Residential Lending Discrimination
Risk Factors
- Review the lending policies, marketing plans, underwriting,
appraisal and pricing guidelines, broker/agent agreements
and loan application forms for each residential loan product
that represents an appreciable volume of, or displays
noticeable growth in, the institution’s residential lending.
- Review also any available data regarding the geographic
distribution of the institution’s loan originations with
respect to the race and national origin percentages of the
census tracts within its assessment area or, if different, its
residential loan product lending area(s).
- Conduct interviews of loan officers and other employees
or agents in the residential lending process concerning
adherence to and understanding of the above policies and
guidelines as well as any relevant operating practices.
- In the course of conducting the foregoing inquiries,
look for the following risk factors (factors are numbered
alphanumerically to coincide with the type of factor, e.g.,
"O" for "overt"; "P" for "pricing", etc.):
Overt indicators of discrimination such as:
O1. Including explicit prohibited basis identifiers in
underwriting criteria or pricing standards.
O2. Collecting information, conducting inquiries or imposing
conditions contrary to express requirements of Regulation
B.
O3. Including variables in a credit scoring system that
constitute a basis or factor prohibited by Regulation B
or, for residential loan scoring systems, the FHAct. (If
a credit scoring system scores age, refer to the Credit
Scoring Analysis section of the Appendix.)
O4. Statements made by the institution’s officers, employees or
agents which constitute an express or implicit indication
that one or more such persons have engaged or do engage
in discrimination on a prohibited basis in any aspect of a
credit transaction.
O5. Employee or institutional statements that evidence
attitudes based on prohibited basis prejudices or
stereotypes.
Note: For risk factors below that are marked with an
asterisk, examiners need not attempt to calculate the
indicated ratios for racial or national origin characteristics
when the institution in not a HMDA reporter. However,
consideration should be given in such cases to whether or
not such calculations should be made based on gender or
racial-ethnic surrogates.
Indicators of potential disparate treatment in Underwriting
such as:
U1. *Substantial disparities among the approval/denial rates
for applicants by monitored prohibited basis characteristic
(especially within income categories).
U2. *Substantial disparities among the application processing
times for applicants by monitored prohibited basis
characteristic (especially within denial reason groups).
U3. *Substantially higher proportion of withdrawn/incomplete
applications from prohibited basis group applicants than
from other applicants.
U4. Vague or unduly subjective underwriting criteria.
U5. Lack of clear guidance on making exceptions to
underwriting criteria, including credit scoring overrides.
U6. Lack of clear loan file documentation regarding reasons
for any exceptions to normal underwriting standards,
including credit scoring overrides.
U7. Relatively high percentages of either exceptions to
underwriting criteria or overrides of credit score cutoffs.
U8. Loan officer or broker compensation based on loan
volume (especially loans approved per period of time).
U9. Consumer complaints alleging discrimination in loan
processing or in approving/denying residential loans.
Indicators of potential disparate treatment in Pricing (interest
rates, fees, or points) such as:
P1. Relationship between loan pricing and compensation of
loan officers or brokers.
P2. Presence of broad discretion in pricing or other transaction
costs.
P3. Use of a system of risk-based pricing that is not
empirically based and statistically sound.
P4. *Substantial disparities among prices being quoted or
charged to applicants who differ as to their monitored
prohibited basis characteristics.
P5. Consumer complaints alleging discrimination in
residential loan pricing.
Indicators of potential disparate treatment by Steering such
as:
S1. For an institution that has one or more sub-prime mortgage
subsidiaries or affiliates, any significant differences,
by loan product, in the percentage of prohibited basis
applicants of the institution compared with the percentage
of prohibited basis applicants of the subsidiary(ies) or
affiliate(s).
S2. Lack of clear, objective standards for (i) referring
applicants to subsidiaries or affiliates, (ii) classifying
applicants as "prime" or "subprime" borrowers, or (iii)
deciding what kinds of alternative loan products should be
offered or recommended to applicants.
S3. For an institution that makes both conventional and FHA
mortgages, any significant differences in the percentages
of prohibited basis group applicants in each of these two
loan products, particularly with respect to loan amounts of
$100,000 or more.
S4. For an institution that makes both prime and sub-prime
loans for the same purpose, any significant differences in
percentages of prohibited basis group borrowers in each of
the alternative loan product categories.
S5. Consumer complaints alleging discrimination in residential
loan pricing.
S6. A lender with a sub-prime mortgage company subsidiary
or affiliate integrates loan application processing for
both entities, such that steering between the prime and
sub-prime products can occur almost seamlessly; i.e., a
single loan processor could simultaneously attempt to
qualify any applicant, whether to the bank or the mortgage
company, under either the bank’s prime criteria or the
mortgage company’s sub-prime criteria.
S7. Loan officers have broad discretion regarding whether to
promote conventional or FHA loans, or both, to applicants
and the lender has not issued guidelines regarding the
exercise of this discretion.
S8. A lender has most of its branches in predominantly
white neighborhoods. The lender’s subprime mortgage
subsidiary has branches which are located primarily in
predominantly minority neighborhoods.
Indicators of potential discriminatory Redlining such as:
R1. *Significant differences, as revealed in HMDA data, in the
number of loans originated in those areas in the lender’s
market that have relatively high concentrations of minority
group residents compared with areas with relatively low
concentrations of minority residents.
R2. *Significant differences between approval/denial rates for
all applicants (minority and nonminority) in areas with
relatively high concentrations of minority group residents
compared with areas with relatively low concentrations of
minority residents.
R3. *Significant differences between denial rates based on
insufficient collateral for applicants from areas with
relatively high concentrations of minority residents and
those areas with relatively low concentrations of minority
residents.
R4. Other patterns of lending identified during the most recent
CRA examination that differ by the concentration of
minority residents.
R5. Explicit demarcation of credit product markets that
excludes MSAs, political subdivisions, census tracts, or
other geographic areas within the institution’s lending
market and having relatively high concentrations of
minority residents.
R6. Policies on receipt and processing of applications,
pricing, conditions, or appraisals and valuation, or on
any other aspect of providing residential credit that vary
between areas with relatively high concentrations of
minority residents and those areas with relatively low
concentrations of minority residents.
R7. Employee statements that reflect an aversion to doing
business in areas with relatively high concentrations of
minority residents.
R8. Complaints or other allegations by consumers or
community representatives that the lender excludes or
restricts access to credit for areas with relatively high
concentrations of minority residents. Examiners should
review complaints against the lender filed with their
agency; the CRA public comment file; community contact
forms; and the responses to questions about redlining,
discrimination, and discouragement of applications,
and about meeting the needs of racial or national origin
minorities, asked as part of "obtaining local perspectives
on the performance of financial lenders" during prior CRA
examinations.
Note: Broad allegations or complaints are not, by
themselves, sufficient justification to shift the focus
of an examination from routine comparative review of
applications to redlining analysis. Such a shift should be
based on complaints or allegations of specific practices or
incidents that are consistent with redlining, along with the
existence of other risk factors.
R9. A lender that has most of its branches in predominantly
white neighborhoods at the same time that the lender’s
subprime mortgage subsidiary has branches which
are located primarily in predominantly minority
neighborhoods.
Indicators of potential disparate treatment in Marketing of
residential products, such as:
M1. Advertising patterns or practices that a reasonable person
would believe indicate prohibited basis customers are less
desirable.
M2. Advertising only in media serving nonminority areas of
the market.
M3. Marketing through brokers or other agents that the lender
knows (or has reason to know) would serve only one racial
or ethnic group in the market.
M4. Use of marketing programs or procedures for residential
loan products that exclude one or more regions or
geographies within the lenders assessment or marketing
area that have significantly higher percentages of minority
group residents than does the remainder of the assessment
or marketing area.
M5. Using mailing or other distribution lists or other marketing
techniques for pre-screened or other offerings of
residential loan products ** that:
- Explicitly exclude groups of prospective borrowers on a
prohibited basis; or
- Exclude geographies (e.g., census tracts, ZIP codes,
etc.) within the institution's marketing area that have
significantly higher percentages of minority group
residents than does the remainder of the marketing area.
** Note: Pre-screened solicitation of potential applicants
on a prohibited basis does not violate ECOA. Such
solicitations are, however, covered by the FHAct.
Consequently, analyses of this form of potential
marketing discrimination should be limited to
residential loan products subject to coverage under the
FHAct.
M6. *Proportion of monitored prohibited basis applicants is
significantly lower than that group’s representation in the
total population of the market area.
M7. Consumer complaints alleging discrimination in
advertising or marketing loans.
Step Five: Organize and Focus Residential Risk Analysis
Review the risk factors identified in Step 4 and, for each
loan product that displays risk factors, articulate the possible
discriminatory effects encountered and organize the
examination of those loan products in accordance with the
following guidance:
-
Where overt evidence of discrimination, as described
in factors O1-O5, has been found in connection with a
product, document those findings as described in Part
III, A, besides completing the remainder of the planned
examination analysis.
- Where any of the risk factors U1-U9 are present, consider
conducting an underwriting comparative file analysis as
described in Part III, B.
- Where any of the risk factors P1-P5 are present, consider
conducting a pricing comparative file analysis as
described in Part III, C.
- Where any of the risk factors S1-S8 are present, consider
conducting a steering analysis as described in Part III, D.
- Where any of the risk factors R1-R9 are present, consult
agency managers about conducting an analysis for
redlining as described in Part III, F.
- Where any of the risk factors M1-M7 are present, consult
agency managers about conducting a marketing analysis
as described in Part III, G.
- Where an institution uses age in any credit scoring
system, consider conducting an examination analysis
of that credit scoring system’s compliance with the
requirements of Regulation B as described in Part III, H.
Step Six: Identify Consumer Lending Discrimination Risk Factors
For credit card, motor vehicle, home equity and other
consumer loan products selected in Step One for risk analysis
in the current examination cycle, conduct a risk factor review
similar to that conducted for residential lending products
in Steps Three through Five, above. Consult with agency
managers regarding the potential use of surrogates to identify
possible prohibited basis group individuals.
Note: The term surrogate in this context refers to any factor
related to a loan applicant that potentially identifies that
applicant’s race, color or other prohibited basis characteristic
in instances where no direct evidence of that characteristic is
available. Thus, in consumer lending, where monitoring data is
generally unavailable, an outwardly Hispanic or Asian surname
could constitute a surrogate for an applicant’s race or national
origin because then examiner can assume that the lender
(who can rebut the presumption) perceived the person to be
Hispanic. Similarly, an applicant’s given name could serve as
a surrogate for his or her gender. A surrogate for a prohibited
basis characteristic may be used as to set up a comparative
analysis with nonminority applicants or borrowers.
Using decision rules in Steps three through five, above,
for residential lending products, articulate the possible
discriminatory patterns encountered and consider examining
those products determined to have sufficient risk of
discriminatory conduct.
Step Seven: Analyze Commercial Lending Discrimination
Risk
Where an institution does a substantial amount of lending in
the commercial lending market, most notably small business
loans (and the product has not recently been examined or
the underwriting standards have changed since the last
examination of the product), the examiner should consider
conducting a risk factor review similar to that performed for
residential lending products, as feasible, given the limited
information available. Such an analysis should generally be
limited to determining risk potential based on risk factors
U4-U8; P1-P3; R4-R7; and M1-M3.
If the institution makes commercial loans insured by the
Small Business Administration (SBA), determine from agency
supervisory staff whether SBA loan data (which codes race
and other factors) are available for the institution and evaluate
those data pursuant to instructions accompanying them.
For large institutions reporting small business loans for
CRA purposes and where the institution also voluntarily
geocodes loan denials, look for material discrepancies in
ratios of approval-to-denial rates for applications in areas with
relatively high concentrations of minority residents compared
with areas with relatively low concentrations.
Articulate the possible discriminatory patterns identified and
consider further examining those products determined to have
sufficient risk of discriminatory conduct in accordance with
the procedures for commercial lending described in Part III, F.
Step Eight: Complete the Scoping Process
To complete the scoping process, the examiner should review
the results of the preceding steps and select those focal points
that warrant examination, based on the relative risk levels
identified above. In order to remain within the agency’s
resource allowances, the examiner may need to choose a
smaller number of Focal Points from among all those selected
on the basis of risk. In such instances, set the scope by first,
prioritizing focal points on the basis of (i) high number and/or
relative severity of risk factors; (ii) high data quality and
other factors affecting the likelihood of obtaining reliable
examination results; (iii) high loan volume and the likelihood
of widespread risk to applicants and borrowers; and (iv) low
quality of any compliance program and, second, selecting for
examination review as many focal points as resources permit.
Where the judgment process among competing Focal Points is
a close call, information learned in the phase of conducting the
compliance management review can be used to further refine
the examiner’s choices.
Part II—Compliance Management Review
The Compliance Management Review enables the examination
team to determine:
- The intensity of the current examination based on an
evaluation of the compliance management measures
employed by an institution.
- The reliability of the institution’s practices and procedures
for ensuring continued fair lending compliance.
Generally, the review should focus on:
- Determining whether the policies and procedures of the
institution enable management to prevent, or to identify and
self-correct, illegal disparate treatment in the transactions
that relate to the products and issues identified for further
analysis under Part I of these procedures.
- Obtaining a thorough understanding of the manner
by which management addresses its fair lending
responsibilities with respect to (a) the institution’s lending
practices and standards, (b) training and other applicationprocessing
aids, (c) guidance to employees or agents in
dealing with customers, and (d) its marketing or other
promotion of products and services.
To conduct this review, examiners should consider institutional
records and interviews with appropriate management
personnel in the lending, compliance, audit, and legal
functions. The examiner should also refer to the Compliance
Management Analysis Checklist contained in the Appendix
to evaluate the strength of the compliance programs in terms
of their capacity to prevent, or to identify and self-correct, fair
lending violations in connection with the products or issues
selected for analysis. Based on this evaluation:
- Set the intensity of the transaction analysis by minimizing
sample sizes within the guidelines established in Part
III and the Sample Size Table in the Appendix, to the
extent warranted by the strength and thoroughness of the
compliance programs applicable to those Focal Points
selected for examination.
- Identify any compliance program or system deficiencies
that merit correction or improvement and present these
to management in accordance with Part IV of these
procedures.
Where an institution performs a self-evaluation or has
voluntarily disclosed the report or results of a self-test of any
product or issue that is within the scope of the examination
and has been selected for analysis pursuant to Part I of these
procedures, examiners may streamline the examination,
consistent with agency instructions, provided the self-test
or self-evaluation meets the requirements set forth in
Streamlining the Examination located in the Appendix.
Part III—Examination Procedures
Once the scope and intensity of the examination have been
determined, assess the institution’s fair lending performance by
applying the appropriate procedures that follow to each of the
examination Focal Points already selected.
A. Documenting Overt Evidence of Disparate Treatment
Where the scoping process or any other source identifies
overt evidence of disparate treatment, the examiner should
assess the nature of the policy or statement and the extent of
its impact on affected applicants by conducting the following
analysis:
Step 1. Where the indicator(s) of overt discrimination are
found in or based on a written policy (for example, a credit
scorecard) or communication, determine and document:
- The precise language of the apparently discriminatory
policy or communication and the nature of the fair lending
concerns that it raises.
- The lender’s stated purpose in adopting the policy or
communication and the identity of the person on whose
authority it was issued or adopted.
- How and when the policy or communication was put into
effect.
- How widely the policy or communication was applied.
- Whether and to what extent applicants were adversely
affected by the policy or communication.
Step 2. Where any indicator of overt discrimination was an
oral statement or unwritten practice, determine and document:
- The precise nature of both the statement or practice and of
the fair lending concerns that they raise.
- The identity of the persons making the statement or
applying the practice and their descriptions of the reasons
for it and the persons authorizing or directing the use of the
statement or practice.
- How and when the statement or practice was disseminated
or put into effect.
- How widely the statement or practice was disseminated or
applied.
- Whether and to what extent applicants were adversely
affected by the statement or practice.
Assemble findings and supporting documentation for
presentation to management in connection with Part IV of
these procedures.
B. Transactional Underwriting Analysis—Residential and
Consumer Loans.
Step 1. Set Sample Size
- For each Focal Point selected for this analysis, two samples
will be utilized: (i) prohibited basis group denials and (ii)
control group approvals, both identified either directly
from monitoring information in the case of residential
loan applications or through the use of application data or
surrogates in the case of consumer applications.
- Refer to the Fair Lending Sample Size Table A in the
Appendix and determine the size of the initial sample for
each Focal Point, based on the number of prohibited basis
group denials and the number of control group approvals
by the lender during the twelve month (or calendar year)
period of lending activity preceding the examination. In the
event that the number of denials and/or approvals acted on
during the preceding 12 month period substantially exceeds
the maximum sample size shown in Table A, reduce the
time period from which that sample is selected to a shorter
period. (In doing so, make every effort to select a period
in which the lender’s underwriting standards are most
representative of those in effect during the full 12 month
period preceding the examination.)
- If the number of prohibited basis group denials or control
group approvals for a given Focal Point that were acted
upon during the 12 month period referenced in 1.b., above,
do not meet the minimum standards set forth in the Sample
Size Table, examiners need not attempt a transactional
analysis for that Focal Point. Where other risk factors
favor analyzing such a Focal Point, consult with agency
managers on possible alternative methods of judgmental
comparative analysis.
- If agency policy calls for a different approach to sampling
(e.g., a form of statistical analysis or a mathematical
formula) for a limited class of institutions, examiners
should follow that approach.
Step 2. Determine Sample Composition.
- To the extent the institution maintains records of
loan outcomes resulting from exceptions to its credit
underwriting standards or other policies (e.g., overrides
to credit score cutoffs), request such records for both
approvals and denials, sorted by loan product and branch
or decision center, if the lender can do so. Include in
the initial sample for each Focal Point all exceptions or
overrides applicable to that Focal Point.
- Using HMDA/LAR data or, for consumer loans,
comparable loan register data to the extent available,
choose approved and denied applications based on
selection criteria that will maximize the likelihood of
finding marginal approved and denied applicants, as
discussed below.
- To the extent that the above factors are inapplicable or
other selection criteria are unavailable or do not facilitate
selection of the entire sample size of files, complete the
initial sample selection by making random file selections
from the appropriate sample categories in the Sample Size
Table.
Step 3. Compare Approved and Denied Applications
Overview: Although a creditor’s written policies and
procedures may appear to be nondiscriminatory, lending
personnel may interpret or apply policies in a discriminatory
manner. In order to detect any disparate treatment among
applicants, the examiner should first eliminate all but
"marginal transactions" (see 3.b. below) from each selected
Focal Point sample. Then, a detailed profile of each marginal
applicant’s qualifications, the level of assistance received
during the application process, the reasons for denial, the
loan terms, and other information should be recorded on an
Applicant Profile Spreadsheet. Once profiled, the examiner
can compare the target and control groups for evidence that
similarly qualified applicants have been treated differently
as to either the institution’s credit decision or the quality of
assistance provided.
- Create Applicant Profile Spreadsheet
Based upon the lender’s written and/or articulated credit
standards and loan policies, identify categories of data
that should be recorded for each applicant and provide
a field for each of these categories on a worksheet or
computerized spreadsheet. Certain data (income, loan
amount, debt, etc.) should always be included in the
spreadsheet, while the other data selected will be tailored
for each loan product and lender based on applicable
underwriting criteria and such issues as branch location and
underwriter. Where credit bureau scores and/or application
scores are an element of the lender’s underwriting criteria
(or where such information is regularly recorded in loan
files, whether expressly used or not), include a data field for
this information in the spread sheet.
In order to facilitate comparisons of the quality
of assistance provided to target and control group
applicants, respectively, every work sheet should provide
a "comments" block appropriately labeled as the site for
recording observations from the file or interviews regarding
how an applicant was, or was not, assisted in overcoming
credit deficiencies or otherwise qualifying for approval.
- Complete Applicant Profiles
From the application files sample for each Focal Point,
complete applicant profiles for selected denied and
approved applications as follows:
- A principal goal is to identify cases where similarly
qualified prohibited basis and control group applicants
had different credit outcomes, because the agencies
have found that discrimination, including differences in
granting assistance during the approval process, is more
likely to occur with respect to applicants who are not
either clearly qualified or unqualified, i.e., "marginal"
applicants. The examiner-in-charge should, during the
following steps, judgmentally select from the initial
sample only those denied and approved applications
which constitute marginal transactions. (See Appendix
on Marginal Transactions for guidance)
- If few marginal control group applicants are identified
from the initial sample, review additional files of
approved control group applicants. This will either
increase the number of marginal approvals or confirm
that marginal approvals are so infrequent that the
marginal denials are unlikely to involve disparate
treatment.
- The judgmental selection of both marginal-denied and
marginal-approved applicant loan files should be done
together, in a "back and forth" manner, to facilitate
close matches and a more consistent definition of
"marginal" between these two types of loan files.
- Once the marginal files have been identified, the data
elements called for on the profile spreadsheet are
extracted or noted and entered.
- While conducting the preceding step, the examiner
should simultaneously look for and document on
the spreadsheet any evidence found in marginal files
regarding the following:
- the extent of any assistance, including both
affirmative aid and waivers or partial waivers of
credit policy provisions or requirements, that appears
to have been provided to marginal-approved
control group applicants which enabled them to
overcome one or more credit deficiencies, such as
excessive debt-to-income ratios; and
- the extent to which marginal-denied target group
applicants with similar deficiencies were, or were
not, provided similar affirmative aid, waivers or
other forms of assistance.
- Review and Compare Profiles
- For each Focal Point, review all marginal profiles
to determine if the underwriter followed institution
lending policies in denying applications and whether
the reason(s) for denial were supported by facts
documented in the loan file and properly disclosed
to the applicant pursuant to Regulation B. If any
(a) unexplained deviations from credit standards,
(b) inaccurate reasons for denial or (c) incorrect
disclosures are noted, (whether in a judgmental
underwriting system, a scored system or a mixed
system) the examiner should obtain an explanation
from the underwriter and document the response on an
appropriate workpaper.
Note: In constructing the applicant profiles to be
compared, examiners must adjust the facts compared
so that assistance, waivers, or acts of discretion are
treated consistently between applicants. For example,
if a control group applicant’s DTI ratio was lowered
to 42% because the lender decided to include shortterm
overtime income, and a prohibited basis group
applicant who was denied due to "insufficient income"
would have had his ratio drop from 46% to 41% if
his short-term overtime income had been considered,
then the examiners should consider 41%, not 46%, in
determining the benchmark.
- For each reason for denial identified within the target
group, rank the denied prohibited basis applicants,
beginning with the applicant whose qualification(s)
related to that reason for denial were least deficient.
(The top-ranked denied applicant in each such
ranking will be referred to below as the "benchmark"
applicant.)
- Compare each marginal control group approval to
the benchmark applicant in each reason-for-denial
ranking developed in step (b), above. If there are no
approvals who are equally or less qualified, then there
are no instances of disparate treatment for the lender to
account for. For all such approvals that appear no better
qualified than the denied benchmark applicant
- identify the approved loan on the worksheet or
spreadsheet as an "overlap approval", and
- compare that overlap approval with other marginal
prohibited basis denials in the ranking to determine
whether additional overlaps exist. If so, identify all
overlapping approvals and denials as above.
- Where the Focal Point involves use of a credit scoring
system, the analysis for disparate treatment is similar to
the procedures set forth in (c) above, and should focus
primarily on overrides of the scoring system itself. For
guidance on this type of analysis, refer to Part C of the
Credit Scoring section of the Appendix.
Step 4. If there is some evidence of violations in the
underwriting process, but not enough to clearly establish the
existence of a pattern or practice, the examiner should expand
the sample as necessary to determine whether a pattern or
practice does or does not exist.
Step 5. Discuss all findings resulting from the above
comparisons with bank management and document both the
findings and all conversations on an appropriate worksheet.
C. Analyzing Potential Disparities in Terms and Conditions.
Step 1. Set Sample Size
For each Focal Point selected for this analysis, two samples
will be utilized: (i) prohibited basis group approvals and
(ii) control group approvals, both identified either directly
from monitoring information in the case of residential
loan applications or through the use of application data or
surrogates in the case of consumer or commercial applications.
Refer to the Fair Lending Sample Size Table B in the
Appendix and determine the size of the initial sample for each
Focal Point, based on the number of prohibited basis group
approvals and the number of control group approvals received
by the lender during the 12 months preceding the examination
and the outcome of the compliance management system
analysis conducted in Part II.
Step 2. Determine Sample Composition.
Note: Sample composition for a comparison of price and other
terms and conditions will initially focus on controlling for two
nondiscriminatory variables that can have a significant impact
on loan terms: whether the loan was sold and the loan closing
date. Other variables, such as household income and loan
amount, will be accounted for on a case-by-case basis during
the file comparison process.
- Disposition of Loan
Determine whether approved loans from which the
sample is to be drawn have been consistently sold to the
secondary market or held in portfolio. If both, determine
the proportion for each category and use that proportion in
selecting loans from each category for the sample. If the
number of loans in either the sold or portfolio categories
is too small to complete the minimum proportional sample
size for that category, ignore loans in that category and
complete the sample using loans solely from the larger
category.
- Period of Review
Sort loans selected in (1), above, by date of loan closing
and match batches of prohibited basis and control group
loans that closed either on the same date or within a range
of dates during which the lender’s pricing policies were the
same. If dates of loan closing are not consistently available,
consider substituting the application date for the closing
date.
Step 3. Create Applicant Profile Spreadsheet
Identify data that should be recorded for each loan to allow for
a valid comparison regarding terms and conditions and place
these onto a spreadsheet. Certain data must always be included
in the spreadsheet, while the other data selected will be
tailored for each loan product and lender based on loan terms
offered and such issues as branch location and underwriter.
Step 4. Review Terms and Conditions; Compare with
Applicant Outcomes
- Determine which loan terms and conditions (rates, points,
fees, maturity variations, LTVs, collateral requirements,
etc.) are left, in whole or in part, to the discretion of loan
officers or underwriters. For each such term or condition,
identify (a) any approved prohibited basis group
applicants in the sample who appear to have been treated
unfavorably with respect to that term or condition and (b)
any approved control group applicants who appear to
have been treated favorably with respect to that term or
condition. The examiner’s analysis should be thoroughly
documented in the workpapers.
- Identify from the sample any approved control group
applicant(s) who appear to have been treated more
favorably than one or more of the above-identified
prohibited basis group applicants and who have negative
creditworthiness factors (under the lender’s standards)
that are equal to or worse than the prohibited basis group
applicant(s).
- Obtain explanations from the appropriate loan officer or
other employee for any differences that exist and reanalyze
the sample for evidence of discrimination.
- If there is some evidence of violations in the imposition of
terms and conditions but not enough to clearly establish
the existence of a pattern or practice, the examiner should
expand the sample as necessary to determine whether a
pattern or practice does or does not exist.
- Discuss differences in comparable loans with the
institution’s management and document all conversations
on an appropriate worksheet. For additional guidance on
evaluating management’s responses, refer to the Part A,
1-6 Evaluating Response to Evidence of Disparate
Treatment in the Appendix.
D. Steering Analysis
Institutions that make FHA as well as conventional loans and
those that lend in both prime or "A" markets and in sub-prime
markets (either directly or through subsidiaries or affiliates),
present opportunities for loan officers to refer or "steer"
applicants from one product or market to another. Steering
is not unlawful per se and, in many instances, the availability
of a more expensive form of credit may enable an applicant
with credit problems to obtain a loan that might otherwise be
unavailable. Steering can, however, raise fair lending issues
if it occurs differently and less advantageously for prohibited
basis group applicants than for similarly-situated non-minority
applicants. If the scoping analysis reveals the presence of
one or more risk factors S1 through S8 for any selected Focal
Point, consult with managers about conducting a steering
analysis as described below.
From the perspective of fair lending analysis, all steering
scenarios involve a decision by the lender’s personnel to
guide an applicant’s choice between a more favorable loan
and one or more less favorable alternatives (e.g., referral to
a more expensive subprime mortgage subsidiary). As such, a
steering analysis should be focused on answering the following
questions:
Step 1. Clarify which of the options available to customers
are the more favorable and less favorable.
Through interviews with appropriate personnel of the
institution and review of policy manuals, procedure guidelines
and other directives, obtain and verify the following
information for each product-alternative product pairing or
grouping identified above:
- All underwriting criteria for the product and for the
alternative product(s) that are offered by the institution or
by a subsidiary or affiliate.
- Pricing or other costs applicable to the product and the
alternative product(s), including interest rates, points, and
all fees.
Step 2. Document the policies, conditions or criteria
that have been adopted by the lender for determining
how referrals are to be made and choices presented to
customers.
- Obtain not only information regarding the product
offered by the lender and alternative products offered by
subsidiaries/affiliates, but also information on products
and alternatives offered solely by the lender itself-, e.g.,
conventional and FHA, secured and unsecured home
improvement loans, prime and subprime mortgages.
- Obtain any information regarding a subsidiary of the lender
directly from that entity, but seek information regarding
an affiliate or holding company subsidiary only from the
lender itself.
- Obtain all appropriate documentation and document all
discussions with loan personnel and managers.
- Obtain documentation and/or employee estimates as to
the volume of referrals made from or to the institution, for
each product, during a relevant time period.
- Resolve to the extent possible any discrepancies
between information found in the lender’s documents
and information obtained in interviews by conducting
appropriate follow-up interviews.
- Identify any policies and procedures established by the
institution and/or the subsidiary or affiliate for (i) referring
a person who applies to the institution, but does not meet
its criteria, to a subsidiary or affiliate; (ii) offering to a
person who applies to the institution for a specific product,
but does not meet its criteria, one or more alternative
loan products; or (iii) referring a person who applies to a
subsidiary or affiliate for its product, but who appears be
qualified for a loan from the institution, to the institution.
- Determine whether loan personnel are encouraged, through
monetary incentives or otherwise, to make referrals, either
from the institution to a subsidiary/affiliate or vice versa.
Step 3. Determine how both the decisions and the
lender’s policies, conditions or criteria are supposed to be
documented in loan files, policy manuals, directives, etc.
Determine how, if at all, a referral from the institution to a
subsidiary/affiliate, or vice versa, and the reason for it, would
be documented in the loan files or in any other records of
either the referring or receiving entity.
Step 4. Determine to what extent individual loan personnel
are able to exercise personal discretion in deciding what
loan products or other credit alternatives will be made
available to a given applicant.
Step 5. Determine whether the lender’s stated policies,
conditions or criteria in fact are adhered to by individual
decision makers. In the alternative, does it appear that
different policies or practices are actually in effect?
Enter data from the prohibited basis group sample on the
spread sheets and determine whether the lender is, in fact,
applying its criteria as stated. For example, if one announced
criterion for receiving a "more favorable" prime mortgage loan
was a back end debt ratio of no more than 38%, review the
spread sheets to determine whether that criteria was adhered
to. If the lender’s actual treatment of prohibited basis group
applicants appears to differ from its stated criteria, document
such differences for subsequent discussion with management.
Step 6. To the extent that individual loan personnel have
any discretion in deciding what credit alternatives (e.g.,
conventional vs. FHA/VA) to offer applicants, conduct a
comparative analysis to determine whether that discretion
has been exercised in a nondiscriminatory manner.
Compare the lender’s or subsidiary/affiliate’s treatment
of control group and prohibited basis group applicants by
adapting the "benchmark" and "overlap" technique discussed
in Part III, B. of these procedures. For purposes of this
Steering Analysis, that technique should be conducted as
follows:
- For each Focal Point to be analyzed, select a sample of
prohibited basis group applicants who received "less
favorable" treatment (e.g., referral to a finance company
or a subprime mortgage subsidiary or counteroffers of less
favorable product alternatives).
Note: In selecting the sample, follow the guidance
of Sample Size Table B in the Appendix and select
"marginal applicants" as instructed in Part III, Section B,
above.
- Prepare a spread sheet for the sample which contains data
entry categories for those underwriting and/or referral
criteria that the lender identified in Step 1. b as used in
reaching underwriting and referral decisions between the
pairs of products.
- Review the "less favorably" treated prohibited basis group
sample and rank this sample from least qualified to most
qualified.
- From the sample, identify the best qualified prohibited
basis group applicant, based on the criteria identified
for the control group, above. This applicant will be the
"benchmark" applicant. Rank order the remaining
applicants from best to least qualified.
- Select a sample of control group applicants. Identify those
who were treated "more favorably" with respect to the
same product-alternative product pair as the prohibited
basis group. (Again refer to the Sample Size Table B and
marginal applicant processes noted above in selecting the
sample.)
- Compare the qualifications of the benchmark applicant
with those of the control group applicants, beginning
with the least qualified member of that sample. Any
control group applicant who appears less qualified than
the benchmark applicant should be identified on the
spreadsheet as a "control group overlap".
- Compare all control group overlaps with other, less
qualified prohibited basis group applicants to determine
whether additional overlaps exist.
- Document all overlaps as possible disparities in treatment.
Discuss all overlaps and related findings (e.g., any
differences between stated and actual underwriting criteria)
with management, documenting all such conversations.
E. Transactional Underwriting Analysis—Commercial
Loans.
Overview: Unlike consumer credit, where loan products and
prices are generally homogenous and underwriting involves
the evaluation of a limited number of credit variables,
commercial loans are generally unique and underwriting
methods and loan pricing may vary depending on a large
number of credit variables. The additional credit analysis
that is involved in underwriting commercial credit products
will entail additional complexity in the sampling and
discrimination analysis process. Although ECOA prohibits
discrimination as to all commercial credit activities of
a covered institution, the agencies recognize that small
businesses (sole proprietorships, partnerships, and small,
closely-held corporations), including those operated by
prohibited basis group members, may have less experience
in borrowing. Therefore, in implementing these procedures,
examinations should generally be focused on small business
credit (commercial applicants that had gross revenues of
$1,000,000 or less in the preceding fiscal year), absent some
evidence that a focus on other commercial products would be
more appropriate.
Step 1. Understand Commercial Loan Policies
For the commercial product line selected for analysis, the
examiner should first review credit policy guidelines and
interview appropriate commercial loan managers and officers
to obtain written and articulated standards used by the lender
in evaluating commercial loan applications.
Step 2. Conduct Initial Sampling
- Select all (up to a maximum of ten) denied applications
that were acted on during the three month period prior to
the examination. To the extent feasible, include denied
applications from businesses that are (i) located in minority
and/or integrated geographies or (ii) appear to be owned by
women or minority group members, based on the names of
the principals shown on applications or related documents.
(In the case of banks that do a significant volume of
commercial lending, consider reviewing more than ten
applications.)
- For each of the denied commercial applications
selected, record specific information from loan files and
through interviews with the appropriate loan officer(s),
about the principal owners, the purpose of the loan, and
the specific, pertinent financial information about the
commercial enterprise (including type of business—retail,
manufacturing, service, etc.), that was used by the lender
to evaluate the credit request. In addition, inquire with
the loan officer as to the gender and race, if known, of the
principals of the business.
- Select ten approved loans that appear to be similar with
regard to business type, purpose of loan, loan amount,
loan terms, and type of collateral, as the denied loans
sampled. For example, if the denied loan sample includes
applications for lines of credit to cover inventory purchases
for retail businesses, the examiner should select approved
applications for lines of credit from retail businesses.
- For each approved commercial loan application selected,
obtain and record information parallel to that obtained for
denied applications, including the gender and race of the
principals.
- The examiner should first compare the credit criteria
considered in the credit process for each of the approved
and denied applications to established underwriting
standards, rather than comparing files directly.
- The examiner should identify any deviations from credit
standards for both approved and denied credit requests,
and differences in loan terms granted for approved credit
requests.
- The examiner should discuss each instance where
deviations from credit standards and terms were noted, but
were not explained in the file, with the commercial credit
underwriter. Each discussion should be documented.
Step 3. Conduct Targeted Sampling.
- If deviations from credit standards or pricing are not
sufficiently explained by other factors either documented in
the credit file or the commercial underwriter was not able
to provide a reasonable explanation, the examiner should
determine if deviations were detrimental to any protected
classes of applicants.
- The examiner should consider employing the same
techniques for determining race and gender characteristics
of commercial applicants as those outlined in the consumer
loan sampling procedures.
- If it is determined that there are members of one or
more prohibited basis groups among commercial
credit requests that were not underwritten according to
established standards or received less favorable terms,
the examiner should select additional commercial loans,
where applicants are members of the same prohibited basis
group and select similarly situated control group credit
requests. These additional files should be selected based
on the specific applicant circumstance(s) that appeared to
have been viewed differently by lending personnel on a
prohibited basis.
- If there are not enough similarly situated applicants
for comparison in the original sample period to draw
a reasonable conclusion, the examiner should expand
the sample period. The expanded sample period should
generally not go beyond the date of the prior examination.
Sampling Guidelines
- Generally, the task of selecting an appropriate expanded
sample of prohibited basis and control group applications
for commercial loans will require examiner judgement. The
examiner should select a sample that is large enough to be
able to draw a reasonable conclusion.
- The examiner should first select from the applications that
were acted on during the initial sample period, but were not
included in the initial sample, and select applications from
prior time periods as necessary.
- The expanded sample should include both approved and
denied, prohibited basis and control group applications,
where similar credit was requested by similar enterprises
for similar purposes.
F. Analysis of Potential Discriminatory "Redlining"
Overview: For purposes of this analysis, "redlining" is a
form of illegal disparate treatment in which a lender provides
unequal access to credit, or unequal terms of credit, because
of the race, color, national origin, or other prohibited
characteristic(s) of the residents of the area in which the
credit seeker resides or will reside or in which the residential
property to be mortgaged is located.
The redlining analysis may be applied to determine whether,
on a prohibited basis:
- a lender fails or refuses to extend credit in such an area;
- makes loans in such an area but at a restricted level or
upon less-favorable terms or conditions as compared to
contrasting areas; or
- a lender omits or excludes such an area from efforts to
market residential loans or solicit customers for residential
credit.
This guidance focuses on possible discrimination against
racial or national origin minorities. The same analysis could
be adapted to evaluate relative access to credit for areas of
geographical concentration on other prohibited bases—for
example, age.
Note: 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 lenders 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.
Like other forms of disparate treatment, redlining can be
proven by overt or comparative evidence. If any written or
oral policy or statement of the lender (see risk factors R5,
R6, and R7 in Part I, above) suggests that the lender links the
racial or national origin character of an area with any aspect
of access to or terms of credit, the examiners should refer to
the guidance in section A of this Part III, on documenting and
evaluating overt evidence of discrimination.
Overt evidence includes not only explicit statements, but also
any geographical terms used by the lender that would, to a
reasonable person familiar with the community in question,
connote a specific racial or national origin character. For
example, if the principal information conveyed by the phrase
"north of 110th Street" is that the indicated area is principally
occupied by Hispanics, then a policy of not making credit
available "north of 110th Street" is overt evidence of potential
redlining on the basis of national origin.
Overt evidence is relatively uncommon. Consequently,
the redlining analysis usually will focus on comparative
evidence (similar to analyses of possible disparate treatment
of individual customers) in which the lender’s treatment of
areas with contrasting racial or national origin characters is
compared.
When the scoping process (including consultation within
an agency as called for by agency procedures) indicates that
a redlining analysis should be initiated, examiners should
complete the following steps of comparative analysis:
- Identify and delineate any areas within the lender’s CRA
assessment area or market area for residential products that
are of a racial or national origin minority character;
- Determine whether any minority area identified in step 1
appears to be excluded, under-served, selectively excluded
from marketing efforts, or otherwise less-favorably treated
in any way by the lender;
- Identify and delineate any areas within the lender’s CRA
assessment area or market area for residential products that
are nonminority in character and that the lender appears to
treat more favorably;
- Obtain the lender’s explanation for the apparent difference
in treatment between the areas and evaluate whether it is
credible and reasonable; and
- Obtain and evaluate other information that may support or
contradict interpreting identified disparities to be the result
of intentional illegal discrimination.
These steps are discussed in detail below.
Using information obtained during scoping
Although the five tasks listed are presented below as
examination steps in the order given above, examiners should
recognize that a different order may be preferable in any given
examination. For example, the lender’s explanation (step 4)
for one of the policies or patterns in question may already be
documented in the CRA materials reviewed (step 2) and the
CRA examiners may already have verified it, which may be
sufficient for purposes of the redlining analysis.
As another example, as part of the scoping process, the
examiners may have reviewed an analysis of the geographic
distribution of the lender’s loan originations with respect
to the racial and national origin composition of census
tracts within its CRA assessment or residential market
area. Such analysis might have documented the existence
of significant discrepancies between areas, by degree of
minority concentration, in loans originated (risk factor R1),
approval/denial rates (risk factor R2) and/or rates of denials
because of insufficient collateral (risk factor R3). In such
a situation in which the scoping process has produced a
reliable factual record, the examiners could begin with step 4
(obtaining an explanation) of the redlining analysis below.
In contrast, when the scoping process only yields partial or
questionable information, or when the risk factors on which
the redlining analysis is based are complaints or allegations
against the lender, steps 1, 2, and/or 3 must be addressed.
Comparative analysis for redlining
Step 1. Identify and delineate any areas within the lender’s
CRA assessment area or market area for residential
products that are of a racial or national origin minority
character.
Note: The CRA assessment area can be a convenient unit
for redlining analysis because information about it typically
already is in hand. However, the CRA assessment area may
be too limited. The redlining analysis focuses on the lender’s
decisions about how much access to credit to provide to
different geographical areas. The areas for which those
decisions can best be compared are areas where the lender
actually marketed and provided credit and where it could
reasonably be expected to have marketed and provided credit.
Some of those areas might be beyond or otherwise different
from the CRA assessment area.
If there are no areas identifiable for their racial or national
origin minority character within the lender’s CRA assessment
area or market area for residential products, a redlining
analysis is not appropriate. (If there is a substantial but
dispersed minority population, potential disparate treatment
can be evaluated by a routine comparative file review of
applicants.)
This step may have been substantially completed during
scoping, but unresolved matters may remain. (For example,
several community spokespersons may allege that the lender
is redlining, but disagree in defining the area). The examiners
should:
- Describe as precisely as possible why a specific area is
recognized in the community (perceptions of residents,
etc.) and/or is objectively identifiable (based on census or
other data) as having a particular racial or national origin
minority character.
- The most obvious identifier is the predominant race or
national origin of the residents of the area. Examiners
should document the percentages of racial or national
origin minorities residing within the census tracts that
make up the area. However, they should bear in mind
that it is illegal for the lender to consider a prohibited
factor in any way. For example, an area might be only
20% black, but if a lender refuses to extend credit there
because the lender believes the area is "changing to
black," that too is a violation. Contacts with community
groups can be helpful to learn whether there are such
subtle features of racial or ethnic character.
- Geographical groupings that are convenient for
CRA may obscure racial patterns. For example, an
underserved, low-income, predominantly minority
neighborhood that lies within a larger low-income area
that primarily consisted of nonminority neighborhoods
may seem adequately served when the entire lowincome
area is analyzed as a unit. However, a racial
pattern of underservice to minority areas might be
revealed if the low-income minority neighborhood
shared a border with an underserved, middle-income,
minority area and those two minority areas were
grouped together for purposes of analysis. Review the
analysis from prior CRA examinations of whether the
assessment area appears to have been influenced by
prohibited factors. If there are minority areas that the
lender excluded from the assessment area improperly,
consider whether they ought to be included in the
redlining analysis.
- Describe how the racial or national origin character
changes across the suspected redlining area’s various
boundaries.
- Document or estimate the amount, within the minority
area, of types of housing for which the lender offers
residential credit. If the minority area does not have
a significant amount of such housing, the area is not
appropriate for a redlining analysis.
Step 2. Determine whether any minority area identified in
step 1 is excluded, under-served, selectively excluded from
marketing efforts, or otherwise less-favorably treated in
any way by the lender.
The examiners should begin with the risk factors identified
during the scoping process. The unfavorable treatment may
have been substantially documented during scoping and needs
only to be finished in this step. If not, this step will verify and
measure the extent to which HMDA data show the minority
areas identified in Step 1 to be underserved and/or how the
lender’s explicit policies treat them less favorably.
- Review prior CRA lending test analyses to learn whether
they have identified any excluded or otherwise underserved
areas or other significant geographical disparities in
the institution’s lending. Determine whether any of those
are the minority areas identified in Step 1.
- Learn from the lender itself whether, as a matter of policy,
it treats any separate or distinct geographical areas within
its marketing or service area differently from other areas.
This may have been done completely or partially during
scoping analysis related to risk factors R5, R6, and R7.
The differences in treatment can be in marketing, branch
operations, appraisal practices, application processing,
approval requirements, pricing, loan conditions, evaluation
of collateral, or any other policy or practice materially
related to access to credit. Determine whether any of those
less-favored areas are the minority areas identified in step
1.
- Obtain from the lender: (i) its reasons for such differences
in policy, (ii) how the differences are implemented, and
(iii) any specific conditions that must exist in an area for it
to receive the particular treatment (more favorable or less
favorable) that the lender has indicated.
Step 3. Identify and delineate any areas within the lender’s
CRA assessment area or market area for residential
products that are nonminority in character and that the
lender appears to treat more favorably.
To the extent not already completed during scoping:
- Document the percentages of whites and of racial or
national origin minorities residing within the census
tract(s) that comprise(s) the nonminority area.
- Document the nature of the housing stock in the area.
- Describe, to the extent known, how the lender’s practices,
policies, or its rate of lending change from less- to morefavorable
as one leaves the minority area at its various
boundaries (Examiners should be particularly attentive
to instances in which the boundaries between favored
and disfavored areas deviate from boundaries the lender
would reasonably be expected to follow, such as political
boundaries or transportation barriers).
- Examiners should particularly consider whether, within
a large area that is composed predominantly of racial or
national origin minority households, there are enclaves that
are predominantly nonminority or whether, along the area’s
borders, there are irregularities where the nonminority
group is predominant. As part of the overall comparison,
examiners should determine whether credit access within
those small nonminority areas differs from credit access in
the larger minority area.
Step 4. Obtain the lender’s explanation for the apparent
difference in treatment between the areas and evaluate
whether it is credible and reasonable.
This step completes the comparative analysis by soliciting
from the lender any additional information not yet
considered by the examiners that might show that there is
a nondiscriminatory explanation for the apparent disparate
treatment based on race or ethnicity.
For each matter that requires explanation, provide the lender
full information about what differences appear to exist in
how it treats minority and nonminority areas, and how the
examiners reached their preliminary conclusions at this stage
of the analysis.
- Evaluate whether the conditions identified by the lender
in step 2 as justifying more favorable treatment pursuant
to institutional policy existed in minority neighborhoods
that did not receive the favorable treatment called for by
institutional policy. If there are minority areas for which
those conditions existed, ask the lender to explain why the
areas were treated differently despite the similar conditions.
- Evaluate whether the conditions identified by the lender
in Step 2 as justifying less favorable treatment pursuant to
institutional policy existed in nonminority neighborhoods
that received favorable treatment nevertheless. If there
are nonminority areas for which those conditions existed,
ask the lender to explain why those areas were treated
differently, despite the similar conditions.
- Obtain explanations from the lender for any apparent
differences in treatment observed by the examiners but not
called for by the lender’s policies.
- If the lender’s explanation cites any specific conditions
in the nonminority area(s) to justify more favorable
treatment, determine whether the minority area(s)
identified in step 1 satisfied those conditions. If there
are minority areas for which those conditions existed,
ask the lender to explain why the areas were treated
differently despite the similar conditions.
- If the lender’s explanation cites any specific conditions
in the minority area(s) to justify less favorable
treatment, determine whether the nonminority area(s)
had those conditions. If there are nonminority areas
for which those conditions existed, ask the lender to
explain why those areas were treated differently, despite
the similar conditions.
- Evaluate the lender’s responses by applying appropriate
principles selected from the Appendix on Evaluating
Responses to Evidence of Disparate Treatment.
Step 5. Obtain and evaluate specific types of other
information that may support or contradict interpreting
identified disparities to be the result of intentional illegal
discrimination.
As a legal matter, discriminatory intent can be inferred simply
from the lack of a legitimate explanation for clearly lessfavorable
treatment of racial or national origin minorities. That
might be the situation after step 4. Nevertheless, if the lender’s
explanations do not adequately account for a documented
difference in treatment, the examiners should consider
additional information that might support or contradict the
interpretation that the difference in treatment was intended.
- Comparative file review. If there was a comparative
file review conducted in conjunction with the redlining
examination, review the results; or, if it is necessary
and feasible to do so to clarify what appears to be
discriminatory redlining, compare denied applications
from within the suspected redlining area to approved
applications from the contrasting area.
- Learn whether there were any denials of fully qualified
applicants from the suspected redlining area. If so,
that tends to support the view that the lender wanted to
avoid doing business in the area.
- Learn whether the file review identified instances of
illegal disparate treatment against applicants of the
same race or national origin as the suspected redlining
area. If so, that tends to support the view that the lender
wanted to avoid doing business with applicants of that
group, such as the residents of the suspected redlining
area. Learn whether any such identified victims applied
for transactions in the suspected redlining area.
- If there are instances of either of the above, identify
denied nonminority residents, if any, of the suspected
redlining area and review their application files to learn
whether they appear to have been treated in an irregular
or less favorable way. If so, that tends to support the
view that the character of the area rather than of the
applicants themselves appears to have influenced the
credit decisions.
- Review withdrawn and incomplete applications for
the suspected redlining area, if those can readily be
identified from the HMDA-LAR, and learn whether
there are reliable indications that the lender discouraged
those applicants from applying. If so, that tends to
support the view that the lender did not want to do
business in the area and may constitute evidence of a
violation of Section 202.5(a) of Regulation B.
Conversely, if the comparisons of individual transactions
show that the lender treated minority and nonminority
applicants within and outside the suspected redlining area
similarly, that tends to contradict the conclusion that the
lender avoided the areas because it had minority residents.
- Interviews of third parties. The perspectives of third
parties will have been taken into account to some degree
through the review of available materials during scoping.
Later in the examination, in appropriate circumstances,
information from third parties may help in interpreting
whether the lender’s apparent differences in treatment of
minority and nonminority areas were intended.
- Identify persons (such as housing or credit counselors,
home improvement contractors, or real estate and
mortgage brokers) who may have extensive experience
dealing with credit applicants from the suspected
redlined area.
- After obtaining appropriate authorization and guidance
from your agency, interview those persons to learn of
their first-hand experiences related to:
- oral statements or written indications by a lender’s
representatives that loan applications from a
suspected redlined area were discouraged;
- whether the lender treated applicants from the
suspected redlining area as called for in its own
procedures (as the examiners understand them)
and/or whether it treated them similarly to applicants
from nonminority areas (as the examiners are
familiar with those transactions);
- any unusual delays or irregularities in loan
processing for transactions in the suspected redlining
area;
- differences in the lender’s pricing, loan conditions,
property valuation practices, etc., in the suspected
redlining area compared to contrasting areas.
Also, learn from the third parties the names of any
consumers they described as having experienced the
questionable behavior recounted by the third party, and
consider contacting those consumers.
If third parties witnessed specific conduct by the lender that
indicates the lender wanted to avoid business from the area
or prohibited basis group in question, this would tend to
support interpreting the difference in treatment as intended.
Conversely, if third parties report proper treatment or
positive actions toward such area or prohibited basis group,
this would tend to contradict the view that the lender
intended to discriminate.
-
Marketing. A clear exclusion of the suspected redlining
area from the lender’s marketing of residential loan
products supports the view that the lender did not want to
do business in the area. Marketing decisions are affirmative
acts to include or exclude areas. Disparities in marketing
between two areas may reveal that the lender prefers one
to the other. If sufficiently stark and supported by other
evidence, a difference in marketing to racially different
areas could itself be treated as a redlining violation of the
Fair Housing Act. Even below that level of difference,
marketing patterns can support or contradict the view that
disparities in lending practices were intentional.
- Review materials that show how the lender has
marketed in the suspected redlined area and in
nonminority areas. Begin with available CRA materials
and discuss the issues with CRA examiners, then
review other materials as appropriate. The materials
may include, for example, the lender’s guidance for the
geographical distribution of pre-approved solicitations
for credit cards or home equity lines of credit,
advertisements in local media or business or telephone
directories, business development calls to real estate
brokers, and calls by telemarketers.
-
Peer performance. Market share analysis and other
comparisons to competitors are insufficient by themselves
to prove that a lender engaged in illegal redlining. By
the same token, a lender cannot justify its own failure to
market or lend in an area by citing other lenders’ failures to
lend or market there.
However, a lender’s inactivity in an underserved area where
its acknowledged competitors are active would tend to
support the interpretation that it intends to avoid doing
business in the area. Conversely, if it is as active as other
lenders, that would suggest that it intends to compete for,
rather than avoid, business in the area.
- Develop a list of the institution's competitors.
- Learn the level of lending in the suspected redlining
area by competitors. Check any public evaluations of
similarly situated competitors obtained by the CRA
examiners as part of evaluating the performance context
or obtain such evaluations independently.
- Institution’s record. Request from the lender information
about its overall record of serving or attempting to serve
the racial or national origin minority group with which
the suspected redlining area is identified. The record may
reveal an intent to serve that group that tends to contradict
the view that the lender intends to discriminate against the
group.
Step 6. For any information that supports interpreting the
situation as illegal discrimination, obtain and evaluate an
explanation from the institution as called for in Part IV.
Note: If the lender’s explanation is that the disparate results are
the consequence of a specific, neutral policy or practice that
the lender applies broadly, such as not making loans on homes
below a certain value, review the guidance in the Appendix
on Disproportionate Adverse Impact and consult agency
managers.
G. Analysis of Potential Discriminatory Marketing Practices.
When scoping identifies significant risk factors (M1-M7)
related to marketing, examiners should consult their managers
and experts about a possible marketing discrimination
analysis. If the managers agree to proceed, the examiners
should collect information as follows:
Step 1. Identify the bank’s marketing initiatives.
-
Pre-approved solicitations
- Determine whether the bank sends out pre-approved
solicitations:
- for home purchase loans,
- for home improvement loans, and
- for refinance loans.
- Determine how the bank selects recipients for such
solicitations:
- Learn from the bank its criteria for such selections.
- Review any guidance or other information the
bank provided credit reporting companies or other
companies that supply such lists.
-
Media Usage
- Determine in which newspapers and broadcast media
the bank advertises.
- Identify any racial or national origin identity
associated with those media.
- Determine whether those media focus on
geographical communities of a particular racial or
national origin character.
- Learn the bank's strategies for geographic and
demographic distribution of advertisements.
- Obtain and review copies of the bank's printed
advertising and promotional materials.
- Determine what criteria the bank communicates to
media about what is an attractive customer or an
attractive area to cultivate business.
- Determine whether advertising and marketing are the
same to racial and national origin minority areas as
compared to nonminority areas.
- Self-produced promotional materials
- Learn how the bank distributes its own promotional
materials, both methods and geographical distribution.
- Learn what the bank regards as the target audience(s)
for those materials.
- Realtors, brokers, contractors, and other intermediaries
- Determine whether the bank solicits business
from specific realtors, brokers, home improvement
contractors, and other conduits.
- Learn how the bank decides which intermediaries it
will solicit.
- Identify the parties contacted and determine the
distribution between minority and nonminority areas.
- Obtain and review the types of information the bank
distributes to intermediaries.
- Determine how often the bank contacts intermediaries.
- Determine what criteria the bank communicates to
intermediaries about the type of customers it seeks or
the nature of the geographic areas in which it wishes to
do business.
Step 2. Determine whether the bank’s activities show
a significantly lower level of marketing effort toward
minority areas or toward media or intermediaries that
tend to reach minority areas.
Step 3. If there is any such disparity, document the bank’s
explanation for it.
For additional guidance, refer to Part C of the Special
Analyses section in the Appendix.
H. Credit Scoring.
If the scoping process results in the selection of a Focal Point
that includes a credit or mortgage scored loan product, refer
to Part B of the Credit Scoring Analysis section of the
Appendix.
If the institution utilizes a credit scoring program which scores
age for any loan product selected for review in the scoping
stage, either as the sole underwriting determinant or only as a
guide to making loan decisions, refer to Part D of the Credit
Scoring Analysis section of the Appendix.
I. Disparate Impact Issues.
These procedures have thus far focused primarily on
examining comparative evidence for possible unlawful
disparate treatment. Disparate impact has been described
briefly in the Introduction. Whenever an examiner believes
that a particular policy or practice of a lender appears to
have a disparate impact on a prohibited basis, the examiner
should refer to Part A of the Special Analyses section of
the Appendix or consult with agency managers for further
guidance.
Part IV—Obtaining and Evaluating Responses from
the Lender and Concluding the Examination
Step 1. Present to the institution’s management for
explanation:
- Any overt evidence of disparate treatment on a prohibited
basis.
- All instances of apparent disparate treatment (e.g.,
overlaps) in either the underwriting of loans or in loan
prices, terms, or conditions.
- All instances of apparent disparate treatment in the form
of discriminatory steering, redlining, or marketing policies
or practices.
- All instances where a denied prohibited basis applicant
was not afforded the same level of assistance or the
same benefit of discretion as an approved control group
applicant who was no better qualified with regard to the
reason for denial.
- All instances where a prohibited basis applicant received
conspicuously less favorable treatment by the lender than
was customary from the lender or was required by the
lender’s policy.
- Any statistically significant average difference in either
the frequency or amount of pricing disparities between
control group and prohibited basis group applicants.
- Any evidence of neutral policies, procedures or practices
that appear to have a disparate impact or effect on a
prohibited basis.
Explain that unless there are legitimate, nondiscriminatory
explanations (or in the case of disparate impact, a compelling
business justification) for each of the preliminary findings
of discrimination identified in this Part, the agency could
conclude that the lender is in violation of the applicable fair
lending laws.
Step 2. Document all responses that have been provided by the
institution, not just its "best" or "final" response. Document
each discussion with dates, names, titles, questions, responses,
any information that supports or undercuts the lender’s
credibility, and any other information that bears on the issues
raised in the discussion(s).
Step 3. Evaluate whether the responses are consistent with
previous statements, information obtained from file review,
documents, reasonable banking practices, and other sources,
and satisfy common-sense standards of logic and credibility.
- Do not speculate or assume that the institution’s decisionmaker
had specific intentions or considerations in mind
when he or she took the actions being evaluated. Do not,
for example, conclude that because you have noticed a
legitimate, nondiscriminatory reason for a denial (such
as an applicant’s credit weakness), that no discrimination
occurred unless it is clear that, at the time of the denial, the
lender actually based the denial on that reason.
- Perform follow-up file reviews and comparative analyses,
as necessary, to determine the accuracy and credibility of
the lender’s explanations.
- Refer to Evaluating Responses to Evidence of Disparate
Treatment in the Appendix for guidance as to common
types of responses.
- Refer to the Disproportionate Adverse Impact portion of
the Special Analyses section of the Appendix for guidance
on evaluating the institution’s responses to apparent
disparate impact.
Step 4. If, after completing steps one through three above,
you conclude that the institution has failed to adequately
demonstrate that one or more apparent violations had a
legitimate nondiscriminatory basis or were otherwise lawful,
prepare a documented list or discussion of violations, or a
draft examination report, as prescribed by agency directives.
Step 5. Consult with agency managers regarding whether (a)
any violations should be referred to the Departments of Justice
or Housing and Urban Development and (b) enforcement
action should be undertaken by your agency.
Compliance Management Analysis Checklist
This checklist is for use in conjunction with Part II of
these procedures as a device for evaluating the quality of
preventive and corrective measures, identifying worthwhile
innovations and offering suggestions for improvement. The
checklist is not, however, intended to be an absolute test of a
lender’s compliance management program. Lender programs
containing all or most of the features described in the list
may nonetheless be flawed for other reasons; conversely, a
compliance program which encompasses only a portion of
the factors listed below may nonetheless adequately support a
strong program under appropriate circumstances. In short, the
examiner must exercise his or her best judgment in utilizing
this list and in assessing the overall quality of a lender’s efforts
to ensure fair lending compliance.
If the transactions within the proposed scope are covered by
a listed self-compliance measure, check the box in the left
column. Reduce the intensity (mainly the sample size) of the
planned comparative file review to the degree that the selfcompliance
measures cover transactions within the proposed
scope. Document your findings in sufficient detail to justify
any resulting reduction in the intensity of the examination.
You are not required to learn whether self-compliance
measures apply to specific products outside the proposed
scope. However, if the information you have obtained shows
that the self-compliance measure is a general practice of the
lender, check the box in the second column in order to assist
future examination planning.
Preventive Measures
Determine whether policies and procedures exists that tend
to prevent illegal disparate treatment in the transactions you
plan to examine. There is no legal or agency requirement for
institutions to conduct these activities. The absence of any of
these policies and practices is never, by itself, a violation.
1. Lending Practices and Standards |
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Within the proposed scope
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Lender-wide |
a. Principal policy issues: |
1. Are underwriting practices clear and similar to industry standards? |
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2. Is pricing within reasonably confined ranges with guidance linking variations to risk and/or cost
factors? |
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3. Does management monitor the nature and frequency of exceptions to its standards? |
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4. Are denial reasons accurately and promptly communicated to unsuccessful applicants?
Note: The items above are not compliance measures, but they are fundamental features of lending
that tend to work against disparate treatment.
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b. Do training, application-processing aids, and other guidance correctly and adequately describe: |
1. Prohibited bases under ECOA, Regulation B, and the Fair Housing Act? |
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2. Other substantive credit access requirements of Regulation B (e.g. spousal signatures, improper
inquiries, protected income)? |
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c. Is it specifically communicated to employees that they must not, on a prohibited basis: |
1. Refuse to deal with individuals inquiring about credit? |
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2. Discourage inquiries or applicants by delays, discourtesy, or other means? |
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3. Provide different, incomplete, or misleading information about the availability of loans,
application requirements, and processing and approval standards or procedures (including
selectively informing applicants about certain loan products while failing to inform them of
alternatives)? |
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4. Encourage or more vigorously assist only certain inquirers or applicants? |
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5. Refer credit seekers to other lenders? |
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6. Waive or grant exceptions to application procedures or credit standards? |
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7. State a willingness to negotiate? |
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8. Use different procedures or standards to evaluate applications? |
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9. Use different procedures to obtain and evaluate appraisals? |
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10. Provide certain applicants opportunities to correct or explain adverse or inadequate information,
or to provide additional information? |
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11. Accept alternative proofs of creditworthiness? |
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12. Require co-signers? |
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13. Offer or authorize loan modifications? |
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14. Suggest or permit loan assumptions? |
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15. Impose late charges, reinstatement fees, etc.? |
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16. Initiate collection or foreclosure? |
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d. Has the institution taken specific initiatives to prevent forms of unintentional discrimination, including: |
1. Basing credit decisions on assumptions derived from racial, gender, and other stereotypes, rather
than facts? |
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2. Seeking customers from a particular racial, ethnic, or religious group, or of a particular gender, to
the exclusion of other types of customers, on the basis of how "comfortable" the employee may
feel in dealing with those different from him/her? |
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3. Because of their discomfort or unease in dealing with customers from certain racial, ethnic, or
religious groups, or of a certain gender, limiting the exchange of credit-related information or
their effort to qualify the applicant? |
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4. Is the institution’s CRA assessment area drawn without unreasonably excluding minority areas? |
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e. Does the institution have procedures to ensure that it does not: |
1. State racial or ethnic limitations in advertisements? |
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2. Employ code words in advertisements that convey racial or ethnic limitations? |
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3. Place advertisement that a reasonable person would regard as indicating minority customers are
less desirable? |
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4. Advertise only in media serving non-minority areas of the market? |
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5. Conduct other forms of marketing only in non-minority areas of the market? |
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6. Market only through brokers known to serve only one racial or ethnic group in the market? |
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7. Use a prohibited basis in any pre-screened solicitation? |
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2. Compliance Audit Function: Does the Bank Attempt to Detect Prohibited Disparate Treatment by Self-Test or Self-Evaluation? |
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Note: A self-test is any program, practice or study that is designed and specifically used to assess the institution’s compliance
with the ECOA and the Fair Housing Act statute or regulation and creates data or factual information that is not otherwise
available and cannot be derived from loan, application or other records related to credit transactions (12 CFR 202.15(b)(1) and
(24 CFR 100.141). The report, results, and many other records associated with a self-test are privileged unless an institution
voluntarily discloses the report or results or otherwise forfeits the privilege. See 12 CFR 202.15(b)(2) and 24 CFR 100.142(a)
for a complete listing of the types of information covered by the privilege. A self-evaluation, while generally having the same
purpose as a self-test, does not create any new data or factual information, but uses data readily available in loan or application
files and other records used in credit transactions and, therefore, does not meet the self-test definition. See Streamlining the
Examination in this Job Aids for more information about self-tests and self-evaluations.
While you may request the results of self-evaluations, you should not request the results of self-tests or any of the information
listed in 12 CFR 202.15(b)(2) and 24 CFR 100.142(a). If an institution discloses the self-test report or results to its regulator,
it will lose the privilege. The following items are intended to obtain information about the bank’s approach to self-testing and
self-evaluation, not the findings. Complete the checklist below for each self-evaluation and each self-test, where the institution
voluntarily discloses the report or results. Evaluating the results of self-evaluations and voluntarily disclosed self-tests is
described in Streamlining the Examination in the Appendix.
Mark the box if the answer is "yes" for the transactions within the scope.
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Within the proposed scope
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Lender-wide |
a. Are the transactions reviewed by an independent analyst who: |
1. Is directed to report objective results? |
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2. Has an adequate level of expertise? |
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3. Produces written conclusions? |
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b. Does the bank’s approach for self-testing or self-evaluation call for: |
1. Attempting to explain major patterns shown in the HMDA or other loan data? |
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2. Determining whether actual practices and standards differ from stated ones and basing the
evaluation on the actual practices? |
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3. Evaluating whether the reasons cited for denial are supported by facts relied on by the decision
maker at the time of the decision? |
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4. Comparing the treatment of prohibited basis group applicants to control group applicants? |
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5. Obtaining explanations from decision makers for any unfavorable treatment of the prohibited
basis group that departed from policy or customary practice? |
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6. Covering significant decision points in the loan process where disparate treatment or
discouragement might occur, including: |
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The approve/deny decision? |
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Pricing? |
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Other terms and conditions? |
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7. Covering at least as many transactions as examiners would independently, if using the Fair
Lending Sample Size Tables for a product with the application volumes of the product to be
evaluated? |
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8. Maintaining information concerning personal characteristics collected as part of a self-test
separately from application or loan files? |
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9. Timely analysis of the data? |
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10. Taking appropriate and timely corrective action? |
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c. In the bank’s plan for comparing the treatment of prohibited
basis group applicants with that of control group applicants: |
1. Are control and prohibited basis groups based on a prohibited basis found in ECOA or the FHAct
and defined clearly to isolate that prohibited basis for analysis? |
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2. Are appropriate data to be obtained to document treatment of applicants and the relative
qualifications vis-à-vis the requirement in question? |
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3. Are the data to be obtained the data on which decisions were based, not later or irrelevant
information? |
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4. Does the plan call for comparing the denied applicants’ qualifications related to the stated reason
for denial with the corresponding qualifications for approved applicants? |
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5. Are comparisons designed to identify instances in which prohibited basis group applicants were
treated less favorably than control group applicants who were no better qualified? |
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6. Is the evaluation designed to determine whether control and prohibited basis group applicants
were treated differently in the processes by which the bank helped applicants overcome obstacles
and by which their qualifications were enhanced? |
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7. Are responses and explanations to be obtained for any apparent disparate treatment on a
prohibited basis or other apparent violations of credit rights? |
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8. Are reasons cited by credit decision makers to justify or explain instances of apparent disparate
treatment to be verified? |
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d. For self-tests under ECOA that involved the collection of
applicant personal characteristics, did the institution: |
1. Develop a written plan that describes or identifies the: |
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specific purpose of the self-test? |
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geographic area(s) to be covered? |
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type(s) of credit transactions to be reviewed? |
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entity that will conduct the test and analyze the data? |
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timing of the test, including start and end dates or the duration of the self-test? |
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other related self-test data that is not privileged? |
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2. Disclose at the time applicant characteristic information is requested, that: |
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the applicant will not be required to provide the information? |
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the creditor is requesting the information to monitor its compliance with ECOA? |
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federal law prohibits the creditor from discriminating on the basis of this information or on the
basis of an applicant’s decision not to furnish the information? |
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if applicable, certain information will be collected based on visual observation or name if not
provided by the applicant? |
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3. Correcting Discriminatory Conduct |
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Within the proposed scope
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Lender-wide |
a. Determine whether the lender has provisions to take appropriate corrective action and
provide adequate relief to victims for any violations in the transactions you plan to review. |
1. Who is to receive the results of a self-evaluation or voluntarily disclosed self-test? |
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2. What decision process is supposed to follow delivery of the information? |
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3. Is feedback to be given to staff whose actions are reviewed? |
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4. What types of corrective action may occur? |
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5. Are customers to be: |
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Offered credit if they were improperly denied? |
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Compensated for any damages, both out of pocket and compensatory? |
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Notified of their legal rights? |
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b. Other corrective action: |
1. Are institutional policies or procedures that may have contributed to the discrimination to be
corrected? |
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2. Are employees involved to be trained and/or disciplined? |
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3, Is the need for community outreach programs and/or changes in marketing strategy or loan
products to better serve minority segments of the lender’s market to be considered? |
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4. Are audit and oversight systems to be improved in order to ensure there is not recurrence of any
identified discrimination? |
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Credit Scoring Analysis
These procedures are intended to assist an examiner in arriving
at supportable conclusions with respect to an institution’s
record of non-discrimination when the Focal Point involves a
product for which the institution uses automated underwriting
or when credit scoring risk factors make such a product the
Focal Point.
A. Structure and Organization of the Scoring System
Determine the utilization of credit scoring at the institution,
including
-
For each customized credit scoring model or scorecard
for any product, or for any credit scoring model used in
connection with a product held in portfolio, identify:
- the number and inter-relationship of each model or card
applied to a particular product;
- the purposes for which each card is employed (e.g.,
approval decision, set credit limits, set pricing,
determine processing requirements, etc.);
- the developer of each card used (e.g., in-house
department, affiliate, independent vendor name) and
describe the development population utilized;
- the types of monitoring reports generated (including
front-end, back-end, account management and any
disparate impact analyses), the frequency of generation
and recent copies of each;
- all policies applicable to the use of credit scoring;
- training materials and programs on credit scoring for
employees, agents and brokers involved in any aspect of
retail lending;
- any action taken to revalidate or re-calibrate any model
or scorecard used during the exam period and the
reason(s) why;
- the number of all high-side and low-side overrides for
each type of override occurring during the exam period
and any guidance given to employees on their ability to
override;
- all cutoffs used for each scorecard throughout the
examination period and the reasons for any change
made during the exam period;
- all variables scored by each product’s scorecard(s) and
the values that each variable may take; and
- the method used to select for disclosure those adverse
action reasons arising from application of the model or
scorecard.
-
For each judgmental underwriting system that includes
as an underwriting criterion a standard credit bureau or
secondary market credit score identify:
- the vendor of each credit score and any vendor
recommendation or guidance on the usage of the score
relied upon by the institution;
- the institution’s basis for using the particular bureau
or secondary market score and the cutoff standards for
each product’s underwriting system and the reasons for
any changes to the same during the exam period;
- the number of exceptions or overrides made to the
credit score component of the underwriting criteria and
the basis for those exceptions or overrides, including
any guidance given to employees on their ability to
depart from credit score underwriting standards, and;
- types of monitoring reports generated on the
judgmental system or its credit scoring component
(including front-end, back-end, differential processing
and disparate impact analysis), the frequency of
generation and recent copies of each.
B. Adverse Action Disclosure Notices
Determine the methodology used to select the reasons why
adverse action was taken on a credit application denied on the
basis of the applicant’s credit score. Compare the methodology
used to the examples recited in the Commentary to Regulation
B and decide acceptability against that standard. Identify any
consumer requests for reconsideration of credit score denial
reasons and review the action taken by management for
consistency across applicant groups.
Where a credit score is used to differentiate application
processing, and an applicant is denied for failure to attain a
judgmental underwriting standard that would not be applied
if the applicant had received a better credit score (thereby
being considered in a different—presumably less stringent—
application processing group), ensure that the adverse action
notice also discloses the bases on which the applicant failed
to attain the credit score required for consideration in the less
stringent processing group.
C. Disparate Treatment in the Application of Credit
Scoring Programs
- Determine what controls and policies management
has implemented to ensure that the institution’s credit
scoring models or credit score criteria are not applied in a
discriminatory manner; in particular:
- Examine institution guidance on using the credit
scoring system, on handling overrides and on
processing applicants and how well that guidance is
understood and observed by the targeted employees and
monitored for compliance by management.
- Examine institution policies that permit overrides or
that provide for different processing or underwriting
requirements based on geographic identifiers or
borrower score ranges to assure that they do not
treat protected group applicants differently than other
similarly situated applicants.
- Evaluate whether any of the bases for granting credit to
control group applicants who are low-side overrides are
applicable to any prohibited basis denials whose credit
score was equal to or greater than the lowest score among
the low-side overrides. If such cases are identified, obtain
and evaluate management’s reason for why such different
treatment is not a fair lending violation.
- Evaluate whether any of the bases for denying credit to
any prohibited basis applicants who are high side overrides
are applicable to any control group approvals whose credit
score was equal to or less than the highest score among
the prohibited basis high-side overrides. If such cases are
identified, obtain and evaluate management’s reason for
why such different treatment is not a fair lending violation.
- If credit scores are used to segment applicants into
groups that receive different processing or are required to
meet additional underwriting requirements (e.g., "tiered
risk underwriting"), perform a comparative file review,
or confirm the results and adequacy of management’s
comparative file review, that evaluates whether all
applicants within each group are treated equally.
D. Credit Scoring Systems that Include Age
Regulation B does not require initial validation or periodic
revalidation of a credit scoring system unless it considers age.
There are two ways a credit scoring system can consider age:
1) the system can be split into different scorecards depending
on the age of the applicant; and 2) age may be directly scored
as a variable. Both features may be present in some systems.
Regulation B requires that all credit scoring systems that
consider age in either of these ways must be validated (in the
language of the regulation, empirically derived, demonstrably
and statistically sound (EDDSS)).
- Age-Split Scorecards: If a system is split into only
two cards and one card covers a wide age range that
encompasses elderly applicants (applicants 62 or older),
the system is treated as considering, but not scoring, age.
Typically, the younger scorecard in an age-split system is
used for applicants under a specific age between 25 and 30.
It de-emphasizes factors such as the number of trade lines
and the length of employment, and increases the negative
weight of any derogatory information on the credit report.
Systems such as these do not raise the issue of assigning a
negative factor or value to the age of an elderly applicant.
However, if age is directly scored as a variable (whether
or not the system is age-split), or if elderly applicants are
included in a card with a narrow age range in an age-split
system, the system is treated as scoring age.
- Scorecards that Score Age: If a scorecard scores age
directly, in addition to meeting the EDDSS requirement,
the creditor must ensure that the age of an elderly applicant
is not assigned a negative factor or value. (See the staff
commentary about 12 CFR 202.2(p) and 202.6(b)(2)). A
negative factor or value means utilizing a factor, value, or
weight that is less favorable than the creditor’s experience
warrants or is less favorable than the factor, value, or
weight assigned to the most favored age group below the
age of 62 (12 CFR 202.2(v)).
E. Examination for Empirical Derivation and Statistical
Soundness
Regulation B requires credit scoring systems that use age
must be EDDSS to be empirically derived, and demonstrably
and statistically sound. This means that they must fulfill
the requirements of 12 CFR 202.2(p)(1)(i) - (iv). Obtain
documentation provided by the developer of the system and
consult the agency’s most recent guidance for making that
determination.
Evaluating Responses to Evidence of Disparate
Treatment
A. Responses to Comparative Evidence of Disparate
Treatment
The following are responses that a lender may offer
— separately or in combination — to attempt to explain that
the appearance of illegal disparate treatment is misleading, and
that no violation has in fact occurred. The responses, if true,
rebut the appearance of disparate treatment. The examiners
must evaluate the validity and credibility of the responses.
1. The lender’s personnel were unaware of the prohibited
basis identity of the applicant(s).
If the lender claims to have been unaware of the prohibited
basis identity (race, etc.) of an applicant or neighborhood,
ask it to show that the application in question was
processed in such a way that the institution’s staff that made
the decisions could not have learned the prohibited basis
identity of the applicant.
If the product is one for which the institution maintains
prohibited basis monitoring information, assume that
all employees could have taken those facts into account.
Assume the same when there was face-to-face contact
between any employee and the customer.
If there are other facts about the application from which
an ordinary person would have recognized the applicant’s
prohibited basis identity (for example, the surname is
an easily recognizable Hispanic one), assume that the
institution’s staff drew the same conclusions. If the racial
character of a community is in question, ask the institution
to provide persuasive evidence why its staff would not
know the racial character of any community in its service
area.
2. The difference in treatment was justified by differences
in the applicants (applicants not "similarly situated").
Ask the lender to account for the difference in treatment by
pointing out a specific difference between the applicants’
qualifications, or some factor not captured in the
application but that legitimately makes one applicant more
or less attractive to the lender, or some non-prohibited
factor related to the processing of their applications. The
difference identified by the lender must be one that is
important enough to justify the difference in treatment in
question, not a meaningless difference.
The factors commonly cited to show that applicants are
not similarly situated fall into two groups: those that can
be evaluated by how consistently they are handled in other
transactions, and those that cannot be evaluated in that way.
- Verifying "not similarly situated" explanations by
consistency
The appearance of disparate treatment remains
if a factor cited by the lender to justify favorable
treatment for a control group applicant also exists for
an otherwise similar prohibited basis applicant who
was treated unfavorably. Similarly, the appearance of
disparate treatment remains if a factor cited by the
lender to justify unfavorable treatment for a prohibited
basis applicant also exists for a control group applicant
that got favorable treatment. If this is not so, ask
the lender to document that the factor cited in its
explanation was used consistently for control group and
prohibited basis applicants.
Among the responses that should be evaluated this way
are:
- Customer relationship. Ask the lender to document
that a customer relationship was also sometimes
considered to the benefit of prohibited basis
applicants and/or that its absence worked against
control group customers.
- "Loan not saleable or insurable." If file review is
still in progress, be alert for loans approved despite
the claimed fatal problem. At a minimum, ask the
lender to be able to produce the text of the secondary
market or insurer’s requirement in question.
- Difference in standards or procedures between
branches or underwriters. Ask the lender to
provide transactions documenting that each of the
two branches or underwriters applied its standards or
procedures consistently to both prohibited basis and
control group applications it processed, and that each
served similar proportions of the prohibited basis
group.
- Difference in applying the same standard
(difference in "strictness") between underwriter,
branches, etc. Ask the lender to provide transactions
documenting that the stricter employee, branch,
etc., was strict for both prohibited basis and control
group applicants and that the other was lenient for
both, and that each served similar proportions of
the prohibited basis group. The best evidence of this
would be prohibited basis applicants who received
favorable treatment from the lenient branch and
control group applicants who received less favorable
treatment from the "strict" branch.
- Standards or procedures changed during period
reviewed. Ask the lender to provide transactions
documenting that during each period the standards
were applied consistently to both prohibited basis
and control group applicants.
- Employee misunderstood standard or procedure.
Ask the lender to provide transactions documenting
that the misunderstanding influenced both prohibited
basis and control group applications. If that is not
available, find no violation if the misunderstanding
is a reasonable mistake.
- Evaluating "not similarly situated" explanations by
other means
If consistency cannot be evaluated, consider an
explanation favorably even without examples of its
consistent use if:
- the factor is documented to exist in (or be absent
from) the transactions, as claimed by the institution;
- the factor is one a prudent lender would consider;
- file review found no evidence that the factor is
applied selectively on a prohibited basis (in other
words, the lender’s explanation is "not inconsistent
with available information"); and
- the lender’s description of the transaction is
generally consistent and reasonable.
Some factors that may be impossible to compare for
consistency are:
- Unusual underwriting standard. Ask the lender to
show that the standard is prudent. If the standard is
prudent and not inconsistent with other information,
accept this explanation even though there is no
documentation that it is used consistently.
- "Close calls." The lender may claim that
underwriters’ opposite decisions on similar
applicants reflects legitimate discretion that the
examiners should not second guess. That is not
an acceptable explanation for identical applicants
with different results, but is acceptable when the
applicants have differing strengths and weaknesses
that different underwriters might reasonably weigh
differently. However, do not accept the explanation
if other files reveal that these "strengths" or
"weaknesses" are counted or ignored selectively on a
prohibited basis.
- "Character loan." Expect the lender to identify
a specific history or specific facts that make the
applicant treated favorably a better risk than those
treated less favorably.
- "Accommodation loan." There are many legitimate
reasons that may make a transaction appealing
to a lender apart from the familiar qualifications
demanded by the secondary market and insurers.
For example, a customer may be related to or
referred by an important customer, be a political or
entertainment figure who would bring prestige to the
institution, be an employee of an important business
customer, etc. It is not illegal discrimination to make
a loan to an otherwise unqualified control group
applicant who has such attributes while denying
a loan to an otherwise similar prohibited basis
applicant without them. However, be skeptical when
the lender cites reasons for "accommodations" that
an ordinary prudent lender would not value.
- "Gut feeling." Be skeptical when lenders justify
an approval or denial by a general perception
or reaction to the customer. Such a perception
or reaction may be linked to a racial or other
stereotype that legally must not influence credit
decisions. Ask whether any specific event or fact
generated the reaction. Often, the lender can cite
something specific that made him or her confident
or uncomfortable about the customer. There is
no discrimination if it is credible that the lender
indeed considered such a factor and did not apply it
selectively on a prohibited basis.
- Follow up customer contacts
If the lender’s explanation of the handling of a
particular transaction is based on customer traits,
actions, or desires not evident from the file, consider
obtaining agency authorization to contact the customer
to verify the lender’s description. Such contacts need
not be limited to possible victims of discrimination, but
can include control group applicants or other witnesses.
3. The different results stemmed from an inadvertent
error.
If the lender claims an identified error such as
miscalculation or misunderstanding caused the favorable or
unfavorable result in question, evaluate whether the facts
support the assertion that such an event occurred.
If the lender claims an "unidentified error" caused
the favorable or unfavorable result in question, expect
the lender to provide evidence that discrimination is
inconsistent with its demonstrated conduct, and therefore
that discrimination is the less logical interpretation of the
situation. Consider the context (as described below).
4. The apparent disparate treatment on a prohibited basis
is a misleading portion of a larger pattern of random
inconsistencies.
Ask the institution to provide evidence that the unfavorable
treatment is not limited to the prohibited basis group and
that the favorable treatment is not limited to the control
group. Without such examples, do not accept a lender’s
unsupported claim that otherwise inexplicable differences
in treatment are distributed randomly.
If the lender can document that similarly situated prohibited
basis applicants received the favorable treatment in question
approximately as frequently and in comparable degree as the
control group applicants, conclude there is no violation.
NOTE: Transactions are relevant to "random inconsistency"
only if they are "similarly situated" to those apparently treated
unequally.
5. Loan terms and conditions.
The same analyses described in the preceding sections
with regard to decisions to approve or deny loans
also apply to pricing differences. Risks and costs are
legitimate considerations in setting prices and other terms
and conditions of loan products. However, generalized
reference by the lender to "cost factors" is insufficient to
explain pricing differences.
If the lender claims that specific borrowers received
different terms or conditions because of cost or risk
considerations, ask the lender to be able to identify
specific risk or cost differences between them.
If the lender claims that specific borrowers received
different terms or conditions because they were not
similarly situated as negotiators, consider whether
application records might provide relevant evidence. If
the records are not helpful, consider seeking authorization
to contact customers to learn whether the lender in fact
behaved comparably toward prohibited basis and control
group customers. The contacts would be to learn such
information as the lender’s opening quote of terms to the
customer and the progress of the negotiations.
If the institution responds that an average price difference
between the control and prohibited basis groups is based
on cost or risk factors, ask it to identify specific risk
or cost differences between individual control group
applicants with the lowest rates and prohibited basis group
applicants with the highest that are significant enough
to justify the pricing differences between them. If the
distinguishing factors cited by the institution are legitimate
and verifiable as described in the sections above, remove
those applications from the average price calculation. If
the average prices for the remaining control group and
prohibited basis group members still differ more than
minimally, consult within the agency about obtaining an
analysis of whether the difference is statistically significant.
Find a violation only if (1) there is evidence of disparate
treatment of similarly situated borrowers or (2) there is
a particular risk factor that meets all the criteria for a
disproportionate adverse impact violation.
B. Responses to Overt Evidence of Disparate Treatment
1. Descriptive references vs. lending considerations.
A reference to race, gender, etc., does not constitute a
violation if it is merely descriptive — for example, "the
applicant was young." In contrast, when the reference
reveals that the prohibited factor influenced the lender’s
decisions and/or customer behavior, treat the situation as an
apparent violation to which the lender must respond.
2. Personal opinions vs. lending considerations.
If an employee involved with credit availability states
unfavorable views regarding a racial group, gender,
etc., but does not explicitly relate those views to credit
decisions, review that employee’s credit decisions for
possible disparate treatment of the prohibited basis
group described unfavorably. If there are no instances of
apparent disparate treatment, treat the employee’s views as
permissible private opinions. Inform the lender that such
views create a risk of future violations.
3. Stereotypes related to credit decisions.
There is an apparent violation when a prohibited factor
influences a credit decision through a stereotype related to
creditworthiness, even if the action based on the stereotype
seems well-intended — for example, a loan denial because
"a single woman could not maintain a large house." If
the stereotyped beliefs are offered as "explanations" for
unfavorable treatment, regard such unfavorable treatment
as apparent illegal disparate treatment. If the stereotype
is only a general observation unrelated to particular
transactions, review that employee’s credit decisions for
possible disparate treatment of the prohibited basis group
in question. Inform the lender that such views create a risk
of future violations.
4. Indirect reference to a prohibited factor.
If negative views related to creditworthiness are described
in non-prohibited terms, consider whether the terms would
commonly be understood as surrogates for prohibited
terms. If so, treat the situation as if explicit prohibited
basis terms were used. For example, a lender’s statement
that "It’s too risky to lend north of 110th Street" might be
reasonably interpreted as a refusal to lend because of race
if that portion of the lender’s lending area north of 110th
Street were predominantly black and the area south white.
5. Lawful use of a prohibited factor.
- Special Purpose Credit Program (SPCP)
If a lender claims that its use of a prohibited factor
is lawful because it is operating an SPCP, ask the
lender to document that its program conforms to the
requirements of Regulation B. An SPCP must be
defined in a written plan that existed before the lender
made any decisions on loan applications under the
program. The written plan must:
- demonstrate that the program will benefit persons
who would otherwise be denied credit or receive
credit on less favorable terms; and
- state the time period the program will be in effect or
when it will be re-evaluated.
No provision of an SPCP should deprive people who
are not part of the target group of rights or opportunities
they otherwise would have. Qualified programs
operating on an otherwise-prohibited basis will not be
cited as a violation.
Note: Advise the lender that an agency finding that
a program is a lawful SPCP is not absolute security
against legal challenge by private parties. Suggest that
an institution concerned about legal challenge from
other quarters use exclusions or limitations that are not
prohibited by ECOA or the FHAct, such as "first-time
home buyer."
- Second review program
Such programs are permissible if they do no more
than ensure that lending standards are applied
fairly and uniformly to all applicants. For example,
it is permissible to review the proposed denial of
applicants who are members of a prohibited basis
groups by comparing their applications to the approved
applications of similarly qualified individuals who are
in the control group to determine if the applications
were evaluated consistently.
Ask the lender to demonstrate that the program
is a safety net that merely attempts to prevent
discrimination, and does not involve underwriting terms
or practices that are preferential on a prohibited basis.
Statements indicating that the mission of the program
is to apply different standards or efforts on behalf
of a particular racial or other group constitute overt
evidence of disparate treatment. Similarly, there is an
apparent violation if comparative analysis of applicants
who are processed through the second review and those
who are not discloses dual standards related to the
prohibited basis.
- Affirmative marketing/advertising program
Affirmative advertising and marketing efforts that do
not involve application of different lending standards
are permissible under both the ECOA and the FHAct.
For example, special outreach to a minority community
would be permissible.
Fair Lending Sample Size
Table A
Underwriting (Accept/Deny) Comparisons
|
| |
Sample 1
Prohibited Basis Denials |
Sample 2
Control Group Approvals |
Number of Denials or Approvals
|
5 -50
|
51-150
|
>150
|
20-50
|
51-250
|
>250
|
Minimum to Review
|
All
|
51
|
75 |
20 |
51 |
100 |
Maximum to Review
|
50
|
100 |
150 |
5x prohibited basis sample (up to 50)
|
5x prohibited basis sample (up to 125)
|
5x prohibited basis sample (up to 300)
|
Table
B
Terms and Conditions Comparisons * |
| |
Sample 1
Prohibited Basis Denials
|
Sample 2
Control Group Approvals
|
Number of Approvals
|
5 - 25
|
26-100
|
>100
|
20-50
|
20-50
|
>250
|
Minimum to Review
|
All
|
26
|
50
|
20
|
40
|
60
|
Maximum to Review
|
25
|
50
|
75
|
5x prohibited basis
sample (up to 50)
|
5x prohibited basis
sample (up to 75)
|
5x prohibited basis
sample (up to 100)
|
* Do not use for most pricing cases. which typically involve an entire universe, not a sample.
Explanatory Notes to Sample Size Tables
- When performing both underwriting and terms and
conditions comparisons, use the same control group
approval sample for both tasks.
- If there are fewer than 5 prohibited basis denials or
20 control group approvals, refer to "Sample Size"
instructions in the procedures.
- "Minimum" and "maximum" sample sizes: select a
sample size between the minimum and maximum based
on the outcome of the Compliance Management Review
conducted in Part II of these procedures. Once the sample
size has been determined, select individual transactions
judgmentally. Refer to procedures.
- If two prohibited basis groups (e.g., Black and Hispanic)
are being compared against one control group, select
a control group that is 5 times greater than the larger
prohibited basis group sample, up to the maximum.
- Where the institution’s discrimination risk profile identifies
significant discrepancies in withdrawal/incomplete activity
between control and prohibited basis groups, or where
the number of marginal prohibited basis group files
available for sampling is small, an examiner may consider
supplementing samples by applying the following rules:
- If prohibited basis group withdrawals/incompletes
occur after the applicant has received an offer of credit
that includes pricing terms, this is a reporting error
under Regulation C (the lender should have reported the
application as approved but not accepted) and therefore
these applications should be included as prohibited
basis group approvals in a terms and conditions
comparative file analysis.
- If prohibited basis group incompletes occur due to
lack of an applicant response with respect to an item
that would give rise to a denial reason, then include
them as denials for that reason when conducting an
underwriting comparative file analysis.
Marginal Transactions
Marginal Denials
Denied applications with any or all the following
characteristics are "marginal." Such denials are compared to
marginal approved applications. Marginal applications include
those that:
- Were close to satisfying the requirement that the adverse
action notice said was the reason for denial;
- Were denied by the lender’s rigid interpretation of
inconsequential processing requirements;
- Were denied quickly for a reason that normally would take
a longer time for an underwriter to evaluate;
- Involved an unfavorable subjective evaluation of facts that
another person might reasonably have interpreted more
favorably (for example, whether late payments actually
showed a "pattern," or whether an explanation for a break
in employment was "credible");
- Resulted from the lender’s failure to take reasonable steps
to obtain necessary information;
- Received unfavorable treatment as the result of a departure
from customary practices or stated policies. For example,
if it is the lender’s stated policy to request an explanation
of derogatory credit information, a failure to do so
for a prohibited basis applicant would be a departure
from customary practices or stated policies even if the
derogatory information seems to be egregious;
- Were similar to an approved control group applicant who
received unusual consideration or service, buy were not
provided such consideration or service;
- Received unfavorable treatment (for example, were denied
or given various conditions or more processing obstacles)
but appeared fully to meet the lender’s stated requirements
for favorable treatment (for example, approval on the terms
sought);
- Received unfavorable treatment related to a policy
or practice that was vague, and/or the file lacked
documentation on the applicant’s qualifications related to
the reason for denial or other factor;
- Met common secondary market or industry standards even
though failing to meet the lender’s more rigid standards;
- Had a strength that a prudent lender might believe
outweighed the weaknesses cited as the basis for denial;
- Had a history of previously meeting a monthly housing
obligation equivalent to or higher than the proposed debt;
and/or
- Were denied for an apparently "serious" deficiency
that might easily have been overcome. For example, an
applicant’s total debt ratio of 50 percent might appear
grossly to exceed the lenders guideline of 36 percent, but
this may in fact be easily corrected if the application lists
assets to pay off sufficient nonhousing debts to reduce
the ratio to the guideline, or if the lender were to count
excluded part-time earnings described in the application.
Marginal Approvals
Approved applications with any or all of the following
characteristics are "marginal." Such approvals are compared
to marginal denied approved applications. Marginal approvals
include those:
- Whose qualifications satisfied the lender’s stated standard,
but very narrowly;
- That bypassed stated processing requirements (such as
verifications or deadlines);
- For which stated creditworthiness requirements were
relaxed or waived;
- That, if the lender’s own standards are not clear, fell
short of common secondary market or industry lending
standards;
- That a prudent conservative lender might have denied;
- Whose qualifications were raised to a qualifying level
by assistance, proposals, counteroffers, favorable
characterizations or questionable qualifications, etc.; and/or
- That in any way received unusual service or consideration
that facilitated obtaining the credit.
Potential Scoping Information
This Job Aid offers a full range of documentation and other
information that might conceivably be brought to bear in an
examination. In that sense, it is a "menu" of resources to be
considered and selected from, depending on the nature and
scope of the examination being conducted. Any decision to
select one or more particular items from this Job Aids for
inclusion in a particular examination should, of course, include
consideration of any burdens to the agency and lender in
assembling and providing the selected item(s).
Internal Agency Documents and Records.
- Previous examination reports and related work papers
for the most recent Compliance / CRA and Safety and
Soundness Examinations.
- Demographic data for the institution’s community.
Comment: The examiner should obtain the most recent
agency demographic data, for information on the
characteristics of the institution’s assessment/market areas.
Information from the institution.
Comment: Prior to beginning a compliance examination,
the examiner should request the institution to provide the
information outlined below. This request should be made far
enough in advance of the on-site phase of the examination to
facilitate compliance by the institution. In some institutions,
the examiner may not be able to review certain of this
information until the on-site examination.
- Institution’s Compliance Program. (For examinations that
will include analysis of the lender’s compliance program.)
- Organization charts identifying those individuals who
have lending responsibilities or compliance, HMDA or
CRA responsibilities, together with job descriptions for
each such position.
- Lists of any pending litigation or administrative
proceedings concerning fair lending matters.
- Results of self-evaluations or self-tests where the
institution chooses to share the report or results, copies
of audit or compliance reviews of the institution’s
program for compliance with fair lending laws and
regulations, including both internal and independent
audits.
Comment: The request should advise the lender that it
is not required to disclose the report or results of any
self-tests of the type protected under amendments to
ECOA and the FHAct programs.
- Complaint file.
- Any written or printed statements describing the
lender’s fair lending policies and/or procedures.
- Training materials related to fair lending issues
including records of attendance.
- Lending Policies / Loan Volume.
- Internal underwriting guidelines and lending policies
for all consumer and commercial loan products.
Comment: If guidelines or policies differ by branch
or other geographic location, request copies of each
variation.
- A description of any credit scoring system(s) in use
now or during the exam period.
Comment: Inquire as to whether a vendor or in-house
system is used; the date of the last verification; the
factors relied on to construct any in-house system
and, if applicable, any judgmental criteria used in
conjunction with the scoring system.
- Pricing policies for each loan product, and for both
direct and indirect loans.
Comment: The lender should be specifically asked
whether its pricing policies for any loan products
include the use of "overages". The request should
also ask whether the lender offers any "sub-prime"
loan products for "B", "C" or "D" risk level customers
or otherwise uses any form of risk-based pricing. A
similar inquiry should be made regarding the use of
any cost-based pricing. If any of these three forms
are or have been in use since the last exam, the lender
should provide pricing policy and practice details for
each affected product, including the lender’s criteria
for differentiating between each risk or cost level.
Regarding indirect lending, the lender should be
asked to provide any forms of agreement (including
compensation) with brokers/dealers, together with a
description of the roles that both the lender and the
dealer/broker play in each stage of the lending process.
- A description of each form of compensation plan for all
lending personnel and managers.
- Advertising copy for all loan products.
- The most recent HMDA / LAR, including unreported
data if available. Information should be provided on
diskette if possible.
Comment: The integrity of the institution’s HMDA
/ LAR data should be verified prior to the preexamination
analysis. Verification should take place
approximately two to three months prior to the on-site
phase of the examination.
- Any existing loan registers for each non-HMDA loan
product.
Comment: Loan registers for the 3 month period
preceding the date of the examination, together with
any available lists of declined loan applicants for the
same period should be requested. Registers/lists should
contain, to the extent available, the complete name and
address of loan applicants and applicable loan terms,
including loan amount, interest rate, fees, repayment
schedule and collateral codes.
- A description of any data bases maintained for each
loan product, including a description of all data fields
within the database.
- Forms used in the application and credit evaluation
process for each loan product.
Comment: At a minimum, this request should include
all types of credit applications, forms requesting
financial information, underwriter worksheets, any
form used for the collection of monitoring information,
and any quality control or second review forms or
worksheets.
- Lists of service providers.
Comment: Service providers may include: realtors,
real estate developers, appraisers, home improvement
contractors and private mortgage insurance companies.
Request the full name and address and geographic area
served by each provider. Also request documentation
as to any fair lending requirements imposed on, or
commitments required of, any of the lender’s service
providers.
- Addresses of any Internet Site(s)
Comment: Internet "Home Pages" or similar sites
that a lender may install on the Internet may provide
information concerning the availability of credit, or
means for obtaining it. All such information would have
to comply with the nondiscrimination requirements of
the fair lending laws. Moreover, future enhancements
to the Internet may include the capacity to conduct
partial or complete credit transactions via that
medium. Accordingly, it is important for examiners
to review a lender’s Internet sites to ensure that all of
the information or procedures set forth therein are in
compliance with any applicable provisions of the fair
lending statutes and regulations.
- Community Information.
- Demographic information prepared or used by the
institution.
- Any fair lending complaints received and lender
responses thereto.
Special Analyses
- Disproportionate Adverse Impact
- Pre-Application Screening
- Marketing
Disproportionate Adverse Impact Violations
When all five conditions below exist, consult within your
agency whether to present the situation to the lender and solicit
an explanation of the lender’s business justification for the
policy or criterion that appears to cause the disproportionate
adverse impact. Note that condition 5 can be satisfied by
either of two alternatives.
The contacts between examiners and lenders described in
this section are information-gathering contacts within the
context of the examination and are not intended to serve as
the formal notices and opportunities for response that an
agency’s enforcement process might provide. Also, the five
conditions are not intended as authoritative statements of the
legal elements of a disproportionate adverse impact proof
of discrimination; they are paraphrases intended to give
examiners practical guidance on situations that call for more
scrutiny and on what additional information is relevant.
Note: Even if it appears likely that a policy or criterion causes
a disproportionate adverse impact on a prohibited basis
(condition 3), do not proceed with this analysis if the policy
or criterion is obviously related to predicting creditworthiness
or to some other basic aspect of prudent lending, and there
appears to be no equally effective alternative for it. Examples
are reliance on credit reports or use of debt-to-income ratio.
- A specific policy or criterion is involved.
The policy or criterion suspected of producing a
disproportionate adverse impact on a prohibited basis must
be clear enough that the nature of action to correct the
situation can be determined.
Note: Gross HMDA denial or approval rate disparities
are not appropriate for disproportionate adverse impact
analysis because they typically cannot be attributed to a
specific policy or criterion. Similarly, a lender’s policies of
allowing employees to exercise discretion and to negotiate
terms or conditions of credit can better be described as
the absence of policies or criteria than as a situation in
which a policy or criterion generates a disproportionate
adverse impact. Broad discretion and vague standards raise
concerns about discrimination, but examiners should focus
on possible disparate treatment.
- The policy or criterion on its stated terms is neutral for
prohibited bases.
- The disparity on a prohibited basis is significant.
The difference between the rate at which prohibited basis
group members are harmed or excluded by the policy or
criterion and the rate for control group members must be
large enough that it is unlikely that it could have occurred
by chance. If there is reason to suspect a significant
disproportionate adverse impact may exist, consult
the supervisory office, compliance manager, district
counsel, and/or compliance management department, as
appropriate.
- There is a causal relationship between the policy or criterion
and the adverse result.
The link between the policy or criterion and the harmful
or exclusionary effect must not be speculative. It must be
clear that changing or terminating the policy or criterion
would reduce the disproportion in the adverse result.
- Either a or b:
- The policy or criterion has no clear rationale, or appears
to exist merely for convenience or to avoid a minimal
expense, or is far removed from common sense or
standard industry underwriting considerations or
lending practices.
The legal doctrine of disproportionate adverse impact
says that the policy or criterion that causes the impact
must be justified by "business necessity" if the lender
is to avoid a violation. There is very little authoritative
legal interpretation of that term with regard to lending,
but that should not stop examiners from making the
preliminary inquiries called for in these procedures.
For example, the rationale is not clear for basing credit
decisions on factors such as location of residence,
income level (per se rather than relative to debt), and
accounts with a finance company. If black applicants
were denied loans significantly more frequently than
white ones because they failed a lender’s minimum
income requirement, it would appear that the first four
conditions plus 5a existed; therefore, the examiners
should consult within their agency about obtaining
the lender’s response, as described in the next section
below.
- Alternatively, even if there is a sound justification
for the policy, it appears that there may be an equally
effective alternative for accomplishing the same
objective with a smaller disproportionate adverse
impact.
The law does not require a lender to abandon a policy
or criterion that is clearly the most effective method
of accomplishing a business objective. However, if an
alternative that is approximately equally effective is
available that would cause a less-severe impact, the
policy or criterion in question will be a violation.
At any stage of the analysis of possible disproportionate
adverse impact, if there appears to be such an
alternative, and the first four conditions exist, consult
within the agency how to evaluate whether the
alternative would be equally effective and would cause
a less-severe impact. If the conclusion is that it would,
solicit a response from the lender, as described in the
next section below.
Obtaining the lender’s response
If the first four conditions plus either 5a or 5b appear to exist,
consult within your agency about whether and how to inform
the lender of the situation and solicit the lender’s business
justification. The communication with the lender should
explain:
- The specific neutral policy or criterion that appears to cause
a disproportionate adverse impact.
- How the examiners learned about the policy.
- How widely the examiners understand it to be
implemented.
- How strictly they understand it to be applied.
- The prohibited basis on which the impact occurs.
- The magnitude of the impact.
- The nature of the injury to individuals.
- The data from which the impact was computed.
The communication should state that no violation exists if
the policy or criterion is used because of business necessity
and there is no alternative that would accomplish the lender’s
objective with a smaller disproportionate adverse impact. It
should inform the lender that cost and profitability are factors
the agency will consider in evaluating the lender’s business
necessity. It should ask the lender to describe any alternatives
it considered before adopting the policy or criterion at issue.
Evaluating and following up on the response
The analyses of "business necessity" and "less discriminatory
alternative" tend to converge because of the close relationship
of the questions of what purpose the policy or criterion serves
and whether it is the most effective means to accomplish that
purpose.
Evaluate whether the lender’s response persuasively
contradicts the existence of the significant disparity or
establishes a business justification. Consult the supervisory
office, compliance manager, district counsel, and/or
compliance management department, as appropriate.
Discriminatory pre-application screening
Obtain an explanation for any:
- Withdrawals by applicants in prohibited basis groups
without documentation of customer intent to withdraw;
- Denials of applicants in prohibited basis groups without
any documentation whether qualified; or
- On a prohibited basis, selectively quoting strongly
unfavorable terms (for example, high fees or down payment
requirements) to prospective applicants, or quoting strongly
unfavorable terms to all prospective applicants but waiving
such terms for control group applicants. (Evidence of this
might be found in withdrawn or incomplete files.)
If the lender cannot explain the situations, examiners should
consider obtaining authorization to contact the customers to
verify the lender’s description of the transactions. Information
from the customer may help determine whether a violation
occurred.
In some instances, such as possible "prescreening" of
applicants by lender personnel, the results of the procedures
discussed so far, including interviews with customers, may
be inconclusive in determining whether a violation has
occurred. In those cases, examiners should, if authorized by
their agency, consult with management regarding the possible
use of "testers" who would pose as apparently similarly
situated applicants, differing only as to race or other applicable
prohibited basis characteristic, to determine and compare how
the lender treats them in the application process.
Possible discriminatory marketing
- Obtain full documentation of the nature and extent,
together with management’s explanation, of any:
- Prohibited basis limitations stated in advertisements;
- Code words in advertisements that convey prohibited
limitations; or
- Advertising patterns or practices that a reasonable
person would believe indicate prohibited basis
customers are less desirable.
-
Obtain full documentation as to the nature and extent,
together with management’s explanation, for any situation
in which the lender, despite the availability of other options
in the market:
- Advertises only in media serving nonminority areas of
the market;
- Markets through brokers or other agents that the lender
knows, or could reasonably be expected to know, to
serve only one racial or ethnic group in the market; or
- Utilizes mailing or other distribution lists or other
marketing techniques for pre- screened or other
offerings of residential loan products* that:
- Explicitly exclude groups of prospective borrowers
on a prohibited basis; or
- Exclude geographies (e.g., census tracts, ZIP codes,
etc.) within the institution’s marketing area that have
demonstrably higher percentages of minority group
residents than does the remainder of the marketing
area, but which have income and other credit-related
characteristics similar to the geographies that were
targeted for marketing.
*Note: Pre-screened solicitation of potential
applicants on a prohibited basis does not violate
ECOA. Such solicitations are, however, covered by
the FHAct. Consequently, analyses of this form of
potential marketing discrimination should be limited
to residential loan products subject to coverage
under the FHAct.
- Evaluate management’s response particularly with regard
to the credibility of any nondiscriminatory reasons offered
as explanations for any of the foregoing practices. Refer
to Evaluating Responses to Evidence of Disparate
Treatment elsewhere in the Appendix for guidance.
Streamlining the Examination
Institutions may find it advantageous to conduct self-tests or
self-evaluations to measure or monitor their compliance with
ECOA and Regulation B. A self-test is any program, practice
or study that is designed and specifically used to assess the
institution’s compliance with fair lending laws that creates
data not available or derived from loan, application or other
records related to credit transactions (12 CFR 202.15(b)(1)
and 24 CFR 100.140-100.148). For example, using testers
to determine whether there is disparate treatment in the
pre-application stage of credit shopping is a self-test. The
information set forth in 12 CFR 202.15(b)(2) and 24 CFR
100.142(a) is privileged unless an institution voluntarily
discloses the report or results or otherwise forfeits the
privilege. A self-evaluation, while generally having the
same purpose as a self-test, does not create any new data or
factual information, but uses data readily available in loan or
application files and other records used in credit transactions
and, therefore, does not meet the self-test definition.
Examiners should not request any information privileged
under 12 CFR 202.15(b)(2) and 24 CFR 100.142(a), related to
self-tests. If the institution discloses the results of any selftests,
or has performed any self-evaluations, and examiners
can confirm the reliability and appropriateness of the self-tests
or -evaluations (or even parts of them), they need not repeat
those tasks.
Note: In the following discussion of "Streamlining the
Examination," the term self-evaluation will also include
self-tests where the institution has voluntarily disclosed the
report or results.
If the institution has performed a self-evaluation of any of
the product(s) selected for examination, obtain a copy thereof
and proceed through the remaining steps of this section on
Streamlining the Examination. If the institution has conducted
a self-evaluation of a product not selected in the scope of
the examination, consider whether the product evaluated by
the institution is appropriate under the scoping guidelines
to substitute for another product that was selected. If such a
substitution is considered appropriate, obtain the results of the
self-evaluation for the substituted product and proceed through
the remaining steps of this section.
Determine whether the research and analysis of the planned
examination would duplicate the institution’s own efforts. If
the answers to Questions A and B below are both Yes, each
successive Yes answer to Questions C through L indicates that
the institution’s work up to that point can serve as a basis for
eliminating examination steps.
If the answer to either Question A or B is No, the selfevaluation
cannot serve as a basis for eliminating examination
steps. However, examiners should still evaluate the selfevaluation
to the degree possible in light of the remaining
questions and communicate the findings to the lender so that it
can improve its self-evaluation process.
- Did the transactions covered by the self-evaluation occur
not longer ago than two years prior to the examination? If
the self-evaluation covered more than two years prior to
the examination incorporate only results from transactions
in the most recent two years.
- Did it cover the same product, prohibited basis, decision
center, and stage of the lending process (for example,
underwriting, setting of loan terms) as the planned
examination?
- Did the self-evaluation include comparative file review?
Note: One type of "comparative file review" is statistical
modeling to determine whether similar control group and
prohibited basis group applicants were treated similarly. If
a lender offers self-evaluation results based on a statistical
model, consult appropriately within your agency.
- Were control and prohibited basis groups defined
accurately and consistently with ECOA and/or the FHAct?
- Were the transactions selected for the self-evaluation
chosen so as to focus on marginal applicants or, in the
alternative, selected randomly?
- Were the data abstracted from files accurate? Were those
data actually relied on by the credit decision makers at the
time of the decisions?
To answer these two questions and Question G below,
for the institution’s control group sample and each of its
prohibited basis group samples, request to review 10%
(but not more than 50 for each group) of the transactions
covered by the self-evaluation. For example, if the
institution’s self-evaluation reviewed 250 white and 75
black transactions, plan to verify the data for 25 white and
seven black transactions.
- Did the 10% sample reviewed for Question F also
show that customer assistance and lender judgment that
assisted or enabled applicants to qualify were recorded
systematically and accurately and were compared for
differences on any prohibited bases?
- Were prohibited basis group applicants’ qualifications
related to the underwriting factor in question compared to
corresponding qualifications of control group approvals?
Specifically, for self-evaluations of approve/deny decisions,
were the denied applicants’ qualifications related to the
stated reason for denial compared to the corresponding
qualifications for approved applicants?
- Did the self-evaluation sample cover at least as many
transactions at the initial stage of review as examiners
would initially have reviewed using the sampling guidance
in these procedures?
If the lender’s samples are significantly smaller than those
in the sampling guidance but its methodology otherwise
is sound, review additional transactions until the numbers
of reviewed control group and prohibited basis group
transactions equal the minimums for the initial stage of
review in the sampling guidance.
- Did the self-evaluation identify instances in which
prohibited basis group applicants were treated less
favorably than control group applicants who were no better
qualified?
- Were explanations solicited for such instances from the
persons responsible for the decisions?
- Were the reasons cited by credit decision makers to justify
or explain instances of apparent disparate treatment
supported by legitimate, persuasive facts or reasoning?
If the questions above are answered Yes, incorporate the
findings of the self-evaluation (whether supporting compliance
or violations) into the examination findings. Indicate that
those findings are based on verified data from the institution’s
self-evaluation. In addition, consult appropriately within the
agency regarding whether or not to conduct corroborative file
analyses in addition to those performed by the lender.
If not all of the questions in the section above are answered
Yes, resume the examination procedures at the point where
the lender’s reliable work would not be duplicated. In other
words, use the reliable portion of the self-evaluation and
correspondingly reduce independent comparative file review
by examiners. For example, if the institution conducted
a comparative file review that compared applicants’
qualifications without taking account of the reasons they
were denied, the examiners could use the qualification data
abstracted by the institution (if accurate) but would have to
construct independent comparisons structured around the
reasons for denial.
FDIC Examination Procedures for "Low-Risk"
Institutions
Many institutions exhibit little or no discrimination risk.
Typically, these institutions are stable community banks
that are often located in suburban or rural areas where the
demographics show a very low percentage of minority
residents. These institutions usually offer standard
products, and many of them are predominantly commercial
or agricultural lenders. There is often the possibility of
conducting a comparative analysis on the basis of gender.
However, in some cases it may not be possible to conduct a
comparative analysis on the basis of race, national origin, or
gender that meets the minimum numbers of the sample size
tables for either underwriting or terms and conditions. In
other cases, the only possible comparative analysis may have
been conducted in the previous examination with no concerns
identified, and the lending policies and staff implementing
them have not changed.
In such cases, there is no risk sufficient to warrant the
establishment of a focal point for the on-site examination.
The examiner shall prepare a written explanation of why
no comparative analysis is feasible or why the Corporation
should rely on a comparative analysis conducted in a previous
examination. If the examiner obtains the documented
concurrence of the Field Office Supervisor, a comparative
analysis is not required.
NOTE: A review of underwriting and pricing policies should
be conducted even when no comparative analysis is possible,
unless previous examinations have established that such
policies do not contain provisions that are discriminatory on
their face.
References
The following can all be found at the fair lending webpage:
http://fdic01/division/dsc/cra/fairlending/flrr.html
- Equal Credit Opportunity Act
- Regulation B (including Supplement I, Official Staff Interpretations)
- Fair Housing Act
- 12 CFR Part 338
- Home Mortgage Disclosure Act
- Regulation C
The following can be found at the fair lending standard
operating procedures webpage:
http://fdic01/division/dsc/cra/fairlending/flsop.html
- Equal Credit Opportunity and Fair Housing Acts Enforcement Policy Statement
- Policy Statement on Discrimination in Lending
DSC RD Memo 04-017: Consultation Policy and Procedures for Compliance Examination Issues
http://fdic01/division/dsc/memos/memos/direct/04-017.pdf
FIL 02-09: Guidance on Avoiding Violations of the Spousal
Signatures Provisions of Regulation B
http://www.fdic.gov/news/news/financial/2002/fil0209.html
FIL 06-04: Spousal Signature Provision of Regulation B
http://www.fdic.gov/news/news/financial/2004/fil0604a.html
FIL 14-99: Interagency Fair Lending Examination Procedures
http://fdic01/division/dsc/cra/fairlending/examref.html
DSC RD Memo 05-006: Guidance on Considering the new HMDA Pricing Info when conducting Fair Lending examinations.
http://fdic01/division/dsc/memos/memos/6000/05-006.pdf
FIL 06-022: Consumer Credit Protection Act and Fair Lending
Prohibition Against Discrimination in Credit Transactions
http://www.fdic.gov/news/news/financial/2006/fil06022.html
Job Aids
Fair Lending Discussion Board
http://wasiis102p/dcaqc/
Fair Lending Exam Tools
http://fdic01/division/dsc/cra/fairlending/examtools.html
- Underwriter Interview Guide
- Terms and Conditions Interview Guide
- Fair Lending Spreadsheet Examples
- Workpaper Requirement for a Fair Lending Examination Memo
