Fair Lending

Fair Lending

v5 © 2021 American Bankers Association

Fair Lending

ABA course content is not a substitute for professional legal advice.

Fair Lending


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Course Introduction

Overview

Fair Lending Discrimination

Fair Lending in Action

Course Conclusion

Fair Lending


Course Introduction Overview

This course introduces fair lending practices and principles, and demonstrates how to avoid discriminatory and unfair lending practices when interacting with clients. It examines the consequences of illegal discrimination and explains the key points in the federal laws. This course also defines disparate treatment and disparate impact practices. It identifies illegal discrimination that should be avoided at common stages in the credit process.

Version: 5.0

Update: March 2021. Added the Consumer Financial Protection Bureau’s (Bureau) interpretive rule regarding sex discrimination.

Most people would not consciously treat customers unfairly or discriminate against them. Nevertheless, many discrimination cases result when a bank employee unconsciously treats similarly qualified clients differently.

Objectives

By the end of Fair Lending, you will be able to

• Describe the relationship between unfair treatment and illegal discrimination

• Explain the relationship between the fair lending laws and three types of discrimination

• Identify best practices to ensure compliance with fair lending laws

ABA course content is not a substitute for professional legal advice.

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Overview Introduction

As a bank employee, it is important to know how to provide quality customer service and avoid illegally discriminating against customers. This module explores what constitutes illegal discrimination. This module also provides an overview of the five federal laws related to fair lending. Three of the laws are antidiscrimination laws. Their purpose is to prohibit illegal lending discrimination. The remaining two laws relate to fair lending. They are not antidiscrimination laws but they are disclosure laws requiring the collection and reporting of certain lending data and do not specifically address prohibited bases. Objectives By the end of this module, you will be able to

• Define fair lending in terms of illegal discrimination

• Identify poor customer service practices that could lead to a claim of illegal discrimination

• Examine the consequences of illegal discrimination

• Explain key points of five federal laws: Equal Credit Opportunity Act, Fair Housing Act, Americans with Disabilities Act, Community Reinvestment Act, and the Home Mortgage Disclosure Act

Glossary term

Illegal discrimination In lending, illegal discrimination occurs when similarly situated customers receive different treatment based on personal characteristics such as age, sex, race, marital status, etc. These characteristics and several others are prohibited under the Equal Credit Opportunity Act and the Fair Housing Act. Page 2

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Overview What is Fair Lending?

Fair lending can be summarized as providing similarly situated borrowers, applicants, or potential applicants equal access to credit, regardless of race, sex, religion, national origin, age, or any other prohibited characteristics under the fair lending laws. Federal fair lending laws regulate lender practices covering all loans, including loans secured by residential property, consumer loans, small business loans, and commercial loans, and in all aspects of the credit life cycle. Page 3

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Most banks have a fair lending policy statement, which states that the bank complies with fair lending laws. A bank's fair lending policy statement accomplishes the following important goals:

• Sets a mandate for complying with fair lending laws

• Creates a management responsibility to establish a fair lending risk management program that covers the actions of all employees

• Requires all institution employees to know their fair lending responsibilities and holds them accountable for adhering to them

• Emphasizes the importance of federal and state fair lending laws

• Reminds the public of the importance of fair lending by posting signage, such as the Fair Housing poster or the HMDA Notice

You may be saying to yourself, "But this is unnecessary! I don't discriminate, so I won't need to worry about violating fair lending laws." You may be right. These laws do sound as though they should be easy to follow, but instances of illegal discrimination still occur more often then you may think. Illegal discrimination is the result of different treatment of customers on a prohibited basis, which often is the result of unconscious behavior. Even if you would never consciously discriminate, you may be doing things unconsciously that are illegally discriminatory or have an illegal discriminatory impact.

Warning Even the most well-meaning employee can be guilty of violating fair lending laws unless he or she is consciously aware of how he or she is treating every borrower, applicant, and potential applicant. Page 4

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This is an example of a fair lending policy statement. Many banks have documents like this that employees can consult so that everyone will have the same understanding of the Board of Directors commitment to fair lending principles.

Fair Lending Policy Statement

Anytown Bank fully supports the principle that all credit decisions should be made without regard to race, color, national origin, religion, sex, age, marital status, or any other prohibited basis delineated by law. We will fulfill this commitment while maintaining safe and sound credit standards and providing an acceptable return for our shareholders. We recognize that supporting steps must be taken to ensure that this concept is applied at all times and in all aspects of our credit operations. This includes product design, marketing and advertising, underwriting, pricing, loss mitigation, and established procedures intended to guarantee that our operations reflect our commitment to fair lending and that our employees have developed a high commitment as well. We monitor our operations and achievements regularly to ensure that procedures are followed and that our objectives are met. We will continue to make adjustments in our operations as we recognize ways to meet more effectively our fair lending responsibilities. Note This sample statement is provided for training purposes only. Do not copy or use this statement in your bank. Page 5

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Overview Customer Service and Disparate Treatment

Disparate treatment is treating customers differently. This becomes illegal discrimination when similarly situated customers are treated differently on a prohibited basis. Bank customers and potential customers deserve good customer service and to be treated fairly. It should be bank’s policy to treat all customers ethically and fairly, regardless of whether they are applying for a loan, making an investment, opening a deposit account, or merely cashing a check. Treating customers differently on a prohibited basis in the lending arena creates legal and reputational risks for banks. Before discussing illegal lending discrimination, take a look at how assumptions and prejudices can harm banks and their customer relationships even in a non-lending scenario. Next, you will read a scenario on how a banker’s assumptions could be the cause of unfair or discriminatory treatment of a customer.

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Scenario 1: How assumptions could cause unfair treatment 1 of 2

Banker: That takes care of your social security direct deposits. Is there anything else I can help you with? Customer: I’m interested in a loan. Banker: We offer small CD secured loans with very low interest rates. Customer: I was actually thinking of a home equity loan. Page 7

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Banker The payments on such a loan can be pretty high for someone who is retired.

Customer I don't know... Banker: Well… here’s a brochure explaining all our various loans. Why don’t you look it over and call me with any questions you have? Customer: Yes… I will do that.

It is clear that this banker did not determine what the customer meant by being interested in a loan and assumed that because she received social security that she had no job and no other source of income. Additionally, the banker made assumptions about her net worth and her need for a loan based on her age.

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The customer in the scenario was not necessarily discriminated against or discouraged from applying for a credit product. However, she was not provided with good customer service and the banker may have lost out on generating additional business with this customer. Additionally, discriminatory conduct could arise out of this situation depending on how this banker treats other customers inquiring about loan products. The banker may have assumed the older woman would be living on a fixed income, had no other means of support, and that the type of loan she could afford was limited. Everyone makes assumptions. Our assumptions are based on many things, including our personal experiences and messages we have received through our families, the media, and other influences. Assumptions lead to unconscious behavior, which in turn can lead to poor customer service and even to illegal discrimination when lending activities are involved. The danger of making assumptions is that you may act as if the assumptions are true. Your actions may become the product of unconscious behavior, based on the assumptions you have made. As we saw in the scenario, the banker's behavior led to poor customer service: the banker assumed she knew what the customer needed. The customer received poor service in that she was not presented with all product options that could meet her needs.

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In a lending situation illegal discrimination can be very subtle. An unfriendly tone of voice, unwillingness to schedule a loan interview, or any other treatment that may discourage the customer from applying for a loan may be considered illegal discrimination if it is on a prohibited basis. Next, you will see another interaction between a lender and customer. The customer in this situation is interested in discussing a loan.

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Scenario 2: How assumptions could cause unfair treatment 1 of 3 Customer: I’d like to talk to someone about a loan. Lender: What type of loan? Customer: It’s for my business. Lender: Ahhh… what type of business? Customer: I’m a business consultant.

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Scenario 2: How assumptions could cause unfair treatment 2 of 3 Lender: We do require three years of financial statements for any business loan. Customer: That’s no problem. Lender: Say, do you make much money in that line of business? Customer: I make a decent living, yes.

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Lender: Hmmm… you said you weren’t married. We may need collateral. Customer: What type of collateral? Lender: If you are a home owner, most likely a second mortgage loan on your home. Page 10

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In the conversation between the lender and the customer in the scenario you just viewed, the lender may have assumed she would be a higher credit risk because she is a single, self-employed woman. First of all, the customer did not mention that she was married or single. Second the lender asked a poorly phrased question related to her income. Third, he indicated that collateral may be needed without knowing anything about the customer’s business or amount of financing needed. Clearly this was poor customer service and may have discouraged the customer from obtaining more information or making an application for a loan, which could be considered illegal discrimination on several prohibited bases. Ask yourself this question, "Would the lender's behavior have been different if the customer was a single, self-employed man?" Or even a married man? In a lending situation, poor customer service is most likely illegal discrimination if done on a prohibited basis. As a lender, you must be keenly aware of how you are treating each customer. You must assess your own assumptions and attitudes and be aware of how those assumptions are impacting your behavior and the customer interaction. During a customer interaction, evaluate yourself, your speech, and your actions. Learn to monitor yourself for anything that may result in treating clients differently on a prohibited basis. Page 11

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Self Check Quiz Which statement best describes the intent of fair lending?

> Select the correct answer and click Submit.

A) Provide similarly situated customers with equal access to credit

B) Provide women with fair and equal access to credit

C) Provide unmarried persons with fair and equal access to credit

D) Provide senior citizens with fair and equal access to credit

A is correct. B, C, and D are incorrect because all similarly situated customers are to be treated fairly regardless of sex, marital status, or age. Page 12

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Self Check Quiz Which two statements best describe how assumptions may cause unfair treatment?

> Select the correct answers and click Submit.

A) Assumptions are based on statistical data gathered over time

B) Assumptions may be acted upon as if they are true

C) Assumptions can lead to conscious or unconscious behavior

D) Assumptions do not lead to difference in treatment B and C are correct. A is incorrect because assumptions are not based on factual data. D is incorrect because assumptions can lead to differences in treatment. Page 13

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Overview Disparate Treatment and Illegal Discrimination

Illegal discrimination has both business and legal consequences. Illegal discrimination generally begins with assumptions made on the part of the lender or other bank staff interacting with customers. Assumptions create a barrier to the sales process. If bank employees assume they know what the customer’s needs are, they are not as likely to find out what the customer’s needs actually are. In customer interactions, bank employees must learn to be good listeners and not to assume anything. Let the customer contribute to the conversation as much as possible. Otherwise, assumptions may result in lost sales and, even more likely, lost customers. Community goodwill can also suffer if some customers receive different treatment than others. The legal ramifications of illegal discrimination include government enforcement and private civil lawsuits. In addition, if a pattern or practice of discrimination exists, applications made by banks for mergers and new branches may be denied or delayed by federal regulatory agencies.

> Roll over the ramifications below to see a list of examples.

Business ramifications

• Lost sales

• Lost customers

• Loss of money from civil money penalties and from damages paid to victims

• Negative publicity and loss of community goodwill

Legal ramifications

• Government enforcement

• Private civil lawsuits

• Possible downgrade of the institution’s Community Reinvestment Act rating

• Expensive new requirements for training, monitoring, and compliance reporting Page 14

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Overview Disparate Treatment and Illegal Discrimination

Self Check Quiz Which three items are primary business ramifications of illegal discrimination?

> Select the correct answers and click Submit.

A) Lost sales

B) Lost customers

C) Loss of shareholders

D) Loss of community goodwill A, B, and D are correct. C is incorrect because although the bank may eventually lose shareholders due to illegal discriminatory practices, it is not one of the primary ramifications. Page 15

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Overview Fair Lending Laws

There are five federal laws related to fair lending. As shown below, three of the five federal laws discussed here are antidiscrimination laws. Their purpose is to prohibit discrimination in lending based on certain factors. The remaining two laws relate to fair lending, but they are not antidiscrimination laws because they do not specifically address prohibited bases.

Antidiscrimination Laws Fair Lending Related Laws

Fair Housing Act Community Reinvestment Act

Equal Credit Opportunity Act Home Mortgage Disclosure Act

Americans with Disabilities Act

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As mentioned, these laws are anti-discrimination laws because they address certain factors.

Antidiscrimination Laws

Fair Housing Act

Equal Credit Opportunity Act

Americans with Disabilities Act

> Click each tab above to learn about the anti-discrimination laws.

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Fair Housing Act Congress enacted the Fair Housing Act (FHA) to address discrimination in housing rentals, sales, and financing. One purpose of the FHA is to prohibit discrimination based on certain factors by any person whose business includes engaging in residential real estate related transactions. The FHA prohibits discrimination based on the prohibited bases listed below. This law applies not only to lenders, but also to professionals such as appraisers, real estate agents, landlords, and other housing-related business people. If someone regularly buys and sells houses, they must comply with the FHA because they are a covered residential real estate business person.

• Race • National Origin

• Sex • Familial Status

• Color • Handicap

• Religion

In mortgage lending, no one may take any of the following actions based on race, color, national origin, religion, sex, familial status, or handicap (disability):

• Refuse to make a mortgage loan

• Refuse to provide information regarding loans

• Impose different terms or conditions on a loan, such as different interest rates, points, or fees

• Discriminate in appraising property

• Refuse to purchase a loan

• Set different terms or conditions for purchasing a loan


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Equal Credit Opportunity Act

Congress enacted the Equal Credit Opportunity Act (ECOA) to prevent discrimination based on certain factors in any phase of a credit transaction. Each of these factors is called a prohibited basis. Regulation B is the federal regulation that implements the requirements of the ECOA. ECOA and Regulation B cover all lending products, both consumer and business lending. The ECOA prohibits discrimination in any phase of a credit transaction based on the nine prohibited bases listed below.

• Race

• Sex

• Marital status

• National origin

• Age (provided the applicant has the capacity to contract)

• Religion

• Color

• The receipt of public assistance income

• The good faith exercise of rights under the Consumer Credit Protection Act

Note In March 2021, the Bureau issued an interpretive rule clarifying that the prohibition against sex discrimination under ECOA and Regulation B includes sexual orientation discrimination and gender identity discrimination. This prohibition also covers discrimination based on actual or perceived nonconformity with traditional sex- or gender-based stereotypes, and discrimination based on an applicant’s social or other associations.


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FHA vs. ECOA When comparing FHA to ECOA, it is important to note that the FHA covers some additional bases that ECOA does not: familial status and disability. ECOA also covers some bases that the FHA does not: marital status, age, receipt of public assistance income, or persons who have exercised rights under the Consumer Credit Protection Act. Note Under the ECOA, “marital status” means “the state of being unmarried, married, or separated.” “Familial status” under the FHA captures the makeup of the family. This includes the following examples:

• Families with children under the age of 18

• Pregnant persons

• A person in the process of securing legal custody of a minor child

• Persons who identify as LGBTQ+


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Americans with Disabilities Act The Americans with Disabilities Act (ADA) prohibits discrimination against persons with disabilities in the areas of employment practices, access to physical facilities, and goods and services offered to the public. Lenders must also accommodate people with disabilities by providing appropriate facilities and assistance. Some examples of these accommodations include providing wheelchair access to the institution itself or assisting someone with hearing or vision impairment when completing an application. Lenders who allow customers to apply for loans using online applications must ensure that their websites meet ADA accessibility standards.


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The Consumer Credit Protection Act includes, among other things, the ECOA, the Electronic Funds Transfer Act, the Fair Credit Reporting Act (FCRA), and the Truth in Lending Act (TILA). Customers who exercise their rights under this act cannot be discriminated against when applying for future credit. With few exceptions, a bank cannot inquire about any characteristic of the applicant that relates to a prohibited basis. The bank also cannot consider any prohibited bases when evaluating credit. A bank may, however, consider some information about an applicant under very limited circumstances. For example, banks may inquire about marital status when it could affect their rights to any collateral for a loan, or inquire about age to determine that an applicant is old enough to enter into a contract with your bank.

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As mentioned earlier, these laws relate to fair lending, but they are not antidiscrimination laws because they do not specifically address prohibitive bases.

Fair Lending Related Laws

Community Reinvestment Act

Home Mortgage Disclosure Act

> Click each tab above to learn about the additional laws related to fair lending.

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Community Reinvestment Act The Community Reinvestment Act (CRA), implemented by the regulations of each of the federal banking agencies, encourages banks to help meet the credit needs of the communities in which they are chartered, including low-and moderate-income neighborhoods. The CRA is not an antidiscrimination law; rather, it reinforces the social responsibility that a bank has to the community it serves. The CRA does not apply to individual credit transactions; instead, it requires collecting and reporting certain lending data among other data to its primary regulator. The CRA applies only to FDIC-insured institutions. CRA Rating Federal bank regulatory agencies prepare a CRA performance evaluation for each institution that measures the bank’s record of helping to meet the credit needs of its entire community. A large bank’s CRA rating is based on an examination and review of a bank’s lending, investment, and service practices. As part of the lending review, the bank’s recent Home Mortgage Disclosure Act (HMDA) data is analyzed (if it is a HMDA reporting institution). If discrimination is found during the bank’s fair lending examination, the bank’s CRA rating can be lowered. This can result in the inability of a bank to expand its operations, such as opening new branches.

> Click each tab above to learn about the additional laws related to fair lending. Page 19

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Home Mortgage Disclosure Act In 1975, Congress passed the Home Mortgage Disclosure Act (HMDA) in response to credit shortages in urban neighborhoods and allegations that financial institutions had contributed to the decline of older urban neighborhoods through restrictive credit practices, particularly apparent with home loan applications. Regulation C implements HMDA. The purposes of HMDA are as follows:

• To provide the public with information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located

• To help public officials target public investments from the private sector to areas where they are needed

• o identify possible discriminatory lending patterns and enforce antidiscrimination statutes by requiring the collection and disclosure of data about applicant and borrower characteristics

HMDA is simply a data collection and disclosure law. HMDA requires that a lender keep records of certain loan applications and originations during the year. It requires the reporting of race, sex, income, and many other applicant/borrower and loan statistics for certain loans secured by a dwelling.

> Click each tab above to learn about the additional laws related to fair lending.

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Question What is the purpose of the Community Reinvestment Act? Answer To encourage financial institutes to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. Question Why is a lender required under the HMDA to track the race, sex, and income of its mortgage loan applicants? Answer Regulatory agencies and others use the data to identify possible discriminatory patterns.

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Overview Wrap Up

In this module you learned to define fair lending in terms of illegal discrimination. You can identify causes of disparate treatment and distinguish between poor customer service and illegal discrimination. You are able to identify the business and legal ramifications of illegal discrimination. You can also explain key points of five federal laws: Equal Credit Opportunity Act, Fair Housing Act, Americans with Disabilities Act, Community Reinvestment Act, and the Home Mortgage Disclosure Act. Page 21

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Fair Lending Discrimination Introduction

This module explains the three types of illegal discrimination prohibited under fair lending laws. In the early 1990s, both Congress and the federal banking agencies renewed their scrutiny of the lending practices of banks to determine the frequency of illegal discrimination. In 1994, a group of 10 federal agencies issued a Joint Policy Statement on Discrimination in Lending to provide guidance to lenders on what the agencies would consider in determining whether lending discrimination existed. Among other things, the policy statement explained to lenders the three types of proof of lending discrimination that have been recognized by courts: overt discrimination, disparate treatment, and disparate impact.

> Roll over the three types of proof of lending discrimination below to see the descriptions.

Overt discrimination Blatant discrimination linked to a prohibited basis such as age, sex, race, or marital status.

Disparate treatment Similarly situated applicants that are treated differently by the same institution, and this difference of treatment can be attributed (for lack of evidence to the contrary) to a prohibited basis. Disparate impact Occurs when a policy or practice, although applied consistently, has the effect of discriminating against some applicants and not others, and furthermore, when this policy is not justified by business necessity.

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Fair Lending Discrimination Introduction

All of the agencies have agreed to use these methods of proof in reviewing lenders for evidence of illegal lending discrimination. Objectives By the end of this module, you will be able to

• Define overt discrimination

• Define disparate treatment

• Define disparate impact

• Identify the fair lending laws that apply to incidents of discrimination

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Fair Lending Discrimination Overt Discrimination

Even though fair lending laws establish what constitutes illegal discrimination, they do not identify specific discriminatory practices that are not overt. However, over time, in applying these laws, courts have approved various methods to prove illegal discrimination. The Joint Policy Statement on Discrimination in Lending supplements the fair lending laws by providing guidance as to what the federal agencies will consider when they are reviewing a bank’s lending practices for discrimination. Overt discrimination, the least common type of discrimination, occurs when a bank’s policy or behavior is openly discriminatory. An overtly discriminatory behavior or policy blatantly discriminates on a prohibited basis. The following are examples of overt discrimination:

• Name calling

• Use of racial slurs

• Refusal to lend or to assist a customer based on a prohibited basis Glossary term Overt discrimination Blatant discrimination linked to a prohibited basis such as age, sex, race, or marital status. Page 24

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Fair Lending Discrimination Overt Discrimination

Example Assume a bank had a policy that it did not make unsecured loans to unmarried women because they generally have only one source of income. In this instance, the policy illegally discriminates against persons based on marital status. Marital status is a prohibited basis under the ECOA; thus, the bank cannot use marital status as a basis for refusing to grant credit to an otherwise qualified unmarried woman. Similarly, if a lender states to a disabled applicant that he does not like to make interim construction loans to persons with physical handicaps, even though he is legally required to do so, this statement is also an example of overt discrimination under the Fair Housing Act. Expressing a preference for illegal discriminatory activities is considered to be overt discrimination, even if the bank never acts on the statement.

The bottom line Overt or blatant discrimination in lending is still practiced even in today's credit markets. Lending policies that explicitly require a spousal signature for a loan is an example of overt discrimination in today's market. Subtle forms of discrimination can be just as damaging, however, and recent fair lending cases discussed in the media show that these occur in a few financial institutions even today. Understanding the theories of disparate treatment and disparate impact, and avoiding both of these practices, is meant to stop this type of illegal discrimination.

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Fair Lending Discrimination Disparate Treatment and Disparate Impact

Discrimination through disparate treatment happens when a lender treats similarly situated applicants differently on a prohibited basis. A loan officer may treat applicants differently for a variety of reasons. It is possible that he or she may have a bias against an applicant that is attributed to the applicant’s race, sex, or other prohibited basis. It is also possible the loan officer might not have these biases at all, but it may appear that he or she does if the loan is denied and there is a lack of evidence to support a reasonable declination of the credit request based upon the institution’s credit granting criteria.

Example Imagine that a loan application submitted by a Native American applicant is declined, and the reason given is the applicant's lack of creditworthiness. If the applicant's lack of creditworthiness is not well documented, the loan officer's reasoning might appear flawed and possibly discriminatory. The decline may be attributed to a prohibited basis simply due to lack of evidence to the contrary. The following are other examples of disparate treatment:

• Providing two applicants who are similarly situated with different levels of service or assistance

• Inconsistently applying bank policies related to obtaining credit reports, investigating applicants' credit histories, or defining income requirements

• Charging similarly situated applicants different fees or interest rates

Disparate treatment can occur at any point in the credit transaction.

Next, you will see a scenario that illustrates how disparate treatment might occur during a loan interview. Glossary term Disparate treatment

Similarly situated applicants are treated differently by the same bank, and this difference of treatment can be attributed (for lack of evidence to the contrary) to a prohibited basis.

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Scenario 2: Fair treatment 1 of 4

Applicant: I’m interested in a real estate loan. I’ll need about $175,000. Loan Officer: Payments on a loan of that size can be pretty high, especially if you factor in the PMI. Applicant: What’s PMI? Loan Officer: Private Mortgage Insurance. It’s required if you put less than 20% down when you purchase a house. Applicant thinks: Why would he assume I’m putting down less than 20%? Click the arrow to turn the page.

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Scenario 2: Fair treatment 2 of 4

Applicant: That’s not a problem; I was going to put 25% down. How long will the loan take to process? Loan Officer: Your loan could take up to 60 to 90 days to process. Next, you will see another example.

Click the arrows to turn the pages.

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Scenario 2: Fair treatment 3 of 4 Applicant: I’m interested in a real estate loan. I’ll need about $175,000. Loan Officer: Excellent! We have several mortgage programs available, depending on your needs. Applicant: I’d like to keep the interest rate as low as possible, but I want a fixed rate. Loan Officer: You can keep the rate lower by paying points up front. Click the arrows to turn the pages. Page 27

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Scenario 2: Fair treatment 4 of 4 Applicant: That sounds like an option. How long will the loan take to process? Loan Officer: We can get started today. We should be able to complete the processing within 30 to 45 days. Click the arrow to review. Page 27

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While the disparate treatment in the preceding example is obvious to those of us who can see both scenarios, each applicant did not see how the other was treated. This is what makes identifying disparate treatment difficult. Both applicants were applying for an identical product, asking for the same loan amount, and getting helped by the same loan officer.

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> Roll over client 1 and client 2 to see examples of how they were treated differently by the same banker.

We cannot discern what would have made the banker treat these two applicants differently, because he had only positive information about each of them at this early stage in the application process. Therefore, it could appear that the disparate treatment can be traced to the different races of the applicants and the loan officer's discriminatory reaction to them. If the loan officer had other reasons for treating these two applicants differently, we do not know what those reasons are, and the loan officer has no documentation for such disparity in his behavior. His treatment of the applicants is irregular, and also illegal, and the black applicant would have a case in making an accusation he received disparate treatment based on race. There is no evidence that the disparate treatment stemmed from any credit worthiness criteria.

Applicant 1 With the African American male, the lender took the following actions:

• Immediately mentioned the possibility of high payments

• Mentioned PMI

• Assumed the amount of down payment would be less than 20 percent

• Said processing time would be 60-90 days

Applicant 2 With the white male, the lender took the following actions:

• Immediately offered lower rate options

• Did not mention PMI

• No assumptions mentioned about amount of down payment

• Said processing time would be 30-45 days

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Disparate impact occurs when a bank applies a single practice to all applicants that affects only some of those applicants in a discriminatory manner and is not justified by business necessity. In effect, disparate impact limits the availability of loan products to particular applicants through questionable policies and procedures. Minimum loan amount is an example of a policy that might result in disparate impact. Minimum loan amounts exclude low-income customers, and that could have a disparate impact on one or more prohibited bases. If there is no business necessity for such a loan minimum, the bank should look at providing alternative products or programs. Another example of disparate impact is the use of gross income used in making credit decisions; for instance, a bank decides to use gross income rather than net income when determining the debt-to-income ratio. However, the bank does not distinguish between taxable and nontaxable income when calculating gross income, even though nontaxable income is of more value than the same amount of taxable income. The bank’s policy may have a disparate impact on individuals with disabilities and the elderly, both of whom are more likely than other loan applicants to receive substantial nontaxable income. Glossary terms Minimum loan amount As part of the terms of a credit transaction, a bank may set a minimum loan amount (i.e., the minimum amount the lender will lend to a borrower based on the type of credit applied for). Minimum loan amounts are typically used to ensure that the return earned by the bank is sufficient to offset loan processing costs and to provide a reasonable return on the bank’s investment.

Disparate impact Occurs when a policy or practice, although applied consistently, has the effect of discriminating against some applicants and not others, and furthermore, when this policy is not justified by business necessity.

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Bank examiners have accused banks of disparate practices in cases involving charging married joint applicants one fee for a joint credit report while charging unmarried joint applicants higher fees for separate credit reports. This happens when a “joint” inquiry is made for a married couple but separate individual inquiries are made for unmarried joint applicants. On its face this seems innocent enough because the difference in price is based on the credit bureau’s fee schedule; many banks simply pass-through the credit bureau fee. The regulators’ position is that charging different fees for similarly situated married and unmarried joint applicants is a fair lending violation. The key to treating similarly situated applicants the same is to ensure that they are not paying different amounts for the credit reports due to the method of ordering credit reports (joint vs. individual inquiries).

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Fair Lending Discrimination Recognizing Discrimination

Self Check Quiz A Spanish-speaking man inquires about a loan. He is told that only bank deposit customers are allowed to apply for loans. This is generally true, but this bank frequently makes exceptions to this policy. Which type of discrimination is possible in this scenario?

>Select the correct answer and click Submit.

A) Overt discrimination B) Disparate treatment C) Disparate impact D) It is not discrimination B is correct. A is incorrect because the discrimination is not overt. The loan officer never explained to the applicant that an exception could have been made but the loan officer is choosing not to do so. As far as the applicant knows, he would have been turned away no matter who he was. If he learns that one of his non Spanish-speaking friends or co-workers got a loan there without being a deposit customer, however, the bank’s disparate treatment will be revealed. C is incorrect because this scenario involves a policy that is not applied consistently. D is incorrect because discrimination may have occurred.

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Fair Lending Discrimination Recognizing Discrimination

Self Check Quiz A loan request is denied due to a 45 percent debt-to-income ratio. The bank’s policy allows for a maximum debt-to-income ratio of 40 percent. Exceptions to this policy are made frequently. Which type of discrimination is possible in this scenario?


A) Overt discrimination B) Disparate treatment C) Disparate impact B is correct. A is incorrect because this is not overt discrimination directly linked to a prohibited basis. C is incorrect because this scenario involves a policy that is not applied consistently.

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Recognizing Discrimination Self Check Quiz

A disabled applicant applies for a condo loan for $37,500 and is told that the minimum real estate loan is $45,000. Which type of discrimination is possible in this scenario?


A) Overt discrimination B) Disparate treatment C) Disparate impact C is correct. A is incorrect because this is not blatant discrimination directly linked to a prohibited basis. B is incorrect because this policy is applied consistently to all applicants.

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Fair Lending


Recognizing Discrimination Self Check Quiz

A Spanish-speaking applicant inquires about an unsecured loan. In the course of the loan interview, the banker mentions that he has had problems collecting loans made to some Hispanic borrowers. Which type of discrimination is evident in this scenario?


A) Overt discrimination B) Disparate treatment C) Disparate impact A is correct. B is incorrect because disparate treatment covers discriminatory practices that are not overt. C is incorrect because the scenario does not involve a standard policy or practice; the loan officer has made a careless and inappropriate comment, but has not done so based on the policy of his bank.

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Wrap Up

In this module you learned to define overt discrimination, disparate treatment, and disparate impact. You are also able to identify the fair lending laws that apply to incidents of discrimination.

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Fair Lending in Action Introduction

Illegal discrimination often occurs due to the inconsistent administration of policies and procedures. This inconsistency constitutes disparate treatment. Best practices are suggested actions that if followed, provide guidelines you can use at each stage of the credit life cycle to ensure compliance with fair lending laws. In this module, you will look at each stage in the credit granting process and identify the most common examples of illegal discrimination that can occur. In addition, you will be provided with a list of best practices for each stage in the credit process. Objectives By the end of this module, you will be able to

• Describe common stages in the credit process

• Identify illegal discrimination at the inquiry stage

• Identify illegal discrimination at the credit application stage

• Identify illegal discrimination at the credit decision stage

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Fair Lending in Action Credit Process

Although your bank may use different terminology, credit requests typically undergo four distinct stages.

> Roll over the stages below to see the descriptions.

Inquiry Customer asks general questions regarding credit products; any employee can be involved in handling a credit inquiry.

Credit application An oral or written request for credit: lender has gathered sufficient information to evaluate the credit request.

Credit decision Completed application is evaluated for creditworthiness: the credit request is granted or denied. Collection Contacting the borrower to collect past due payments, make payment arrangements, determine loss mitigation offers, or pursue foreclosure actions can create situations where illegal discrimination can also occur.

Banks must comply with fair lending laws at each stage of the credit transaction life cycle. For instance, during the inquiry and credit application stage, banks must be very careful about questions they ask of applicants. This is because, with few exceptions, a bank cannot inquire about any characteristic of the applicant that relates to a prohibited basis. During the credit decision stage, the bank, with few exceptions, cannot consider any prohibited bases when evaluating creditworthiness. It is important to know what types of questions a bank cannot ask a potential borrower, as well as questions that are appropriate. It is also important to know what fair lending laws require of banks when a request for credit is declined. Learning how to ensure compliance with fair lending laws during the credit process will help banks avoid common mistakes that can sometimes result in illegal discrimination.

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Fair Lending


Fair Lending in Action Inquiry Stage

An inquiry typically begins with the customer expressing a general credit need and interest in a specific credit product. An inquiry can happen over the phone or in person. Any person who has customer contact may have the opportunity to respond to a credit inquiry. This would include receptionists, tellers, customer service representatives, new account representatives, as well as credit officers and collection personnel. The key at the inquiry stage in the credit transaction life cycle is to provide information and encouragement to the customer. Illegal discrimination can occur if the customer is somehow discouraged from completing a formal credit application. Discrimination at the inquiry stage can be very subtle. Discrimination at this stage is caused by disparate treatment, where a customer is not given the same level of attention and encouragement that other customers receive. Examples of disparate treatment at the inquiry stage include:

• Greeting some customers upon arrival while others go unnoticed

• Customers not helped in the order they arrive

• Brochures offered to some, but not all, interested customers

• Appointment with credit officer offered to some, but not all, interested customers

• Different rates and terms quoted (for the same product)

• Making a statement that may discourage the customer from applying

• Discouraging a delinquent borrower from applying for a loan workout on a prohibited basis

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Fair Lending



The customer here is inquiring about a loan. In an inquiry situation, the key is to provide information needed by the customer and encourage him or her to make a formal credit application. A bank should not discourage a customer in any way from applying for credit. This is what happened in the scene to the right. The statement about unsecured credit being difficult to obtain is inappropriate. The bank employee has not even seen the customer’s credit information yet. It is unlikely that this bank employee makes a similar statement to each person inquiring about a personal loan, and therefore this is a case of disparate treatment.

Customer I am interested in a personal loan.

Banker Unsecured credit is difficult to qualify for; it requires an excellent credit history.

Tip The key to avoiding illegal discrimination at the inquiry stage is to treat each customer consistently and fairly, and to encourage each customer to make a formal credit application.

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Best practices “Best practices” are suggested actions that, if followed, will ensure banks are complying with fair lending laws. The following is a list of the best practices for the inquiry stage of a credit transaction.

• Greet each customer as soon as possible after he or she enters your bank

• Give your full attention to the customer during the inquiry

• Use standardized rates and terms for commonly offered consumer credit products such as car loans, CD-secured loans, credit cards, and unsecured transactions

• Question each customer sufficiently to determine his or her real needs

• Provide written information such as brochures to all customers who appear to be interested in certain types of credit

• Inform all customers about credit products in which they may be interested

• Offer refreshments consistently to all waiting clients (if you offer them to any customers)

• Encourage each customer to make a formal application for credit

• Make appointments on a consistent basis for customers to see credit officers Warning This list contains recommended behaviors to observe when handling a credit inquiry. Make sure to follow the standards required by your bank. Page 41

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Question What are two examples of illegal discrimination at the inquiry stage of a credit transaction?

Answer Any of the following are examples of illegal discrimination if provided on a prohibited basis:

• When some customers are greeted upon arrival, while others go unnoticed

• When customers are not helped in the order they arrive

• When brochures are offered to some, but not all, customers that are interested in that particular service or feature

• When different rates and terms are quoted for the same product

• When a banker makes a statement that discourages the customer from applying for credit Page 42

Fair Lending



Exercise Background Patricia Johnson came into her local bank to apply for a home equity loan. She entered the lobby just ahead of another customer, Jerry Smith. The following scenario occurred: Even though Patricia approached the customer service desk first, Jerry was greeted and she was not. The customer service representative provided Jerry an application package for a home equity loan (the same product Patricia needed), and told him to complete the application and that a credit officer would be with him shortly. The customer service representative also provided Patricia an application package, but told Patricia to read it over and call back with any questions. Patricia asked to see a credit officer while she was at the bank instead of calling back. She was able to and they had a discussion. The credit officer asked Patricia if she was married, since she was applying in her name only. Patricia told the credit officer that she was divorced and received child support and public assistance income, which she listed on her application. The credit officer asked if Patricia planned to have any more children. The credit officer also asked if Patricia planned to get a job and stated that she would have a better chance at credit approval with another source of income. He did say that her debt-to-income ratio looked OK, but that having a job would show a more stable source of income. Instructions Consider the scenario and describe the lender’s action(s) that may be considered illegal discrimination.

> Type your answer in the field below. When finished, click the Suggested Results button to view possible

responses.

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Suggested Results Best practices In this scenario, none of the following best practices were used:

• Greet each customer as soon as possible after he or she enters your bank. Make appointments on a consistent basis for customers to see credit officers

• Apply consistent requirements to each customer (for example, do not require some information from one customer and not request it of another)

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Fair Lending in Action Credit Application Stage

An inquiry becomes a credit application at the point when the bank has sufficient information to evaluate the credit request and make a credit decision. Information about the applicant can be gathered through an interview and/or through the applicant completing a credit application. This process can take place over the phone, by mail, online, or in person. During the credit application stage, there is a danger of asking questions that are potentially illegal because they relate to prohibited bases. Illegal questions The following are examples of illegal questions:

• What country are you from?

• Is your last name Hispanic?

• Do you plan on having children?

What questions can you ask? Keep in mind that this is an overview and should not be taken as a complete discussion of all the questions a bank employee should and should not ask considering the requirements of the fair lending laws. Generally, a bank employee can ask the following types of questions that directly relate to the creditworthiness of an applicant that are not related to a prohibited basis:

• Is there any other income you would like me to consider as I'm evaluating your credit request?

• Is there anything that may appear on your credit report that will require further explanation from you? However, if a bank employee asks questions related to creditworthiness of one applicant, they should ask the same questions of all applicants. Otherwise, the different questions the bank employee asks could be perceived as disparate treatment. Generally, a bank employee may not ask any questions related to a prohibited basis. However, there are circumstances where certain questions are appropriate.

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The following table provides guidelines for asking questions related to prohibited bases that are legal and appropriate under certain circumstances.

What is legal/appropriate? Under what circumstances?

Marital status May ask about marital status using the following three terms:

• Married

• Unmarried

• Separated

When someone is applying for anything other than individual unsecured credit or when an application is for individual unsecured credit and relies in part upon property that the applicant owns jointly with another person to satisfy the creditor's standards of creditworthiness, and the applicant resides in a community property state or is relying on property located in such a state as a basis for repayment of the credit requested.

Sex (gender) May use courtesy title such as Mr., Miss, Ms., etc. and ask about sex in order to comply with the government monitoring data collection requirements under the Equal Credit Opportunity Act (Regulation B) or the Home Mortgage Disclosure Act (HMDA) (Regulation C).

Only if the application form discloses that the use of such title is optional.

Race May ask about race in order to comply with the government monitoring data collection requirements under the Equal Credit Opportunity Act (Regulation B) or the Home Mortgage Disclosure Act (HMDA) (Regulation C).

If the transaction is a covered loan* under HMDA or if the purpose is to purchase or refinance the principal dwelling of the customer and the loan is secured by the dwelling (Regulation B).

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Color, religion, national origin

May inquire about immigration status and permanent residence.

May inquire about the immigration status and permanent residence of all applicants.

*There are many variations of a “covered loan” under HMDA which are too detailed to cover here. For more information about covered loans under Regulation C, see the ABA Frontline Compliance course, Home Mortgage Disclosure Act (HMDA) Overview.

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Best practices at the credit application stage

• Use standard rate sheets, brochures, and other credit product information

• Apply consistent requirements to each applicant (for example, do not require some information from one applicant and not request it of another)

• Quote consistent time frames and action steps to each applicant (such as length of processing time, next steps to take in the credit process, etc.)

Warning The ECOA (and Regulation B) includes detailed guidelines about requesting information from a credit applicant. Ask your bank’s manager or compliance officer for the bank’s procedures for complying with Regulation B guidelines for requesting information from credit applicants.

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Fair Lending in Action Credit Decision Stage

After an application is completed, the credit request is evaluated and a credit decision is made. Illegal discrimination at this stage in the credit process typically occurs due to inconsistently administered policies and procedures. A case for disparate treatment can be made if an applicant is treated differently than another similarly situated applicant and, for lack of evidence to the contrary, the different treatment can be attributed to a prohibited basis. Examples

• An applicant from one prohibited basis group (e.g. race) is declined credit based on his or her insufficient credit history while another applicant, from a different racial group, is approved without a credit report. Disparate treatment may have occurred

• An applicant is declined because of his or her 45 percent debt-to-income ratio, while another applicant with a debt-to-income ratio of 46 percent is approved. This is illegal discrimination if the applicants are similarly situated and the decline can be linked to a prohibited basis

The two examples above highlight the need for consistency in determining applicants' creditworthiness in lending transactions. Bank employees should learn their bank's policies on credit decisions and apply them universally.

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When can you consider a prohibited basis in making credit decisions? Although banks generally may not take into consideration any prohibited basis when determining creditworthiness, there are certain instances when taking a prohibited basis into consideration is allowed. Below are some examples of when a bank employee may consider a prohibited basis when evaluating a credit request.

What is legal/appropriate? Under what circumstances?

Age May consider whether the applicant is old enough to enter into a legally binding contract in the state where the bank is located. May consider whether the applicant is age 62 or over.

If, based on the documentation provided, the client appears to be younger than the minimum age required to enter into a legally binding contract in the state where the bank is located. To provide preferable loan rates and terms.

Public assistance income

May consider the length of time public assistance income will be received, whether the applicant will continue to qualify for the income, and whether the income can be garnished.

If public assistance income is a primary source of repayment, and without it, the client would not meet the debt-to-income ratio requirement.

Child support/alimony May consider the length of time the applicant will continue to receive the income.

If the applicant wishes the income to be considered.

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Recent enforcement actions An example of what can create fair lending trouble for a bank is a Department of Justice (DOJ) case, referred by the Board of Governors of the Federal Reserve System. The DOJ alleged the bank violated fair lending regulations because it discriminated against mortgage applicants on the basis of disability (prohibited under the FHA) and receipt of disability income (prohibited under the ECOA) by requiring some applicants to provide a doctor’s letter to show that social security disability income and other disability income would continue. To resolve the matter, the bank agreed to adopt revised disability income policies and train employees to ensure mortgage applicants with a disability or who receive public assistance are treated consistent with FHA and ECOA requirements. The bank was also ordered to provide financial remuneration to alleged victims. This is just one of the enforcement actions related to the receipt of public assistance income. If a bank employee is responsible for collecting and verifying income, it is important that they understand exactly what and when they may consider public assistance income, social security, and other disability income. Page 49

Fair Lending



Best practices at the credit decision stage

• Administer policies and procedures consistently (for example, use of credit reports, consideration of debt-to-income ratios, etc.)

• When denying or adversely acting upon a credit request, ensure the bank has a well-documented process for sending an accurate adverse action notice within 30 days of receiving the completed application

Tip Evaluate each individual applicant based on his or her creditworthiness. Personal characteristics such as sex, race, religion, and marital status are not indicators of an individual's willingness and ability to repay a credit obligation. Page 50

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Fair Lending in Action Collection

Debt collection process

Fair lending concerns can arise in all phases of the loan life cycle, including treatment of delinquent borrowers. The Fair Debt Collection Practices Act (FDCPA) governs the behavior of debt collectors. Just as lenders may not discriminate at the inquiry, application or decision phases of a loan, neither may they discriminate in the collection phase. A collector who automatically assumes that borrowers, on a prohibited basis, are less likely to be able to repay under a loan workout arrangement, who treats borrowers, on a prohibited basis, less respectfully due to race or gender, or who offers inferior workout terms to borrowers on a prohibited basis are violating fair lending laws. Loan servicing or loan workout applications and discussions should only be considered on the basis of the customer's actual qualifications and situation and not on a prohibited basis.

Assuring fair and equal treatment during the collection process is one reason why lenders should not place photocopies of a driver's license or other photo identification in a loan file. Knowledge of a borrower's ethnicity, race or gender, and having access to that information makes it difficult to defend the bank in the case of a lawsuit alleging discriminatory treatment by loan collectors. Illegal discrimination in the collection process such as offering to work with a white borrower while refusing to consider a workout or modification with a Hispanic borrower can result in different treatment of individuals on a prohibited basis, which often is the result of unconscious behavior. Even if a bank employee would never consciously discriminate, they may be doing something unconsciously that is creating illegal discriminatory treatment or impact. In loan servicing and collection, just as in every other phase of the loan process, bank employees must treat customers fairly and without prejudice.

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Fair Lending in Action Wrap Up

In this module, you learned the common stages in the credit process. You can identify illegal discrimination at the inquiry stage, credit application stage, credit decision stage, and the collection stage.

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Course Conclusion Wrap Up

By completing Fair Lending, you studied the essential points of the five federal fair lending laws and the Joint Policy Statement on Discrimination in Lending. You learned about the relationship between unfair treatment and illegal discrimination. By exploring practices that help ensure compliance with fair lending laws, you learned how to interact with clients fairly in all phases of lending transactions. Whether you primarily refer interested parties to a lending specialist, or are a lending specialist yourself, this course sharpened your fair lending skills.

> Click Exit to close this course.

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