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Federal Fair Lending Regulations and StatutesInteragency Fair Lending Examination Procedures

INTRODUCTION

Overview of Fair Lending Lawsand Regulations

This overview provides a basic and abbreviateddiscussion of federal fair lending laws and regula-tions. It is adapted from the Interagency PolicyStatement on Fair Lending issued in March 1994.

1. Lending Discrimination Statutesand Regulations

The Equal Credit Opportunity Act (ECOA) prohibitsdiscrimination in any aspect of a credit transaction.It applies to any extension of credit, includingextensions of credit to small businesses, corpora-tions, 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 tocontract)

• The applicant’s receipt of income derived fromany public assistance program

• The applicant’s exercise, in good faith, of anyright 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 practicesthat are specifically prohibited, permitted, orrequired. Official staff interpretations of the regula-tion are found in Supplement I to 12 CFR part 202.

The Fair Housing Act (FHAct) prohibits discrimi-nation in all aspects of ‘‘residential real-estaterelated transactions,’’ including but not limited to:

• Making loans to buy, build, repair or improve adwelling

• Purchasing real estate loans

• Selling, brokering, or appraising residential realestate

• 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 ageof 18 living with a parent or legal custodian,pregnant women, and people securing custodyof children under 18)

• Handicap

HUD’s regulations implementing the FHAct arefound at 24 CFR Part 100. Because both the FHActand the ECOA apply to mortgage lending, lendersmay not discriminate in mortgage lending based onany of the prohibited factors in either list.

Under the ECOA, it is unlawful for a lender todiscriminate on a prohibited basis in any aspect ofa credit transaction, and under both the ECOA andthe FHAct, it is unlawful for a lender to discriminateon a prohibited basis in a residential real-estate-related transaction. Under one or both of theselaws, a lender may not, because of a prohibitedfactor

• Fail to provide information or services or providedifferent information or services regarding anyaspect of the lending process, including creditavailability, application procedures, or lendingstandards

• Discourage or selectively encourage applicantswith respect to inquiries about or applications forcredit

• Refuse to extend credit or use different standardsin determining whether to extend credit

• Vary the terms of credit offered, including theamount, interest rate, duration, or type of loan

• Use different standards to evaluate collateral

• Treat a borrower differently in servicing a loan orinvoking default remedies

• Use different standards for pooling or packaginga loan in the secondary market.

A lender may not express, orally or in writing, apreference based on prohibited factors or indicatethat it will treat applicants differently on a prohibitedbasis. A violation may still exist even if a lendertreated applicants equally.

A lender may not discriminate on a prohibitedbasis because of the characteristics of

• An applicant, prospective applicant, or borrower

• A person associated with an applicant, prospec-tive applicant, or borrower (for example, a

Consumer Compliance Handbook Fair Lending Exams • 1 (11/09)

co-applicant, spouse, business partner, or live-inaide)

• The present or prospective occupants of eitherthe property to be financed or the characteristicsof the neighborhood or other area where propertyto be financed is located.

Finally, the FHAct requires lenders to makereasonable accommodations for a person withdisabilities when such accommodations are neces-sary to afford the person an equal opportunity toapply for credit.

2. Types of Lending Discrimination

The courts have recognized three methods of proofof lending discrimination under the ECOA and theFHAct:

• Overt evidence of disparate treatment

• Comparative evidence of disparate treatment

• Evidence of disparate impact

Disparate Treatment

The existence of illegal disparate treatment may beestablished either by statements revealing that alender explicitly considered prohibited factors(overt evidence) or by differences in treatment thatare not fully explained by legitimate nondiscrimina-tory factors (comparative evidence).

Overt Evidence of Disparate Treatment

There is overt evidence of discrimination when alender openly discriminates on a prohibited basis.

Example: A lender offered a credit card with alimit of up to $750 for applicants aged 21–30 and$1500 for applicants over 30. This policy violatedthe ECOA’s prohibition on discrimination basedon age.

There is overt evidence of discrimination evenwhen a lender expresses—but does not act on—adiscriminatory preference:

Example: A lending officer told a customer, ‘‘Wedo not like to make home mortgages to NativeAmericans, but the law says we cannot discrimi-nate and we have to comply with the law.’’ Thisstatement violated the FHAct’s prohibition onstatements expressing a discriminatory prefer-ence as well as Section 202.4(b) of Regulation B,which prohibits discouraging applicants on aprohibited basis.

Comparative Evidence of Disparate Treatment

Disparate treatment occurs when a lender treats acredit applicant differently based on one of theprohibited bases. It does not require any showingthat the treatment was motivated by prejudice or a

conscious intention to discriminate against a per-son beyond the difference in treatment itself.

Disparate treatment may more likely occur in thetreatment of applicants who are neither clearlywell-qualified nor clearly unqualified. Discrimina-tion may more readily affect applicants in thismiddle group for two reasons. First, if the applica-tions are ‘‘close cases,’’ there is more room andneed for lender discretion. Second, whether or notan applicant qualifies may depend on the level ofassistance the lender provides the applicant incompleting an application. The lender may, forexample, propose solutions to credit or otherproblems regarding an application, identify com-pensating factors, and provide encouragement tothe applicant. Lenders are under no obligation toprovide such assistance, but to the extent that theydo, the assistance must be provided in a nondis-criminatory way.

Example: A non-minority couple applied for anautomobile loan. The lender found adverseinformation in the couple’s credit report. Thelender discussed the credit report with them anddetermined that the adverse information, ajudgment against the couple, was incorrectbecause the judgment had been vacated. Thenon-minority couple was granted their loan. Aminority couple applied for a similar loan with thesame lender. Upon discovering adverse informa-tion in the minority couple’s credit report, thelender denied the loan application on the basis ofthe adverse information without giving the couplean opportunity to discuss the report.

The foregoing is an example of disparate treat-ment of similarly situated applicants, apparentlybased on a prohibited factor, in the amount ofassistance and information the lender provided.

If a lender has apparently treated similar appli-cants differently on the basis of a prohibited factor,it must provide an explanation for the difference intreatment. If the lender’s explanation is found to benot credible, the agency may find that the lenderdiscriminated.

Redlining is a form of illegal disparate treatmentin which a lender provides unequal access tocredit, or unequal terms of credit, because of therace, color, national origin, or other prohibitedcharacteristic(s) of the residents of the area inwhich the credit seeker resides or will reside or inwhich the residential property to be mortgaged islocated. Redlining may violate both the FHAct andthe ECOA.

Disparate Impact

When a lender applies a racially or otherwiseneutral policy or practice equally to all credit

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applicants, but the policy or practice disproportion-ately excludes or burdens certain persons on aprohibited basis, the policy or practice is describedas having a ‘‘disparate impact.’’

Example: A lender’s policy is not to extend loansfor single family residences for less than$60,000.00. This policy has been in effect for tenyears. This minimum loan amount policy is shownto disproportionately exclude potential minorityapplicants from consideration because of theirincome levels or the value of the houses in theareas in which they live.

The fact that a policy or practice creates adisparity on a prohibited basis is not alone proof ofa violation. When an Agency finds that a lender’spolicy or practice has a disparate impact, the nextstep is to seek to determine whether the policy orpractice is justified by ‘‘business necessity.’’ Thejustification must be manifest and may not behypothetical or speculative. Factors that may berelevant to the justification could include cost andprofitability. Even if a policy or practice that has adisparate impact on a prohibited basis can bejustified by business necessity, it still may be foundto be in violation if an alternative policy or practicecould serve the same purpose with less discrimi-natory effect. Finally, evidence of discriminatoryintent is not necessary to establish that a lender’sadoption or implementation of a policy or practicethat has a disparate impact is in violation of theFHAct or ECOA.

These procedures do not call for examiners toplan examinations to identify or focus on potentialdisparate impact issues. The guidance in thisIntroduction is intended to help examiners recog-nize fair lending issues that may have a potentialdisparate impact. Guidance in the Appendix to theInteragency Fair Lending Examination Proceduresprovides details on how to obtain relevant informa-tion regarding such situations along with methodsof evaluation, as appropriate.

General Guidelines

These procedures are intended to be a basic andflexible framework to be used in the majority of fairlending examinations conducted by the FFIECagencies. They are also intended to guide exam-iner judgment, not to supplant it. The procedurescan be augmented by each agency as necessaryto ensure their effective implementation.

While these procedures apply to many examina-tions, agencies routinely use statistical analyses orother specialized techniques in fair lending exami-nations to assist in evaluating whether a prohibitedbasis was a factor in an institution’s credit deci-sions. Examiners should follow the procedures

provided by their respective agencies in thesecases.

For a number of aspects of lending—for example,credit scoring and loan pricing—the ‘‘state of theart’’ is more likely to be advanced if the agencieshave some latitude to incorporate promising inno-vations. These interagency procedures provide forthat latitude.

Any references in these procedures to options,judgment, etc., of ‘‘examiners’’ means discretionwithin the limits provided by that examiner’sagency. An examiner should use these proceduresin conjunction with his or her own agency’spriorities, examination philosophy, and detailedguidance for implementing these procedures.These procedures should not be interpreted asproviding an examiner greater latitude than his orher own agency would. For example, if an agency’spolicy is to review compliance management sys-tems in all of its institutions, an examiner for thatagency must conduct such a review rather thaninterpret Part II of these interagency procedures asleaving the review to the examiner’s option.

The procedures emphasize racial and nationalorigin discrimination in residential transactions, butthe key principles are applicable to other prohib-ited bases and to nonresidential transactions.

Finally, these procedures focus on analyzinginstitution compliance with the broad, nondiscrimi-nation requirements of the ECOA and the FHAct.They do not address such explicit or technicalcompliance provisions as the signature rules oradverse action notice requirements in Sections202.7 and 202.9, respectively, of Regulation B.

PART I. EXAMINATION SCOPEGUIDELINES

Background

The scope of an examination encompasses theloan product(s), market(s), decision center(s), timeframe, and prohibited basis and control group(s) tobe analyzed during the examination. These proce-dures refer to each potential combination of thoseelements as a ‘‘focal point.’’ Setting the scope of anexamination involves, first, identifying all of thepotential focal points that appear worthwhile toexamine. Then, from among those, examinersselect the focal point(s) that will form the scope ofthe examination, based on risk factors, prioritiesestablished in these procedures or by their respec-tive agencies, the record from past examinations,and other relevant guidance. This phase includesobtaining an overview of an institution’s compliancemanagement system as it relates to fair lending.

When selecting focal points for review, examin-



ers may determine that the institution has per-formed ‘‘self-tests’’ or ‘‘self-evaluations’’ related tospecific lending products. The difference between‘‘self tests’’ and ‘‘self evaluations’’ is discussed intheUsing Self-Tests and Self-Evaluations to Stream-line the Examination section of the Appendix.Institutions must share all information regarding‘‘self-evaluations’’ and certain limited informationrelated to ‘‘self-tests.’’ Institutions may choose tovoluntarily disclose additional information about‘‘self-tests.’’ Examiners should make sure thatinstitutions understand that voluntarily sharing theresults of self-tests will result in a loss of confiden-tial status of these tests. Information from ‘‘self-evaluations’’ or ‘‘self-tests’’ may allow the scopingto be streamlined. Refer to Using Self-Tests andSelf-Evaluations to Streamline the Examination inthe Appendix for additional details.

Scoping may disclose the existence ofcircumstances—such as the use of credit scoringor a large volume of residential lending—which,under an agency’s policy, call for the use ofregression analysis or other statistical methods ofidentifying potential discrimination with respect toone or more loan products. Where that is the case,the agency’s specialized procedures should beemployed for such loan products rather than theprocedures set forth below.

Setting the intensity of an examination meansdetermining the breadth and depth of the analysisthat will be conducted on the selected loanproduct(s). This process entails a more involvedanalysis of the institution’s compliance risk man-agement processes, particularly as it relates toselected products, to reach an informed decisionregarding how large a sample of files to review inany transactional analyses performed and whethercertain aspects of the credit process deserveheightened scrutiny.

Part I of these procedures provides guidance onestablishing the scope of the examination. Part II(Compliance Management Review) provides guid-ance on determining the intensity of the examina-tion. There is naturally some interdependencebetween these two phases. Ultimately the scopeand intensity of the examination will determine therecord of performance that serves as the founda-tion for agency conclusions about institutionalcompliance with fair lending obligations. Theexaminer should employ these procedures to arriveat a well-reasoned and practical conclusion abouthow to conduct a particular institution’s examina-tion of fair lending performance.

In certain cases where an agency alreadypossesses information which provides examinerswith guidance on priorities and risks for planning anupcoming examination, such information mayexpedite the scoping process and make it unnec-

essary to carry out all of the steps below. Forexample, the report of the previous fair lendingexamination may have included recommendationsfor the focus of the next examination. However,examiners should validate that the institution’soperational structure, product offerings, policiesand risks have not changed since the priorexamination before condensing the scopingprocess.

The scoping process can be performed eitheroff-site, onsite, or both, depending on whatever isdetermined appropriate and feasible. In the interestof minimizing burdens on both the examinationteam and the institution, requests for informationfrom the institution should be carefully thought outso as to include only the information that will clearlybe useful in the examination process. Finally, anyoff-site information requests should be madesufficiently in advance of the on-site schedule topermit institutions adequate time to assemblenecessary information and provide it to the exami-nation team in a timely fashion. (See ‘‘PotentialScoping Information’’ in the Appendix for guidanceon additional information that the examiner mightwish to consider including in a request).

Examiners should focus the examination basedon:

• An understanding of the credit operations of theinstitution

• The risk that discriminatory conduct may occur ineach area of those operations

• The feasibility of developing a factually reliablerecord of an institution’s performance and fairlending compliance in each area of thoseoperations.

1. Understanding Credit Operations

Before evaluating the potential for discriminatoryconduct, the examiner should review sufficientinformation about the institution and its market tounderstand the credit operations of the institutionand the representation of prohibited basis groupresidents within the markets where the institutiondoes business. The level of detail to be obtained atthis stage should be sufficient to identify whetherany of the risk factors in the steps below arepresent. Relevant background information in-cludes:

• The types and terms of credit products offered,differentiating among broad categories of creditsuch as residential, consumer, or commercial, aswell as product variations within such categories(fixed vs. variable, etc.)

• Whether the institution has a special purposecredit program, or other program that is specifi-



cally designed to assist certain underservedpopulations

• The volume of, or growth in, lending for each ofthe credit products offered

• The demographics (i.e., race, national origin,etc.) of the credit markets in which the institutionis doing business

• The institution’s organization of its credit decision-making process, including identification of thedelegation of separate lending authorities andthe extent to which discretion in pricing or settingcredit terms and conditions is delegated tovarious levels of managers, employees or inde-pendent brokers or dealers

• The institution’s loan officer or broker compensa-tion program

• The types of relevant documentation/data thatare available for various loan products and whatis the relative quantity, quality and accessibility ofsuch information. i.e., for which loan product(s)will the information available be most likely tosupport a sound and reliable fair lending analysis

• The extent to which information requests can bereadily organized and coordinated with othercompliance examination components to reduceundue burden on the institution. (Do not requestmore information than the exam team can beexpected to utilize during the anticipated courseof the examination.)

In thinking about an institution’s credit markets,the examiner should recognize that these marketsmay or may not coincide with an institution’sCommunity Reinvestment Act (CRA) assessmentarea(s). Where appropriate, the examiner shouldreview the demographics for a broader geographicarea than the assessment area.

Where an institution has multiple underwriting orloan processing centers or subsidiaries, each withfully independent credit-granting authority, con-sider evaluating each center and/or subsidiaryseparately, provided a sufficient number of loansexist to support a meaningful analysis. In determin-ing the scope of the examination for such institu-tions, examiners should consider whether:

• Subsidiaries should be examined. The agencieswill hold a financial institution responsible forviolations by its direct subsidiaries, but nottypically for those by its affiliates (unless theaffiliate has acted as the agent for the institutionor the violation by the affiliate was known orshould have been known to the institution beforeit became involved in the transaction or pur-chased the affiliate’s loans). When seeking todetermine an institution’s relationship with affili-ates that are not supervised financial institutions,limit the inquiry to what can be learned in the

institution and do not contact the affiliate withoutprior consultation with agency staff.

• The underwriting standards and proceduresused in the entity being reviewed are used inrelated entities not scheduled for the plannedexamination. This will help examiners to recog-nize the potential scope of policy-basedviolations.

• The portfolio consists of applications from apurchased institution. If so, for scoping pur-poses, examiners should consider the applica-tions as if they were made to the purchasinginstitution. For comparison purposes, applica-tions evaluated under the purchased institution’sstandards should not be compared to applica-tions evaluated under the purchasing institution’sstandards.).

• The portfolio includes purchased loans. If so,examiners should look for indications that theinstitution specified loans to purchase based ona prohibited factor or caused a prohibited factorto influence the origination process.

• A complete decision can be made at one of theseveral underwriting or loan processing centers,each with independent authority. In such asituation, it is best to conduct on-site a separatecomparative analysis at each underwriting cen-ter. If covering multiple centers is not feasibleduring the planned examination, examinersshould review their processes and internal con-trols to determine whether or not expanding thescope and/or length of the examination is justified.

• Decision-making responsibility for a single trans-action may involve more than one underwritingcenter. For example, an institution may haveauthority to decline mortgage applicants, butonly the mortgage company subsidiary mayapprove them. In such a situation, examinersshould learn which standards are applied in eachentity and the location of records needed for theplanned comparisons.

• Applicants can be steered from the financialinstitution to the subsidiary or other lendingchannel and vice versa, and what policies andprocedures exist to monitor this practice.

• Any third parties, such as brokers or contractors,are involved in the credit decision and howresponsibility is allocated among them and theinstitution. The institution’s familiarity with thirdparty actions may be important, for an institutionmay be in violation if it participates in transactionsin which it knew or reasonably ought to haveknown other parties were discriminating.

As part of understanding the financial institution’sown lending operations, it is also important tounderstand any dealings the financial institution



has with affiliated and non-affiliated mortgage loanbrokers and other third party lenders.

These brokers may generate mortgage applica-tions and originations solely for a specific financialinstitution or may broadly gather loan applicationsfor a variety of local, regional, or national lenders.As a result, it is important to recognize what impactthese mortgage brokers and other third partylender actions and application processing opera-tions have on the lending operations of a financialinstitution. Because brokers can be located any-where in or out of the financial institution’s primarylending or CRA assessment areas, it is important toevaluate broker activity and fair lending compli-ance related to underwriting, terms and conditions,redlining, and steering, each of which is covered inmore depth in sections of these procedures.Examiners should consult with their respectiveagencies for specific guidance regarding brokeractivity.

If the institution is large and geographicallydiverse, examiners should select only as manymarkets or underwriting centers as can be re-viewed readily in depth, rather than selectingproportionally to cover every market. As needed,examiners should narrow the focus to the Metro-politan Statistical Area (MSA) or underwritingcenter(s) that are determined to present the highestdiscrimination risk. Examiners should use LoanApplication Register (LAR) data organized byunderwriting center, if available. After calculatingdenial rates between the control and prohibitedbasis groups for the underwriting centers, examin-ers should select the centers with the highest fairlending risk. This approach would also be usedwhen reviewing pricing or other terms and condi-tions of approved applicants from the prohibitedbasis and control groups. If underwriting centershave fewer than five racial or national origindenials, examiners should not examine for racialdiscrimination in underwriting. Instead, they shouldshift the focus to other loan products or prohibitedbases, or examination types such as a pricingexamination.

However, if examiners learn of other indicationsof risks that favor analyzing a prohibited basis withfewer transactions than the minimum in the samplesize tables, they should consult with their supervi-sory office on possible alternative methods ofanalysis. For example, there is strong reason toexamine a pattern in which almost all of 19 maleborrowers received low rates but almost all of fourfemale borrowers received high rates, even thoughthe number of each group is fewer than the statedminimum. Similarly, there would be strong reasonto examine a pattern in which almost all of 100control group applicants were approved but all fourprohibited basis group applicants were not, even

though the number of prohibited basis denials wasfewer than five.

2. Evaluating the Potential forDiscriminatory Conduct

Step One: Develop an Overview

Based on his or her understanding of the creditoperations and product offerings of an institution,an examiner should determine the nature andamount of information required for the scopingprocess and should obtain and organize thatinformation. No single examination can reasonablybe expected to evaluate compliance performanceas to every prohibited basis, in every product, or inevery underwriting center or subsidiary of aninstitution. In addition to information gained in theprocess of Understanding Credit Operations,above, the examiner should keep in mind thefollowing factors when selecting products for thescoping review:

• Which products and prohibited bases werereviewed during the most recent prior examina-tion(s) and, conversely, which products andprohibited bases have not recently beenreviewed?

• Which prohibited basis groups make up asignificant portion of the institution’s market forthe different credit products offered?

• Which products and prohibited basis groups theinstitution reviewed using either a voluntarilydisclosed self-test or a self evaluation?

Based on consideration of the foregoing factors,the examiner should request information for allresidential and other loan products consideredappropriate for scoping in the current examinationcycle. In addition, wherever feasible, examinersshould conduct preliminary interviews with theinstitution’s key underwriting personnel and thoseinvolved with establishing the institution’s pricingpolicies and practices. Using the accumulatedinformation, the examiner should evaluate thefollowing, as applicable:

• Underwriting guidelines, policies, and standards

• Descriptions of credit scoring systems, includinga list of factors scored, cutoff scores, extent ofvalidation, and any guidance for handling over-rides and exceptions. (Refer to Part A of theConsidering Automated Underwriting and CreditScoring section of the Appendix for guidance)

• Applicable pricing policies, risk-based pricingmodels, and guidance for exercising discretionover loan terms and conditions

• Descriptions of any compensation system, includ-ing whether compensation is related to, loanproduction or pricing



• The institution’s formal and informal relationshipswith any finance companies, subprime mortgageor consumer lending entities, or similar institu-tions

• Loan application forms

• Home Mortgage Disclosure Act–Loan Applica-tion Register (HMDA–LAR) or loan registers andlists of declined applications

• Description(s) of databases maintained for loanproduct(s) to be reviewed

• Records detailing policy exceptions or overrides,exception reporting and monitoring processes

• Copies of any consumer complaints allegingdiscrimination and related loan files

• Compliance program materials (particularly fairlending policies), training manuals, organizationcharts, as well as record keeping, monitoringprotocols, and internal controls

• Copies of any available marketing materials ordescriptions of current or previous marketingplans or programs or pre-screened solicitations.

Step Two: Identify Compliance ProgramDiscrimination Risk Factors

Review information from agency examination workpapers, institutional records and any availablediscussions with management representatives insufficient detail to understand the organization,staffing, training, recordkeeping, auditing, policiesand procedures of the institution’s fair lendingcompliance systems. Review these systems andnote the following risk factors:

C1. Overall institution compliance record is weak.

C2. Prohibited basis monitoring informationrequired by applicable laws and regulationsis nonexistent or incomplete.

C3. Data and/or recordkeeping problems com-promised reliability of previous examinationreviews.

C4. Fair lending problems were previously foundin one or more institution products or ininstitution subsidiaries.

C5. The size, scope, and quality of the compli-ance management program, including seniormanagement’s involvement, designation of acompliance officer, and staffing is materiallyinferior to programs customarily found ininstitutions of similar size, market demograph-ics and credit complexity.

C6. The institution has not updated compliancepolicies and procedures to reflect changes inlaw or in agency guidance.

C7. Fair lending training is nonexistent or weak.

Consider these risk factors and their impact onparticular lending products and practices as youconduct the product specific risk review during thescoping steps that follow. Where this reviewidentifies fair lending compliance system deficien-cies, give them appropriate consideration as partof the Compliance Management Review in Part II ofthese procedures.

Step Three: Review Residential LoanProducts

Although home mortgages may not be the ultimatesubject of every fair lending examination, thisproduct line must at least be considered in thecourse of scoping every institution that is engagedin the residential lending market.

Divide home mortgage loans into the followinggroupings: home purchase, home improvement,and refinancings. Subdivide those three groupsfurther if an institution does a significant number ofany of the following types or forms of residentiallending, and consider them separately:

• Government-insured loans

• Mobile home or manufactured housing loans

• Wholesale, indirect and brokered loans

• Portfolio lending (including portfolios of FannieMae/Freddie Mac rejections)

In addition, determine whether the institutionoffers any conventional ‘‘affordable’’ housing loanprograms special purpose credit programs or otherprograms that are specifically designed to assistcertain borrowers, such as underserved popula-tions and whether their terms and conditions makethem incompatible with regular conventional loansfor comparative purposes. If so, consider themseparately.

If previous examinations have demonstrated thefollowing, then an examiner may limit the focus ofthe current examination to alternative underwritingor processing centers or to other residentialproducts that have received less scrutiny in thepast:

• A strong fair lending compliance program

• No record of discriminatory transactions at par-ticular decision centers or in particular residentialproducts

• No indication of a significant change in person-nel, operations or underwriting or pricing policiesat those centers or in those residential products

• No unresolved fair lending complaints, adminis-trative proceedings, litigation or similar factors.

• No discretion to set price or credit terms and



conditions in particular decision centers or forparticular residential products.

Step Four: Identify Residential LendingDiscrimination Risk Factors• Review the lending policies, marketing plans,underwriting, appraisal and pricing guidelines,broker/agent agreements and loan applicationforms for each residential loan product thatrepresents an appreciable volume of, or displaysnoticeable growth in, the institution’s residentiallending.

• Review also any available data regarding thegeographic distribution of the institution’s loanoriginations with respect to the race and nationalorigin percentages of the census tracts within itsassessment area or, if different, its residentialloan product lending area(s).

• Conduct interviews of loan officers and otheremployees or agents in the residential lendingprocess concerning adherence to and under-standing of the above policies and guidelines aswell as any relevant operating practices.

• In the course of conducting the foregoinginquiries, look for the following risk factors(factors are numbered alphanumerically to coin-cide with the type of factor, e.g., ‘‘O’’ for ‘‘overt’’;‘‘P’’ for ‘‘pricing’’, etc.).

NOTE: For risk factors below that are markedwith an asterisk (*), examiners need not attempt tocalculate the indicated ratios for racial or nationalorigin characteristics when the institution is not aHMDA reporter. However, consideration should begiven in such cases to whether or not suchcalculations should be made based on gender orracial–ethnic surrogates.

Overt indicators of discrimination such as:

O1. Including explicit prohibited basis identifiersin the institution’s written or oral policies andprocedures (underwriting criteria, pricingstandards, etc.)

O2. Collecting information, conducting inquiriesor imposing conditions contrary to expressrequirements of Regulation B

O3. Including variables in a credit scoring systemthat constitute a basis or factor prohibited byRegulation B or, for residential loan scoringsystems, the FHAct. (If a credit scoringsystem scores age, refer to Part E of theConsidering Automated Underwriting andCredit Scoring section of the Appendix.)

O4. Statements made by the institution’s officers,employees or agents which constitute anexpress or implicit indication that one or

more such persons have engaged or doengage in discrimination on a prohibitedbasis in any aspect of a credit transaction

O5. Employee or institutional statements thatevidence attitudes based on prohibitedbasis prejudices or stereotypes.

Indicators of potential disparate treatment inUnderwriting such as:

U1. *Substantial disparities among the approval/denial rates for applicants by monitoredprohibited basis characteristic (especiallywithin income categories)

U2. *Substantial disparities among the applica-tion processing times for applicants bymonitored prohibited basis characteristic (es-pecially within denial reason groups)

U3. *Substantially higher proportion of withdrawn/incomplete applications from prohibited ba-sis group applicants than from otherapplicants

U4. Vague or unduly subjective underwritingcriteria

U5. Lack of clear guidance on making excep-tions to underwriting criteria, including creditscoring overrides

U6. Lack of clear loan file documentation regard-ing reasons for any exceptions to standardunderwriting criteria, including credit scoringoverrides

U7. Relatively high percentages of either excep-tions to underwriting criteria or overrides ofcredit score cutoffs

U8. Loan officer or broker compensation basedon loan volume (especially loans approvedper period of time)

U9. Consumer complaints alleging discriminationin loan processing or in approving/denyingresidential loans.

Indicators of potential disparate treatment inPricing (interest rates, fees, or points) such as:

P1. Financial incentives for loan officers or bro-kers to charge higher prices (including inter-est rate, fees and points). Special attentionshould be given to situations where financialincentives are accompanied by broad pricingdiscretion (as in P2), such as through the useof overages or yield spread premiums.

P2. Presence of broad discretion in loan pricing(including interest rate, fees and points),such as through overages, underages oryield spread premiums. Such discretion maybe present even when institutions provide



rate sheets and fees schedules, if loanofficers or brokers are permitted to deviatefrom those rates and fees without clear andobjective criteria.

P3. Use of risk-based pricing that is not based onobjective criteria or applied consistently

P4. *Substantial disparities among prices beingquoted or charged to applicants who differ asto their monitored prohibited basis character-istics

P5. Consumer complaints alleging discriminationin residential loan pricing.

P6. *In mortgage pricing, disparities in the inci-dence or rate spreads1 of higher-pricedlending by prohibited basis characteristics asreported in the HMDA data.

P7. *A loan program that contains only borrowersfrom a prohibited basis group, or has signifi-cant differences in the percentages of pro-hibited basis groups, especially in theabsence of a Special Purpose Credit Pro-gram under ECOA.

Indicators of potential disparate treatment bySteering such as:

S1. Lack of clear, objective and consistentlyimplemented standards for (i) referring appli-cants to subsidiaries, affiliates, or lendingchannels within the institution (ii) classifyingapplicants as ‘‘prime’’ or ‘‘sub-prime’’ borrow-ers, or (iii) deciding what kinds of alternativeloan products should be offered or recom-mended to applicants (product placement).

S2. Financial incentives for loan officers or bro-kers to place applicants in nontraditionalproducts (i.e., negative amortization, ‘‘interestonly’’, ‘‘payment option’’ adjustable rate mort-gages) or higher cost products.

S3. For an institution that offers different productsbased on credit risk levels, any significantdifferences in percentages of prohibitedbasis groups in each of the alternative loanproduct categories.

S4. *Significant differences in the percentage ofprohibited basis applicants in loan productsor products with specific features relative tocontrol group applicants. Special attentionshould be given to products and features thathave potentially negative consequences forapplicants (i.e., non-traditional mortgages,prepayment penalties, lack of escrow require-ments, or credit life insurance)

S5. *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 appli-cants of the institution compared to thepercentage of prohibited basis applicants ofthe subsidiary(ies) or affiliate(s).

S6. *For an institution that has one or morelending channels that originate the same loanproduct, any significant differences in thepercentage of prohibited basis applicants inone of the lending channels compared to thepercentage of prohibited basis applicants ofthe other lending channel.

S7. Consumer complaints alleging discriminationin residential loan pricing or productplacement.

S8. *For an institution with sub-prime mortgagesubsidiaries, a concentration of those subsid-iaries’ branches in minority areas relative toits other branches.

Indicators of potential discriminatory Redliningsuch as:

R1. *Significant differences, as revealed in HMDAdata, in the number of applications received,withdrawn, approved not accepted, andclosed for incompleteness or loans origi-nated in those areas in the institution’s marketthat have relatively high concentrations ofminority group residents compared with areaswith relatively low concentrations of minorityresidents.

R2. *Significant differences between approval/denial rates for all applicants (minority andnon-minority) in areas with relatively highconcentrations of minority group residentscompared with areas with relatively lowconcentrations of minority residents.

R3. *Significant differences between denial ratesbased on insufficient collateral for applicantsfrom areas with relatively high concentrationsof minority residents and those areas withrelatively low concentrations of minorityresidents.

R4. *Significant differences in the number oforiginations of higher-priced loans or loanswith potentially negative consequences forborrowers, (i.e., non-traditional mortgages,prepayment penalties, lack of escrow require-ments) in areas with relatively high concen-trations of minority residents compared withareas with relatively low concentrations ofminority residents.

R5. Other patterns of lending identified during themost recent CRA examination that differ bythe concentration of minority residents.1. Regulation C, Section 203.4(a)(12).



R6. Explicit demarcation of credit product mar-kets that excludes MSAs, political subdivi-sions, census tracts, or other geographicareas within the institution’s lending market orCRA assessment areas and having relativelyhigh concentrations of minority residents.

R7. Difference in services available or hours ofoperation at branch offices located in areaswith concentrations of minority residentswhen compared to branch offices located inareas with concentrations of non-minorityresidents.

R8. Policies on receipt and processing of appli-cations, pricing, conditions, or appraisalsand valuation, or on any other aspect ofproviding residential credit that vary betweenareas with relatively high concentrations ofminority residents and those areas withrelatively low concentrations of minorityresidents.

R9. The institution’s CRA assessment areaappears to have been drawn to excludeareas with relatively high concentrations ofminority residents.

R10. Employee statements that reflect an aversionto doing business in areas with relatively highconcentrations of minority residents.

R11. Complaints or other allegations by consum-ers or community representatives that theinstitution excludes or restricts access tocredit for areas with relatively high concen-trations of minority residents. Examinersshould review complaints against the institu-tion filed either with their agency or theinstitution; the CRA public comment file;community contact forms; and the responsesto questions about redlining, discrimination,and discouragement of applications, andabout meeting the needs of racial or nationalorigin minorities, asked as part of obtaininglocal perspectives on the performance offinancial institutions during prior CRAexaminations.

R12. An institution that has most of its branches inpredominantly non-minority neighborhoodsat the same time that the institution’s sub-prime mortgage subsidiary has brancheswhich are located primarily in predominantlyminority neighborhoods.

Indicators of potential disparate treatment inMarketing of residential products, such as:

M1. Advertising patterns or practices that areasonable person would believe indicateprohibited basis customers are lessdesirable.

M2. Advertising only in media serving non-minority areas of the market.

M3. Marketing through brokers or other agentsthat the institution knows (or has reason toknow) would serve only one racial or ethnicgroup in the market.

M4. Use of marketing programs or proceduresfor residential loan products that exclude oneor more regions or geographies within theinstitutions assessment or marketing areathat have significantly higher percentages ofminority group residents than does theremainder of the assessment or marketingarea.

M5. Using mailing or other distribution lists orother marketing techniques for pre-screenedor other offerings of residential loan productsthat:• Explicitly exclude groups of prospectiveborrowers on a prohibited basis; or

• Exclude geographies (e.g., census tracts,ZIP codes, etc.) within the institution’smarketing area that have significantlyhigher percentages of minority group resi-dents than does the remainder of themarketing area.

M6. *Proportion of prohibited basis applicants issignificantly lower than that group’s represen-tation in the total population of the marketarea.

M7. Consumer complaints alleging discrimina-tion in advertising or marketing loans.

Step Five: Organize and FocusResidential Risk Analysis

Review the risk factors identified in Step 4 and, foreach loan product that displays risk factors,articulate the possible discriminatory effects en-countered and organize the examination of thoseloan products in accordance with the followingguidance. For complex issues regarding thesefactors, consult with agency supervisory staff.

• Where overt evidence of discrimination, asdescribed in factors O1–O5, has been found inconnection with a product, document thosefindings as described in Part III, B, besidescompleting the remainder of the planned exami-nation analysis.

• Where any of the risk factors U1–U9 are present,consider conducting an underwriting compara-tive file analysis as described in Part III, C.

• Where any of the risk factors P1–P7 are present,consider conducting a pricing comparative fileanalysis as described in Part III, D.



• Where any of the risk factors S1–S8 are present,consider conducting a steering analysis asdescribed in Part III, E.

• Where any of the risk factors R1–R12 are present,consider conducting an analysis for redlining asdescribed in Part III, G.

• Where any of the risk factors M1–M7 are present,consider conducting a marketing analysis asdescribed in Part III, H.

• Where an institution uses age in any creditscoring system, consider conducting an exami-nation analysis of that credit scoring system’scompliance with the requirements of Regula-tion B as described in Part III, I.

Step Six: Identify Consumer LendingDiscrimination Risk Factors

For any consumer loan products selected in StepOne for risk analysis, examiners should conduct arisk factor review similar to that conducted forresidential lending products in Steps Three throughFive, above. Examiners should consult with agencysupervisory staff regarding the potential use ofsurrogates to identify possible prohibited basisgroup individuals.

NOTE: The term surrogate in this context refersto any factor related to a loan applicant thatpotentially identifies that applicant’s race, coloror other prohibited basis characteristic ininstances where no direct evidence of thatcharacteristic is available. Thus, in consumerlending, where monitoring data is generallyunavailable, a Hispanic or Asian surname couldconstitute a surrogate for an applicant’s race ornational origin because the examiner canassume that the institution (which can rebut thepresumption) perceived the person to beHispanic or Asian. Similarly, an applicant’sgiven name could serve as a surrogate for hisor her gender. A surrogate for a prohibitedbasis group characteristic may be used to setup a comparative analysis with control groupapplicants or borrowers.

Examiners should then follow the rules in StepsThree through Five, above and identify the possiblediscriminatory patterns encountered and considerexamining those products determined to havesufficient risk of discriminatory conduct.

Step Seven: Identify CommercialLending Discrimination Risk Factors

Where an institution does a substantial amount of

lending in the commercial lending market, mostnotably small business lending and the producthas not recently been examined or the underwritingstandards have changed since the last examina-tion of the product, the examiner should considerconducting a risk factor review similar to thatperformed for residential lending products, asfeasible, given the limited information available.Such an analysis should generally be limited todetermining risk potential based on risk factorsU4–U8; P1–P3; R5–R7; and M1–M3.

If the institution makes commercial loans insuredby the Small Business Administration (SBA), deter-mine from agency supervisory staff whether SBAloan data (which codes race and other factors) areavailable for the institution and evaluate those datapursuant to instructions accompanying them.

For large institutions reporting small businessloans for CRA purposes and where the institutionalso voluntarily geocodes loan denials, look formaterial discrepancies in ratios of approval-to-denial rates for applications in areas with highconcentrations of minority residents compared toareas with concentrations of non-minority residents.

Articulate the possible discriminatory patternsidentified and consider further examining thoseproducts determined to have sufficient risk ofdiscriminatory conduct in accordance with theprocedures for commercial lending described inPart III, F.

Step Eight: Complete theScoping Process

To complete the scoping process, the examinershould review the results of the preceding stepsand select those focal points that warrant examina-tion, based on the relative risk levels identifiedabove. In order to remain within the agency’sresource allowances, the examiner may need tochoose a smaller number of focal points fromamong all those selected on the basis of risk. Insuch instances, set the scope by first, prioritizingfocal points on the basis of (i) high number and/orrelative severity of risk factors; (ii) high data qualityand other factors affecting the likelihood of obtain-ing reliable examination results; (iii) high loanvolume and the likelihood of widespread risk toapplicants and borrowers; and (iv) low quality ofany compliance program and, second, selectingfor examination review as many focal points asresources permit.

Where the judgment process among competingfocal points is a close call, information learned in



the phase of conducting the compliance manage-ment review can be used to further refine theexaminer’s choices.

PART II. COMPLIANCE MANAGEMENTREVIEW

The Compliance Management Review enables theexamination team to determine:

• The intensity of the current examination based onan evaluation of the compliance managementmeasures employed by an institution

• The reliability of the institution’s practices andprocedures for ensuring continued fair lendingcompliance.

Generally, the review should focus on

• Determining whether the policies and proce-dures of the institution enable management toprevent, or to identify and self-correct, illegaldisparate treatment in the transactions that relateto the products and issues identified for furtheranalysis under Part I of these procedures

• Obtaining a thorough understanding of themanner by which management addresses its fairlending responsibilities with respect to (a) theinstitution’s lending practices and standards, (b)training and other application-processing aids,(c) guidance to employees or agents in dealingwith customers, and (d) its marketing or otherpromotion of products and services.

To conduct this review, examiners should con-sider institutional records and interviews withappropriate management personnel in the lending,compliance, audit, and legal functions. The exam-iner should also refer to the Compliance Manage-ment Analysis Checklist contained in the Appendixto evaluate the strength of the compliance pro-grams in terms of their capacity to prevent, or toidentify and self-correct, fair lending violations inconnection with the products or issues selected foranalysis. Based on this evaluation

• Set the intensity of the transaction analysis byminimizing sample sizes within the guidelinesestablished in Part III and the Fair LendingSample Size Tables in the Appendix, to the extentwarranted by the strength and thoroughness ofthe compliance programs applicable to thosefocal points selected for examination

• Identify any compliance program or systemdeficiencies that merit correction or improvementand present these to management in accordancewith Part IV of these procedures.

Where an institution performs a self-evaluation orhas voluntarily disclosed the report or results of aself-test of any product or issue that is within the

scope of the examination and has been selectedfor analysis pursuant to Part I of these procedures,examiners may streamline the examination, consis-tent with agency guidance, provided the self-test orself-evaluation meets the requirements set forth inUsing Self-Tests and Self-Evaluations to Streamlinethe Examination located in the Appendix.

PART III. EXAMINATION PROCEDURES

Once the scope and intensity of the examinationhave been determined, assess the institution’s fairlending performance by applying the appropriateprocedures that follow to each of the examinationfocal points already selected.

A. Verify Accuracy of Data

Prior to any analysis and preferably before thescoping process, examiners should assess theaccuracy of the data being reviewed. Data verifi-cations should follow specific protocols (sampling,size, etc.) intended to ensure the validity of thereview. For example, where an institution’s LARdata is relied upon, examiners should generallyvalidate the accuracy of the institution’s submitteddata by selecting a sample of LAR entries andverifying that the information noted on the LAR wasreported according to instructions by comparinginformation contained in the loan file for eachsampled loan. If the LAR data are inconsistent withthe information contained in the loan files, depend-ing on the nature of the errors, examiners may notbe able to proceed with a fair lending analysis untilthe LAR data have been corrected by the institu-tion. In cases where inaccuracies impede theexamination, examiners should direct the institutionto take action to ensure data integrity (datascrubbing, monitoring, training, etc.).

Note: While the procedures refer to the use ofHMDA data, other data sources should be consid-ered, especially in the case of non-HMDA reportersor institutions that originate loans but are notrequired to report them on a LAR.

B. Documenting Overt Evidence ofDisparate Treatment

Where the scoping process or any other sourceidentifies overt evidence of disparate treatment, theexaminer should assess the nature of the policy orstatement and the extent of its impact on affectedapplicants by conducting the following analysis

Step 1. Where the indicator(s) of overt discrimina-tion are found in or based on a written policy forexample, a credit scorecard) or communication,determine and document:

a. The precise language of the apparently discrimi-natory policy or communication and the nature



of the fair lending concerns that it raises

b. The institution’s stated purpose in adopting thepolicy or communication and the identity of theperson on whose authority it was issued oradopted

c. How and when the policy or communicationwas put into effect

d. How widely the policy or communication wasapplied

e. Whether and to what extent applicants wereadversely affected by the policy orcommunication.

Step 2. Where any indicator of overt discriminationwas an oral statement or unwritten practice,determine and document:

a. The precise nature of both the statement orpractice and of the fair lending concerns thatthey raise

b. The identity of the persons making the state-ment or applying the practice and their descrip-tions of the reasons for it and the personsauthorizing or directing the use of the statementor practice

c. How and when the statement or practice wasdisseminated or put into effect

d. How widely the statement or practice wasdisseminated or applied

e. Whether and to what extent applicants wereadversely affected by the statement or practice.

Assemble findings and supporting documenta-tion for presentation to management in connectionwith Part IV of these procedures.

C. Transactional UnderwritingAnalysis—Residential andConsumer Loans

Step 1: Set Sample Size

a. For each focal point selected for this analysis,two samples will be utilized: (i) prohibited basisgroup denials and (ii) control group approvals,both identified either directly from monitoringinformation in the case of residential loanapplications or through the use of applicationdata or surrogates in the case of consumerapplications.

b. Refer to Fair Lending Sample Size Tables,Table A in the Appendix and determine the sizeof the initial sample for each focal point, basedon the number of prohibited basis groupdenials and the number of control groupapprovals by the institution during the twelvemonth (or calendar year) period of lendingactivity preceding the examination. In the event

that the number of denials and/or approvalsacted on during the preceding 12 month periodsubstantially exceeds the maximum samplesize shown in Table A, reduce the time periodfrom which that sample is selected to a shorterperiod. (In doing so, make every effort to selecta period in which the institution’s underwritingstandards are most representative of those ineffect during the full 12 month period precedingthe examination.)

c. If the number of prohibited basis group denialsor control group approvals for a given focalpoint that were acted upon during the 12 monthperiod referenced in 1.b., above, do not meetthe minimum standards set forth in the SampleSize Table, examiners need not attempt atransactional analysis for that focal point. Whereother risk factors favor analyzing such a focalpoint, consult with agency supervisory staff onpossible alternative methods of judgmentalcomparative analysis.

d. If agency policy calls for a different approach tosampling (e.g., a form of statistical analysis, amathematical formula, or an automated tool) fora limited class of institutions, examiners shouldfollow that approach.

Step 2. Determine Sample Composition.

a. To the extent the institution maintains records ofloan outcomes resulting from exceptions to itscredit underwriting standards or other policies(e.g., overrides to credit score cutoffs), requestsuch records for both approvals and denials,sorted by loan product and branch or decisioncenter, if the institution can do so. Include in theinitial sample for each focal point all exceptionsor overrides applicable to that focal point.

b. Using HMDA/LAR data or, for consumer loans,comparable loan register data to the extentavailable, choose approved and denied appli-cations based on selection criteria that willmaximize the likelihood of finding marginalapproved and denied applicants, as discussedbelow.

c. To the extent that the above factors areinapplicable or other selection criteria areunavailable or do not facilitate selection of theentire sample size of files, complete the initialsample selection by making random file selec-tions from the appropriate sample categories inthe Sample Size Table.

Step 3: Compare Approved andDenied Applications

Overview: Although a creditor’s written policies andprocedures may appear to be nondiscriminatory,lending personnel may interpret or apply policies ina discriminatory manner. In order to detect any



disparate treatment among applicants, the exam-iner should first eliminate all but ‘‘marginal transac-tions’’ (see 3.b. below) from each selected focalpoint sample. Then, a detailed profile of eachmarginal applicant’s qualifications, the level ofassistance received during the application pro-cess, the reasons for denial, the loan terms, andother information should be recorded on anApplicant Profile Spreadsheet. Once profiled, theexaminer can compare the target and controlgroups for evidence that similarly qualified appli-cants have been treated differently as to either theinstitution’s credit decision or the quality of assis-tance provided.

a. Create Applicant Profile SpreadsheetBased upon the institution’s written and/orarticulated credit standards and loan policies,identify categories of data that should berecorded for each applicant and provide a fieldfor each of these categories on a worksheet orcomputerized spreadsheet. Certain data(income, loan amount, debt, etc.) should alwaysbe included in the spreadsheet, while the otherdata selected will be tailored for each loanproduct and institution based on applicableunderwriting criteria and such issues as branchlocation and underwriter. Where credit bureauscores and/or application scores are an ele-ment of the institution’s underwriting criteria (orwhere such information is regularly recorded inloan files, whether expressly used or not),include a data field for this information in thespread sheet.In order to facilitate comparisons of the

quality of assistance provided to target andcontrol group applicants, respectively, everywork sheet should provide a ‘‘comments’’ blockappropriately labeled as the site for recordingobservations from the file or interviews regard-ing how an applicant was, or was not, assistedin overcoming credit deficiencies or otherwisequalifying for approval.

b. Complete Applicant ProfilesFrom the application files sample for each focalpoint, complete applicant profiles for selecteddenied and approved applications as follows:

• A principal goal is to identify cases wheresimilarly qualified prohibited basis and con-trol group applicants had different creditoutcomes, because the agencies have foundthat discrimination, including differences ingranting assistance during the approval pro-cess, is more likely to occur with respect toapplicants who are not either clearly qualifiedor unqualified, i.e., ‘‘marginal’’ applicants. Theexaminer-in-charge should, during the follow-ing steps, judgmentally select from the initialsample only those denied and approved

applications which constitute marginal trans-actions. (See Appendix on Identifying Mar-ginal Transactions for guidance)

• If few marginal control group applicants areidentified from the initial sample, reviewadditional files of approved control groupapplicants. This will either increase the num-ber of marginal approvals or confirm thatmarginal approvals are so infrequent that themarginal denials are unlikely to involve dis-parate treatment.

• The judgmental selection of both marginal-denied and marginal-approved applicant loanfiles should be done together, in a ‘‘back andforth’’ manner, to facilitate close matches anda 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 profilespreadsheet are extracted or noted andentered.

• While conducting the preceding step, theexaminer should simultaneously look for anddocument on the spreadsheet any evidencefound in marginal files regarding the following:

– the extent of any assistance, including bothaffirmative aid and waivers or partial waiv-ers of credit policy provisions or require-ments, that appears to have been providedto marginal-approved control group appli-cants which enabled them to overcomeone or more credit deficiencies, such asexcessive debt-to-income ratios

– the extent to which marginal-denied targetgroup applicants with similar deficiencieswere, or were not, provided similar affirma-tive aid, waivers or other forms of assis-tance.

c. Review and Compare Profiles

• For each focal point, review all marginalprofiles to determine if the underwriter fol-lowed institution lending policies in denyingapplications and whether the reason(s) fordenial were supported by facts documentedin the loan file and properly disclosed to theapplicant pursuant to Regulation B. If any (a)unexplained deviations from credit stan-dards, (b) inaccurate reasons for denial or (c)incorrect disclosures are noted, (whether in ajudgmental underwriting system, a scoredsystem or a mixed system) the examinershould obtain an explanation from the under-writer and document the response on anappropriate workpaper.

NOTE: In constructing the applicant profilesto be compared, examiners must adjust the



facts compared so that assistance, waivers,or acts of discretion are treated consistentlybetween applicants. For example, if a controlgroup applicant’s DTI ratio was lowered to42% because the institution decided to in-clude short-term overtime income, and aprohibited basis group applicant who wasdenied due to ‘‘insufficient income’’ wouldhave had his ratio drop from 46% to 41% if hisshort-term overtime income had been consid-ered, then the examiners should consider41%, not 46%, in determining the benchmark.

• For each reason for denial identified within thetarget group, rank the denied prohibitedbasis applicants, beginning with the appli-cant whose qualification(s) related to thatreason for denial were least deficient. (Thetop-ranked denied applicant in each suchranking will be referred to below as the‘‘benchmark’’ applicant.)

• Compare each marginal control groupapproval to the benchmark applicant in eachreason-for-denial ranking developed in step(b), above. If there are no approvals who areequally or less qualified, then there are noinstances of disparate treatment for theinstitution to account for. For all such approv-als that appear no better qualified than thedenied benchmark applicant

– identify the approved loan on the work-sheet or spreadsheet as an ‘‘overlapapproval’’, and

– compare that overlap approval with othermarginal prohibited basis denials in theranking to determine whether additionaloverlaps exist. If so, identify all overlappingapprovals and denials as above.

• Where the focal point involves use of a creditscoring system, the analysis for disparatetreatment is similar to the procedures set forthin (c) above, and should focus primarily onoverrides of the scoring system itself. Forguidance on this type of analysis, refer toConsidering Automated Underwriting andCredit Scoring, Part C in the Appendix.

Step 4. If there is some evidence of violations in theunderwriting process but not enough to clearlyestablish the existence of a pattern or practice, theexaminer should expand the sample as necessaryto determine whether a pattern or practice does ordoes not exist.

Step 5. Discuss all findings resulting from theabove comparisons with management and docu-ment both the findings and all conversations on an

appropriate worksheet.

D. Analyzing Potential Disparitiesin Pricing and Other Termsand Conditions

Depending on the intensity of the examination andthe size of the borrower population to be reviewed,the analysis of decisions on pricing and other termsand conditions may involve a comparative filereview, statistical analysis, a combination of thetwo, or other specialized technique used by anagency. Each examination process assesses aninstitution’s credit-decision standards and whetherdecisions on pricing and other terms and condi-tions are applied to borrowers without regard to aprohibited basis.

The procedures below encompass the examina-tion steps for a comparative file review. Examinersshould consult their own agency’s procedures fordetailed guidance where appropriate. For ex-ample, when file reviews are undertaken in con-junction with statistical analysis, the guidance onspecific sample sizes referenced below may notapply.

Step 1: Determine Sample Selection

Examiners may review data in its entirety or restricttheir analysis to a sample depending on theexamination approach used and the quality of theinstitution’s compliance management system. TheFair Lending Sample Size Tables in the Appendixprovide general guidance about appropriatesample sizes. Generally, the sample size should bebased on the number of prohibited basis groupand control group originations for each focal pointselected during the 12 months preceding theexamination and the outcome of the compliancemanagement system analysis conducted in Part II.When possible, examiners should request specificloan files in advance and request that the institutionhave them available for review at the start of theexamination.

Step 2: Determine Sample Composition andCreate Applicant Profiles

Examiners should tailor their sample and subse-quent analysis to the specific factors that theinstitution considers when determining its pricing,terms, and conditions. For example, while deci-sions on pricing, and other terms and conditionsare part of an institution’s underwriting process,general underwriting criteria should not be used inthe analysis if they are not relevant to the term orcondition to be reviewed. Additionally, consider-ation should be limited to factors which examiners



determine to be legitimate.

a. While the period for review should be 12-months, prohibited basis group and controlgroup borrowers should be grouped andreviewed around a range of dates during whichthe institution’s practices for the term or condi-tion being reviewed were the same. Generally,examiners should use the loan origination dateor the loan application date.

b. Identify data to be analyzed for each focal pointto be reviewed and record this information foreach borrower on a spreadsheet to ensure avalid comparison regarding terms and condi-tions. For example, in certain cases, an institu-tion may offer slightly differentiated productswith significant pricing implications to borrow-ers. In these cases, it may be appropriate togroup these procedures together for the pur-poses of evaluation.

Step 3: Review Terms and Conditions; Comparewith Borrower Outcomes

a. Review all loan terms and conditions (rates,points, fees, maturity variations, LTVs, collateralrequirements, etc.) with special attention tothose which are left, in whole or in part, to thediscretion of loan officers or underwriters. Foreach such term or condition, identify (a) anyprohibited basis group borrowers in the samplewho appear to have been treated unfavorablywith respect to that term or condition and (b)any control group borrowers who appear tohave been treated favorably with respect to thatterm or condition. The examiner’s analysisshould be thoroughly documented in the work-papers.

b. Identify from the sample universe any controlgroup borrowers who appear to have beentreated more favorably than one or more of theabove-identified prohibited basis group borrow-ers and who have pricing or creditworthinessfactors (under the institution’s standards) thatare equal to or less favorable than the prohib-ited basis group borrowers.

c. Obtain explanations from the appropriate loanofficer or other employee for any differencesthat exist and reanalyze the sample for evi-dence of discrimination.

d. If there is some evidence of violations in theimposition of terms and conditions but notenough to clearly establish the existence of apattern or practice, the examiner should expandthe sample as necessary to determine whethera pattern or practice does or does not exist.

e. Discuss differences in comparable loans withthe institution’s management and document allconversations on an appropriate worksheet. For

additional guidance on evaluating manage-ment’s responses, refer to Part A,1–5, Evaluat-ing Responses to Evidence of Disparate Treat-ment in the Appendix.

E. Steering Analysis

An institution that offers a variety of lendingproducts or product features, either through onechannel or through multiple channels, may benefitconsumers by offering greater choices and meet-ing the diverse needs of applicants. Greaterproduct offerings and multiple channels, however,may also create a fair lending risk that applicantswill be illegally steered to certain choices based onprohibited characteristics.

Several examples illustrate potential fair lendingrisk:

• An institution that offers different lending prod-ucts based on credit risk levels may presentopportunities for loan officers or brokers toillegally steer applicants to the higher-risk prod-ucts

• An institution that offers nontraditional loan prod-ucts or loan products with potentially onerousterms (such as prepayment penalties) maypresent opportunities for loan officers or brokersto illegally steer applicants to certain products orfeatures

• An institution that offers prime or sub-primeproducts through different channels may presentopportunities for applicants to be illegally steeredto the sub-prime channel

The distinction between guiding consumerstoward a specific product or feature and illegalsteering centers on whether the institution did so ona prohibited basis, rather than based on anapplicant’s needs or other legitimate factors. It isnot necessary to demonstrate financial harm to agroup that has been ‘‘steered.’’ It is enough todemonstrate that action was taken on a prohibitedbasis regardless of the ultimate financial outcome.If the scoping analysis reveals the presence of oneor more risk factors S1 through S8 for any selectedfocal point, consult with agency supervisory staffabout conducting a steering analysis as describedbelow.

Step 1. Clarify what options are available toapplicants.

Through interviews with appropriate personnel ofthe institution and review of policy manuals,procedure guidelines and other directives, obtainand verify the following information for eachproduct-alternative product pairing or groupingidentified above:

a. All underwriting criteria for the product or



feature and their alternatives that are offered bythe institution or by a subsidiary or affiliate.Examples of products may include statedincome, negative amortization and optionsARMs. Examples of terms and features includeprepayment penalties and escrow require-ments. The distinction between a product, term,and feature may vary institution to institution.For example, some institutions may consider‘‘stated income’’ a feature, whiles others mayconsider that a distinct product.

b. Pricing or other costs applicable to the productand the alternative product(s), including inter-est rates, points, and all fees.

Step 2: Document the policies, conditions orcriteria that have been adopted by the institution fordetermining how referrals are to be made andchoices presented to applicants.

a. Obtain not only information regarding the prod-uct or feature offered by the institution andalternatives offered by subsidiaries/affiliates,but also information on alternatives offeredsolely by the institution itself.

b. Obtain any information regarding a subsidiaryof the institution directly from that entity, butseek information regarding an affiliate or hold-ing company subsidiary only from the institutionitself.

c. Obtain all appropriate documentation and pro-vide a written summary of all discussions withloan personnel and managers.

d. Obtain documentation and/or employee esti-mates as to the volume of referrals made fromor to the institution, for each product, during arelevant time period.

e. Resolve to the extent possible any discrepan-cies between information found in the institu-tion’s documents and information obtained indiscussions with loan personnel and managersby conducting appropriate follow-up interviews.

f. Identify any policies and procedures estab-lished by the institution and/or the subsidiary oraffiliate for (i) referring a person who applies tothe institution, but does not meet its criteria, toanother internal lending channel, subsidiary oraffiliate; (ii) offering one or more alternatives to aperson who applies to the institution for aspecific product or feature, but does not meetits criteria; or (iii) referring a person who appliesto a subsidiary or affiliate for its product, butwho appears qualified for a loan from theinstitution, to the institution; or referring a personwho applies through one internal lending chan-nel for a product, but who appears to bequalified for a loan through another lendingchannel to that particular lending channel.

g. Determine whether loan personnel are encour-aged, through financial incentives or otherwise,to make referrals, either from the institution to asubsidiary/affiliate or vice versa. Similarly, de-termine whether the institution provides finan-cial incentives related to products and features.

Step 3. Determine how referral decisions are madeand documented within the institution.

Determine how a referral is made to anotherinternal lending channel, subsidiary, or affiliate.Determine the reason for referral and how it isdocumented.

Step 4. Determine to what extent individual loanpersonnel are able to exercise personal discretionin deciding what loan products or other creditalternatives will be made available to a givenapplicant.

Step 5. Determine whether the institution’s statedpolicies, conditions or criteria in fact are adhered toby individual decision makers. If not, does it appearthat different policies or practices are actually ineffect?

Enter data from the prohibited basis group sampleon the spread sheets and determine whether theinstitution is, in fact, applying its criteria as stated.For example, if one announced criterion for receiv-ing a ‘‘more favorable’’ prime mortgage loan was aback end debt ratio of no more than 38%, reviewthe spread sheets to determine whether that criteriawas adhered to. If the institution’s actual treatmentof prohibited basis group applicants appears todiffer from its stated criteria, document suchdifferences for subsequent discussion with man-agement.

Step 6. To the extent that individual loan personnelhave any discretion in deciding what products andfeatures to offer applicants, conduct a comparativeanalysis to determine whether that discretion hasbeen exercised in a nondiscriminatory manner.

Compare the institution’s or subsidiary/affiliate’streatment of control group and prohibited basisgroup applicants by adapting the ‘‘benchmark’’and ‘‘overlap’’ technique discussed in Part III,Section C. of these procedures. For purposes ofthis Steering Analysis, that technique should beconducted as follows:

a. For each focal point to be analyzed, select asample of prohibited basis group applicantswho received ‘‘less favorable’’ treatment (e.g.,referral to a finance company or a subprimemortgage subsidiary or counteroffers of lessfavorable product alternatives).NOTE: In selecting the sample, follow theguidance of Fair Lending Sample Size Tables,Table B in the Appendix and select ‘‘marginal



applicants’’ as instructed in Part III, SectionC, above.

b. Prepare a spread sheet for the sample whichcontains data entry categories for those under-writing and/or referral criteria that the institutionidentified in Step 1.b as used in reachingunderwriting and referral decisions between thepairs of products.

c. Review the ‘‘less favorably’’ treated prohibitedbasis group sample and rank this sample fromleast qualified to most qualified.

d. From the sample, identify the best qualifiedprohibited basis group applicant, based on thecriteria identified for the control group, above.This applicant will be the ‘‘benchmark’’ appli-cant. Rank order the remaining applicants frombest to least qualified.

e. Select a sample of control group applicants.Identify those who were treated ‘‘more favor-ably’’ with respect to the same product-alternative product pair as the prohibited basisgroup. (Again refer to the Sample Size Table Band marginal applicant processes noted abovein selecting the sample.)

f. Compare the qualifications of the benchmarkapplicant with those of the control groupapplicants, beginning with the least qualifiedmember of that sample. Any control groupapplicant who appears less qualified than thebenchmark applicant should be identified onthe spreadsheet as a ‘‘control group overlap’’.

g. Compare all control group overlaps with other,less qualified prohibited basis group applicantsto determine whether additional overlaps exist

h. Document all overlaps as possible disparities intreatment. Discuss all overlaps and relatedfindings (e.g., any differences between statedand actual underwriting and/or referral criteria)with management, documenting all suchconversations.

Step 7. Examiners should consult with their agen-cy’s supervisory staff if they see a need to contactcontrol group or prohibited basis group applicantsto substantiate the steering analysis.

F. Transactional UnderwritingAnalysis—Commercial Loans

Overview: Unlike consumer credit, where loanproducts and prices are generally homogenousand underwriting involves the evaluation of alimited number of credit variables, commercialloans are generally unique and underwriting meth-ods and loan pricing may vary depending on alarge number of credit variables. The additionalcredit analysis that is involved in underwriting

commercial credit products will entail additionalcomplexity in the sampling and discriminationanalysis process. Although ECOA prohibits discrimi-nation in all commercial credit activities of acovered institution, the agencies recognize thatsmall businesses (sole proprietorships, partner-ships, and small, closely-held corporations) mayhave less experience in borrowing. Small busi-nesses may have fewer borrowing options, whichmay make them more vulnerable to discrimination.Therefore, in implementing these procedures, ex-aminations should generally be focused on smallbusiness credit (commercial applicants that hadgross revenues of $1,000,000 or less in thepreceding fiscal year), absent some evidence thata focus on other commercial products would bemore appropriate.

Step 1: Understand Commercial Loan Policies

For the commercial product line selected foranalysis, the examiner should first review creditpolicy guidelines and interview appropriate com-mercial loan managers and officers to obtainwritten and articulated standards used by theinstitution in evaluating commercial loanapplications.

NOTE: Examiners should consult their ownagencies for guidance on when a comparativeanalysis or statistical analysis is appropriate, andfollow their agencies procedures for conductingsuch a review/analysis.

Step 2: Conduct Comparative File Review

a. Select all (or a maximum of ten) deniedapplications that were acted on during the threemonth period prior to the examination. To theextent feasible, include denied applicationsfrom businesses that are (i) located in minorityand/or integrated geographies or (ii) appear tobe owned by women or minority group mem-bers, based on the names of the principalsshown on applications or related documents.(In the case of institutions that do a significantvolume of commercial lending, consider review-ing more than ten applications.)

b. For each of the denied commercial applicationsselected, record specific information from loanfiles and through interviews with the appropriateloan officer(s), about the principal owners, thepurpose of the loan, and the specific, pertinentfinancial information about the commercialenterprise (including type of business—retail,manufacturing, service, etc.), that was used bythe institution to evaluate the credit request.Maintenance or use of data that identifiesprohibited basis characteristics of those in-volved with the business (either in approved ordenied loan applications) should be evaluatedas a potential violation of Regulation B.



c. Select ten approved loans that appear to besimilar with regard to business type, purpose ofloan, loan amount, loan terms, and type ofcollateral, as the denied loans sampled. Forexample, if the denied loan sample includesapplications for lines of credit to cover inventorypurchases for retail businesses, the examinershould select approved applications for lines ofcredit from retail businesses.

d. For each approved commercial loan applica-tion selected, obtain and record informationparallel to that obtained for denied applications.

e. The examiner should first compare the creditcriteria considered in the credit process foreach of the approved and denied applicationsto established underwriting standards, ratherthan comparing files directly.

f. The examiner should identify any deviationsfrom credit standards for both approved anddenied credit requests, and differences in loanterms granted for approved credit requests.

g. The examiner should discuss each instancewhere deviations from credit standards andterms were noted, but were not explained in thefile, with the commercial credit underwriter.Each discussion should be documented.

Step 3: Conduct Targeted Sampling

a. If deviations from credit standards or pricingare not sufficiently explained by other factorseither documented in the credit file or thecommercial underwriter was not able to providea reasonable explanation, the examiner shoulddetermine if deviations were detrimental to anyprotected classes of applicants.

b. The examiner should consider employing thesame techniques for determining race andgender characteristics of commercial appli-cants as those outlined in the consumer loansampling procedures.

c. If it is determined that there are members of oneor more prohibited basis groups among com-mercial credit requests that were not underwrit-ten according to established standards orreceived less favorable terms, the examinershould select additional commercial loans,where applicants are members of the sameprohibited basis group and select similarlysituated control group credit requests in orderto determine whether there is a pattern orpractice of discrimination. These additional filesshould be selected based on the specificapplicant circumstance(s) that appeared tohave been viewed differently by lending person-nel on a prohibited basis.

d. If there are not enough similarly situatedapplicants for comparison in the original sample

period to draw a reasonable conclusion, theexaminer should expand the sample period.The expanded sample period should generallynot go beyond the date of the prior examination.

Sampling Guidelines

a. Generally, the task of selecting an appropriateexpanded sample of prohibited basis andcontrol group applications for commercial loanswill require examiner judgment. The examinershould select a sample that is large enough tobe able to draw a reasonable conclusion.

b. The examiner should first select from theapplications that were acted on during the initialsample period, but were not included in theinitial sample, and select applications from priortime periods as necessary.

c. The expanded sample should include bothapproved and denied, prohibited basis andcontrol group applications, where similar creditwas requested by similar enterprises for similarpurposes.

G. Analysis of PotentialDiscriminatory ‘‘Redlining’’

Overview: For purposes of this analysis, traditional‘‘redlining’’ is a form of illegal disparate treatment inwhich an institution provides unequal access tocredit, or unequal terms of credit, because of therace, color, national origin, or other prohibitedcharacteristic(s) of the residents of the area inwhich the credit seeker resides or will reside or inwhich the residential property to be mortgaged islocated. Redlining may also include ‘‘reverseredlining,’’ the practice of targeting certain borrow-ers or areas with less advantageous products orservices based on prohibited characteristics.

The redlining analysis may be applied to deter-mine whether, on a prohibited basis:

• an institution fails or refuses to extend credit incertain areas;

• an institution targets certain borrowers or certainareas with less advantageous products

• an institution makes loans in such an area but ata restricted level or upon less-favorable terms orconditions as compared to contrasting areas; or

• an institution omits or excludes such an area fromefforts to market residential loans or solicitcustomers for residential credit.

This guidance focuses on possible discrimina-tion based on race or national origin. The sameanalysis could be adapted to evaluate relativeaccess to credit for areas of geographical concen-tration on other prohibited bases—for example,age.



NOTE: It is true that neither the Equal CreditOpportunity Act (ECOA) nor the Fair Housing Act(FHAct) specifically uses the term ‘‘redlining.’’However, federal courts as well as agencies thathave enforcement responsibilities for the FHAct,have interpreted it as prohibiting institutions fromhaving different marketing or lending practicesfor certain geographic areas, compared toothers, where the purpose or effect of suchdifferences would be to discriminate on aprohibited basis. Similarly, the ECOA wouldprohibit treating applicants for credit differentlyon the basis of differences in the racial or ethniccomposition of their respective neighborhoods.

Like other forms of disparate treatment, redliningcan be proven by overt or comparative evidence. Ifany written or oral policy or statement of theinstitution (see risk factors R6–10 in Part I, above)suggests that the institution links the racial ornational origin character of an area with any aspectof access to or terms of credit, the examinersshould refer to the guidance in Section B of this PartIII, on documenting and evaluating overt evidenceof discrimination.

Overt evidence includes not only explicit state-ments, but also any geographical terms used bythe institution that would, to a reasonable personfamiliar with the community in question, connote aspecific racial or national origin character. Forexample, if the principal information conveyed bythe phrase ‘‘north of 110th Street’’ is that theindicated area is principally occupied by Hispan-ics, then a policy of not making credit available‘‘north of 110th Street’’ is overt evidence of potentialredlining on the basis of national origin.

Overt evidence is relatively uncommon. Conse-quently, the redlining analysis usually will focus oncomparative evidence (similar to analyses of pos-sible disparate treatment of individual customers)in which the institution’s treatment of areas withcontrasting racial or national origin characters iscompared.

When the scoping process (including consulta-tion within an agency as called for by agencyprocedures) indicates that a redlining analysisshould be initiated, examiners should complete thefollowing steps of comparative analysis:

1. Identify and delineate any areas within theinstitution’s CRA assessment area and reason-ably expected market area for residential prod-ucts that have a racial or national origin charac-ter;

2. Determine whether any minority area identifiedin Step 1 appears to be excluded, under-served,selectively excluded from marketing efforts, or

otherwise less-favorably treated in any way bythe institution;

3. Identify and delineate any areas within theinstitution’s CRA assessment area and reason-ably expected market area for residential prod-ucts that are non-minority in character and thatthe institution appears to treat more favorably;

4. Identify the location of any minority areaslocated just outside the institution’s CRA assess-ment area and market area for residentialproducts, such that the institution may bepurposely avoiding such areas.

5. Obtain the institution’s explanation for the appar-ent difference in treatment between the areasand evaluate whether it is credible and reason-able; and

6. Obtain and evaluate other information that maysupport or contradict interpreting identified dis-parities to be the result of intentional illegaldiscrimination.

These steps are discussed in detail below.

Using Information Obtainedduring Scoping

Although the six tasks listed are presented belowas examination steps in the order given above,examiners should recognize that a different ordermay be preferable in any given examination. Forexample, the institution’s explanation (Step 5) forone of the policies or patterns in question mayalready be documented in the CRA materialsreviewed (Step 1) and the CRA examiners mayalready have verified it, which may be sufficient forpurposes of the redlining analysis.

As another example, as part of the scopingprocess, the examiners may have reviewed ananalysis of the geographic distribution of theinstitution’s loan originations with respect to theracial and national origin composition of censustracts within its CRA assessment or residentialmarket area. Such analysis might have docu-mented the existence of significant discrepanciesbetween areas, by degree of minority concentra-tion, in loans originated (risk factor R1), approval/denial rates (risk factor R2) and/or rates of denialsbecause of insufficient collateral (risk factor R3). Insuch a situation in which the scoping process hasproduced a reliable factual record, the examinerscould begin with Step 5 (obtaining an explanation)of the redlining analysis below.

In contrast, when the scoping process onlyyields partial or questionable information, or whenthe risk factors on which the redlining analysis isbased on complaints or allegations against the



institution, Steps 1–4 must be addressed.

Comparative Analysis for Redlining

Step 1: Identify and delineate any areas within theinstitution’s CRA assessment area and reasonablyexpected market area for residential products thatare of a racial or national origin minority character.

NOTE: The CRA assessment area can be aconvenient unit for redlining analysis becauseinformation about it typically already is in hand.However, the CRA assessment area may be toolimited. The redlining analysis focuses on theinstitution’s decisions about how much access tocredit to provide to different geographical areas.The areas for which those decisions can best becompared are areas where the institution actuallymarketed and provided credit and where it couldreasonably be expected to have marketed andprovided credit. Some of those areas might bebeyond or otherwise different from the CRAassessment area.

If there are no areas identifiable for their racial ornational origin minority character within the institu-tion’s CRA assessment area or reasonablyexpected market area for residential products, aredlining analysis is not appropriate. (If there is asubstantial but dispersed minority population,potential disparate treatment can be evaluated bya routine comparative file review of applicants.)

This step may have been substantially com-pleted during scoping, but unresolved matters mayremain. (For example, several community spokes-persons may allege that the institution is redlining,but disagree in defining the area). The examinersshould:

a. Describe as precisely as possible why aspecific area is recognized in the community(perceptions of residents, etc.) and/or is objec-tively identifiable (based on census or otherdata) as having a particular racial or nationalorigin minority character.

• The most obvious identifier is the predomi-nant race or national origin of the residents ofthe area. Examiners should document thepercentages of racial or national origin minori-ties residing within the census tracts thatmake up the area. Analyzing racial andnational origin concentrations in quartiles(such as 0 to ≤25%, >25% to ≤50%, >50% to≤75%, and >75%) or based on majorityconcentration (0 to ≤50%, and >50%) may behelpful. However, examiners should bear inmind that it is illegal for the institution toconsider a prohibited factor in any way. Forexample, an area or neighborhood may onlyhave a minority population of 20%, but if the

area’s concentration appears related to lend-ing practices, it would be appropriate to usethat area’s level of concentration in theanalysis. Contacts with community groupscan be helpful to learn whether there are suchsubtle features of racial or ethnic characterwithin a particular neighborhood.

• Geographical groupings that are convenientfor CRA may obscure racial patterns. Forexample, an underserved, low-income, pre-dominantly minority neighborhood that lieswithin a larger low-income area that primarilyconsisted of non-minority neighborhoods, mayseem adequately served when the entirelow-income area is analyzed as a unit.However, a racial pattern of underservice tominority areas might be revealed if thelow-income minority neighborhood shared aborder with an underserved, middle-income,minority area and those two minority areaswere grouped together for purposes ofanalysis.

b. Describe how the racial or national origincharacter changes across the suspected redlin-ing area’s various boundaries.

c. Document or estimate the demand for credit,within the minority area. This may include theapplicable demographics of the area, includingthe percentage of homeowners, the medianhouse value, median family income, or thenumber of small businesses, etc. Review theinstitution’s non-originated loan applicationsfrom the suspected redlined areas. If available,review aggregate institution data for loansoriginated and applications received from thesuspected redlined areas. Community contactsmay also be helpful in determining the demandfor such credit. If the minority area does nothave a significant amount of demand for suchcredit, the area is not appropriate for a redlininganalysis.

Step 2: Determine whether any minority areaidentified in Step 1 is excluded, under-served,selectively excluded from marketing efforts, orotherwise less-favorably treated in any way by theinstitution.

The examiners should begin with the risk factorsidentified during the scoping process. The unfavor-able treatment may have been substantially docu-mented during scoping and needs only to befinished in this step. If not, this step will verify andmeasure the extent to which HMDA data show theminority areas identified in Step 1 to be under-served and/or how the institution’s explicit policiestreat them less favorably.

a. Review prior CRA lending test analyses to learnwhether they have identified any excluded or



otherwise under-served areas or other signifi-cant geographical disparities in the institution’slending. Determine whether any of those are theminority areas identified in Step 1.

b. Learn from the institution itself whether, as amatter of policy, it treats any separate or distinctgeographical areas within its marketing orservice area differently from other areas. Thismay have been done completely or partiallyduring scoping analysis related to risk factorsR5–R9. The differences in treatment can be inmarketing, products offered, branch operations(including the services provided and the hoursof operation), appraisal practices, applicationprocessing, approval requirements, pricing,loan conditions, evaluation of collateral, or anyother policy or practice materially related toaccess to credit. Determine whether any ofthose less-favored areas are the minority areasidentified in Step 1.

c. Obtain from the institution: (i) its reasons forsuch differences in policy, (ii) how the differ-ences are implemented, and (iii) any specificconditions that must exist in an area for it toreceive the particular treatment (more favorableor less favorable) that the institution hasindicated.

Step 3: Identify and delineate any areas within theinstitution’s CRA assessment area and reasonablyexpected market area for residential products thatare non-minority in character and that the institutionappears to treat more favorably.

To the extent not already completed during scoping:

a. Document the percentages of control groupand of racial or national origin minoritiesresiding within the census tract(s) that com-prise(s) the non-minority area

b. Document the nature of the housing stock in thearea

c. Describe, to the extent known, how the institu-tion’s practices, policies, or its rate of lendingchange from less- to more-favorable as oneleaves the minority area at its various bound-aries (Examiners should be particularly atten-tive to instances in which the boundariesbetween favored and disfavored areas deviatefrom boundaries the institution would reason-ably be expected to follow, such as politicalboundaries or transportation barriers)

d. Examiners should particularly consider whether,within a large area that is composed predomi-nantly of racial or national origin minorityhouseholds, there are enclaves that are pre-dominantly non-minority or whether, along thearea’s borders, there are irregularities wherethe non-minority group is predominant. As part

of the overall comparison, examiners shoulddetermine whether credit access within thosesmall non-minority areas differs from creditaccess in the larger minority area.

Step 4: Identify the location of any minority areaslocated just outside the institution’s CRA assess-ment area and market area for residential products,such that the institution may be purposely avoidingsuch areas.

Review the analysis from prior CRA examinations ofwhether the assessment area appears to havebeen influenced by prohibited factors. If there areminority areas that the institution excluded from theassessment area improperly, consider whetherthey ought to be included in the redlining analysis.Analyze the institution’s reasonably expected mar-ket area in the same manner.

Step 5: Obtain the institution’s explanation for theapparent difference in treatment between the areasand evaluate whether it is credible and reasonable.

This step completes the comparative analysis bysoliciting from the institution any additional informa-tion not yet considered by the examiners that mightshow that there is a nondiscriminatory explanationfor the apparent disparate treatment based on raceor ethnicity.

For each matter that requires explanation, pro-vide the institution full information about whatdifferences appear to exist in how it treats minorityand non-minority areas, and how the examinersreached their preliminary conclusions at this stageof the analysis.

a. Evaluate whether the conditions identified bythe institution in Step 2 as justifying morefavorable treatment pursuant to institutionalpolicy existed in minority neighborhoods thatdid not receive the favorable treatment calledfor by institutional policy. If there are minorityareas for which those conditions existed, askthe institution to explain why the areas weretreated differently despite the similar conditions.

b. Evaluate whether the conditions identified bythe institution in Step 2 as justifying lessfavorable treatment pursuant to institutionalpolicy existed in non-minority neighborhoodsthat received favorable treatment nevertheless.If there are non-minority areas for which thoseconditions existed, ask the institution to explainwhy those areas were treated differently, despitethe similar conditions.

c. Obtain explanations from the institution for anyapparent differences in treatment observed bythe examiners but not called for by the institu-tion’s policies

• If the institution’s explanation cites any spe-



cific conditions in the non-minority area(s) tojustify more favorable treatment, determinewhether the minority area(s) identified in Step1 satisfied those conditions. If there areminority areas for which those conditionsexisted, ask the institution to explain why theareas were treated differently despite thesimilar conditions

• If the institution’s explanation cites any spe-cific conditions in the minority area(s) to justifyless favorable treatment, determine whetherthe non-minority area(s) had those conditions.If there are non-minority areas for which thoseconditions existed, ask the institution toexplain why those areas were treated differ-ently, despite the similar conditions.

d. Evaluate the institution’s responses by applyingappropriate principles selected from the Appen-dix on Evaluating Responses to Evidence ofDisparate Treatment.

Step 6: Obtain and evaluate specific types of otherinformation that may support or contradict a findingof redlining.

As a legal matter, discriminatory intent can beinferred simply from the lack of a legitimateexplanation for clearly less-favorable treatment ofracial or national origin minorities. Nevertheless, ifthe institution’s explanations do not adequatelyaccount for a documented difference in treatment,the examiners should consider additional informa-tion that might support or contradict the interpreta-tion that the difference in treatment constitutedredlining.

a. Comparative file review. If there was a compara-tive file review conducted in conjunction withthe redlining examination, review the results; or,if it is necessary and feasible to do so to clarifywhat appears to be discriminatory redlining,compare denied applications from within thesuspected redlining area to approved applica-tions from the contrasting area.

• Learn whether there were any denials of fullyqualified applicants from the suspected redlin-ing area. If so, that may support the view thatthe institution was avoiding doing business inthe area.

• Learn whether the file review identifiedinstances of illegal disparate treatment againstapplicants of the same race or national originas the suspected redlining area. If so, thatmay support the view that the institution wasavoiding doing business with applicants ofthat group, such as the residents of thesuspected redlining area. Learn whether anysuch identified victims applied for transac-tions in the suspected redlining area.

• If there are instances of either of the above,identify denied non-minority residents, if any,of the suspected redlining area and reviewtheir application files to learn whether theyappear to have been treated in an irregular orless favorable way. If so, that may support theview that the character of the area rather thanof the applicants themselves appears to haveinfluenced the credit decisions.

• Review withdrawn and incomplete applica-tions for the suspected redlining area, if thosecan readily be identified from the HMDA–LAR, and learn whether there are reliableindications that the institution discouragedthose applicants from applying. If so, thatmay support the view that the institution wasavoiding conducting business in the area andmay constitute evidence of a violation ofSection 202.4(b) of Regulation B.

Conversely, if the comparisons of individual trans-actions show that the institution treated minorityand non-minority applicants within and outside thesuspected redlining area similarly, that tends tocontradict the conclusion that the institution avoidedthe areas because it had minority residents.

b. Interviews of third parties. The perspectives ofthird parties will have been taken into accountto some degree through the review of availablematerials during scoping. Later in the examina-tion, in appropriate circumstances, informationfrom third parties may help determine whetherthe institution’s apparent differences in treat-ment of minority and non-minority areas consti-tute redlining.

• Identify persons (such as housing or creditcounselors, home improvement contractors,or real estate and mortgage brokers) whomay have extensive experience dealing withcredit applicants from the suspected redlinedarea.

• After obtaining appropriate authorization andguidance from your agency, interview thosepersons to learn of their first-hand experi-ences related to:– oral statements or written indications by aninstitution’s representatives that loan appli-cations from a suspected redlined areawere discouraged;

– whether the institution treated applicantsfrom the suspected redlining area as calledfor in its own procedures (as the examinersunderstand them) and/or whether it treatedthem similarly to applicants from non-minority areas (as the examiners are famil-iar with those transactions);

– any unusual delays or irregularities in loanprocessing for transactions in the sus-



pected redlining area;– differences in the institution’s pricing, loanconditions, property valuation practices,etc., in the suspected redlining area com-pared to contrasting areas.

Also, learn from the third parties the namesof any consumers they described as havingexperienced the questionable behaviorrecounted by the third party, and considercontacting those consumers.If third parties witnessed specific conduct

by the institution that indicates the institutionwanted to avoid business from the area orprohibited basis group in question, this wouldtend to support interpreting the difference intreatment as intended. Conversely, if thirdparties report proper treatment or positiveactions toward such area or prohibited basisgroup, this would tend to contradict the viewthat the institution intended to discriminate.

c. Marketing. A clear exclusion of the suspectedredlining area from the institution’s marketing ofresidential loan products supports the view thatthe institution did not want to do business in thearea. Marketing decisions are affirmative acts toinclude or exclude areas. Disparities in market-ing between two areas may reveal that theinstitution prefers one to the other. If sufficientlystark and supported by other evidence, adifference in marketing to racially differentareas could itself be treated as a redliningviolation of the Fair Housing Act. Even belowthat level of difference, marketing patterns cansupport or contradict the view that disparities inlending practices were intentional.

• Review materials that show how the institutionhas marketed in the suspected redlined areaand in non-minority areas. Begin with avail-able CRA materials and discuss the issueswith CRA examiners, then review other mate-rials as appropriate. The materials may in-clude, for example, the institution’s guidancefor the geographical distribution of pre-approved solicitations for credit cards orhome equity lines of credit, advertisements inlocal media or business or telephone directo-ries, business development calls to realestate brokers, and calls by telemarketers.

d. Peer performance. Market share analysis andother comparisons to competitors are insuffi-cient by themselves to prove that an institutionengaged in illegal redlining. By the same token,an institution cannot justify its own failure tomarket or lend in an area by citing otherinstitutions’ failures to lend or market there.However, an institution’s inactivity in an

underserved area where its acknowledged

competitors are active would tend to supportthe interpretation that it intends to avoid doingbusiness in the area. Conversely, if it is asactive as other institutions that would suggestthat 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 suspectedredlining area by competitors. Check anypublic evaluations of similarly situated com-petitors obtained by the CRA examiners aspart of evaluating the performance context orobtain such evaluations independently.

e. Institution’s record. Request from the institutioninformation about its overall record of serving orattempting to serve the racial or national originminority group with which the suspected redlin-ing area is identified. The record may reveal anintent to serve that group that tends to contra-dict the view that the institution intends todiscriminate against the group.

NOTE: For any information that supports inter-preting the situation as illegal discrimination, obtainand evaluate an explanation from the institution ascalled for in Part IV. If the institution’s explanation isthat the disparate results are the consequence of aspecific, neutral policy or practice that the institu-tion applies broadly, such as not making loans onhomes below a certain value, review the guidancein the Special Analyses section of the Appendixunder Disproportionate Adverse Impact Violationsand consult agency managers.

H. Analysis of PotentialDiscriminatory Marketing Practices

When scoping identifies significant risk factors(M1–M7) related to marketing, examiners shouldconsult their agency’s supervisory staff and expertsabout a possible marketing discrimination analysis.If the supervisory staff agrees to proceed, theexaminers should collect information as follows:

Step 1: Identify the institution’s marketing initiatives.

a. Pre-approved solicitations

• Determine whether the institution sends outpre-approved solicitations:

– for home purchase loans

– for home improvement loans

– for refinance loans

• Determine how the institution selects recipi-ents for such solicitations

– learn from the institution its criteria for suchselections

– review any guidance or other informationthe institution provided credit reporting



companies or other companies that supplysuch lists

b. Media Usage

• Determine in which newspapers and broad-cast media the institution advertises.

– identify any racial or national origin identityassociated with those media

– determine whether those media focus ongeographical communities of a particularracial or national origin character

• Learn the institution’s strategies for geo-graphic and demographic distribution ofadvertisements.

• Obtain and review copies of the institution’sprinted advertising and promotional materials.

• Determine what criteria the institution commu-nicates to media about what is an attractivecustomer or an attractive area to cultivatebusiness.

• Determine whether advertising and marketingare the same to racial and national originminority areas as compared to non-minorityareas.

c. Self-produced promotional materials

• Learn how the institution distributes its ownpromotional materials, both methods andgeographical distribution

• Learn what the institution regards as thetarget audience(s) for those materials

d. Realtors, brokers, contractors, and otherintermediaries

• Determine whether the institution solicits busi-ness from specific realtors, brokers, homeimprovement contractors, and other conduits.

– learn how the institution decides whichintermediaries it will solicit

– identify the parties contacted and deter-mine the distribution between minority andnon-minority areas

– obtain and review the types of informationthe institution distributes to intermediaries

– determine how often the institution contactsintermediaries

• Determine what criteria the institution commu-nicates to intermediaries about the type ofcustomers it seeks or the nature of thegeographic areas in which it wishes to dobusiness.

e. Telemarketers or predictive dialer programs

• Learn how the institution identifies whichconsumers to contact, and whether the insti-tution sets any parameters on how the list of

consumers is compiled.

Step 2: Determine whether the institution’s activitiesshow a significantly lower level of marketing efforttoward minority areas or toward media or interme-diaries that tend to reach minority areas.

Step 3: If there is any such disparity, document theinstitution’s explanation for it.

For additional guidance, refer to Part C of theSpecial Analyses section in the Appendix.

I. Credit Scoring

If the scoping process results in the selection of afocal point that includes a credit or mortgagescored loan product, refer to the ConsideringAutomated Underwriting and Credit Scoring sec-tion of the Appendix.

If the institution utilizes a credit scoring programwhich scores age for any loan product selected forreview in the scoping stage, either as the soleunderwriting determinant or only as a guide tomaking loan decisions, refer to Part E of theConsidering Automated Underwriting and CreditScoring section of the Appendix.

J. Disparate Impact Issues

These procedures have thus far focused primarilyon examining comparative evidence for possibleunlawful disparate treatment. Disparate impact hasbeen described briefly in the Introduction. When-ever an examiner believes that a particular policy orpractice of an institution appears to have adisparate impact on a prohibited basis, the exam-iner should refer to Part A of the Special Analysessection of the Appendix or consult with agencysupervisory staff for further guidance.

PART IV. OBTAINING ANDEVALUATING RESPONSESFROM THE INSTITUTION ANDCONCLUDING THE EXAMINATION

Step 1. Present to the institution’s management forexplanation:

a. Any overt evidence of disparate treatment on aprohibited basis.

b. All instances of apparent disparate treatment(e.g., overlaps) in either the underwriting ofloans or in loan prices, terms, or conditions.

c. All instances of apparent disparate treatment inthe form of discriminatory steering, redlining, ormarketing policies or practices.

d. All instances where a denied prohibited basisapplicant was not afforded the same level ofassistance or the same benefit of discretion as



an approved control group applicant who wasno better qualified with regard to the reason fordenial.

e. All instances where a prohibited basis applicantreceived conspicuously less favorable treat-ment by the institution than was customary fromthe institution or was required by the institution’spolicy.

f. Any statistically significant average differencein either the frequency or amount of pricingdisparities between control group and prohib-ited basis group applicants.

g. Any evidence of neutral policies, procedures orpractices that appear to have a disparateimpact or effect on a prohibited basis.

Explain that unless there are legitimate, nondis-criminatory explanations (or in the case of dispar-ate impact, a compelling business justification) foreach of the preliminary findings of discriminationidentified in this Part, the agency could concludethat the institution is in violation of the applicablefair lending laws.

Step 2. Document all responses that have beenprovided by the institution, not just its ‘‘best’’ or‘‘final’’ response. Document each discussion withdates, names, titles, questions, responses, anyinformation that supports or undercuts the institu-tion’s credibility, and any other information thatbears on the issues raised in the discussion(s).

Step 3. Evaluate whether the responses areconsistent with previous statements, informationobtained from file review, documents, reasonablebanking practices, and other sources, and satisfycommon-sense standards of logic and credibility.

a. Do not speculate or assume that the institution’sdecision-maker had specific intentions or con-siderations in mind when he or she took theactions being evaluated. Do not, for example,conclude that because you have noticed alegitimate, nondiscriminatory reason for a de-nial (such as an applicant’s credit weakness),that no discrimination occurred unless it is clearthat, at the time of the denial, the institutionactually based the denial on that reason.

b. Perform follow-up file reviews and comparativeanalyses, as necessary, to determine the accu-racy and credibility of the institution’s explana-tions.

c. Refer to Evaluating Responses to Evidence ofDisparate Treatment in the Appendix for guid-ance as to common types of responses.

d. Refer to the Disproportionate Adverse ImpactViolations portion of the Special Analysessection of the Appendix for guidance onevaluating the institution’s responses to appar-ent disparate impact.

Step 4. If, after completing Steps 1–3 above, youconclude that the institution has failed to ad-equately demonstrate that one or more apparentviolations had a legitimate nondiscriminatory basisor were otherwise lawful, prepare a documentedlist or discussion of violations, or a draft examina-tion report, as prescribed by agency directives.

Step 5. Consult with agency supervisory staffregarding whether (a) any violations should bereferred to the Departments of Justice or Housingand Urban Development and (b) enforcementaction should be undertaken by your agency.



Federal Fair Lending Regulations and StatutesInteragency Fair Lending Examination Procedures:Appendix

INTRODUCTION

This Appendix offers a full range of information thatmight conceivably be brought to bear in anexamination. In that sense, it is a ‘‘menu’’ ofresources to be considered and selected from,depending on the nature and scope of theexamination being conducted.

COMPLIANCE MANAGEMENTANALYSIS CHECKLIST

This checklist is for use in conjunction with Part II ofthese procedures as a device for examiners toevaluate the strength of an institution’s complianceprogram in terms of its capacity to prevent, and toidentify and self-correct fair lending violations inconnection with the products or issues selected foranalysis. The checklist is not intended to be anabsolute test of an institution’s compliance man-agement program. Programs containing all or mostof the features described in the list may nonethe-less be flawed for other reasons; conversely, acompliance program that encompasses only a

portion of the factors listed below may nonethelessadequately support a strong program under appro-priate circumstances. In short, the examiner mustexercise his or her best judgment in utilizing this listand in assessing the overall quality of an institu-tion’s efforts to ensure fair lending compliance.

If the transactions within the proposed scope arecovered by a listed preventive measure, and theanswer is ‘‘Yes’’, check the box in the first column.You may then reduce the intensity (mainly thesample size) of the planned comparative file reviewto the degree that the preventive measures covertransactions within the proposed scope. Documentyour findings in sufficient detail to justify anyresulting reduction in the intensity of theexamination.

You are not required to learn whether preventivemeasures apply to specific products outside theproposed scope. However, if the information youhave obtained shows that the measure is a generalpractice of the institution, and thus applies to allloan products, check the box in the second columnin order to assist future examination planning.

A. Preventive Measures

Determine whether policies and procedures exist that tend to prevent illegal disparate treatment in thetransactions you plan to examine. There is no legal or agency requirement for institutions to conduct theseactivities. The absence of any of these policies and practices is never, by itself, a violation.1. Lending Practices and Standards:

a. Principal Policy Issues

Are underwriting practices clear, objective, and generally consistent with industrystandards?

Is pricing within reasonably confined ranges with guidance linking variations to riskand/or cost factors?

Does management monitor the nature and frequency of exceptions to its standards?

Are denial reasons accurately and promptly communicated to unsuccessfulapplicants?

Are there clear and objective standards for referring applicants to (i) subsidiaries,affiliates, or other lending channels within the institution, (ii) classifying applicants as‘‘prime’’ or sub-prime‘‘ borrowers, or (iii) deciding what kinds of alternative loanproducts should be offered or recommended to applicants?

Are loan officers required to document any deviation from the rate sheet?

Does management monitor consumer complaints alleging discrimination in loanpricing or underwriting?

b. Do training, application-processing aids, and other guidance correctly and adequately describe:

Consumer Compliance Handbook Fair Lending Exams: Appendix • 27 (11/09)

Prohibited bases under ECOA, Regulation B, and the Fair Housing Act?

Other substantive credit access requirements of Regulation B (e.g. spousalsignatures, improper inquiries, protected income)?

c. Is it specifically communicated to employees that they must not, on a prohibited basis:

Refuse to deal with individuals inquiring about credit?

Discourage inquiries or applicants by delays, discourtesy, or other means?

Provide different, incomplete, or misleading information about the availability ofloans, application requirements, and processing and approval standards orprocedures (including selectively informing applicants about certain loan productswhile failing to inform them of alternatives)?

Encourage or more vigorously assist only certain inquirers or applicants?

Refer credit seekers to other institutions, more costly loan products, or potentiallyonerous features?

Refer credit seekers to nontraditional products (i.e., negative amortization, ’’interestonly,‘‘ ’’payment option‘‘ adjustable rate mortgages) when they could have qualifiedfor traditional mortgages?

Waive or grant exceptions to application procedures or credit standards?

State a willingness to negotiate?

Use different procedures or standards to evaluate applications?

Use different procedures to obtain and evaluate appraisals?

Provide certain applicants opportunities to correct or explain adverse or inadequateinformation, or to provide additional information?

Accept alternative proofs of creditworthiness?

Require co-signers?

Offer or authorize loan modifications?

Suggest or permit loan assumptions?

Impose late charges, reinstatement fees, etc.?

Initiate collection or foreclosure?

d. Has the institution taken specific initiatives to prevent the following practices:

Basing credit decisions on assumptions derived from racial, gender, and otherstereotypes, rather than facts?

Seeking consumers from a particular racial, ethnic, or religious group, or of aparticular gender, to the exclusion of other types of consumers, on the basis of how’’comfortable‘‘ the employee may feel in dealing with those different from him/her?

Limiting the exchange of credit-related information or the institution’s efforts to qualifyan applicant from a prohibited basis group.

Drawing the institution’s CRA assessment area by unreasonably excluding minorityareas?

Targeting certain borrowers or areas with less advantageous products?

e. Does the institution have procedures to ensure that it does not:

Fair Lending: Examination Procedures: Appendix

28 (11/09) • Fair Lending Exams: Appendix Consumer Compliance Handbook

State racial or ethnic limitations in advertisements?

Employ code words or use photos in advertisements that convey racial or ethniclimitations or preferences?

Place advertisement that a reasonable person would regard as indicating minorityconsumers are less desirable?

Advertise only in media serving predominantly minority or non-minority areas of themarket?

Conduct other forms of marketing differentially in minority or non- minority areas ofthe market?

Market only through brokers known to serve only one racial or ethnic group in themarket?

Use a prohibited basis in any pre-screened solicitation?

Provide financial incentives for loan officers to place applicants in nontraditionalproducts or higher-risk products?

2. Compliance Audit Function: Does the Institution Attempt to Detect Prohibited Disparate Treatment bySelf-Test or Self-Evaluation?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. It creates data or factual information thatis not otherwise available and cannot be derived from loan, application or other records related to credittransactions (12 CFR 202.15(b)(1) and 24 CFR 100.141). The report, results, and many other recordsassociated with a self-test are privileged unless an institution voluntarily discloses the report or results orotherwise forfeits the privilege. See 12 CFR 202.15(b)(2) and 24 CFR 100.142(a) for a complete listing ofthe types of information covered by the privilege. A self-evaluation, while generally having the samepurpose as a self-test, does not create any new data or factual information, but uses data readily availablein loan or application files and other records used in credit transactions and, therefore, does not meet theself-test definition. See Using Self-Tests and Self-Evaluations to Streamline the Examination in thisAppendix 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 theself-test report or results to its regulator, it will lose the privilege. The following items are intended to obtaininformation about the institution’s approach to self-testing and self-evaluation, not the findings. Completethe checklist below for each self-evaluation and each self-test, where the institution voluntarily disclosesthe report or results. Evaluating the results of self-evaluations and voluntarily disclosed self-tests isdescribed in Using Self-tests and Self-Evaluations to Streamline the Examination in this Appendix.

a. Are the transactions reviewed by an independent analyst who:

Is directed to report objective results?

Has an adequate level of expertise?

Produces written conclusions?

b. Does the institution’s approach for self-testing or self-evaluation call for:

Attempting to explain major patterns shown in the HMDA or other loan data?

Determining whether actual practices and standards differ from stated ones andbasing the evaluation on the actual practices?

Evaluating whether the reasons cited for denial are supported by facts relied on bythe decision maker at the time of the decision?

Comparing the treatment of prohibited basis group applicants to control groupapplicants?

Obtaining explanations from decision makers for any unfavorable treatment of theprohibited basis group that departed from policy or customary practice?



Covering significant decision points in the loan process where disparate treatment ordiscouragement might occur, including:

The approve/deny decision?

Pricing?

Other terms and conditions?

Covering at least as many transactions as examiners would independently, if usingthe Fair Lending Sample Size Tables for a product with the application volumes ofthe product to be evaluated?

Maintaining information concerning personal characteristics collected as part of aself-test separately from application or loan files?

Timely analysis of the data?

Taking appropriate and timely corrective action?

c. In the institution’s plan for comparing the treatment of prohibited basis group applicants with that ofcontrol group applicants:

Are control and prohibited basis groups based on a prohibited basis found in ECOAor the FHAct and defined clearly to isolate that prohibited basis for analysis?

Are appropriate data to be obtained to document treatment of applicants and therelative qualifications vis-a-vis the requirement in question?

Will the data to be obtained reflect the data on which decisions were based?

Does the plan call for comparing the denied applicants’ qualifications related to thestated reason for denial with the corresponding qualifications for approvedapplicants?

Are comparisons designed to identify instances in which prohibited basis groupapplicants were treated less favorably than control group applicants who were nobetter qualified?

Is the evaluation designed to determine whether control and prohibited basis groupapplicants were treated differently in the processes by which the institution helpedapplicants overcome obstacles and by which their qualifications were enhanced?

Are responses and explanations to be obtained for any apparent disparate treatmenton a prohibited basis or other apparent violations of credit rights?

Are reasons cited by credit decision makers to justify or explain instances ofapparent disparate treatment to be verified?

d. For self-tests under ECOA that involved the collection of applicant personal characteristics, did theinstitution:

1. develop a written plan that describes or identifies the:

specific purpose of the self-test?

methodology to be used?

geographic area(s) to be covered?

type(s) of credit transactions to be reviewed?

entity that will conduct the test and analyze the data?

timing of the test, including start and end dates or the duration of the self- test?

other related self-test data that is not privileged?



2. disclose at the time applicant characteristic information is requested, that:

the applicant will not be required to provide the information?

the creditor is requesting the information to monitor its compliance with ECOA?

federal law prohibits the creditor from discriminating on the basis of this informationor on the basis of an applicant’s decision not to furnish the information?

if applicable, certain information will be collected based on visual observation orsurname if not provided by the applicant?

B. Corrective Measuresa. Determine whether the institution has provisions to take appropriate corrective action and provide

adequate relief to victims for any violations in the transactions you plan to review. Who is to receive theresults of a self-evaluation or voluntarily disclosed self-test? What decision process is supposed tofollow delivery of the information? Is feedback to be given to staff whose actions are reviewed? Whattypes of corrective action may occur? Are consumers to be:

Offered credit if they were improperly denied?

Compensated for any damages, both out of pocket and compensatory?

Notified of their legal rights?

b. Other corrective action:

Are institutional policies or procedures that may have contributed to thediscrimination to be corrected?

Are employees involved to be trained and/or disciplined?

Is the need for community outreach programs and/or changes in marketing strategyor loan products to better serve minority segments of the institution’s market to beconsidered?

Are audit and oversight systems to be improved in order to ensure there is notrecurrence of any identified discrimination?

CONSIDERING AUTOMATEDUNDERWRITING AND CREDITSCORING

These procedures are designed to help an exam-iner draw and support fair lending conclusions insituations involving automated underwriting orcredit scoring.

A. Structure and Organization of theScoring System

Determine the utilization of credit scoring at theinstitution including

1. For each customized credit scoring model orscorecard for any product, or for any creditscoring model used in connection with a productheld in portfolio, identify and obtain:

a. the number and inter-relationship of eachmodel or scorecard applied to a particularproduct;

b. the purposes for which each scorecard is

employed (e.g., approval decision, set creditlimits, set pricing, determine processingrequirements, etc.);

c. the developer of each scorecard used (e.g.,in-house department, affiliate, independentvendor name) and describe the develop-ment population utilized:

d. the types of monitoring reports generated(including front-end, back-end, account man-agement and any disparate impact analy-ses), the frequency of generation and recentcopies of each;

e. all policies applicable to the use of creditscoring;

f. training materials and programs on creditscoring for employees, agents and brokersinvolved in any aspect of retail lending;

g. any action taken to revalidate or re-calibrateany model or scorecard used during theexam period and the reason(s) why;

h. the number of all high-side and low-side



overrides for each type of override occurringduring the exam period and any guidancegiven to employees on their ability to over-ride;

i. all cutoffs used for each scorecard through-out the examination period and the reasonsfor the cutoffs and any change made duringthe exam period;

j. all variables scored by each product’s score-card(s) and the values that each variablemay take; and

k. the method used to select for disclosurethose adverse action reasons arising fromapplication of the model or scorecard.

2. For each judgmental underwriting system thatincludes as an underwriting criterion a standardcredit bureau or secondary market credit score,identify:

a. the vendor of each credit score and anyvendor recommendation or guidance on theusage of the score relied upon by theinstitution;

b. the institution’s basis for using the particularbureau or secondary market score and thecutoff standards for each product’s under-writing system and the reasons for the cutoffsand any changes to the same during theexam period;

c. the number of exceptions or overrides madeto the credit score component of the under-writing criteria and the basis for thoseexceptions or overrides, including any guid-ance given to employees on their ability todepart from credit score underwriting stan-dards; and

d. types of monitoring reports generated on thejudgmental system or its credit scoringcomponent (including front-end, back-end,differential processing and disparate impactanalysis), the frequency of generation andrecent copies of each.

B. Adverse Action Disclosure Notices

Determine the methodology used to select thereasons why adverse action was taken on a creditapplication denied on the basis of the applicant’scredit score. Compare the methodology used tothe examples recited in the Commentary to Regu-lation B and decide acceptability against thatstandard. Identify any consumer requests forreconsideration of credit score denial reasons andreview the action taken by management for consis-tency across applicant groups.

Where a credit score is used to differentiateapplication processing, and an applicant is denied

for failure to attain a judgmental underwritingstandard that would not be applied if the applicanthad received a better credit score (thereby beingconsidered in a different—presumably lessstringent—application processing group), ensurethat the adverse action notice also discloses thebases on which the applicant failed to attain thecredit score required for consideration in the lessstringent processing group.

C. Disparate Treatment in theApplication of Credit ScoringPrograms1. Determine what controls and policies manage-

ment has implemented to ensure that theinstitution’s credit scoring models or credit scorecriteria are not applied in a discriminatorymanner, in particular:

a. Examine institution guidance on using thecredit scoring system, on handling overridesand on processing applicants and how wellthat guidance is understood and observedby the targeted employees and monitored forcompliance by management; and

b. Examine institution policies that permit over-rides or that provide for different processingor underwriting requirements based on geo-graphic identifiers or borrower score rangesto assure that they do not treat protectedgroup applicants differently than other simi-larly situated applicants.

2. Evaluate whether any of the bases for grantingcredit to control group applicants who arelow-side overrides are applicable to any prohib-ited basis denials whose credit score was equalto or greater than the lowest score among thelow-side overrides. If such cases are identified,obtain and evaluate management’s reason forwhy such different treatment is not a fair lendingviolation.

3. Evaluate whether any of the bases for denyingcredit to any prohibited basis applicants who arehigh-side overrides are applicable to any controlgroup approvals whose credit score was equalto or less than the highest score among theprohibited basis high-side overrides. If suchcases are identified, obtain and evaluate man-agement’s reason for why such different treat-ment is not a fair lending violation.

4. If credit scores are used to segment applicantsinto groups that receive different processing orare required to meet additional underwritingrequirements (e.g., ’’tiered risk underwriting‘‘),perform a comparative file review, or confirm theresults and adequacy of management’s com-parative file review, that evaluates whether allapplicants within each group are treated equally.



D. Disparate Impact and CreditScoring Algorithms

Consult with agency supervisory staff to assesspotential disparate treatment issues relating to thecredit scoring algorithm.

E. Credit Scoring Systems thatInclude Age

Regulation B expressly requires the initial validationand periodic revalidation of a credit scoring systemthat considers age. There are two ways a creditscoring system can consider age: 1) the systemcan be split into different scorecards depending onthe age of the applicant; and 2) age may be directlyscored as a variable. Both features may be presentin some systems. Regulation B requires that allcredit scoring systems that consider age in eitherof these ways must be validated (in the language ofthe regulation, empirically derived, demonstrablyand statistically sound (EDDSS)).

1. Age-Split Scorecards: If a system is split intoonly two cards and one card covers a wide agerange that encompasses elderly applicants(applicants 62 or older), the system is treated asconsidering, but not scoring, age. Typically, theyounger scorecard in an age-split system isused for applicants under a specific age be-tween 25 and 30. It de-emphasizes factors suchas the number of trade lines and the length ofemployment, and increases the negative weightof any derogatory information on the creditreport. Systems such as these do not raise theissue of assigning a negative factor or value tothe age of an elderly applicant. However, if ageis directly scored as a variable (whether or notthe system is age-split), or if elderly applicantsare included in a card with a narrow age range inan age-split system, the system is treated asscoring age.

2. Scorecards that Score Age: If a scorecardscores age directly, in addition to meeting theEDDSS requirement, the creditor must ensurethat the age of an elderly applicant is notassigned a negative factor or value. (See thestaff commentary at 12 CFR 202.2(p) and202.6(b)(2)). A negative factor or value meansutilizing a factor, value, or weight that is lessfavorable than the creditor’s experience war-rants or is less favorable than the factor, value,or weight assigned to the most favored agegroup below the age of 62 (12 CFR 202.2(v)).

F. Examination for EmpiricalDerivation and Statistical Soundness

Regulation B requires credit scoring systems thatuse age to be empirically derived, and demonstra-

bly and statistically sound. This means that theymust fulfill the requirements of 12 CFR202.2(p)(1)(i)–(iv). Obtain documentation providedby the developer of the system and consult theagency’s most recent guidance for making thatdetermination.

EVALUATING RESPONSES TOEVIDENCE OF DISPARATETREATMENT

A. Responses to ComparativeEvidence of Disparate Treatment

The following are responses that an institution mayoffer—separately or in combination—to attempt toexplain that the appearance of illegal disparatetreatment is misleading, and that no violation has infact occurred. The responses, if true, may rebut theappearance of disparate treatment. The examinersmust evaluate the validity and credibility of theresponses.

1. The institution’s personnel were unaware of theprohibited basis identity of the applicant(s)If the institution claims to have been unaware

of the prohibited basis identity (race, etc.) of anapplicant or neighborhood, ask it to show thatthe application in question was processed insuch a way that the institution’s staff that madethe decisions could not have learned theprohibited basis identity of the applicant.If the product is one for which the institution

maintains prohibited basis monitoring informa-tion, assume that all employees could havetaken those facts into account. Assume thesame when there was face-to-face contactbetween any employee and the consumer.If there are other facts about the application

from which an ordinary person would haverecognized the applicant’s prohibited basisidentity (for example, the surname is an easilyrecognizable Hispanic one), assume that theinstitution’s staff drew the same conclusions. Ifthe racial character of a community is inquestion, ask the institution to provide persua-sive evidence why its staff would not know theracial character of any community in its servicearea.

2. The difference in treatment was justified bydifferences in the applicants (applicants not’’similarly situated‘‘)Ask the institution to account for the difference

in treatment by pointing out a specific differencebetween the applicants’ qualifications, or somefactor not captured in the application but thatlegitimately makes one applicant more or lessattractive to the institution, or some non-prohibited factor related to the processing of



their applications. The difference identified bythe institution must be one that is importantenough to justify the difference in treatment inquestion, not a meaningless difference.The factors commonly cited to show that

applicants are not similarly situated fall into twogroups: those that can be evaluated by howconsistently they are handled in other transac-tions, and those that cannot be evaluated in thatway.

a. Verifying ’’not similarly situated‘‘ explanationsby consistencyThe appearance of disparate treatment

remains if a factor cited by the institution tojustify favorable treatment for a control groupapplicant also exists for an otherwise similarprohibited basis applicant who was treatedunfavorably. Similarly, the appearance ofdisparate treatment remains if a factor citedby the institution to justify unfavorable treat-ment for a prohibited basis applicant alsoexists for a control group applicant that gotfavorable treatment. If this is not so, ask theinstitution to document that the factor cited inits explanation was used consistently forcontrol group and prohibited basis appli-cants.Among the responses that should be

evaluated this way are:

• Customer relationship. Ask the institution todocument that a customer relationship wasalso sometimes considered to the benefitof prohibited basis applicants and/or thatits absence worked against control groupcustomers.

• ’’Loan not saleable or insurable.‘‘ If filereview is still in progress, be alert for loansapproved despite the claimed fatal prob-lem. At a minimum, ask the institution to beable to produce the text of the secondarymarket or insurer’s requirement in ques-tion.

• Difference in standards or proceduresbetween branches or underwriters. Ask theinstitution to provide transactions docu-menting that each of the two branches orunderwriters applied its standards or pro-cedures consistently to both prohibitedbasis and control group applications itprocessed, and that each served similarproportions of the prohibited basis group.

• Difference in applying the same standard(difference in ’’strictness‘‘) between under-writer, branches, etc. Ask the institution toprovide transactions documenting that thestricter employee, branch, etc., was strictfor both prohibited basis and control group

applicants and that the other was lenientfor both, and that each served similarproportions of the prohibited basis group.The best evidence of this would be prohib-ited basis applicants who received favor-able treatment from the lenient branch andcontrol group applicants who received lessfavorable treatment from the ’’strict‘‘ branch.

• Standards or procedures changed duringperiod reviewed. Ask the institution toprovide transactions documenting that dur-ing each period the standards were ap-plied consistently to both prohibited basisand control group applicants.

• Employee misunderstood standard or pro-cedure. Ask the institution to providetransactions documenting that the misun-derstanding influenced both prohibitedbasis and control group applications. Ifthat is not available, find no violation if themisunderstanding is a reasonable mistake.

b. Evaluating ’’not similarly situated‘‘ explana-tions by other meansIf consistency cannot be evaluated, con-

sider an explanation favorably even withoutexamples of its consistent use if:

• the factor is documented to exist in (or beabsent from) the transactions, as claimedby the institution;

• the factor is one a prudent institution wouldconsider and is consistent with the institu-tion’s policies and procedures;

• file review found no evidence that thefactor is applied selectively on a prohibitedbasis (in other words, the institution’sexplanation is ’’not inconsistent with avail-able information‘‘); and

• the institution’s description of the transac-tion is generally consistent and reason-able.Some factors that may be impossible to

compare for consistency are:

• Unusual underwriting standard. Ask theinstitution to show that the standard isprudent. If the standard is prudent and notinconsistent with other information, acceptthis explanation even though there is nodocumentation that it is used consistently.

• ’’Close calls.‘‘ The institution may claim thatunderwriters’ opposite decisions on similarapplicants reflects legitimate discretionthat the examiners should not secondguess. That is not an acceptable explana-tion for identical applicants with differentresults, but is acceptable when the appli-cants have differing strengths and weak-



nesses that different underwriters mightreasonably weigh differently. However, donot accept the explanation if other filesreveal that these ’’strengths‘‘ or ’’weak-nesses‘‘ are counted or ignored selectivelyon a prohibited basis.

• ’’Character loan.‘‘ Expect the institution toidentify a specific history or specific factsthat make the applicant treated favorably abetter risk than those treated less favor-ably.

• ’’Accommodation loan.‘‘ There are manylegitimate reasons that may make a trans-action appealing to an institution apartfrom the familiar qualifications demandedby the secondary market and insurers. Forexample, a consumer may be related to orreferred by an important customer, be apolitical or entertainment figure who wouldbring prestige to the institution, be anemployee of an important business cus-tomer, etc. It is not illegal discrimination tomake a loan to an otherwise unqualifiedcontrol group applicant who has suchattributes while denying a loan to anotherwise similar prohibited basis appli-cant without them. However, be skepticalwhen the institution cites reasons for ’’ac-commodations‘‘ that an ordinary prudentinstitution would not value.

• ’’Gut feeling.‘‘ Be skeptical when institu-tions justify an approval or denial by ageneral perception or reaction to theconsumer. Such a perception or reactionmay be linked to a racial or other stereo-type that legally must not influence creditdecisions. Ask whether any specific eventor fact generated the reaction. Often, theinstitution can cite something specific thatmade him or her confident or uncomfort-able about the consumer. There is nodiscrimination if it is credible that theinstitution indeed considered such a factorand did not apply it selectively on aprohibited basis.

c. Follow up customer contactsIf the institution’s explanation of the han-

dling of a particular transaction is based onconsumer traits, actions, or desires notevident from the file, consider obtainingagency authorization to contact the con-sumer to verify the institution’s description.Such contacts need not be limited to pos-sible victims of discrimination, but can in-clude control group applicants or otherwitnesses.

3. The different results stemmed from an inadvert-

ent errorIf the institution claims an identified error such

as miscalculation or misunderstanding causedthe favorable or unfavorable result in question,evaluate whether the facts support the assertionthat such an event occurred.If the institution claims an unidentified error

caused the favorable or unfavorable result inquestion, expect the institution to provide evi-dence that discrimination is inconsistent with itsdemonstrated conduct, and therefore that dis-crimination is the less logical interpretation of thesituation. Consider the context (as describedbelow).

4. The apparent disparate treatment on a prohib-ited basis is a misleading portion of a largerpattern of random inconsistenciesAsk the institution to provide evidence that the

unfavorable treatment is not limited to theprohibited basis group and that the favorabletreatment is not limited to the control group.Without such examples, do not accept aninstitution’s unsupported claim that otherwiseinexplicable differences in treatment are distrib-uted randomly.If the institution can document that similarly

situated prohibited basis group applicants re-ceived the favorable treatment in questionapproximately as frequently and in comparabledegree as the control group applicants, con-clude there is no violation.NOTE: Transactions are relevant to ’’random

inconsistency‘‘ only if they are ’’similarly situ-ated‘‘ to those apparently treated unequally.

5. Loan terms and conditionsThe same analyses described in the preced-

ing sections with regard to decisions to approveor deny loans also apply to pricing differences.Risks and costs are legitimate considerations insetting prices and other terms and conditions ofloan products. However, generalized referenceby the institution to ’’cost factors‘‘ is insufficientto explain pricing differences.If the institution claims that specific borrowers

received different terms or conditions becauseof cost or risk considerations, ask the institutionto be able to identify specific risk or costdifferences between them.If the institution claims that specific borrowers

received different terms or conditions becausethey were not similarly situated as negotiators,consider whether application records mightprovide relevant evidence. If the records are nothelpful, consider seeking authorization to con-tact consumers to learn whether the institution infact behaved comparably toward prohibitedbasis and control group consumers. The con-tacts would be to learn such information as theinstitution’s opening quote of terms to the



consumer and the progress of the negotiations.If the institution responds that an average

price difference between the control and prohib-ited basis groups is based on cost or riskfactors, ask it to identify specific risk or costdifferences between individual control groupapplicants with the lowest rates and prohibitedbasis group applicants with the highest ratesthat are significant enough to justify the pricingdifferences between them. If the distinguishingfactors cited by the institution are legitimate andverifiable as described in the sections above,remove those applications from the averageprice calculation. If the average prices for theremaining control group and prohibited basisgroup members still differ more than minimally,consult agency supervisory staff about furtheranalysis. Findings or violations based on dispar-ate treatment or disparate impact regarding costor risk factors should be discussed with agencysupervisory staff.

B. Responses to Overt Evidence ofDisparate Treatment1. Descriptive references vs. lending consider-

ationsA reference to race, gender, etc., does not

constitute a violation if it is merely descriptive—for example, ’’the applicant was young.‘‘ Incontrast, when the reference reveals that theprohibited factor influenced the institution’s de-cisions and/or consumer behavior, treat thesituation as an apparent violation to which theinstitution must respond.

2. Personal opinions vs. lending considerationsIf an employee involved with credit availability

states unfavorable views regarding a racialgroup, gender, etc., but does not explicitly relatethose views to credit decisions, review thatemployee’s credit decisions for possible dispar-ate treatment of the prohibited basis groupdescribed unfavorably. If there are no instancesof apparent disparate treatment, treat the em-ployee’s views as permissible private opinions.Inform the institution that such views create arisk of future violations.

3. Stereotypes related to credit decisionsThere is an apparent violation when a prohib-

ited factor influences a credit decision through astereotype related to creditworthiness—for ex-ample, a loan denial because ’’a single womancould not maintain a large house.‘‘ If thestereotyped beliefs are offered as ’’explana-tions‘‘ for unfavorable treatment, regard suchunfavorable treatment as apparent illegal dispar-ate treatment. If the stereotype is only a generalobservation unrelated to particular transactions,review that employee’s credit decisions for

possible disparate treatment of the prohibitedbasis group in question. Inform the institutionthat such views create a risk of future violations.

4. Indirect reference to a prohibited factorIf negative views related to creditworthiness

are described in non-prohibited terms, considerwhether the terms would commonly be under-stood as surrogates for prohibited terms. If so,treat the situation as if explicit prohibited basisterms were used. For example, an institution’sstatement that ’’It’s too risky to lend north of110th Street‘‘ might be reasonably interpreted asa refusal to lend because of race if that portion ofthe institution’s lending area north of 110th Streetwere predominantly black and the area south,white.

5. Lawful use of a prohibited factor

a. Special Purpose Credit Program (SPCP)If an institution claims that its use of a

prohibited factor is lawful because it isoperating an SPCP, ask the institution todocument that its program conforms to therequirements of Regulation B. An SPCP mustbe defined in a written plan that existedbefore the institution made any decisions onloan applications under the program. Thewritten plan must:

• demonstrate that the program will benefitpersons who would otherwise be deniedcredit or receive credit on less favorableterms; and

• state the time period the program will be ineffect or when it will be re-evaluated.

No provision of an SPCP should deprivepeople who are not part of the target group ofrights or opportunities they otherwise wouldhave. Qualified programs operating on anotherwise-prohibited basis will not be citedas a violation.NOTE: Advise the institution that an agency

finding that a program is a lawful SPCP is notabsolute security against legal challenge byprivate parties. Suggest that an institutionconcerned about legal challenge from otherquarters use exclusions or limitations that arenot prohibited by ECOA or the FHAct, suchas ’’first-time home buyer.‘‘

b. Second review programSuch programs are permissible if they do

no more than ensure that lending standardsare applied fairly and uniformly to all appli-cants. For example, it is permissible toreview the proposed denial of applicantswho are members of a prohibited basisgroup by comparing their applications to theapproved applications of similarly qualifiedindividuals who are in the control group to



determine if the applications were evaluatedconsistently.Ask the institution to demonstrate that the

program is a safety net that merely attemptsto prevent discrimination, and does notinvolve underwriting terms or practices thatare preferential on a prohibited basis.Statements indicating that the mission of

the program is to apply different standards orefforts on behalf of a particular racial or othergroup constitute overt evidence of disparatetreatment. Similarly, there is an apparentviolation if comparative analysis of appli-

cants who are processed through the sec-ond review and those who are not disclosesdual standards related to the prohibitedbasis.

c. Affirmative marketing/advertising program:Affirmative advertising and marketing ef-

forts that do not involve application ofdifferent lending standards are permissibleunder both the ECOA and the FHAct. Forexample, special outreach to a minoritycommunity would be permissible.

FAIR LENDING SAMPLE SIZE TABLES

Table A. Underwriting (Accept/Deny) ComparisonsSample 1. Prohibited Basis Denials Sample 2. Control Group Approvals

Number ofDenials orApprovals 5–50 51–150 >150 20–50 51–250 >250

Minimum toreview: All 51 75 20 51 100Maximum toreview: 50 100 150

5x prohibitedbasis sample(up to 50)



Table B. Terms and Conditions ComparisonsSample 1. Prohibited Basis

ApprovalsSample 2. Control Group Approvals

Number ofApprovals 5–25 26–100 >100 20–50 51–250 >250

Minimum toreview: All 26 50 20 40 60Maximum toreview: 25 50 75




Explanatory Notes to Sample Size Tables

1. Examiners should not follow Table B when conducting a pricing review that involves a regression analysis.Consult with agency supervisory staff for specific protocol in these cases.

2. When performing both underwriting and terms and conditions comparisons, use the same control groupapproval sample for both tasks.

3. If there are fewer than 5 prohibited basis denials or 20 control group approvals, refer to ’’Sample Size‘‘instructions in the procedures.

4. ’’Minimum‘‘ and ’’maximum‘‘ sample sizes: select a sample size between the minimum and maximumnumbers identified above. Examiners should base the size of their review on the level of risk identifiedduring the preplanning and scoping procedures. Once the sample size has been determined, selectindividual transactions judgmentally. Refer to procedures.

5. 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 themaximum.

6. 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 marginalprohibited 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 ofcredit that includes pricing terms, this is a reporting error under Regulation C (the institution should havereported the application as approved but not accepted) and therefore these applications should beincluded 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 itemthat would give rise to a denial reason, then include them as denials for that reason when conductingan underwriting comparative file analysis.

IDENTIFYING MARGINALTRANSACTIONS

These procedures are intended to assist anexaminer in identifying denied and approvedapplications that were not either clearly qualified orunqualified, i.e., marginal transactions.

A. Marginal Denials

Denied applications with any or all the followingcharacteristics are ’’marginal.‘‘ Such denials arecompared to marginal approved applications.Marginal denied applications include those that:

• Were close to satisfying the requirement that theadverse action notice said was the reason fordenial;

• Were denied by the institution’s rigid interpreta-tion of inconsequential processing requirements;

• Were denied quickly for a reason that normallywould take a longer time for an underwriter toevaluate;

• Involved an unfavorable subjective evaluation offacts that another person might reasonably haveinterpreted more favorably (for example, whetherlate payments actually showed a ’’pattern,‘‘ orwhether an explanation for a break in employ-ment was ’’credible‘‘);

• Resulted from the institution’s failure to takereasonable steps to obtain necessary informa-tion;

• Received unfavorable treatment as the result of adeparture from customary practices or statedpolicies. For example, if it is the institution’sstated policy to request an explanation of deroga-tory credit information, a failure to do so for aprohibited basis applicant would be a departurefrom customary practices or stated policies evenif the derogatory information seems to be egre-gious;

• Were similar to an approved control groupapplicant who received unusual consideration orservice, but were not provided such consider-ation or service;

• Received unfavorable treatment (for example,were denied or given various conditions or more

processing obstacles) but appeared fully to meetthe institution’s stated requirements for favorabletreatment (for example, approval on the termssought);

• Received unfavorable treatment related to apolicy or practice that was vague, and/or the filelacked documentation on the applicant’s qualifi-cations related to the reason for denial or otherfactor;

• Met common secondary market or industrystandards even though failing to meet theinstitution’s more rigid standards;

• Had a strength that a prudent institution mightbelieve outweighed the weaknesses cited as thebasis for denial;

• Had a history of previously meeting a monthlyhousing obligation equivalent to or higher thanthe proposed debt; and/or

• Were denied for an apparently ’’serious‘‘ defi-ciency that might easily have been overcome.For example, an applicant’s total debt ratio of50 percent might appear grossly to exceed theinstitutions guideline of 36 percent, but this mayin fact be easily corrected if the application listsassets to pay off sufficient nonhousing debts toreduce the ratio to the guideline, or if theinstitution were to count excluded part-timeearnings described in the application.

B. Marginal Approvals

Approved applications with any or all of thefollowing characteristics are ’’marginal.‘‘ Such ap-provals are compared to marginal denied applica-tions. Marginal approvals include those:

• Whose qualifications satisfied the institution’sstated standard, but very narrowly;

• That bypassed stated processing requirements(such as verifications or deadlines);

• For which stated creditworthiness requirementswere relaxed or waived;

• That, if the institution’s own standards are notclear, fell short of common secondary market orindustry lending standards;

• That a prudent conservative institution might



have denied;

• Whose qualifications were raised to a qualifyinglevel by assistance, proposals, counteroffers,favorable characterizations or questionable quali-fications, etc.; and/or

• That in any way received unusual service orconsideration that facilitated obtaining the credit.

POTENTIAL SCOPING INFORMATION

As part of the scoping process described in Part Iof the procedures, examiners will need to gatherdocuments and information to sufficiently identifytheir focal points for review. Below is a list ofsuggested information that examiners may wish togather internally, as well as from the institutionitself.

A. Internal Agency Documents andRecords1. Previous examination reports and related work

papers for the most recent Compliance/CRAand Safety and Soundness Examinations.

2. Complaint information.

3. Demographic data for the institution’s commu-nity.

Comment: The examiner should obtain themost recent agency demographic data, forinformation on the characteristics of the institu-tion’s assessment/market areas.

B. Information from the InstitutionComment: Prior to beginning a complianceexamination, the examiner should request theinstitution to provide the information outlinedbelow. This request should be made far enoughin advance of the on-site phase of the examina-tion to facilitate compliance by the institution. Insome institutions, the examiner may not be ableto review certain of this information until theon-site examination. The examiner should gener-ally request only those items that correspond tothe time period(s) being examined.

1. Institution’s Compliance Program (For examina-tions that will include analysis of the institution’scompliance program.)

a. Organization charts identifying those individu-als who have lending responsibilities orcompliance, HMDA or CRA responsibilities,together with job descriptions for each suchposition.

b. Lists of any pending litigation or administra-tive proceedings concerning fair lendingmatters.

c. Results of self-evaluations or self-tests (where

the institution chooses to share self-testresults), copies of audit or compliance re-views of the institution’s program for compli-ance with fair lending laws and regulations,including both internal and independentaudits.NOTE: The request should advise the

institution that it is not required to disclosethe report or results of any self-tests of thetype protected under amendments to ECOAand the FHAct programs.

d. Complaint file.

e. Any written or printed statements describingthe institution’s fair lending policies and/orprocedures.

f. Training materials related to fair lendingissues including records of attendance.

g. Records detailing policy exceptions or over-rides, exception reporting and monitoringprocesses.

2. Lending Policies / Loan Volume

a. Internal underwriting guidelines and lendingpolicies for all consumer and commercialloan products.

Comment: If guidelines or policies differ bybranch or other geographic location, requestcopies of each variation.

b. A description of any credit scoring system(s)in use now or during the exam period.

Comment: Inquire as to whether a vendoror in-house system is used; the date of thelast verification; the factors relied on toconstruct any in-house system and, if appli-cable, any judgmental criteria used in con-junction with the scoring system.

c. Pricing policies for each loan product, andfor both direct and indirect loans.

Comment: The institution should be spe-cifically asked whether its pricing policies forany loan products include the use of ’’over-ages‘‘. The request should also ask whetherthe institution offers any ’’sub-prime‘‘ loanproducts or otherwise uses any form ofrisk-based pricing. A similar inquiry shouldbe made regarding the use of any cost-based pricing. If any of these three forms areor have been in use since the last exam, theinstitution should provide pricing policy andpractice details for each affected product,including the institution’s criteria for differen-tiating between each risk or cost level andany policies regarding overages. Regardingindirect lending, the institution should beasked to provide any forms of agreement(including compensation) with brokers/dealers, together with a description of the



roles that both the institution and the dealer/broker play in each stage of the lendingprocess.

d. A description of each form of compensationplan for all lending personnel and managers.

e. Advertising copy for all loan products.

f. The most recent HMDA / LAR, includingunreported data if available.

Comment: The integrity of the institution’sHMDA–LAR data should be verified prior tothe pre-examination analysis.

g. Any existing loan registers for each non-HMDA loan product.

Comment: Loan registers for the 3 monthperiod preceding the date of the examina-tion, together with any available lists ofdeclined loan applicants for the same periodshould be requested. Registers / lists shouldcontain, to the extent available, the completename and address of loan applicants andapplicable loan terms, including loan amount,interest rate, fees, repayment schedule andcollateral codes.

h. A description of any application or loan-leveldata bases maintained, including a descrip-tion of all data fields within the database orthat can be linked at the loan-level.

i. Forms used in the application and creditevaluation process for each loan product.

Comment: At a minimum, this requestshould include all types of credit applica-tions, forms requesting financial information,underwriter worksheets, any form used forthe collection of monitoring information, andany quality control or second review forms orworksheets.

j. Lists of service providers.Comment: Service providers may include:

brokers, realtors, real estate developers,appraisers, underwriters, home improvementcontractors and private mortgage insurancecompanies. Request the full name andaddress and geographic area served byeach provider. Also request documentationas to any fair lending requirements imposedon, or commitments required of, any of theinstitution’s service providers.

k. Addresses of any Internet Site(s)Comment: Internet ’’Home Pages‘‘ or simi-

lar sites that an institution may have on theInternet may provide information concerningthe availability of credit, or means for obtain-ing it. All such information must comply withthe nondiscrimination requirements of the fairlending laws. In view of the increasingcapability to conduct transactions on the

Internet, it is extremely important for examin-ers to review an institution’s Internet sites toensure that all of the information or proce-dures set forth therein are in compliance withany applicable provisions of the fair lendingstatutes and regulations.

3. Community Information

a. Demographic information prepared or usedby the institution.

b. Any fair lending complaints received andinstitution responses thereto.

SPECIAL ANALYSES

These procedures are intended to assist examinerswho encounter disproportionate adverse impactviolations, discriminatory pre-application screeningand possible discriminatory marketing.

A. Disproportionate Adverse ImpactViolations

When all five conditions below exist, consult withinyour agency to determine whether to present thesituation to the institution and solicit the institution’sresponse. Note that condition 5 can be satisfied byeither of two alternatives.

The contacts between examiners and institutionsdescribed in this section are information-gatheringcontacts within the context of the examination andare not intended to serve as the formal notices andopportunities for response that an agency’s enforce-ment process might provide. Also, the five condi-tions are not intended as authoritative statements ofthe legal elements of a disproportionate adverseimpact proof of discrimination; they are para-phrases intended to give examiners practicalguidance on situations that call for more scrutinyand on what additional information is relevant.

NOTE: Even if it appears likely that a policy orcriterion causes a disproportionate adverse im-pact on a prohibited basis (condition 3), consultagency supervisory staff if the policy or criterionis obviously related to predicting creditworthi-ness and is used in a way that is commensuratewith its relationship to creditworthiness, or isobviously related to some other basic aspect ofprudent lending, and there appears to be noequally effective alternative for it. Examples arereliance on credit reports or use of debt-to-income ratio in a way that appears consistentwith industry standards and with a prudentevaluation of credit risk.

Conditions1. A specific policy or criterion is involved.



The policy or criterion suspected of producinga disproportionate adverse impact on a prohib-ited basis should be clear enough that thenature of action to correct the situation can bedetermined.NOTE: Gross HMDA denial or approval rate

disparities are not appropriate for disproportion-ate adverse impact analysis because theytypically cannot be attributed to a specific policyor criterion.

2. The policy or criterion on its stated terms isneutral for prohibited bases.

3. The policy or criterion falls disproportionately onapplicants or borrowers in a prohibited basisgroup.The difference between the rate at which

prohibited basis group members are harmed orexcluded by the policy or criterion and the ratefor control group members must be largeenough that it is unlikely that it could haveoccurred by chance. If there is reason tosuspect a significant disproportionate adverseimpact may exist, consult with agency supervi-sory staff as appropriate.

4. There is a causal relationship between the policyor criterion and the adverse result.The link between the policy or criterion and the

harmful or exclusionary effect must not bespeculative. It must be clear that changing orterminating the policy or criterion would reducethe disproportion in the adverse result.

5. Either a or b:

a. The policy or criterion has no clear rationale,or appears to exist merely for convenience orto avoid a minimal expense, or is far removedfrom common sense or standard industryunderwriting considerations or lending prac-tices.The legal doctrine of disproportionate

adverse impact provides that the policy orcriterion that causes the impact must bejustified by ’’business necessity‘‘ if the insti-tution is to avoid a violation. There is very littleauthoritative legal interpretation of that termwith regard to lending, but that should notstop examiners from making the preliminaryinquiries called for in these procedures. Forexample, the rationale is generally not clearfor basing credit decisions on factors suchas location of residence, income level (per serather than relative to debt), and accountswith a finance company. If prohibited basisgroup applicants were denied loans morefrequently than control group applicantsbecause they failed an institution’s minimumincome requirement, it would appear that the

first four conditions plus 5a existed; there-fore, the examiners should consult withintheir agency about obtaining the institution’sresponse, as described in the next sectionbelow.

b. Alternatively, even if there is a sound justifi-cation for the policy, it appears that theremay be an equally effective alternative foraccomplishing the same objective with asmaller disproportionate adverse impact.The law does not require an institution to

abandon a policy or criterion that is clearlythe most effective method of accomplishinga legitimate business objective. However, ifan alternative that is approximately equallyeffective is available that would cause a lesssevere adverse impact, the policy or criterionin question may constitute a violation.At any stage of the analysis of possible

disproportionate adverse impact, if thereappears to be such an alternative, and thefirst four conditions exist, consult within theagency how to evaluate whether the alterna-tive would be equally effective and wouldcause a less-severe impact. If the conclusionis that it would, solicit a response from theinstitution, as described in the next sectionbelow.

Obtaining the Institution’s Response

If the first four conditions plus either 5a or 5bappear to exist, consult with agency supervisorystaff about whether and how to inform the institutionof the situation and solicit the institution’s response.The communication with the institution may includethe following:

• The specific neutral policy or criterion thatappears to cause a disproportionate adverseimpact.

• How the examiners learned about the policy.

• How widely the examiners understand it to beimplemented.

• 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 request that theinstitution provide any information supporting thebusiness justification for the policy and request thatthe institution describe any alternatives it consid-



ered before adopting the policy or criterion atissue.

Evaluating and Following Up on theResponse

The analyses of ’’business necessity‘‘ and ’’lessdiscriminatory alternative‘‘ tend to converge be-cause of the close relationship of the questions ofwhat purpose the policy or criterion serves andwhether it is the most effective means to accom-plish that purpose.

Evaluate whether the institution’s response per-suasively contradicts the existence of the signifi-cant disparity or establishes a business justifica-tion. Consult with agency supervisory staff, asappropriate.

B. Discriminatory Pre-ApplicationScreening

Obtain an explanation for any:

• Withdrawals by applicants in prohibited basisgroups without documentation of consumer in-tent to withdraw;

• Denials of applicants in prohibited basis groupswithout any documentation of applicant qualifica-tions; or

• On a prohibited basis, selectively quoting unfa-vorable terms (for example, high fees or downpayment requirements) to prospective appli-cants, or quoting unfavorable terms to all pro-spective applicants but waiving such terms forcontrol group applicants. (Evidence of this mightbe found in withdrawn or incomplete files.)

• Obtain explanations for any delays betweenapplication and action dates on a prohibitedbasis

If the institution cannot explain the situations,examiners should consider obtaining authorizationfrom their agency to contact the consumers toverify the institution’s description of the transac-tions. Information from the consumer may helpdetermine whether a violation occurred.

In some instances, such as possible ’’prescreen-ing‘‘ of applicants by institution personnel, theresults of the procedures discussed so far, includ-ing interviews with consumers, may be inconclu-sive in determining whether a violation has oc-curred. In those cases, examiners should, ifauthorized by their agency, consult with agencysupervisory staff regarding the possible use of’’testers‘‘ who would pose as apparently similarlysituated applicants, differing only as to race orother applicable prohibited basis characteristic, todetermine and compare how the institution treats

them in the application process.

C. Possible Discriminatory Marketing1. Obtain full documentation of the nature and

extent, together with management’s explana-tion, of any:

• Prohibited basis limitations stated in adver-tisements;

• Code words in advertisements that conveyprohibited limitations; or

• Advertising patterns or practices that areasonable person would believe indicateprohibited basis consumers are less desir-able or are only eligible for certain products.

2. Obtain full documentation as to the nature andextent, together with management’s explana-tion, for any situation in which the institution,despite the availability of other options in themarket:

• Advertises only in media serving eitherminority or non-minority areas of the market;

• Markets through brokers or other agents thatthe institution knows, or could reasonably beexpected to know, to serve only one racial orethnic group in the market; or

• Utilizes mailing or other distribution lists orother marketing techniques for pre-screenedor other offerings of residential loan product-sthat:

– Explicitly exclude groups of prospectiveborrowers on a prohibited basis; or

– Exclude geographies (e.g., census tracts,ZIP codes, etc.) within the institution’smarketing area that have demonstrablyhigher percentages of minority group resi-dents than does the remainder of themarketing area, but which have incomeand other credit-related characteristicssimilar to the geographies that were tar-geted for marketing; or

– Offer different products to such geogra-phies, especially if sub-prime products areprimarily marketed to racial or ethnicminorities.NOTE: Pre-screened solicitation of po-

tential applicants on a prohibited basisdoes not violate ECOA. Such solicitationsare, however, covered by the FHAct.Consequently, analyses of this form ofpotential marketing discrimination shouldbe limited to residential loan products.

3. Evaluate management’s response particularlywith regard to the credibility of any nondiscrimi-natory reasons offered as explanations for any



of the foregoing practices. Refer to EvaluatingResponses to Evidence of Disparate Treatmentelsewhere in this Appendix for guidance.

USING SELF-TESTS ANDSELF-EVALUATIONS TO STREAMLINETHE EXAMINATION

Institutions may find it advantageous to conductself-tests or self-evaluations to measure or monitortheir compliance with ECOA and Regulation B. Aself-test is a program, practice or study that isdesigned and specifically used to assess theinstitution’s compliance with fair lending laws thatcreates data not available or derived from loan,application or other records related to credittransactions (12 CFR 202.15(b)(1) and 24 CFR100.140–100.148). For example, using testers todetermine whether there is disparate treatment inthe pre-application stage of credit shopping mayconstitute a self-test. The information set forth in12 CFR 202.15(b)(2) and 24 CFR 100.142(a) isprivileged unless an institution voluntarily disclosesthe report or results or otherwise forfeits theprivilege. A self-evaluation, while generally havingthe same purpose as a self-test, does not createany new data or factual information, but uses datareadily available in loan or application files andother records used in credit transactions and,therefore, does not meet the self-test definition.

Examiners should not request any informationprivileged under 12 CFR 202.15(b)(2) and 24 CFR100.142(a), related to self-tests. If the institutiondiscloses the results of any self-tests, or hasperformed any self-evaluations, and examiners canconfirm the reliability and appropriateness of theself-tests or self-evaluations (or even parts ofthem), they need not repeat those tasks.

NOTE: When the term self-evaluation is usedbelow, it is meant to include self-tests where theinstitution has voluntarily disclosed the report orresults.

If the institution has performed a self-evaluationof any of the product(s) selected for examination,obtain a copy thereof and proceed through theremaining steps of this section on Streamlining theExamination.

Determine whether the research and analysis ofthe planned examination would duplicate theinstitution’s own efforts. If the answers to QuestionsA and B below are both Yes, each successive Yesanswer to Questions C through L indicates that theinstitution’s work up to that point can serve as abasis for eliminating examination steps.

If the answer to either Question A or B is No, theself-evaluation cannot serve as a basis for eliminat-ing examination steps. However, examiners should

still consider the self-evaluation to the degreepossible in light of the remaining questions andcommunicate the findings to the institution so that itcan improve its self-evaluation process.

A. Did the transactions covered by the self-evaluation occur not longer ago than two yearsprior to the examination? If the self-evaluationcovered more than two years prior to theexamination incorporate only results from trans-actions in the most recent two years.

B. Did it cover the same product, prohibited basis,decision center, and stage of the lendingprocess (for example, underwriting, setting ofloan terms) as the planned examination?

C. Did the self-evaluation include comparative filereview?NOTE: One type of ’’comparative file review‘‘

is statistical modeling to determine whethersimilar control group and prohibited basisgroup applicants were treated similarly. If aninstitution offers self-evaluation results based ona statistical model, consult appropriately withinyour agency.

D. Were control and prohibited basis groupsdefined accurately and consistently with ECOAand/or the FHAct?

E. Were the transactions selected for the self-evaluation chosen so as to focus on marginalapplicants or, in the alternative, selected ran-domly?

F. Were the data analyzed (whether abstractedfrom files or obtained from electronic data-bases) accurate? Were those data actuallyrelied on by the credit decision makers at thetime of the decisions?To answer these two questions and Question

G below, for the institution’s control groupsample and each of its prohibited basis groupsamples, request to review 10% (but not morethan 50 for each group) of the transactionscovered by the self-evaluation. For example, ifthe institution’s self-evaluation reviewed 250control group and 75 prohibited basis grouptransactions, plan to verify the data for 25control group and seven prohibited basis grouptransactions.

G. Did the 10% sample reviewed for Question Falso show that customer assistance and institu-tion judgment that assisted or enabled appli-cants to qualify were recorded systematicallyand accurately and were compared for differ-ences on any prohibited bases?

H. Were prohibited basis group applicants’ quali-fications related to the underwriting factor inquestion compared to corresponding qualifica-tions of control group approvals? Specifically,



for self-evaluations of approve/deny decisions,were the denied applicants’ qualifications re-lated to the stated reason for denial comparedto the corresponding qualifications for ap-proved applicants?

I. Did the self-evaluation sample cover at least asmany transactions at the initial stage of reviewas examiners would initially have reviewedusing the sampling guidance in these proce-dures?If the institution’s samples are significantly

smaller than those in the sampling guidance butits methodology otherwise is sound, reviewadditional transactions until the numbers ofreviewed control group and prohibited basisgroup transactions equal the minimums for theinitial stage of review in the sampling guidance.

J. Did the self-evaluation identify instances inwhich prohibited basis group applicants weretreated less favorably than control group appli-cants who were no better qualified?

K. Were explanations solicited for such instancesfrom the persons responsible for the decisions?

L. Were the reasons cited by credit decisionmakers to justify or explain instances of appar-

ent disparate treatment supported by legiti-mate, persuasive facts or reasoning?

If the questions above are answered ’’Yes‘‘,incorporate the findings of the self-evaluation(whether supporting compliance or violations) intothe examination findings. Indicate that those find-ings are based on verified data from the institution’sself-evaluation. In addition, consult appropriatelywithin the agency regarding whether or not toconduct corroborative file analyses in addition tothose performed by the institution.

If not all of the questions in the section above areanswered ’’Yes‘‘, resume the examination proce-dures at the point where the institution’s reliablework would not be duplicated. In other words, usethe reliable portion of the self-evaluation andcorrespondingly reduce independent comparativefile review by examiners. For example, if theinstitution conducted a comparative file review thatcompared applicants’ qualifications without takingaccount of the reasons they were denied, theexaminers could use the qualification data ab-stracted by the institution (if accurate) but wouldhave to construct independent comparisons struc-tured around the reasons for denial.

