compliance handbook

Note: This overview is adapted from the introduction to the

Interagency Fair Lending Examination Procedures, which were

revised in 2004 and distributed by the Board as an attachment to

CA Letter 04-8.

1. HUD’s regulations are at 24 CFR 100.

Federal Fair Lending Regulations and Statutes

Overview

The federal fair lending laws—the Equal Credit

Opportunity Act and the Fair Housing Act—prohibit

discrimination in

credit transactions, including

transactions

related to residential real estate.

The Statutes and

Implementing Regulations

The Equal Credit Opportunity Act (ECOA), which is

implemented by the

Board’s Regulation B (12 CFR

202), prohibits discrimination in any aspect of a

credit transaction. It applies to any extension of

credit, including residential real estate lending and

extensions 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 to

contract)

• The applicant’s receipt of income derived from

any public assistance program

• The applicant’s exercise, in good faith, of any

right under the Consumer

Credit Protection Act

Lending acts and practices that are specifically

prohibited, permitted, or

required are described in

the

regulation. Official staff interpretations of the

regulation are contained in supplement I to the

regulation.

The Fair Housing Act (FHAct), which is imple-

mented by HUD

regulations,

prohibits discrimina-

tion in all aspects of

residential real estate–related

transactions, including, but not limited to,

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

dwelling

• Purchasing real estate loans

• Selling, brokering, or appraising residential real

estate

• Selling or renting a dwelling

The FHAct prohibits discrimination based on

Consumer Compliance Handbook Fair Lending: Overview • 1 (1/06)

• Race or color

• Religion

• National origin

• Sex

• Familial status (that is, discrimination against

households having

children under the age of 18

living with a

parent or legal custodian, pregnant

women, or persons with legal custody of

children

under 18)

• Handicap

Because both the FHAct and the ECOA apply to

mortgage lending, lenders may not discriminate in

mortgage lending on the basis of any of the

prohibited factors listed. In addition, with

respect to

residential real estate–related lending, under both

laws, a lender may not, on the basis of a prohibited

factor,

• Fail to provide information or services relating to,

or provide

different information or services

relating to, any aspect of the lending process,

including

credit availability, application proce-

dures, and lending standards

• Discourage or selectively encourage applicants

with

respect to inquiries about or applications for

credit

• Refuse to extend credit, or use different stan-

dards in determining whether to extend credit

• Vary the terms of credit offered, including the

amount,

interest rate, duration, and type of loan

• Use different standards to evaluate collateral

• Treat a borrower differently in servicing a loan or

invoking default

remedies

• Use different standards for pooling or packaging

a loan in the secondary market

A lender may not express, orally or in writing, a

preference that is based on a prohibited factor or

indicate that it will

treat applicants differently on the

basis of a prohibited

factor. Moreover, a lender may

not discriminate on a prohibited basis because of

the characteristics of

• An applicant, prospective applicant, or borrower

• A person associated with an applicant, prospec-

tive applicant, or borrower (for example, a

co-applicant, spouse, business

partner, or live-in

aide)

• The present or prospective occupants of either

the property to be financed or the neighborhood

or other

area in which the property to be financed

is located

Federal Fair Lending Regulations and Statutes: Overview

Finally, the FHAct requires lenders to make

reasonable accommodations for a person with

disabilities when such accommodations

are neces-

sary to

afford the person an equal opportunity to

apply for

credit.

Types of Lending Discrimination

The courts have recognized three types of proof of

lending discrimination under the ECOA and the

FHAct:

• Overt evidence of disparate treatment

• Comparative evidence of disparate treatment

• Evidence of disparate impact

Disparate Treatment

The existence of illegal disparate treatment may be

established either by statements

revealing that a

lender explicitly

considered prohibited factors

(overt evidence) or by differences in treatment that

are not fully explained by legitimate nondiscrimina-

tory factors (comparative evidence).

Overt Evidence of Disparate Treatment

Overt evidence of discrimination exists when a

lender openly discriminates on a prohibited basis.

Example. A lender offers a credit card with a limit

of up to $750 for applicants age 21–30 and

$1,500 for applicants over 30. This policy violates

the ECOA’s prohibition on discrimination on the

basis of age.

Overt evidence of discrimination also exists even

when a lender

expresses—but does not act on—a

discriminatory

preference.

Example. A lending officer tells a customer, ‘‘We

do not like to make home mortgages to Native

Americans, but the law says we may not

discriminate and we have to comply with the

law.’’ This statement violates the FHAct’s prohi-

bition against statements

expressing a discrimi-

natory

preference as well as section 202.5(a) of

Regulation B, which prohibits discouraging

appli-

cants on a prohibited basis.

Comparative Evidence

of Disparate Treatment

Disparate treatment occurs when a lender treats a

credit applicant differently on the basis of one of the

prohibited factors. Showing that, beyond the

differ-

ence in

treatment, the treatment was motivated by

prejudice or by conscious intention to discriminate

against a person is not

required. Different treatment

considered by courts to be intentional discrimi-

2 (1/06) • Fair Lending: Overview Consumer Compliance Handbook

nation because the difference in treatment on a

prohibited basis has no

credible, nondiscriminatory

explanation.

Disparate treatment may be more likely to occur

in the

treatment of applicants who are neither

clearly well qualified nor clearly unqualified.

Dis-

crimination may

more readily affect applicants in

this middle group for two

reasons. First, applica-

tions that

are ‘‘close cases’’ have more room and

need for lender

discretion. Second, whether or not

an applicant qualifies may depend on the level of

assistance provided by the lender in completing an

application. The lender

may, for example, propose

solutions to

credit or other problems relevant to an

application, identify compensating factors, and

provide encouragement to the applicant. Lenders

are under no obligation to provide such assistance,

but to the extent that they do, the assistance must

be provided in a nondiscriminatory

way.

Example. A nonminority couple applies for an

automobile loan. The lender finds adverse

infor-

mation in the couple’s

credit report. The lender

discusses the

credit report with the couple and

determines that the adverse information, a

judg-

ment against the couple, was

incorrect, as the

judgment had been vacated. The nonminority

couple was granted a loan. A minority couple

applied for a similar loan with the same

lender.

Upon discovering adverse information in the

minority couple’s

credit report, the lender denies

the loan application on the basis of the adverse

information without giving the couple an

oppor-

tunity to discuss the

report.

The foregoing is an example of disparate treat-

ment of similarly situated

applicants—apparently

on the basis of a prohibited factor—in the amount

of assistance and information provided.

If a lender has apparently treated similar appli-

cants

differently on the basis of a prohibited factor,

it must explain the

difference. If the explanation is

found to be not

credible, the Federal Reserve may

conclude that the lender intentionally

discrimi-

nated.

Redlining is a form of illegal disparate treatment

whereby a lender provides unequal access to

credit, or unequal terms of credit, because of the

race,

color, national origin, or other prohibited

characteristic(s) of the

residents of the area in

which the

credit seeker resides or will reside or in

which the

residential property to be mortgaged is

located. Redlining may violate both the FHAct and

the ECOA.

Disparate Impact

A disparate impact occurs when a lender applies a

racially (or otherwise) neutral policy or practice

Federal Fair Lending Regulations and Statutes: Overview

equally to all credit applicants but the policy or

practice disproportionately excludes or burdens

certain persons on a prohibited basis.

Example. A lender’s policy is to deny loan

applications for single-family residences for less

than $60,000. The policy has been in effect for

ten years. This minimum loan amount policy is

shown to disproportionately exclude potential

minority applicants from consideration because

of their income levels or the value of the houses

in the areas in which they live.

Although the law on disparate impact as it

applies to lending discrimination continues to

develop, it has been clearly established that a

policy or practice that creates a disparity on a

prohibited basis is not, by itself, proof of a violation.

When an examiner finds that a lender’s policy or

practice has a disparate impact, the next step is to

determine whether the policy or practice is justified

‘‘business necessity.’’ The justification must be

manifest and may not be hypothetical or specula-

tive. Factors that may be relevant to the justification

include cost and profitability. But even if a policy or

practice that has a disparate impact on a prohib-

ited basis can be justified by business necessity, it

may still be found to be in violation if an alternative

policy or practice could serve the same purpose

with less discriminatory effect. Finally, evidence of

discriminatory intent is not necessary to establish

that a lender’s adoption or implementation of a

policy or practice that has a disparate impact is in

violation of the FHAct or the ECOA.

Consumer Compliance Handbook Fair Lending: Overview • 3 (1/06)