Regulators Tell How They'll Spot Subtly Biased Lending Policies
Last week, financial regulators released a joint statement on lending discrimination, which answers a number of industry questions on how fair-lending laws will be enforced. The document also reviews three types of discrimination that the agencies will be trying to uncover.
The first two - overt discrimination and disparate treatment - are well understood by the industry. The third - diparate impact - has received less attention, but is likely to be the focus of an increasing number of government investigations.
The policy statement provides perhaps the most detailed description to date of how regulators will search for disparate impact. Excerpts follow:
When a lender applies a policy or practice equality to credit applicants, but the policy or practice has a disproportionate adverse impact on applicants from a group protected against discrimination, the policy or practice is described as having a "disparate impact."
Policies and practices that are neutral on their face and that are applied equally may still, on a prohibited basis, disproportionately and adversely affect a peson's access to credit.
Although the precise contours of the law on disparate impact as it applies to lending discrimination are under development, it has been clearly established that poof of lending discrimination using a disparate impact analysis encompasses several steps.
The single fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. Where the policy or practice is justified by "business necessity" and there is no less discriminatory alternative, a violation of the Fair Housing Act or the Equal Credit Opportunity Act will not exist.
The existence of a disparate impact must be established by facts. Frequently this is done through a quantitatives or statistical analysis.
Sometimes the operation of the practice is reviewed by analyzing its effect on an applicant pool; sometimes it consists of an analysis of the practice's effect on possible applicants, or on the population in general. Not every member of the group must be adversely affected for the practice to have a disparate impact. …