When you are applying for a loan, every part of the lending transaction is being covered by fair lending laws and regulations.
Right from the very beginning the loan application and even the initial inquiry, right through to the granting of the loan and through to debt settlement, all of this is included.
The challenge is on the lender to evaluate through an infinite number of lending risk areas that, if mishandled, will not see accusations of discrimination that were made.
It is essential that lenders fully understand the types of lending discrimination that might be brought to the attention of those regulatory agencies enforcing those laws. When we talk about fair lending, there are three recognized types of discrimination. Here are some brief explanations below:
It is the easiest one to understand, and when people talk about discrimination, this is what they think about. To put it simply, it is blatantly offering and/or providing better or more favorable loan terms to one group of people over another. For example, if the favorable conditions were based on gender.
To be honest, this type of discrimination is the least likely to occur and for that reason does not get a lot of attention when being assessed for fair lending.
The word overt sometimes means deliberate, but in the case of discrimination, it can be unintentional. A good example of this is where a lending institution offers a loan product which has an age requirement that may be different to the legal requirements. That can be misconstrued to be discrimination based on age.
Sometimes these loan offers might be specials, like promotional products, and so can be easily overlooked by those in charge of compliance. Even though it is unintentional, they still can be deemed as examples of overt discrimination.
When you look at the three types of discrimination, this one is the most common and therefore the most likely to be the target of a review of fair lending.
Disparate treatment is based on inconsistencies in treatment, or the different ways in which a borrower might be treated that is simply not allowed, but not wholly explained or made clear.
There are many issues in disparate treatment, such as pricing and underwriting for example. You can find out whether you received different treatment by reviewing your file or by applying statistical analysis to your loan data. Most lenders tend to fall into this category concerning fair lending as it is inconsistencies in the lending profile that reveal the discrimination.
Where disparate treatment is based on inconsistencies, disparate impact is all about the opposite, consistency. If a lending policy is consistently applied and results in an adverse impact on a protected class, this is a disparate impact. The Fair Lending Commission defines it best by specifying it as follows:
“When a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a disparate impact.”
An example of this might be having a minimum credit score or a minimum loan amount requirement. It is not as clear-cut as you might think. Let’s say a lender is always consistent in their policies and never deviate; it still can be judged to be the disparate impact if it negatively affects a protected class of people. In this case, the lending institution should be able to show it was done for “business necessity.”
There is a lot of debate around disparate impact, for the fact that it is not consistent and therefore remains controversial. On the positive side, it is very seldom the type of discrimination that gets targeted when there is a fair lending review or inquiry.
One should be aware of the types of discrimination that can occur so that fair lending risk can be accurately evaluated. While overt discrimination may appear to be obvious and quite blatant, lenders understand that it can happen inadvertently as well. Disparate treatment refers to a lender’s lending practices in which there are inconsistencies. Disparate impact relates to a policy that may be applied consistently, it is in itself a neutral policy, but may adversely affect a particular group. While the disparate impact is the most common, the other two discriminatory lending treatments should not be ignored as they also present a real risk.
1 Consumer Financial Protection Bureau “What protections do I have against credit discrimination?” https://www.consumerfinance.gov/fair-lending/” rel=”nofollow noopener
2 Office of the Comptroller of the Currency “Fair Lending” https://www.occ.treas.gov/topics/consumer-protection/fair-lending/index-fair-lending.html
3 FindLaw.com “Credit & Lending Discrimination and Borrowers’ Rights” https://civilrights.findlaw.com/discrimination/credit-lending-discrimination-and-borrowers-rights.html