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Under fair lending, all decisions in any aspect of the lending process should be made without regard to any of the prohibited bases for discrimination contained in either the Equal Credit Opportunity Act or the Fair Housing Act. Fair lending begins with the notions that all applicants should have equal access to credit; that applications from similarly situated applicants should yield similar outcomes; and that applicants should only be treated differently if there is a documented legitimate business reason to do so.
But the reach of fair lending goes far beyond applicants and applications. It affects how credit products are designed; how, where and to whom they are advertised; pricing; loan servicing; delinquency and loss mitigation management; and so much more. Fair lending is truly a "soup-to-nuts" concept affecting every form of credit offered.
Intentional discrimination on a prohibited basis is exceedingly rare. But lending practices and policies that have a discriminatory impact can exist, despite a lack of discriminatory intent.
Some types of lending criteria can appear facially neutral, but actually result in a disparate impact on a particular group. Requiring five years of employment history, for example, would have a disparate impact on young applicants because they wouldn't have a lengthy work history.
Disparate impact can also result from an otherwise reasonable business decision, such as allowing loan officer or underwriting discretion in order to encourage lending responsiveness and creativity. The unintended result could be a disparate impact on a particular group if a statistically significant variance in rates or fees develops.
The application of a disparate impact test to fair lending has been controversial, but it isn't going away any time soon. HUD promulgated a new rule on the subject in February, 2013. Recent enforcement actions demonstrate the doctrine's use by financial institution regulators. And the Magner and Mt. Holly cases, which were to focus the Supreme Court's attention on the issue, were both settled at the 11th hour, taking the issue off of the high court's table.
This program will cover:
- What disparate impact is
- HUD's Disparate Impact rule
- Types of policies most often cited as leading to disparate impact
- Types of practices that can lead to disparate impact
- What enforcement actions tell us about regulator expectations in this area
- Steps you can take to identify disparate situations before the regulators do
- Actions you can take to avoid disparate impact
Disparate Impact: What You Need to Know
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