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Side by Side: A Guide to Fair Lending

INTRODUCTION

The Fair Housing Act and the Equal Credit Opportunity Act prohibit lending discrimination. Although these laws have been in effect for many years, lending discrimination continues to be a cause for national concern. This guide will help lenders compare the treatment of loan applicants and identify differences that may be discriminatory. It offers suggestions on how to correct discriminatory practices and improve fair lending performance.

Part One describes how to compare the experiences of testers to determine if all persons asking about credit are provided equivalent information and encouragement. Such lending tests can be performed internally by the lender or by using an independent contractor. The information provided here on how to plan and manage a pre-application testing program will help an institution decide. Testing can help to detect discrimination or it can reassure an institution that it does not discriminate. Its focus is the point where an applicant inquires about a loan, gathers information and receives counseling or an invitation to apply. Discrimination at this important stage of the loan process occurs before it is captured on paper and often results from how one person treated another. We encourage financial institutions to take whatever steps are necessary, including some form of pre-application testing, to inspect the treatment of potential applicants. It will help to prevent illegal discrimination, improve customer service and attain lending goals.

We also encourage institutions to compare the treatment of applicants after submission of an application through a comparative analysis of loan files. Part Two of the guide suggests one method of comparative file analysis. It also provides examples of how loan product features, underwriting standards, or instances of lender assistance to borrowers can be compared to identify unequal treatment that may constitute discrimination. Disparate treatment may occur among any applicants. However, the risk of disparate treatment occurring is higher among applicants who are neither clearly qualified nor clearly unqualified for a loan as there is more room for lender discretion. The system of comparing loan files set out in this guide helps to identify and evaluate such applications.

Evaluating the results of a comparative analysis of tester experiences or actual loan applications requires identifying the different types of discrimination that may have occurred. Part Two discusses how to identify these including overt or subtle discrimination, disparate treatment, disparate impact, an individual instance of discrimination and a pattern or practice of discrimination. Further, it suggests several corrective actions that may be appropriate to consider depending on the circumstances.

Part Three presents excerpts from other widely distributed fair lending guides that provide information useful to the comparative evaluation process. We encourage lenders to review the guides in their entirety.

As financial institutions and their legal counsel may want to evaluate all aspects of a self-assessment program, Part Four discusses what criteria will be used by the regulatory agencies in taking enforcement actions and seek-ing remedial measures. It further advises that the agencies must refer evi-dence of discrimination they may uncover to the Department of Justice or HUD even when discovered through a lender's self-testing effort. However, voluntary identification and correction of violations disclosed through a self-testing program will be a substantial mitigating factor in considering what further actions might be taken.

Finally, the closing statement of this guide is perhaps the first step that an institution should take to ensure equal treatment of loan applicants. It highlights the importance of providing multicultural awareness, race, gender and handicap sensitivity training to all levels of an institution's staff.

Last Updated 07/28/1999 supervision@fdic.gov