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Home > Regulation & Examinations > Bank Examinations > Side by Side: A Guide to Fair Lending

Side by Side: A Guide to Fair Lending

Evaluating the Test
Completing Report Forms
Analyzing the Results
Addressing Lender Concerns
Correcting Discriminatory Practices


After completing the test, several critical steps are necessary to determine whether illegal discrimination has occurred during the test and what corrective measures should be considered. These include:

  • Debriefing the testers
  • Completing all test forms
  • Analyzing each test carefully
  • Writing a report on the results of the test
  • Recommending corrective action

Debriefing the Testers

Testers should contact the test manager after a site visit is completed or telephone interaction. This contact allows the test manager to debrief the tester and gives the tester an opportunity to describe any problems that may have arisen during the site visit.

Debriefings will confirm that a test was performed and enable the supervisor to elicit information about the visit. Questions may include the loan representative's name, the interest rate quoted, the amount of time spent with the loan representative or other questions to clarify what the tester reports.

Completing a Report

Nearly every test will require some type of report form. Report forms are used to record information exchanged between the tester and the loan representative during the site visit. Reports usually contain two sections. The first section contains specific questions soliciting information such as whether an appointment was made, the time the visit began and ended, how long the tester waited for an interview, and which loan products were discussed.

Appendix C provides a listing of examples of other questions that may be included in the first section of a testing report.

The second section of a testing report would usually provide space for a tester's narrative, or a comprehensive description of the site visit. The narrative is particularly important because it can be used to validate the tester's responses to the specific questions in the first part of the report. The narrative should begin with the tester first contacting the lending

institution, whether by telephone or in person, and should conclude with the tester leaving the institution. The narrative should include verbatim statements by the loan officer to the tester, where possible, as well as other information received during the test. As the narrative is one of the most important aspects of a report, it should avoid subjective or ambiguous comments.

In addition to the test there may be other reports for the tester to complete. The most common are:

  • Telephone Contact Report: This type of form may be used to record any telephone calls made to a lending institution. Most telephone calls are made before a site visit to the institution. Information from this type of call would generally include:
  • - Name of the staff person

    - Purpose of the call

    - Whether the tester asked about any specific programs or products

    - Whether the person informed the tester of a specific program or product

    - Date of the call

    - Whether the staff person requested specific personal financial information or information about the property such as its location or price

    - A narrative description of the conversation

  • Follow-Up Report: This type of report may be used to record any post-test attempts by loan staff to contact a tester. Testers should record who made the contact, the type of contact (e.g., mail or telephone), whether a specific product or program was discussed, the date and time of the contact, and a narrative description of the conversation or nature of the contact.

Analyzing the Results

The test manager has sole responsibility for collecting the reports, analyzing the data, and determining whether an institution may have engaged in discriminatory practices. The test results will either show that corrective measures should be considered by the lender or that the institution is serving its clients well and in a manner consistent with the fair lending laws.

The manager analyzes the tester reports to determine if the Equal Credit Opportunity Act or the Fair Housing Act appear to have been violated. Comparing the reports side-by-side will help in identifying inconsistent

statements by personnel of the lending institution. For example, report forms should be examined to see if the lender offered different terms or conditions concerning loan products, interest rates, application fees, loan terms, or provided different information regarding the availability of loans in certain neighborhoods.

Particular attention should be paid to service questions such as: How long did the tester wait for an interview? How was the tester greeted? Where was the tester interviewed? Although differences in the responses to these questions may not necessarily indicate illegal discrimination, different answers may reveal areas where customer service can be improved.

Following the test manager's initial evaluation, another qualified person should analyze the test results. The second analysis provides an internal control against any possible bias of the test manager and may either verify or contradict the manager's initial findings. The second review person should evaluate the reports without knowing the outcome of the first evaluation.

A summary report of both analyses should be completed. If any differences in treatment are discovered, it is important that legal counsel be notified to help determine if any fair lending laws were violated.

Addressing Lender Concerns

Any discussion of pre-application testing would be incomplete without addressing some of the concerns that relate to the use of testers. Some people claim that testing is illegal because testers deliberately set out to look for discrimination, or they criticize testing because they say it is entrapment. If appropriate procedures are followed, testing is not illegal, nor is it entrapment.

At least since 1973, Federal courts have approved using testers to investigate and prove allegations of housing discrimination. To quote one judge: "It would be difficult indeed to prove discrimination in housing without this means of gathering information." Hamilton v. Miller, 477 F.2d 908, 910 n.1 (10th Cir. 1973). Even though testers mislead commercial landlords and lenders, such deception is viewed by the courts as a relatively small price to pay to detect and prevent discrimination.

The criticism that testing is entrapment is insupportable because the defense of having been induced by the government to engage in an illegal act is available only in criminal actions, not under civil discrimination statutes, and where the government has allegedly induced the activity. In the present situation, the FDIC is advocating that institutions test themselves to discover civil violations of law. Therefore, no matter how objectionable testing may seem to some, it is not a defense to a civil charge of discrimination.

Admittedly, some people are suspicious and critical of testing. They may not realize that testing is both a means to discover possible discrimination, and a protection for law-abiding lenders because it may provide evidence that an institution is not violating the discrimination laws. For example, testing may show that a complaint was unfounded because there is no evidence of discrimination or because a borrower has misinterpreted a lender's practices.

In the latter case, testing may enhance internal controls by bringing to light a practice that might be confusing or offensive to some borrowers. Corrective steps may then be taken.

Correcting Discriminatory Practices

How to correct discriminatory practices that may be discovered is addressed at the conclusion of Part Two on page 26. Part Four outlines on page 36 what criteria will be employed by the financial institution regulatory agencies in taking enforcement actions or seeking remedial measures when discrimination is discovered.

It also should be noted that if an institution finds a pattern or practice violation through its own self-testing effort, and a federal regulatory agency becomes aware of it, the agency is required under the Equal Credit Opportunity Act, to refer the matter to the Department of Justice whether or not corrective action has been taken. To address lenders' concerns about possible referrals and to encourage the use of self-testing, several agencies, including the FDIC, have agreed not to require or request any information about a lender's self-testing program, except in cases where the agency has independently determined that a lender has unlawfully discriminated and the lender uses the results of self-tests to defend itself against the charge. Even the Department of Justice has announced that, as a general matter, it will not use evidence created by self-testing against the lender that undertook the self-testing, and will not request a lender's self-testing results to form a basis for determining whether to file a pattern or practice complaint. If a lender relies on the results of self-testing to defend itself against a Department of Justice charge of discrimination, the Department will expect the information to be disclosed. To that end, if a fair lending suit is authorized and litigation actually commences following unsuccessful settlement efforts, the Department has reserved the right to seek discovery at that time.

Financial institutions should check with their primary regulatory agency to determine the current position of the agency, or other agencies, on whether, or under what circumstances, it would ever seek the results of the institution's self-testing activity. However, it can only benefit an institution to discover and correct possibly discriminatory practices before an applicant is harmed or a federal regulatory agency learns of them.

A testing program can help an institution assess its compliance with fair lending laws. How useful it will be is up to the institution. Testing should not be done to placate regulators and community groups. Instead, testing should be undertaken to facilitate an institution's ongoing evaluation of its lending policies and procedures in an effort to guarantee equal access to loans.

Last Updated 07/28/1999

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