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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

How to Evaluate and Improve Fair Lending Performance


Many useful guides to detecting and preventing illegal lending discrimination have been developed in recent years by the regulatory agencies and others. With the passage of time, some may have been put aside, overlooked, or forgotten. Included in this section are excerpts from several that outline how lenders can evaluate and improve fair lending performance.

How to Evaluate and Improve Fair Lending Performance

Home Mortgage Lending and Equal Treatment, A Guide for Financial Institutions, published by the FFIEC in November, 1991, highlights some lending standards and practices that may on the basis of race, sex, handicap, or certain other factors adversely affect the ability of credit applicants to obtain home mortgages. A summary is provided here that alerts lenders to less obvious forms of discrimination discussed in the previous sections of this guide and suggests ways to avoid them.

Closing the Gap - A Guide to Equal Opportunity Lending, a publication of the Federal Reserve Bank of Boston released in April, 1993, presents a comprehensive approach that financial institutions can take to address possible discrimination in lending and improve fair lending performance. It emphasizes participation and involvement at all levels of lender operations. While the focus is on mortgage lending, most of the recommendations apply to other lending areas, including consumer, commercial and small business lending. A fair lending check list from Closing the Gap is highlighted here to assist lenders in evaluating performance.

Suggested Lending Activities. In a public announcement on May 27, 1993, the federal financial institutions supervisory agencies jointly communicated to lenders eleven activities suggested as a means to improve fair lending performance. We include them in this section.

The FDIC Compliance Examination Manual and the examination procedures and guidelines in use by other regulatory agencies are a useful source of information to assist financial institutions in developing self-assessment programs. Excerpts presented here from the FDIC Fair Housing Examination Procedures expand upon the discussion in the previous section on policies, procedures and subjective lending criteria that may raise questions of disparate impact discrimination.

We encourage financial institutions to contact the agencies cited for copies of the source documents in their entirety.

Home Mortgage Lending and Equal Treatment

A Guide for Financial Institutions

Published by:

Federal Financial Institutions Examination Council

1776 G Street, NW, Suite 850B,

Washington, DC 20006

The FDIC distributed a camera-ready copy of this brochure in a letter to financial institutions on March 16, 1992 (FIL-19-92). It presents examples of lender requirements that may have a discriminatory effect on minority applicants and offers several recommendations. While the principles outlined apply to all forms of discrimination, the guide focuses on discrimination based on race in several areas of the lending process. The following is a summary of several of its recommendations:

Loan Origination Process

To assure that lending personnel are applying standards appropriately, lenders should:

  • Reassess property standards and minimum loan amounts that may not consider neighborhood differences in minority areas
  • Investigate credit practices for possible pre-screening when disproportionate low application levels are found for particular groups
  • Develop a simple "equal opportunity in lending" policy statement and periodically discuss it with staff
  • Print detailed information about mortgage loan terms and qualifications and make it easily available to loan officers and the general public. Information about steps applicants can take to help them qualify, such as monetary gifts from others to meet a downpayment, can be made available. Discrimination is less likely to occur if information regarding qualifications, rules, common exceptions, and helpful hints is clearly spelled out in writing, made available in the lobby, and explained to all applicants.

Appraisal Process

If appraised values appear to play a substantial role in rejections or reductions of loan amounts in minority areas, lenders should:

  • Determine that appraisers have recently received effective fair housing training and subscribe to current fair housing standards of the Appraisal foundation or other organizations
  • Be alert to two appraisal practices most likely to cause equal opportunity problems:

First, in the cost approach to value,racial bias may be reflected in unsupported adjustments for "functional and economic obsolescence." Lenders should not assume that large adjustments are appropriate just because a home or neighborhood is over a certain age.

Second, in the comparable sales approach, racial bias may cause the appraiser to select comparables or make adjustments that are inappropriate.

Marketing Process

Lenders also should be sensitive to potential discriminatory effects of their marketing practices, in particular:

  • Where lender strategies fail to include contact with minority realtors and other realtors serving predominately minority areas, there is almost always a low level of minority applicants
  • Similarly, lender advertising can have dramatic effects on the way minority borrowers view lenders. Failure to advertise in media directed to minority areas, or in media known to appeal to minorities, can limit the ability of an institution to attract minority applicants.

Private Mortgage Insurance

In addition to reviewing and revising their own standards and practices lenders can also attempt to influence the standards of private mortgage insurers. Lenders should:

  • Carefully review rejections of loans submitted to private mortgage insurance companies
  • Select companies that may be more receptive to ideas for changes


Published by:

Federal Reserve Bank of Boston

P. O. Box 2076

Boston, MA 02106 (617) 973-3459

Recognizing that fair lending is good business "Closing the Gap" states that lenders, and their regulators, should look for ways to eliminate the unjustified lending disparities that have been documented over the years. A series of questions from it are included here to assist lenders in evaluating fair lending performance.

1. When hiring, do you seek cultural diversity which reflects the demo-graphics of your community?

2. When hiring lending staff, do you take into account possible racial, religious or other prejudices of job applicants?3. Do you train all staff in the area of fair lending?

4. Do you have any mechanisms through which unfair lending practices, policies, or procedures may be detected? If so, are you able to determine the effectiveness of those mechanisms?

5. Do you inform all potential borrowers, regardless of their race or ethnic background or the location of the property, about all of your lending programs so they may decide which best fits their needs?

6. Do you deliberately steer minority applicants to federally insured programs because you assume that minorities are less credit-worthy? 7. Do you have mortgage lending practices that include location of property as a risk factor?

8. Does your mortgage prequalifying procedure tend to encourage or discourage minority applicants?

9. Do you offer home-buyer education programs for potential applicants who are unfamiliar with the mortgage lending process?

10. Do you regularly review your advertising to see if the choice of illustrations or models suggests a customer preference based on race?

11. Are you as assertive in attracting minority applicants as you are in attracting non-minority applicants?

12. Are you familiar with the practices of the real estate and mortgage brokers with whom you do business?

13. Do you encourage the brokers and appraisers with whom you do business to be constructively active in minority communities?

14. All things being equal, do non-minority and minority credit applicants have the same chance of getting a loan from this financial institution?


Available by Subscription from the FDIC

Fair Housing Section

In the previous section of this guide, A Comparative Analysis of Residential Loan Applications, we stressed the importance of reviewing loan policies and procedures for any disparate impact implications, i.e., where policies and practices may appear neutral on their face but have the net effect of a disparate impact on a protected group. If an adverse effect or impact on a prohibited bases group is shown, it is the responsibility of the institution to justify the particular policy or practice by a "business necessity." Some policies or practices that may raise disparate impact questions include, but are not limited to, the following excerpted from the"FDIC Compliance Examination Manual"

  • A requirement that the property securing a mortgage loan must not exceed a particular age, or appraisal practices that establish unrealistically low values for older properties
  • Restricting mortgage lending to loans for certain types of properties, such as single family homes, properties having no more than two floors, those with large lots, garages, or with large square footage requirements
  • A policy of not making loans on properties in certain locations or appraisal practices that arbitrarily discount the value of a property because of its location
  • A policy of making mortgage loans only to applicants who have previously owned a home
  • Establishing highly restrictive downpayment or income requirements, e.g., requiring a 25 percent downpayment or setting a very low (such as 20 per-cent) maximum monthly mortgage payment to income ratio
  • Setting high minimum mortgage loan amounts that effectively exclude low-income borrowers or low maximum loan amounts that limit the financial institution's participation in the mortgage market
  • Arbitrarily excluding FHA or VA mortgage loans
  • In addition, general and not specific subjective lending criteria may raise effects test or disparate impact questions. Examples of subjective lending criteria that may lead to possible unlawful discrimination include:

  • The property should be in a "stable" or "rising" area, should be "well-maintained" and have an "attractive appearance" or "good curb appeal"
  • The neighborhood should be "desirable"; there should be "homogeneity of residents and structures"; or the neighborhood should reflect "satisfactory pride of ownership"
  • Applicants must not be of "questionable" character; must have an "excellent" credit rating; or must have "adequate" longevity on the job

Such subjective criteria may allow lending personnel to arrive at differing interpretations. Also, they may have the effect of discouraging creditworthy applicants.


Press Release, May 27, 1993

Federal Deposit Insurance Corporation

Federal Reserve Board

Comptroller of the Currency

Office of Thrift Supervision

On May 27, 1993, the federal financial institutions supervisory agencies jointly communicated their deep concerns about lending discrimination in a letter to the chief executive officers of financial institutions. The letter urged special attention to the following 11 activities suggested to improve fair lending performance:

  • Using an internal review system for consumer, mortgage and small business loan applications that would otherwise be denied
  • Enhanced employee training that engenders greater sensitivity by financial institution management and employees, to racial and cultural differences in our society
  • Training of loan application processors to assure that any assistance provided to applicants in how to qualify for credit is provided consistently to all loan applicants
  • Efforts to ensure that all persons asking about credit are provided equivalent information and encouragement
  • Affirmative marketing and call programs designed to assure minority consumers, realtors, and business owners that credit is available on an equitable basis; marketing may involve sustained advertising programs covering publications and electronic media that are targeted to minority audiences
  • Ongoing outreach programs that provide the institution with useful information about the minority community, its resources, credit needs and business opportunities
  • Participation on multi-lender Mortgage Review Boards that provide second reviews of applications by participating lenders
  • Participation in public or private subsidy or guarantee programs that would provide financing on an affordable basis in targeted neighborhoods and communities
  • Use of commissions or other monetary or nonmonetary incentives for loan officers to seek and make safe and sound consumer and small business

Last Updated 07/28/1999

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