Comparative vs Overt Disparate Treatment

Fair lending continues to be one of the highest risk areas for any creditor.  Deficiencies can result in significant penalties, fines, and other enforcement actions.  Therefore, each creditor must understand the different types of fair lending violations that could be cited during a fair lending audit or compliance examination.  In other words, if a creditor if familiar with what an examiner will be looking for, they will be more likely to self-identify and correct the issue before it becomes a significant exam violation.

Two Types of Fair Lending Violations

When an examiner conducts a fair lending examination of a creditor, they are generally going to follow the FFIEC interagency fair lending examination procedures.  To explain, the FFIEC - or “federal financial institutions examination council” - is a joint agency where all of the different regulators work together to create uniform and standard examination procedures that will be used by each regulatory agency.  This joint effort ensures that every creditor is examined in a somewhat similar way.

The interagency fair lending examination procedures explain that there are essentially two types of fair lending violations recognized by the courts: Disparate impact and disparate treatment.  While disparate impact is pretty straight forward (for now), disparate treatment actually contains two different types of discrimination:

Disparate Impact

Disparate impact occurs 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.  Under the current regulatory framework, disparate impact can occur even if a creditor does not intentionally discriminate, but the result of an arbitrary policy excludes or burdens individuals of a protected class.

Note: The current examination model used to determine disparate impact is being re-evaluated by HUD.  

Comparative vs Overt Disparate Treatment

Disparate treatment occurs when a protected class applicant is treated differently than other applicant during any part of the credit process.  Specifically, the courts have recognized two different types of disparate treatment: comparative evidence of disparate treatment and overt evidence of disparate treatment.  Organizations who understand the difference between comparative vs overt disparate treatment will be able to better mitigate the risks associated with each type of discrimination.

Comparative Evidence of Disparate Treatment

Comparative evidence of disparate treatment occurs when a protected class applicant is treated less favorably than other applicants and is typically discovered through a comparative analysis during a fair lending examination.  A comparative analysis is a method used by examiners to compare protected class applicants with control group applicants. For example, a comparative analysis may compare the best (marginal) denials against the worst (marginal) approvals.  In this case, the comparative analysis would be comparing the denials that barely didn’t make it to the approvals that were barely approved - and then identifying any overlaps or inconsistencies between the two. A comparative analysis may also focus on other underwriting terms such as pricing, fees, or credit terms.

Comparative evidence of disparate treatment often occurs when a creditor permits discretion in the underwriting process as discretion leads to inconsistencies.  When all underwriting discretion is eliminated (such as is the case with some automated underwriting models), fair lending risk from comparative evidence of disparate treatment is significantly reduced.  

Comparative evidence of disparate treatment is often not intentional (though it could be) as this type of discrimination is typically a result of lender discretion in the underwriting process - meaning that discretion results in inconsistencies in the approval and denial process.  These inconsistencies then result in a protected class applicant receiving less favorable terms than a control group applicant.

The bottom line is that comparative evidence of disparate treatment occurs when a denied protected class applicant has substantially similar (or better) underwriting characteristics than a control group applicant who was approved by the creditor.

Overt Evidence of Disparate Treatment

Overt evidence of disparate treatment is a bit different than comparative evidence as overt evidence is typically a blatant statement of discrimination.  For example, if a lender refuses to lend to women because he thinks that women can’t run a business, then this would be an example of overt evidence of disparate treatment.  It is important to note, however, that overt evidence of disparate treatment does not require an applicant to receive less favorable terms - just the fact that a lender made overt statements can be enough evidence of disparate treatment.

Overt evidence typically occurs through verbal statements by lenders, but could also occur through written advertisements and other materials published by the creditor.  For example, if an advertisement makes a statement that discourages applications from a specific protected class, then the advertisement could be considered disparate treatment.


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