Fair Lending Risk - Overt Evidence of Disparate Treatment

As we continue our discussion on conducting a fair lending risk assessment, we are today going to discuss the first of three types of discrimination recognized by the courts: overt evidence of disparate treatment.

As we discussed when discussing how to assess fair lending risk, there are three types of fair lending recognized by the courts:

  1. Overt evidence of disparate treatment
  2. Comparative evidence of disparate treatment
  3. Evidence of disparate impact

Understanding Overt Evidence of Disparate Treatment

Overt evidence of disparate treatment is the first type of discrimination recognized by the courts and probably the easiest one to identify in an organization.  This type of discrimination occurs when a lender openly discriminates on a prohibited basis.  This means that a lender publicly makes a statement or publishes an advertisement that is a blatant statement of discrimination.  A simple example of this would be if a lender were to take out an ad that said “We are happy to lend to anyone except [insert protected class here].  Another example would be if if a lender says that they won’t lend to someone just because they are over 65, without regard to their ongoing retirement income, strong assets, and great credit score.

While this type of discrimination is pretty easy to identify, it really isn’t that common as most financial institutions have trained repeatedly on this topic and most lenders understand that they cannot discriminate.  Over the years, I have really only heard of a few stories of blatant discrimination, though one always stands out as my favorite.  

I had just started working with a new bank and was being introduced staff at a number of branches.  Typically, I was mainly introduced to the branch manager (who was also the only commercial lender) at each branch, but found myself at a branch were I was being introduced to the assistant branch manager.  When I inquired about the branch manager/lender, the assistant told me that the former branch manager/lender had just left for another bank.  Giving me more information than I had asked for, she went on to tell me about this person saying how he was a quirky and a bit different, though customers usually liked him.  “For example,” she explained, “he didn’t think that women could run a business so he woudn’t lend to women.”  My eyes must have said a thousand words as she immediately followed up with a statement that “everybody knew this” so women would just go to the next closest branch - that happened to be over 30 minutes away.

You can see the problem with that statement, can’t you?  Apparently, this lender did not and that is a perfect example of why there are fair lending laws in the first place.  (I have always wondered what sort of awakening this lender received when he started working at his new bank.)

Overt Evidence Occurs Without Action

One thing about overt evidence of disparate treatment that is important to understand is that a financial institution (or lender) doesn’t have to act on an overt statement for there to be discrimination - they just have to say it.  This means that discrimination has occurred once the statement is made, regardless of whether or not a loan is actually denied or originated.

For example, let’s imagine that a lender says something like “we really don’t like to lend to Native Americans, but the law says we have too.”  If that lender then proceeds to grant the loan to the Native American applicants, overt evidence of disparate treatment can be proven even though the loan was actually made and the Native Americans received the loan at appropriate terms.

Assessing Risk of Overt Evidence of Disparate Treatment

There are a few ways to assess fair lending risks associated with overt evidence of disparate treatment.  First, a financial institution should evaluate policies and procedures to ensure that lenders have clear guidelines prohibiting such discrimination.  Secondly, it is important to determine where a bank or credit union has conducted appropriate fair lending training to ensure that the organization has explained their expectations (and potential consequences) with their lenders.  Finally, a financial institution could conduct interviews with lenders and customers to identify potential risks associated with overt evidence of disparate treatment.

As you can expect, it is important to include overt evidence of disparate treatment in any fair lending risk assessment template that you might be using. 


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Fair Lending Risk - Comparative Evidence of Disparate Treatment

Assessing Fair Lending Risk