The is the second article on our Fair Lending Training series – Types of Discrimination & Prohibited Practices. In this article we cover types of discrimination such as disparate treatment and disparate impact and prohibited practices that fall under ECOA and the FH Ac.
Types of Discrimination
There are basically two types of discrimination: disparate treatment and disparate impact. Disparate treatment can be overt, such as we don’t lend to single women or we don’t lend to anyone over 50. Or disparate treatment claims can be made by comparative evidence, where differences in treatment are not fully explained by non discriminatory factors.
Recently there was a redlining case brought against Santander that claims discrimination. Although Santander’s entire lending levels decreased since 2009 the level of lending to minority areas decreased by a greater percentage than their lending decreased in white neighborhoods. This would be comparative evidence that Santander will need to explain.
Another important note about disparate treatment is that it does not have to have hate or prejudice as a motive. If you like women, but still charge them higher rates than similar situated males simply because they are less likely to negotiate that’s disparate treatment.
Disparate Impact is a bit controversial and still is working through case law, but in general its when an otherwise neutral policy or practice has a disproportionately negative impact on persons from a prohibited basis group.
However, there is more to the story. A neutral policy that has a negative impact on a PBG is still ok if it serves a legitimate business need such as controlling costs or lack of expertise or some other legitimate business need and that business need can’t be accomplished in a less discrimtaory manner.
- Overt-Lender openly discriminates on a prohibited basis (can be written or verbal)
- Comparative Evidence-Differences in treatment not fully explained by legitimate non-discriminatory factors
*A disparate treatment claim does not require evidence the lender intended to discriminate or was motivated by prejudice.
Disparate Impact (“Effects Test”)
- When an otherwise neutral policy or practice has a disproportionately negative impact on persons from a prohibited basis group.
*A disparate impact claim must show the challenged policy or practice is either:
- not justified by a valid business propose or
- that the business justification could be accomplished using a less discriminatory alternative.
- Fail to provide or provide different information or services regarding any aspect of the lending process
- Discrourage or selectively entourage individuals who inquire or apply for credit
- Refuse to extend credit or use different standards in determining whether to extend credit
- Vary the terms of credit offered
- Use different standards to evaluate collateral
- Treat a borrower differently in servicing a loan or making invoking default remedies
- Use different standards for pooling or packaging loans in the secondary market
This does not mean you have to provide great customer service or competitive products; you just can’t provide different experiences for protected basis groups vs. control groups. These practices apply to applicants and co-applicatns; people associated with the applicant; occupants of a property to be financed; or the characteristics of the neighborhood in which a property to be financed is located.
Interested in Learning More? Download our Guide on Self-testing for Pricing Discrimination.