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Side by Side: A Guide to Fair Lending

What is Pre-Application Testing
Paired Testing
Multi-layered Testing
Complaing Testing
Self-Testing or Contract Testing


Self-testing allows an institution to compare, in a controlled manner, the treatment of customers and potential customers. Testing for discrimination can help to find potential problems, or it can reassure an institution that it does not discriminate. In addition, an institution can gain insight into how its lending practices appear from the loan applicant's perspective, a valuable insight not readily available through other internal audit methods.


Testing is a way of measuring differences in treatment. A financial institution can use pre-application testing to uncover instances of overt or subtle discrimination against individuals protected under the ECOA and the Fair Housing Act. To detect illegal discrimination, testers visit financial institutions posing as prospective loan applicants. While they do not actually complete a loan application, testers do experience the important pre-application phase of the loan process. After discussing loan possibilities, they objectively document how they were treated and the information given to them by the institution's personnel.

There are three basic types of tests: paired, multi-layered or sandwich, and complaint.

Paired Testing

A paired test consists of sending two individuals (or two couples) separately to an institution to collect detailed information about its lending practices. The testers pose as potential applicants for the same type of loan.

Example: To test for discrimination based on race, a white tester and a black tester separately visit a lending institution to ask about applying for the same type of loan. They would be provided with similar background information such as family size and employment. The black tester would generally have a slightly higher income and less debt in order to appear better qualified than his or her white counterpart. Otherwise, the individuals selected as testers should be similar in all significant respects except for the variable being tested (e.g., race, gender, familial status, etc.).

Their experiences would then be compared to determine if the individual in the protected class may have been the victim of discrimination. Importantly, in paired tests, the testers usually do not have knowledge of each other or the purpose of the test. Conducting the test in this manner helps ensure the valid-ity of the test by minimizing the potential for bias in recording experiences.

Multi-layered Testing

Multi-layered testing or "sandwich" testing uses three testers, only one of whom is a protected class member. As with paired testing, the testers should be similar except for the variable being tested.

Example: In testing for discrimination based on sex, the first tester would be male, the second tester would be female, and the third tester would be male. Marital status would be the same for all three and the female tester's qualifications would be slightly better than those of the male testers. This test structure limits non-gender variables leaving gender as the most likely basis for potential differences in treatment.

In sandwich testing, as in paired testing, the testers separately ask about similar financing requirements.

Complaint Testing

Complaint testing, unlike the sandwich or paired scenarios, uses a single tester to evaluate the experience of an actual loan applicant who believes that an illegal discriminatory event has occurred. The tester assumes characteristics similar to the complainant's and attempts to obtain information about the same loan product.

Example: The complainant is Hispanic and believes that his loan application was denied based on his national origin. A white tester would be assigned slightly worse financial and employment qualifications than those of the complainant. The complainant's experiences at the institution would be compared to the white tester's experiences to determine if there were any differences in treatment. If the tester is offered a loan or receives better treatment and more information, then the complainant may have been discriminated against on the basis of national origin.

In all three types of testing, paired, multi-layered and complaint, the testers prepare an objective, factual written account of their experiences on a standardized report form.

Self-Testing or Contract-Testing

Lending tests can be performed internally by the lending institution or by an independent contractor. The decision rests with the institution; however, it is important for each institution to weigh the advantages and disadvantages of either selection carefully.

One advantage of in-house testing is that the institution directly controls the program as it hires the testers and analyzes the results. Disadvantages are that the testing program may divert employees from other tasks, and it may be more difficult to keep the testing confidential. In addition, it may be harder to analyze the results objectively. This may be especially true if the reviewer knows the employee who was tested.

The use of an independent contractor, on the other hand, limits the use of an institution's personnel. Furthermore, objectivity and confidentiality are more easily maintained because fewer people within the institution are privy to testing program information. Disadvantages to using an independent contractor are that their methods may not suit a particular financial institution's needs, experience levels may vary, and costs may be significant. As testing expertise among contractors varies, it is important to verify a contractor's experience level, testing methodology and references. For example, a particular contractor's testing program may only deal with customer service issues and ignore testing for illegal discriminatory lending practices.

The following guide to planning, conducting, and evaluating a test are provided for your financial institution's consideration in developing an internal self-testing program or in evaluating an independent contractor's program.

Last Updated 07/28/1999 supervision@fdic.gov