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Side by Side: A Guide to Fair Lending
PART THREE: OTHER GUIDES 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.
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
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:
If appraised values appear to play a substantial role in rejections or reductions of loan amounts in minority areas, lenders should:
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.
Lenders also should be sensitive to potential discriminatory effects of their marketing practices, in particular:
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:
CLOSING THE GAP
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?
FDIC COMPLIANCE EXAMINATION MANUAL
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"
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:
Such subjective criteria may allow lending personnel to arrive at differing interpretations. Also, they may have the effect of discouraging creditworthy applicants.
SUGGESTED LENDING ACTIVITIES
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:
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