After each target group loan file has been reviewed and compared for different treatment, a determination must be made about whether the differing treatment constitutes a violation of law. Substantive as well as technical violations should be identified in addition to different types of discrimination. It also should be determined whether any violations constitute a pattern or practice of discrimination.
Unlawful discriminatory practices range from the overt to the very subtle. The motivations behind such practices range from prejudice to simple ignorance of the law. Violations generally fall into two categories: technical and substantive. Within the category of technical violations, some may be procedural, such as not having the Equal Housing Lender poster on display. However, technical violations, especially of a repetitive nature, can be indicators that possible substantive violations may also exist. Substantive violations involve actual discrimination on a prohibited basis, either disparate treatment or disparate impact.
When evaluating the results of the analysis, look for any evidence of overt discrimination, as well as evidence of disparate treatment and disparate impact.
Evidence of overt discrimination exists when a lender openly and blatantly discriminates on a prohibited basis.
Disparate treatment occurs when a lender treats an applicant differently based on one of the prohibited bases. Disparate treatment ranges from overt discrimination to more subtle differences in treatment. As discussed earlier, disparate treatment may more likely occur in the treatment of applicants who are neither clearly well-qualified nor clearly unqualified for a loan. Even when there is an apparently valid explanation for a particular difference in treatment, further investigation may indicate disparate treatment.
Disparate impact occurs when a policy or practice applied equally to all applicants has a disproportionate adverse impact on applicants in a protected group. However, identifying the existence of a possible disparate impact is only the first step in finding lending discrimination. The next step is to determine whether the policy or practice is justified by a "business necessity." For example, a lender's policy, in effect for several years, does not permit mortgage loans for less than $60,000. If this minimum loan amount is shown to disproportionately exclude potential minority applicants from consideration because of their income levels or the value of the houses in certain areas in which they live, the lender will be required to justify the "business necessity" for the policy.
The justification may not be hypothetical or speculative. Yet, factors that may be relevant to the justification could include, for example, cost and profitability.
Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by "business necessity," it may still be found to be discriminatory if an alternative policy or practice could serve the same purpose with less discriminatory effect. However, where the policy or practice is justified by "business necessity" and there is no less discriminatory alternative, a violation of the Fair Housing Act or the ECOA may not exist.
It is important to identify both individual violations and possible patterns of violations. Isolated, unrelated or accidental occurrences will not constitute a pattern or practice of discrimination. However, repeated, intentional, regular, usual, deliberate or institutionalized practices will almost always constitute a pattern or practice.
In determining whether a pattern or practice exists certain factors should be considered, including whether the conduct appears to be grounded in either written or unwritten policy or an established practice; whether there is evidence of similar conduct to more than one applicant; whether the conduct is within an institution's control and the relationship of the number of instances of the conduct to total lending activity. Depending on the circumstances, violations that may involve only a small percentage of an institution's total lending activity could constitute a pattern or practice.
The evaluation should focus on detecting the presence of both individual instance and systemic violations, and should evaluate internal controls present within the institution to prevent and detect discrimination. Lenders should review any articulated standards or lending policies for possible violations and to detect:
Purposeful discrimination. This includes both overt and the less obvious types of discrimination such as disparate treatment when strict standards are used to reject applicants on a prohibited basis, but more flexible standards are applied selectively to others;
Disparate impact. This includes a policy or practice that may be applied equally to all credit applicants, but the policy or practice has a disproportionate adverse impact on applicants from a group protected against discrimination; and
Unduly subjective standards. This includes no standards or non-specific standards. Such subjectivity can lead unintentionally to allowing
prohibited factors to influence an institution's decision-making process. Historic customs concerning race, gender or handicap discrimination, for example, may continue to be practiced until clear and direct policies ensuring nondiscrimination are in place.
If an institution discovers practices that may be discriminatory, it should determine the cause and consider taking appropriate corrective actions including, but not necessarily limited to:
Identifying applicants whose applications were processed inappropriately and, with legal counsel's advice: offering to extend credit if applicants were denied improperly and compensating them for any damages, both out-of-pocket and compensatory, and notifying them of their legal rights
Correcting any institutional policies or procedures that may have contributed to the discrimination
Identifying, training or disciplining the employees involved
Considering development of community outreach programs or changes in marketing strategy or loan products to better serve minority segments of the market area
Improving audit and oversight systems to ensure there is no recurrence of the discrimination