[Federal Register Volume 59, Number 73 (Friday, April 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9214]
[[Page Unknown]]
[Federal Register: April 15, 1994]
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Part III
Department of Housing and Urban Development
Office of Federal Housing Enterprise Oversight
_______________________________________________________________________
Department of Justice
_______________________________________________________________________
Department of the Treasury
Office of the Comptroller of the Currency
Office of Thrift Supervision
_______________________________________________________________________
Federal Reserve System
_______________________________________________________________________
Federal Deposit Insurance Corporation
_______________________________________________________________________
Federal Housing Finance Board
_______________________________________________________________________
Federal Trade Commission
_______________________________________________________________________
National Credit Union Administration
_______________________________________________________________________
Policy Statement on Discrimination in Lending; Notice
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of Federal Housing Enterprise Oversight
[Docket No. N-94-3751; FR-3706-N-01]
DEPARTMENT OF JUSTICE
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 94-04]
Office of Thrift Supervision
[Docket No. 94-41]
FEDERAL RESERVE SYSTEM
[Docket No. R-0834]
FEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL HOUSING FINANCE BOARD
FEDERAL TRADE COMMISSION
NATIONAL CREDIT UNION ADMINISTRATION
Policy Statement on Discrimination in Lending
AGENCIES: Department of Housing and Urban Development; Office of
Federal Housing Enterprise Oversight; Department of Justice; Office of
the Comptroller of the Currency, Treasury; Office of Thrift
Supervision, Treasury; Board of Governors of the Federal Reserve
System; Federal Deposit Insurance Corporation; Federal Housing Finance
Board; Federal Trade Commission; National Credit Union Administration.
ACTION: Notice of approval and adoption of ``Policy Statement on
Discrimination in Lending''; and Solicitation of Comments regarding its
application.
SUMMARY: The Department of Housing and Urban Development (HUD), the
Office of Federal Housing Enterprise Oversight (OFHEO), the Department
of Justice (DOJ), the Office of the Comptroller of the Currency (OCC),
the Office of Thrift Supervision (OTS), the Board of Governors of the
Federal Reserve System (Board); Federal Deposit Insurance Corporation
(FDIC); Federal Housing Finance Board (FHFB), the Federal Trade
Commission (FTC), and the National Credit Union Administration (NCUA)
(collectively, ``the Agencies'') have adopted a statement entitled
``Policy Statement on Discrimination in Lending'' that describes the
general principles that these Agencies will consider to identify
lending discrimination in violation of the Equal Credit Opportunity Act
or the Fair Housing Act. The principles outlined are general in nature.
Their application in specific situations will depend on the facts
involved and is subject to continuing development. The Agencies welcome
comments about application of the principles to specific policies and
practices. The Agencies anticipate providing further clarification and
elaboration on the application of the principles in the future.
DATES: Effective date: April 15, 1994.
Comment due date: June 14, 1994.
ADDRESSES:
HUD: Comments should be directed to the Rules Docket Clerk, Office
of General Counsel, Room 10276, Department of Housing and Urban
Development, 451 Seventh Street SW., Washington, DC 20410.
Communications should refer to the above title.
OFHEO: Comments should be directed to: Communications and Public
Affairs, Office of Federal Housing Enterprise Oversight, 1700 G Street,
Fourth Floor, NW., Washington, DC 20552.
DOJ: Comments should be mailed to: U.S. Department of Justice,
Housing and Civil Enforcement Section, P.O. Box 65998, Washington, DC
20035-5998.
OCC: Comments should be directed to: Communications Division,
Office of the Comptroller of the Currency, 250 E Street SW.,
Washington, DC 20219, Attention Docket No. 94-04. Comments will be
available for public inspection and photocopying at the same location.
OTS: Send comments to: Director, Information Services Division,
Public Affairs, Office of Thrift Supervision, 1700 G Street NW.,
Washington, DC 20552, Attention Docket No. 94-41. These submissions may
be hand delivered to 1700 G Street NW., from 9 a.m. to 5 p.m. on
business days; they may be sent by facsimile transmission to FAX number
(202) 906-7755. Comments will be available for inspection at 1700 G
Street NW., from 1 p.m. until 4 p.m. on business days. Visitors will be
escorted to and from the Public Reading Room at established intervals.
BOARD: Comments should refer to Docket No. R-0834 and mailed to
William W. Wiles, Secretary, Board of Governors of the Federal Reserve
System, Washington, DC 20551. Comments addressed to Mr. Wiles may also
be delivered to room B-2222 of the Eccles Building between 8:45 a.m.
and 5:15 p.m. weekdays, or to the guard station in the Eccles Building
courtyard entrance on 20th Street NW (between Constitution Avenue and C
Street NW) at any time. Comments may be inspected in room MP-500 of the
Martin Building between 9 a.m. and 5 p.m. weekdays, except as provided
in the Board's rules regarding the availability of information (12 CFR
261.8).
FDIC: Comments should be directed to: Robert E. Feldman, Acting
Executive Secretary, FDIC, 550 17th Street NW., Washington, DC 20429.
They may be hand delivered to room 402, 1776 F Street NW., Washington
DC between 8:30 a.m. and 5:15 p.m. on business days. Comments may also
be faxed to (202) 898-3838.
FHFB: Comments should be directed to: Elaine L. Baker, Associate
Director and Executive Secretary, Federal Housing Finance Board, 1777 F
Street NW., Washington, DC 20006.
FTC: Comments may be filed in person or mailed to: Secretary,
Federal Trade Commission, 6th Street and Pennsylvania Avenue NW.,
Washington, DC 20580.
NCUA: Comments should be directed to: Mr. Michael J. McKenna, Staff
Attorney, Office of General Counsel, National Credit Union
Administration, 1775 Duke Street, Alexandria, VA 22314-3428.
FOR FURTHER INFORMATION CONTACT:
HUD: Peter Kaplan, Director, Office of Regulatory Initiatives and
Federal Coordination, (202) 708-2904 (voice) or 1-800-877-TDDY (Federal
Information Relay Service).
OFHEO: Kevin G. Chavers, Chief of Staff, Office of Federal Housing
Enterprise Oversight, (202) 414-3800.
DOJ: Alexander C. Ross, (202) 514-2303, or Richard J. Ritter, (202)
514-4739, Housing and Civil Enforcement Division, or (202) 514-0383
(TDD).
OCC: R. Russell Bailey, Fair Lending Specialist, Compliance
Management, (202) 874-4446; Margaret Hesse, Attorney, Bank Operations
and Assets Division, (202) 874-4460.
OTS: Timothy R. Burniston, Deputy Assistant Director for Policy,
(202) 906-5629; David H. Enzel, Special Counsel, (202) 906-6844; or
Vicki Hawkins-Jones, Senior Attorney, (202) 906-7034.
BOARD: Glenn E. Loney, Associate Director, (202) 452-3585; or
Michael S. Bylsma, Senior Attorney, (202) 452-3667; Division of
Consumer and Community Affairs, Board of Governors of the Federal
Reserve System.
FDIC: Ken A. Quincy, Chief, Compliance and Special Review Section,
Division of Supervision, (202) 898-6753; Bobbie Jean Norris, Deputy
Director, Office of Consumer Affairs, (202) 898-6760; Ann Loikow,
Counsel, (202) 898-3796.
FHFB: Sylvia C. Martinez, Director, Housing Finance Directorate,
(202) 408-2825 (voice) or (202) 408-2579 (TDD).
FTC: Peggy L. Twohig, Assistant Director for Credit Practices,
Bureau of Consumer Protection, (202) 326-3224.
NCUA: Robert M. Fenner, General Counsel, or Michael J. McKenna,
Staff Attorney, Office of General Counsel, (703) 518-6540.
SUPPLEMENTARY INFORMATION: The following Federal Agencies--HUD, OFHEO,
DOJ, OCC, OTS, the Board, FDIC, FHFB, FTC, and the NCUA--sharing a
concern that some prospective homebuyers and other borrowers may be
experiencing discriminatory treatment in their efforts to obtain loans,
formed an Interagency Task Force on Fair Lending to establish uniform
policy against discriminatory lending.
On March 8, 1994, the Interagency Task Force on Fair Lending met to
approve or recommend approval to their respective Agencies of the
``Policy Statement on Discrimination in Lending,'' published in this
notice, as a statement of the Agencies' general position on the Equal
Credit Opportunity Act and the Fair Housing Act for purposes of
administrative enforcement of those statutes. The Policy Statement is
intended to be consistent with those statutes and their implementing
regulations and provide guidance to lenders seeking to comply with
them. The Policy Statement does not create or confer any substantive or
procedural rights on third parties which could be enforceable in any
administrative or civil proceeding.
The Agencies have all approved the Policy Statement and welcome
comments from the public about application of the principles set forth
in the Policy Statement to specific lending policies and practices. The
Agencies anticipate providing further clarification and elaboration on
the application of the fair lending principles, and these comments will
be taken into consideration as they do so.
Accordingly, the following policy statement is the Policy Statement
on Discrimination in Lending adopted by the Interagency Task Force on
Fair Lending.
Policy Statement on Discrimination in Lending
The Department of Housing and Urban Development (``HUD''), the
Department of Justice (``DOJ''), the Office of the Comptroller of the
Currency (``OCC''), the Office of Thrift Supervision (``OTS''), the
Board of Governors of the Federal Reserve System (the ``Board''), the
Federal Deposit Insurance Corporation (``FDIC''), the Federal Housing
Finance Board (``FHFB''), the Federal Trade Commission (``FTC''), the
National Credit Union Administration (``NCUA''), and the Office of
Federal Housing Enterprise Oversight (``OFHEO'') (collectively, ``the
Agencies'') are concerned that some prospective home buyers and other
borrowers may be experiencing discriminatory treatment in their efforts
to obtain loans. The 1992 Federal Reserve Bank of Boston study on
lending discrimination, Congressional hearings, and agency
investigations have indicated that race is a factor in some lending
decisions. Discrimination in lending on the basis of race or other
prohibited factors is destructive, morally repugnant, and against the
law. It prevents those who are discriminated against from enjoying the
benefits of access to credit. The Agencies will not tolerate lending
discrimination in any form. Further, fair lending is not inconsistent
with safe and sound operations. Lenders must continue to ensure that
their lending practices are consistent with safe and sound operating
policies.
This policy statement applies to all lenders, including mortgage
brokers, issuers of credit cards, and any other person who extends
credit of any type. The policy statement is being issued for several
reasons, including:
To provide guidance about what the agencies consider in
determining if lending discrimination exists; and
To provide a foundation for future interpretations and
rulemakings by the Agencies.
A number of federal statutes seek to promote fair lending. For
example, the Home Mortgage Disclosure Act (``HMDA''), 12 U.S.C. 2801 et
seq., seeks to prevent lending discrimination and redlining by
requiring public disclosure of certain information about mortgage loan
applications. The Community Reinvestment Act (``CRA''), 12 U.S.C. 2901
et seq., seeks affirmatively to encourage institutions to help to meet
the credit needs of the entire community served by each institution
covered by the statute, and CRA ratings take into account lending
discrimination by those institutions. The Americans with Disabilities
Act, 42 U.S.C. 12101 et seq., prohibits discrimination against persons
with disabilities in the provision of goods and services, including
credit services. This policy statement, however, is based upon and
addresses only the Equal Credit Opportunity Act (``ECOA''), 15 U.S.C.
1691 et seq., and the Fair Housing Act (``FH Act''), 42 U.S.C. 3601 et
seq , the two statutes that specifically prohibit discrimination in
lending.
This policy statement has been approved and adopted by the
signatory Agencies listed above as a statement of the Agencies' general
position on the ECOA and the FH Act for purposes of administrative
enforcement of those statutes. It is intended to be consistent with
those statutes and their implementing regulations and to provide
guidance to lenders seeking to comply with them. It does not create or
confer any substantive or procedural rights on third parties which
could be enforceable in any administrative or civil proceeding.
This policy statement will discuss what constitutes lending
discrimination under these statutes and answer questions about how the
Agencies will respond to lending discrimination and what steps lenders
might take to prevent discriminatory lending practices.
A. Lending Discrimination Statutes and Regulations
(1) The ECOA prohibits discrimination in any aspect of a credit
transaction. The ECOA is not limited to consumer loans. It applies to
any extension of credit, including extensions of credit to small
businesses, corporations, partnerships, and trusts.
The ECOA prohibits discrimination based on:
Race or color;
Religion;
National origin;
Sex;
Marital status;
Age (provided the applicant has the capacity to contract);
The applicant's receipt of income derived from any public
assistance program; and
The applicant's exercise, in good faith, of any right
under the Consumer Credit Protection Act.
The Federal Reserve Board's Regulation B, found at 12 CFR part 202,
implements the ECOA. Regulation B describes lending acts and practices
that are specifically prohibited, permitted, or required. Official
interpretations of the regulation are found in Supplement I to 12 CFR
part 202.
(2) The FH Act prohibits discrimination in all aspects of
residential real-estate related transactions, including, but not
limited to:
Making loans to buy, build, repair or improve a dwelling;
Purchasing real estate loans;
Selling, brokering or appraising residential real estate;
and
Selling or renting a dwelling.
The FH Act prohibits discrimination based on:
Race or color;
National origin;
Religion;
Sex;
Familial status (defined as children under the age of 18
living with a parent or legal custodian, pregnant women, and people
securing custody of children under 18); and
Handicap.
HUD's regulations implementing the FH Act are found at 24 CFR Part
100.
Because both the FH Act and the ECOA apply to mortgage lending,
lenders may not discriminate in mortgage lending based on any of the
prohibited factors in either list.
Liability under these two statutes for discrimination on a
prohibited basis is civil, not criminal. However, there is criminal
liability under the FH Act for various forms of interference with
efforts to enforce the FH Act, such as altering or withholding evidence
or forcefully intimidating persons seeking to exercise their rights
under the FH Act.
What is prohibited. Under the ECOA, it is unlawful for a lender to
discriminate on a prohibited basis in any aspect of a credit
transaction and, under both the ECOA and the FH Act, it is unlawful for
a lender to discriminate on a prohibited basis in a residential real
estate related transaction. Under one or both of these laws, a lender
may not, because of a prohibited factor:
Fail to provide information or services or provide
different information or services regarding any aspect of the lending
process, including credit availability, application procedures, or
lending standards;
Discourage or selectively encourage applicants with
respect to inquiries about or applications for credit;
Refuse to extend credit or use different standards in
determining whether to extend credit;
Vary the terms of credit offered, including the amount,
interest rate, duration, or type of loan;
Use different standards to evaluate collateral;
Treat a borrower differently in servicing a loan or
invoking default remedies; or
Use different standards for pooling or packaging a loan in
the secondary market.
A lender may not express, orally or in writing, a preference based
on prohibited factors or indicate that it will treat applicants
differently on a prohibited basis.
A lender may not discriminate on a prohibited basis because of the
characteristics of:
A person associated with a credit applicant (for example,
a co-applicant, spouse, business partner, or live-in aide); or
The present or prospective occupants of the area where
property to be financed is located.
Finally, the FH Act requires lenders to make reasonable
accommodations for a person with disabilities when such accommodations
are necessary to afford the person an equal opportunity to apply for
credit.
B. Types of Lending Discrimination
The courts have recognized three methods of proof of lending
discrimination under the ECOA and the FH Act:
``Overt evidence of discrimination,'' when a lender
blatantly discriminates on a prohibited basis;
Evidence of ``disparate treatment,'' when a lender treats
applicants differently based on one of the prohibited factors; and
Evidence of ``disparate impact,'' when a lender applies a
practice uniformly to all applicants but the practice has a
discriminatory effect on a prohibited basis and is not justified by
business necessity.
Overt Evidence of Discrimination. There is overt evidence of
discrimination when a lender openly discriminates on a prohibited
basis.
Example: A lender offered a credit card with a limit of up to
$750 for applicants aged 21-30 and $1500 for applicants over 30.
This policy violated the ECOA's prohibition on discrimination based
on age.
There is overt evidence of discrimination even when a lender
expresses--but does not act on--a discriminatory preference:
Example: A lending officer told a customer, ``We do not like to
make home mortgages to Native Americans, but the law says we cannot
discriminate and we have to comply with the law.'' This statement
violated the FH Act's prohibition on statements expressing a
discriminatory preference.
Evidence of Disparate Treatment. Disparate treatment occurs when a
lender treats a credit applicant differently based on one of the
prohibited bases. Disparate treatment ranges from overt discrimination
to more subtle disparities in treatment. It does not require any
showing that the treatment was motivated by prejudice or a conscious
intention to discriminate against a person beyond the difference in
treatment itself. It is considered by courts to be intentional
discrimination because no credible, nondiscriminatory reason explains
the difference in treatment on a prohibited basis.
Example: Two minority loan applicants were told that it would
take several hours and require the payment of an application fee to
determine whether they would qualify for a home mortgage loan. In
contrast, a loan officer took financial information immediately from
nonminority applicants and determined whether they qualified in
minutes, without a fee being paid. The lender's differential
treatment violated both the ECOA and the FH Act.
Redlining refers to the illegal practice of refusing to make
residential loans or imposing more onerous terms on any loans made
because of the predominant race, national origin, etc., of the
residents of the neighborhood in which the property is located.
Redlining violates both the FH Act and the ECOA.
Disparate treatment may more likely occur in the treatment of
applicants who are neither clearly well-qualified nor clearly
unqualified. Discrimination may more readily affect applicants in this
middle group for two reasons. First, because the applications are all
``close cases,'' there is more room and need for lender discretion.
Second, whether or not an applicant qualifies may depend on the level
of assistance the lender provides the applicant in preparing an
application. The lender may, for example, propose solutions to problems
on an application, identify compensating factors, and provide
encouragement to the applicant. Lenders are under no obligation to
provide such assistance, but to the extent that they do, the assistance
must be provided in a nondiscriminatory way.
Example: A nonminority couple applied for an automobile loan.
The lender found adverse information in the couple's credit report.
The lender discussed the credit report with them and determined that
the adverse information, a judgment against the couple, was
incorrect since the judgment had been vacated. The nonminority
couple was granted their loan. A minority couple applied for a
similar loan with the same lender. Upon discovering adverse
information in the minority couple's credit report, the lender
denied the loan application on the basis of the adverse information
without giving the couple an opportunity to discuss the report.
Example: Two minority borrowers inquired with a lender about
mortgage loans. They were given applications for fixed-rate loans
only and were not offered assistance in completing the loan
applications. They completed the applications on their own and
ultimately failed to qualify. Two similarly situated nonminority
borrowers made an identical inquiry about mortgage loans to the same
lender. They were given information about both adjustable-rate and
fixed-rate mortgages and were given assistance in preparing
applications that the lender could accept.
Both of these are examples of disparate treatment of similarly
situated applicants, apparently based on a prohibited factor, in the
amount of assistance and information the lender provided. The lender
might also generally exercise its discretion to disfavor some
individuals or favor others in a manner that results in a pattern or
practice of disparate treatment that cannot be explained on grounds
other than a prohibited basis.
If a lender has apparently treated similar applicants differently
on the basis of a prohibited factor, it must provide an explanation for
the difference in treatment. If the lender is unable to provide a
credible and legitimate nondiscriminatory explanation, the agency may
infer that the lender discriminated.
If an agency determines that a lender's explanation for treating
some applicants differently is a pretext for discrimination, the agency
may find that the lender discriminated, notwithstanding the lender's
explanation.
Example: A lender rejected a loan application made by a female
applicant with flaws in her credit report but accepted applications
by male applicants with similar flaws. The lender offered the
explanation that the rejected application had been processed by a
new loan officer who was unfamiliar with the bank's policy to work
with applicants to correct credit report problems. However, an
investigation revealed that the same loan officer who processed the
rejected application had accepted applications from males with
similar credit problems after working with them to provide
satisfactory explanations.
When a lender's treatment of two applicants is compared, even when
there is an apparently valid explanation for a particular difference in
treatment, further investigation may establish disparate treatment on a
prohibited basis. For example, seemingly valid explanations for denying
loans to minority applicants may have been applied consistently to
minority applicants and inconsistently to nonminority applicants; or
``offsetting'' or ``compensatory'' factors cited as the reason for
approving nonminority applicants may involve information that the
lender usually failed to consider for minority applicants but usually
considered for nonminority applicants.
A pattern or practice of disparate treatment on a prohibited basis
may also be established through a valid statistical analysis of
detailed loan file information, provided that the analysis controls for
possible legitimate explanations for differences in treatment. Where a
lender's underwriting decisions are the subject of a statistical
analysis, detailed information must be collected from individual loan
files about the applicants' qualifications for credit. Data reported by
lenders under the HMDA do not, standing alone, provide sufficient
information for such an analysis because they omit important variables,
such as credit histories and debt ratios. HMDA data are useful, though,
for identifying lenders whose practices may warrant investigation for
compliance with fair lending laws. HMDA data may also be relevant, in
conjunction with other evidence, to the determination whether a lender
has discriminated.
Evidence of Disparate Impact
When a lender applies a policy or practice equally to credit
applicants, but the policy or practice has a disproportionate adverse
impact on applicants from a group protected against discrimination, the
policy or practice is described as having a ``disparate impact.''
Policies and practices that are neutral on their face and that are
applied equally may still, on a prohibited basis, disproportionately
and adversely affect a person's access to credit.
Although the precise contours of the law on disparate impact as it
applies to lending discrimination are under development, it has been
clearly established that proof of lending discrimination using a
disparate impact analysis encompasses several steps. The single fact
that a policy or practice creates a disparity on a prohibited basis is
not alone proof of a violation. Where the policy or practice is
justified by ``business necessity'' and there is no less discriminatory
alternative, a violation of the FH Act or the ECOA will not exist.
The existence of a disparate impact may be established through
review of how a particular practice, policy or standard operates with
respect to those who are affected by it. The existence of disparate
impact is not established by a mere assertion or general perception
that a policy or practice disproportionately excludes or injures people
on a prohibited basis. The existence of a disparate impact must be
established by facts. Frequently this is done through a quantitative or
statistical analysis. Sometimes the operation of the practice is
reviewed by analyzing its effect on an applicant pool; sometimes it
consists of an analysis of the practice's effect on possible
applicants, or on the population in general. Not every member of the
group must be adversely affected for the practice to have a disparate
impact. Evidence of discriminatory intent is not necessary to establish
that a policy or practice adopted or implemented by a lender that has a
disparate impact is in violation of the FH Act or ECOA.
Identifying the existence of a disparate impact is only the first
step in proving lending discrimination under this method of proof. When
an Agency finds that a lender's policy or practice has a disparate
impact, the next step is to seek to determine whether the policy or
practice is justified by ``business necessity.'' The justification must
be manifest and may not be hypothetical or speculative. Factors that
may be relevant to the justification could include 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 still may
be found to be discriminatory if an alternative policy or practice
could serve the same purpose with less discriminatory effect.
Example: A lender's policy is not to extend loans for single
family residences for less than $60,000.00. This policy has been in
effect for ten years. This minimum loan amount policy is shown to
disproportionately exclude potential minority applicants from
consideration because of their income levels or the value of the
houses in the areas in which they live. The lender will be required
to justify the ``business necessity'' for the policy.
Example: In the past, lenders primarily considered net income in
making underwriting decisions. In recent years, the trend has been
to consider gross income. A lender decided to switch its practices
to consider gross income rather than net income. However, in
calculating gross income, the lender did not distinguish between
taxable and nontaxable income even though nontaxable income is of
more value than the equivalent amount of taxable income. The
lender's policy may have a disparate impact on individuals with
disabilities and the elderly, both of whom are more likely than the
general applicant pool to receive substantial nontaxable income. The
lender's policy is likely to be proven discriminatory. First, the
lender is unlikely to be able to show that the policy is compelled
by business necessity. Second, even if the lender could show
business necessity, the lender could achieve the same purpose with
less discriminatory effect by ``grossing up'' nontaxable income
(i.e., making it equivalent to gross taxable income by using
formulas related to the applicant's tax bracket).
Lenders will not have to justify every requirement and practice
every time that they face a compliance examination. The Agencies
recognize the relevance to credit decisions of factors related to the
adequacy of the borrower's income to carry the loan, the likely
continuation of that income, the adequacy of the collateral to secure
the loan, the borrower's past performance in paying obligations, the
availability of funds to close, and the existence of adequate reserves.
While lenders should think critically about whether widespread,
familiar requirements and practices have an unjustifiable disparate
impact, they should look especially carefully at requirements that are
more stringent than customary. Lenders should also stay informed of
developments in underwriting and portfolio performance evaluation so
that they are well positioned to consider all options by which their
business objectives can be achieved.
C. Answers to Questions Often Asked by Financial Institutions and
the Public
Lending institutions and others often ask the Agencies questions
about various aspects of lending discrimination. The Agencies have
compiled this list of common questions, with answers, in order to
provide further guidance.
Q1: Are disparities in application, approval, or denial rates
revealed by HMDA data sufficient to establish lending discrimination?
A: HMDA data alone do not prove lending discrimination. The data do
not contain enough information on major credit-related factors, such as
employment and credit histories, to prove discrimination. Despite these
limitations, the data can provide ``red flags'' that there may be
problems at particular institutions. Therefore, regulatory and
enforcement agencies may use HMDA data, along with other factors, to
identify institutions whose lending practices warrant more scrutiny.
Furthermore, HMDA data can be relevant, in conjunction with other data
and information, to the determination whether a lender has
discriminated.
Q2: Does a lending institution that submits inaccurate HMDA data
violate lending discrimination laws?
A: An inaccurate HMDA data submission constitutes a violation of
the HMDA, the Federal Reserve Board's Regulation C, and other
applicable laws, and may subject the lending institution to an
enforcement action, which could include civil money penalties, and, if
the lender is a HUD-approved mortgagee, the sanctions of the HUD
Mortgagee Review Board. An inaccurate HMDA data submission, however, is
not in itself a violation of the ECOA or the FH Act. However, a person
who intentionally submits incorrect or incomplete HMDA data in order to
cover up a violation of the FH Act may be subject, under the FH Act and
federal criminal statutes, to a fine or prison term or both. In
addition, a failure to ensure accurate HMDA data may be considered as a
relevant fact during a FH Act investigation or an examination of the
institution's lending activities.
Q3: Does a second review program only for loan applicants who are
members of a protected class violate laws prohibiting discrimination in
lending?
A: Such programs are permissible if they do no more than ensure
that lending standards are applied fairly and uniformly to all
applicants. For example, it is permissible to review the proposed
denial of applicants who are members of a protected class by comparing
their applications to the approved applications of similarly qualified
individuals who are not members of a protected class to determine if
the applications were evaluated consistently. It is impermissible,
however, to review the applications of members of a protected class in
order to apply standards to those applications different from the
standards used to evaluate other applications for the same credit
program or to apply the same standards in a different manner, unless
such actions are otherwise permitted by law, as described in Question
4.
Other types of second review programs are also permissible. For
example, lenders could review the proposed denial of all applicants
within a certain income range. Lenders also could review a sampling of
all applications proposed for denial, or even review all such
applications.
Q4: May a lender apply different lending standards to applicants
who are members of a protected class in order to increase lending to
that sector of its community?
A: Generally, a lender that applies different lending standards or
offers different levels of assistance on a prohibited basis, regardless
of its motivation, would be violating both the FH Act and the ECOA.
There are exceptions to the general rule; thus, applying different
lending standards or offering different levels of assistance to
applicants who are members of a protected class is permissible in some
circumstances. For example, the FH Act requires lenders to provide
reasonable accommodation to people with disabilities. In addition,
providing different treatment to applicants to address past
discrimination would be permissible if done in response to a court
order or otherwise in accord with applicable legal precedent. However,
the law in this area is complex and developing. Before implementing
programs of this sort, a lender should seek legal advice.
Of course, affirmative advertising and marketing efforts that do
not involve application of different lending standards are permissible
under both the ECOA and the FH Act. For example, special outreach to a
minority community would be permissible.
Q5: Should a lender engage in self-testing?
A: Principles of sound lending dictate that adequate policies and
procedures be in place to ensure safe and sound lending practices and
compliance with applicable laws and regulations, and that a lender
adopt appropriate audit and control systems to determine whether the
institution's policies and procedures are functioning adequately. This
is as true in the area of fair lending as in other operations. Lenders
should employ reliable measures for auditing fair lending compliance. A
well-designed and implemented program of self-testing could be a
valuable part of this process. Lenders should be aware, however, that
data documenting lending discrimination discovered in a self-test
generally will not be shielded from disclosure.
Corrective actions should always be taken by any lender that
discovers discrimination. Self-testing and corrective actions do not
expunge or extinguish legal liability for the violations of law,
insulate a lender from private suits, or eliminate the primary
regulatory agency's obligation to make the referrals required by law.
However, they will be considered as a substantial mitigating factor by
the primary regulatory agencies when contemplating possible enforcement
actions. In addition, HUD and DOJ will consider as a substantial
mitigating factor an institution's self-identification and self-
correction when determining whether they will seek additional penalties
or other relief under the FH Act and the ECOA. The Agencies strongly
encourage self-testing and will consider further steps that might be
taken to provide greater incentives for institutions to undertake self-
assessment and self-correction.
Q6: What should a lender do if self-testing evidences lending
discrimination?
A: If a lender discovers discriminatory practices, it should make
all reasonable efforts to determine the full extent of the
discrimination and its cause, e.g., determine whether the practices
were grounded in defective policies, poor implementation or control of
those policies, or isolated to a particular area of the lender's
operations. The lender should take all appropriate corrective actions
to address the discrimination, including, but not limited to:
Identifying customers whose applications may have been
inappropriately processed, offering to extend credit if they were
improperly denied; 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, and then training and/or disciplining, the
employees involved;
Considering the need for community outreach programs and/
or changes in marketing strategy or loan products to better serve
minority segments of the lender's market; and
Improving audit and oversight systems in order to ensure
there is no recurrence of the discrimination.
An institution is not required to report to the Agencies a lending
discrimination problem it has discovered. However, a lender that
reports its discovery can ensure that the corrective actions it
develops are appropriate and complete and thereby minimize the damages
to which it will be subject.
Q7: Will a lender be held responsible for discriminatory lending
engaged in by a single loan officer where the lending institution has
good policies and procedures in place, is otherwise in full compliance
with all applicable laws and regulations and neither knows nor
reasonably could have known that the officer was engaged in illegal
discriminatory conduct?
A: Fair lending violations can occur even in the most well-run
lending institutions that have good policies in place to ensure
compliance with fair lending laws and regulations. Of course, the
chances that such violations will occur can be greatly reduced by
backing up those policies with proper employee training and supervision
and subjecting the lending process to proven systems of oversight and
review. Self-testing can further reduce the likelihood that violations
may occur. Notwithstanding these efforts, a single loan officer might
still improperly apply policies or, worse yet, deliberately circumvent
them and manage to conceal or disguise the true nature of his or her
practices for a time. It may be particularly difficult to discover this
type of behavior when it occurs in the pre-application process.
In any case where discriminatory lending by a lending institution
is identified, the lender will be expected to identify and fairly
compensate victims of discriminatory conduct just as it would be
expected to compensate a customer if an employee's conduct resulted in
physical injury to the customer. In addition, such a violation might
constitute a ``pattern or practice'' that must be referred to DOJ or a
violation that must be referred to HUD.
As in other cases of discriminatory behavior, where a lender takes
self-initiated corrective actions, such actions will be considered as a
substantial mitigating factor by the Agencies in determining the nature
of any enforcement action and what penalties or other relief would be
appropriate.
Q8: If a federal financial institutions regulatory agency has
``reason to believe'' that a lender has engaged in a pattern or
practice of discrimination in violation of the ECOA, the ECOA requires
the agency to refer the matter to DOJ. What constitutes a ``reason to
believe''?
A: A federal financial institutions regulatory agency has reason to
believe that an ECOA violation has occurred when a reasonable person
would conclude from an examination of all credible information
available that discrimination has occurred. This determination requires
weighing the available evidence and applicable law and determining
whether an apparent violation has occurred. Information supporting a
reason to believe finding may include loan files and other documents,
credible observations by persons with direct knowledge, statistical
analysis, and the financial institution's response to the preliminary
examination findings.
Reason to believe is more than an unfounded suspicion. While the
evidence of discrimination need not be definitive and need not include
evidence of overt discrimination, it should be developed to the point
that a reasonable person would conclude that a violation exists.
Q9: If a federal financial institutions regulatory agency has
reason to believe that a lender has engaged in a ``pattern or
practice'' of discrimination in violation of the ECOA, the agency will
refer the matter to DOJ. What constitutes a ``pattern or practice'' of
lending discrimination?
A: Determinations by federal financial institutions regulatory
agencies regarding a pattern or practice of lending discrimination must
be based on an analysis of the facts in a given case. Isolated,
unrelated or accidental occurrences will not constitute a pattern or
practice. However, repeated, intentional, regular, usual, deliberate,
or institutionalized practices will almost always constitute a pattern
or practice. The totality of the circumstances must be considered when
assessing whether a pattern or practice is present. Considerations
include, but are not limited to:
Whether the conduct appears to be grounded in a written or
unwritten policy or established practice that is discriminatory in
purpose or effect;
Whether there is evidence of similar conduct by a
financial institution toward more than one applicant. Note, however,
that this is not a mathematical process, e.g., ``more than one'' does
not necessarily constitute a pattern or practice;
Whether the conduct has some common source or cause within
the financial institution's control;
The relationship of the instances of conduct to one
another (e.g., whether they all occurred in the same area of the
financial institution's operations); and
The relationship of the number of instances of conduct to
the financial institution's total lending activity. Note, however,
that, depending on the circumstances, violations that involve only a
small percentage of an institution's total lending activity could
constitute a pattern or practice.
Depending on the egregiousness of the facts and circumstances
involved, singly or in combination, these factors could provide
evidence of a pattern or practice.
Q10: How does the employment of few minorities and individuals from
other protected classes in lending positions--e.g., Account Executive,
Underwriter, Loan Counselor, Loan Processor, Staff Appraiser, Assistant
Branch Manager and Branch Manager--affect compliance with lending
discrimination laws?
A: The employment of few minorities and others in protected
classes, in itself, is not a violation of the FH Act or the ECOA.
However, employment of few members of protected classes in lending
positions can contribute to a climate in which lending discrimination
could occur by affecting the delivery of services.
Therefore, lenders might consider the following steps, as
appropriate to their institutions:
Advertising lending job openings in local minority-
oriented publications;
Notifying predominantly minority organizations of such
openings;
Seeking employment referrals from current minority
employees, minority real estate boards and local historically minority
colleges and other institutions that serve minority groups in the
community; and
Seeking qualified independent fee appraisers from local
minority appraisal organizations.
Similar outreach steps could be considered to recruit women,
persons with disabilities, and other persons protected by the FH Act
and the ECOA.
Q11: What is the role of the guidelines of secondary market
purchasers and private and governmental loan insurers in determining
whether primary lenders practice lending discrimination?
A: Many lenders make mortgage loans only when they can be sold on
the secondary market, or they may place some loans in their own
portfolios and sell others on the secondary market. The principal
secondary market purchasers, Federal National Mortgage Association
(``Fannie Mae'') and Federal Home Loan Mortgage Corporation (``Freddie
Mac''), publish underwriting guidelines to inform primary lenders of
the conditions under which they will buy loans. For example, ability to
repay the loan is measured by suggested ratios of monthly housing
expense to income (28%) and total obligations to income (36%). However,
these guidelines allow considerable discretion on the part of the
primary lender. In addition, the secondary market guidelines have in
some cases been made more flexible, for example, with respect to
factors such as stability of income (rather than stability of
employment) and use of nontraditional ways of establishing good credit
and ability to pay (e.g., use of past rent and utility payment
records). Lenders should ensure that their loan processors and
underwriters are aware of the provisions of the secondary market
guidelines that provide various alternative and flexible means by which
applicants may demonstrate their ability and willingness to repay their
loans. Fannie Mae and Freddie Mac not infrequently purchase mortgages
exceeding the suggested ratios, and their guidelines contain detailed
discussions of the compensating factors that can justify higher ratios
(and which must be documented by the primary lender).
A lender who rejects an application from an applicant who is a
member of a protected class and who has ratios above those of the
guidelines and approves an application from another applicant with
similar ratios should be prepared to show that the reason for the
rejection was based on factors that are applied consistently without
regard to any of the prohibited factors.
These same principles apply equally to the guidelines of private
and governmental loan insurers.
Q12: What criteria will be employed in taking enforcement actions
or seeking remedial measures when lending discrimination is discovered?
A: Enforcement sanctions and remedial measures for lending
discrimination violations vary depending on whether such sanctions are
sought by the appropriate federal financial institutions regulatory
agencies, DOJ, HUD or other federal agencies charged with enforcing
either the ECOA or the FH Act. The following discussion sets out the
criteria typically employed by the federal banking agencies (i.e., OCC,
OTS, the Board and FDIC), NCUA, DOJ, HUD, OFHEO, FHFB and FTC in
determining the nature and severity of sanctions that may be used to
address discriminatory lending practices. As discussed in Questions 8
and 9, above, in certain situations, the primary regulatory agencies
will also refer enforcement matters to HUD or DOJ.
The federal banking agencies:
The federal banking agencies are authorized to use the full range
of their enforcement authority under 12 U.S.C. 1818 to address
discriminatory lending practices. This includes the authority to seek:
Enforcement actions that may require both prospective and
retrospective relief; and
Civil money penalties (``CMPs'') in varying amounts
against the financial institution or any institution-affiliated party
(``IAP'') within the meaning of 12 U.S.C. 1813(u), depending, among
other things, on the nature of the violation and the degree of
culpability.
In addition to the above actions, the federal banking agencies may
also take removal and prohibition actions against any IAP where the
statutory requirements for such actions are met.
The federal banking agencies will make determinations as to the
appropriateness of any potential enforcement action after giving full
consideration to a variety of factors. In making these determinations,
the banking agencies will take into account:
The number and duration of violations identified;
The nature of the evidence of discrimination (i.e., overt
discrimination, disparate treatment or disparate impact);
Whether the discrimination was limited to a particular
office or unit of the financial institution or was more pervasive in
nature;
The presence and effectiveness of any anti-discrimination
policies;
Any history of discriminatory conduct; and
Any corrective measures implemented or proposed by the
financial institution.
The severity of the federal banking agencies' enforcement response
will depend on the egregiousness of the financial institution's
conduct. Voluntary identification and correction of violations
disclosed through a self-testing program will be a substantial
mitigating factor in considering whether to initiate an enforcement
action.
In addition, the federal banking agencies may consider whether an
institution has provided victims of discrimination with all the relief
available to them under applicable civil rights laws.
The federal banking agencies may seek both prospective and
retrospective relief for fair lending violations.
Prospective relief may include requiring the financial institution
to:
Adopt corrective policies and procedures and correct any
financial institution policies or procedures that may have contributed
to the discrimination;
Train financial institution employees involved;
Establish community outreach programs and change marketing
strategy or loan products to better serve all sectors of the financial
institution's service area;
Improve internal audit controls and oversight systems in
order to ensure there is no recurrence of discrimination; or
Monitor compliance and provide periodic reports to the
primary federal regulator.
Retrospective relief may include:
Identifying customers who may have been subject to
discrimination and offering to extend credit if the customers were
improperly denied;
Requiring the financial institution to make payments to
injured parties:
Restitution: This may include any out-of-pocket expenses
incurred as a result of the violation to make the victim of
discrimination whole, such as: fees or expenses in connection with the
application; the difference between any greater fees or expenses of
another loan granted elsewhere after denial by the discriminating
lender; and, when loans were granted on disparate terms, appropriate
modification of those terms and refunds of any greater amounts paid.
Other Affirmative Action As Appropriate to Correct
Conditions Resulting From Discrimination: The federal banking agencies
also have the authority to require a financial institution to take
affirmative action to correct or remedy any conditions resulting from
any violation or practice. The banking agencies will determine whether
such affirmative action is appropriate in a given case and, if such
action is appropriate, the type of remedy to order.
Requiring the financial institution to pay CMPs:
The banking agencies have the authority to assess CMPs against
financial institutions or individuals for violating fair lending laws
or regulations. Each agency has the authority to assess CMPs of up to
$5,000 per day for any violation of law, rule or regulation. Penalties
of up to $25,000 per day are also permitted, but only if the violations
represent a pattern of misconduct, cause more than minimal loss to the
financial institution, or result in gain or benefit to the party
involved. CMPs are paid to the U.S. Treasury and therefore do not
compensate victims of discrimination.
National Credit Union Administration
For federal credit unions, NCUA will employ criteria comparable to
those of the federal banking agencies, pursuant to its authority under
12 U.S.C. 1786.
The Department of Justice
The Department of Justice is authorized to use the full range of
its enforcement authority under the FH Act and the ECOA. DOJ has
authority to commence pattern or practice investigations of possible
lending discrimination on its own initiative or through referrals from
the federal financial institutions regulatory agencies, and to file
lawsuits in federal court where there is reasonable cause to believe
that such violations have occurred. DOJ is also authorized under the FH
Act to bring suit based on individual complaints filed with HUD where
one of the parties to the complaint elects to have the case heard in
federal court.
The relief sought by DOJ in lending discrimination lawsuits may
include:
An injunction which may require both prospective and
retrospective relief; and,
In enforcement actions under the FH Act, CMPs not to
exceed $50,000 per defendant for a first violation and $100,000 for any
subsequent violation.
Prospective injunctive relief may include:
A permanent injunction to insure against a recurrence of
the unlawful practices;
Affirmative measures to correct past discriminatory
policies, procedures, or practices, so long as consistent with safety
and soundness, such as:
Expansion of the lender's service areas to include
previously excluded minority neighborhoods;
Opening branches or other credit facilities in under-
served minority neighborhoods;
Targeted sales calls on real estate agents and builders
active in minority neighborhoods;
Advertising through minority-oriented media;
Self-testing;
Employee training;
Changes to commission structures which tend to discourage
lending in minority and low-income neighborhoods; and
Changes in loan processing and underwriting procedures
(including second reviews of denied applications) to ensure equal
treatment without regard to prohibited factors; and
Record keeping and reporting requirements to monitor
compliance with remedial obligations.
Retrospective injunctive relief may include relief for victims of
past discrimination, actual and punitive damages, and offers or
adjustments of credit or other forms of loan commitments.
The Department of Housing and Urban Development
The Department of Housing and Urban Development is fully authorized
to investigate complaints alleging discrimination in lending in
violation of the FH Act and has the authority to initiate complaints
and investigations even when an individual complaint has not been
received. HUD issues determinations on whether or not reasonable cause
exists to believe that the FH Act has been violated. HUD also may
authorize actions for temporary and preliminary injunctions to be
brought by DOJ and has authority to issue enforceable subpoenas for
information related to investigations.
Following issuance of a determination of reasonable cause under the
FH Act, HUD enforces the FH Act administratively unless one of the
parties elects to have the case heard in federal court in a case
brought by DOJ.
Relief under the FH Act that may be awarded by an administrative
law judge (``ALJ'') after a hearing, or by the Secretary on review of a
decision by an ALJ, includes:
Injunctive or other appropriate relief, including a
variety of actions designed to correct discriminatory practices, such
as changes in loan processes or procedures, modifications of loan
service areas or branching actions, approval of previously denied loans
to aggrieved persons, additional record-keeping and reporting on future
activities or other affirmative relief;
Actual damages suffered by persons who are aggrieved by
any violation of the FH Act, including damages for mental distress and
out-of-pocket losses attributable to a violation; and
Civil penalties of up to $10,000 for each initial
violation and up to $25,000 and $50,000 for successive violations
within specific time frames.
HUD also is authorized to direct Fannie Mae and Freddie Mac to
undertake various remedial actions, including suspension, probation,
reprimand, or settlement, against lenders found to have engaged in
discriminatory lending practices in violation of the FH Act or the
ECOA.
The Office of Federal Housing Enterprise Oversight
The Office of Federal Housing Enterprise Oversight is authorized to
use its enforcement authority under 12 U.S.C. 4631 and 4636, including
cease and desist orders and CMPs for violations by Fannie Mae and
Freddie Mac of the fair housing regulations promulgated by the
Secretary of HUD pursuant to 12 U.S.C. Sec. 4545.
The Federal Housing Finance Board
While the Federal Housing Finance Board does not have enforcement
authority under the ECOA or the FH Act, in reviewing the members of the
Federal Home Loan Bank System for community support, it may restrict
access to long-term System advances to any member that, within two
years prior to the due date of submission of a Community Support
Statement, had a final administrative or judicial ruling against it
based on violations of those statutes (or any similar state or local
law prohibiting discrimination in lending). System members in this
situation are asked to submit to the Finance Board an explanation of
steps taken to remedy the violation or prevent a recurrence. See 12
U.S.C. 1430(g); 12 CFR 936.3 (b)(5).
The Federal Trade Commission
The Federal Trade Commission enforces the requirements of the ECOA
and Regulation B for all lenders subject to the ECOA, except where
enforcement is specifically committed to another agency. The FTC may
exercise all of its functions and powers under the Federal Trade
Commission Act (``FTC Act'') to enforce the ECOA, and a violation of
any requirement under the ECOA is deemed to be a violation of a
requirement under the FTC Act. The FTC has the power to enforce
Regulation B in the same manner as if a violation of Regulation B were
a violation of an FTC trade regulation rule.
This means that the FTC has the power to investigate lenders
suspected of lending discrimination and to use compulsory process in
doing so. The Commission, through DOJ or on its own behalf where the
Justice Department declines to act, may file suit in federal court
against suspected violators and seek relief including:
Injunctions against the violative practice;
Civil penalties of up to $10,000 for each violation; and
Redress to affected consumers.
In addition, the Commission routinely imposes recordkeeping and
reporting requirements to monitor compliance.
Q13: Will a financial institution be subjected to multiple actions
by DOJ or HUD and its primary regulator if discriminatory practices are
discovered?
A: In all cases where referrals to other agencies are made, the
appropriate federal financial institutions regulatory agency will
engage in ongoing consultations with DOJ or HUD regarding coordination
of each agency's actions. The Agencies will coordinate their
enforcement actions and make every effort to eliminate unnecessarily
duplicative actions. Where both a federal financial institutions
regulatory agency and either DOJ or HUD are contemplating taking
actions under their own respective authorities, the Agencies will seek
to coordinate their actions to ensure that each agency's action is
consistent and complementary. The financial institutions regulatory
agencies also will discuss referrals on a case-by-case basis with DOJ
or HUD to determine whether multiple actions are necessary and
appropriate.
Dated: April 6, 1994.
Henry G. Cisneros,
Secretary, U.S. Department of Housing and Urban Development.
Aida Alvarez,
Director, Office of Federal Housing Enterprise Oversight.
Janet Reno,
Attorney General, Department of Justice.
Eugene A. Ludwig,
Comptroller of the Currency.
Jonathan L. Fiechter
Acting Director, Office of Thrift Supervision.
Alan Greenspan,
Chairman, Board of Governors of the Federal Reserve System.
Andrew C. Hove, Jr.,
Acting Chairman, Federal Deposit Insurance Corporation.
Nicolas P. Retsinas,
HUD--Secretary, Designee to the Board, Federal Housing Finance Board.
Donald S. Clark,
Secretary, Federal Trade Commission.
Norman E. D'Amours,
Chairman, National Credit Union Administration.
Norman E. D'Amours,
Chairman, National Credit Union Administration.
Norman E. D'Amours,
Chairman, National Credit Union Administration.
[FR Doc. 94-9214 Filed 4-14-93; 8:45 am]
BILLING CODES 4210-32-P; 4210-01-P; 15-01-0004-P; 4810-33-P; 6720-01-P;
6210-01-P; 6714-01-P; 6725-01-P; 6750-01-P; and 753-501-P
