Fair Lending and Disparate Treatment

Issue/Inquiry

The Bank declined two applications for unsecured personal loans on the basis of “lack of assets”. Does this indicate disparate treatment?

Response Summary

Generally, a bank can decline a loan for any reason it considers sufficient, provided that it does not do so on a basis prohibited by Fair Lending. If similarly situated applicants are treated differently on a basis that is not fully explained by legitimate business factors, this may be comparative evidence of disparate treatment on a prohibited basis.

Response Detail

“Disparate” means that one person is treated differently than another. Generally, a bank can decline a loan for any reason it considers to be sufficient, so long as it does not do so on a basis that is prohibited under the Equal Credit Opportunity Act (“ECOA”) or Fair Housing Act (collectively, the “Fair Lending Laws”). Lack of assets may be a valid reason for declining an unsecured loan, since the absence of collateral would cause a bank to consider what assets it could reach in the event of a default. However, if applicants are similarly situated and one is treated differently than another on a basis prohibited by the Fair Lending Laws, this may be a violation of the requirements of those laws.

Disparate treatment may be established either through statements revealing that a lender explicitly considered prohibited factors (i.e., overt evidence) or by differences in treatment that are not fully explained by legitimate non-discriminatory factors (i.e., comparative evidence).

An example of overt evidence of disparate treatment would be offering a credit card with a limit of $750 for applicants aged 21 to 30, while a limit of $1,500 is offered for applicants over 30. This would violate the ECOA’s prohibition on discrimination based on age.

If similarly situated applicants are treated differently, apparently based on a prohibited factor, this may be comparative evidence of disparate treatment. For example, a non-minority couple applies for an automobile loan and the credit check reveals a judgment against them. After discussion, the loan officer concludes that the credit report was incorrect because the judgment had been vacated, and grants the loan. A minority couple applies for a similar loan and has similar adverse information on their credit report. However, the loan officer declines the loan on that basis without discussing the information with them. This would be comparative evidence of disparate treatment in the degree of assistance that the loan officer provided.

In this case, “lack of assets” is not considered overt evidence of disparate treatment. In order for there to be comparative evidence, one would need to discover that similarly situated applicants were treated differently. Suppose that two applicants whose applications were declined for lack of assets were minorities. Suppose also that one or more applicants who are non-minorities were granted credit despite having a lack of assets. This could be evidence of disparate treatment. On the other hand, suppose one of the two applicants in this case is a minority and the other is a non-minority, but both applications were declined due to a lack of assets. This would not be comparative evidence of disparate treatment, but rather may indicate that a prohibited basis played no part in the credit decision.

Reference: FFIEC, Interagency Fair Lending Examination Procedures (August 2009).

This entry was posted on Monday, April 29th, 2019 at 6:00 am.