Comparative Evidence of Disparate Treatment
Adam discusses the second type of discrimination recognized by the courts: comparative evidence of disparate treatment. He gives examples and a warning to community banks and credit unions. A sister article that goes with this video can be found at https://www.compliancecohort.com/blog/fair-lending-risk-comparative-evidence-of-disparate-treatment
Video Transcript
The following is a transcript of this video.
Today's topic is comparative evidence of disparate treatment. This is one type of discrimination that is recognized by the courts. There are in fact three types. The first type is overt evidence of disparate treatment. The second type is comparative evidence of disparate treatment. And the third type is disparate impact. Of course, our topic for today is comparative evidence of disparate treatment.
What is comparative evidence of disparate treatment? It's when you treat a protected class differently and you discriminate. That's the general overview.
Let's review what a protected class is. A protected class under Regulation B is a number of things. It includes race and color, religion, national origin, gender, marital status, age, income from public assistance, and even if a consumer exercises their rights under the Consumer Credit Protection Act. These are all protected classes we cannot discriminate against. Also, the Fair Housing Act adds a couple of protected classes, has some of the similar ones that are found in the Equal Credit Opportunity Act, but adds two new ones including familial status and also handicap. So, when it comes to comparative evidence, what we're looking for is discrimination against a protected class.
Now, what is comparative evidence of disparate treatment? It occurs through an analysis of loan files. That's how we discover comparative evidence of disparate treatment. It's through an analysis, and this analysis is called a comparative analysis. This occurs when the review or the analysis results in a protected class applicant receiving less favorable terms than a controlled group applicant. So, that's the bottom line, it’s when the terms are not consistent. One denied protected class had the same credit posture as somebody who was approved that was not a protected class, that's what we're talking about here. It's the less favorable terms to the protected class.
A comparative analysis is how examiners look for comparative evidence of disparate treatment. And to conduct this review, what they typically do is they stack up your denials and compare them against your approvals. Basically, what they do is they take the best denials, stack them up over here, and take the absolute best denials, those that just barely missed being approved, and compare those against your absolute worst approvals, and then they look for overlap. And it's that overlap that becomes the comparative evidence of disparate treatment.
Comparative evidence results from a number of things but the biggest thing it comes from is lender discretion - discretion, or the ability of a lender to make their own decisions in the underwriting process. That is problematic for comparative evidence of disparate treatment because it results from a lack of consistency. The real problem is that even if a lender is 100% consistent in the way that they underwrite, they're not going to be consistent with the other lenders in the organization. And then you can have comparative evidence of disparate treatment from one lender to another, and that is problematic and recognized by the courts as discrimination.
Now, big banks, the biggest banks in the country, have had to mitigate this because they have so many lenders they're dealing with, the risk is so high so what they've done is that they've implemented either central underwriting or automated underwriting. Community banks and credit unions know this so they've taken advantage of this and even used it in this as a competitive advantage and done marketing campaigns and really pushed this as a perk to customers to be able to do business with them. The problem is that when there is discretion in local underwriting, then you have risk of comparative evidence of disparate treatment. Honestly, I believe that any community bank or credit union that has local credit decisions, comparative evidence of disparate treatment is your biggest risk when it comes to fair lending, absolutely.
So what can you do to mitigate this risk of comparative evidence of disparate treatment?
The first thing you can do is to define as many underwriting standards as possible. Of course, you're not gonna define everything because you'd be just like a big bank and lose your competitive advantage, but the more areas that you define, the better chance you have of having a violation of discrimination based on comparative evidence.
Also to mitigate your risk what you can do is have a strong exception program where any overrides to your policy are effectively managed and looked at and controlled. That will mitigate your risk. Also if you conduct a second review of denied applications to make sure there is not a way that you could have approved it or to make sure another lender would not have approved this application, that will also reduce your risk of having that overlap when a comparative analysis is taking place.
Those are some of the things you can do but the key is consistency.
Well, that is comparative evidence to disparate treatment. I hope you enjoyed this video.
