VIDEO: Disparate Impact
In this Compliance Clip (video), Adam talks about one of the types of discrimination recognized by the courts: disparate impact. He explains the main source of this type of discrimination and gives a few examples of what to look for.
Click here to see a video explaining Comparative Evidence of Disparate Treatment.
Click here to see a video explaining Overt Evidence of Disparate Treatment.
Video Transcript
The following is a transcript of this video.
Today's topic is disparate impact. We're going through a series where we are looking at the types of discrimination recognized by the courts. There are three types. The first type is overt evidence of disparate treatment. The second is comparative evidence of disparate treatment. And the third type is disparate impact, which of course is our topic for today.
In order for any type of discrimination to occur, it has to occur against a protected class. Let's look at what a protected class is under Regulation B, which implements the Equal Credit Opportunity Act. Protected class under Regulation B includes a number of things such as race and color, religion, national origin, gender, marital status, age, and income from public assistance, or when a consumer exercises their rights in good faith under the Consumer Credit Protection Act. The Fair Housing Act also has protected classes, which are very similar to ECOA, but I have two different ones which include familial status and handicap. Discrimination must occur against the protected class. It must be a protected class involved for discrimination to occur.
Now, what is disparate impact? Disparate impact occurs when a lender applies a racially or otherwise neutral policy or practice equally to all applicants, but the result is discrimination of a protected class. The bottom line here is disparate impact almost always comes down to a policy, a policy or practice. From the Interagency Exam Procedures, they explained what disparate impact is a little better. They say, “When a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, that's the protected class, the policy or practice is described as having disparate impact.” That's the actual definition.
Let's look at a couple examples of disparate impact. The first example, let's just show that there is a product where we have a minimum loan amount for a single family residence of $60,000. So we won't offer loans less than the loan amount of $60,000. After this policy has been in place for about 10 years, who could potentially be affected by this? I mean, and even to make the example better, increase that minimum loan amount up to $400,000 or $300,000. Who would this impact? Well, it would be the people who can't afford a loan up to the amount of $60,000 or the amount in question. It would be somebody needing a loan such as maybe the elderly or single women or minorities. In the rules, they do say that you can have a minimum loan amount if there is a business necessity. We have seen where banks have tried to implement a minimum loan amount of $400,000, that will not fly, but a minimum loan amount of maybe $20,000 or less has been recognized in settlements with the Department of Justice. But what you need to do is justify that minimum loan amount to say this is our breakeven point where we will actually lose money, or we will not produce enough profit and it's to draw the line in the sand, but to be able to justify that to your examiners when you do bring this up. Minimum loan amounts are a potential problem for disparate impact.
Another potential problem for disparate impact, the second example here would be a minimum income requirement. I went into a bank one time where I saw a minimum income requirement on a credit card product of about $35,000 per year. They only took applicants of individuals, they did not take joint applicants, so any individual applicant wanting a credit card had to have the minimum income of $35,000. Well, who would this likely affect? Of course, it could potentially affect the elderly, single women, and minorities, and probably bank employees, right? Even the tellers, right? Now, the bank argued this, but when we looked at their statistics, it was very problematic for them.
The bottom line here is you have to be careful on how you set your policies, because if they inadvertently affect a protected class, you can have a discrimination because of disparate impact on your hands. The bottom line here is to consider policies and how they could have a negative impact on protecting class applicants. You kind of have to play the devil's advocate when reviewing policies because the bottom line is they could have. But your examiners are going to do this and over time, if you do have a negative impact, you're going to end up with discrimination and that's going to be a problem all around.
That's all I have for you in this video.