VIDEO: An Example of Disparate Impact
In this Compliance Clip (video), Adam gives an example of a disparate impact that actually comes from the regulators through the Interagency Exam Procedures on Fair Lending. This example shows how an otherwise neutral policy or practice, applied equally to all credit applicants, can disproportionately exclude or burden certain persons on a prohibited basis.
If you want to learn more about disparate impact, we have a brand new class in our store, the Disparate Impact, that takes a deep dive into this rather complicated fair lending topic.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to give an example of disparate impact.
Disparate impact has been a hot topic and, in fact, there were some changes that took place most recently in May of 2023. But disparate impact really has been a hot topic over the last decade or so as it's been evolving. And what we want to do is take a look at what the regulators have said about disparate impact to understand an example because the regulators have jointly provided an example consistent together to tell us what disparate impact is. The OCC, the FDIC, the Federal Reserve, all issued statements regarding disparate impact, separately, but these statements are all very consistent with their interagency exam procedures for fair lending, which is where the example for disparate impact comes from that we're going to talk about in just a minute.
Now, what is disparate impact? Regulators say the disparate impact is when a bank or 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. When this happens, the policy or practice is described as having “disparate impact”.
So you have a policy or practice that you have no intention for it to be discriminating. But at the end of the day, the end result is discrimination. That's what we're talking about as it relates to disparate impact and really disparate impact theory.
To understand it, let's talk about this example. This is an example that comes from the Interagency Exam Procedures on Fair Lending that the FDIC, the Federal Reserve, and the OCC have all given in their guidance to their banks that they regulate. So this example is this:
They say a banker or lender has a policy to not extend loans for single family residences for less than $60,000, so a minimum loan amount. This policy has been in effect for 10 years. The minimum loan amount policy is shown to disproportionately exclude potential applicants based on race from consideration because of their income levels or the value of the houses in the areas in which they live. So what we have here is a minimum loan policy, and we've seen some examples of this, and I just ended up going over several examples in our Disparate Impact class that's available in our store, but what we see here is when you have a policy that requires a minimum loan amount, you can disproportionately exclude certain protected classes.
For example, what could happen is if you have a minimum loan amount of $60,000, you could have low income people who could not qualify for that, and you could be violating the Fair Lending laws and discrimination because you're disproportionately excluding a protected class, if it's a minority who has low income. You also might have elderly individuals who don't need a loan amount of $60,000 because they've paid down their equity. And if they're unable to get a loan because of their age and because of the fact they've paid down their loan, that could be a problem as well.
That's a really good example of disparate impact and, in fact, we go over quite a few examples in our class called Disparate Impact in our store. So this is really just one slide out of our class in our store and I just wanted to briefly let you know about that because if you want to take a deep dive in disparate impact, this is a great resource for you.
We've broken this class down, we have divided it into several sections. It's really in three videos, but the sections include talking about the three types of discrimination, which of course, disparate impact is one of those. Then talking about what the regulators say on disparate impact, which what we just talked about was one of the slides from that section. Then we go on to discuss the disparate impact conflict. Then we'll discuss the HUD rule that has changed a couple of times. We'll actually talk about what the CFBB has said and hasn't said as it relates to disparate impact. Then what we're going to do is go over a number of examples of disparate impact and finally leave you with some risk mitigation tips and some things you can do in your organization as strategies to mitigate your risk of disparate impact.
So, that's how our program is structured. If you're interested in taking a deep dive into this, it's a hour and a half program that talks about disparate impact in great detail. It's available in our store at compliancecohort.com/store.
That's all I have for you for this Compliance Clip.