IV.

Fair Lending — Fair Lending Laws and Regulations

NOTE: Further information regarding the technical

Fair Lending Laws and Regulations requirements of fair lending are incorporated into the
sections ECOA V 7.1 and FCRA VIII 6.1 of this manual.
Introduction
The Fair Housing Act (FHAct) prohibits discrimination in all
This overview provides a basic and abbreviated discussion of
aspects of “residential real-estate related transactions,”
federal fair lending laws and regulations. It is adapted from
including but not limited to:
the Interagency Policy Statement on Fair Lending issued in
March 1994. • Making loans to buy, build, repair, or improve a
dwelling;
Lending Discrimination Statutes and Regulations • Purchasing real estate loans;
The Equal Credit Opportunity Act (ECOA) prohibits • Selling, brokering, or appraising residential real estate; or
discrimination in any aspect of a credit transaction. It
applies to any extension of credit, including extensions of • Selling or renting a dwelling.
credit to small businesses, corporations, partnerships, and
trusts.
The FHAct prohibits discrimination based on:
The ECOA prohibits discrimination based on:
• Race or color;
• Race or color;
• National origin;
• Religion;
• Religion;
• National origin;
• Sex;
• Sex;
• Familial status (defined as children under the age of 18
• Marital status;
living with a parent or legal custodian, pregnant women,
• Age (provided the applicant has the capacity to contract); and people securing custody of children under 18); or

• The applicant’s receipt of income derived from any • Handicap.

public assistance program; or
The Department of Housing and Urban Development’s
• The applicant’s exercise, in good faith, of any right (HUD) regulations implementing the FHAct are found at 24
under the Consumer Credit Protection Act. CFR Part 100. Because both the FHAct and the ECOA
apply to mortgage lending, lenders may not discriminate in
The Consumer Financial Protection Bureau’s Regulation B, mortgage lending based on any of the prohibited factors in
found at 12 CFR part 1002, implements the ECOA. either list.
Regulation B describes lending acts and practices that are
specifically prohibited, permitted, or required. Official staff Under the ECOA, it is unlawful for a lender to discriminate
interpretations of the regulation are found in Supplement I on a prohibited basis in any aspect of a credit transaction,
to 12 CFR part 1002. and under both the ECOA and the FHAct, it is unlawful for a
lender to discriminate on a prohibited basis in a residential
The Dodd–Frank Wall Street Reform and Consumer real-estate-related transaction. Under one or both of these
Protection Act of 2010 further amended the ECOA and laws, a lender may not, because of a prohibited factor:
covers:
• Fail to provide information or services or provide
• Data collection for loans to minority-owned and different information or services regarding any aspect of
women-owned businesses (awaiting final regulation); the lending process, including credit availability,
• Legal action statute of limitations for ECOA application procedures, or lending standards.
violations is extended to five years (effective July 21, 2010); • Discourage or selectively encourage applicants
and with respect to inquiries about or applications for
• A disclosure of the consumer’s ability to receive a credit.
copy of any appraisal(s) and valuation(s) prepared in • Refuse to extend credit or use different standards
connection with first-lien loans secured by a dwelling is to be in determining whether to extend credit.
provided to applicants within 3 business days of receiving the
application (effective January 18, 2014). • Vary the terms of credit offered, including the

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IV. Fair Lending — Fair Lending Laws and Regulations

amount, interest rate, duration, or type of loan. There is overt evidence of discrimination even when a lender
expresses — but does not act on — a discriminatory
• Use different standards to evaluate collateral. preference:
• Treat a borrower differently in servicing a loan Example: A lending officer told a customer, “We do not like
or invoking default remedies. to make home mortgages to Native Americans, but the law
• Use different standards for pooling or packaging a loan says we cannot discriminate and we have to comply with the
in the secondary market. law.” This statement violated the FHAct’s prohibition on
statements expressing a discriminatory preference as well as
A lender may not express, orally or in writing, a Section 1002.4(b) of Regulation B, which prohibits
preference based on prohibited factors or indicate that it discouraging applicants on a prohibited basis.
will treat applicants differently on a prohibited basis. A
violation may still exist even if a lender treated applicants Comparative Evidence of Disparate Treatment. Disparate
equally. treatment occurs when a lender treats a credit applicant
differently based on one of the prohibited bases. It does
A lender may not discriminate on a prohibited basis because not require any showing that the treatment was motivated
of the characteristics of by prejudice or a conscious intention to discriminate
against a person beyond the difference in treatment itself.
• An applicant, prospective applicant, or borrower.
Disparate treatment may more likely occur in the treatment of
• A person associated with an applicant, prospective
applicants who are neither clearly well-qualified nor clearly
applicant, or borrower (for example, a co-applicant,
unqualified. Discrimination may more readily affect applicants
spouse, business partner, or live-in aide).
in this middle group for two reasons. First, if the applications
• The present or prospective occupants of either the are “close cases,” there is more room and need for lender
property to be financed or the characteristics of the discretion. Second, whether or not an applicant qualifies may
neighborhood or other area where property to be financed depend on the level of assistance the lender provides the
is located. applicant in completing an application. The lender may, for
example, propose solutions to credit or other problems
Finally, the FHAct requires lenders to make reasonable regarding an application, identify compensating factors, and
accommodations for a person with disabilities when such provide encouragement to the applicant. Lenders are under no
accommodations are necessary to afford the person an equal obligation to provide such assistance, but to the extent that they
opportunity to apply for credit. do, the assistance must be provided in a nondiscriminatory
way.
Types of Lending Discrimination
The courts have recognized three methods of proof of lending Example: A non-minority couple applied for an automobile
discrimination under the ECOA and the FHAct: loan. The lender found adverse information in the couple’s
credit report. The lender discussed the credit report with
• Overt evidence of disparate treatment;
them and determined that the adverse information, a
• Comparative evidence of disparate treatment; and judgment against the couple, was incorrect because the
judgment had been vacated. The non-minority couple was
• Evidence of disparate impact. granted their loan. A minority couple applied for a similar
loan with the same lender. Upon discovering adverse
Disparate Treatment
information in the minority couple’s credit report, the lender
The existence of illegal disparate treatment may be established denied the loan application on the basis of the adverse
either by statements revealing that a lender explicitly information without giving the couple an opportunity to
considered prohibited factors (overt evidence) or by discuss the report.
differences in treatment that are not fully explained by
The foregoing is an example of disparate treatment of
legitimate nondiscriminatory factors (comparative evidence).
similarly situated applicants, apparently based on a
Overt Evidence of Disparate Treatment. There is overt prohibited factor, in the amount of assistance and
evidence of discrimination when a lender openly discriminates information the lender provided.
on a prohibited basis.
If a lender has apparently treated similar applicants
Example: A lender offered a credit card with a limit of up to differently on the basis of a prohibited factor, it must
$750 for applicants aged 21-30 and $1500 for applicants over provide an explanation for the difference in treatment. If the
30. This policy violated the ECOA’s prohibition on lender’s explanation is found to be not credible, the agency
discrimination based on age. may find that the lender discriminated.

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 IV. Fair Lending — Fair Lending Laws and Regulations

Redlining is a form of illegal disparate treatment in which intended to guide examiner judgment, not to supplant it. The
a lender provides unequal access to credit, or unequal procedures can be augmented by each agency as necessary to
terms of credit, because of the race, color, national origin, ensure their effective implementation.While these procedures
or other prohibited characteristic(s) of the residents of the apply to many examinations, agencies routinely use statistical
area in which the credit seeker resides or will reside or in analyses or other specialized techniques in fair lending
which the residential property to be mortgaged is located. examinations to assist in evaluating whether a prohibited basis
Redlining may violate both the FHAct and the ECOA. was a factor in an institution’s credit decisions. Examiners
should follow the procedures provided by their respective
Disparate Impact agencies in these cases.
When a lender applies a racially or otherwise neutral policy For a number of aspects of lending — for example, credit
or practice equally to all credit applicants, but the policy or scoring and loan pricing — the “state of the art” is more likely
practice disproportionately excludes or burdens certain to be advanced if the agencies have some latitude to
persons on a prohibited basis, the policy or practice is incorporate promising innovations. These interagency
described as having a “disparate impact.” procedures provide for that latitude.
Example: A lender’s policy is not to extend loans for single Any references in these procedures to options, judgment, etc.,
family residences for less than $60,000.00. This policy has of “examiners” means discretion within the limits provided by
been in effect for ten years. This minimum loan amount that examiner’s agency. An examiner should use these
policy is shown to disproportionately exclude potential procedures in conjunction with his, or her, own agency’s
minority applicants from consideration because of their priorities, examination philosophy, and detailed guidance for
income levels or the value of the houses in the areas in implementing these procedures. These procedures should not
which they live. be interpreted as providing the examiner greater latitude than
The fact that a policy or practice creates a disparity on a his, or her, own agency would. For example, if an agency’s
prohibited basis is not alone proof of a violation. When an policy is to review compliance management systems in all of
Agency finds that a lender’s policy or practice has a disparate its institutions, an examiner for that agency must conduct such
impact; the next step is to seek to determine whether the policy a review rather than interpret Part II of these interagency
or practice is justified by “business necessity.” The procedures as leaving the review to the examiner’s option.
justification must be manifest and may not be hypothetical or The procedures emphasize racial and national origin
speculative. discrimination in residential transactions, but the key
Factors that may be relevant to the justification could include principles are applicable to other prohibited bases and
cost and profitability. Even if a policy or practice that has a to nonresidential transactions.
disparate impact on a prohibited basis can be justified by Finally, these procedures focus on analyzing
business necessity, it still may be found to be in violation if an institution compliance with the broad,
alternative policy or practice could serve the same purpose nondiscrimination requirements of the ECOA and the
with less discriminatory effect. Finally, evidence of FHAct. They do not address such explicit or
discriminatory intent is not necessary to establish that a technical compliance provisions as the signature rules
lender’s adoption or implementation of a policy or practice that or adverse action notice requirements in Sections
has a disparate impact is in violation of the FHAct or ECOA. 1002.7 and 1002.9, respectively, of Regulation B.
These procedures do not call for examiners to plan
Part I — Examination Scope Guidelines Background
examinations to identify or focus on potential disparate impact
issues. The guidance in this Introduction is intended to help The FDIC has developed the Fair Lending Scope and
examiners recognize fair lending issues that may have a Conclusions Memorandum (FLSC) to implement a standard
potential disparate impact. Guidance in the Appendix to the nationwide format for documenting the scope and
Interagency Fair Lending Examination Procedures provides conclusions of fair lending reviews. FLSC has been adopted
details on how to obtain relevant information regarding such as a means of focusing the examiner’s attention to the areas
situations along with methods of evaluation, as appropriate. that pose the greatest unmanaged fair lending risk to the
institution. It incorporates the Interagency Fair Lending
Examination Procedures 1 and assists in documenting the
General Guidelines types of fair lending risks that are present; the controls that

These procedures are intended to be a basic and flexible

1
framework to be used in the majority of fair lending The interagency examination procedures are presented in their entirety in Part
examinations conducted by the FFIEC agencies. They are also III of this section of the manual.

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IV. Fair Lending — Fair Lending Laws and Regulations

management has put in place to manage the risk; the heightened scrutiny.
effectiveness of these controls; why the particular focal
point(s) are chosen; the level of review conducted; and the
Part I of these procedures provides guidance on establishing
results of any additional analysis that was conducted. The
the scope of the examination. Part II (Compliance
FLSC is included in section IV-3.1 of this manual.
Management Review) provides guidance on determining the
The scope of an examination encompasses the loan intensity of the examination. There is naturally some
product(s), market(s), decision center(s), time frame, and interdependence between these two phases. Ultimately the
prohibited basis and control group(s) to be analyzed during scope and intensity of the examination will determine the
the examination. These procedures refer to each potential record of performance that serves as the foundation for
combination of those elements as a “focal point.” Setting the agency conclusions about institutional compliance with fair
scope of an examination involves, first, identifying all of the lending obligations. The examiner should employ these
potential focal points that appear worthwhile to examine. procedures to arrive at a well-reasoned and practical
Then, from among those, examiners select the Focal conclusion about how to conduct a particular institution’s
Point(s) that will form the scope of the examination, based examination of fair lending performance.
on risk factors, priorities established in these procedures or
In certain cases where an agency already possesses
by their respective agencies, the record from past
information which provides examiners with guidance on
examinations, and other relevant guidance. This phase
priorities and risks for planning an upcoming examination,
includes obtaining an overview of an institution’s
such information may expedite the scoping process and make
compliance management system as it relates to fair lending.
it unnecessary to carry out all of the steps below. For
When selecting focal points for review, examiners may example, the report of the previous fair lending examination
determine that the institution has performed “self-tests” or may have included recommendations for the focus of the next
“self-evaluations” related to specific lending products. The examination. However, examiners should validate that the
difference between “self-tests” and “self-evaluations” is institution’s operational structure, product offerings, policies,
discussed in the Using Self-Tests and Self-Evaluations to and risks have not changed since the prior examination before
Streamline the Examination section of the Appendix. condensing the scoping process.
Institutions must share all information regarding “self-
The scoping process can be performed either off-site, onsite, or
evaluations” and certain limited information related to “self-
both, depending on whatever is determined appropriate and
tests.” Institutions may choose to voluntarily disclose
feasible. In the interest of minimizing burdens on both the
additional information about “self-tests.” Examiners should
examination team and the institution, requests for information
make sure that institutions understand that voluntarily
from the institution should be carefully thought out so as to
sharing the results of self-tests will result in a loss of
include only the information that will clearly be useful in the
confidential status of these tests. Information from “self-
examination process. Finally, any off-site information requests
evaluations” or “self-tests” may allow the scoping to be
should be made sufficiently in advance of the on-site schedule
streamlined. Refer to Using Self-Tests and Self-Evaluations
to permit institutions adequate time to assemble necessary
to Streamline the Examination in the Appendix for
information and provide it to the examination team in a timely
additional details.
fashion. (See “Potential Scoping Information” in the
Scoping may disclose the existence of circumstances — Appendix for guidance on additional information that the
such as the use of credit scoring or a large volume of examiner might wish to consider including in a request).
residential lending — which, under an agency’s policy, call
Examiners should focus the examination based on:
for the use of regression analysis or other statistical methods
of identifying potential discrimination with respect to one or • An understanding of the credit operations
more loan products. Where that is the case, the agency’s of the institution;
specialized procedures should be employed for such loan
products rather than the procedures set forth below. • The risk that discriminatory conduct may
occur in each area of those operations; and

Setting the intensity of an examination means determining the • The feasibility of developing a factually
breadth and depth of the analysis that will be conducted on the reliable record of an institution’s
selected loan product(s). This process entails a more involved performance and fair lending compliance in
analysis of the institution’s compliance risk management each area of those operations.
processes, particularly as it relates to selected products, to
Understanding Credit Operations
reach an informed decision regarding how large a sample of
files to review in any transactional analyses performed and Before evaluating the potential for discriminatory conduct,
whether certain aspects of the credit process deserve the examiner should review sufficient information about the

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 IV. Fair Lending — Fair Lending Laws and Regulations

institution and its market to understand the credit operations independent credit-granting authority, consider evaluating
of the institution and the representation of prohibited basis each center and/or subsidiary separately, provided a
group residents within the markets where the institution does sufficient number of loans exist to support a meaningful
business. The level of detail to be obtained at this stage analysis. In determining the scope of the examination for
should be sufficient to identify whether any of the risk such institutions, examiners should consider whether:
factors in the steps below are present. Relevant background
information includes:
• Subsidiaries should be examined. The agencies will hold
• The types and terms of credit products offered, a financial institution responsible for violations by its
differentiating among broad categories of credit such as direct subsidiaries, but not typically for those by its
residential, consumer, or commercial, as well as product affiliates (unless the affiliate has acted as the agent for the
variations within such categories (fixed vs. variable, etc.). institution or the violation by the affiliate was known or
should have been known to the institution before it
• Whether the institution has a special purpose credit became involved in the transaction or purchased the
program, or other program that is specifically designed to affiliate’s loans). When seeking to determine an
assist certain underserved populations. institution’s relationship with affiliates that are not
supervised financial institutions, limit the inquiry to what
• The volume of, or growth in, lending for each of the
can be learned in the institution and do not contact the
credit products offered.
affiliate without prior consultation with agency staff.
• The demographics (i.e., race, national origin, etc.) of
• The underwriting standards and procedures used in the
the credit markets in which the institution is doing
entity being reviewed are used in related entities not
business.
scheduled for the planned examination. This will help
• The institution’s organization of its credit decision- examiners to recognize the potential scope of policy-
making process, including identification of the based violations.
delegation of separate lending authorities and the extent
• The portfolio consists of applications from a purchased
to which discretion in pricing or setting credit terms and
institution. If so, for scoping purposes, examiners
conditions is delegated to various levels of managers,
should consider the applications as if they were made to
employees or independent brokers or dealers.
the purchasing institution. For comparison purposes,
• The institution’s loan officer or broker applications evaluated under the purchased institution’s
compensation program. standards should not be compared to applications
evaluated under the purchasing institution’s standards.
• The types of relevant documentation/data that are
available for various loan products and what is the • The portfolio includes purchased loans. If so, examiners
relative quantity, quality and accessibility of such should look for indications that the institution specified
information (i.e., for which loan product(s) will the loans to purchase based on a prohibited factor or caused a
information available be most likely to support a sound prohibited factor to influence the origination process.
and reliable fair lending analysis).
• A complete decision can be made at one of the several
• The extent to which information requests can be underwriting or loan processing centers, each with
readily organized and coordinated with other independent authority. In such a situation, it is best to
compliance examination components to reduce undue conduct on-site a separate comparative analysis at each
burden on the institution. (Do not request more underwriting center. If covering multiple centers is not
information than the exam team can be expected to feasible during the planned examination, examiners should
utilize during the anticipated course of the review their processes and internal controls to determine
examination.) whether or not expanding the scope and/or length of the
examination is justified.
In thinking about an institution’s credit markets, the
examiner should recognize that these markets may or may • Decision-making responsibility for a single transaction
not coincide with an institution’s Community Reinvestment may involve more than one underwriting center. For
Act (CRA) assessment area(s). Where appropriate, the example, an institution may have authority to decline
examiner should review the demographics for a broader mortgage applicants, but only the mortgage company
geographic area than the assessment area. subsidiary may approve them. In such a situation,
examiners should learn which standards are applied in
each entity and the location of records needed for the
Where an institution has multiple underwriting or loan
planned comparisons.
processing centers or subsidiaries, each with fully

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IV. Fair Lending — Fair Lending Laws and Regulations

• Applicants can be steered from the financial institution to than the minimum in the sample size tables, they should
the subsidiary or other lending channel and vice versa, and consult with their supervisory office on possible alternative
what policies and procedures exist to monitor this practice. methods of analysis. For example, there is strong reason to
examine a pattern in which almost all of 19 male borrowers
• Any third parties, such as brokers or contractors, are received low rates but almost all of four female borrowers
involved in the credit decision and how responsibility is received high rates, even though the number of each group is
allocated among them and the institution. The fewer than the stated minimum. Similarly, there would be
institution’s familiarity with third party actions may be strong reason to examine a pattern in which almost all of 100
important, for an institution may be in violation if it control group applicants were approved but all four
participates in transactions in which it knew or reasonably prohibited basis group applicants were not, even though the
ought to have known other parties were discriminating. number of prohibited basis denials was fewer than five.
As part of understanding the financial institution’s own Evaluating the Potential for Discriminatory Conduct
lending operations, it is also important to understand any
dealings the financial institution has with affiliated and non- Step One: Develop an Overview
affiliated mortgage loan brokers and other third party
lenders. Based on his or her understanding of the credit operations and
product offerings of an institution, an examiner should
These brokers may generate mortgage applications and determine the nature and amount of information required for
originations solely for a specific financial institution or may the scoping process and should obtain and organize that
broadly gather loan applications for a variety of local, information. No single examination can reasonably be
regional, or national lenders. As a result, it is important to expected to evaluate compliance performance as to every
recognize what impact these mortgage brokers and other prohibited basis, in every product, or in every underwriting
third party lender actions and application processing center or subsidiary of an institution. In addition to
operations have on the lending operations of a financial information gained in the process of Understanding Credit
institution. Because brokers can be located anywhere in or Operations, above, the examiner should keep in mind the
out of the financial institution’s primary lending or CRA following factors when selecting products for the scoping
assessment areas, it is important to evaluate broker activity review:
and fair lending compliance related to underwriting, terms,
and conditions, redlining, and steering, each of which is • Which products and prohibited bases were reviewed
covered in more depth in sections of these procedures. during the most recent prior examination(s) and,
Examiners should consult with their respective agencies for conversely, which products and prohibited bases have not
specific guidance regarding broker activity. recently been reviewed?

If the institution is large and geographically diverse, • Which prohibited basis groups make up a significant
examiners should select only as many markets or portion of the institution’s market for the different credit
underwriting centers as can be reviewed readily in depth, products offered?
rather than selecting proportionally to cover every market. • Which products and prohibited basis groups the institution
As needed, examiners should narrow the focus to the reviewed using either a voluntarily disclosed self-test or a
Metropolitan Statistical Area (MSA) or underwriting self-evaluation?
center(s) that are determined to present the highest
discrimination risk. Examiners should use Loan Application Based on consideration of the foregoing factors, the examiner
Register (LAR) data organized by underwriting center, if should request information for all residential and other loan
available. After calculating denial rates between the control products considered appropriate for scoping in the current
and prohibited basis groups for the underwriting centers, examination cycle. In addition, wherever feasible, examiners
examiners should select the centers with the highest fair should conduct preliminary interviews with the institution’s
lending risk. This approach would also be used when key underwriting personnel and those involved with
reviewing pricing or other terms and conditions of approved establishing the institution’s pricing policies and practices.
applicants from the prohibited basis and control groups. If Using the accumulated information, the examiner should
underwriting centers have fewer than five racial or national evaluate the following, as applicable:
origin denials, examiners should not examine for racial
• Underwriting guidelines, policies, and standards.
discrimination in underwriting. Instead, they should shift the
focus to other loan products or prohibited bases, or • Descriptions of credit scoring systems, including a list of
examination types such as a pricing examination. factors scored, cutoff scores, extent of validation, and any
guidance for handling overrides and exceptions. (Refer
However, if examiners learn of other indications of risks that
to Part A of the “Considering Automated Underwriting
favor analyzing a prohibited basis with fewer transactions
and Credit Scoring” section of the Appendix for

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 IV. Fair Lending — Fair Lending Laws and Regulations

guidance.) C5. The size, scope, and quality of the compliance

management program, including management’s
• Applicable pricing policies, risk-based pricing models, involvement, designation of a compliance officer, and
and guidance for exercising discretion over loan terms staffing is materially inferior to programs customarily
and conditions. found in institutions of similar size, market
• Descriptions of any compensation system, including demographics, and credit complexity.
whether compensation is related to, loan production or C6. The institution has not updated compliance policies and
pricing. procedures to reflect changes in law or in agency
• The institution’s formal and informal relationships with guidance.
any finance companies, subprime mortgage or consumer C7. Fair lending training is nonexistent or weak.
lending entities, or similar institutions.
Consider these risk factors and their impact on particular
• Loan application forms. lending products and practices as you conduct the product
• Home Mortgage Disclosure Act – Loan Application specific risk review during the scoping steps that follow.
Register (HMDA-LAR) or loan registers and lists of Where this review identifies fair lending compliance system
declined applications. deficiencies, give them appropriate consideration as part of the
Compliance Management Review in Part II of these
• Description(s) of databases maintained for loan product(s) procedures.
to be reviewed.
Step Three: Review Residential Loan Products
• Records detailing policy exceptions or overrides,
exception reporting and monitoring processes. Although home mortgages may not be the ultimate subject of
every fair lending examination, this product line must at least
• Copies of any consumer complaints alleging be considered in the course of scoping every institution that is
discrimination and related loan files. engaged in the residential lending market.
• Compliance program materials (particularly fair lending Divide home mortgage loans into the following groupings:
policies), training manuals, organization charts, as well as home purchase, home improvement, and refinancings.
record keeping, monitoring protocols, and internal Subdivide those three groups further if an institution does a
controls. significant number of any of the following types or forms of
residential lending, and consider them separately:
• Copies of any available marketing materials or
descriptions of current or previous marketing plans or • Government-insured loans
programs or pre-screened solicitations.
• Mobile home or manufactured housing loans
Step Two: Identify Compliance Program Discrimination
• Wholesale, indirect, and brokered loans
Risk Factors
• Portfolio lending (including portfolios of Fannie
Review information from agency examination work papers,
Mae/Freddie Mac rejections)
institutional records and any available discussions with
management representatives in sufficient detail to In addition, determine whether the institution offers any
understand the organization, staffing, training, conventional “affordable” housing loan programs special
recordkeeping, auditing, policies and procedures of the purpose credit programs or other programs that are
institution’s fair lending compliance systems. Review specifically designed to assist certain borrowers, such as
these systems and note the following risk factors: underserved populations and whether their terms and
conditions make them incompatible with regular conventional
C1. Overall institution compliance record is weak.
loans for comparative purposes. If so, consider them
C2. Prohibited basis monitoring information required by separately.
applicable laws and regulations is nonexistent or
If previous examinations have demonstrated the following,
incomplete.
then an examiner may limit the focus of the current
C3. Data and/or recordkeeping problems compromised examination to alternative underwriting or processing centers
reliability of previous examination reviews. or to other residential products that have received less scrutiny
in the past:
C4. Fair lending problems were previously found in one or
more institution products or in institution subsidiaries. • A strong fair lending compliance program.

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 IV. Fair Lending — Fair Lending Laws and Regulations

• No record of discriminatory transactions at particular decision credit scoring system scores age, refer to Part E of the
centers or in particular residential products. Considering Automated Underwriting and Credit Scoring
section of the Appendix.)
• No indication of a significant change in personnel, operations,
or underwriting or pricing policies at those centers or in those O4. Statements made by the institution’s officers, employees,
residential products. or agents which constitute an express or implicit
indication that one or more such persons have engaged or
• No unresolved fair lending complaints, administrative do engage in discrimination on a prohibited basis in any
proceedings, litigation, or similar factors. aspect of a credit transaction.
• No discretion to set price or credit terms and conditions in O5. Employee or institutional statements that evidence
particular decision centers or for particular residential attitudes based on prohibited basis prejudices or
products. stereotypes.
Step Four: Identify Residential Lending Discrimination Risk Indicators of potential disparate treatment in
Factors Underwriting such as:
Review the lending policies, marketing plans, underwriting, U1. *Substantial disparities among the approval/denial rates
appraisal and pricing guidelines, broker/agent agreements and for applicants by monitored prohibited basis
loan application forms for each residential loan product that characteristic (especially within income categories).
represents an appreciable volume of, or displays noticeable
growth in, the institution’s residential lending. U2. *Substantial disparities among the application processing
times for applicants by monitored prohibited basis
• Review also any available data regarding the geographic characteristic (especially within denial reason groups).
distribution of the institution’s loan originations with respect
to the race and national origin percentages of the census tracts U3. *Substantially higher proportion of withdrawn/
within its assessment area or, if different, its residential loan incomplete applications from prohibited basis group
product lending area(s). applicants than from other applicants.

• Conduct interviews of loan officers and other employees or U4. Vague or unduly subjective underwriting criteria.
agents in the residential lending process concerning adherence U5. Lack of clear guidance on making exceptions to
to and understanding of the above policies and guidelines as underwriting criteria, including credit scoring overrides.
well as any relevant operating practices.
U6. Lack of clear loan file documentation regarding reasons
• In the course of conducting the foregoing inquiries, look for for any exceptions to standard underwriting criteria,
the following risk factors (factors are numbered including credit scoring overrides.
alphanumerically to coincide with the type of factor, e.g., “O”
for “overt”; “P” for “pricing,” etc.). U7. Relatively high percentages of either exceptions to
underwriting criteria or overrides of credit score cutoffs.
NOTE: For risk factors below that are marked with an
asterisk (*), examiners need not attempt to calculate the U8. Loan officer or broker compensation based on loan
indicated ratios for racial or national origin characteristics volume (especially loans approved per period of time).
when the institution is not a HMDA reporter. However,
consideration should be given in such cases to whether or not U9. Consumer complaints alleging discrimination in loan
such calculations should be made based on gender or racial- processing or in approving/denying residential loans.
ethnic surrogates. Indicators of potential disparate treatment in Pricing (interest
Overt indicators of discrimination such as: rates, fees, or points) such as:

O1. Including explicit prohibited basis identifiers in the P1. Financial incentives for loan officers or brokers to
institution’s written or oral policies and procedures charge higher prices (including interest rate, fees and
(underwriting criteria, pricing standards, etc.). points). Special attention should be given to situations
where financial incentives are accompanied by broad
O2. Collecting information, conducting inquiries or imposing pricing discretion (as in P2), such as through the use of
conditions contrary to express requirements of Regulation overages or yield spread premiums.
B.
P2. Presence of broad discretion in loan pricing (including
O3. Including variables in a credit scoring system that interest rate, fees and points), such as through overages,
constitute a basis or factor prohibited by Regulation B or, underages or yield spread premiums. Such discretion
for residential loan scoring systems, the FHAct. (If a may be present even when institutions provide rate sheets

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 IV. Fair Lending — Fair Lending Laws and Regulations

and fees schedules, if loan officers or brokers are prohibited basis applicants of the institution compared to
permitted to deviate from those rates and fees without the percentage of prohibited basis applicants of the
clear and objective criteria. subsidiary(ies) or affiliate(s).
P3. Use of risk-based pricing that is not based on objective S6. *For an institution that has one or more lending channels
criteria or applied consistently. that originate the same loan product, any significant
differences in the percentage of prohibited basis
P4. *Substantial disparities among prices being quoted or applicants in one of the lending channels compared to the
charged to applicants who differ as to their monitored percentage of prohibited basis applicants of the other
prohibited basis characteristics. lending channel.
P5. Consumer complaints alleging discrimination in S7. Consumer complaints alleging discrimination in
residential loan pricing. residential loan pricing or product placement.
P6. *In mortgage pricing, disparities in the incidence or rate S8. *For an institution with sub-prime mortgage subsidiaries,
spreads 2 of higher-priced lending by prohibited basis a concentration of those subsidiaries’ branches in
characteristics as reported in the HMDA data. minority areas relative to its other branches.
P7. *A loan program that contains only borrowers from a Indicators of potential discriminatory Redlining such as:
prohibited basis group, or has significant differences in
the percentages of prohibited basis groups, especially in R1. *Significant differences, as revealed in HMDA data, in
the absence of a Special Purpose Credit Program under the number of applications received, withdrawn,
ECOA. approved not accepted, and closed for incompleteness or
loans originated in those areas in the institution’s market
Indicators of potential disparate treatment by Steering such that have relatively high concentrations of minority group
as: residents compared with areas with relatively low
S1. Lack of clear, objective and consistently implemented concentrations of minority residents.
standards for (i) referring applicants to subsidiaries, R2. *Significant differences between approval/denial rates for
affiliates, or lending channels within the institution (ii) all applicants (minority and non-minority) in areas with
classifying applicants as “prime” or “sub-prime” relatively high concentrations of minority group residents
borrowers, or (iii) deciding what kinds of alternative compared with areas with relatively low concentrations of
loan products should be offered or recommended to minority residents.
applicants (product placement).
R3. *Significant differences between denial rates based on
S2. Financial incentives for loan officers or brokers to place insufficient collateral for applicants from areas with
applicants in nontraditional products (i.e., negative relatively high concentrations of minority residents and
amortization, “interest only”, “payment option” those areas with relatively low concentrations of minority
adjustable rate mortgages) or higher cost products. residents.
S3. For an institution that offers different products based on R4. *Significant differences in the number of originations of
credit risk levels, any significant differences in higher-priced loans or loans with potentially negative
percentages of prohibited basis groups in each of the consequences for borrowers, (i.e., non-traditional
alternative loan product categories. mortgages, prepayment penalties, lack of escrow
S4. *Significant differences in the percentage of prohibited requirements) in areas with relatively high concentrations
basis applicants in loan products or products with specific of minority residents compared with areas with relatively
features relative to control group applicants. Special low concentrations of minority residents.
attention should be given to products and features that R5. Other patterns of lending identified during the most
have potentially negative consequences for applicants recent CRA examination that differ by the concentration
(i.e., non-traditional mortgages, prepayment penalties, of minority residents.
lack of escrow requirements, or credit life insurance).
R6. Explicit demarcation of credit product markets that
S5. *For an institution that has one or more sub-prime excludes MSAs, political subdivisions, census tracts, or
mortgage subsidiaries or affiliates, any significant other geographic areas within the institution’s lending
differences, by loan product, in the percentage of market or CRA assessment areas and having relatively
high concentrations of minority residents.
2
Regulation C, Section 203.4(a)(12)
R7. Difference in services available or hours of operation at

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IV. Fair Lending — Fair Lending Laws and Regulations

branch offices located in areas with concentrations of M5. Using mailing or other distribution lists or other
minority residents when compared to branch offices marketing techniques for pre-screened or other offerings
located in areas with concentrations of non-minority of residential loan products that:
residents.
• Explicitly exclude groups of prospective borrowers on
R8. Policies on receipt and processing of applications, a prohibited basis; or
pricing, conditions, or appraisals and valuation, or on any
other aspect of providing residential credit that vary • Exclude geographies (e.g., census tracts, ZIP codes,
between areas with relatively high concentrations of etc.) within the institution’s marketing area that have
minority residents and those areas with relatively low significantly higher percentages of minority group
concentrations of minority residents. residents than does the remainder of the marketing area.

R9. The institution’s CRA assessment area appears to have M6. *Proportion of prohibited basis applicants is
been drawn to exclude areas with relatively high significantly lower than that group’s representation in
concentrations of minority residents. the total population of the market area.

R10.Employee statements that reflect an aversion to doing M7. Consumer complaints alleging discrimination in
business in areas with relatively high concentrations of advertising or marketing loans.
minority residents. Step Five: Organize and Focus Residential Risk Analysis
R11. Complaints or other allegations by consumers or Review the risk factors identified in Step 4 and, for each loan
community representatives that the institution excludes or product that displays risk factors, articulate the possible
restricts access to credit for areas with relatively high discriminatory effects encountered and organize the
concentrations of minority residents. Examiners should examination of those loan products in accordance with the
review complaints against the institution filed either with following guidance. For complex issues regarding these
their agency or the institution; the CRA public comment factors, consult with agency supervisory staff.
file; community contact forms; and the responses to
questions about redlining, discrimination, and • Where overt evidence of discrimination, as described in
discouragement of applications, and about meeting the factors O1-O5, has been found in connection with a
needs of racial or national origin minorities, asked as part product, document those findings as described in Part III,
of obtaining local perspectives on the performance of B, besides completing the remainder of the planned
financial institutions during prior CRA examinations. examination analysis.

R12. An institution that has most of its branches in • Where any of the risk factors U1-U9 are present,
predominantly non-minority neighborhoods at the same consider conducting an underwriting comparative file
time that the institution’s sub-prime mortgage subsidiary analysis as described in Part III, C.
has branches which are located primarily in
• Where any of the risk factors P1-P7 are present,
predominantly minority neighborhoods.
consider conducting a pricing comparative file analysis
Indicators of potential disparate treatment in Marketing of as described in Part III, D.
residential products, such as:
• Where any of the risk factors S1-S8 are present,
M1. Advertising patterns or practices that a reasonable consider conducting a steering analysis as described in
person would believe indicate prohibited basis Part III, E.
customers are less desirable.
• Where any of the risk factors R1-R12 are present,
M2. Advertising only in media serving non-minority areas of consider conducting an analysis for redlining as described
the market. in Part III, G.

M3. Marketing through brokers or other agents that the • Where any of the risk factors M1-M7 are present,
institution knows (or has reason to know) would serve consider conducting a marketing analysis as described in
only one racial or ethnic group in the market. Part III, H.

M4. Use of marketing programs or procedures for residential • Where an institution uses age in any credit scoring system,
loan products that exclude one or more regions or consider conducting an examination analysis of that credit
geographies within the institutions assessment or scoring system’s compliance with the requirements of
marketing area that have significantly higher Regulation B as described in Part III, I.
percentages of minority group residents than does the
remainder of the assessment or marketing area. Step Six: Identify Consumer Lending Discrimination Risk

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 IV. Fair Lending — Fair Lending Laws and Regulations

Factors Articulate the possible discriminatory patterns identified

and consider further examining those products determined
For any consumer loan products selected in Step One for risk to have sufficient risk of discriminatory conduct in
analysis, examiners should conduct a risk factor review similar accordance with the procedures for commercial lending
to that conducted for residential lending products in Steps described in Part III, F.
Three through Five, above. Examiners should consult with
agency supervisory staff regarding the potential use of Step Eight: Complete the Scoping Process
surrogates to identify possible prohibited basis group
individuals. To complete the scoping process, the examiner should
review the results of the preceding steps and select those
NOTE: The term surrogate in this context refers to any factor focal points that warrant examination, based on the relative
related to a loan applicant that potentially identifies that risk levels identified above. In order to remain within the
applicant’s race, color, or other prohibited basis agency’s resource allowances, the examiner may need to
characteristic in instances where no direct evidence of that choose a smaller number of focal points from among all
characteristic is available. Thus, in consumer lending, where those selected on the basis of risk. In such instances, set the
monitoring data is generally unavailable, a Hispanic or Asian scope by first, prioritizing focal points on the basis of (i)
surname could constitute a surrogate for an applicant’s race high number and/or relative severity of risk factors; (ii) high
or national origin because the examiner can assume that the data quality and other factors affecting the likelihood of
institution (which can rebut the presumption) perceived the obtaining reliable examination results; (iii) high loan volume
person to be Hispanic or Asian. Similarly, an applicant’s and the likelihood of widespread risk to applicants and
given name could serve as a surrogate for his or her gender. borrowers; and (iv) low quality of any compliance program
A surrogate for a prohibited basis group characteristic may be and, second, selecting for examination review as many focal
used to set up a comparative analysis with control group points as resources permit.
applicants or borrowers.
Where the judgment process among competing focal points is
Examiners should then follow the rules in Steps Three a close call, information learned in the phase of conducting the
through Five, above and identify the possible discriminatory compliance management review can be used to further refine
patterns encountered and consider examining those products the examiner’s choices.
determined to have sufficient risk of discriminatory conduct.
Part II — Compliance Management Review
Step Seven: Identify Commercial Lending Discrimination
The Compliance Management Review enables the
Risk Factors
examination team to determine:
Where an institution does a substantial amount of lending in
the commercial lending market, most notably small business
lending and the product has not recently been examined or • The intensity of the current examination based on an
the underwriting standards have changed since the last evaluation of the compliance management measures
examination of the product, the examiner should consider employed by an institution.
conducting a risk factor review similar to that performed for
residential lending products, as feasible, given the limited • The reliability of the institution’s practices and procedures
information available. Such an analysis should generally be for ensuring continued fair lending compliance.
limited to determining risk potential based on risk factors Generally, the review should focus on:
U4- U8; P1-P3; R5-R7; and M1-M3.
• Determining whether the policies and procedures of the
If the institution makes commercial loans insured by the institution enable management to prevent, or to identify
Small Business Administration (SBA), determine from and self-correct, illegal disparate treatment in the
agency supervisory staff whether SBA loan data (which transactions that relate to the products and issues
codes race and other factors) are available for the institution identified for further analysis under Part I of these
and evaluate those data pursuant to instructions procedures.
accompanying them.
• Obtaining a thorough understanding of the manner by
For large institutions reporting small business loans for which management addresses its fair lending
CRA purposes and where the institution also voluntarily responsibilities with respect to (a) the institution’s lending
geocodes loan denials, look for material discrepancies in practices and standards, (b) training and other application-
ratios of approval-to-denial rates for applications in areas processing aids, (c) guidance to employees or agents in
with high concentrations of minority residents compared to dealing with customers, and (d) its marketing or other
areas with concentrations of non-minority residents. promotion of products and services.

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IV. Fair Lending — Fair Lending Laws and Regulations

To conduct this review, examiners should consider institutional proceed with a fair lending analysis until the LAR data
records and interviews with appropriate management personnel have been corrected by the institution. In cases where
in the lending, compliance, audit, and legal functions. The inaccuracies impede the examination, examiners should
examiner should also refer to the Compliance Management direct the institution to take action to ensure data integrity
Analysis Checklist contained in the Appendix to evaluate the (data scrubbing, monitoring, training, etc.).
strength of the compliance programs in terms of their capacity
to prevent, or to identify and self- correct, fair lending NOTE: While the procedures refer to the use of HMDA data,
violations in connection with the products or issues selected for other data sources should be considered, especially in the
analysis. Based on this evaluation: case of non-HMDA reporters or institutions that originate
loans but are not required to report them on a LAR.
• Set the intensity of the transaction analysis by minimizing
sample sizes within the guidelines established in Part III B. Documenting Overt Evidence of Disparate Treatment
and the Fair Lending Sample Size Tables in the Where the scoping process or any other source identifies
Appendix, to the extent warranted by the strength and overt evidence of disparate treatment, the examiner should
thoroughness of the compliance programs applicable to assess the nature of the policy or statement and the extent of
those focal points selected for examination. its impact on affected applicants by conducting the
• Identify any compliance program or system deficiencies following analysis.
that merit correction or improvement and present these to Step 1. Where the indicator(s) of overt discrimination are
management in accordance with Part IV of these found in or based on a written policy (for example, a credit
procedures. scorecard) or communication, determine and document:
Where an institution performs a self-evaluation or has a. The precise language of the apparently discriminatory
voluntarily disclosed the report or results of a self-test of policy or communication and the nature of the fair
any product or issue that is within the scope of the lending concerns that it raises.
examination and has been selected for analysis pursuant to
Part I of these procedures, examiners may streamline the b. The institution’s stated purpose in adopting the policy
examination, consistent with agency guidance, provided or communication and the identity of the person on
the self-test or self-evaluation meets the requirements set whose authority it was issued or adopted.
forth in Using Self-Tests and Self-Evaluations to
c. How and when the policy or communication was put
Streamline the Examination located in the Appendix.
into effect.
Part III — Examination Procedures 3 d. How widely the policy or communication was applied.
Once the scope and intensity of the examination have been e. Whether and to what extent applicants were adversely
determined, assess the institution’s fair lending affected by the policy or communication.
performance by applying the appropriate procedures that
follow to each of the examination focal points already Step 2. Where any indicator of overt discrimination was an
selected. oral statement or unwritten practice, determine and
document:
A. Verify Accuracy of Data
a. The precise nature of both the statement, or practice, and
Prior to any analysis and preferably before the scoping of the fair lending concerns that they raise.
process, examiners should assess the accuracy of the data
being reviewed. Data verifications should follow specific b. The identity of the persons making the statement or
protocols (sampling, size, etc.) intended to ensure the applying the practice and their descriptions of the
validity of the review. For example, where an institution’s reasons for it and the persons authorizing or directing the
LAR data is relied upon, examiners should generally use of the statement or practice.
validate the accuracy of the institution’s submitted data by
selecting a sample of LAR entries and verifying that the c. How and when the statement or practice was
information noted on the LAR was reported according to disseminated or put into effect.
instructions by comparing information contained in the loan d. How widely the statement or practice was disseminated
file for each sampled loan. If the LAR data are inconsistent or applied.
with the information contained in the loan files, depending
on the nature of the errors, examiners may not be able to e. Whether and to what extent applicants were
adversely affected by the statement or practice.
3
This reflects the interagency examination procedures in their entirety.
Assemble findings and supporting documentation for

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 IV. Fair Lending — Fair Lending Laws and Regulations

presentation to management in connection with Part IV of exceptions or overrides applicable to that focal point.
these procedures.
b. Using HMDA/LAR data or, for consumer loans,
C. Transactional Underwriting Analysis — Residential and comparable loan register data to the extent
Consumer Loans. available, choose approved and denied
applications based on selection criteria that will
Step 1. Set Sample Size maximize the likelihood of finding marginal
a. For each focal point selected for this analysis, two approved and denied applicants, as discussed
samples will be utilized: (i) prohibited basis group denials below.
and (ii) control group approvals, both identified either c. To the extent that the above factors are inapplicable or
directly from monitoring information in the case of other selection criteria are unavailable or do not
residential loan applications or through the use of facilitate selection of the entire sample size of files,
application data or surrogates in the case of consumer complete the initial sample selection by making random
applications. file selections from the appropriate sample categories in
b. Refer to Fair Lending Sample Size Tables, Table A in the the Sample Size Table.
Appendix and determine the size of the initial sample for Step 3. Compare Approved and Denied Applications
each focal point, based on the number of prohibited basis
group denials and the number of control group approvals Overview: Although a creditor’s written policies and
by the institution during the twelve month (or calendar procedures may appear to be nondiscriminatory, lending
year) period of lending activity preceding the personnel may interpret or apply policies in a
examination. discriminatory manner. In order to detect any disparate
treatment among applicants, the examiner should first
In the event that the number of denials and/or approvals eliminate all but “marginal transactions” (see 3.b. below)
acted on during the preceding 12 month period from each selected focal point sample. Then, a detailed
substantially exceeds the maximum sample size shown profile of each marginal applicant’s qualifications, the
in Table A, reduce the time period from which that level of assistance received during the application process,
sample is selected to a shorter period. (In doing so, the reasons for denial, the loan terms, and other
make every effort to select a period in which the information should be recorded on an Applicant Profile
institution’s underwriting standards are most Spreadsheet. Once profiled, the examiner can compare the
representative of those in effect during the full 12 target and control groups for evidence that similarly
month period preceding the examination.) qualified applicants have been treated differently as to
c. If the number of prohibited basis group denials or either the institution’s credit decision or the quality of
control group approvals for a given focal point that were assistance provided.
acted upon during the 12 month period referenced in a. Create Applicant Profile Spreadsheet
1.b., above, do not meet the minimum standards set forth
in the Sample Size Table, examiners need not attempt a Based upon the institution’s written and/or articulated
transactional analysis for that focal point. Where other credit standards and loan policies, identify categories of
risk factors favor analyzing such a focal point, consult data that should be recorded for each applicant and
with agency supervisory staff on possible alternative provide a field for each of these categories on a
methods of judgmental comparative analysis. worksheet or computerized spreadsheet. Certain data
(income, loan amount, debt, etc.) should always be
d. If agency policy calls for a different approach to included in the spreadsheet, while the other data
sampling (e.g., a form of statistical analysis, a selected will be tailored for each loan product and
mathematical formula, or an automated tool) for a institution based on applicable underwriting criteria
limited class of institutions, examiners should follow and such issues as branch location and underwriter.
that approach. Where credit bureau scores and/or application scores
Step 2. Determine Sample Composition are an element of the institution’s underwriting criteria
(or where such information is regularly recorded in
a. To the extent the institution maintains records of loan loan files, whether expressly used or not), include a
outcomes resulting from exceptions to its credit data field for this information in the spread sheet.
underwriting standards or other policies (e.g., overrides
to credit score cutoffs), request such records for both In order to facilitate comparisons of the quality of
approvals and denials, sorted by loan product and assistance provided to target and control group applicants,
branch or decision center, if the institution can do so. respectively, every work sheet should provide a
Include in the initial sample for each focal point all “comments” block appropriately labeled as the site for

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IV. Fair Lending — Fair Lending Laws and Regulations

recording observations from the file or interviews c. Review and Compare Profiles
regarding how an applicant was, or was not, assisted in
overcoming credit deficiencies or otherwise qualifying for • For each focal point, review all marginal profiles to determine
approval. if the underwriter followed institution lending policies in
denying applications and whether the reason(s) for denial were
b. Complete Applicant Profiles supported by facts documented in the loan file and properly
disclosed to the applicant pursuant to Regulation B. If any (a)
From the application files sample for each focal point, unexplained deviations from credit standards, (b) inaccurate
complete applicant profiles for selected denied and reasons for denial or (c) incorrect disclosures are noted,
approved applications as follows: (whether in a judgmental underwriting system, a scored
• A principal goal is to identify cases where similarly system or a mixed system) the examiner should obtain an
qualified prohibited basis and control group explanation from the underwriter and document the response
applicants had different credit outcomes, because the on an appropriate workpaper.
agencies have found that discrimination, including NOTE: In constructing the applicant profiles to be
differences in granting assistance during the approval compared, examiners must adjust the facts compared so that
process, is more likely to occur with respect to assistance, waivers, or acts of discretion are treated
applicants who are not either clearly qualified or consistently between applicants. For example, if a control
unqualified ( i.e., “marginal” applicants). The group applicant’s DTI ratio was lowered to 42% because
examiner-in-charge should, during the following the institution decided to include short-term overtime
steps, judgmentally select from the initial sample income and a prohibited basis group applicant who was
only those denied and approved applications which denied due to “insufficient income” would have had his
constitute marginal transactions. (See Appendix on ratio drop from 46% to 41% if his short-term overtime
Identifying Marginal Transactions for guidance) income had been considered, then the examiners should
• If few marginal control group applicants are identified consider 41%, not 46%, in determining the benchmark.
from the initial sample, review additional files of • For each reason for denial identified within the target
approved control group applicants. This will either group, rank the denied prohibited basis applicants,
increase the number of marginal approvals or confirm that beginning with the applicant whose qualification(s)
marginal approvals are so infrequent that the marginal related to that reason for denial were least deficient.
denials are unlikely to involve disparate treatment. (The top-ranked denied applicant in each such ranking
• The judgmental selection of both marginal-denied and will be referred to below as the “benchmark”
marginal-approved applicant loan files should be done applicant.)
together, in a “back and forth” manner, to facilitate • Compare each marginal control group approval to the
close matches and a more consistent definition of benchmark applicant in each reason-for-denial ranking
“marginal” between these two types of loan files. developed in step (b), above. If there are no approvals
• Once the marginal files have been identified, the data who are equally or less qualified, then there are no
elements called for on the profile spreadsheet are instances of disparate treatment for the institution to
extracted or noted and entered. account for. For all such approvals that appear no better
qualified than the denied benchmark applicant
• While conducting the preceding step, the examiner
should simultaneously look for and document on the o identify the approved loan on the worksheet or
spreadsheet any evidence found in marginal files spreadsheet as an “overlap approval,” and
regarding the following: o compare that overlap approval with other
° the extent of any assistance, including both marginal prohibited basis denials in the ranking to
affirmative aid and waivers or partial waivers of determine whether additional overlaps exist. If
credit policy provisions or requirements, that so, identify all overlapping approvals and denials
appears to have been provided to marginal- as above.
approved control group applicants which enabled • Where the focal point involves use of a credit scoring
them to overcome one or more credit deficiencies, system, the analysis for disparate treatment is similar to
such as excessive debt-to-income ratios; and the procedures set forth in (c) above, and should focus
° the extent to which marginal-denied target group primarily on overrides of the scoring system itself. For
applicants with similar deficiencies were, or were guidance on this type of analysis, refer to Considering
not, provided similar affirmative aid, waivers or Automated Underwriting and Credit Scoring, Part C in
other forms of assistance. the Appendix.

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 IV. Fair Lending — Fair Lending Laws and Regulations

Step 4. If there is some evidence of violations in the to factors which examiners determine to be legitimate.
underwriting process but not enough to clearly establish the
existence of a pattern or practice, the examiner should While the period for review should be 12-months, prohibited
expand the sample as necessary to determine whether a basis group and control group borrowers should be grouped
pattern or practice does or does not exist. and reviewed around a range of dates during which the
institution’s practices for the term or condition being
Step 5. Discuss all findings resulting from the above reviewed were the same. Generally, examiners should use
comparisons with management and document both the the loan origination date or the loan application date.
findings and all conversations on an appropriate worksheet.
Identify data to be analyzed for each focal point to be
reviewed and record this information for each borrower on
D. Analyzing Potential Disparities in Pricing and Other a spreadsheet to ensure a valid comparison regarding terms
Terms and Conditions. and conditions. For example, in certain cases, an institution
Depending on the intensity of the examination and the size of may offer slightly differentiated products with significant
the borrower population to be reviewed, the analysis of pricing implications to borrowers. In these cases, it may be
decisions on pricing and other terms and conditions may appropriate to group these procedures together for the
involve a comparative file review, statistical analysis, a purposes of evaluation.
combination of the two, or other specialized technique used by
Step 3. Review Terms and Conditions; Compare with
an agency. Each examination process assesses an institution’s
credit-decision standards and whether decisions on pricing and Borrower Outcomes
other terms and conditions are applied to borrowers without a. Review all loan terms and conditions (rates, points,
regard to a prohibited basis. fees, maturity variations, LTVs, collateral
The procedures below encompass the examination steps for a requirements, etc.) with special attention to those
comparative file review. Examiners should consult their own which are left, in whole or in part, to the discretion of
agency’s procedures for detailed guidance where appropriate. loan officers or underwriters. For each such term or
For example, when file reviews are undertaken in conjunction condition, identify (a) any prohibited basis group
with statistical analysis, the guidance on specific sample sizes borrowers in the sample who appear to have been
referenced below may not apply. treated unfavorably with respect to that term or
condition and (b) any control group borrowers who
Step 1. Determine Sample Selection appear to have been treated favorably with respect to
that term or condition. The examiner’s analysis should
Examiners may review data in its entirety or restrict their be thoroughly documented in the workpapers.
analysis to a sample depending on the examination
approach used and the quality of the institution’s b. Identify from the sample universe any control group
compliance management system. The Fair Lending Sample borrowers who appear to have been treated more
Size Tables in the Appendix provide general guidance about favorably than one or more of the above-identified
appropriate sample sizes. Generally, the sample size should prohibited basis group borrowers and who have
be based on the number of prohibited basis group and pricing or creditworthiness factors (under the
control group originations for each focal point selected institution’s standards) that are equal to or less
during the 12 months preceding the examination and the favorable than the prohibited basis group borrowers.
outcome of the compliance management system analysis
conducted in Part II. When possible, examiners should c. Obtain explanations from the appropriate loan officer or
request specific loan files in advance and request that the other employee for any differences that exist and
institution have them available for review at the start of the reanalyze the sample for evidence of discrimination.
examination. d. If there is some evidence of violations in the imposition of
Step 2. Determine Sample Composition and Create terms and conditions but not enough to clearly establish
Applicant Profiles the existence of a pattern or practice, the examiner should
expand the sample as necessary to determine whether a
Examiners should tailor their sample and subsequent pattern or practice does or does not exist.
analysis to the specific factors that the institution considers
when determining its pricing, terms, and conditions. For e. Discuss differences in comparable loans with the
example, while decisions on pricing, and other terms and institution’s management and document all conversations
conditions are part of an institution’s underwriting process, on an appropriate worksheet. For additional guidance on
general underwriting criteria should not be used in the evaluating management’s responses, refer to Part A, 1 – 5,
analysis if they are not relevant to the term or condition to Evaluating Responses to Evidence of Disparate Treatment
be reviewed. Additionally, consideration should be limited in the Appendix.

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IV. Fair Lending — Fair Lending Laws and Regulations

E. Steering Analysis b. Pricing or other costs applicable to the product and the
alternative product(s), including interest rates, points,
An institution that offers a variety of lending products or and all fees.
product features, either through one channel or through
multiple channels, may benefit consumers by offering greater Step 2. Document the policies, conditions, or criteria that
choices and meeting the diverse needs of applicants. Greater have been adopted by the institution for determining how
product offerings and multiple channels, however, may also referrals are to be made and choices presented to applicants.
create a fair lending risk that applicants will be illegally
steered to certain choices based on prohibited characteristics. a. Obtain not only information regarding the product or
feature offered by the institution and alternatives
Several examples illustrate potential fair lending risk: offered by subsidiaries/affiliates, but also information
on alternatives offered solely by the institution itself.
• An institution that offers different lending products based
on credit risk levels may present opportunities for loan b. Obtain any information regarding a subsidiary of the
officers or brokers to illegally steer applicants to the institution directly from that entity, but seek
higher-risk products. information regarding an affiliate or holding company
subsidiary only from the institution itself.
• An institution that offers nontraditional loan products or
loan products with potentially onerous terms (such as c. Obtain all appropriate documentation and provide a
prepayment penalties) may present opportunities for loan written summary of all discussions with loan
officers or brokers to illegally steer applicants to certain personnel and managers.
products or features.
d. Obtain documentation and/or employee estimates as to
• An institution that offers prime or sub-prime products the volume of referrals made from or to the institution,
through different channels may present opportunities for for each product, during a relevant time period.
applicants to be illegally steered to the sub-prime
channel. e. Resolve to the extent possible any discrepancies
between information found in the institution’s
The distinction between guiding consumers toward a specific documents and information obtained in discussions
product or feature and illegal steering centers on whether the with loan personnel and managers by conducting
institution did so on a prohibited basis, rather than based on appropriate follow-up interviews.
an applicant’s needs or other legitimate factors. It is not
necessary to demonstrate financial harm to a group that has f. Identify any policies and procedures established by the
been “steered.” It is enough to demonstrate that action was institution and/or the subsidiary or affiliate for (i)
taken on a prohibited basis regardless of the ultimate referring a person who applies to the institution, but
financial outcome. If the scoping analysis reveals the does not meet its criteria, to another internal lending
presence of one or more risk factors S1 through S8 for any channel, subsidiary or affiliate; (ii) offering one or
selected focal point, consult with agency supervisory staff more alternatives to a person who applies to the
about conducting a steering analysis as described below. institution for a specific product or feature, but does
not meet its criteria; or (iii) referring a person who
Step 1. Clarify what options are available to applicants applies to a subsidiary or affiliate for its product, but
who appears qualified for a loan from the institution, to
Through interviews with appropriate personnel of the the institution; or referring a person who applies
institution and review of policy manuals, procedure through one internal lending channel for a product, but
guidelines and other directives, obtain and verify the who appears to be qualified for a loan through another
following information for each product-alternative product lending channel to that particular lending channel.
pairing or grouping identified above:
g. Determine whether loan personnel are encouraged,
a. All underwriting criteria for the product or feature and through financial incentives or otherwise, to make
their alternatives that are offered by the institution or by referrals, either from the institution to a
a subsidiary or affiliate. Examples of products may subsidiary/affiliate or vice versa. Similarly,
include stated income, negative amortization, and determine whether the institution provides
options ARMs. Examples of terms and features include financial incentives related to products and
prepayment penalties and escrow requirements. The features.
distinction between a product, term, and feature may
vary institution to institution. For example, some Step 3. Determine how referral decisions are made and
institutions may consider “stated income” a feature, documented within the institution.
whiles others may consider that a distinct product.
Determine how a referral is made to another internal lending

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 IV. Fair Lending — Fair Lending Laws and Regulations

channel, subsidiary, or affiliate. Determine the reason for basis group applicant, based on the criteria identified
referral and how it is documented. for the control group, above. This applicant will be
the “benchmark” applicant. Rank order the remaining
Step 4. Determine to what extent individual loan personnel applicants from best to least qualified.
are able to exercise personal discretion in deciding what loan
products or other credit alternatives will be made available to e. Select a sample of control group applicants. Identify
a given applicant. those who were treated “more favorably” with respect to
the same product-alternative product pair as the
Step 5. Determine whether the institution’s stated policies, prohibited basis group. (Again refer to the Sample Size
conditions, or criteria in fact are adhered to by individual Table B and marginal applicant processes noted above
decision makers. If not, does it appear that different policies in selecting the sample.)
or practices are actually in effect?
f. Compare the qualifications of the benchmark applicant
Enter data from the prohibited basis group sample on the with those of the control group applicants, beginning
spread sheets and determine whether the institution is, in fact, with the least qualified member of that sample. Any
applying its criteria as stated. For example, if one announced control group applicant who appears less qualified than
criterion for receiving a “more favorable” prime mortgage the benchmark applicant should be identified on the
loan was a back end debt ratio of no more than 38%, review spreadsheet as a “control group overlap.”
the spread sheets to determine whether that criteria was
adhered to. If the institution’s actual treatment of prohibited g. Compare all control group overlaps with other, less
basis group applicants appears to differ from its stated qualified prohibited basis group applicants to
criteria, document such differences for subsequent discussion determine whether additional overlaps exist
with management.
h. Document all overlaps as possible disparities in treatment.
Step 6. To the extent that individual loan personnel have any Discuss all overlaps and related findings (e.g., any
discretion in deciding what products and features to offer differences between stated and actual underwriting and/or
applicants, conduct a comparative analysis to determine referral criteria) with management, documenting all such
whether that discretion has been exercised in a conversations.
nondiscriminatory manner.
Step 7. Examiners should consult with their agency’s
Compare the institution’s or subsidiary/affiliate’s treatment of supervisory staff if they see a need to contact control group
control group and prohibited basis group applicants by or prohibited basis group applicants to substantiate the
adapting the “benchmark” and “overlap” technique discussed steering analysis.
in Part III, Section C of these procedures. For purposes of
this Steering Analysis, that technique should be conducted as
follows: F. Transactional Underwriting Analysis — Commercial
Loans.
a. For each focal point to be analyzed, select a sample of
prohibited basis group applicants who received “less Overview: Unlike consumer credit, where loan products and
favorable” treatment (e.g., referral to a finance prices are generally homogenous and underwriting involves
company or a subprime mortgage subsidiary or the evaluation of a limited number of credit variables,
counteroffers of less favorable product alternatives). commercial loans are generally unique and underwriting
methods and loan pricing may vary depending on a large
NOTE: In selecting the sample, follow the guidance of
number of credit variables. The additional credit analysis
Fair Lending Sample Size Tables, Table B in the
that is involved in underwriting commercial credit products
Appendix and select “marginal applicants” as
will entail additional complexity in the sampling and
instructed in Part III, Section C, above.
discrimination analysis process. Although ECOA prohibits
b. Prepare a spread sheet for the sample which contains discrimination in all commercial credit activities of a covered
data entry categories for those underwriting and/or institution, the agencies recognize that small businesses (sole
referral criteria that the institution identified in Step 1.b proprietorships, partnerships, and small, closely-held
as used in reaching underwriting and referral decisions corporations) may have less experience in borrowing. Small
between the pairs of products. businesses may have fewer borrowing options, which may
make them more vulnerable to discrimination. Therefore, in
c. Review the “less favorably” treated prohibited basis implementing these procedures, examinations should
group sample and rank this sample from least qualified generally be focused on small business credit (commercial
to most qualified. applicants that had gross revenues of $1,000,000 or less in
d. From the sample, identify the best qualified prohibited the preceding fiscal year), absent some evidence that a focus

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IV. Fair Lending — Fair Lending Laws and Regulations

on other commercial products would be more appropriate. f. The examiner should identify any deviations from
credit standards for both approved and denied credit
Step 1. Understand Commercial Loan Policies requests, and differences in loan terms granted for
For the commercial product line selected for analysis, the approved credit requests.
examiner should first review credit policy guidelines and g. The examiner should discuss each instance where
interview appropriate commercial loan managers and officers deviations from credit standards and terms were noted,
to obtain written and articulated standards used by the but were not explained in the file, with the commercial
institution in evaluating commercial loan applications. credit underwriter. Each discussion should be
NOTE: Examiners should consult their own agencies for documented.
guidance on when a comparative analysis or statistical Step 3. Conduct Targeted Sampling
analysis is appropriate, and follow their agencies procedures
for conducting such a review/analysis. a. If deviations from credit standards or pricing are not
sufficiently explained by other factors either
Step 2. Conduct Comparative File Review documented in the credit file or the commercial
a. Select all (or a maximum of ten) denied applications that underwriter was not able to provide a reasonable
were acted on during the three month period prior to the explanation, the examiner should determine if
examination. To the extent feasible, include denied deviations were detrimental to any protected classes of
applications from businesses that are (i) located in applicants.
minority and/or integrated geographies or (ii) appear to be b. The examiner should consider employing the same
owned by women or minority group members, based on techniques for determining race and gender
the names of the principals shown on applications or characteristics of commercial applicants as those
related documents. (In the case of institutions that do a outlined in the consumer loan sampling procedures.
significant volume of commercial lending, consider
reviewing more than ten applications.) c. If it is determined that there are members of one or more
prohibited basis groups among commercial credit
b. For each of the denied commercial applications selected, requests that were not underwritten according to
record specific information from loan files and through established standards or received less favorable terms,
interviews with the appropriate loan officer(s), about the the examiner should select additional commercial loans,
principal owners, the purpose of the loan, and the specific, where applicants are members of the same prohibited
pertinent financial information about the commercial basis group and select similarly situated control group
enterprise (including type of business — retail, credit requests in order to determine whether there is a
manufacturing, service, etc.), that was used by the pattern or practice of discrimination. These additional
institution to evaluate the credit request. Maintenance or files should be selected based on the specific applicant
use of data that identifies prohibited basis characteristics circumstance(s) that appeared to have been viewed
of those involved with the business (either in approved or differently by lending personnel on a prohibited basis.
denied loan applications) should be evaluated as a
potential violation of Regulation B. d. If there are not enough similarly situated applicants for
comparison in the original sample period to draw a
c. Select ten approved loans that appear to be similar with reasonable conclusion, the examiner should expand the
regard to business type, purpose of loan, loan amount, sample period. The expanded sample period should
loan terms, and type of collateral, as the denied loans generally not go beyond the date of the prior examination.
sampled. For example, if the denied loan sample
includes applications for lines of credit to cover Sampling Guidelines
inventory purchases for retail businesses, the examiner
should select approved applications for lines of credit a. Generally, the task of selecting an appropriate expanded
from retail businesses. sample of prohibited basis and control group applications
for commercial loans will require examiner judgment.
d. For each approved commercial loan application The examiner should select a sample that is large enough
selected, obtain and record information parallel to that to be able to draw a reasonable conclusion.
obtained for denied applications.
b. The examiner should first select from the applications that
e. The examiner should first compare the credit criteria were acted on during the initial sample period, but were
considered in the credit process for each of the not included in the initial sample, and select applications
approved and denied applications to established from prior time periods as necessary.
underwriting standards, rather than comparing files
directly. c. The expanded sample should include both approved and

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 IV. Fair Lending — Fair Lending Laws and Regulations

denied, prohibited basis and control group applications, guidance in Section B of this Part III, on documenting and
where similar credit was requested by similar enterprises evaluating overt evidence of discrimination.
for similar purposes.
Overt evidence includes not only explicit statements, but
G. Analysis of Potential Discriminatory “Redlining” also any geographical terms used by the institution that
would, to a reasonable person familiar with the community
Overview: For purposes of this analysis, traditional “redlining” in question, connote a specific racial or national origin
is a form of illegal disparate treatment in which an institution character. For example, if the principal information
provides unequal access to credit, or unequal terms of credit, conveyed by the phrase “north of 110th Street” is that the
because of the race, color, national origin, or other prohibited indicated area is principally occupied by Hispanics, then a
characteristic(s) of the residents of the area in which the credit policy of not making credit available “north of 110th Street”
seeker resides or will reside or in which the residential is overt evidence of potential redlining on the basis of
property to be mortgaged is located. Redlining may also national origin.
include “reverse redlining,” the practice of targeting certain
borrowers or areas with less advantageous products or services Overt evidence is relatively uncommon. Consequently, the
based on prohibited characteristics. redlining analysis usually will focus on comparative
evidence (similar to analyses of possible disparate treatment
The redlining analysis may be applied to determine whether, of individual customers) in which the institution’s treatment
on a prohibited basis: of areas with contrasting racial or national origin characters
• an institution fails or refuses to extend credit in certain is compared.
areas; When the scoping process (including consultation within
• an institution targets certain borrowers or certain areas an agency as called for by agency procedures) indicates
with less advantageous products: that a redlining analysis should be initiated, examiners
should complete the following steps of comparative
• an institution makes loans in such an area but at a analysis:
restricted level or upon less-favorable terms or conditions
as compared to contrasting areas; or 1. Identify and delineate any areas within the institution’s
CRA assessment area and reasonably expected market
• an institution omits or excludes such an area from efforts area for residential products that have a racial or
to market residential loans or solicit customers for national origin character;
residential credit.
2. Determine whether any minority area identified in Step 1
This guidance focuses on possible discrimination based on appears to be excluded, under-served, selectively
race or national origin. The same analysis could be adapted excluded from marketing efforts, or otherwise less-
to evaluate relative access to credit for areas of geographical favorably treated in any way by the institution;
concentration on other prohibited bases — for example,
age. 3. Identify and delineate any areas within the institution’s
CRA assessment area and reasonably expected market
NOTE: It is true that neither the Equal Credit Opportunity Act area for residential products that are non-minority in
(ECOA) nor the Fair Housing Act (FHAct) specifically uses character and that the institution appears to treat more
the term “redlining.” However, federal courts as well as favorably;
agencies that have enforcement responsibilities for the FHAct,
have interpreted it as prohibiting institutions from having 4. Identify the location of any minority areas located just
different marketing or lending practices for certain outside the institution’s CRA assessment area and market
geographic areas, compared to others, where the purpose or area for residential products, such that the institution may
effect of such differences would be to discriminate on a be purposely avoiding such areas;
prohibited basis. Similarly, the ECOA would prohibit treating 5. Obtain the institution’s explanation for the apparent
applicants for credit differently on the basis of differences in difference in treatment between the areas and evaluate
the racial or ethnic composition of their respective whether it is credible and reasonable; and
neighborhoods.
6. Obtain and evaluate other information that may support or
Like other forms of disparate treatment, redlining can be contradict interpreting identified disparities to be the result
proven by overt or comparative evidence. If any written or of intentional illegal discrimination.
oral policy or statement of the institution (see risk factors R6-
10 in Part I, above) suggests that the institution links the racial These steps are discussed in detail below.
or national origin character of an area with any aspect of
access to or terms of credit, the examiners should refer to the Using Information Obtained During Scoping

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IV. Fair Lending — Fair Lending Laws and Regulations

Although the six tasks listed are presented below as example, several community spokespersons may allege that
examination steps in the order given above, examiners should the institution is redlining, but disagree in defining the
recognize that a different order may be preferable in any given area). The examiners should:
examination. For example, the institution’s explanation (Step
5) for one of the policies or patterns in question may already a. Describe as precisely as possible why a specific area is
be documented in the CRA materials reviewed (Step 1) and recognized in the community (perceptions of residents,
the CRA examiners may already have verified it, which may etc.) and/or is objectively identifiable (based on census
be sufficient for purposes of the redlining analysis. or other data) as having a particular racial or national
origin minority character.
As another example, as part of the scoping process, the
examiners may have reviewed an analysis of the geographic • The most obvious identifier is the predominant race
distribution of the institution’s loan originations with respect or national origin of the residents of the area.
to the racial and national origin composition of census tracts Examiners should document the percentages of
within its CRA assessment or residential market area. Such racial or national origin minorities residing within
analysis might have documented the existence of significant the census tracts that make up the area. Analyzing
discrepancies between areas, by degree of minority racial and national origin concentrations in quartiles
concentration, in loans originated (risk factor R1), (such as 0 to <=25%, >25% to < = 50%, >50% to <=
approval/denial rates (risk factor R2), and/or rates of denials 75%, and >75%) or based on majority concentration
because of insufficient collateral (risk factor R3). In such a (0 to <=50%, and >50%) may be helpful. However,
situation in which the scoping process has produced a reliable examiners should bear in mind that it is illegal for
factual record, the examiners could begin with Step 5 the institution to consider a prohibited factor in any
(obtaining an explanation) of the redlining analysis below. way. For example, an area or neighborhood may
only have a minority population of 20%, but if the
In contrast, when the scoping process only yields partial or area’s concentration appears related to lending
questionable information, or when the risk factors on which practices, it would be appropriate to use that area’s
the redlining analysis is based on complaints or allegations level of concentration in the analysis. Contacts with
against the institution, Steps 1-4 must be addressed. community groups can be helpful to learn whether
there are such subtle features of racial or ethnic
Comparative analysis for redlining character within a particular neighborhood.
Step 1. Identify and delineate any areas within the • Geographical groupings that are convenient for CRA
institution’s CRA assessment area and reasonably expected may obscure racial patterns. For example, an
market area for residential products that are of a racial or underserved, low-income, predominantly minority
national origin minority character. neighborhood that lies within a larger low-income
area that primarily consisted of non-minority
NOTE: The CRA assessment area can be a convenient unit neighborhoods may seem adequately served when
for redlining analysis because information about it typically the entire low-income area is analyzed as a unit.
already is in hand. However, the CRA assessment area may However, a racial pattern of underservice to minority
be too limited. The redlining analysis focuses on the areas might be revealed if the low-income minority
institution’s decisions about how much access to credit to neighborhood shared a border with an underserved,
provide to different geographical areas. The areas for which middle-income, minority area and those two
those decisions can best be compared are areas where the minority areas were grouped together for purposes of
institution actually marketed and provided credit and where analysis.
it could reasonably be expected to have marketed and
provided credit. Some of those areas might be beyond or b. Describe how the racial or national origin character
otherwise different from the CRA assessment area. changes across the suspected redlining area’s
various boundaries.
If there are no areas identifiable for their racial or national
origin minority character within the institution’s CRA c. Document or estimate the demand for credit, within the
assessment area or reasonably expected market area for minority area. This may include the applicable
residential products, a redlining analysis is not appropriate. demographics of the area, including the percentage of
(If there is a substantial but dispersed minority population, homeowners, the median house value, median family
potential disparate treatment can be evaluated by a routine income, or the number of small businesses, etc. Review
comparative file review of applicants.) the institution’s non-originated loan applications from
the suspected redlined areas. If available, review
This step may have been substantially completed during aggregate institution data for loans originated and
scoping, but unresolved matters may remain. (For applications received from the suspected redlined areas.

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 IV. Fair Lending — Fair Lending Laws and Regulations

Community contacts may also be helpful in determining c. Describe, to the extent known, how the institution’s
the demand for such credit. If the minority area does not practices, policies, or its rate of lending change
have a significant amount of demand for such credit, the from less-to more-favorable as one leaves the
area is not appropriate for a redlining analysis. minority area at its various boundaries. (Examiners
should be particularly attentive to instances in
Step 2. Determine whether any minority area identified in which the boundaries between favored and
Step 1 is excluded, under-served, selectively excluded from disfavored areas deviate from boundaries the
marketing efforts, or otherwise less-favorably treated in institution would reasonably be expected to follow,
any way by the institution. such as political boundaries or transportation
The examiners should begin with the risk factors identified barriers.)
during the scoping process. The unfavorable treatment may d. Examiners should particularly consider whether, within
have been substantially documented during scoping and needs a large area that is composed predominantly of racial or
only to be finished in this step. If not, this step will verify and national origin minority households, there are enclaves
measure the extent to which HMDA data show the minority that are predominantly non-minority or whether, along
areas identified in Step 1 to be underserved and/or how the the area’s borders, there are irregularities where the
institution’s explicit policies treat them less favorably. non- minority group is predominant. As part of the
a. Review prior CRA lending test analyses to learn whether overall comparison, examiners should determine
they have identified any excluded or otherwise under- whether credit access within those small non-minority
served areas or other significant geographical disparities in areas differs from credit access in the larger minority
the institution’s lending. Determine whether any of those area.
are the minority areas identified in Step 1. Step 4. Identify the location of any minority areas located
b. Learn from the institution itself whether, as a matter of just outside the institution’s CRA assessment area and
policy, it treats any separate or distinct geographical areas market area for residential products, such that the
within its marketing or service area differently from other institution may be purposely avoiding such areas.
areas. This may have been done completely or partially Review the analysis from prior CRA examinations of
during scoping analysis related to risk factors R5-R9. whether the assessment area appears to have been influenced
The differences in treatment can be in marketing, by prohibited factors. If there are minority areas that the
products offered, branch operations (including the institution excluded from the assessment area improperly,
services provided and the hours of operation), appraisal consider whether they ought to be included in the redlining
practices, application processing, approval requirements, analysis. Analyze the institution’s reasonably expected
pricing, loan conditions, evaluation of collateral, or any market area in the same manner.
other policy or practice materially related to access to
credit. Determine whether any of those less-favored areas Step 5. Obtain the institution’s explanation for the
are the minority areas identified in Step 1. apparent difference in treatment between the areas and
evaluate whether it is credible and reasonable.
c. Obtain from the institution: (i) its reasons for such
differences in policy, (ii) how the differences are This step completes the comparative analysis by soliciting
implemented, and (iii) any specific conditions that must from the institution any additional information not yet
exist in an area for it to receive the particular treatment considered by the examiners that might show that there is a
(more favorable or less favorable) that the institution has nondiscriminatory explanation for the apparent disparate
indicated. treatment based on race or ethnicity.
Step 3. Identify and delineate any areas within the For each matter that requires explanation, provide the
institution’s CRA assessment area and reasonably institution full information about what differences appear to
expected market area for residential products that are exist in how it treats minority and non-minority areas, and how
non-minority in character and that the institution appears the examiners reached their preliminary conclusions at this
to treat more favorably. stage of the analysis.
To the extent not already completed during scoping: a. Evaluate whether the conditions identified by
the institution in Step 2 as justifying more
a. Document the percentages of control group and of favorable treatment pursuant to institutional
racial or national origin minorities residing within the policy existed in minority neighborhoods that
census tract(s) that comprise(s) the non-minority area. did not receive the favorable treatment called
b. Document the nature of the housing stock in the for by institutional policy. If there are minority
area. areas for which those conditions existed, ask

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IV. Fair Lending — Fair Lending Laws and Regulations

the institution to explain why the areas were to approved applications from the contrasting area.
treated differently despite the similar
conditions. • Learn whether there were any denials of
fully qualified applicants from the
b. Evaluate whether the conditions identified by the suspected redlining area. If so, that may
institution in Step 2 as justifying less favorable treatment support the view that the institution was
pursuant to institutional policy existed in non-minority avoiding doing business in the area.
neighborhoods that received favorable treatment
nevertheless. If there are non-minority areas for which • Learn whether the file review identified instances of
those conditions existed, ask the institution to explain illegal disparate treatment against applicants of the
why those areas were treated differently, despite the same race or national origin as the suspected
similar conditions. redlining area. If so, that may support the view that
the institution was avoiding doing business with
c. Obtain explanations from the institution for any apparent applicants of that group, such as the residents of the
differences in treatment observed by the examiners but suspected redlining area. Learn whether any such
not called for by the institution’s policies: identified victims applied for transactions in the
suspected redlining area.
• If the institution’s explanation cites any specific
conditions in the non-minority area(s) to justify more • If there are instances of either of the above, identify
favorable treatment, determine whether the minority denied non-minority residents, if any, of the
area(s) identified in Step 1 satisfied those conditions. suspected redlining area and review their
If there are minority areas for which those conditions application files to learn whether they appear to
existed, ask the institution to explain why the areas have been treated in an irregular or less favorable
were treated differently despite the similar conditions. way. If so, that may support the view that the
character of the area rather than of the applicants
• If the institution’s explanation cites any specific themselves appears to have influenced the credit
conditions in the minority area(s) to justify less decisions.
favorable treatment, determine whether the non-
minority area(s) had those conditions. If there are • Review withdrawn and incomplete applications for
non-minority areas for which those conditions existed, the suspected redlining area, if those can readily be
ask the institution to explain why those areas were identified from the HMDA-LAR, and learn whether
treated differently, despite the similar conditions. there are reliable indications that the institution
discouraged those applicants from applying. If so,
d. Evaluate the institution’s responses by applying that may support the view that the institution was
appropriate principles selected from the Appendix on avoiding conducting business in the area and may
Evaluating Responses to Evidence of Disparate constitute evidence of a violation of Section
Treatment. 1002.4(b) of Regulation B. Conversely, if the
Step 6. Obtain and evaluate specific types of other comparisons of individual transactions show that
information that may support or contradict a finding of the institution treated minority and non-minority
redlining. applicants within and outside the suspected
redlining area similarly, that tends to contradict the
As a legal matter, discriminatory intent can be inferred conclusion that the institution avoided the areas
simply from the lack of a legitimate explanation for clearly because it had minority residents.
less- favorable treatment of racial or national origin
minorities. Nevertheless, if the institution’s explanations do b. Interviews of third parties. The perspectives of third
not adequately account for a documented difference in parties will have been taken into account to some degree
treatment, the examiners should consider additional through the review of available materials during scoping.
information that might support or contradict the Later in the examination, in appropriate circumstances,
interpretation that the difference in treatment constituted information from third parties may help determine
redlining. whether the institution’s apparent differences in treatment
of minority and non-minority areas constitute redlining.
a. Comparative file review. If there was a comparative
file review conducted in conjunction with the • Identify persons (such as housing or credit counselors,
redlining examination, review the results; or, if it is home improvement contractors, or real estate and
necessary and feasible to do so to clarify what appears mortgage brokers) who may have extensive
to be discriminatory redlining, compare denied experience dealing with credit applicants from the
applications from within the suspected redlining area suspected redlined area.

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 IV. Fair Lending — Fair Lending Laws and Regulations

• After obtaining appropriate authorization and for the geographical distribution of pre-approved
guidance from your agency, interview those persons solicitations for credit cards or home equity lines of
to learn of their first-hand experiences related to: credit, advertisements in local media or business or
telephone directories, business development calls to
o oral statements or written indications by an real estate brokers, and calls by telemarketers.
institution’s representatives that loan applications
from a suspected redlined area were discouraged; e. Peer performance. Market share analysis and other
comparisons to competitors are insufficient by
o whether the institution treated applicants from themselves to prove that an institution engaged in illegal
the suspected redlining area as called for in its redlining. By the same token, an institution cannot
own procedures (as the examiners understand justify its own failure to market or lend in an area by
them) and/or whether it treated them similarly to citing other institutions’ failures to lend or market there.
applicants from non-minority areas (as the
examiners are familiar with those transactions); However, an institution’s inactivity in an underserved
area where its acknowledged competitors are active
o any unusual delays or irregularities in loan would tend to support the interpretation that it intends to
processing for transactions in the suspected avoid doing business in the area. Conversely, if it is as
redlining area; and active as other institutions that would suggest that it
o differences in the institution’s pricing, loan intends to compete for, rather than avoid, business in the
conditions, property valuation practices, etc., in area.
the suspected redlining area compared to • Develop a list of the institution’s competitors.
contrasting areas.
• Learn the level of lending in the suspected
Also, learn from the third parties the names of any redlining area by competitors. Check any public
consumers they described as having experienced the evaluations of similarly situated competitors
questionable behavior recounted by the third party, and obtained by the CRA examiners as part of
consider contacting those consumers. evaluating the performance context or obtain such
If third parties witnessed specific conduct by the institution evaluations independently.
that indicates the institution wanted to avoid business from f. Institution’s record. Request from the institution
the area or prohibited basis group in question, this would information about its overall record of serving or
tend to support interpreting the difference in treatment as attempting to serve the racial or national origin
intended. Conversely, if third parties report proper treatment minority group with which the suspected redlining area
or positive actions toward such area or prohibited basis is identified. The record may reveal intent to serve
group, this would tend to contradict the view that the that group that tends to contradict the view that the
institution intended to discriminate. institution intends to discriminate against the group.
c. Marketing. A clear exclusion of the suspected redlining NOTE: For any information that supports interpreting
area from the institution’s marketing of residential loan the situation as illegal discrimination, obtain and
products supports the view that the institution did not want evaluate an explanation from the institution as called
to do business in the area. Marketing decisions are for in Part IV. If the institution’s explanation is that the
affirmative acts to include or exclude areas. Disparities in disparate results are the consequence of a specific,
marketing between two areas may reveal that the neutral policy or practice that the institution applies
institution prefers one to the other. If sufficiently stark broadly, such as not making loans on homes below a
and supported by other evidence, a difference in certain value, review the guidance in the Special
marketing to racially different areas could itself be treated Analyses section of the Appendix under
as a redlining violation of the Fair Housing Act. Even Disproportionate Adverse Impact Violations and consult
below that level of difference, marketing patterns can agency managers.
support or contradict the view that disparities in lending
practices were intentional. H. Analysis of Potential Discriminatory Marketing
Practices.
• Review materials that show how the institution has
marketed in the suspected redlined area and in non- When scoping identifies significant risk factors (M1-M7)
minority areas. Begin with available CRA materials related to marketing, examiners should consult their agency’s
and discuss the issues with CRA examiners, then supervisory staff and experts about a possible marketing
review other materials as appropriate. The materials discrimination analysis. If the supervisory staff agrees to
may include, for example, the institution’s guidance proceed, the examiners should collect information as follows:

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IV. Fair Lending — Fair Lending Laws and Regulations

Step 1. Identify the institution’s marketing initiatives. o Learn how the institution decides which
intermediaries it will solicit.
a. Pre-approved solicitations
o Identify the parties contacted and determine the
• Determine whether the institution sends out pre- distribution between minority and non-minority
approved solicitations: areas.
° For home purchase loans, o Obtain and review the types of information the
° For home improvement loans, or institution distributes to intermediaries.

° For refinance loans. o Determine how often the institution contacts

intermediaries.
• Determine how the institution selects recipients for
such solicitations o Determine what criteria the institution
communicates to intermediaries about the type
° Learn from the institution its criteria for such of customers it seeks or the nature of the
selections. geographic areas in which it wishes to do
business.
° Review any guidance or other information the
institution provided credit reporting companies or e. Telemarketers or predictive dialer programs
other companies that supply such lists.
• Learn how the institution identifies which consumers
b. Media Usage to contact, and whether the institution sets any
parameters on how the list of consumers is compiled.
• Determine in which newspapers and broadcast media
the institution advertises. Step 2. Determine whether the institution’s activities show a
significantly lower level of marketing effort toward minority
° Identify any racial or national origin identity
areas or toward media or intermediaries that tend to reach
associated with those media.
minority areas.
° Determine whether those media focus on
Step 3. If there is any such disparity, document the
geographical communities of a particular racial or
institution’s explanation for it.
national origin character.
For additional guidance, refer to Part C of the Special Analyses
• Learn the institution’s strategies for geographic and
section in the Appendix.
demographic distribution of advertisements.
I. Credit Scoring.
• Obtain and review copies of the institution’s printed
advertising and promotional materials. If the scoping process results in the selection of a focal point
that includes a credit or mortgage scored loan product, refer
• Determine what criteria the institution communicates
to the Considering Automated Underwriting and Credit
to media about what is an attractive customer or an
Scoring section of the Appendix.
attractive area to cultivate business.
If the institution utilizes a credit scoring program which
• Determine whether advertising and marketing are the
scores age for any loan product selected for review in the
same to racial and national origin minority areas as
scoping stage, either as the sole underwriting determinant or
compared to non-minority areas.
only as a guide to making loan decisions, refer to Part E of
c. Self-produced promotional materials the Considering Automated Underwriting and Credit
Scoring section of the Appendix.
• Learn how the institution distributes its own
promotional materials, both methods and geographical J. Disparate Impact Issues.
distribution.
These procedures have thus far focused primarily on
• Learn what the institution regards as the target examining comparative evidence for possible unlawful
audience(s) for those materials. disparate treatment. Disparate impact has been described
briefly in the Introduction. Whenever an examiner
d. Realtors, brokers, contractors, and other intermediaries believes that a particular policy or practice of an institution
• Determine whether the institution solicits business appears to have a disparate impact on a prohibited basis,
from specific realtors, brokers, home improvement the examiner should refer to Part A of the Special Analyses
contractors, and other conduits. section of the Appendix or consult with agency supervisory

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 IV. Fair Lending — Fair Lending Laws and Regulations

staff for further guidance. a. Do not speculate or assume that the institution’s
decision- maker had specific intentions or
Part IV — Obtaining and Evaluating Responses considerations in mind when he or she took the actions
From the Institution and Concluding the being evaluated. Do not, for example, conclude that
Examination because you have noticed a legitimate,
nondiscriminatory reason for a denial (such as an
Step 1. Present to the institution’s management for
applicant’s credit weakness), that no discrimination
explanation:
occurred unless it is clear that, at the time of the denial,
a. Any overt evidence of disparate treatment on a prohibited the institution actually based the denial on that reason.
basis.
b. Perform follow-up file reviews and comparative
b. All instances of apparent disparate treatment (e.g., analyses, as necessary, to determine the accuracy and
overlaps) in either the underwriting of loans or in loan credibility of the institution’s explanations.
prices, terms, or conditions.
c. Refer to Evaluating Responses to Evidence of
c. All instances of apparent disparate treatment in the form Disparate Treatment in the Appendix for guidance as
of discriminatory steering, redlining, or marketing to common types of responses.
policies or practices.
d. Refer to the Disproportionate Adverse Impact
d. All instances where a denied prohibited basis applicant Violations portion of the Special Analyses section of
was not afforded the same level of assistance or the same the Appendix for guidance on evaluating the
benefit of discretion as an approved control group institution’s responses to apparent disparate impact.
applicant who was no better qualified with regard to the
Step 4. If, after completing Steps 1–3 above, you conclude
reason for denial.
that the institution has failed to adequately demonstrate
e. All instances where a prohibited basis applicant received that one or more apparent violations had a legitimate
conspicuously less favorable treatment by the institution nondiscriminatory basis or were otherwise lawful, prepare
than was customary from the institution or was required a documented list or discussion of violations, or a draft
by the institution’s policy. examination report, as prescribed by agency directives.

f. Any statistically significant average difference in either Step 5. Consult with agency supervisory staff regarding
the frequency or amount of pricing disparities between whether (a) any violations should be referred to the
control group and prohibited basis group applicants. Departments of Justice or Housing and Urban
g. Any evidence of neutral policies, procedures or practices Development and (b) enforcement action should be
that appear to have a disparate impact or effect on a undertaken by your agency.
prohibited basis.
Explain that unless there are legitimate, nondiscriminatory
explanations (or in the case of disparate impact, a compelling
business justification) for each of the preliminary findings of
discrimination identified in this Part, the agency could
conclude that the institution is in violation of the applicable
fair lending laws.
Step 2. Document all responses that have been provided
by the institution, not just its “best” or “final” response.
Document each discussion with dates, names, titles,
questions, responses, any information that supports or
undercuts the institution’s credibility, and any other
information that bears on the issues raised in the
discussion(s).
Step 3. Evaluate whether the responses are consistent with
previous statements, information obtained from file
review, documents, reasonable banking practices, and
other sources, and satisfy common-sense standards of logic
and credibility.

FDIC Consumer Compliance Examination Manual – September 2015 IV – 1.25