IV. Fair Lending —Fair Lending Laws and Regulations

IV. Fair Lending — Fair Lending Laws and Regulations

FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.1

Fair Lending Laws and Regulations

Introduction

This overview provides a basic and abbreviated discussion of

federal fair lending laws and regulations. It is adapted from

the Interagency Policy Statement on Fair Lending issued in

March 1994.

Lending Discrimination Statutes and Regulations

The Equal Credit Opportunity Act (ECOA) prohibits

discrimination in any aspect of a credit transaction. It

applies to any extension of credit, including extensions of

credit to small businesses, corporations, partnerships, and

trusts.

The ECOA prohibits discrimination based on:

• Race or color;

• Religion;

• National origin;

• Sex;

• Marital status;

• Age (provided the applicant has the capacity to contract);

• The applicant’s receipt of income derived from any

public assistance program; or

• The applicant’s exercise, in good faith, of any right

under the Consumer Credit Protection Act.

The Consumer Financial Protection Bureau’s Regulation B,

found at 12 CFR part 1002, implements the ECOA.

Regulation B describes lending acts and practices that are

specifically prohibited, permitted, or required. Official staff

interpretations of the regulation are found in

Supplement I to

12 CFR part 1002.

The Dodd–Frank Wall Street Reform and Consumer

Protection Act of 2010 further amended the ECOA and

covers:

• Data collection for loans to minority-owned and

women-owned businesses (awaiting final regulation);

• Legal action statute of limitations for ECOA

violations is extended to five years (effective July 21, 2010);

and

• A disclosure of the consumer’s ability to receive a

copy of any appraisal(s) and valuation(s) prepared in

connection with first-lien loans secured by a dwelling is to be

provided to applicants within 3 business days of receiving the

application (effective January 18, 2014).

NOTE: Further information regarding the technical

requirements of fair lending are incorporated into the

sections ECOA V 7.1 and FCRA VIII 6.1 of this manual.

The Fair Housing Act (FHAct) prohibits discrimination in all

aspects of “residential real-estate related transactions,”

including but not limited to:

• Making loans to buy, build, repair, or improve a

dwelling;

• Purchasing real estate loans;

• Selling, brokering, or appraising residential real estate; or

• Selling or renting a dwelling.

The FHAct prohibits discrimination based on:

• Race or color;

• National origin;

• Religion;

• Sex;

• Familial status (defined as children under the age of 18

living with a parent or legal custodian, pregnant women,

and people securing custody of children under 18); or

• Handicap.

The Department of Housing and Urban Development’s

(HUD) regulations implementing the FHAct are found at 24

CFR Part 100. Because both the FHAct and the ECOA

apply to mortgage lending, lenders may not discriminate in

mortgage lending based on any of the prohibited factors in

either list.

Under the ECOA, it is unlawful for a lender to discriminate

on a prohibited basis in any aspect of a credit transaction,

and under both the ECOA and the FHAct, it is unlawful for

lender

to discriminate on a prohibited basis in a residential

real-estate-related transaction. Under one or both of these

laws, a lender may not, because of a prohibited factor:

• Fail to provide information or services or provide

different information or services regarding any aspect of

the lending process, including credit availability,

application procedures, or lending standards.

• Discourage or selectively encourage applicants

with respect to inquiries about or applications for

credit.

• Refuse to extend credit or use different standards

in determining whether to extend credit.

• Vary the terms of credit offered, including the

amount, interest rate, duration, or type of loan.

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.2 FDIC Consumer Compliance Examination Manual – March 2021

• Use different standards to evaluate collateral.

• Treat a borrower differently in servicing a loan

or invoking default remedies.

• Use different standards for pooling or packaging a loan

in the secondary market.

A lender may not express, orally or in writing, a

preference based on prohibited factors or indicate that it

will treat applicants differently on a prohibited basis. A

violation may still exist even if a lender treated applicants

equally.

A lender may not discriminate on a prohibited basis because

of the characteristics of

• An applicant, prospective applicant, or borrower.

• A person associated with an applicant, prospective

applicant, or borrower (for example, a co-applicant,

spouse, business partner, or live-in aide).

• The present or prospective occupants of either

the

property

to be financed or the characteristics of the

neighborhood or other area where property to be financed

is located.

Finally, the FHAct requires lenders to make reasonable

accommodations for a person with disabilities when such

accommodations are necessary to afford the person an equal

opportunity to apply for credit.

Types of Lending Discrimination

The courts have recognized three methods of proof of lending

discrimination under the ECOA and the FHAct:

• Overt evidence of disparate treatment;

• Comparative evidence of disparate treatment; and

• Evidence of disparate impact.

Disparate Treatment

The existence of illegal disparate treatment may be established

either by statements revealing that a lender explicitly

considered prohibited factors (overt evidence) or by

differences in treatment that are not fully explained by

legitimate nondiscriminatory factors (comparative evidence).

Overt Evidence of Disparate Treatment. There is overt

evidence of discrimination when a lender openly discriminates

on a prohibited basis.

Example: A lender offered a credit card with a limit of up to

$750 for applicants aged 21-30 and $1500 for applicants over

30. This policy violated the ECOA’s prohibition on

discrimination based on age.

There is overt evidence of discrimination even when a lender

expresses — but does not act on — a discriminatory

preference:

Example: A lending officer told a customer, “We do not like

to make home mortgages to Native Americans, but the law

says we cannot discriminate and we have to comply with the

law.” This statement violated the FHAct’s prohibition on

statements expressing a discriminatory preference as well as

Section 1002.4(b) of Regulation B, which prohibits

discouraging applicants on a prohibited basis.

Comparative Evidence of Disparate Treatment. Disparate

treatment occurs when a lender treats a credit applicant

differently based on one of the prohibited bases. It does

not require any showing that the treatment was motivated

by prejudice or a conscious intention to discriminate

against a person beyond the difference in treatment itself.

Disparate treatment may more likely occur in the treatment of

applicants who are neither clearly well-qualified nor clearly

unqualified. Discrimination may more readily affect applicants

in this middle group for two reasons. First, if the applications

are “close cases,” there is more room and need for lender

discretion. Second, whether or not an applicant qualifies may

depend on the level of assistance the lender provides the

applicant in completing an application. The lender may, for

example, propose solutions to credit or other problems

regarding an application, identify compensating factors, and

provide encouragement to the applicant. Lenders are under no

obligation to provide such assistance, but to the extent that they

do, the assistance must be provided in a nondiscriminatory

way.

Example: A non-minority couple applied for an automobile

loan. The lender found adverse information in the couple’s

credit report. The lender discussed the credit report with

them and determined that the adverse information, a

judgment against the couple, was incorrect because the

judgment had been vacated. The non-minority couple was

granted their loan. A minority couple applied for a similar

loan with the same lender. Upon discovering adverse

information in the minority couple’s credit report, the lender

denied the loan application on the basis of the adverse

information without giving the couple an opportunity to

discuss the report.

The foregoing is an example of disparate treatment of

similarly situated applicants, apparently based on a

prohibited factor, in the amount of assistance and

information the lender provided.

If a lender has apparently treated similar applicants

differently on the basis of a prohibited factor, it must

provide an explanation for the difference in treatment. If the

lender’s explanation is found to be not credible, the agency

may find that the lender discriminated.

IV. Fair Lending — Fair Lending Laws and Regulations

FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.3

Redlining is a form of illegal disparate treatment in which

a lender provides unequal access to credit, or unequal

terms of credit, because of the race, color, national origin,

or other prohibited characteristic(s) of the residents of the

area in which the credit seeker resides or will reside or in

which the residential property to be mortgaged is located.

Redlining may violate both the FHAct and the ECOA.

Disparate Impact

When a lender applies a racially or otherwise neutral policy

or practice equally to all credit applicants, but the policy or

practice disproportionately excludes or burdens certain

persons on a prohibited basis, the policy or practice is

described as having a “disparate impact.”

Example: A lender’s policy is not to extend loans for single

family residences for less than $60,000.00. This policy has

been in effect for ten years. This minimum loan amount

policy is shown to disproportionately exclude potential

minority applicants from consideration because of their

income levels or the value of the houses in the areas in

which they live.

The fact that a policy or practice creates a disparity on a

prohibited basis is not alone proof of a violation. When an

Agency finds that a lender’s policy or practice has a disparate

impact; the next step is to seek to determine whether the policy

or practice is justified by “business necessity.” The

justification must be manifest and may not be hypothetical or

speculative.

Factors that may be relevant to the justification could include

cost and profitability. Even if a policy or practice that has a

disparate impact on a prohibited basis can be justified by

business necessity, it still may be found to be in violation if an

alternative policy or practice could serve the same purpose

with less discriminatory effect. Finally, evidence of

discriminatory intent is not necessary to establish that a

lender’s adoption or implementation of a policy or practice that

has a disparate impact is in violation of the FHAct or ECOA.

These procedures do not call for examiners to plan

examinations to identify or focus on potential disparate impact

issues. The guidance in this Introduction is intended to help

examiners recognize fair lending issues that may have a

potential disparate impact. Guidance in the Appendix to the

Interagency Fair Lending Examination Procedures provides

details on how to obtain relevant information regarding such

situations along with methods of evaluation, as appropriate.

General Guidelines

These procedures are intended to be a basic and flexible

framework to be used in the majority of fair lending

examinations conducted by the FFIEC agencies. They are also

intended to guide examiner judgment, not to supplant it. The

procedures can be augmented by each agency as necessary to

ensure their effective implementation. While these procedures

apply to many examinations, agencies routinely use statistical

analyses or other specialized techniques in fair lending

examinations to assist in evaluating whether a prohibited basis

was a factor in an institution’s credit decisions. Examiners

should follow the procedures provided by their respective

agencies in these cases.

For a number of aspects of lending — for example, credit

scoring and loan pricing — the “state of the art” is more likely

to be advanced if the agencies have some latitude to

incorporate promising innovations. These interagency

procedures provide for that latitude.

Any references in these procedures to options, judgment, etc.,

of “examiners” means discretion within the limits provided by

that examiner’s agency. An examiner should use these

procedures in conjunction with his, or her, own agency’s

priorities, examination philosophy, and detailed guidance for

implementing these procedures. These procedures should not

be interpreted as providing the examiner greater latitude than

his, or her, own agency would. For example, if an agency’s

policy is to review compliance management systems in all of

its institutions, an examiner for that agency must conduct such

a review rather than interpret Part II of these interagency

procedures as leaving the review to the examiner’s option.

The procedures emphasize racial and national origin

discrimination in residential transactions, but the key

principles are applicable to other prohibited bases and

to nonresidential transactions.

Finally, these procedures focus on analyzing

institution compliance with the broad,

nondiscrimination requirements of the ECOA and the

FHAct. They do not address such explicit or

technical compliance provisions as the signature rules

or adverse action notice requirements in Sections

1002.7 and 1002.9, respectively, of Regulation B.

Part I — Examination Scope Guidelines Background

Consistent with the Federal Financial Institutions

Examination Council Interagency Fair Lending Examination

Procedures, FDIC examiners evaluate fair lending risk

during the scoping process by completing three general

steps:

1. Examiners develop an institutional overview to assess an

institution’s inherent fair lending risk. As part of this

process, examiners become familiar with an institution’s

structure and management, supervisory history, loan

portfolio, and credit and market operations. Once examiners

understand a financial institution’s lending operations they

can identify the level of inherent risk. Inherent risk for fair

lending is broad-based and would impact a range of products

if no controls or other mitigating factors were in place to

control the risk. Inherent risk arises from the general

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IV – 1.4 FDIC Consumer Compliance Examination Manual – March 2021

conditions or the environment in which the institution

operates. The risk could be present based on an institution’s

structure, supervisory history, the composition of the loan

portfolio, and the credit and market operations

2. If an examiner believes that an institution has more than

minimal inherent fair lending risk, the examiner should then

identify the product(s) or product group(s) to review. The

products or product groups selected may differ based on the

type of discrimination. For example, for purposes of pricing,

an examiner may select HMDA loans for further review,

while for underwriting, the examiner may select consumer

loans. Examiners are not expected to review all products for

discrimination risk if there is more than minimal inherent

risk. Rather, examiners should use their judgment and

consider the following when deciding which loan products

warrant further review. Examiners would then identify any

discrimination risk factors and assess an institution’s

compliance management system (CMS) for fair lending.

Understanding the strength of an institution’s CMS is

necessary to properly assess whether an institution has

sufficiently mitigated applicable discrimination risk factors.

If there is minimal inherent risk, no additional analysis is

necessary and the fair lending review can conclude.

3. For those discrimination risk factors that have not been

fully mitigated, examiners compile a list of potential focal

points and identify which should be pursued as a focal point.

The FDIC has developed the Fair Lending Scope and

Conclusions Memorandum (FLSC) to implement a standard

nationwide format for documenting the scope and

conclusions of fair lending reviews. FLSC has been adopted

as a means of focusing the examiner’s attention to the areas

that pose the greatest unmanaged fair lending risk to the

institution. It incorporates the Interagency Fair Lending

Examination Procedures

and assists in documenting the

types of fair lending risks that are present; the controls that

management has put in place to manage the risk; the

effectiveness of these controls; why the particular focal

point(s) are chosen; the level of review conducted; and the

results of any additional analysis that was conducted. The

FLSC is included in section IV-3.1 of this manual.

The scope of an examination encompasses the loan

product(s), market(s), decision center(s), time frame, and

prohibited basis and control group(s) to be analyzed during

the examination. These procedures refer to each potential

combination of those elements as a “focal point.” Setting the

scope of an examination involves, first, identifying all of the

potential focal points that appear worthwhile to examine.

Then, from among those, examiners select the Focal

Point(s) that will form the scope of the examination, based

on risk factors, priorities established in these procedures or

The interagency examination procedures are presented in their entirety in Part

III of this section of the manual.

by their respective agencies, the record from past

examinations, and other relevant guidance. This phase

includes obtaining an overview of an institution’s

compliance management system as it relates to fair lending.

When selecting focal points for review, examiners may

determine that the institution has performed “self-tests” or

“self-evaluations” related to specific lending products. The

difference between “self-tests” and “self-evaluations” is

discussed in the Using Self-Tests and Self-Evaluations to

Streamline the Examination section of the Appendix.

Institutions must share all information regarding “self-

evaluations” and certain limited information related to “self-

tests.” Institutions may choose to voluntarily disclose

additional information about “self-tests.” Examiners should

make sure that institutions understand that voluntarily

sharing the results of self-tests will result in a loss of

confidential status of these tests. Information from “self-

evaluations” or “self-tests” may allow the scoping to be

streamlined. Refer to Using Self-Tests and Self-Evaluations

to Streamline the Examination in the Appendix for

additional details.

Scoping may disclose the existence of circumstances —

such as the use of credit scoring or a large volume of

residential lending — which, under an agency’s policy, call

for the use of regression analysis or other statistical methods

of identifying potential discrimination with respect to one or

more loan products. Where that is the case, the agency’s

specialized procedures should be employed for such loan

products rather than the procedures set forth below.

Setting the intensity of an examination means determining the

breadth and depth of the analysis that will be conducted on the

selected loan product(s). This process entails a more involved

analysis of the institution’s compliance risk management

processes, particularly as it relates to selected products, to

reach an informed decision regarding how large a sample of

files to review in any transactional analyses performed and

whether certain aspects of the credit process deserve

heightened scrutiny.

Part I of these procedures provides guidance on establishing

the scope of the examination. Part II (Compliance

Management Review) provides guidance on determining the

intensity of the examination. There is naturally some

interdependence between these two phases. Ultimately the

scope and intensity of the examination will determine the

record of performance that serves as the foundation for

agency conclusions about institutional compliance with fair

lending obligations. The examiner should employ these

procedures to arrive at a well-reasoned and practical

conclusion about how to conduct a particular institution’s

examination of fair lending performance.

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FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.5

In certain cases where an agency already possesses

information which provides examiners with guidance on

priorities and risks for planning an upcoming examination,

such information may expedite the scoping process and make

it unnecessary to carry out all of the steps below. For

example, the report of the previous fair lending examination

may have included recommendations for the focus of the next

examination. However, examiners should validate that the

institution’s operational structure, product offerings, policies,

and risks have not changed since the prior examination before

condensing the scoping process.

The scoping process can be performed either off-site, onsite, or

both, depending on whatever is determined appropriate and

feasible. In the interest of minimizing burdens on both the

examination team and the institution, requests for information

from the institution should be carefully thought out so as to

include only the information that will clearly be useful in the

examination process. Finally, any off-site information requests

should be made sufficiently in advance of the on-site schedule

to permit institutions adequate time to assemble necessary

information and provide it to the examination team in a timely

fashion. (See “Potential Scoping Information” in the

Appendix for guidance on additional information that the

examiner might wish to consider including in a request).

Exami

ners should focus the examination based on:

• An understanding of the credit operations

of the institution;

• The risk that discriminatory conduct may

occur in each area of those operations; and

• The feasibility of developing a factually

reliable record of an institution’s

performance and fair lending compliance in

each area of those operations.

Understanding Credit Operations

Before evaluating the potential for discriminatory conduct,

the examiner should review sufficient information about the

institution and its market to understand the credit operations

of the institution and the representation of prohibited basis

group residents within the markets where the institution does

business. The level of detail to be obtained at this stage

should be sufficient to identify whether any of the risk

factors in the steps below are present. Relevant background

information includes:

• The types and terms of credit products offered,

differentiating among broad categories of credit such as

residential, consumer, or commercial, as well as product

variations within such categories (fixed vs. variable, etc.).

• Wh

ether the institution has a special purpose credit

program, or other program that is specifically designed to

assist certain underserved populations.

• The volume of, or growth in, lending for each of the

credit products offered.

• The demographics (i.e., race, national origin, etc.) of

the credit markets in which the institution is doing

business.

• The institution’s organization of its credit decision-

making process, including identification of the

delegation of separate lending authorities and the extent

to which discretion in pricing or setting credit terms and

conditions is delegated to various levels of managers,

employees or independent brokers or dealers.

• The institution’s loan officer or broker

compensation program.

• The types of relevant documentation/data that are

available for various loan products and what is the

relative quantity, quality and accessibility of such

information (i.e., for which loan product(s) will the

information available be most likely to support a sound

and reliable fair lending analysis).

• The extent to which information requests can be

readily organized and coordinated with other

compliance examination components to reduce undue

burden on the institution. (Do not request more

information than the exam team can be expected to

utilize during the anticipated course of the

examination.)

In t

hinking about an institution’s credit markets, the

examiner should recognize that these markets may or may

not coincide with an institution’s Community Reinvestment

Act (CRA) assessment area(s). Where appropriate, the

examiner should review the demographics for a broader

geographic area than the assessment area.

Where an institution has multiple underwriting or loan

processing centers or subsidiaries, each with fully

independent credit-granting authority, consider evaluating

each center and/or subsidiary separately, provided a

sufficient number of loans exist to support a meaningful

analysis. In determining the scope of the examination for

such institutions, examiners should consider whether:

• Subsidiaries should be examined. The agencies will hold

a financial institution responsible for violations by its

direct subsidiaries, but not typically for those by its

affiliates (unless the affiliate has acted as the agent for the

institution or the violation by the affiliate was known or

should have been known to the institution before it

became involved in the transaction or purchased the

affiliate’s loans). When seeking to determine an

institution’s relationship with affiliates that are not

supervised financial institutions, limit the inquiry to what

can be learned in the institution and do not contact the

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IV – 1.6 FDIC Consumer Compliance Examination Manual – March 2021

affiliate without prior consultation with agency staff.

• The underwriting standards and procedures used in the

entity being reviewed are used in related entities not

scheduled for the planned examination. This will help

examiners to recognize the potential scope of policy-

based violations.

• The portfolio consists of applications from a purchased

institution. If so, for scoping purposes, examiners

should consider the applications as if they were made to

the purchasing institution. For comparison purposes,

applications evaluated under the purchased institution’s

standards should not be compared to applications

evaluated under the purchasing institution’s standards.

• The portfolio includes purchased loans. If so, examiners

should look for indications that the institution specified

loans to purchase based on a prohibited factor or caused a

prohibited factor to influence the origination process.

• A complete decision can be made at one of the several

underwriting or loan processing centers, each with

independent authority. In such a situation, it is best to

conduct on-site a separate comparative analysis at each

underwriting center. If covering multiple centers is not

feasible during the planned examination, examiners should

review their processes and internal controls to determine

whether or not expanding the scope and/or length of the

examination is justified.

• Decision-making responsibility for a single transaction

may involve more than one underwriting center. For

example, an institution may have authority to decline

mortgage applicants, but only the mortgage company

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

planned comparisons.

• Applicants can be steered from the financial institution to

the subsidiary or other lending channel and vice versa, and

what policies and procedures exist to monitor this practice.

• Any third parties, such as brokers or contractors, are

involved in the credit decision and how responsibility is

allocated among them and the institution. The

institution’s familiarity with third party actions may be

important, for an institution may be in violation if it

participates in transactions in which it knew or reasonably

ought to have known other parties were discriminating.

As part of understanding the financial institution’s own

lending operations, it is also important to understand any

dealings the financial institution has with affiliated and non-

affiliated mortgage loan brokers and other third party

lenders.

These brokers may generate mortgage applications and

originations solely for a specific financial institution or may

broadly gather loan applications for a variety of local,

regional, or national lenders. As a result, it is important to

recognize what impact these mortgage brokers and other

third party lender actions and application processing

operations have on the lending operations of a financial

institution. Because brokers can be located anywhere in or

out of the financial institution’s primary lending or CRA

assessment areas, it is important to evaluate broker activity

and fair lending compliance related to underwriting, terms,

and conditions, redlining, and steering, each of which is

covered in more depth in sections of these procedures.

Examiners should consult with their respective agencies for

specific guidance regarding broker activity.

If the institution is large and geographically diverse,

examiners should select only as many markets or

underwriting centers as can be reviewed readily in depth,

rather than selecting proportionally to cover every market.

As needed, examiners should narrow the focus to the

Metropolitan Statistical Area (MSA) or underwriting

center(s) that are determined to present the highest

discrimination risk. Examiners should use Loan Application

available. After calculating denial rates between the control

and prohibited basis groups for the underwriting centers,

examiners should select the centers with the highest fair

lending risk. This approach would also be used when

reviewing pricing or other terms and conditions of approved

applicants from the prohibited basis and control groups. If

underwriting centers have fewer than five racial or national

origin denials, examiners should not examine for racial

discrimination in underwriting. Instead, they should shift the

focus to other loan products or prohibited bases, or

examination types such as a

pricing examination.

However, if examiners learn of other indications of risks that

favor analyzing a prohibited basis with fewer transactions

than the minimum in the sample size tables, they should

consult with their supervisory office on possible alternative

methods of analysis. For example, there is strong reason to

examine a pattern in which almost all of 19 male borrowers

received low rates but almost all of four female borrowers

received high rates, even though the number of each group is

fewer than the stated minimum. Similarly, there would be

strong reason to examine a pattern in which almost all of 100

control group applicants were approved but all four

prohibited basis group applicants were not, even though the

number of prohibited basis denials was fewer than five.

Evaluating the Potential for Discriminatory Conduct

Step One: Develop an Overview

Based on his or her understanding of the credit operations and

product offerings of an institution, an examiner should

determine the nature and amount of information required for

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FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.7

the scoping process and should obtain and organize that

information. No single examination can reasonably be

expected to evaluate compliance performance as to every

prohibited basis, in every product, or in every underwriting

center or subsidiary of an institution. In addition to

information gained in the process of Understanding Credit

Operations, above, the examiner should keep in mind the

following factors when selecting products for the scoping

review:

• Which products and prohibited bases were reviewed

during the most recent prior examination(s) and,

conversely, which products and prohibited bases have not

recently been reviewed?

• Which prohibited basis groups make up a significant

portion of the institution’s market for the different credit

products offered?

• Which products and prohibited basis groups the institution

reviewed using either a voluntarily disclosed self-test or a

self-evaluation?

Based on consideration of the foregoing factors, the examiner

should request information for all residential and other loan

products considered appropriate for scoping in the current

examination cycle. In addition, wherever feasible, examiners

should conduct preliminary interviews with the institution’s

key underwriting personnel and those involved with

establishing the institution’s pricing policies and practices.

Using the accumulated information, the examiner should

evaluate the following, as applicable:

• Underwriting guidelines, policies, and standards.

• Descriptions of credit scoring systems, including a list of

factors scored, cutoff scores, extent of validation, and any

guidance for handling overrides and exceptions. (Refer

to Part A of the “Considering Automated Underwriting

and Credit Scoring” section of the Appendix for

guidance.)

• Applicable pricing policies, risk-based pricing models,

and guidance for exercising discretion over loan terms

and conditions.

• Descriptions of any compensation system, including

whether compensation is related to, loan production or

pricing.

• The institution’s formal and informal relationships with

any finance companies, subprime mortgage or consumer

lending entities, or similar institutions.

• Loan application forms.

• Home Mortgage Disclosure Act – Loan Application

declined applications.

• Description(s) of databases maintained for loan product(s)

to be reviewed.

• Records detailing policy exceptions or overrides,

exception reporting and monitoring processes.

• Copies of any consumer complaints alleging

discrimination and related loan files.

• Compliance program materials (particularly fair lending

policies), training manuals, organization charts, as well as

record keeping, monitoring protocols, and internal

controls.

• Copies of any available marketing materials or

descriptions of current or previous marketing plans or

programs or pre-screened solicitations.

Step

Two: Identify Compliance Program Discrimination

Risk Factors

Review information from agency examination work papers,

institutional records and any available discussions with

management representatives in sufficient detail to

understand the organization, staffing, training,

recordkeeping, auditing, policies and procedures of the

institution’s fair lending compliance systems. Review

these systems and note the following risk factors:

C1. Overall institution compliance record is weak.

C2. Prohibited basis monitoring information required by

applicable laws and regulations is nonexistent or

incomplete.

C3. Data and/or recordkeeping problems compromised

reliability of previous examination reviews.

C4. Fair lending problems were previously found in one or

more institution products or in institution subsidiaries.

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

management program, including management’s

involvement, designation of a compliance officer, and

staffing is materially inferior to programs customarily

found in institutions of similar size, market

demographics, and credit complexity.

C6. The institution has not updated compliance policies and

procedures to reflect changes in law or in agency

guidance.

C7. Fair lending training is nonexistent or weak.

Consider these risk factors and their impact on particular

lending products and practices as you conduct the product

specific risk review during the scoping steps that follow.

Where this review identifies fair lending compliance system

deficiencies, give them appropriate consideration as part of the

Compliance Management Review in Part II of these

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.8 FDIC Consumer Compliance Examination Manual – March 2021

procedures.

Step Three: Review Residential Loan Products

Although home mortgages may not be the ultimate subject of

every fair lending examination, this product line must at least

be considered in the course of scoping every institution that is

engaged in the residential lending market.

Divide home mortgage loans into the following groupings:

home purchase, home improvement, and refinancings.

Subdivide those three groups further if an institution does a

significant number of any of the following types or forms of

residential lending, and consider them separately:

• Government-insured loans

• Mobile home or manufactured housing loans

• Wholesale, indirect, and brokered loans

• Portfolio lending (including portfolios of Fannie

Mae/Freddie Mac rejections)

In addition, determine whether the institution offers any

conventional “affordable” housing loan programs special

purpose credit programs or other programs that are

specifically designed to assist certain borrowers, such as

underserved populations and whether their terms and

conditions make them incompatible with regular conventional

loans for comparative purposes. If so, consider them

separately.

If previous examinations have demonstrated the following,

then an examiner may limit the focus of the current

examination to alternative underwriting or processing centers

or to other residential products that have received less scrutiny

in the past:

• A strong fair lending compliance program.

• No record of discriminatory transactions at particular

decision centers or in particular residential products.

• No indication of a significant change in personnel,

operations, or underwriting or pricing policies at those

centers or in those residential products.

• No unresolved fair lending complaints, administrative

proceedings, litigation, or similar factors.

• No discretion to set price or credit terms and conditions

in particular decision centers or for particular

residential products.

Step

Four: Identify Residential Lending Discrimination Risk

Factors

Review the lending policies, marketing plans, underwriting,

appraisal and pricing guidelines, broker/agent agreements and

loan application forms for each residential loan product that

represents an appreciable volume of, or displays noticeable

growth in, the institution’s residential lending.

• Review also any available data regarding the geographic

distribution of the institution’s loan originations with respect

to the race and national origin percentages of the census tracts

within its assessment area or, if different, its residential loan

product lending area(s).

• Conduct interviews of loan officers and other employees or

agents in the residential lending process concerning adherence

to and understanding of the above policies and guidelines as

well as any relevant operating practices.

• In the course of conducting the foregoing inquiries, look for

the following risk factors (factors are numbered

alphanumerically to coincide with the type of factor, e.g., “O”

for “overt”; “P” for “pricing,” etc.).

NOTE: For risk factors below that are marked with an

asterisk (*), examiners need not attempt to calculate the

indicated ratios for racial or national origin characteristics

when the institution is not a HMDA reporter. However,

consideration should be given in such cases to whether or not

such calculations should be made based on gender or racial-

ethnic surrogates.

Overt indicators of discrimination such as:

O1. Including explicit prohibited basis identifiers in the

institution’s written or oral policies and procedures

(underwriting criteria, pricing standards, etc.).

O2. Collecting information, conducting inquiries or imposing

conditions contrary to express requirements of Regulation

O3. Including variables in a credit scoring system that

constitute a basis or factor prohibited by Regulation B or,

for residential loan scoring systems, the FHAct. (If a

credit scoring system scores age, refer to Part E of the

Considering Automated Underwriting and Credit Scoring

section of the Appendix.)

O4. Statements made by the institution’s officers, employees,

or agents which constitute an express or implicit

indication that one or more such persons have engaged or

do engage in discrimination on a prohibited basis in any

aspect of a credit transaction.

O5. Employee or institutional statements that evidence

attitudes based on prohibited basis prejudices or

stereotypes.

Indicators of potential disparate treatment in

Underwriting such as:

U1. *Substantial disparities among the approval/denial rates

for applicants by monitored prohibited basis

characteristic (especially within income categories).

IV. Fair Lending — Fair Lending Laws and Regulations

FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.9

U2. *Substantial disparities among the application processing

times for applicants by monitored prohibited basis

characteristic (especially within denial reason groups).

U3. *Substantially higher proportion of withdrawn/

incomplete applications from prohibited basis group

applicants than from other applicants.

U4. Vague or unduly subjective underwriting criteria.

U5. Lack of clear guidance on making exceptions to

underwriting criteria, including credit scoring overrides.

U6. Lack of clear loan file documentation regarding reasons

for any exceptions to standard underwriting criteria,

including credit scoring overrides.

U7. Relatively high percentages of either exceptions to

underwriting criteria or overrides of credit score cutoffs.

U8. Loan officer or broker compensation based on loan

volume (especially loans approved per period of time).

U9. Consumer complaints alleging discrimination in loan

processing or in approving/denying residential loans.

Indicators of potential disparate treatment in Pricing (interest

rates, fees, or points) such as:

P1. Financial incentives for loan officers or brokers to

charge higher prices (including interest rate, fees and

points). Special attention should be given to situations

where financial incentives are accompanied by broad

pricing discretion (as in P2), such as through the use of

overages or yield spread premiums.

P2. Presence of broad discretion in loan pricing (including

interest rate, fees and points), such as through overages,

underages or yield spread premiums. Such discretion

may be present even when institutions provide rate sheets

and fees schedules, if loan officers or brokers are

permitted to deviate from those rates and fees without

clear and objective criteria.

P3. Use of risk-based pricing that is not based on objective

criteria or applied consistently.

P4. *Substantial disparities among prices being quoted or

charged to applicants who differ as to their monitored

prohibited basis characteristics.

P5. Consumer complaints alleging discrimination in

residential loan pricing.

P6. *In mortgage pricing, disparities in the incidence or rate

spreads

of higher-priced lending by prohibited basis

characteristics as reported in the HMDA data.

P7. *A loan program that contains only borrowers from a

Regulation C, Section 203.4(a)(12)

prohibited basis group, or has significant differences in

the percentages of prohibited basis groups, especially in

the absence of a Special Purpose Credit Program under

ECOA.

Indicators of potential disparate treatment by Steering such

as:

S1. Lack of clear, objective and consistently implemented

standards for (i) referring applicants to subsidiaries,

affiliates, or lending channels within the institution (ii)

classifying applicants as “prime” or “sub-prime”

borrowers, or (iii) deciding what kinds of alternative

loan products should be offered or recommended to

applicants (product placement).

S2. Financial incentives for loan officers or brokers to place

applicants in nontraditional products (i.e., negative

amortization, “interest only”, “payment option”

adjustable rate mortgages) or higher cost products.

S3. For an institution that offers different products based on

credit risk levels, any significant differences in

percentages of prohibited basis groups in each of the

alternative loan product categories.

S4. *Significant differences in the percentage of prohibited

basis applicants in loan products or products with specific

features relative to control group applicants. Special

attention should be given to products and features that

have potentially negative consequences for applicants

(i.e., non-traditional mortgages, prepayment penalties,

lack of escrow requirements, or credit life insurance).

S5. *For an institution that has one or more sub-prime

mortgage subsidiaries or affiliates, any significant

differences, by loan product, in the percentage of

prohibited basis applicants of the institution compared to

the percentage of prohibited basis applicants of the

subsidiary(ies) or affiliate(s).

S6. *For an institution that has one or more lending channels

that originate the same loan product, any significant

differences in the percentage of prohibited basis

applicants in one of the lending channels compared to the

percentage of prohibited basis applicants of the other

lending channel.

S7. Consumer complaints alleging discrimination in

residential loan pricing or product placement.

S8. *For an institution with sub-prime mortgage subsidiaries,

a concentration of those subsidiaries’ branches in

minority areas relative to its other branches.

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.10 FDIC Consumer Compliance Examination Manual – March 2021

Indicators of potential discriminatory Redlining such as:

R1. *Significant differences, as revealed in HMDA data, in

the number of applications received, withdrawn,

approved not accepted, and closed for incompleteness or

loans originated in those areas in the institution’s market

that have relatively high concentrations of minority group

residents compared with areas with relatively low

concentrations of minority residents.

R2. *Significant differences between approval/denial rates for

all applicants (minority and non-minority) in areas with

relatively high concentrations of minority group residents

compared with areas with relatively low concentrations of

minority residents.

R3. *Significant differences between denial rates based on

insufficient collateral for applicants from areas with

relatively high concentrations of minority residents and

those areas with relatively low concentrations of minority

residents.

R4. *Significant differences in the number of originations of

higher-priced loans or loans with potentially negative

consequences for borrowers, (i.e., non-traditional

mortgages, prepayment penalties, lack of escrow

requirements) in areas with relatively high concentrations

of minority residents compared with areas with relatively

low concentrations of minority residents.

R5. Other patterns of lending identified during the most

recent CRA examination that differ by the concentration

of minority residents.

R6. Explicit demarcation of credit product markets that

excludes MSAs, political subdivisions, census tracts, or

other geographic areas within the institution’s lending

market or CRA assessment areas and having relatively

high concentrations of minority residents.

R7. Difference in services available or hours of operation at

branch offices located in areas with concentrations of

minority residents when compared to branch offices

located in areas with concentrations of non-minority

residents.

R8. Policies on receipt and processing of applications,

pricing, conditions, or appraisals and valuation, or on any

other aspect of providing residential credit that vary

between areas with relatively high concentrations of

minority residents and those areas with relatively low

concentrations of minority residents.

R9. The institution’s CRA assessment area appears to have

been drawn to exclude areas with relatively high

concentrations of minority residents.

R10.Employee statements that reflect an aversion to doing

business in areas with relatively high concentrations of

minority residents.

R11. Complaints or other allegations by consumers or

community representatives that the institution excludes or

restricts access to credit for areas with relatively high

concentrations of minority residents. Examiners should

review complaints against the institution filed either with

their agency or the institution; the CRA public comment

file; community contact forms; and the responses to

questions about redlining, discrimination, and

discouragement of applications, and about meeting the

needs of racial or national origin minorities, asked as part

of obtaining local perspectives on the performance of

financial institutions during prior CRA examinations.

R12. An institution that has most of its branches in

predominantly non-minority neighborhoods at the same

time that the institution’s sub-prime mortgage subsidiary

has branches which are located primarily in

predominantly minority neighborhoods.

Indicators of potential disparate treatment in Marketing of

residential products, such as:

M1. Advertising patterns or practices that a reasonable

person would believe indicate prohibited basis

customers are less desirable.

M2. Advertising only in media serving non-minority areas of

the market.

M3. Marketing through brokers or other agents that the

institution knows (or has reason to know) would serve

only one racial or ethnic group in the market.

M4. Use of marketing programs or procedures for residential

loan products that exclude one or more regions or

geographies within the institutions assessment or

marketing area that have significantly higher

percentages of minority group residents than does the

remainder of the assessment or marketing area.

M5. Using mailing or other distribution lists or other

marketing techniques for pre-screened or other offerings

of residential loan products that:

• Explicitly exclude groups of prospective borrowers on

a prohibited basis; or

• Exclude geographies (e.g., census tracts, ZIP codes,

etc.) within the institution’s marketing area that have

significantly higher percentages of minority group

residents than does the remainder of the marketing area.

M6. *Proportion of prohibited basis applicants is

significantly lower than that group’s representation in

the total population of the market area.

M7. Consumer complaints alleging discrimination in

advertising or marketing loans.

IV. Fair Lending — Fair Lending Laws and Regulations

FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.11

Step Five: Organize and Focus Residential Risk Analysis

Review the risk factors identified in Step 4 and, for each loan

product that displays risk factors, articulate the possible

discriminatory effects encountered and organize the

examination of those loan products in accordance with the

following guidance. For complex issues regarding these

factors, consult with agency supervisory staff.

• Where overt evidence of discrimination, as described in

factors O1-O5, has been found in connection with a

product, document those findings as described in Part III,

B, besides completing the remainder of the planned

examination analysis.

• Where any of the risk factors U1-U9 are present,

consider conducting an underwriting comparative file

analysis as described in Part III, C.

• Where any of the risk factors P1-P7 are present,

consider conducting a pricing comparative file analysis

as described in Part III, D.

• Where any of the risk factors S1-S8 are present,

consider conducting a steering analysis as described in

Part III, E.

• Where any of the risk factors R1-R12 are present,

consider conducting an analysis for redlining as described

in Part III, G.

• Where any of the risk factors M1-M7 are present,

consider conducting a marketing analysis as described in

Part III, H.

• Where an institution uses age in any credit scoring system,

consider conducting an examination analysis of that credit

scoring system’s compliance with the requirements of

Regulation B as described in Part III, I.

Step

Six: Identify Consumer Lending Discrimination Risk

Factors

For any consumer loan products selected in Step One for risk

analysis, examiners should conduct a risk factor review similar

to that conducted for residential lending products in Steps

Three through Five, above. Examiners should consult with

agency supervisory staff regarding the potential use of

surrogates to identify possible prohibited basis group

individuals.

NOTE: The term surrogate in this context refers to any factor

related to a loan applicant that potentially identifies that

applicant’s race, color, or other prohibited basis

characteristic in instances where no direct evidence of that

characteristic is available. Thus, in consumer lending, where

monitoring data is generally unavailable, a Hispanic or Asian

surname could constitute a surrogate for an applicant’s race

or national origin because the examiner can assume that the

institution (which can rebut the presumption) perceived the

person to be Hispanic or Asian. Similarly, an applicant’s

given name could serve as a surrogate for his or her gender.

A surrogate for a prohibited basis group characteristic may be

used to set up a comparative analysis with control group

applicants or borrowers.

Examiners should then follow the rules in Steps Three

through Five, above and identify the possible discriminatory

patterns encountered and consider examining those products

determined to have sufficient risk of discriminatory conduct.

Step

Seven: Identify Commercial Lending Discrimination

Risk Factors

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 underwriting standards have changed since the last

examination of the product, the examiner should consider

conducting a risk factor review similar to that performed for

residential lending products, as feasible, given the limited

information available. Such an analysis should generally be

limited to determining risk potential based on risk factors

U4- U8; P1-P3; R5-R7; and M1-M3.

If the institution makes commercial loans insured by the

Small Business Administration (SBA), determine from

agency supervisory staff whether SBA loan data (which

codes race and other factors) are available for the institution

and evaluate those data pursuant to instructions

accompanying them.

For large institutions reporting small business loans for

CRA purposes and where the institution also voluntarily

geocodes loan denials, look for material discrepancies in

ratios of approval-to-denial rates for applications in areas

with high concentrations of minority residents compared to

areas with concentrations of non-minority residents.

Articulate the possible discriminatory patterns identified

and consider further examining those products determined

to have sufficient risk of discriminatory conduct in

accordance with the procedures for commercial lending

described in Part III, F.

Step Eight: Complete the Scoping Process

To complete the scoping process, the examiner should

review the results of the preceding steps and select those

focal points that warrant examination, based on the relative

risk levels identified above. In order to remain within the

agency’s resource allowances, the examiner may need to

choose a smaller number of focal points from among all

those selected on the basis of risk. In such instances, set the

scope by first, prioritizing focal points on the basis of (i)

high number and/or relative severity of risk factors; (ii) high

data quality and other factors affecting the likelihood of

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.12 FDIC Consumer Compliance Examination Manual – March 2021

obtaining reliable examination results; (iii) high loan volume

and the likelihood of widespread risk to applicants and

borrowers; and (iv) low quality of any compliance program

and, second, selecting for examination review as many focal

points as resources permit.

Where the judgment process among competing focal points is

a close call, information learned in the phase of conducting the

compliance management review can be used to further refine

the examiner’s choices.

Part II — Compliance Management Review

The Compliance Management Review enables the

examination team to determine:

• The intensity of the current examination based on an

evaluation of the compliance management measures

employed by an institution.

• The reliability of the institution’s practices and procedures

for ensuring continued fair lending compliance.

Generally, the review should focus on:

• Determining whether the policies and procedures of the

institution enable management to prevent, or to identify

and self-correct, illegal disparate treatment in the

transactions that relate to the products and issues

identified for further analysis under Part I of these

procedures.

• Obtaining a thorough understanding of the manner by

which management addresses its fair lending

responsibilities with respect to (a) the institution’s lending

practices and standards, (b) training and other application-

processing aids, (c) guidance to employees or agents in

dealing with customers, and (d) its marketing or other

promotion of products and services.

To conduct this review, examiners should consider institutional

records and interviews with appropriate management personnel

in the lending, compliance, audit, and legal functions. The

examiner should also refer to the Compliance Management

Analysis Checklist contained in the Appendix to evaluate the

strength of the compliance programs in terms of their capacity

to prevent, or to identify and self- correct, fair lending

violations in connection with the products or issues selected for

analysis. Based on this evaluation:

• Set the intensity of the transaction analysis by minimizing

sample sizes within the guidelines established in Part III

and the Fair Lending Sample Size Tables in the

Appendix, to the extent warranted by the strength and

thoroughness of the compliance programs applicable to

those focal points selected for examination.

This reflects the interagency examination procedures in their entirety.

• Identify any compliance program or system deficiencies

that merit correction or improvement and present these to

management in accordance with Part IV of these

procedures.

Where an institution performs a self-evaluation or has

voluntarily disclosed the report or results of a self-test of

any product or issue that is within the scope of the

examination and has been selected for analysis pursuant to

Part I of these procedures, examiners may streamline the

examination, consistent with agency guidance, provided

the self-test or self-evaluation meets the requirements set

forth in Using Self-Tests and Self-Evaluations to

Streamline the Examination located in the Appendix.

Part III — Examination Procedures

Once the scope and intensity of the examination have been

determined, assess the institution’s fair lending

performance by applying the appropriate procedures that

follow to each of the examination focal points already

selected.

A. Verify Accuracy of Data

Prior to any analysis and preferably before the scoping

process, examiners should assess the accuracy of the data

being reviewed. Data verifications should follow specific

protocols (sampling, size, etc.) intended to ensure the

validity of the review. For example, where an institution’s

LAR data is relied upon, examiners should generally

validate the accuracy of the institution’s submitted data by

selecting a sample of LAR entries and verifying that the

information noted on the LAR was reported according to

instructions by comparing information contained in the loan

file for each sampled loan. If the LAR data are inconsistent

with the information contained in the loan files, depending

on the nature of the errors, examiners may not be able to

proceed with a fair lending analysis until the LAR data

have been corrected by the institution. In cases where

inaccuracies impede the examination, examiners should

direct the institution to take action to ensure data integrity

(data scrubbing, monitoring, training, etc.).

NOTE: While the procedures refer to the use of HMDA data,

other data sources should be considered, especially in the

case of non-HMDA reporters or institutions that originate

loans but are not required to report them on a LAR.

B. Documenting Overt Evidence of Disparate Treatment

Where the scoping process or any other source identifies

overt evidence of disparate treatment, the examiner should

assess the nature of the policy or statement and the extent of

its impact on affected applicants by conducting the

following analysis.

IV. Fair Lending — Fair Lending Laws and Regulations

FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.13

Step 1. Where the indicator(s) of overt discrimination are

found in or based on a written policy (for example, a credit

scorecard) or communication, determine and document:

a. The precise language of the apparently discriminatory

policy or communication and the nature of the fair

lending concerns that it raises.

b. The institution’s stated purpose in adopting the policy

or communication and the identity of the person on

whose authority it was issued or adopted.

c. How and when the policy or communication was put

into effect.

d. How widely the policy or communication was applied.

e. Whether and to what extent applicants were adversely

affected by the policy or communication.

Step 2. Where any indicator of overt discrimination was an

oral statement or unwritten practice, determine and

document:

a. The precise nature of both the statement, or practice, and

of the fair lending concerns that they raise.

b. The identity of the persons making the statement or

applying the practice and their descriptions of the

reasons for it and the persons authorizing or directing the

use of the statement or practice.

c. How and when the statement or practice was

disseminated or put into effect.

d. How widely the statement or practice was disseminated

or applied.

e. Whether and to what extent applicants were

adversely affected by the statement or practice.

Assemble findings and supporting documentation for

presentation to management in connection with Part IV of

these procedures.

C. Transactional Underwriting Analysis — Residential and

Consumer Loans.

Step 1. Set Sample Size

a. For each focal point selected for this analysis, two

samples will be utilized: (i) prohibited basis group denials

and (ii) control group approvals, both identified either

directly from monitoring information in the case of

residential loan applications or through the use of

application data or surrogates in the case of consumer

applications.

b. Refer to Fair Lending Sample Size Tables, Table A in the

Appendix and determine the size of the initial sample for

each focal point, based on the number of prohibited basis

group denials and the number of control group approvals

by the institution during the twelve month (or calendar

year) period of lending activity preceding the

examination.

In the event that the number of denials and/or approvals

acted on during the preceding 12 month period

substantially exceeds the maximum sample size shown

in Table A, reduce the time period from which that

sample is selected to a shorter period. (In doing so,

make every effort to select a period in which the

institution’s underwriting standards are most

representative of those in effect during the full 12

month period preceding the examination.)

c. If the number of prohibited basis group denials or

control group approvals for a given focal point that were

acted upon during the 12 month period referenced in

1.b., above, do not meet the minimum standards set forth

in the Sample Size Table, examiners need not attempt a

transactional analysis for that focal point. Where other

risk factors favor analyzing such a focal point, consult

with agency supervisory staff on possible alternative

methods of judgmental comparative analysis.

d. If agency policy calls for a different approach to

sampling (e.g., a form of statistical analysis, a

mathematical formula, or an automated tool) for a

limited class of institutions, examiners should follow

that approach.

Step 2. Determine Sample Composition

a. To the extent the institution maintains records of loan

outcomes resulting from exceptions to its credit

underwriting standards or other policies (e.g., overrides

to credit score cutoffs), request such records for both

approvals and denials, sorted by loan product and

branch or decision center, if the institution can do so.

Include in the initial sample for each focal point all

exceptions or overrides applicable to that focal point.

b. Using HMDA/LAR data or, for consumer loans,

comparable loan register data to the extent

available, choose approved and denied

applications based on selection criteria that will

maximize the likelihood of finding marginal

approved and denied applicants, as discussed

below.

c. To the extent that the above factors are inapplicable or

other selection criteria are unavailable or do not

facilitate selection of the entire sample size of files,

complete the initial sample selection by making random

file selections from the appropriate sample categories in

the Sample Size Table.

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.14 FDIC Consumer Compliance Examination Manual – March 2021

Step 3. Compare Approved and Denied Applications

Overview: Although a creditor’s written policies and

procedures may appear to be nondiscriminatory, lending

personnel may interpret or apply policies in a

discriminatory manner. In order to detect any disparate

treatment among applicants, the examiner should first

eliminate all but “marginal transactions” (see 3.b. below)

from each selected focal point sample. Then, a detailed

profile of each marginal applicant’s qualifications, the

level of assistance received during the application process,

the reasons for denial, the loan terms, and other

information should be recorded on an Applicant Profile

Spreadsheet. Once profiled, the examiner can compare the

target and control groups for evidence that similarly

qualified applicants have been treated differently as to

either the institution’s credit decision or the quality of

assistance provided.

a. Create Applicant Profile Spreadsheet

Based upon the institution’s written and/or articulated

credit standards and loan policies, identify categories of

data that should be recorded for each applicant and

provide a field for each of these categories on a

worksheet or computerized spreadsheet. Certain data

(income, loan amount, debt, etc.) should always be

included in the spreadsheet, while the other data

selected will be tailored for each loan product and

institution based on applicable underwriting criteria

and such issues as branch location and underwriter.

Where credit bureau scores and/or application scores

are an element of the institution’s underwriting criteria

(or where such information is regularly recorded in

loan files, whether expressly used or not), include a

data field for this information in the spread sheet.

In order to facilitate comparisons of the quality of

assistance provided to target and control group applicants,

respectively, every work sheet should provide a

“comments” block appropriately labeled as the site for

recording observations from the file or interviews

regarding how an applicant was, or was not, assisted in

overcoming credit deficiencies or otherwise qualifying for

approval.

b. Complete Applicant Profiles

From the application files sample for each focal point,

complete applicant profiles for selected denied and

approved applications as follows:

• A principal goal is to identify cases where similarly

qualified prohibited basis and control group

applicants had different credit outcomes, because the

agencies have found that discrimination, including

differences in granting assistance during the approval

process, is more likely to occur with respect to

applicants who are not either clearly qualified or

unqualified ( i.e., “marginal” applicants). The

examiner-in-charge should, during the following

steps, judgmentally select from the initial sample

only those denied and approved applications which

constitute marginal transactions. (See Appendix on

Identifying Marginal Transactions for guidance)

• If few marginal control group applicants are identified

from the initial sample, review additional files of

approved control group applicants. This will either

increase the number of marginal approvals or confirm that

marginal approvals are so infrequent that the marginal

denials are unlikely to involve disparate treatment.

• The judgmental selection of both marginal-denied and

marginal-approved applicant loan files should be done

together, in a “back and forth” manner, to facilitate

close matches and a more consistent definition of

“marginal” between these two types of loan files.

• Once the marginal files have been identified, the data

elements called for on the profile spreadsheet are

extracted or noted and entered.

• While conducting the preceding step, the examiner

should simultaneously look for and document on the

spreadsheet any evidence found in marginal files

regarding the following:

° the extent of any assistance, including both

affirmative aid and waivers or partial waivers of

credit policy provisions or requirements, that

appears to have been provided to marginal-

approved control group applicants which enabled

them to overcome one or more credit deficiencies,

such as excessive debt-to-income ratios; and

° the extent to which marginal-denied target group

applicants with similar deficiencies were, or were

not, provided similar affirmative aid, waivers or

other forms of assistance.

c. Review and Compare Profiles

• For each focal point, review all marginal profiles to determine

if the underwriter followed institution lending policies in

denying applications and whether the reason(s) for denial were

supported by facts documented in the loan file and properly

disclosed to the applicant pursuant to Regulation B. If any (a)

unexplained deviations from credit standards, (b) inaccurate

reasons for denial or (c) incorrect disclosures are noted,

(whether in a judgmental underwriting system, a scored

system or a mixed system) the examiner should obtain an

explanation from the underwriter and document the response

on an appropriate workpaper.

NOTE: In constructing the applicant profiles to be

compared, examiners must adjust the facts compared so that

IV. Fair Lending — Fair Lending Laws and Regulations

FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.15

assistance, waivers, or acts of discretion are treated

consistently between applicants. For example, if a control

group applicant’s DTI ratio was lowered to 42% because

the institution decided to include short-term overtime

income and a prohibited basis group applicant who was

denied due to “insufficient income” would have had his

ratio drop from 46% to 41% if his short-term overtime

income had been considered, then the examiners should

consider 41%, not 46%, in determining the benchmark.

• For each reason for denial identified within the target

group, rank the denied prohibited basis applicants,

beginning with the applicant whose qualification(s)

related to that reason for denial were least deficient.

(The top-ranked denied applicant in each such ranking

will be referred to below as the “benchmark”

applicant.)

• Compare each marginal control group approval to the

benchmark applicant in each reason-for-denial ranking

developed in step (b), above. If there are no approvals

who are equally or less qualified, then there are no

instances of disparate treatment for the institution to

account for. For all such approvals that appear no better

qualified than the denied benchmark applicant

o identify the approved loan on the worksheet or

spreadsheet as an “overlap approval,” and

o compare that overlap approval with other

marginal prohibited basis denials in the ranking to

determine whether additional overlaps exist. If

so, identify all overlapping approvals and denials

as above.

• Where the focal point involves use of a credit scoring

system, the analysis for disparate treatment is similar to

the procedures set forth in (c) above, and should focus

primarily on overrides of the scoring system itself. For

guidance on this type of analysis, refer to Considering

Automated Underwriting and Credit Scoring, Part C in

the Appendix.

Step 4. If there is some evidence of violations in the

underwriting process but not enough to clearly establish the

existence of a pattern or practice, the examiner should

expand the sample as necessary to determine whether a

pattern or practice does or does not exist.

Step 5. Discuss all findings resulting from the above

comparisons with management and document both the

findings and all conversations on an appropriate worksheet.

D. Analyzing Potential Disparities in Pricing and Other

Terms and Conditions.

Depending on the intensity of the examination and the size of

the borrower population to be reviewed, the analysis of

decisions on pricing and other terms and conditions may

involve a comparative file review, statistical analysis, a

combination of the two, or other specialized technique used by

an agency. Each examination process assesses an institution’s

credit-decision standards and whether decisions on pricing and

other terms and conditions are applied to borrowers without

regard to a prohibited basis.

The procedures below encompass the examination steps for a

comparative file review. Examiners should consult their own

agency’s procedures for detailed guidance where appropriate.

For example, when file reviews are undertaken in conjunction

with statistical analysis, the guidance on specific sample sizes

referenced below may not apply.

Step 1. Determine Sample Selection

Examiners may review data in its entirety or restrict their

analysis to a sample depending on the examination

approach used and the quality of the institution’s

compliance management system. The Fair Lending Sample

Size Tables in the Appendix provide general guidance about

appropriate sample sizes. Generally, the sample size should

be based on the number of prohibited basis group and

control group originations for each focal point selected

during the 12 months preceding the examination and the

outcome of the compliance management system analysis

conducted in Part II. When possible, examiners should

request specific loan files in advance and request that the

institution have them available for review at the start of the

examination.

Step 2. Determine Sample Composition and Create

Applicant Profiles

Examiners should tailor their sample and subsequent

analysis to the specific factors that the institution considers

when determining its pricing, terms, and conditions. For

example, while decisions on pricing, and other terms and

conditions are part of an institution’s underwriting process,

general underwriting criteria should not be used in the

analysis if they are not relevant to the term or condition to

be reviewed. Additionally, consideration should be limited

to factors which examiners determine to be legitimate.

While the period for review should be 12-months, prohibited

basis group and control group borrowers should be grouped

and reviewed around a range of dates during which the

institution’s practices for the term or condition being

reviewed were the same. Generally, examiners should use

the loan origination date or the loan application date.

Identify data to be analyzed for each focal point to be

reviewed and record this information for each borrower on

a spreadsheet to ensure a valid comparison regarding terms

and conditions. For example, in certain cases, an institution

may offer slightly differentiated products with significant

pricing implications to borrowers. In these cases, it may be

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.16 FDIC Consumer Compliance Examination Manual – March 2021

appropriate to group these procedures together for the

purposes of evaluation.

Step

3. Review Terms and Conditions; Compare with

Borrower Outcomes

a. Review all loan terms and conditions (rates, points,

fees, maturity variations, LTVs, collateral

requirements, etc.) with special attention to those

which are left, in whole or in part, to the discretion of

loan officers or underwriters. For each such term or

condition, identify (a) any prohibited basis group

borrowers in the sample who appear to have been

treated unfavorably with respect to that term or

condition and (b) any control group borrowers who

appear to have been treated favorably with respect to

that term or condition. The examiner’s analysis should

be thoroughly documented in the workpapers.

b. Identify from the sample universe any control group

borrowers who appear to have been treated more

favorably than one or more of the above-identified

prohibited basis group borrowers and who have

pricing or creditworthiness factors (under the

institution’s standards) that are equal to or less

favorable than the prohibited basis group borrowers.

c. Obtain explanations from the appropriate loan officer or

other employee for any differences that exist and

reanalyze the sample for evidence of discrimination.

d. If there is some evidence of violations in the imposition of

terms and conditions but not enough to clearly establish

the existence of a pattern or practice, the examiner should

expand the sample as necessary to determine whether a

pattern or practice does or does not exist.

e. Discuss differences in comparable loans with the

institution’s management and document all conversations

on an appropriate worksheet. For additional guidance on

evaluating management’s responses, refer to Part A, 1 – 5,

Evaluating Responses to Evidence of Disparate Treatment

in the Appendix.

E. Steering Analysis

An institution that offers a variety of lending products or

product features, either through one channel or through

multiple channels, may benefit consumers by offering greater

choices and meeting the diverse needs of applicants. Greater

product offerings and multiple channels, however, may also

create a fair lending risk that applicants will be illegally

steered to certain choices based on prohibited characteristics.

Several examples illustrate potential fair lending risk:

• An institution that offers different lending products based

on credit risk levels may present opportunities for loan

officers or brokers to illegally steer applicants to the

higher-risk products.

•

An institution that offers nontraditional loan products or

loan products with potentially onerous terms (such as

prepayment penalties) may present opportunities for loan

officers or brokers to illegally steer applicants to certain

products or features.

•

An institution that offers prime or sub-prime products

through different channels may present opportunities for

applicants to be illegally steered to the sub-prime

channel.

The distinction between guiding consumers toward a specific

product or feature and illegal steering centers on whether the

institution did so on a prohibited basis, rather than based on

an applicant’s needs or other legitimate factors. It is not

necessary to demonstrate financial harm to a group that has

been “steered.” It is enough to demonstrate that action was

taken on a prohibited basis regardless of the ultimate

financial outcome. If the scoping analysis reveals the

presence of one or more risk factors S1 through S8 for any

selected focal point, consult with agency supervisory staff

about conducting a steering analysis as described below.

Step 1. Clarify what options are available to applicants

Through interviews with appropriate personnel of the

institution and review of policy manuals, procedure

guidelines and other directives, obtain and verify the

following information for each product-alternative product

pairing or grouping identified above:

a. All underwriting criteria for the product or feature and

their alternatives that are offered by the institution or by

a subsidiary or affiliate. Examples of products may

include stated income, negative amortization, and

options ARMs. Examples of terms and features include

prepayment penalties and escrow requirements. The

distinction between a product, term, and feature may

vary institution to institution. For example, some

institutions may consider “stated income” a feature,

whiles others may consider that a distinct product.

b. Pricing or other costs applicable to the product and the

alternative product(s), including interest rates, points,

and all fees.

Step 2. Document the policies, conditions, or criteria that

have been adopted by the institution for determining how

referrals are to be made and choices presented to applicants.

a. Obtain not only information regarding the product or

feature offered by the institution and alternatives

offered by subsidiaries/affiliates, but also information

on alternatives offered solely by the institution itself.

b. Obtain any information regarding a subsidiary of the

institution directly from that entity, but seek

IV. Fair Lending — Fair Lending Laws and Regulations

FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.17

information regarding an affiliate or holding company

subsidiary only from the institution itself.

c. Obtain all appropriate documentation and provide a

written summary of all discussions with loan

personnel and managers.

d. Obtain documentation and/or employee estimates as to

the volume of referrals made from or to the institution,

for each product, during a relevant time period.

e. Resolve to the extent possible any discrepancies

between information found in the institution’s

documents and information obtained in discussions

with loan personnel and managers by conducting

appropriate follow-up interviews.

f. Identify any policies and procedures established by the

institution and/or the subsidiary or affiliate for (i)

referring a person who applies to the institution, but

does not meet its criteria, to another internal lending

channel, subsidiary or affiliate; (ii) offering one or

more alternatives to a person who applies to the

institution for a specific product or feature, but does

not meet its criteria; or (iii) referring a person who

applies to a subsidiary or affiliate for its product, but

who appears qualified for a loan from the institution, to

the institution; or referring a person who applies

through one internal lending channel for a product, but

who appears to be qualified for a loan through another

lending channel to that particular lending channel.

g. Determine whether loan personnel are encouraged,

through financial incentives or otherwise, to make

referrals, either from the institution to a

subsidiary/affiliate or vice versa. Similarly,

determine whether the institution provides

financial incentives related to products and

features.

Step 3. Determine how referral decisions are made and

documented within the institution.

Determine how a referral is made to another internal lending

channel, subsidiary, or affiliate. Determine the reason for

referral and how it is documented.

Step 4. Determine to what extent individual loan personnel

are able to exercise personal discretion in deciding what loan

products or other credit alternatives will be made available to

a given applicant.

Step 5. Determine whether the institution’s stated policies,

conditions, or criteria in fact are adhered to by individual

decision makers. If not, does it appear that different policies

or practices are actually in effect?

Enter data from the prohibited basis group sample on the

spread sheets and determine whether the institution is, in fact,

applying its criteria as stated. For example, if one announced

criterion for receiving a “more favorable” prime mortgage

loan was a back end debt ratio of no more than 38%, review

the spread sheets to determine whether that criteria was

adhered to. If the institution’s actual treatment of prohibited

basis group applicants appears to differ from its stated

criteria, document such differences for subsequent discussion

with management.

Step 6. To the extent that individual loan personnel have any

discretion in deciding what products and features to offer

applicants, conduct a comparative analysis to determine

whether that discretion has been exercised in a

nondiscriminatory manner.

Compare the institution’s or subsidiary/affiliate’s treatment of

control group and prohibited basis group applicants by

adapting the “benchmark” and “overlap” technique discussed

in Part III, Section C of these procedures. For purposes of

this Steering Analysis, that technique should be conducted as

follows:

a. For each focal point to be analyzed, select a sample of

prohibited basis group applicants who received “less

favorable” treatment (e.g., referral to a finance

company or a subprime mortgage subsidiary or

counteroffers of less favorable product alternatives).

NOTE: In selecting the sample, follow the guidance of

Fair Lending Sample Size Tables, Table B in the

Appendix and select “marginal applicants” as

instructed in Part III, Section C, above.

b. Prepare a spread sheet for the sample which contains

data entry categories for those underwriting and/or

referral criteria that the institution identified in Step 1.b

as used in reaching underwriting and referral decisions

between the pairs of products.

c. Review the “less favorably” treated prohibited basis

group sample and rank this sample from least qualified

to most qualified.

d. From the sample, identify the best qualified prohibited

basis group applicant, based on the criteria identified

for the control group, above. This applicant will be

the “benchmark” applicant. Rank order the remaining

applicants from best to least qualified.

e. Select a sample of control group applicants. Identify

those who were treated “more favorably” with respect to

the same product-alternative product pair as the

prohibited basis group. (Again refer to the Sample Size

Table B and marginal applicant processes noted above

in selecting the sample.)

f. Compare the qualifications of the benchmark applicant

with those of the control group applicants, beginning

with the least qualified member of that sample. Any

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.18 FDIC Consumer Compliance Examination Manual – March 2021

control group applicant who appears less qualified than

the benchmark applicant should be identified on the

spreadsheet as a “control group overlap.”

g. Compare all control group overlaps with other, less

qualified prohibited basis group applicants to

determine whether additional overlaps exist

h. Document all overlaps as possible disparities in treatment.

Discuss all overlaps and related findings (e.g., any

differences between stated and actual underwriting and/or

referral criteria) with management, documenting all such

conversations.

Step 7. Examiners should consult with their agency’s

supervisory staff if they see a need to contact control group

or prohibited basis group applicants to substantiate the

steering analysis.

F. Transactional Underwriting Analysis — Commercial

Loans.

Overview: Unlike consumer credit, where loan products and

prices are generally homogenous and underwriting involves

the evaluation of a limited number of credit variables,

commercial loans are generally unique and underwriting

methods and loan pricing may vary depending on a large

number of credit variables. The additional credit analysis

that is involved in underwriting commercial credit products

will entail additional complexity in the sampling and

discrimination analysis process. Although ECOA prohibits

discrimination in all commercial credit activities of a covered

institution, the agencies recognize that small businesses (sole

proprietorships, partnerships, and small, closely-held

corporations) may have less experience in borrowing. Small

businesses may have fewer borrowing options, which may

make them more vulnerable to discrimination. Therefore, in

implementing these procedures, examinations should

generally be focused on small business credit (commercial

applicants that had gross revenues of $1,000,000 or less in

the preceding fiscal year), absent s

ome evidence that a focus

on other commercial products would be more appropriate.

Step 1. Understand Commercial Loan Policies

For the commercial product line selected for analysis, the

examiner should first review credit policy guidelines and

interview appropriate commercial loan managers and officers

to obtain written and articulated standards used by the

institution in evaluating commercial loan applications.

NOTE: Examiners should consult their own agencies for

guidance on when a comparative analysis or statistical

analysis is appropriate, and follow their agencies procedures

for conducting such a review/analysis.

Step 2. Conduct Comparative File Review

a. Select all (or a maximum of ten) denied applications that

were acted on during the three month period prior to the

examination. To the extent feasible, include denied

applications from businesses that are (i) located in

minority and/or integrated geographies or (ii) appear to be

owned by women or minority group members, based on

the names of the principals shown on applications or

related documents. (In the case of institutions that do a

significant volume of commercial lending, consider

reviewing more than ten applications.)

b. For each of the denied commercial applications selected,

record specific information from loan files and through

interviews with the appropriate loan officer(s), about the

principal owners, the purpose of the loan, and the specific,

pertinent financial information about the commercial

enterprise (including type of business — retail,

manufacturing, service, etc.), that was used by the

institution to evaluate the credit request. Maintenance or

use of data that identifies prohibited basis characteristics

of those involved with the business (either in approved or

denied loan applications) should be evaluated as a

potential violation of Regulation B.

c. Select ten approved loans that appear to be similar with

regard to business type, purpose of loan, loan amount,

loan terms, and type of collateral, as the denied loans

sampled. For example, if the denied loan sample

includes applications for lines of credit to cover

inventory purchases for retail businesses, the examiner

should select approved applications for lines of credit

from retail businesses.

d. For each approved commercial loan application

selected, obtain and record information parallel to that

obtained for denied applications.

e. The examiner should first compare the credit criteria

considered in the credit process for each of the

approved and denied applications to established

underwriting standards, rather than comparing files

directly.

f. The examiner should identify any deviations from

credit standards for both approved and denied credit

requests, and differences in loan terms granted for

approved credit requests.

g. The examiner should discuss each instance where

deviations from credit standards and terms were noted,

but were not explained in the file, with the commercial

credit underwriter. Each discussion should be

documented.

Step 3. Conduct Targeted Sampling

a. If deviations from credit standards or pricing are not

sufficiently explained by other factors either

documented in the credit file or the commercial

IV. Fair Lending — Fair Lending Laws and Regulations

FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.19

underwriter was not able to provide a reasonable

explanation, the examiner should determine if

deviations were detrimental to any protected classes of

applicants.

b. The examiner should consider employing the same

techniques for determining race and gender

characteristics of commercial applicants as those

outlined in the consumer loan sampling procedures.

c. If it is determined that there are members of one or more

prohibited basis groups among commercial credit

requests that were not underwritten according to

established standards or received less favorable terms,

the examiner should select additional commercial loans,

where applicants are members of the same prohibited

basis group and select similarly situated control group

credit requests in order to determine whether there is a

pattern or practice of discrimination. These additional

files should be selected based on the specific applicant

circumstance(s) that appeared to have been viewed

differently by lending personnel on a prohibited basis.

d. If there are not enough similarly situated applicants for

comparison in the original sample period to draw a

reasonable conclusion, the examiner should expand the

sample period. The expanded sample period should

generally not go beyond the date of the prior examination.

Sampling Guidelines

a. Generally, the task of selecting an appropriate expanded

sample of prohibited basis and control group applications

for commercial loans will require examiner judgment.

The examiner should select a sample that is large enough

to be able to draw a reasonable conclusion.

b. The examiner should first select from the applications that

were acted on during the initial sample period, but were

not included in the initial sample, and select applications

from prior time periods as necessary.

c. The expanded sample should include both approved and

denied, prohibited basis and control group applications,

where similar credit was requested by similar enterprises

for similar purposes.

G. Analysis of Potential Discriminatory “Redlining”

Overview: For purposes of this analysis, traditional “redlining”

is a form of illegal disparate treatment in which an institution

provides unequal access to credit, or unequal terms of credit,

because of the race, color, national origin, or other prohibited

characteristic(s) of the residents of the area in which the credit

seeker resides or will reside or in which the residential

property to be mortgaged is located. Redlining may also

include “reverse redlining,” the practice of targeting certain

borrowers or areas with less advantageous products or services

based on prohibited characteristics.

The redlining analysis may be applied to determine whether,

on a prohibited basis:

• an institution fails or refuses to extend credit in certain

areas;

• an institution targets certain borrowers or certain areas

with less advantageous products:

• an institution makes loans in such an area but at a

restricted level or upon less-favorable terms or conditions

as compared to contrasting areas; or

• an institution omits or excludes such an area from efforts

to market residential loans or solicit customers for

residential credit.

This guidance focuses on possible discrimination based on

race or national origin. The same analysis could be adapted

to evaluate relative access to credit for areas of geographical

concentration on other prohibited bases — for example,

age.

NOTE: It is true that neither the Equal Credit Opportunity Act

(ECOA) nor the Fair Housing Act (FHAct) specifically uses

the term “redlining.” However, federal courts as well as

agencies that have enforcement responsibilities for the FHAct,

have interpreted it as prohibiting institutions from having

different marketing or lending practices for certain

geographic areas, compared to others, where the purpose or

effect of such differences would be to discriminate on a

prohibited basis. Similarly, the ECOA would prohibit treating

applicants for credit differently on the basis of differences in

the racial or ethnic composition of their respective

neighborhoods.

Like other forms of disparate treatment, redlining can be

proven by overt or comparative evidence. If any written or

oral policy or statement of the institution (see risk factors R6-

10 in Part I, above) suggests that the institution links the racial

or national origin character of an area with any aspect of

access to or terms of credit, the examiners should refer to the

guidance in Section B of this Part III, on documenting and

evaluating overt evidence of discrimination.

Overt evidence includes not only explicit statements, but

also any geographical terms used by the institution that

would, to a reasonable person familiar with the community

in question, connote a specific racial or national origin

character. For example, if the principal information

conveyed by the phrase “north of 110th Street” is that the

indicated area is principally occupied by Hispanics, then a

policy of not making credit available “north of 110th Street”

is overt evidence of potential redlining on the basis of

national origin.

Overt evidence is relatively uncommon. Consequently, the

redlining analysis usually will focus on comparative

evidence (similar to analyses of possible disparate treatment

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.20 FDIC Consumer Compliance Examination Manual – March 2021

of individual customers) in which the institution’s treatment

of areas with contrasting racial or national origin characters

is compared.

When the scoping process (including consultation within

an agency as called for by agency procedures) indicates

that a redlining analysis should be initiated, examiners

should complete the following steps of comparative

analysis:

1. Identify and delineate any areas within the institution’s

CRA assessment area and reasonably expected market

area for residential products that have a racial or

national origin character;

2. Determine whether any minority area identified in Step 1

appears to be excluded, under-served, selectively

excluded from marketing efforts, or otherwise less-

favorably treated in any way by the institution;

3. Identify and delineate any areas within the institution’s

CRA assessment area and reasonably expected market

area for residential products that are non-minority in

character and that the institution appears to treat more

favorably;

4. Identify the location of any minority areas located just

outside the institution’s CRA assessment area and market

area for residential products, such that the institution may

be purposely avoiding such areas;

5. Obtain the institution’s explanation for the apparent

difference in treatment between the areas and evaluate

whether it is credible and reasonable; and

6. Obtain and evaluate other information that may support or

contradict interpreting identified disparities to be the result

of intentional illegal discrimination.

These steps are discussed in detail below.

Using Information Obtained During Scoping

Although the six tasks listed are presented below as

examination steps in the order given above, examiners should

recognize that a different order may be preferable in any given

examination. For example, the institution’s explanation (Step

5) for one of the policies or patterns in question may already

be documented in the CRA materials reviewed (Step 1) and

the CRA examiners may already have verified it, which may

be sufficient for purposes of the redlining analysis.

As another example, as part of the scoping process, the

examiners may have reviewed an analysis of the geographic

distribution of the institution’s loan originations with respect

to the racial and national origin composition of census tracts

within its CRA assessment or residential market area. Such

analysis might have documented the existence of significant

discrepancies between areas, by degree of minority

concentration, in loans originated (risk factor R1),

approval/denial rates (risk factor R2), and/or rates of denials

because of insufficient collateral (risk factor R3). In such a

situation in which the scoping process has produced a reliable

factual record, the examiners could begin with Step 5

(obtaining an explanation) of the redlining analysis below.

In contrast, when the scoping process only yields partial or

questionable information, or when the risk factors on which

the redlining analysis is based on complaints or allegations

against the institution, Steps 1-4 must be addressed.

Comparative analysis for redlining

Step 1. Identify and delineate any areas within the

institution’s CRA assessment area and reasonably expected

market area for residential products that are of a racial or

national origin minority character.

NOTE: The CRA assessment area can be a convenient unit

for redlining analysis because information about it typically

already is in hand. However, the CRA assessment area may

be too limited. The redlining analysis focuses on the

institution’s decisions about how much access to credit to

provide to different geographical areas. The areas for which

those decisions can best be compared are areas where the

institution actually marketed and provided credit and where

it could reasonably be expected to have marketed and

provided credit. Some of those areas might be beyond or

otherwise different from the CRA assessment area.

If there are no areas identifiable for their racial or national

origin minority character within the institution’s CRA

assessment area or reasonably expected market area for

residential products, a redlining analysis is not appropriate.

(If there is a substantial but dispersed minority population,

potential disparate treatment can be evaluated by a routine

comparative file review of applicants.)

This step may have been substantially completed during

scoping, but unresolved matters may remain. (For

example, several community spokespersons may allege that

the institution is redlining, but disagree in defining the

area). The examiners should:

a. Describe as precisely as possible why a specific area is

recognized in the community (perceptions of residents,

etc.) and/or is objectively identifiable (based on census

or other data) as having a particular racial or national

origin minority character.

• The most obvious identifier is the predominant race

or national origin of the residents of the area.

Examiners should document the percentages of

racial or national origin minorities residing within

the census tracts that make up the area. Analyzing

racial and national origin concentrations in quartiles

(such as 0 to <=25%, >25% to < = 50%, >50% to <=

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FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.21

75%, and >75%) or based on majority concentration

(0 to <=50%, and >50%) may be helpful. However,

examiners should bear in mind that it is illegal for

the institution to consider a prohibited factor in any

way. For example, an area or neighborhood may

only have a minority population of 20%, but if the

area’s concentration appears related to lending

practices, it would be appropriate to use that area’s

level of concentration in the analysis. Contacts with

community groups can be helpful to learn whether

there are such subtle features of racial or ethnic

character within a particular neighborhood.

• Geographical groupings that are convenient for CRA

may obscure racial patterns. For example, an

underserved, low-income, predominantly minority

neighborhood that lies within a larger low-income

area that primarily consisted of non-minority

neighborhoods may seem adequately served when

the entire low-income area is analyzed as a unit.

However, a racial pattern of underservice to minority

areas might be revealed if the low-income minority

neighborhood shared a border with an underserved,

middle-income, minority area and those two

minority areas were grouped together for purposes of

analysis.

b. Describe how the racial or national origin character

changes across the suspected redlining area’s

various boundaries.

c. Document or estimate the demand for credit, within the

minority area. This may include the applicable

demographics of the area, including the percentage of

homeowners, the median house value, median family

income, or the number of small businesses, etc. Review

the institution’s non-originated loan applications from

the suspected redlined areas. If available, review

aggregate institution data for loans originated and

applications received from the suspected redlined areas.

Community contacts may also be helpful in determining

the demand for such credit. If the minority area does not

have a significant amount of demand for such credit, the

area is not appropriate for a redlining analysis.

Step 2. Determine whether any minority area identified in

Step 1 is excluded, under-served, selectively excluded from

marketing efforts, or otherwise less-favorably treated in

any way by the institution.

The examiners should begin with the risk factors identified

during the scoping process. The unfavorable treatment may

have been substantially documented during scoping and needs

only to be finished in this step. If not, this step will verify and

measure the extent to which HMDA data show the minority

areas identified in Step 1 to be underserved and/or how the

institution’s explicit policies treat them less favorably.

a. Review prior CRA lending test analyses to learn whether

they have identified any excluded or otherwise under-

served areas or other significant geographical disparities in

the institution’s lending. Determine whether any of those

are the minority areas identified in Step 1.

b. Learn from the institution itself whether, as a matter of

policy, it treats any separate or distinct geographical areas

within its marketing or service area differently from other

areas. This may have been done completely or partially

during scoping analysis related to risk factors R5-R9.

The differences in treatment can be in marketing,

products offered, branch operations (including the

services provided and the hours of operation), appraisal

practices, application processing, approval requirements,

pricing, loan conditions, evaluation of collateral, or any

other policy or practice materially related to access to

credit. Determine whether any of those less-favored areas

are the minority areas identified in Step 1.

c. Obtain from the institution: (i) its reasons for such

differences in policy, (ii) how the differences are

implemented, and (iii) any specific conditions that must

exist in an area for it to receive the particular treatment

(more favorable or less favorable) that the institution has

indicated.

Step 3. Identify and delineate any areas within the

institution’s CRA assessment area and reasonably

expected market area for residential products that are

non-minority in character and that the institution appears

to treat more favorably.

To the extent not already completed during scoping:

a. Document the percentages of control group and of

racial or national origin minorities residing within the

census tract(s) that comprise(s) the non-minority area.

b. Document the nature of the housing stock in the

area.

c. Describe, to the extent known, how the institution’s

practices, policies, or its rate of lending change

from less-to more-favorable as one leaves the

minority area at its various boundaries. (Examiners

should be particularly attentive to instances in

which the boundaries between favored and

disfavored areas deviate from boundaries the

institution would reasonably be expected to follow,

such as political boundaries or transportation

barriers.)

d. Examiners should particularly consider whether, within

a large area that is composed predominantly of racial or

national origin minority households, there are enclaves

that are predominantly non-minority or whether, along

the area’s borders, there are irregularities where the

IV. Fair Lending — Fair Lending Laws and Regulations

IV – 1.22 FDIC Consumer Compliance Examination Manual – March 2021

non- minority group is predominant. As part of the

overall comparison, examiners should determine

whether credit access within those small non-minority

areas differs from credit access in the larger minority

area.

Step 4. Identify the location of any minority areas located

just outside the institution’s CRA assessment area and

market area for residential products, such that the

institution may be purposely avoiding such areas.

Review the analysis from prior CRA examinations of

whether the assessment area appears to have been influenced

by prohibited factors. If there are minority areas that the

institution excluded from the assessment area improperly,

consider whether they ought to be included in the redlining

analysis. Analyze the institution’s reasonably expected

market area in the same manner.

Step 5. Obtain the institution’s explanation for the

apparent difference in treatment between the areas and

evaluate whether it is credible and reasonable.

This step completes the comparative analysis by soliciting

from the institution any additional information not yet

considered by the examiners that might show that there is a

nondiscriminatory explanation for the apparent disparate

treatment based on race or ethnicity.

For each matter that requires explanation, provide the

institution full information about what differences appear to

exist in how it treats minority and non-minority areas, and how

the examiners reached their preliminary conclusions at this

stage of the analysis.

a. Evaluate whether the conditions identified by the

institution in Step 2 as justifying more favorable

treatment pursuant to institutional policy existed

in minority neighborhoods that did not receive

the favorable treatment called for by institutional

policy. If there are minority areas for which

those conditions existed, ask the institution to

explain why the areas were treated differently

despite the similar conditions.

b. Evaluate whether the conditions identified by the

institution in Step 2 as justifying less favorable treatment

pursuant to institutional policy existed in non-minority

neighborhoods that received favorable treatment

nevertheless. If there are non-minority areas for which

those conditions existed, ask the institution to explain

why those areas were treated differently, despite the

similar conditions.

c. Obtain explanations from the institution for any apparent

differences in treatment observed by the examiners but

not called for by the institution’s policies:

• If the institution’s explanation cites any specific

conditions in the non-minority area(s) to justify more

favorable treatment, determine whether the minority

area(s) identified in Step 1 satisfied those conditions.

If there are minority areas for which those conditions

existed, ask the institution to explain why the areas

were treated differently despite the similar conditions.

• If the institution’s explanation cites any specific

conditions in the minority area(s) to justify less

favorable treatment, determine whether the non-

minority area(s) had those conditions. If there are

non-minority areas for which those conditions existed,

ask the institution to explain why those areas were

treated differently, despite the similar conditions.

d. Evaluate the institution’s responses by applying

appropriate principles selected from the Appendix on

Evaluating Responses to Evidence of Disparate

Treatment.

Step 6. Obtain and evaluate specific types of other

information that may support or contradict a finding of

redlining.

As a legal matter, discriminatory intent can be inferred

simply from the lack of a legitimate explanation for clearly

less- favorable treatment of racial or national origin

minorities. Nevertheless, if the institution’s explanations do

not adequately account for a documented difference in

treatment, the examiners should consider additional

information that might support or contradict the

interpretation that the difference in treatment constituted

redlining.

a. Comparative file review. If there was a comparative

file review conducted in conjunction with the

redlining examination, review the results; or, if it is

necessary and feasible to do so to clarify what appears

to be discriminatory redlining, compare denied

applications from within the suspected redlining area

to approved applications from the contrasting area.

• Learn whether there were any denials of

fully qualified applicants from the

suspected redlining area. If so, that may

support the view that the institution was

avoiding doing business in the area.

• Learn whether the file review identified instances of

illegal disparate treatment against applicants of the

same race or national origin as the suspected

redlining area. If so, that may support the view that

the institution was avoiding doing business with

applicants of that group, such as the residents of the

suspected redlining area. Learn whether any such

identified victims applied for transactions in the

suspected redlining area.

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FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.23

• If there are instances of either of the above, identify

denied non-minority residents, if any, of the

suspected redlining area and review their

application files to learn whether they appear to

have been treated in an irregular or less favorable

way. If so, that may support the view that the

character of the area rather than of the applicants

themselves appears to have influenced the credit

decisions.

• Review withdrawn and incomplete applications for

the suspected redlining area, if those can readily be

identified from the HMDA-LAR, and learn whether

there are reliable indications that the institution

discouraged those applicants from applying. If so,

that may support the view that the institution was

avoiding conducting business in the area and may

constitute evidence of a violation of Section

1002.4(b) of Regulation B. Conversely, if the

comparisons of individual transactions show that

the institution treated minority and non-minority

applicants within and outside the suspected

redlining area similarly, that tends to contradict the

conclusion that the institution avoided the areas

because it had minority residents.

b. Interviews of third parties. The perspectives of third

parties will have been taken into account to some degree

through the review of available materials during scoping.

Later in the examination, in appropriate circumstances,

information from third parties may help determine

whether the institution’s apparent differences in treatment

of minority and non-minority areas constitute redlining.

• Identify persons (such as housing or credit counselors,

home improvement contractors, or real estate and

mortgage brokers) who may have extensive

experience dealing with credit applicants from the

suspected redlined area.

• After obtaining appropriate authorization and

guidance from your agency, interview those persons

to learn of their first-hand experiences related to:

o oral statements or written indications by an

institution’s representatives that loan applications

from a suspected redlined area were discouraged;

o whether the institution treated applicants from

the suspected redlining area as called for in its

own procedures (as the examiners understand

them) and/or whether it treated them similarly to

applicants from non-minority areas (as the

examiners are familiar with those transactions);

o any unusual delays or irregularities in loan

processing for transactions in the suspected

redlining area; and

o differences in the institution’s pricing, loan

conditions, property valuation practices, etc., in

the suspected redlining area compared to

contrasting areas.

Also, learn from the third parties the names of any

consumers they described as having experienced the

questionable behavior recounted by the third party, and

consider contacting those consumers.

If third parties witnessed specific conduct by the institution

that indicates the institution wanted to avoid business from

the area or prohibited basis group in question, this would

tend to support interpreting the difference in treatment as

intended. Conversely, if third parties report proper treatment

or positive actions toward such area or prohibited basis

group, this would tend to contradict the view that the

institution intended to discriminate.

c. Marketing. A clear exclusion of the suspected redlining

area from the institution’s marketing of residential loan

products supports the view that the institution did not want

to do business in the area. Marketing decisions are

affirmative acts to include or exclude areas. Disparities in

marketing between two areas may reveal that the

institution prefers one to the other. If sufficiently stark

and supported by other evidence, a difference in

marketing to racially different areas could itself be treated

as a redlining violation of the Fair Housing Act. Even

below that level of difference, marketing patterns can

support or contradict the view that disparities in lending

practices were intentional.

• Review materials that show how the institution has

marketed in the suspected redlined area and in non-

minority areas. Begin with available CRA materials

and discuss the issues with CRA examiners, then

review other materials as appropriate. The materials

may include, for example, the institution’s guidance

for the geographical distribution of pre-approved

solicitations for credit cards or home equity lines of

credit, advertisements in local media or business or

telephone directories, business development calls to

real estate brokers, and calls by telemarketers.

e. Peer performance. Market share analysis and other

comparisons to competitors are insufficient by

themselves to prove that an institution engaged in illegal

redlining. By the same token, an institution cannot

justify its own failure to market or lend in an area by

citing other institutions’ failures to lend or market there.

However, an institution’s inactivity in an underserved

area where its acknowledged competitors are active

would tend to support the interpretation that it intends to

avoid doing business in the area. Conversely, if it is as

active as other institutions that would suggest that it

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IV – 1.24 FDIC Consumer Compliance Examination Manual – March 2021

intends to compete for, rather than avoid, business in the

area.

• Develop a list of the institution’s competitors.

• Learn the level of lending in the suspected

redlining area by competitors. Check any public

evaluations of similarly situated competitors

obtained by the CRA examiners as part of

evaluating the performance context or obtain such

evaluations independently.

f. Institution’s record. Request from the institution

information about its overall record of serving or

attempting to serve the racial or national origin

minority group with which the suspected redlining area

is identified. The record may reveal intent to serve

that group that tends to contradict the view that the

institution intends to discriminate against the group.

NOTE: For any information that supports interpreting

the situation as illegal discrimination, obtain and

evaluate an explanation from the institution as called

for in Part IV. If the institution’s explanation is that the

disparate results are the consequence of a specific,

neutral policy or practice that the institution applies

broadly, such as not making loans on homes below a

certain value, review the guidance in the Special

Analyses section of the Appendix under

Disproportionate Adverse Impact Violations and consult

agency managers.

H. Analysis of Potential Discriminatory Marketing

Practices.

When scoping identifies significant risk factors (M1-M7)

related to marketing, examiners should consult their agency’s

supervisory staff and experts about a possible marketing

discrimination analysis. If the supervisory staff agrees to

proceed, the examiners should collect information as follows:

Step 1. Identify the institution’s marketing initiatives.

a. Pre-approved solicitations

• Determine whether the institution sends out pre-

approved solicitations:

° For home purchase loans,

° For home improvement loans, or

° For refinance loans.

• Determine how the institution selects recipients for

such solicitations

° Learn from the institution its criteria for such

selections.

° Review any guidance or other information the

institution provided credit reporting companies or

other companies that supply such lists.

b. Media Usage

• Determine in which newspapers and broadcast media

the institution advertises.

° Identify any racial or national origin identity

associated with those media.

° Determine whether those media focus on

geographical communities of a particular racial or

national origin character.

• Learn the institution’s strategies for geographic and

demographic distribution of advertisements.

• Obtain and review copies of the institution’s printed

advertising and promotional materials.

• Determine what criteria the institution communicates

to media about what is an attractive customer or an

attractive area to cultivate business.

• Determine whether advertising and marketing are the

same to racial and national origin minority areas as

compared to non-minority areas.

c. Self-produced promotional materials

• Learn how the institution distributes its own

promotional materials, both methods and geographical

distribution.

• Learn what the institution regards as the target

audience(s) for those materials.

d. Realtors, brokers, contractors, and other intermediaries

• Determine whether the institution solicits business

from specific realtors, brokers, home improvement

contractors, and other conduits.

o Learn how the institution decides which

intermediaries it will solicit.

o Identify the parties contacted and determine the

distribution between minority and non-minority

areas.

o Obtain and review the types of information the

institution distributes to intermediaries.

o Determine how often the institution contacts

intermediaries.

o Determine what criteria the institution

communicates to intermediaries about the type

of customers it seeks or the nature of the

geographic areas in which it wishes to do

business.

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FDIC Consumer Compliance Examination Manual – March 2021 IV – 1.25

e. Telemarketers or predictive dialer programs

• Learn how the institution identifies which consumers

to contact, and whether the institution sets any

parameters on how the list of consumers is compiled.

Step 2. Determine whether the institution’s activities show a

significantly lower level of marketing effort toward minority

areas or toward media or intermediaries that tend to reach

minority areas.

Step 3. If there is any such disparity, document the

institution’s explanation for it.

For additional guidance, refer to Part C of the Special Analyses

section in the Appendix.

I. Credit Scoring.

If the scoping process results in the selection of a focal point

that includes a credit or mortgage scored loan product, refer

to the Considering Automated Underwriting and Credit

Scoring section of the Appendix.

If the institution utilizes a credit scoring program which

scores age for any loan product selected for review in the

scoping stage, either as the sole underwriting determinant or

only as a guide to making loan decisions, refer to Part E of

the Considering Automated Underwriting and Credit

Scoring section of the Appendix.

J. Disparate Impact Issues.

These procedures have thus far focused primarily on

examining comparative evidence for possible unlawful

disparate treatment. Disparate impact has been described

briefly in the Introduction. Whenever an examiner

believes that a particular policy or practice of an institution

appears to have a disparate impact on a prohibited basis,

the examiner should refer to Part A of the Special Analyses

section of the Appendix or consult with agency supervisory

staff for further guidance.

Part IV — Obtaining and Evaluating Responses

From the Institution and Concluding the

Examination

Step 1. Present to the institution’s management for

explanation:

a. Any overt evidence of disparate treatment on a prohibited

basis.

b. All instances of apparent disparate treatment (e.g.,

overlaps) in either the underwriting of loans or in loan

prices, terms, or conditions.

c. All instances of apparent disparate treatment in the form

of discriminatory steering, redlining, or marketing

policies or practices.

d. All instances where a denied prohibited basis applicant

was not afforded the same level of assistance or the same

benefit of discretion as an approved control group

applicant who was no better qualified with regard to the

reason for denial.

e. All instances where a prohibited basis applicant received

conspicuously less favorable treatment by the institution

than was customary from the institution or was required

by the institution’s policy.

f. Any statistically significant average difference in either

the frequency or amount of pricing disparities between

control group and prohibited basis group applicants.

g. Any evidence of neutral policies, procedures or practices

that appear to have a disparate impact or effect on a

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.

a. Do not speculate or assume that the institution’s

decision- maker had specific intentions or

considerations in mind when he or she took the actions

being evaluated. Do not, for example, conclude that

because you have noticed a legitimate,

nondiscriminatory reason for a denial (such as an

applicant’s credit weakness), that no discrimination

occurred unless it is clear that, at the time of the denial,

the institution actually based the denial on that reason.

b. Perform follow-up file reviews and comparative

analyses, as necessary, to determine the accuracy and

credibility of the institution’s explanations.

c. Refer to Evaluating Responses to Evidence of

Disparate Treatment in the Appendix for guidance as

to common types of responses.

d. Refer to the Disproportionate Adverse Impact

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IV – 1.26 FDIC Consumer Compliance Examination Manual – March 2021

Violations portion of the Special Analyses section of

the Appendix for guidance on evaluating the

institution’s responses to apparent disparate impact.

Step 4. If, after completing Steps 1–3 above, you conclude

that the institution has failed to adequately demonstrate

that one or more apparent violations had a legitimate

nondiscriminatory basis or were otherwise lawful, prepare

a documented list or discussion of violations, or a draft

examination report, as prescribed by agency directives.

Step 5. Consult with agency supervisory staff regarding

whether (a) any violations should be referred to the

Departments of Justice or Housing and Urban

Development and (b) enforcement action should be

undertaken by your agency.