RiskTech Forum

SAS: Disparate Treatment Testing Breakthrough

Posted: 24 October 2005  |  Source: SAS


The federal government has enacted laws and standards making discrimination in lending illegal for a variety of protected class applicants. Key laws are the Fair Housing Act (FHA), the Equal Credit Opportunity Act (ECOA) and the Civil Rights Act of 1866. Enforcement actions and investigations may be conducted by the Department of Justice (DOJ); bank regulatory agencies, including the Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation (FDIC), and Federal Reserve Board (FRB); the Department of Housing and Urban Development (HUD); the Federal Trade Commission (FTC); and state enforcement agencies and attorney generals.

The methods used to establish lending discrimination vary depending upon the type of discrimination being examined. There are three main categories of discrimination — overt discrimination, disparate impact and disparate treatment. Overt discrimination occurs when a prohibited factor (e.g., race) is explicitly considered in a negative context in the underwriting (or pricing) process, and can result in the denial (or higher cost) of credit. Disparate impact occurs when there is evidence that a lender’s policies and practices, although facially neutral, produced discriminatory effects, or “disparately impact” members of a protected class. Disparate treatment is said to occur when there is evidence that the lender intentionally subjected members of a protected group to “disparate treatment” (i.e., different treatment) during the course of the lending transaction.

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