In this series of posts, we address types of fair lending discrimination that are commonly recognized by the regulatory and enforcement agencies. The points covered are risk areas that are often examined in the course of regulatory reviews. Previously, we’ve covered fees and steering.
It is critical to bear in mind that fair lending laws and regulations are vast and, accordingly, there is almost an infinite number of pressure points. Our goal in this series is simply to draw from our experiences in our fair lending practice and provide information that will assist in reducing risk.
When most people think of fair lending or discrimination, race and ethnicity typically are the first forms to come to mind followed by possibly gender. Other prohibited bases dictated by fair lending laws and regulations often are not given much attention, including age.
Indeed, age as a direct focal point of a regulatory review occurs infrequently in our experience relative to other protected groups. We also do not often see in our analysis of data much that suggests disparate treatment by age. These two points are interesting since information on borrower age is usually readily available for nearly all types of loans.
Although we rarely see age as a primary target of a regulatory inquiry, we have seen a number of situations where discrimination based on age was raised as an issue. It is, therefore, an area of real fair lending risk and one that should not be neglected.
What have created problems for institutions historically have been policies or practices in which age was inadvertently a consideration for particular loan products in terms of the decision, pricing, or other terms and conditions. These could be in the form of an age requirement for a particular product. Another could be a special product offering in which age was a condition. These types of discrepancies, though unintentional, could end up being overt forms of discrimination.
For example, let’s assume a lender offered a “senior citizen discount” for a particular loan product, but classified “senior” as age 55 or over. The regulations allow such only for persons 62 years of age or older. This could be overt discrimination based on age even though the lender did not intend to discriminate.
Another example would be if state law allowed a person to enter into a loan contract for Product A at 21 years of age but the lender had a policy that only persons 25 of age were eligible. Though these things seem straightforward and avoidable, they are very easily overlooked.
Reducing Risk
There are a few things that will help avoid this type of fair lending risk:
- Annual fair lending training is imperative so that lending staff are knowledgeable of fair lending laws and prohibited bases.
- Policies should be reviewed consistently to evaluate fair lending risk.
- Reviews should include software applications used in the loan origination and lending process to include pricing or decisioning type models to the extent these are relied on.
- New product offerings or changes to existing products should involve compliance staff – no exceptions.
- Marketing efforts should be discussed with compliance staff and reviewed prior to implementation.