Welcome to Part 4 and the final post in this series addressing the regulatory environment as it relates to fair lending!
In the first three parts, we covered some basic concepts, the importance of statistical evidence, and a deeper look at disparate treatment vs disparate impact. In this part, we'll cover the practical side of distinguishing these two concepts in a bank's examinations.
With disparate impact excised from the OCC and FDIC examination approaches, exams now hinge on disparate treatment, but the use of statistical evidence can blur lines. How do you distinguish these in practice? This post offers a roadmap for lenders, especially community banks, to navigate the shift.
Distinguishing the Theories in Exams
Disparate Treatment in Action: In a nutshell, guidance defines disparate treatment as treating applicants differently based on prohibited bases, provable through comparative evidence. Statistics such as higher minority denial rates trigger further review if unexplained—e.g., a lender approving non-minorities while denying minorities with similar risk profiles. Examiners have used, and will continue to use data during scoping to flag such inconsistencies for review. Again, this is aligned with how fair lending has been evaluated historically.
Disparate Impact: Previously, statistics alone could flag disparate impact risk if a neutral policy (such as a minimum loan amount) disproportionately excluded minorities. With disparate impact removed, this approach is off the table—exams won’t assess business necessity or alternatives unless tied to disparate treatment. Again, actions based on disparate impact alone have been rare in the community bank space, so this change may not be as impactful as observers may believe.
Regulatory Context
Although Executive Order 14281 set this stage for these changes, the agencies have simply aligned their approaches to broaden and focus on disparate treatment, NOT change their fundamental examination processes. Much of the confusion that has been created stems from a misconception that disparate treatment and disparate impact are mutually exclusive. There are not; and in fact, almost universally, they are intertwined. For example, redlining, once more of a disparate impact focus, is now simply framed as disparate treatment issue, with stats used to identify unequal access.
Data Remains Critical
As pointed out earlier in this series, data remains critical to identifying patterns or practices of discrimination, which lies at the heart of a fair lending enforcement action. The examiner’s scoping process guidance specifically directs them to analyze data, such as HMDA for disparities to identify risks. This signifies that all fair lending pressure points clearly remain “on the table.”
Practical Strategies
Preparation for an exam should include ongoing monitoring efforts that are part of the bank’s CMS, well before the examination. Waiting to just prior to an exam to conduct reviews is a very unwise approach. Instead, lenders should be managing risk, and be able to demonstrate such, not that they are just “putting out fires.” The latter approach will quickly erode an examiner’s confidence in the bank’s program and commitment to compliance. Conversely, being able to demonstrate you have evaluated, understand, and are getting ahead of risk will go a long way to ensure a smoother exam process.
Training is also critical, and this should include lending and frontline staff as well as executive management and the Board.
Thank you for joining for this series concerning recent regulatory changes in regard to fair lending!
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Resources:
FDIC changes to compliance manual: https://www.fdic.gov/news/financial-institution-letters/2025/update-fdics-consumer-compliance-examination-manual?source=govdelivery&utm_medium=email&utm_source=govdelivery.
OCC changes: https://occ.gov/news-issuances/bulletins/2025/bulletin-2025-16.html.
Understanding (3) forms of lending discrimination: https://www.premierinsights.com/blog/blog/understanding-the-3-types-of-fair-lending-discrimination.
Executive Order 14821 April 23, 2025: https://www.federalregister.gov/documents/2025/04/28/2025-07378/restoring-equality-of-opportunity-and-meritocracy.
