The
Interagency Policy Statement on Discrimination in Lending offers
guidance on the meaning of a pattern or practice. The Policy Statement states
that "repeated, intentional, regular, usual, deliberate, or
institutionalized practices will almost always constitute a pattern
or practice" of lending discrimination but "isolated, unrelated, or
accidental occurrences will not." In assessing whether a
pattern or practice exists, the OCC considers the totality of
circumstances, including the following
factors:
- Whether the
conduct appears to be grounded in a written or unwritten policy or
established practice that is discriminatory in purpose or
effect.
- Whether there
is evidence of similar conduct by a bank toward more than one
applicant.
- Whether the
conduct has some common source or cause within the bank's
control.
- The
relationship of the instances of conduct to one
another.
- The
relationship of the number of instances of conduct to the bank's
total lending activity.
This list of factors is not exhaustive and whether the OCC
finds evidence of a pattern or practice depends on the egregiousness
of the facts and circumstances involved. Each inquiry is intensively
fact-specific and there is no minimum number of violations that will
trigger a finding of a pattern or practice of
discrimination.
The term
"pattern or practice" is not defined in the FHA but has generally
been interpreted to mean that the discrimination must not be
isolated, sporadic, or accidental. Also, while there is no
minimum number of incidents that must be proven as a prerequisite to
finding a pattern or practice of discrimination, a party does not
have to discriminate consistently to be engaging in a pattern or
practice.
What the facts
in the judicial decisions and the examples in the Policy Statement
indicate, however, is that a "pattern or practice" involves some
degree of action or conduct toward a protected person. In particular, the Policy
Statement specifically refers to a lender's "conduct" in describing
relevant factors to a "pattern or practice"
determination.
Even in the
absence of a discriminatory policy, evidence of a contractor's
discriminatory actions may still affect the bank when the bank hires
the contractor to act as the bank's agent. According to agency law, a
principal generally is liable for the acts of its agents. Thus, if the contractor's
actions constitute a pattern or practice of discrimination (even if
the contractor alleged that he or she followed nondiscriminatory
criteria), the bank may be liable as principal for those actions.
The fact that a single
agent acted without express direction by the principal should not
preclude a finding a liability.
Under the FHA,
which protects persons from discriminatory housing treatment that is
about to occur, a discriminatory policy (even if not acted on) could
nevertheless signal the likelihood of imminent discriminatory
treatment and could provide a basis for a charge by the Secretary of
HUD. In accordance with
Executive Order 12892, the OCC must notify HUD whenever it has
received information "suggesting a violation" of the FHA and the OCC
must forward such information to the DOJ if it "indicates a possible
pattern or practice."
Where there is
an openly declared or otherwise manifested policy that discriminates
on a prohibited basis, it is not necessary to prove that the policy
was consistently followed in order to believe that a pattern or
practice existed. The
written appraisal report guidelines of the bank did contain
discriminatory familial status considerations. Moreover, under the FHA, any
consideration by a lender or appraiser of a prohibitive factor such
as familial status constitutes discrimination. Although the appraiser failed
to provide a designated park quality rating as detailed by the
guidelines, this does not alter the fact that he applied familial
status considerations as one of the stated reasons for discounting
the properties. While
the appraiser had the latitude under the law to consider legitimate
market and economic factors in appraising particular properties, any
consideration of a prohibited factor such as familial status (rather
than fair market value derived from comparable sales) is sufficient
reason to believe that discrimination
occurred.
Conclusion
The ombudsman
concluded that there was sufficient reason to believe that a
violation of the FHA occurred and as such, remanded to the OCC's
supervisory office the matter of notification to the U.S. Department
of Housing and Urban Development and a referral to the U.S.
Department of Justice.
Background
A Competitive
Equality Banking Act (CEBA) institution filed a formal appeal with
the ombudsman's office concerning potential violations of the Equal
Credit Opportunity Act (ECOA).
The potential violations involved possible disparate
treatment on the basis of national origin. The institution received
correspondence stating the Office of the Comptroller of the Currency
(OCC) had determined that it has reason to believe the bank engaged
in a pattern or practice of violating the ECOA and Regulation B by
treating Spanish-language applicants less favorably than similarly
situated English-language applicants involving a co-branded credit
card. Specific
practices included holding Spanish-language customers to a different
standard of approval, excluding them from certain promotional credit
services commonly offered to English-language customers, and
assigning them lower credit limits.
In the early
1990s, the bank established a co-branding credit card relationship
with a company whereby the bank offered a credit card through
"take-one" applications in company stores. The bank's initial program
offered applications in the English language only. However, the following year,
the bank began offering Spanish-language application forms in order
to reach out to predominately Spanish-speaking communities.
In order to
keep track of the Spanish-language program's performance and to
facilitate record-keeping requirements, the bank created a separate
sub-file of the co-branded portfolio in its processing systems. At the time the
Spanish-language program was started, the underwriting standards
were no less favorable than those used to underwrite the
English-language accounts.
The terms and conditions of both credit card groups,
including fees, charges, and credit line assignments, were the same
for both Spanish- and English-speaking account
holders.
The only
distinction between the handling of accounts originated through
Spanish- and English-language applications was that the sub-file of
accounts generated from the Spanish-language applications was placed
on a marketing "exclusion" list. Any accounts on this
particular list did not receive marketing mailings for special
balance consolidation offers or similar promotional programs. Bank management felt that
these customers had made a clear election to be treated as
Spanish-language applicants, and they therefore might take offense
at periodically receiving promotional materials in the English
language. Since the
number of accounts generated from the Spanish-language application
process was relatively low, the bank also felt that they could not
justify the additional business expense of having promotional
materials translated into the Spanish language for the relatively
small group of account holders (less than
2,000).
Periodically,
it was the bank's policy to conduct an analysis of each credit card
program in order to evaluate its overall performance and
profitability (i.e., a loss control analysis). The purpose of these
periodic analyses was to identify if underwriting standards and
application processing needed to be changed, based on the
performance of the specific pool. The bank's credit card
portfolio was separated into "sub-files" of various sizes for each
type of co-branding card.
The bank's policy was that it was cost effective to conduct
the loss analysis of the largest sub-file
first.
Accordingly, in
early 1996 the bank conducted an analysis of the English-language
application sub-file.
Consistent with the bank's policy, management did not
review
the Spanish-language sub-file because it was
considered too small.
As a result of the analysis, credit score cutoffs and credit
line assignment matrices for the English language applications were
lowered in an effort to address loss issues. Because the Spanish-language
application sub-file was very small, the bank did not apply the same
underwriting standard changes to the Spanish language generated
account holders. This
change in application processing resulted in unequal treatment of
the Spanish-language application group of customers.
In addition to
the application of different underwriting standards between the
English- and Spanish-language portfolios, disparate treatment was
also found in the differences of the availability of credit-related
programs between the two groups. As a result of management's
original decision to place Spanish-language accounts on their
internal marketing "exclusion" list, many Spanish language account
holders were excluded from certain skip-a-payment and balance
consolidation programs offered to English-applicant account
holders. Because these
programs had an impact on credit terms but were only offered to one
group, the effect was that different services and potentially less
favorable credit terms were provided to cardholders of
Spanish-language origin.
During the
examination, management stated that their practices of disparate
treatment were unintentional and isolated. Upon notification of these
findings, management took actions to cease the potentially
discriminatory practices and address the problem. In particular, all credit
card applications were processed using the same decision tree, all
Spanish- and English-language applications were treated equally in
terms of credit score cutoffs and line assignments, and all
Spanish-language applicant account holders were included in
marketing and special promotion programs. In addition, management
identified those Spanish-language applicants who were improperly
denied credit or given lower credit lines as a result of the
possible disparate treatment.
They subsequently completed the process of offering credit
cards or increasing credit lines to those persons identified as part
of the affected pool.
Management also took steps to correct deficient internal
controls and compliance management weaknesses, which will improve
management oversight.
The OCC
conducted an examination of the bank's compliance with fair lending
statutes. The agency
concluded that there was "reason to believe" that the bank imposed
different credit requirements on applicants based on their national
origin, in violation of ECOA.
The agency stated there was "reason to believe" that the bank
engaged in a pattern or practice of violating ECOA by treating its
Spanish-language applicants and customers less favorably than
similarly situated English-language customers. The supervisory office
concluded that it was therefore obligated to refer this matter to
the U.S. Department of Justice.
The bank
appealed this decision to the ombudsman based on the following
issues:
1. Because of
fewer cardholders and costs involved, it is an industry practice not
to offer sub-file cardholders the same promotional opportunities
that are made available to the main-file cardholders. Therefore, the different
treatment of the Spanish language sub-file did not constitute
disparate treatment or disparate impact and was not a violation of
ECOA.
2. The
potential number of accounts is too small to support a finding of a
pattern or practice of discrimination.
Discussion
While it may
be industry practice to treat an account sub-file differently, this
practice may result in disparate treatment or disparate
impact.
The ECOA, 15
USC 1691(a) prohibits a creditor from discriminating against an
applicant on a prohibited basis regarding any aspect of a credit
transaction. The
implementing regulation 12 CFR 202.4 (Regulation B) defines
prohibited basis as follows:
Prohibited
basis means race, color, religion, national origin, sex, marital
status, or age (provided that the applicant has the capacity to
enter into a binding contract); the fact that all or part of the
applicant's income derives from any public assistance program; or
the fact that the applicant has in good faith exercised any right
under the Consumer Credit Protection Act or any state law upon which
an exemption has been granted by the Board. (12 CFR 202.2
(z))
While ECOA
does not define the term "pattern or practice" the Interagency
Policy Statement on Discrimination in Lending offers guidance on the
meaning of a pattern or practice. The policy statement states
that "repeated, intentional, regular, usual, deliberate, or
institutionalized practices will almost always constitute a pattern
or practice" of lending discrimination but "isolated, unrelated, or
accidental occurrences will not." In assessing whether a
pattern or practice exists, the OCC considers the totality of
circumstances, including the following
factors:
- Whether the
conduct appears to be grounded in a written or unwritten policy or
established practice that is discriminatory in purpose or
effect.
- Whether there
is evidence of similar conduct by a bank toward more than one
applicant.
- Whether the
conduct has some common source or cause within the bank's
control.
- The
relationship of the instances of conduct to one
another.
- The
relationship of the number of instances of conduct to the bank's
total lending activity.
This list of factors is not exhaustive and whether the OCC
finds evidence of a pattern or practice depends on the egregiousness
of the facts and circumstances involved. Each inquiry is intensively
fact-specific and there is no minimum number of violations that will
trigger a finding of a pattern or practice of discrimination. The term "pattern or
practice" is not defined in the ECOA but has generally been
interpreted to mean that the discrimination must not be isolated,
sporadic, or accidental.
Also, while there is no minimum number of incidents that must
be proven as a prerequisite to finding a pattern or practice of
discrimination, a party does not have to discriminate consistently
to be engaging in a pattern or practice.
What the facts
in the judicial decisions and the examples in the policy statement
indicate, however, is that a "pattern or practice" involves some
degree of action or conduct toward a protected person. In particular, the policy
statement specifically refers to a lender's "conduct" in describing
relevant factors to a "pattern or practice"
determination.
Conclusion
The ombudsman
concluded that there was sufficient reason to believe that a
violation of the ECOA occurred and, as such, remanded to the OCC's
supervisory office the matter for referral to the U.S. Department of
Justice.
Appeal
of Potential Violation of the Equal Credit
Opportunity Act (ECOA) and the Fair Housing
Act (FHA)-Disparate Treatment on the Basis of Race and National
Origin - (Third Quarter 1998)
Background
An institution
filed a formal appeal with the ombudsman's office concerning
potential violations of the Equal Credit Opportunity Act (ECOA) and
the Fair Housing Act (FHA).
In addition to the core disagreement with the potential
violations, the appeal also highlighted the bank's concern with the
following:
- Lack of an
acknowledgment of the bank's response to the agency's initial
findings;
- Concerns about
prejudgment by the examination staff; and,
- The impact of
hearsay from former bank employees on the agency's
conclusions.
The potential
violations involved possible disparate treatment on the basis of
race and national origin.
The institution received correspondence stating the Office of
the Comptroller of the Currency (OCC) had determined it had reason
to believe the bank engaged in a pattern or practice of treating
white, Hispanic, and black applicants for home mortgage loans less
favorably than Asian applicants. Beginning in the early
1990s, the bank regularly made home purchase loans through two
channels, a wholesale mortgage division, and the retail loan
department. The
wholesale division generated a significant volume of home purchase
and home refinance loans, primarily referred by brokers, while loans
originated through the retail loan department generated a much lower
volume.
During this
time period, the bank also offered a special "low-documentation"
loan program. The
program characteristics were a low loan-to-value, no requirement of
a social security number or credit history, acceptance of overseas
funds for down payment, nonresident aliens could qualify, and
minimal documentation.
These loans were retained on the bank's
books.
To evaluate
the bank's fair lending performance, the OCC conducted a comparative
file analysis both manually and by statistical modeling. The manual analysis compared
the treatment of Asian applicants with the treatment of white,
Hispanic, and black applicants. The statistical analysis,
which consisted of a legitimate regression model, compared the
treatment of Asian and white applicants. There were an insufficient
number of applications from Hispanics and blacks to permit
statistical analysis of their treatment.
The manual
file analysis showed evidence of discriminatory practices that
indicated that more stringent underwriting standards were applied to
whites, Hispanics, and blacks than to Asians. Differing treatment was
found in the following areas:
- Requiring
asset and income verifications;
- Handling
discrepancies in applications or credit bureau
reports;
- Offering of
counteroffers;
- Reviewing
credit history;
- Handling
applicant occupancy; and
- Handling
related buyers and sellers.
Statistical
analysis, in the form of a regression model, was used to refine and
extend the judgmental analysis. The same conclusions
occurred. The results
identified instances where it appeared Asian applicants were
qualified more frequently than similarly situated non-Asian
applicants. Whites had
largely increased odds of being denied home loans, even after
controlling for other variables in the regression analysis that were
critical to the underwriting process. Subsequent discussions with
officers, employees, and two former employees of the bank failed to
mitigate most of the instances of apparent difference in treatment
identified from the file sample. After evaluating all the
evidence, including the bank's response, the OCC concluded there
remained reason to believe the bank had potentially engaged in a
pattern or practice of discrimination against non-Asian applicants
for home loans.
Therefore, the OCC concluded it was obligated to refer this
matter to the U.S. Department of Justice and to notify the U.S.
Department of Housing and Urban Development.
Discussion
The ECOA, 15
USC 1691(a) prohibits a creditor from discriminating against an
applicant on a prohibited basis regarding any aspect of a credit
transaction. The
implementing regulation 12 CFR 202.4 (Regulation B) defines
prohibited basis as follows:
Prohibited
basis means race, color, religion, national origin, sex, marital
status, or age (provided that the applicant has the capacity to
enter into a binding contract); the fact that all or part of the
applicant's income derives from any public assistance program; or
the fact that the applicant has in good faith exercised any right
under the Consumer Credit Protection Act or any state law upon which
an exemption has been granted by the Board. (12 CFR 202.2
(z))
The Fair
Housing Act (FHA), 42 USC 3605, prohibits a lender from
discriminating on a prohibited basis in a residential real estate
related transaction (including the making of loans) or in the terms
or conditions of the transaction. The implementing regulation,
24 CFR 100.130, states it shall be unlawful for any person or entity
engaged in the making of loans or in the provision of other
financial assistance relating to the purchase, construction,
improvement, repair, or maintenance of dwellings, or which are
secured by residential real estate, to impose different terms or
conditions for the availability of such loans or other financial
assistance because of, among other factors, race and national
origin.
While the ECOA
and the FHA do not define the term "pattern and practice," the
Interagency Policy Statement on Discrimination in Lending offers
guidance on the meaning of a pattern or practice. The policy statement states
that "repeated, intentional, regular, usual, deliberate, or
institutionalized practices will almost always constitute a pattern
or practice" of lending discrimination but "isolated, unrelated, or
accidental occurrences will not." In
assessing whether a pattern or practice exists, the OCC considers
the totality of the circumstances, including the following factors:
- Whether the conduct appears to be
grounded in a written or unwritten policy or established practice
that is discriminatory in purpose or effect.
- Whether there is evidence of similar conduct by a bank toward
more than one applicant.
- Whether the conduct has some common source or cause within the
bank's control.
- The relationship of the instances of conduct to one another.
- The
relationship of the number of instances of conduct to the bank's
total lending activity.
This list of factors is not exhaustive and whether the OCC
finds evidence of a pattern or practice depends on the egregiousness
of the facts and circumstances involved. Each inquiry is intensively
fact-specific and there is no minimum number of violations that will
trigger a finding of a pattern or practice of discrimination. The term "pattern or
practice" is not defined in the ECOA or the FHA but has generally
been interpreted to mean that the discrimination must not be
isolated, sporadic, or accidental. Also, while there is no minimum
number of incidents that must be proven as a prerequisite to
finding a pattern or practice of discrimination, a party does not
have to discriminate consistently to be engaging in a pattern or
practice.
What the facts
in the judicial decisions and the examples in the policy statement
indicate, however, is that a "pattern or practice" involves some
degree of action or conduct toward a protected person. In particular, the policy
statement specifically refers to a lender's "conduct" in describing
relevant factors to a "pattern or practice"
determination.
Conclusion
The ombudsman
reviewed the issues noted in the bank's appeal letter, the bank's
response to the district's initial conclusions, and all relevant
supporting internal and external documents. Discussions were held with
appropriate bank managers and involved OCC staff. Based on this comprehensive
analysis, the ombudsman concluded that there was sufficient reason
to believe that violations of the ECOA and the FHA occurred and, as
such, remanded to the OCC's supervisory office the matter of
notification to the U.S. Department of Housing and Urban Development
and a referral to the U.S. Department of Justice.
While the OCC
supervisory office did not send a written acknowledgment of the
bank's response to the OCC's initial conclusions, that fact alone
did not mean that the additional information supplied by the bank
was not considered in the OCC's final decision to refer the
violations of ECOA and FHA to the Department of Justice. In fact, the ombudsman found
that the bank's response was carefully analyzed and considered in
detail by OCC bank supervisory and enforcement offices prior to
rendering the final decision.
As a result, this issue was not remanded back to the OCC's
bank supervision and enforcement staff for further analysis. However, based on the
concerns identified in the appeal, the OCC will, in the future,
acknowledge initial conclusion submissions. The ombudsman found no
evidence of prejudgment by OCC staff, or any undue reliance on
hearsay from former bank employees at any point in the
decision-making process.