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Side by Side: A Guide to Fair Lending

FIL-36-96 Fair Lending Guide Regional Field Offices For ease of printing a PDF version of Side By Side: A Guide to Fair Lending is available (159 Kb PDF File - PDF Help). FOREWORD The Federal Deposit Insurance Corporation recognizes the efforts undertaken by many financial institutions to improve fair lending performance. Every day our examiners and community affairs staff work with compliance officers, loan officers and others who want to ensure equal opportunity in lending. Although few lenders believe that intentional discrimination is prevalent, we know that they all share a genuine concern about the other more subtle or inadvertent forms of discrimination. People treat other people differently and differences in treatment can lead to illegal discrimination. We are also aware of the questions asked by lenders when they begin to address this concern. Does it happen here? How do we know? What can we do? In this guide, which we first distributed in August of 1994, we provide alternative means that an institution may use to discover uneven customer service or inconsistent lending practices that may be discriminatory. This guide is not about finding discrimination, that is, violations of the fair lending laws. It's about tools that a lender can use to compare the treatment of loan applicants, identify differences and correct potential problems. Financial institutions may decide to use other methods or take a different approach to those we outline here. The process is not mandatory nor are the tools that are discussed in this guide all inclusive. A self-analysis program of detecting and preventing potentially discriminatory practices should not be undertaken to placate regulators or others. Instead, it should be used to help assure equal access to loans. We encourage institutions to employ whatever methods may work best for them to detect and prevent lending discrimination. The Federal Deposit Insurance Corporation wants to help financial institutions seek ways to know whether discrimination occurs. We have distributed over 35,000 copies of this guide to financial institutions -- compliance officers and senior executives --, to community organizations, and to others. The guide was originally developed to provide a place to begin, take some of the mystery out of the process, and help answer some of the more basic questions. Based on the demand for the guide, we believe the procedures and processes described herein continue to be appropriate tools for financial institutions. Carmen J. Sullivan Director Division of Compliance and Consumer Affairs TABLE OF CONTENTS 1 INTRODUCTION 3 PART ONE: PRE-APPLICATION TESTING 4 WHAT IS PRE-APPLICATION TESTING? Paired Testing Multi-layered Testing Complaint Testing Self-Testing or Contract Testing 7 PLANNING THE TEST Selecting the Testers Training the Testers Providing Tester Identities 10 CONDUCTING THE TEST Maintaining Confidentiality & Objectivity Following Test Instructions Interviewing Techniques Scheduling the Test Documenting the Test 13 EVALUATING THE TEST Debriefing the Testers Completing Report Forms Analyzing the Results Addressing Lender Concerns Correcting Discriminatory Practices 17 PART TWO: A COMPARATIVE ANALYSIS OF LOAN FILES 18 PLANNING THE ANALYSIS Selecting the Target Group Selecting the Control Group Creating the Sample Determining the Sample Size 20 COMPARING THE FILES Creating a Comparison Spreadsheet Identifying Exceptions to Policy or Standard Practice Identifying Unequal Treatment 23 EVALUATING THE RESULTS Identifying Technical and Substantive Violations Identifying Types of Discrimination Identifying a Pattern or Practice Correcting Discriminatory Practices 26 PART THREE: OTHER GUIDES TO FAIR LENDING How to Evaluate and Improve Fair Lending Performance 34 PART FOUR: ENFORCEMENT ACTIONS AND REMEDIAL MEASURES Excerpts from the Interagency Policy Statement on Discrimination in Lending 39 CONCLUSION A Final Word 41 APPENDIX A: TESTER IDENTITY 45 APPENDIX B: LENDING GLOSSARY FOR TESTERS 49 APPENDIX C: TESTING REPORT FORM 51 APPENDIX D: MORTGAGE LENDING DECISION ANALYSIS WORKSHEET 55 ACKNOWLEDGEMENT AND SELECTED REFERENCES