Fair Lending Appendices Flashcards
1
Q
True or false:
The absence of policies and practices that prevent disparate treatment can itself result in a fair lending violation.
A
False: There is no legal or agency requirement for banks to have policies or practices that prevent disparate treatment. The absences of policies and practices is never, by itself, a violation.
2
Q
What is a self-test?
What type of data does it use?
What is important about the results?
A
Program, practice or study that is designed and used to assess the bank’s compliance with ECOA and FHA.
It creates data and info that is not otherwise available from loan, applications, or other credit records.
The report results are privileged unless a bank voluntarily discloses them or forfeits the privileges’.
3
Q
What is a self-evaluation?
What type of data does it use?
A
Same as a self test, to evaluate a bank’s compliance of fair lending laws.
Does not create new data. uses data from loan applications and other credit records.
4
Q
What should examiners identify when reviewing a customized credit scoring model, scorecard for any product, or credit scoring model for portfolio products? (11)
A
- The # and interrelationship of each model/scorecard applied to each product
- Purpose for each scorecard (approval decision, set credit limits, set pricing, processing requirements)
- Developer for each scorecard (in-house, third party)
- Type and frequency of monitoring reports
- Applicable policies
- Training for applicable employees and third parties
- Actions taken to revalidate/ re-calibrate an model and why
- # of high side and low side overrides for each override type and guidance on overrides.
- All cutoffs used for each score card, reasons for any cutoffs or changes.
- All variables scored for each product and permitted values
- method for disclosing adverse action reasons arising from the model or scorecard.
5
Q
What should examiners identify when reviewing a judgmental underwriting system that includes a standard credit bureau or standard credit score as an underwriting criterion? (4)
A
- vendor of each credit score and any vendor guidance on the usage of the score relied upon
- bank’s basis for using a particular bureau or score, and the cutoff standards for each products underwriting system, reason for cutoffs, and any cutoff changes since LX.
- # of exceptions made to credit score component of underwriting criteria, basis for exceptions, and any guidance given to employees
- types and frequency of monitoring reports
6
Q
What must be disclosed on the Adverse Action notice for an applicant, where a credit score was used to differentiate application processing and the applicant was denied for failure to attain a judgmental underwriting standard, that would not have applied if the applicant had a better credit score?
A
Must disclose the bases on which the applicant failed to attain the credit score required for consideration in the less stringent processing group.
7
Q
When reviewing for disparate treatment in the application of credit scoring programs, what should examiners identify? (4)
A
- controls and policies management has in place to ensure credit scoring models or criteria are not applied in a discriminatory manner.
- if bases for granting credit to control group applicants who are low-side overrides are applicable to any prohibited basis denials whose credit score was equal to or greater than the lowest score among the low-side overrides.
- if bases for denying credit to any prohibited basis applicants who are high-side overrides are applicable to any control group approvals whose credit score is equal to or less than the highest score among the prohibited bases high-side overrides.
- if credit scores are used to segment applicants into groups that receive different processing or underwriting requirements. Perform a comparative file review if needed.
8
Q
What are the two ways a credit scoring system can consider age?
A
- system splits into different scorecards depending on the age of the applicant
- age may be directly scored as a variable.
9
Q
What does regulation B require of all credit scoring systems that consider age? (3)
A
They require initial validation and periodic revalidation to ensure the system is EDDSS
- Empirically derived
- Demonstrably
- Statistically Sound
10
Q
If a credit scoring system splits applications into only two cards, one card covers a wide age range (62 and older), is this system scoring age?
A
No, this system is treated as considering but not scoring age.
11
Q
In an age-split credit scoring system, what is the younger scorecard (applicants under a specific age between 25 and 30) typically used for?
A
To de-emphasize factors such as the number of trade lines, length of employment, and increases negative weight of any derogatory information on the credit report.
12
Q
Is this credit scoring system treated as scoring age?
Age is directly scored as a variable in an age split system
A
Yes
13
Q
Is this credit scoring system treated as scoring age?
Elderly applicants are included in a scorecard with a narrow age range
A
Yes
14
Q
What must a bank ensure regarding elderly applicants if a scorecard scores age directly and meets the EDDSS requirement?
A
Creditor must ensure the age of the elderly applicant is not assigned a negative factor or value.
i.e. a factor, value or weight that is less favorable than the creditor experience warrants or is less favorable than would be assigned to the most favored age group below 62
15
Q
How should examiners evaluate the following response to evidence of disparate treatment: (3)
The employees were unaware of the prohibited basis identity of the applicant
A
- Ask the bank to show that the application was processed in such a way that the employees could not have learned the identity of the applicant
- if GMI is collected or the surname was recognizable as proxy assume employees could have taken those facts into account
- if the racial character of the community is in question, as the bank to provide evidence of how its staff would not know the character of any community in the AA.
16
Q
How should examiners evaluate the following response to evidence of disparate treatment: (4)
The difference in treatment was justified by difference in the applicants (ie applicants are not “similarly situated”)
A
-ask the bank to account for the difference in treatment by pointing out specific differences between the applicants’ qualifications or other factors taken into account. (cannot be a meaningless difference)
- verify not similarly situated explanations for consistency
- Evaluate other not similarly situated explanations by other means.
- Follow up with customer contacts
17
Q
Factors commonly cited to show applicants are not similarly situated fall into two groups, what are they?
A
- factors that can be evaluated by how consistently they are handled in other transactions
- those that cannot be evaluated for consistency.
18
Q
What factors should be evaluated for consistency to show applicants when cited by a bank are not similarly situated? (6)
A
- Customer Relationship
- loan not saleable or insurable
- differences in standards or procedures between branches or underwriters
- differences in applying the same standard (differences in strictness)
- standards or procedures changed during the period reviewed
- Employee misunderstood standard or procedure.
19
Q
When a bank cites customer relationship as an explanation for apparent disparate treatment, how should examiners validate this factor for consistency?
A
-Ask the bank to document that a customer relationship was also sometimes considered to the benefit of prohibited basis applicants and/or the absence worked against control group applicants.
20
Q
When a bank cites loan not saleable or insurable as an explanation for apparent disparate treatment, how should examiners validate this factor for consistency? (2)
A
- if the file review is still in progress, look for loans approved despite the claimed fatal problem.
- Ask the bank to produce the text of the secondary market or insurer’s requirement in question.
21
Q
When a bank cites difference in standards or procedures between branches or underwriters as an explanation for apparent disparate treatment, how should examiners validate this factor for consistency?
A
-ask the bank to provide transactions documenting that each of the branches or underwriters applied its standards/ procedures consistently to both prohibited basis and control group applicants, and that each served similar proportions of the target group.
22
Q
When a bank cites differences in applying the same standard (difference in strictness) as an explanation for disparate treatment, how should examiners validate this factor for consistency?
A
-ask the bank to provide transaction documenting that the stricter employee, branch was strict for both target and control group applicants and that the other was lenient for both groups.
Best evidence: target group who received favorable treatment from the lenient branch and control group applicants who received less favorable treatment from the strict branch.
23
Q
When a bank cites standards or procedures changed during the review period as an explanation for disparate treatment, how should examiners validate this factor for consistency?
A
-ask the bank to provide transactions documenting that during each period the standards were applied consistently to both applicant groups.
24
Q
When a bank cites employee misunderstood standard or procedures as an explanation for disparate treatment, how should examiners validate this factor for consistency?
A
- ask the bank to provide transactions documenting that the misunderstanding influenced both target and control group applications.
- no violation if the misunderstanding is a reasonable mistake.
25
How can examiners validate factors cited for disparate treatment that cannot be validated through consistency? (4)
- if the factor is documented to exist in or be absent from the transactions, as claimed by the bank
- if the factor is one a prudent bank would consider and is consistent with the bank's policies/procedures
- file review found no evidence that the factor is applied selectively
- if the bank's description of the transaction is generally reasonable and consistent.
26
What types of factors cannot be compared for consistency when cited by a bank for apparent disparate treatment? (5)
- unusual underwriting standard
- Close calls
- Character loans
- Accommodation Loan
- Gut feeling
27
When a bank cites unusual underwriting standard as an explanation for disparate treatment, how should examiners validate the response? (2)
- Ask the bank to show the standard is prudent.
- Accept the explanation if the standard is prudent and not inconsistent with other info even if there is no documentation it is used consistently.
28
When a bank cites close call as an explanation for disparate treatment, how should examiners validate the response? (3)
- discretion resulting in differences in underwriting for similar applicants should not be second guessed
- Discretion resulting in differences in underwriting for identical applicants is not an acceptable explanation unless the applicants have different strengths and weaknesses that may be weighed differently by underwriters.
- don't except the explanation if other files reveal strengths and weaknesses are counted or ignored selectively on a prohibited basis.
29
When a bank cites character loan for disparate treatment, how should examiners validate the response?
-expect the bank to identify a specific history or facts that make the applicant treated favorably a better risk than those treated less favorably.
30
When a bank cites accommodation loan for disparate treatment, how should examiners validate the response? (2)
- be skeptical when a bank cites reasons for accommodations that a prudent institution would not value
- Legitimate reasons for an accommodation are not illegal even if they make the loan to an unqualified control group applicant who has an accommodation while denying a loan to a similar target group applicant who does not have one.
- -Accommodations can include: customer is related or referred by an important customer, is a politician or entertainment figure who would bring prestige to the bank, is an employee of an important business customer, etc.
31
When a bank cites gut feeling for disparate treatment, how should examiners validate the response?
- be skeptical when bank's justify based on perception of a customer as it may be linked to a racial or other stereotype that cannot influence credit decisions
- ask what generated the reaction to make them confident or uncomfortable about the customer.
- no discrimination if the reason is creditable and the bank did not apply any factor selectively on a prohibited basis.
32
When should examiners consider contacting customers to verify bank descriptions?
If the bank's explanation of handling a particular transaction is based on consumer traits, actions, or desires not evident from the file.
Such contacts need not be limited to possible victims of discriminations, but can include control group applicants or other witnesses.
33
How should examiners assess descriptive references in bank responses to overt evidence of disparate treatment?
A reference to race, gender, etc. does not constitute a violation if it is merely descriptive (i.e the applicant was young)
Conversely, if the reference reveals the prohibited factor influenced the bank's decisions or the customers behavior, treat the situation as an apparent violation to which the bank must respond.
34
How should examiners assess personal opinions in bank responses to overt evidence of disparate treatment?
If an employee involved in credit availability states unfavorable views based on a prohibited factor but does not explicitly relate those views to credit decisions, review that employee's credit decisions for possible disparate treatment.
With no instances of disparate treatment, treat the employee's views as personal opinion and inform the bank that such views create a risk of future violations.
35
How should examiners assess stereotypes related to credit decisions in bank responses to overt evidence of disparate treatment?
Apparent violation when a prohibited factor influences a credit decision through a stereotype related to creditworthiness. (i.e a single woman could not maintain a large house)
If the stereotype is offered as an explanation for unfavorable treatment it is an apparent violation.
If it is only a general observation, review the employee's credit decisions for possible disparate treatment and inform the bank that such views create a risk of future violations.
36
How should examiners assess an indirect reference to a prohibited factor in bank responses to overt evidence of disparate treatment?
Determine if the terms would be commonly understood as surrogates for prohibited factors. if so treat it as if a prohibited factor was used. (i.e. its too risky to lend north of 110th street)
37
In what scenarios can a bank lawfully use a prohibited factor overtly? (3)
- Special purpose credit program
- Second Review Program
- Affirmative marketing program
38
What is a special purpose credit program (SPCP)?
Program under Regulation B to provide credit to specific groups that is accompanied by a defined and written plan written prior to accepting applications.
39
What 2 elements must be included as part of the written plan for a Special purpose credit program?
The written plan must:
- Demonstrate that the program will benefit persons who would otherwise be denied credit or receive credit on less favorable terms
- state the time period the program will be in effect or when it will be re-evaluated.
40
When would a Secondary review programs that uses a prohibited factor be permissible?
if the program does no more than ensure that lending standards are applied fairly and uniformly to all applicants. (i.e. an internal comparative file review for a specific group to determine if applicants were evaluated consistently)
41
When would affirmative marketing programs be permissible?
if they do not involve application of different lending standards they are permissible under both ECOA and FHA. i.e special outreach to a minority community.
42
Is this considered a marginal application?
Applicant was close to satisfying the requirement that the adverse action notice cited as the reason for denial
Yes this is a marginal denial
43
Is this considered a marginal application?
Applicant was denied by the bank's rigid interpretation of inconsequential processing requirements
Yes this is a marginal denial
44
is this considered a marginal application?
Applicant was denied quickly for a reason that normally would take longer for an underwriter to evaluate
yes this is a marginal denial
45
is this considered a marginal application?
Applicant was part of an unfavorable subjective evaluation of facts that another person may reasonably interpret more favorably i.e late payments showed a "pattern" or the reason for their break in employment was "credible"
yes this is a marginal denial
46
Is this considered a marginal application?
application where the bank failed to take reasonable steps to obtain necessary information prior to denial
yes this is a marginal denial
47
is this considered a marginal application?
applicant received unfavorable treatment as a result of a departure from customary practices or stated policies. i.e. policy to obtain explanation of derogatory credit info, but LO failed to do so for a prohibited basis applicant
Yes this is a marginal denial, even if the derogatory information seems to be egregious
48
Is this considered a marginal application?
applicant was similar to an approved control group applicant who received unusual consideration for service, but was not provided such consideration
yes this is a marginal denial
49
is this considered a marginal application?
applicant received unfavorable treatment but appeared fully to meet the bank's stated requirements for approval
yes this is a marginal denial
50
Is this considered a marginal application?
applicant received unfavorable treatment related to a policy or practice that was vague, or the file lacked documentation on the applicants qualifications
yes this is a marginal denial
51
is this considered a marginal application?
Applicant met common secondary market or industry standards even though failing to meet the bank's more rigid standards
yes this is a marginal denial
52
is this considered a marginal application?
applicant had a strength that a prudent bank might believe outweighed the weaknesses cited as the basis for denial
yes this is a marginal denial
53
is this considered a marginal application?
applicant had a history of previously meeting a monthly housing obligation equivalent to or higher than the proposed debt
yes this is a marginal denial
54
is this considered a marginal application?
applicant was denied for an apparently "serious" deficiency that may have easily been overcome. ie. DTI that is overstated due to the bank's method of calculation overcounting or failing to account for something
yes this is a marginal denial
55
is this considered a marginal application?
applicant whose qualifications satisfied the bank's stated standard but narrowly
yes this is a marginal approval
56
is this considered a marginal application?
applicant that bypassed stated processing requirements (verifications or deadlines)
yes this is a marginal approval
57
is this considered a marginal application?
applicant for which stated creditworthiness requirements were relaxed or waived
yes this is a marginal approval
58
is this considered a marginal application?
applicant that fell short of common secondary market or industry standards where the bank's standards are not clear
yes this is a marginal approval
59
is this considered a marginal application?
applicant that a prudent conservative bank may have denied
yes this is a marginal approval
60
is this considered a marginal application?
applicant whose qualifications were raised to a qualifying level by assistance, proposals, counteroffers, favorable characterizations, or questionable qualifications
yes this is a marginal approval
61
is this considered a marginal application?
applicant that received unusual service or consideration that facilitated obtaining credit
yes this is a marginal approval.
62
true or false:
when performing both underwriting and pricing comparisons, examiners should use the same control group approval sample for both tasks.
True
63
When performing a comparative file review how should examiners determine the sample size to use for target and control groups?
Examiners should determine the number of approvals and denials for each group and then using the appendix tables select a sample size between the minimum and maximum sample sizes based on the level of risk identified during the scoping phase.
64
How should examiners select files for a comparative file review sample?
once the sample size has been determined, select individual files judgmentally.
65
How large should the control group be if two prohibited basis groups are being compared against one control group?
Select a control group 5x greater than the larger prohibited basis group up to the maximum.
66
Where the institution’s discrimination risk profile identifies significant discrepancies in withdrawal/incomplete activity between control and prohibited basis groups, or where the number of marginal prohibited basis group files available for sampling is small, an examiner may consider supplementing samples by applying what rules? (2)
Examiners should consider supplementing samples by:
-determining if withdrawals/ incompletes occur after the applicant has received an offer of credit. If so, this is a HMDA reporting error (should have been reported approved not accepted) and they should be included as target group approvals for pricing file review.
-if target group incompletes occur due to lack of applicant response with respect to an item that would give rise to a denial reason, then include them as denials for that reason for underwriting file review
67
When requesting loan registers for a FL review, what period should they be requested for and what should they include?
- 3 month period prior to the exam, with any lists of declined applications for the same period
- should include name, address, applicable loan terms: loan amount, interest rate, fees, repayment schedule, collateral codes.
68
If examiners identify a policy or criterion that likely causes a disparate impact on a prohibited basis, what should examiners consider? (2)
- if the policy or criterion is obviously related to predicting creditworthiness and is used in a way to determine creditworthiness
- if it is obviously related to some other basic aspect of prudent lending, and it appears there is no equally affective alternative for it
then it may just be consistent with industry standards or be due to a prudent evaluation of credit risk (ex: DTI)
69
What 5 conditions must be met for disparate impact violations?
- specific policy or criterion is involved
- policy or criterion on its stated terms is neutral for prohibited bases
- policy or criterion falls disproportionally on applicants or borrowers in a prohibited basis group
- there is a causal relationship between the policy or the criterion and the adverse result
- Either or:
- -the policy/criterion has no clear rational, appears to exist for convenience, is far removed from common sense or standard industry lending practices
- -if there is a sound justification for the policy, there is an equally effective alternative for accomplishing the same objective with a smaller disproportionate impact.
70
True or false:
Gross HMDA denial or approval rate disparities are appropriate for disparate impact analysis
false
They are not appropriate because they typically cannot be attributed to a specific policy or criterion
71
How should examiners determine if a policy or criterion has a SIGNIFICANT disproportionate adverse impact on applicants or borrowers in a prohibited basis group?
The difference between the rate at which prohibited basis group members are harmed or excluded by the policy/criterion and the rate for control group members must be large enough that it is unlikely that it could have occurred by chance.
72
Can the relationship between a policy/criterion be speculative to determine disparate impact?
No, it must be a causal relationship. It must be clear that changing or terminating the policy/criterion would reduce the disproportion in the adverse result.
73
To avoid a violation, what must a bank establish to justify a policy or criterion that has a disproportionate adverse impact?
The impact must be justified by "business necessity."
74
Do any of the following policies/criterion demonstrate a clear rational (meet condition 5a) for Disparate Impact?
Credit decision is based on:
- location of residence
- income level (alone not relative to debt)
- accounts with a finance company
No, the rationale is generally not clear for basing credit decisions on any of those factors.
75
Does the following example meet all five conditions to establish Disparate impact?
Prohibited basis group applicants were denied more frequently than control group applicants because they failed a bank's minimum income requirement.
yes
```
1-meets a specific criterion
2-criteria appears neutral
3-criterion falls disproportionately on a prohibited basis group
4-there is a causal relationship
5a-criterion has no clear rationale.
```
76
Does the law require a bank to abandon a policy/criterion that is clearly the most effective method for accomplishing a legitimate business objective if it creates a disproportionate impact?
No, however, if an alternative that is equally effective is available that would cause a less severe adverse impact, the policy/criterion my constitute a violation.
77
If the criterion meets all 5 factors to establish disparate impact, how should examiners solicit the bank's response?
What should they communicate (6)/request (2)?
Communicate:
- the specific policy/criterion causing the impact
- how examiners learned about the policy
- how widely it is they understand it to be implemented
- how strictly they understand its applied
- applicable prohibited basis
- nature of the injury to individuals
- data used to compute the impact
Request:
- the bank provide information supporting the business justification for the policy
- the bank describe any alternatives it considered before adopting the policy/criterion
78
How should examiners evaluate a business justification for disparate impact?
evaluate if the bank's response:
- persuasively contradicts the existence of the significant disparity
- or, establishes a business justification
The analyses of “business necessity” and “less discriminatory alternative” tend to converge because of the close relationship of the questions of what purpose the policy or criterion serves and whether it is the most effective means to accomplish that purpose.
79
What should an examiner do in this situation:
bank has withdrawals by applicants in prohibited basis groups without documentation of consumer intent to withdraw
obtain an explanation from the bank
if, the bank doesn't give an explanation, obtain approval to contact the customers to verify the bank's descriptions of the transactions
80
What should an examiner do with the following scenario:
Bank has denials of applicants in prohibited basis groups without any documentation of applicant qualifications
obtain an explanation from the bank
if, the bank doesn't give an explanation, obtain approval to contact the customers to verify the bank's descriptions of the transactions
81
What should an examiner do in the following scenario:
The bank has, no a prohibited basis, selectively quoted unfavorable terms (for example, high fees or down payment requirements) to prospective applicants, or quoted unfavorable terms to all prospective applicants but waived such terms for control group applicants. (Evidence of this might be found in withdrawn or
incomplete files.)
Obtain an explanation from the bank
if, the bank doesn't give an explanation, obtain approval to contact the customers to verify the bank's descriptions of the transactions
82
What should an examiner do in this situation:
Identified delays between application and action dates on a prohibited basis
Obtain an explanation from the bank
if, the bank doesn't give an explanation, obtain approval to contact the customers to verify the bank's descriptions of the transactions
83
What should examiners do if interviews with consumers are inconclusive to determine if the bank is "prescreening"?
Request authorization for possible "testers" who would pose as apparently similarly situated applicants, differing only as to race or other prohibited basis characteristic, to compare how the bank treats each in the application process.
84
True or false:
Pre-screened solicitation of potential applicants on a prohibited basis violates ECOA
False
However such solicitations are covered under FHA so an analysis of this form of potential marketing discrimination should be limited to residential loan products.
85
What is a self-test under ECOA?
program, practice or study that is designed and specifically used to assess the bank's compliance with fair lending laws that creates data not available or derived from loan, application, or other records related to credit transactions. (ex: using testers to determine if there is disparate treatment in the pre-screening stages of credit shopping)
86
Can examiners request self tests?
No, examiners should not request any information privileged under ECOA. However, if a bank discloses the results of any self-tests examiners can confirm the reliability and appropriateness of the self-tests.
87
What is the purpose of streamlining an examination using a self-evaluation from the bank?
If the research and analysis of the planned examination would duplicate the banks efforts, a streamlined report can serve as a basis for eliminating examination steps.
This can reduce independent comparative file review by examiners.
88
When must a focal point be approved by for statistical analysis?
If an EIC identifies fair lending risks that are not fully mitigated, the approval of a focal point should occur no longer than 7 days from the examination start date.
89
When would examiners conduct a statistical analysis focal point?
Unlike a comparative file review, which is conducted during the examination. Statistical analysis is conducted through a targeted Fair Lending visitation by the FLEX/ES.
90
When should a criteria interview occur for statistical analysis?
Within 7 days from the focal point approval date.
91
In a statistical analysis, when are the notes from the criteria interview due from the FLEX to WO?
When do they provide the bank a document detailing the criteria?
Within 2 days of the criteria interview
Within 3 days of the criteria interview
92
How long does the bank have to attest to the accuracy of the criteria interview summary document?
Within 10 days from the date of the criteria interview.
But a bank may elect to not attest to the criteria document and the FLEX should make note.
93
When is the onsite visitation date for a fair lending statistical analysis?
When the bank provides the signed criteria document.
If the bank does not attest to the criteria, then 10 days from the date they sent the criteria to the bank.
94
Statistical analysis: How many days does research have to finalize the list of data fields?
5 days from when the bank provides the attestation to the criteria interview.
95
Statistical analysis: How long does the collection team have to collect the required data for the FLEX to complete the validation and send the data file to research?
80 days from when the bank provides the attestation. If validation is for physical files
14 days if the data is electronic.
96
How long does research have to complete the regression analysis?
40 days from when the FLEX submits the data file.
97
Statistical Analysis: When should a meeting occur following the initial results of the regression analysis?
Within 3 days of the initial results.
98
Statistical Analysis: When should the FLEX mail the Fair lending Visitation letter after deciding not to pursue the results of the regression analysis?
Within 10 days of the decision to not pursue the results.
99
Statistical Analysis: When should the final signed research memo be provided to the team if they pursue a 15 day letter?
Within 7 days of when the research completed the statistical analysis.
100
When should the final 15 day letter be signed and mailed to the bank?
within 7 days from research's signed research memo
101
How long does the bank have to respond to the 15 day letter?
15 days up to a 30 days extension from when they receive the letter.
102
Statistical analysis: When must the Team have a meeting to discuss the bank's response to the 15 day letter with the bank?
5 days after the due date of the bank's response.
103
Statistical analysis: When must the team make a decision to recommend to the director to cite a pattern or practice violation?
within 30 days from the bank's response to the 15 day letter.
