VIDEO: What is Comparative Evidence of Disparate Treatment
In this Compliance Clip (video), Adam provides an overview of one of the three types of discrimination: comparative evidence of disparate treatment. This is the third and final video in our series on the three types of discrimination.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about comparative evidence of disparate treatment. This is actually the third video in the series that we've been doing on fair lending. In fact, what we're doing is we're talking about the three types of discrimination that have been recognized by the court. So this is one of those types.
The first type that we've already made a video on is overt evidence of disparate treatment. The second type that what we're doing today, is comparative evidence of disparate treatment. And we released a prior video on evidence of disparate impact. What these three things are, are the types of discrimination recognized by the courts, which means when your examiners come in to your institution, these are the potential violations you can have. This is how your examiners are going to look at fair lending and your organization. Therefore, it's very important that you understand these types of discrimination because this is the test that you will have in your financial institutions when your examiners come in and take a look at fair lending.
Let's talk about comparative evidence of disparate treatment. This occurs through a file comparison of a protected class and a control group applicant. Essentially, what is happening here is your examiners will come in and they'll request files. What they are going to be requesting is a stack of denials and a stack of approvals. That's how this works. What they will do is they will take your denials, stack them up and look for your absolute past denials. The ones that almost made it but got denied, the marginal denials. The ones that didn't quite get through but were turned down. What they will do is stack up your approvals and they will look for your very worst approvals. The ones that barely made it, just barely got through and almost were denied. Then what they're going to do is they're going to look for any overlap on the two, then they're going to find potential discrimination in that gap in between your worst approvals and your best denials. So that's what comparative evidence of disparate treatment is.
Your examiners will also be looking for comparative evidence of disparate treatment when it comes to pricing. They'll compare your pricing for your non-protected classes or your control group, maybe mainly white males, will look at pricing and compare that to protected classes like elderly or females or younger individuals or something else, a minority, somebody receiving public assistance. What they're going to do is be looking for disparate impact through comparative evidence. Those are the two types of ways we could have comparative evidence of disparate treatment.
The challenge with this is that comparative evidence of disparate treatment is not necessarily intentional but the result is discrimination. What happens is this almost always results from discretion. So smaller institutions, credit unions, community banks, who are having in-house loans that maybe have local underwriting and make their own decisions, this is where the risk lies. Larger banks, the secondary market loans that don't have discretion don't really have risk on comparative evidence of disparate treatment because they've taken all discretion away. So in community banks and credit unions, this is where some of your biggest risk in fair lending lies because you may not have completely defined rules. You give your lender some discretion to make decisions and this could be a fair lending challenge for you and your organization. Discretion can often come from a couple of places – underwriting discretion, and then overrides, and exceptions and making exceptions to the rules when it comes to discretion.
As far as oversight for comparative evidence of disparate treatment, oversight can be done by evaluating your discretion and putting some controls in place like reviewing your denials to make sure that if one person is denied a loan, then somebody else wouldn't have approved it. There's not another way to make this loan.
So that is comparative evidence of disparate treatment. As I said, this is a three-part series that we had released. It's actually part of our Fair Lending Bootcamp that we just released in our store at compliancecohort.com/store. Fair Lending Bootcamp is a full day long virtual seminar where we go through fair lending with slides just like these and we spend a whole lot of time – six-full hours – taking a deep dive into the world of fair lending. If you think that that's something you would benefit from or somebody in your organization would benefit from, take a look at our store, compliancecohort.com/store, and look for our Fair Lending Bootcamp because it's a deep dive into fair lending.