Ms. Orla Beth Peck
Supervisor of Credit Unions
Department of Financial Institutions
P.O. Box 146800
Salt Lake City, Utah 84114-6800
Re: Disparate Impact Discrimination Inquiry.
Dear Ms. Peck:
You have asked if a lender’s practice of routinely adding an amount to the debts of a loan applicant who does not report any housing expense is likely to result in a “disparate impact,” a result federal antidiscrimination law prohibits. We think this practice could result in a disparate impact on younger applicants.
Federal antidiscrimination rules prohibit lenders from using age to determine whether to provide credit to an applicant. 12 C.F.R. §202.4(a). A policy that is facially neutral as to age or another prohibited factor, such as race, color, religion, national origin, sex, or religion, may constitute illegal discrimination if it results in a disproportionately adverse impact on a protected class of applicants, despite the absence of intent to discriminate. Official Commentary, 12 C.F.R. Part 202 Supp. I, §202.6(a)-2. A policy that has a disparate impact is prohibited unless it meets a legitimate business need that cannot reasonably be achieved through means that are less disparate in their impact. Id.
The fair lending rules generally prohibit discrimination against any person based on age, although a program that provides relatively more favorable treatment of older individuals may be permissible. See, e.g., Official Commentary, 12 C.F.R. Part 202 Supp. I, §208.6(b)(2)-2 (relating to the impact of credit scoring systems on persons older than age 62). The Official Commentary provides, moreover, that a credit scoring system can establish a category for persons in their twenties or younger with attributes that are predictive for that age group. Id.
In evaluating an individual applicant’s income in a “judgmental system,” age or age related information may be considered only in evaluating other pertinent elements of creditworthiness. Official Commentary, 12 C.F.R. Part 202 Supp. I, §202.6(b)(2)-3; 12 C.F.R §202.2(t) (definition of “judgmental system of evaluating applicants means any system . . . evaluating the creditworthiness . . . other than an empirically derived, demonstrably and statistically sound, credit scoring system”). The Official Commentary permits a creditor to evaluate each component of income separately and permits discounting or disregarding any portion of income that is considered unreliable. Official Commentary, 12 C.F.R. Part 202 Supp. I, §202.6(b)(5)-3-i-B.
Accordingly, a lender may consider the circumstances surrounding an individual applicant’s lack of housing expense and may determine the facts in a particular case warrant an adjustment. We believe, however, a blanket policy of adding an amount to every applicant’s debts to compensate for the absence of a stated housing expense is improper and could result in illegal discrimination under the federal fair lending rules.
Sheila A. Albin
Associate General Counsel