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Question: We have been cited by our regulator for disparate treatment. The matter is with our attorneys. However, in our discussions with staff it seems that we do not know the difference between overt discrimination, disparate treatment, and disparate impact. From a regulatory perspective, what is overt discrimination, disparate treatment, and disparate impact?
Answer: Courts have held that there are primarily three classes of discrimination, each with its own proof requirements, under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Going back to 1994, there was an Interagency issuance published in the Federal Register that affirmed this observation. The issuance was called Policy Statement on Discrimination in Lending (“Policy Statement”). [Federal Register, Vol. 59, No. 73, April 15, 1994, Notices, 18266-18274]
These three methods of discrimination are:
1. Overt evidence of discrimination, which occurs when a lender blatantly discriminates on a prohibited basis;
2. Disparate treatment, which occurs when there is evidence that a lender treats applicants differently based on one of the prohibited facts; and
3. Disparate impact, occurring when there is evidence that a lender applies a practice uniformly to all applicants but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity. [Supra, 18266, 18268]
With respect to disparate treatment, the Policy Statement provides that disparate treatment ranges from overt discrimination to more subtle disparities in treatment and, importantly, does not require any showing that treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself.
Jonathan Foxx is president and managing director of Lenders Compliance Group and Brokers Compliance Group, mortgage risk management firms devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456 or e-mail at [email protected].