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Appeal of Potential Violation of the Equal Credit Opportunity Act (ECOA)-Disparate Treatment on the Basis of National Origin - (Third Quarter 1998)

Background

An institution filed a formal appeal with the ombudsman's office concerning a potential violation of the Fair Housing Act (FHA).  The potential violation involved possible discrimination against applicants for mortgage loans on the basis of familial status.  The institution received correspondence stating the Office of the Comptroller of the Currency (OCC) had determined that it has reason to believe the bank engaged in a pattern or practice of violating the FHA by applying different appraisal criteria to property located in family developments than it did to property located in developments restricted to adults only or carefully separated adult/family sections. At the time of the potential violation the bank was operating under written residential appraisal report guidelines that set forth mobile home park rating criteria. The criteria contained 11 quality rating categories ranging from "exclusive" to "negative influences."  Contained within the criteria was descriptive language which differentiated between "adult" and "family" occupancy and specified that "adult" parks would be rated higher than "family" parks.  The guidelines specified that an appraisal should include a designated park rating and a statement referring to the criteria on which the rating was based. 

A third-party fee appraiser was engaged to provide appraisals for loan applications originating from a family oriented mobile home park.  The appraiser had earlier signed a bank statement confirming that he would comply with the guidelines to the best of his ability.  While the record is unclear as to whether he actually applied the guidelines in conducting the appraisals, it is clear that he compared lots in nearby "adult" mobile home parks to the applicant lots located in the "family" mobile home park.  Consequently, the appraiser applied a substantial discount to each of the proposed collateral lots.  At a later date, the bank revised the guidelines eliminating differentiating language between adult and family occupancy.

The OCC conducted a review of the mobile home application documents and informed the bank that the agency found there was reason to believe the bank had violated the FHA when its fee appraiser discounted the value of lots in the family park at least, in part, on the basis of familial status.  The OCC determined there remained reason to believe the bank had engaged in a pattern or practice of violating the FHA by applying different appraisal criteria to property located in family developments than it did to property located in developments restricted to adults only or carefully separated adult/family sections.  The supervisory office concluded that it was therefore obligated to refer this matter to the U.S. Department of Justice (DOJ) and to notify the U.S. Department of Housing and Urban Development (HUD).

The bank appealed this decision to the ombudsman.

Discussion

The FHA, 42 USC 3605, prohibits a lender from discriminating on a prohibited basis in a residential real estate related transaction (including the making of loans) or in the terms or conditions of the transaction.  The implementing regulation, 24 CFR 100.130, describes unlawful conduct as using different policies, practices, or procedures for any loan which is secured by residential real estate because of, among other factors, familial status. 

The appraiser exemption, 42 USC 3605©, states that nothing in the FHA prohibits an appraiser from considering factors other than prohibited criteria (e.g., familial status).  The implementing regulation 24 CFR 100.135(d) further describes unlawful practices as using an appraisal for financing any dwelling where the person knows or reasonably should know that the appraisal improperly contained familial status consideration.  42 USC 3607(b) establishes specific criteria for housing to qualify for the "housing for older persons" exemption.  It states that the FHA provisions that protect familial status do not apply to "housing for older persons" as housing (i) intended for, and solely occupied by, persons 62 year of age or older; and (ii) intended for and operated for occupancy by at least one person 55 or older per unit. 

The Interagency Policy Statement on Discrimination in Lending offers guidance on the meaning of a pattern or practice.  The Policy Statement states that "repeated, intentional, regular, usual, deliberate, or institutionalized practices will almost always constitute a pattern or practice" of lending discrimination but "isolated, unrelated, or accidental occurrences will not."  In assessing whether a pattern or practice exists, the OCC considers the totality of circumstances, including the following factors:

  • Whether the conduct appears to be grounded in a written or unwritten policy or established practice that is discriminatory in purpose or effect.
  • Whether there is evidence of similar conduct by a bank toward more than one applicant.
  • Whether the conduct has some common source or cause within the bank's control.
  • The relationship of the instances of conduct to one another.
  • The relationship of the number of instances of conduct to the bank's total lending activity.  This list of factors is not exhaustive and whether the OCC finds evidence of a pattern or practice depends on the egregiousness of the facts and circumstances involved.  Each inquiry is intensively fact-specific and there is no minimum number of violations that will trigger a finding of a pattern or practice of discrimination.

The term "pattern or practice" is not defined in the FHA but has generally been interpreted to mean that the discrimination must not be isolated, sporadic, or accidental.  Also, while there is no minimum number of incidents that must be proven as a prerequisite to finding a pattern or practice of discrimination, a party does not have to discriminate consistently to be engaging in a pattern or practice.

What the facts in the judicial decisions and the examples in the Policy Statement indicate, however, is that a "pattern or practice" involves some degree of action or conduct toward a protected person.  In particular, the Policy Statement specifically refers to a lender's "conduct" in describing relevant factors to a "pattern or practice" determination.

Even in the absence of a discriminatory policy, evidence of a contractor's discriminatory actions may still affect the bank when the bank hires the contractor to act as the bank's agent.  According to agency law, a principal generally is liable for the acts of its agents.  Thus, if the contractor's actions constitute a pattern or practice of discrimination (even if the contractor alleged that he or she followed nondiscriminatory criteria), the bank may be liable as principal for those actions.  The fact that a single agent acted without express direction by the principal should not preclude a finding a liability. 

Under the FHA, which protects persons from discriminatory housing treatment that is about to occur, a discriminatory policy (even if not acted on) could nevertheless signal the likelihood of imminent discriminatory treatment and could provide a basis for a charge by the Secretary of HUD.  In accordance with Executive Order 12892, the OCC must notify HUD whenever it has received information "suggesting a violation" of the FHA and the OCC must forward such information to the DOJ if it "indicates a possible pattern or practice."

Where there is an openly declared or otherwise manifested policy that discriminates on a prohibited basis, it is not necessary to prove that the policy was consistently followed in order to believe that a pattern or practice existed.  The written appraisal report guidelines of the bank did contain discriminatory familial status considerations.  Moreover, under the FHA, any consideration by a lender or appraiser of a prohibitive factor such as familial status constitutes discrimination.  Although the appraiser failed to provide a designated park quality rating as detailed by the guidelines, this does not alter the fact that he applied familial status considerations as one of the stated reasons for discounting the properties.  While the appraiser had the latitude under the law to consider legitimate market and economic factors in appraising particular properties, any consideration of a prohibited factor such as familial status (rather than fair market value derived from comparable sales) is sufficient reason to believe that discrimination occurred.

Conclusion

The ombudsman concluded that there was sufficient reason to believe that a violation of the FHA occurred and as such, remanded to the OCC's supervisory office the matter of notification to the U.S. Department of Housing and Urban Development and a referral to the U.S. Department of Justice.

Background

A Competitive Equality Banking Act (CEBA) institution filed a formal appeal with the ombudsman's office concerning potential violations of the Equal Credit Opportunity Act (ECOA).  The potential violations involved possible disparate treatment on the basis of national origin.  The institution received correspondence stating the Office of the Comptroller of the Currency (OCC) had determined that it has reason to believe the bank engaged in a pattern or practice of violating the ECOA and Regulation B by treating Spanish-language applicants less favorably than similarly situated English-language applicants involving a co-branded credit card.  Specific practices included holding Spanish-language customers to a different standard of approval, excluding them from certain promotional credit services commonly offered to English-language customers, and assigning them lower credit limits.

In the early 1990s, the bank established a co-branding credit card relationship with a company whereby the bank offered a credit card through "take-one" applications in company stores.  The bank's initial program offered applications in the English language only.  However, the following year, the bank began offering Spanish-language application forms in order to reach out to predominately Spanish-speaking communities. 

In order to keep track of the Spanish-language program's performance and to facilitate record-keeping requirements, the bank created a separate sub-file of the co-branded portfolio in its processing systems.  At the time the Spanish-language program was started, the underwriting standards were no less favorable than those used to underwrite the English-language accounts.  The terms and conditions of both credit card groups, including fees, charges, and credit line assignments, were the same for both Spanish- and English-speaking account holders.

The only distinction between the handling of accounts originated through Spanish- and English-language applications was that the sub-file of accounts generated from the Spanish-language applications was placed on a marketing "exclusion" list.  Any accounts on this particular list did not receive marketing mailings for special balance consolidation offers or similar promotional programs.  Bank management felt that these customers had made a clear election to be treated as Spanish-language applicants, and they therefore might take offense at periodically receiving promotional materials in the English language.  Since the number of accounts generated from the Spanish-language application process was relatively low, the bank also felt that they could not justify the additional business expense of having promotional materials translated into the Spanish language for the relatively small group of account holders (less than 2,000).

Periodically, it was the bank's policy to conduct an analysis of each credit card program in order to evaluate its overall performance and profitability (i.e., a loss control analysis).  The purpose of these periodic analyses was to identify if underwriting standards and application processing needed to be changed, based on the performance of the specific pool.  The bank's credit card portfolio was separated into "sub-files" of various sizes for each type of co-branding card.  The bank's policy was that it was cost effective to conduct the loss analysis of the largest sub-file first.

Accordingly, in early 1996 the bank conducted an analysis of the English-language application sub-file.  Consistent with the bank's policy, management did not review

the Spanish-language sub-file because it was considered too small.  As a result of the analysis, credit score cutoffs and credit line assignment matrices for the English language applications were lowered in an effort to address loss issues.  Because the Spanish-language application sub-file was very small, the bank did not apply the same underwriting standard changes to the Spanish language generated account holders.  This change in application processing resulted in unequal treatment of the Spanish-language application group of customers. 

In addition to the application of different underwriting standards between the English- and Spanish-language portfolios, disparate treatment was also found in the differences of the availability of credit-related programs between the two groups.  As a result of management's original decision to place Spanish-language accounts on their internal marketing "exclusion" list, many Spanish language account holders were excluded from certain skip-a-payment and balance consolidation programs offered to English-applicant account holders.  Because these programs had an impact on credit terms but were only offered to one group, the effect was that different services and potentially less favorable credit terms were provided to cardholders of Spanish-language origin. 

During the examination, management stated that their practices of disparate treatment were unintentional and isolated.  Upon notification of these findings, management took actions to cease the potentially discriminatory practices and address the problem.  In particular, all credit card applications were processed using the same decision tree, all Spanish- and English-language applications were treated equally in terms of credit score cutoffs and line assignments, and all Spanish-language applicant account holders were included in marketing and special promotion programs.  In addition, management identified those Spanish-language applicants who were improperly denied credit or given lower credit lines as a result of the possible disparate treatment.  They subsequently completed the process of offering credit cards or increasing credit lines to those persons identified as part of the affected pool.  Management also took steps to correct deficient internal controls and compliance management weaknesses, which will improve management oversight.

The OCC conducted an examination of the bank's compliance with fair lending statutes.  The agency concluded that there was "reason to believe" that the bank imposed different credit requirements on applicants based on their national origin, in violation of ECOA.  The agency stated there was "reason to believe" that the bank engaged in a pattern or practice of violating ECOA by treating its Spanish-language applicants and customers less favorably than similarly situated English-language customers.  The supervisory office concluded that it was therefore obligated to refer this matter to the U.S. Department of Justice.

The bank appealed this decision to the ombudsman based on the following issues:

1. Because of fewer cardholders and costs involved, it is an industry practice not to offer sub-file cardholders the same promotional opportunities that are made available to the main-file cardholders.  Therefore, the different treatment of the Spanish language sub-file did not constitute disparate treatment or disparate impact and was not a violation of ECOA.

2. The potential number of accounts is too small to support a finding of a pattern or practice of discrimination.

Discussion

While it may be industry practice to treat an account sub-file differently, this practice may result in disparate treatment or disparate impact.

The ECOA, 15 USC 1691(a) prohibits a creditor from discriminating against an applicant on a prohibited basis regarding any aspect of a credit transaction.  The implementing regulation 12 CFR 202.4 (Regulation B) defines prohibited basis as follows:

Prohibited basis means race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); the fact that all or part of the applicant's income derives from any public assistance program; or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Board.  (12 CFR 202.2 (z))

While ECOA does not define the term "pattern or practice" the Interagency Policy Statement on Discrimination in Lending offers guidance on the meaning of a pattern or practice.  The policy statement states that "repeated, intentional, regular, usual, deliberate, or institutionalized practices will almost always constitute a pattern or practice" of lending discrimination but "isolated, unrelated, or accidental occurrences will not."  In assessing whether a pattern or practice exists, the OCC considers the totality of circumstances, including the following factors:

  • Whether the conduct appears to be grounded in a written or unwritten policy or established practice that is discriminatory in purpose or effect.
  • Whether there is evidence of similar conduct by a bank toward more than one applicant.
  • Whether the conduct has some common source or cause within the bank's control.
  • The relationship of the instances of conduct to one another.
  • The relationship of the number of instances of conduct to the bank's total lending activity.  This list of factors is not exhaustive and whether the OCC finds evidence of a pattern or practice depends on the egregiousness of the facts and circumstances involved.  Each inquiry is intensively fact-specific and there is no minimum number of violations that will trigger a finding of a pattern or practice of discrimination.  The term "pattern or practice" is not defined in the ECOA but has generally been interpreted to mean that the discrimination must not be isolated, sporadic, or accidental.  Also, while there is no minimum number of incidents that must be proven as a prerequisite to finding a pattern or practice of discrimination, a party does not have to discriminate consistently to be engaging in a pattern or practice.

What the facts in the judicial decisions and the examples in the policy statement indicate, however, is that a "pattern or practice" involves some degree of action or conduct toward a protected person.  In particular, the policy statement specifically refers to a lender's "conduct" in describing relevant factors to a "pattern or practice" determination.

Conclusion

The ombudsman concluded that there was sufficient reason to believe that a violation of the ECOA occurred and, as such, remanded to the OCC's supervisory office the matter for referral to the U.S. Department of Justice.

Appeal of Potential Violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA)-Disparate Treatment on the Basis of Race and National Origin - (Third Quarter 1998)

Background

An institution filed a formal appeal with the ombudsman's office concerning potential violations of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).  In addition to the core disagreement with the potential violations, the appeal also highlighted the bank's concern with the following:

  • Lack of an acknowledgment of the bank's response to the agency's initial findings;
  • Concerns about prejudgment by the examination staff; and,
  • The impact of hearsay from former bank employees on the agency's conclusions.

The potential violations involved possible disparate treatment on the basis of race and national origin.  The institution received correspondence stating the Office of the Comptroller of the Currency (OCC) had determined it had reason to believe the bank engaged in a pattern or practice of treating white, Hispanic, and black applicants for home mortgage loans less favorably than Asian applicants.  Beginning in the early 1990s, the bank regularly made home purchase loans through two channels, a wholesale mortgage division, and the retail loan department.  The wholesale division generated a significant volume of home purchase and home refinance loans, primarily referred by brokers, while loans originated through the retail loan department generated a much lower volume.

During this time period, the bank also offered a special "low-documentation" loan program.  The program characteristics were a low loan-to-value, no requirement of a social security number or credit history, acceptance of overseas funds for down payment, nonresident aliens could qualify, and minimal documentation.  These loans were retained on the bank's books.

To evaluate the bank's fair lending performance, the OCC conducted a comparative file analysis both manually and by statistical modeling.  The manual analysis compared the treatment of Asian applicants with the treatment of white, Hispanic, and black applicants.  The statistical analysis, which consisted of a legitimate regression model, compared the treatment of Asian and white applicants.  There were an insufficient number of applications from Hispanics and blacks to permit statistical analysis of their treatment.

The manual file analysis showed evidence of discriminatory practices that indicated that more stringent underwriting standards were applied to whites, Hispanics, and blacks than to Asians.  Differing treatment was found in the following areas:

  • Requiring asset and income verifications;
  • Handling discrepancies in applications or credit bureau reports;
  • Offering of counteroffers;
  • Reviewing credit history;
  • Handling applicant occupancy; and
  • Handling related buyers and sellers.

Statistical analysis, in the form of a regression model, was used to refine and extend the judgmental analysis.  The same conclusions occurred.  The results identified instances where it appeared Asian applicants were qualified more frequently than similarly situated non-Asian applicants.  Whites had largely increased odds of being denied home loans, even after controlling for other variables in the regression analysis that were critical to the underwriting process.  Subsequent discussions with officers, employees, and two former employees of the bank failed to mitigate most of the instances of apparent difference in treatment identified from the file sample.  After evaluating all the evidence, including the bank's response, the OCC concluded there remained reason to believe the bank had potentially engaged in a pattern or practice of discrimination against non-Asian applicants for home loans.  Therefore, the OCC concluded it was obligated to refer this matter to the U.S. Department of Justice and to notify the U.S. Department of Housing and Urban Development.

Discussion

The ECOA, 15 USC 1691(a) prohibits a creditor from discriminating against an applicant on a prohibited basis regarding any aspect of a credit transaction.  The implementing regulation 12 CFR 202.4 (Regulation B) defines prohibited basis as follows:

Prohibited basis means race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); the fact that all or part of the applicant's income derives from any public assistance program; or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Board.  (12 CFR 202.2 (z))

The Fair Housing Act (FHA), 42 USC 3605, prohibits a lender from discriminating on a prohibited basis in a residential real estate related transaction (including the making of loans) or in the terms or conditions of the transaction.  The implementing regulation, 24 CFR 100.130, states it shall be unlawful for any person or entity engaged in the making of loans or in the provision of other financial assistance relating to the purchase, construction, improvement, repair, or maintenance of dwellings, or which are secured by residential real estate, to impose different terms or conditions for the availability of such loans or other financial assistance because of, among other factors, race and national origin. 

While the ECOA and the FHA do not define the term "pattern and practice," the Interagency Policy Statement on Discrimination in Lending offers guidance on the meaning of a pattern or practice.  The policy statement states that "repeated, intentional, regular, usual, deliberate, or institutionalized practices will almost always constitute a pattern or practice" of lending discrimination but "isolated, unrelated, or accidental occurrences will not."  In assessing whether a pattern or practice exists, the OCC considers the totality of the circumstances, including the following factors:

  • Whether the conduct appears to be grounded in a written or unwritten policy or established practice that is discriminatory in purpose or effect.
  • Whether there is evidence of similar conduct by a bank toward more than one applicant.
  • Whether the conduct has some common source or cause within the bank's control.
  • The relationship of the instances of conduct to one another.
  • The relationship of the number of instances of conduct to the bank's total lending activity.  This list of factors is not exhaustive and whether the OCC finds evidence of a pattern or practice depends on the egregiousness of the facts and circumstances involved.  Each inquiry is intensively fact-specific and there is no minimum number of violations that will trigger a finding of a pattern or practice of discrimination.  The term "pattern or practice" is not defined in the ECOA or the FHA but has generally been interpreted to mean that the discrimination must not be isolated, sporadic, or accidental.  Also, while there is no minimum number of incidents that must be proven as a prerequisite to finding a pattern or practice of discrimination, a party does not have to discriminate consistently to be engaging in a pattern or practice.
Conclusion

The ombudsman reviewed the issues noted in the bank's appeal letter, the bank's response to the district's initial conclusions, and all relevant supporting internal and external documents.  Discussions were held with appropriate bank managers and involved OCC staff.  Based on this comprehensive analysis, the ombudsman concluded that there was sufficient reason to believe that violations of the ECOA and the FHA occurred and, as such, remanded to the OCC's supervisory office the matter of notification to the U.S. Department of Housing and Urban Development and a referral to the U.S. Department of Justice. 

While the OCC supervisory office did not send a written acknowledgment of the bank's response to the OCC's initial conclusions, that fact alone did not mean that the additional information supplied by the bank was not considered in the OCC's final decision to refer the violations of ECOA and FHA to the Department of Justice.  In fact, the ombudsman found that the bank's response was carefully analyzed and considered in detail by OCC bank supervisory and enforcement offices prior to rendering the final decision.  As a result, this issue was not remanded back to the OCC's bank supervision and enforcement staff for further analysis.  However, based on the concerns identified in the appeal, the OCC will, in the future, acknowledge initial conclusion submissions.  The ombudsman found no evidence of prejudgment by OCC staff, or any undue reliance on hearsay from former bank employees at any point in the decision-making process.