Compliance Q&A: Disparate Impact

Absence of intent to discriminate isn't a defense against disparate impact.

September 1, 2010

Q Some credit unions add a minimum housing expense for members who report living with family to aid in loan decisioning. Could this practice of adding debt to loan applicants who report no housing expense result in “disparate impact,” which federal antidiscrimination law prohibits?

A Yes, this practice could result in a disparate impact on younger applicants, according to the National Credit Union Administration (NCUA).

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 (i.e., race, color, religion, national origin, or gender) 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.

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 [NCUA Official Commentary, 12 C.F.R. Part 202 Supp. I, §208.6(b)(2)-2].

The Official Commentary provides that a credit scoring system can establish a category for persons in their 20s or younger with attributes that are predictive for that age group.

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.

A creditor may evaluate each component of income separately and permits discounting or disregarding any portion of income that’s considered unreliable, the agency reports.

Accordingly, a lender may consider the circumstances surrounding an individual applicant’s lack of housing expense and may determine that 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,” NCUA reports, “and could result in illegal discrimination under the federal fair lending rules.”