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IV. Fair Lending — Fair Lending Laws and Regulations
IV – 1.6 FDIC Consumer Compliance Examination Manual – March 2021
affiliate without prior consultation with agency staff.
• The underwriting standards and procedures used in the
entity being reviewed are used in related entities not
scheduled for the planned examination. This will help
examiners to recognize the potential scope of policy-
based violations.
• The portfolio consists of applications from a purchased
institution. If so, for scoping purposes, examiners
should consider the applications as if they were made to
the purchasing institution. For comparison purposes,
applications evaluated under the purchased institution’s
standards should not be compared to applications
evaluated under the purchasing institution’s standards.
• The portfolio includes purchased loans. If so, examiners
should look for indications that the institution specified
loans to purchase based on a prohibited factor or caused a
prohibited factor to influence the origination process.
• A complete decision can be made at one of the several
underwriting or loan processing centers, each with
independent authority. In such a situation, it is best to
conduct on-site a separate comparative analysis at each
underwriting center. If covering multiple centers is not
feasible during the planned examination, examiners should
review their processes and internal controls to determine
whether or not expanding the scope and/or length of the
examination is justified.
• Decision-making responsibility for a single transaction
may involve more than one underwriting center. For
example, an institution may have authority to decline
mortgage applicants, but only the mortgage company
subsidiary may approve them. In such a situation,
examiners should learn which standards are applied in
each entity and the location of records needed for the
planned comparisons.
• Applicants can be steered from the financial institution to
the subsidiary or other lending channel and vice versa, and
what policies and procedures exist to monitor this practice.
• Any third parties, such as brokers or contractors, are
involved in the credit decision and how responsibility is
allocated among them and the institution. The
institution’s familiarity with third party actions may be
important, for an institution may be in violation if it
participates in transactions in which it knew or reasonably
ought to have known other parties were discriminating.
As part of understanding the financial institution’s own
lending operations, it is also important to understand any
dealings the financial institution has with affiliated and non-
affiliated mortgage loan brokers and other third party
lenders.
These brokers may generate mortgage applications and
originations solely for a specific financial institution or may
broadly gather loan applications for a variety of local,
regional, or national lenders. As a result, it is important to
recognize what impact these mortgage brokers and other
third party lender actions and application processing
operations have on the lending operations of a financial
institution. Because brokers can be located anywhere in or
out of the financial institution’s primary lending or CRA
assessment areas, it is important to evaluate broker activity
and fair lending compliance related to underwriting, terms,
and conditions, redlining, and steering, each of which is
covered in more depth in sections of these procedures.
Examiners should consult with their respective agencies for
specific guidance regarding broker activity.
If the institution is large and geographically diverse,
examiners should select only as many markets or
underwriting centers as can be reviewed readily in depth,
rather than selecting proportionally to cover every market.
As needed, examiners should narrow the focus to the
Metropolitan Statistical Area (MSA) or underwriting
center(s) that are determined to present the highest
discrimination risk. Examiners should use Loan Application
Register (LAR) data organized by underwriting center, if
available. After calculating denial rates between the control
and prohibited basis groups for the underwriting centers,
examiners should select the centers with the highest fair
lending risk. This approach would also be used when
reviewing pricing or other terms and conditions of approved
applicants from the prohibited basis and control groups. If
underwriting centers have fewer than five racial or national
origin denials, examiners should not examine for racial
discrimination in underwriting. Instead, they should shift the
focus to other loan products or prohibited bases, or
examination types such as a
pricing examination.
However, if examiners learn of other indications of risks that
favor analyzing a prohibited basis with fewer transactions
than the minimum in the sample size tables, they should
consult with their supervisory office on possible alternative
methods of analysis. For example, there is strong reason to
examine a pattern in which almost all of 19 male borrowers
received low rates but almost all of four female borrowers
received high rates, even though the number of each group is
fewer than the stated minimum. Similarly, there would be
strong reason to examine a pattern in which almost all of 100
control group applicants were approved but all four
prohibited basis group applicants were not, even though the
number of prohibited basis denials was fewer than five.
Evaluating the Potential for Discriminatory Conduct
Step One: Develop an Overview
Based on his or her understanding of the credit operations and
product offerings of an institution, an examiner should
determine the nature and amount of information required for