Oh Boy, here comes the really fuzzy regulation! Disparate Impact is a practice or policy that is applied neutrally but has a disparate impact on a prohibited basis client.
The biggest area of concern regarding this regulation is how well your company fits into your lending footprint, with your present pricing and underwriting criteria and policy. In the redlining posting, I recommended that you review your MSA and look for pockets of high minority areas where you have little to no coverage.
I then mentioned that many fair lending analysts are researching their MSAs as to whether or not the company’s pricing and underwriting are compatible with the average homebuyer in the higher minority areas. Remember, that if this complaint is lodged against your company, the regulator has already accumulated substantial data to launch the complaint. You will need to out-data the regulator.
Once you have this information, it is time to evaluate your risk in each of the following areas:
Do you currently have any employees who are doing outreach to these communities? Are there plans for any additional personnel who will have this territory assigned to them for outreach? If not, why?
Evaluate you LLPA adjustments for risk. Are those adjustments causing your rates to be out of the market compared to other lenders in those areas? If so, do you have a business justification that is backed by facts and numbers as to why you are unable to compete via price in those markets?
Do your underwriting guidelines exclude the average client in these markets? Are your minimums or maximums out of line with that portion of the market? Do you offer programs that are common for the area, and if not, why?
Do you offer any advertising, community participation, or marketing to the underserved markets? When you demonstrate your marketing to the examiner is it generally located in lower minority markets? Or, can you demonstrate outreach to higher minority populations as well? If not, why?
If you are not in diverse markets within your MSA, and you use the reasoning that you do not have the product type, personnel or secondary marketing conduits, the regulator will likely do a “peer analysis”. This analysis will demonstrate to the examiner if other lenders are in that market. If there are many lenders similar to your company, who are able to lend without adverse impact to their company, you will be asked why you are not able to lend there. This is based on the regulation’s wording of “interest could be served by a practice that has less of a discriminatory effect”.
The only way to defend against Disparate Impact is research, documentation and data. You must demonstrate that you are attempting to engage underserved markets as well as the well-served markets. If your company does not want to do that, then you need a business justification as to why this is not a viable market for you. Again, this takes more than a statement and it is generally recommended that you engage a fair lending analyst or legal counsel prior to taking that stance.
Next Up-Data Integrity-The #1 Issue with the CFPB and Lenders!