There could be potential fair lending issues with this product, particularly given its minimum deposit or loan requirements, although carefully documented business considerations for offering the program could mitigate the risks to your banks.
In general, any promotion that singles out a group of customers creates some potential for fair lending concerns. Although younger customers (who would be excluded from this promotion) are not a protected class, the age and minimum deposit or loan requirements for club membership could result in a disparate impact on a protected class. For example, the FFIEC’s Interagency Fair Lending Procedures provide that setting a minimum loan amount of $60,000 could be shown to have a disparate impact if it disproportionately excludes minority potential applicants. Similarly, your bank’s minimum deposit or loan requirement could disproportionately exclude a minority or other protected class.
The FFIEC provides a helpful explanation of the disparate impact concept and how institutions can mitigate the risks of a disparate impact finding. Notably, a policy resulting in a disparate impact can be justified by a “business necessity,” with documentation of any factors that went into setting the bank’s policy. We recommend that your reasons for adopting the requirements for club membership be rooted in business considerations and carefully documented. This way, even if an examiner (or others) find a measurable disparate impact on a protected class, at least the bank would have a defense by pointing to these business justifications.
Due to the complexity of this area and the risks involved, you may wish to consult with your bank counsel if you choose to proceed.
For resources related to our guidance, please see:
- Equal Credit Opportunity Act, 15 USC 1691 (“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under this chapter.”)
- Equal Credit Opportunity Act, 15 USC 1691a(d) (“The term ‘credit’ means the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor.”)
- FFIEC Interagency Fair Lending Procedures, page iv (“Example: A lender’s policy is not to extend loans for single family residences for less than $60,000.00. This policy has been in effect for ten years. This minimum loan amount policy is shown to disproportionately exclude potential minority applicants from consideration because of their income levels or the value of the houses in the areas in which they live.”)
- FFIEC Interagency Fair Lending Procedures, page iv (“When a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a ‘disparate impact.’ . . . The fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. When an Agency finds that a lender’s policy or practice has a disparate impact, the next step is to seek to determine whether the policy or practice is justified by ‘business necessity.’ The justification must be manifest and may not be hypothetical or speculative. Factors that may be relevant to the justification could include cost and profitability. Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by business necessity, it still may be found to be in violation if an alternative policy or practice could serve the same purpose with less discriminatory effect.”)
- FFIEC Interagency Fair Lending Examination Procedures, Appendix