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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.”