We are a small bank on the west coast. Recently, our regulator issued an administrative action against us for redlining. This came as a total shock because we pride ourselves on serving a diverse community.
Apparently, our marketing department put out an advertisement that caused this problem. They published advertisements that featured only white customers and white company employees. To make matters worse, our compliance manager, who is white, had signed off on it.
Our CEO confronted her, and she was surprised. She responded by saying, if she were shopping for a loan, would she lean toward our bank or would she be more likely to go to another bank because its ads show Latinos? That was the last day the compliance manager worked here.
The local news has already picked up on this situation, and we’re in damage control. Meanwhile, we are now stuck with this administrative action. We have revamped our marketing policies and hired a consultant to resolve the regulatory issue.
Would you please enlighten us about how much the regulators are involved in finding redlining violations?
ANSWER
An allegation of redlining resulting from an advertisement is an avoidable situation. There really is no reason why this should happen if a financial institution is appropriately following existing rules and regulations. Our firm has clients who literally send us all their advertisements for review. Sometimes, our responses provide just a few corrections; other times, our responses can consist of many revisions.
A marketing department does not necessarily know the ins and outs of advertising compliance, but surely it is reasonable to expect the compliance department to know the applicable regulatory requirements. Most importantly, advertising and marketing compliance is vast. If you do not have the depth of knowledge and expertise in this area, just stay away from advertising until you do!
As a general proposition, regulators are mightily involved in examining for violations of redlining. A foundational statute that they rely on is the Equal Credit Opportunity Act (ECOA), implemented through Regulation B. It prohibits the discouragement of “applicants or prospective applications” and states:
“A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”[i]
Regulation B Commentary explains that Regulation B “covers acts or practices directed at prospective applicants that could discourage a reasonable person, on a prohibited basis, from applying for credit.”[ii]
Recently, the CFPB formally criticized banks for almost exclusively featuring white models in their advertisements. I kid you not! In 2021, this is much more prevalent than you think. The CFPB was so concerned that the Bureau included it in its Summer 2020 edition of Supervisory Highlights.[iii]
In the course of conducting supervisory activity of bank and non-bank mortgage lenders, the CFPB examiners had observed that one or more lenders violated ECOA and Regulation B, intentionally redlining majority-minority neighborhoods – that is, communities in which the majority of residents were minorities – in two Metropolitan Statistical Areas (MSAs) by engaging in acts or practices directed at prospective applicants that may have discouraged reasonable people from applying for credit.
How was this determined?
Examiners found that the lenders used marketing that would discourage reasonable persons on a prohibited basis from applying to the lenders for a mortgage loan. They came to this conclusion by considering these three factors:
First, the lenders advertised in a publication with a wide circulation in the MSAs, weekly, for two years, and these ads prominently featured a white model;
Second, the lenders’ marketing materials, which were intended to be distributed to consumers by the lenders’ retail loan originators, featured almost exclusively white models; and
Third, the lenders included headshots of the lenders’ mortgage professionals in nearly all its open house marketing materials, and, in almost all these materials,[iv] the headshots showed professionals who appeared to be white.
The statistical analysis of the HMDA data and U.S. Census data provided evidence regarding the lenders’ intent to discourage prospective applicants from majority-minority neighborhoods. General and refined peer analyses showed that the lenders received significantly fewer applications from majority-minority and high-minority neighborhoods relative to other peer lenders in the MSAs. If you haven’t heard the terms “majority-minority” or “high-minority” neighborhoods, majority-minority areas are greater than 50% minority, and high-minority areas are greater than 80% minority.
Also, examiners looked at the lenders’ direct marketing campaign focused on majority-white areas in the MSAs. These reviews provided additional evidence of the lenders’ intent to discourage prospective applicants on a prohibited basis. Consequently, when we conduct HMDA reviews, we take the foregoing metrics into consideration.
In response to the examination findings, the lenders implemented outreach and marketing programs to increase their visibility among consumers living in or seeking credit in majority-minority census tracts in the MSAs. You should conduct a similar review and act accordingly. And it is important to review the advertising and marketing material at least annually to ensure that they meet any new regulatory guidelines.
It is also worth noting that one or more lenders agreed to improve their Compliance Management System, including board and management oversight, monitoring, audit programs, and consumer complaints handling.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
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[i] 12 CFR 1002.4(b); 85 FR 55828, 55831
[ii] 12 CFR part 1002, Supplement I, Paragraph 4(b)-1
[iii] Supervisory Highlights, Issue 22 (Summer 2020), Federal Register, 9/10/20, 85 FR 55828, Bureau of Consumer Financial Protection
[iv] Op. cit. i, 55832
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[i] 12 CFR 1002.4(b); 85 FR 55828, 55831
[ii] 12 CFR part 1002, Supplement I, Paragraph 4(b)-1
[iii] Supervisory Highlights, Issue 22 (Summer 2020), Federal Register, 9/10/20, 85 FR 55828, Bureau of Consumer Financial Protection
[iv] Op. cit. i, 55832
