Thursday, March 28, 2024

“Woke” Policies in Mortgage Banking


There was a big argument in a sales meeting last week. The loan officers got into a verbal fight over the use of the word “woke.” After the meeting, the whole company was talking about it. HR and Compliance got involved. I’m not sure what will happen next. But there is a lot of hate churning up in the company. This has never happened before. We were all friends, but now everyone is taking sides. All over the word “woke.” 

During the sales meeting, they discussed expanding into a mostly minority area. One of the loan officers got up and said he refuses to go into that area and is sick and tired of these “woke” policies that make him do deals with people based on their being minorities. Another loan officer got up and said he agreed and none of the loan officers should be forced to abide by these “woke” rules. 

The loan officers said they were not being racist or discriminatory. They just said they don’t feel safe and that loans from that area don’t close. There was a lot of pushback. Most loan officers disagreed, saying they never feel threatened, and most of their loans do close. There was a big shouting match. The sales manager ended the meeting, and everyone left, but they continued shouting at each other in the parking lot. 

I know this is a touchy subject. But you have taken on controversial subjects many times. I hope you can help to shed some light on the situation we’re in. I want things to go back to normal. 

Is there really a “woke” policy that forces loan officers to take applications in minority areas? 


ECOA Tune-up 


Several benign words have come into the American idiom that morphed into a malignant meaning, and “woke” is one of those words. A few years ago, it meant being aware or well-informed politically or culturally. I believe it first entered the Oxford English Dictionary in 2017. 


The word “woke” was derived from Black culture. I believe it goes back to the 1940s. To be “woke” or to “stay woke” meant to wake up in the sense of being alert to social justice and preserving African American rights. Recently, the term has had negative overtones, especially in the context of demeaning the politics relating to the left-of-center, a kind of weaponizing by right-of-center and far-right politicians as a way to denigrate left-of-center politics. 

Because right-of-center politicians have adopted “woke” from Black culture, sociologically speaking, it is a form of “cultural appropriation,” although I’ve heard it described as “cultural theft.” Cultural appropriation happens when a majority group adopts elements of a minority group in an exploitative, disrespectful, and stereotypical way.[i] So, if “woke” is used in such a manner, it is inherently a racist term. 

Not all cultural appropriation is intrinsically wrong when there is proper attribution and respectful use of the cultural artifact, keeping honestly to its use and meaning. People who use the term to disparage are not necessarily racist, but if used improperly – lacking attribution, not using it respectfully, being dishonest in use and meaning – it is a proxy for taboo words that are more explicitly racist. 


Thus, in your specific scenario, when a loan officer says a policy is “woke,” they may be using it disparagingly, generalizing left-of-center policies, which they deem unacceptable to their right-of-center and far-right politics. Their use of the word doesn’t make them racists. They may simply be identifying a left-of-center policy they do not want to accept. However, it could also be a proxy for socially unacceptable racist lingo. 

There are no “woke” policies in mortgage banking. The regulations that financial institutions follow are extensively vetted over generations and many federal and state administrations. A mountain of litigation determines the legal interpretation of the applicable statutes. The rules are often refined to respond to economic demands and ensure appropriate consumer protection, such as the protection afforded through fair lending prohibitions relating to a protected class. 


I have heard grumbling over the years about “protected classes.” These are the categories of groups that are legally protected. I have listened to complaining for and against age as a protected class. From time to time, someone moans about allowing protected class status for sexual and transgender orientation. 

A CEO I spoke to a few years ago felt that political affiliation should never be a protected class. His view was that he is legally allowed to discriminate against an at-will employee or candidate as a direct result of their political beliefs or activities. He held that First Amendment protections do not apply to private employment. He need not fear. Title VII of the Civil Rights Act of 1964 does not deem political affiliation to be a protected class. Public employees have a few more rights regarding political activity protections, but these rights are not absolute. 


Your loan officers who refuse to work in minority areas are walking on thin ice. The sales manager may choose to assign them elsewhere, but this is a very litigious terrain. There are two primary acts relating to protected classes. I fail to see that either of them falls into the black hole of being “woke”— unless “woke” means acts whose goal is to allow consumers to be treated fairly in the marketplace. 

If loan officers object to treating consumers fairly, maybe they should find another line of work. Lenders strive mightily to build a strong and upstanding reputation. They don’t need some rogue loan officers undermining their reputation or putting them at regulatory risk. 

In any event, I suggest you retain competent counsel to ensure that a decision to withhold loan origination personnel from a minority area would not violate the law, especially the two following acts. 


The Fair Housing Act (FHAct), among its list of illegal, discriminatory practices, includes this example of lending discrimination:


Providing a different customer service experience to mortgage applicants depending on their race, color, religion, sex (including gender identity and sexual orientation), familial status, national origin or disability.[ii] [My emphasis.] 

A different “service experience” would be discrimination in approvals and denials, loan terms, advertising, mortgage broker and other loan originator services, property appraisals, mortgage servicing, loan modification assistance, and homeowners insurance. 

Be advised: anyone can file a complaint with the Department of Housing and Urban Development (HUD), which administers and enforces the FHAct. Once the complaint is filed, the Office of Fair Housing and Equal Opportunity (FHEO) immediately opens an investigation to enforce applicable policies and laws. And, I can assure you, a complaint may be filed if a member of a minority community believes your firm is deliberately curtailing or shutting down access to loans in their area. 

The Equal Credit Opportunity Act (ECOA), taken together with the FHAct, covers a wide spectrum of anti-discrimination protections. For instance, the ECOA prohibits discrimination in any aspect of a credit transaction. Prohibitions consist of discrimination based on race or color, religion, national origin, sex, marital status, age (provided the applicant can legally contract), applicant’s receipt of income derived from any public assistance program, or the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act.[iii] 

Under both the ECOA and the FHAct, it is illegal for a lender to discriminate on a prohibited basis in a residential real estate-related transaction. And, among other things, under one or both of these acts, a lender may not:


·       Fail to provide information or services or provide different information or services regarding any aspect of the lending process, including credit availability, application procedures, or lending standards.


·       Discourage or selectively encourage applicants concerning inquiries about or applications for credit. 


Without more information than you provided, it seems your loan officers – and, by extension, your company – risk running straight into the buzzsaw of a prohibited factor! Indeed, to go further, a lender may not discriminate on a prohibited basis because the present or prospective occupants of either the property to be financed or the characteristics of the neighborhood or other area where the property to be financed is located. Deliberately avoiding minority communities with respect to originating loans substantially increases legal and regulatory risk. 

If your firm were to pull back from or shut down originations in a minority area, it could trigger disparate treatment violations. All it takes for an illegal disparate treatment allegation to be set in motion is the establishment either by statements revealing that a lender explicitly considered prohibited factors (overt evidence) or by differences in treatment that are not fully explained by legitimate, nondiscriminatory factors (comparative evidence).[iv] 

Indeed, when a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants but disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a disparate impact. 

Your scenario manages to trigger all three types of lending discrimination: overt evidence of disparate treatment, comparative evidence of disparate treatment, and evidence of disparate impact. Here’s how. 

First, there is overt evidence of disparate treatment because, as described above, your firm would be openly discriminating on a prohibited basis. 

Secondly, there is comparative evidence of disparate treatment because your firm would treat a credit applicant differently based on one of the prohibited bases. It does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in the treatment itself. 

Third, there is a disparate impact because your firm would apply a racially or otherwise neutral policy or practice equally to all credit applicants, disproportionately excluding or burdening persons on a prohibited basis. 


A final word about redlining, a form of disparate treatment that your loan officers seem to be suggesting. Your firm may be exposing itself to a redlining allegation if it provides unequal access to credit or unequal terms of credit because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Redlining is a double-whammy: it often violates both the FHAct and the ECOA. 

Hopefully, your loan officers will worry less about “woke” policies and more about not violating fair lending laws. If your firm treats similar applicants differently based on a prohibited factor, it must explain the difference in treatment. If the explanation is not found to be credible, a supervision and enforcement agency may find that your financial institution discriminated.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 
Lenders Compliance Group

[i] See What Is Cultural Appropriation?, Encyclopedia Britannica, December 2023

[ii] Fair Lending: Learn the Fact, Fair Lending Guide, U.S. Department of Housing and Urban Development

[iii] § 1002.5(b), Title 12, Chapter X, Part 1002

[iv] Consumer Compliance Examination Manual, March 2021, IV. Fair Lending – Fair Lending Laws and Regulations, Federal Deposit Insurance Corporation