QUESTION
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?
COMPLIANCE SOLUTION
ECOA Tune-up
ANSWER
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.
“WOKE”
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.
“WOKE” POLICIES
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.
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.
GOING ROGUE
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.
REGULATIONS
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.
BUZZSAWS
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.
REDLINING
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
