“Woke” Policies in Mortgage Banking

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

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[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

AVMs and the “Fifth Factor”

QUESTION

We have a question that involves appraisals and AVMs. Our concern is about the new proposals coming out of the CFPB about computer models influencing home valuations. As we understand it, their view is that these models could cause fair lending violations. 

We’ve read whatever we could about this proposal. However, it still is a bit confusing because computer models are simply not something that we know anything about. It makes us feel that this is a potential blind spot that could expose us to fair lending risk. 

It would be great if you’d explain the CFPB’s proposal in layman’s terms. 

How does the CFPB’s proposal about AVMs and computer models potentially cause fair lending violations? 

ANSWER

I know how you feel. Sometimes it seems like you have to be a computer wiz to stay current with the latest and greatest digital improvements used to originate loans. I’ll explain the CFPB’s proposal. Hopefully, it will give you a better understanding. 

The proposal involves potential requirements to prevent “algorithmic” bias in home valuations. The word “algorithmic” just means a set of concise rules that must be followed, for instance, in doing calculations. It has come to be associated with computer science, but it’s actually a term used in many disciplines. 

Let’s refer, then, to the proposal as involving “Algorithmic Bias,” which, in fact, is the CFPB’s terminology. The Bureau's proposal is entitled Consumer Financial Protection Bureau Outlines Options to Prevent Algorithmic Bias in Home Valuations.[i] 

Categorically, the proposal involves compliance management, ECOA (Regulation B), fair Lending, Fintech (Financial Technology), and Real Estate Appraisals. You can comment on the proposal at the CFPB. All potentially affected entities will have the opportunity to comment once these new AVM rules are proposed. 

In essence, the CFPB announced an initiative to ensure that computer models used to help determine home valuations are accurate and fair. Thus, the Bureau outlined the options it is considering in connection with future rulemaking on quality control standards for automated valuation models (AVMs). 

First, some background and then an explication of where this all goes. 

According to the CFPB,[ii] 

“When underwriting a mortgage, lenders typically require an appraisal, which is an estimate of the home’s value. While traditional appraisals are conducted in person, many lenders also employ algorithmic computer models. These models use massive amounts of data drawn from many sources to value homes. The technical term for these models is automated valuation models. Both in-person and algorithmic appraisals appear to be susceptible to bias and inaccuracy, absent appropriate safeguards.” 

The CFPB claims that 

“AVMs can pose fair lending risks to homebuyers and homeowners. [It] is particularly concerned that without proper safeguards, flawed versions of these models could digitally redline certain neighborhoods and further embed and perpetuate historical lending, wealth, and home value disparities.” 

This claim leads the CFPB to conclude that “computer models and algorithms…[used in] AVMs can pose fair lending risks to homebuyers and homeowners.” 

The CFPB’s oversight of these computer models is multifold, including: 

·       Ensuring a high level of confidence in the estimates produced by automated valuation  models;

·       Protecting against the manipulation of data;

·       Seeking to avoid conflicts of interest;

·       Requiring random sample testing and reviews; and

·       Accounting for any other such factor that the agencies determine to be appropriate. 

Where is this all going? 

It is going to the Fifth Factor. 

The CFPB is considering including an AVM nondiscrimination quality control factor, referred to as the “Fifth Factor.” Under this option, entities would be required to adopt policies and procedures specifically designed to mitigate fair lending risk in the use of AVMs. This would be an obligation independent of the preexisting obligation to comply with federal nondiscrimination requirements. 

There are two alternative compliance approaches the CFPB is considering. 

Under the first approach, entities would have the flexibility to design the relevant, fair lending policies, practices, and control systems in a manner that is tailored to their business models and commensurate with the institution’s risk exposures, size, and business activities. 

Under the second approach, the CFPB is considering whether compliance with applicable nondiscrimination laws for AVMs is already encompassed within the first Four Factors; specifically, the factors requiring: 

Factor 1: A high level of confidence in the estimates produced by AVMs; 

Factor 2: Protection against the manipulation of data;

Factor 3: Avoidance of conflicts of interest; and 

Factor 4: Random sample testing and reviews.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Consumer Financial Protection Bureau Outlines Options to Prevent Algorithmic Bias in Home Valuations, Consumer Financial Protection Bureau, Newsroom, February 23, 2022 https://www.consumerfinance.gov/about-us/newsroom/cfpb-outlines-options-to-prevent-algorithmic-bias-in-home-valuations

[ii] Idem, this and following quotes.

Mortgage Companies and Credit Unions: New CRA Law

QUESTION
We are a credit union located in Illinois. Recently, we have become involved in developing CRA initiatives for the first time. Non-bank mortgage companies in Illinois are also affected. We have had numerous conversations with mortgage companies in our area about it. This is happening because Illinois has passed a law that requires us to collect and report CRA data.

Here’s a news article on the law: “Illinois Will Now Grade Credit Unions and Mortgage Companies on Their Commitment to Fair Lending.”

A few quotes from this article give you an idea of what I’m referring to.

“But now, for the first time in Illinois, mortgage companies and certain credit unions are subject to standards for community reinvestment just like banks.” …

 

“Only a few other states have their own CRA laws. Generally, state CRA laws and regulations hew closely to federal reinvestment policies and standards, but provide an extra layer of oversight.” …

 

“Meanwhile, Federal Reserve Chairperson Jerome Powell recently voiced his support for expanding the federal CRA to all institutions that make consumer loans.” … 

So, our question is, can you give us some preparatory notes to consider in drafting policies and procedures for the CRA requirements? 

ANSWER
We have clients in Illinois, and we’ve been tracking this legislation since its inception. Consequently, our clients have been getting gradually ramped up in advance of the law being passed. In the last month especially, we have been retained by state credit unions and non-bank mortgage lenders in Illinois to prepare them for the Illinois Community Reinvestment Act (ILCRA) requirements, as outlined in the subject legislation.

What action can you take?

We have subject matter experts and are fully staffed to help you. 

Don’t try to go it alone if you haven’t had substantial experience in Community Reinvestment Act requirements. 

Please notify others similarly situated to contact us HERE. We’ll respond promptly.

What is the new law about?

The federal CRA was passed to address concerns with financial institutions that accepted deposits from their local communities and failed to make loans in the same communities. Under the Illinois provision, the ILCRA does not just pertain to depository institutions. It requires regulators to examine financial institutions for ILCRA compliance and consider their local lending records when they seek approval to open new offices, relocate offices, merge or consolidate, acquire other institutions, or expand their authority. Your HMDA filing is still mandated, so the HMDA and ILCRA filings must be consistently corroborative of each other.

The ILCRA law you referred to was signed into law and became effective on March 23, 2021. It is called the Illinois Community Reinvestment Act (“ILCRA”).[i] The ILCRA requires continuing community investment obligations on covered financial institutions, which include non-depository mortgage lenders.

Take note, the ILCRA does not require financial institutions to undertake any particular activities or make risky loans. The law provides for considerable flexibility in meeting the credit needs of local communities within the bounds of safety and soundness.

The ILCRA applies to covered financial institutions, which include Illinois charted depositories (banks and credit unions), and entities licensed under the Illinois Residential Mortgage License Act of 1987 (ILRMLA), which lent or originated 50 or more residential mortgage loans in the previous calendar year.

How about definitions?

It is worth noting that the ILCRA does not define the terms “lent” or “originated,” and the scope of these terms is currently unclear. I suggest you review these definitions with us in the context of your institution’s loan products. However, how these terms will be defined are significant to some ILRMLA licensees because the ILRMLA license covers entities performing various mortgage market activities, for instance, mortgage brokers, lenders, services, and secondary market purchasers. Having said that, while it’s likely that these terms would cover brokers and lenders, it is somewhat unclear whether these terms also cover servicers and secondary market purchasers unless the terms “originated” or “lent” are defined to include mortgage loan modifications and purchasing mortgage loans.

What are performance tests?

Regulators are required to evaluate each financial institution’s actual performance in meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. Generally, the regulator applies the lending, investment, and service tests to evaluate ILCRA compliance, the first test – the lending test – is the most important for the purposes of sketching out brief response because it focuses on your mortgage lending efforts. 

·        The lending test measures your lending activities by assessing the home mortgage loan originations and purchases, small business and small farm loans, community development loans, and, when appropriate, consumer loans. 

·        The investment test evaluates the extent to which you meet community needs through qualified investments. 

·        The service test reviews the availability and responsiveness of your systems for delivering retail banking and community development services. 

Are there checklists and worksheets?

There are some basic checklists and worksheets that you will want to include in your ILCRA policies and procedures, among which are review sheets for: 

1.       Branch Openings

2.       Public File Audits

3.       Service Activities

4.       Community Development Loans 

How do you meet a community’s financial needs?

The ILCRA expects you to meet the financial services needs of the communities where your institution has offices, branches, and other facilities are maintained. And that means taking into consideration the products and services offered via mobile and other digital channels. Additionally, your institution should help meet the financial services needs of deposit-based assessment areas, including areas contiguous thereto, low-income and moderate-income neighborhoods, and areas where there is a lack of access to safe and affordable banking and lending services. However, these obligations are imposed in a manner consistent with your institution's safe and sound operation.

Let’s drill down a little. Please keep in mind that this is a very complex area of regulatory compliance, so please keep this a high-level overview.

How will you be evaluated?

The Illinois Department of Financial and Professional Regulation (“IDFPR”) will assess the records of each institution that is subject to the ILCRA obligations. To conduct such compliance assessment, the IDFPR will set forth rules which must cover the assessment of the following factors: 

·        Activities to ascertain the financial services needs of the community, including communication with community members regarding the financial services provided; 

·        Extent of marketing to make members of the community aware of the financial services offered; 

·        Origination of mortgage loans, including, but not limited to, home improvement and rehabilitation loans, and other efforts to assist existing low-income and moderate-income residents to be able to remain in affordable housing in their neighborhoods; 

·        For small business lenders, the origination of loans to businesses with gross annual revenues of $1,000,000 or less, particularly those in low-income and moderate-income neighborhoods; 

·        Participation, including investments, in community development and redevelopment programs, small business technical assistance programs, minority-owned depository institutions, community development financial institutions, and mutually-owned financial institutions; 

·        Efforts working with delinquent customers to facilitate a resolution of the delinquency; 

·        Origination of loans that show an undue concentration and a systematic pattern of lending resulting in the loss of affordable housing units; 

·        Evidence of discriminatory and prohibited practices; and 

·        Other factors or requirements as in the judgment of the IDFPR reasonably bear upon the extent to which an institution meets the financial services needs of its entire community, including responsiveness to community needs as reflected by public comments.

What is in the assessment report?

Your institution will get a written report of the examination, parts of which will be made public. It will provide information no less than that provided under the Federal Community Reinvestment Act. You will have an opportunity to review and comment on the report of the examination. The public will have an opportunity for inspection and comments on the public-facing part of the report. The ILCRA requires covered institutions to provide a public notice in the public lobby of each of its offices, if any, and on its website. The public notice has a specific, public declaration language.

The ILCRA report of examination must include the following components: 

·        The assessment factors utilized to determine the institution’s descriptive rating; 

·        The IDFPR’s conclusions for each such assessment factor; 

·        A discussion of the facts supporting such conclusions; 

·        The institution’s descriptive rating and the basis therefor; and, 

·        A summary of public comments.

Is there a compliance rating?

Concerning the compliance rating, there are four such ratings, as follows: 

1.       Outstanding record of performance in meeting its community financial services needs; 

2.       Satisfactory record of performance in meeting its community financial services needs; 

3.       Needs to improve record of performance in meeting its community financial services needs; or, 

4.       Substantial noncompliance in meeting its community financial services needs.

The effect of the compliance rating will cause your company (viz., including parent and subsidiary) when you apply for: 

·        Establishment of a branch, office, or other facility; 

·        The relocation of a main office, branch, office, or other facility; 

·        A license renewal; 

·        Change in control; and, 

·        Mergers or acquisitions.

Importantly, that means dispositively that your record of compliance with the ILCRA obligations may be the basis for the denial of the foregoing applications.

Even non-depository mortgage lenders are covered?

Of course, non-depository mortgage lenders traditionally were not subject to community reinvestment obligations because, unlike banks, they did not make loans using depositors’ money; that is, non-depository mortgage lenders use their own private funds to provide financial services, and for this reason, historically, they were not required to “reinvest” depositors money back in the communities in which they operated. But the ILCRA has changed this standard: it imposes a new community investment (rather than the federal, generic “reinvestment”) obligation on non-depository mortgage lenders.

How will this affect your budget?

As I see it, the ILCRA will most likely result in additional costs related to compliance and examinations, especially for non-depository mortgage lenders. For them, it’s all entirely new. But a can of worms can be opened because of the ILCRA. It may lead to additional fair lending enforcement action against institutions as a result of ILCRA examinations. At this point, much will also depend on how the IDFPR defines assessment areas for ILCRA compliance – leading to a requirement for the institution to conduct marketing and outreach in areas that they did not cover or operate in before.

Will non-depository mortgage lenders ever be exempt?

Non-depository mortgage lenders will need to ramp up appropriately and promptly, as they are certainly going to be included, even though there has been an attempt to remove Illinois charted depositories (i.e., banks and credit unions) from the covered financial institutions. To which I submit: removal of banks and credit unions – don’t count on that happening!

After the passage of the ILCRA, on February 19, 2021, to wit, after the Illinois legislature passed the ILCRA, but before it became law, new legislation was proposed,[ii] which would remove Illinois charted depositories from the definitions of a covered financial institution under the ILCRA.

In any event, if this bill becomes law, it would still leave non-depository mortgage lenders subject to the ILCRA obligations. And, I expect this type of legislation to become law in many states soon.

I suggest that you notify covered institutions to contact us HERE. We’re ready to help.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director

Lenders Compliance Group

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[i] Illinois Community Reinvestment Act (“ILCRA”), Senate Bill No. 1608, Public Act 101-0657, Article 35, was signed into law on March 23, 2021
[ii] House Bill No. 3694

Redlining Violations caused by Advertisements

QUESTION
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