When reviewing the overall effectiveness of your fair lending program, one of the areas that can often be overlooked is the area of potential discouragement. This area requires a great deal of empathy at best, and knowledge of the community and the history of the community at a minimum. Discouragement can be a matter of interpretation; one persons’ joke can be another’s insult. Moreover, discouragement can often be difficult to recognize. After all, discouraged persons are unlikely to have contact with the financial institution and it is difficult to know about the people who do not apply for services. Preventing discouragement is not only a good compliance policy; it also helps a financial institution reach out to potentially large pockets of customers.
Advertising is one of the more important areas of fair lending to review. An advertising campaign can be published with the greatest of innocent intent and still have the effect of discouraging members of a community from participating in the financial institution. When this issue comes up it is often in the context of a financial institution using testimonials from people in its advertising. Several financial institutions have been admonished to make sure that the people used in advertising are diverse. The thinking here is that the more diverse the people in the advertisements, the more open the financial institution will appear to be. However, even when widely using people from various ethnicities in advertising, it is possible to discourage potential customers with advertising.
Fair Lending Laws
Discouragement is generally reviewed as part of the fair lending audit performed by the regulators. Fair lending is a combination of a set of regulations that are brought together to make a determination of how a financial institution avoids overt and unintentional discrimination. The laws that combine to form fair Lending include
• The Equal credit opportunity Act (Regulation B)
• The Fair Housing Act
• The Truth in Lending act
• Unfair Deceptive Abusive Acts or Practices Act (UDAAP)
Of these regulations, the Equal Credit Opportunity Act specifically prohibits discouragement of applicants. Section 202.4b says specifically:
Discouragement. 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.
Fair Lending laws specifically establish groups of people who are specifically protected. The rationale for these groups is that there have been documented instances in the past where financial institutions engaged in behavior that directly discriminated against them. When congress was considering these laws there were several studies performed and hearings conducted that showed that certain practices by financial institutions had to be limited. The US Supreme Court has also added to the purview of the fair lending laws by adding definitions for the way financial institutions practices might be interpreted as violating fair lending laws. The Supreme Court has established that there are three types of discrimination that can occur under fair lending laws:
• Overt Disparate Treatment- a lender discriminates on a prohibited basis. For example, only making loans to men, or only to Christians
• Comparative Evidence of Disparate Treatment – a lender treats two sets of people who are similar in different ways. For example, a male lender receives assistance with the completing of his application while a female applicant is left to complete the application on her own
• Evidence of Disparate Impact –a policy that is neutral on its face but impacts protected groups unequally. For example, a lender decides that it will not count part time income as income for purposes of loan underwriting. Although this policy might be applied equally to all applicants, since most part time employees are women and minorities, the policy would have a harsher impact on these groups.
Discouragement Comes in Many Forms
Based upon the definitions given by the court, discouragement can take on many different forms. For example, suppose a loan officer made a statement to borrowers that they “really don’t want to make home loans to women, but the law says we have to”. This sort of statement would be the overt disparate treatment type of discouragement. Very few women who heard such a statement would continue with the loan process. The fact that the loan officer is naming a protected class with their statements makes the discouragement the type that falls under overt disparate treatment.
When lenders advertise and use people in their advertisements, they run the risk of comparative evidence of disparate treatment. Advertising that excludes certain members of a community or implies a preference of one group over another can also be a form of discouragement. This area of fair lending laws is nuanced and requires some level of empathy to navigate successfully.
One case that we came across was particularly instructive. A financial institution had prepared an advertising campaign that focused on the history of the financial institution. Included in the advertisement were various pictures from the time of the formation of the financial institution which in this case was pre-civil war. The ad campaign was designed to focus on the significant people in the financial institutions history such as the founder of the financial institution and his descendants who ran the financial institution throughout the years. The financial institutions’ compliance staff had reviewed the campaign and approved it. Senior management at the financial institution was quite proud of the campaign. Imagine the surprise of management when they were informed by the regulators that the posters amounted to a form of discouragement!
As it turned out there were two factors that played into the regulators decision. First, the history that was described in the timeline of the advertising campaign was painful for many of the people of color within the financial institutions’ service area. Unfortunately, during the same time period that financial institution was growing, many hurtful things were happening to members of the community. This was not to say that the financial institution was in any way involved in the terrible things that had happened. However, an advertising campaign that highlighted the time when these things happened was at a minimum, insensitive. The other factor that played into the judgment of the regulators was that the demographic make-up of the financial institution’s service area had significantly changed since the opening of the financial institution. Therefore, the people depicted in the advertisement did not represent the current universe of potential clients.
In another example, in 2010, the Federal Reserve ordered a financial institution in Oklahoma to take down advertisements that included a cross, a bible verse and the statement “Merry Christmas, God is with Us”. In this case, the advertisement was interpreted to discourage people who were not Christian from applying at the financial institution.
As you might imagine, in both of the cases described above the management teams were stung and upset. In the Oklahoma case, the management of the financial institution went to their members of Congress and did eventually get the decision reversed, but it did not end the scrutiny of the financial institution’s policies and procedures.
Discouragement can cause Economic Pain to Financial Institutions
As we mentioned at the outset, discouragement is an area that can be difficult to discern. Of course, the common approach has been for financial institutions to avoid all uses of people in advertising and to limit publications to basic information about the financial institution. The truth is that even using this approach can result in a finding of discouragement. For example, in the case of USA V First American Financial institution, one of the practices that were specifically pointed out was:
The Financial institution has also consistently directed its print media advertising to daily newspapers of general circulation and neighborhood and suburban weekly newspapers serving largely non-minority city neighborhoods and suburbs in the Chicago MSA. Until at least December 2002, the Financial institution had never advertised in minority-focused publications, many of which have larger circulations than some suburban newspapers the Financial institution has used.
Excluding advertising from publications in the service area can also be a form of discouragement. In the case of First American, this was one of the factors that contributed to the penalties and fees that assess to the financial institution.
Reducing the Possibilities of Discouragement
Avoiding publications that cater to specific segments of a community is the same as missing opportunities for growth. Advertising strategy should be aggressively inclusive of the various businesses social and ethnic groups that make up the communities that surround your financial institution. To take on such a strategy, we recommend the following steps:
1. Know the Players: As part of your community reinvestment act program, the institution should make attempts at outreach to the various service groups within the assessment area. It is critical that this effort should include identification of the most influential of the community groups and the ways in which the financial institution may partner with these groups
2. Know the History of the Area: The historical development of an area is often overlooked when developing advertising and products at financial institutions. It is important to know and understand both the good and the bad history of your area. In this manner, you can prepare the financial institution for potential complaints and make your outreach more effective
3. Test the Staff: It is an excellent idea to get “mystery shoppers” to test staff on the presentations being made to the general community. A quick and simple review of customer experiences can be illuminating. Often times, misunderstandings of policy can result in fair lending issues that are much unexpected.
4. Training: It is a best practice to conduct interactive training that is designed to assist staff in their understanding of the history of and intentions of fair lending regulations. When staff understands its role in an overall larger scheme, compliance becomes most effective.