Advertising and Fair
Lending – A balancing test
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. [1]
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.[2]
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.
** For more information about methods
to avoid discouragement and ways to enhance your fair lending program, please
contact us at www.VCM4you.com**
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