Targeted Marketing and Fair Lending Concerns
Happy Friday, Compliance Family!
Advertisements are everywhere: in our physical mailboxes, our email spam folders, our social media feeds, the apps on our phones, EVERYWHERE. In this age of non-stop marketing and pushes to buy the best or newest products, some of our other priorities can get lost in the shuffle. Let’s take a moment to remember some of our fair lending obligations, which matter even before a credit application is received.
To start, here is a refresher on some of the major fair lending laws. The Equal Credit Opportunity Act (ECOA) and its accompanying Regulation B generally prohibit discriminatory practices in lending. The provisions broadly apply to "any aspect of a credit transaction.” The Fair Housing Act (FHA) prohibits discrimination “in making available a [residential real estate related transaction]” based on a prohibited factor. NCUA’s nondiscrimination rule prohibits denial or discouragement of an application for a real estate related transaction based on any prohibited basis. There is a great deal of overlap in these regulations, as they all include race, color, religion, national origin, and sex as prohibited basis for making credit decisions. In short, lending fairly means treating members consistently from the very beginning of the lending transaction, including marketing. Keep in mind states have their own nondiscrimination laws that may govern more financial products or name other protected groups. Consult with local counsel to determine how these laws affect your credit union's marketing strategies.
Credit unions can maintain effective marketing plans while ensuring that all members and audiences are treated equally and offered equal opportunities to receive financial products. It is important to note an analysis of fair lending risks of a marketing strategy may reduce the chance of unintentional discrimination. For example, a marketing campaign that offers favorable promotional rates for a local hospital may seem nondiscriminatory. However, if in practice, the campaign and promotional information is only sent to white men, and other hospitals employees never see it, this may lead to a fair lending issue. In this case, the promotion was meant to benefit all hospital employees, but the women and minorities cannot take advantage of the promotion if the information is not shared with them. To avoid these type of issues when selecting a marketing technique, a credit union may consider the need to conduct an analysis of the most effective and fair way to market to ensure the information will reach all groups who would qualify for the product.
As a useful resource, the FFIEC’s Interagency Fair Lending Examination Procedures explains factors that may be used to analyze the risks associated with a marketing strategy. The guide describes indicators of potential disparate treatment in marketing residential products, including:
· “Advertising patterns or practices that a reasonable person would believe indicate prohibited basis customers are less desirable.
· Advertising only in media serving non-minority areas of the market.
· Marketing through brokers or other agents that the institution knows (or has reason to know) would serve only one racial or ethnic group in the market.
· Use of marketing programs or procedures for residential loan products that exclude one or more regions or geographies within the institutions assessment or marketing area that have significantly higher percentages of minority group residents than does the remainder of the assessment or marketing area.
· Using mailing or other distribution lists or other marketing techniques for prescreened or other offerings of residential loan products that: Explicitly exclude groups of prospective borrowers on a prohibited basis; or exclude geographies within the institution's marketing area that have significantly higher percentages of minority group residents than does the remainder of the marketing area.
· Proportion of prohibited basis applicants is significantly lower than that group's representation in the total population of the market area.
· Consumer complaints alleging discrimination in advertising or marketing loans.”
Unfortunately, there are a few recent examples of lenders violating fair lending laws with respect to marketing plans that discourage or otherwise exclude marginalized communities. In July, the CFPB filed a lawsuit against Townstone Financial, Inc., a nonbank mortgage lender for violations of ECOA, which included a targeted marketing scheme and discouragement based on a prohibited basis. The CFPB alleged that Townstone “engaged in illegal redlining by engaging in acts or practices that discouraged prospective applicants living in other areas from applying to Townstone for mortgage loans for properties located in African-American neighborhoods in the Chicago MSA, including by making discouraging statements during its weekly radio shows and podcasts through which it marketed its services.” Here, the lender used its radio show and podcast to create a marketing plan that disparately impacted minority borrowers and minority neighborhoods.
Today’s world of marketing goes far beyond the use of mailing lists and radio advertisements. One rising concern within the realm of fair lending is the impact of using big data to target advertisements to certain individuals or groups. For example, in 2019 the Department of Housing and Urban Development (HUD) alleged Facebook violated the FHA. HUD stated that Facebook allowed advertisers to exclude groups of people from seeing certain advertisements. The program also allowed advertisements to be altered based on the audience and commonalities among users. Civil rights activist groups argued that steering advertisements in this way diminishes a customer’s ability to learn about different financial products that are actually available on the market. If a credit union is interested in using big data and other emerging tools to increase advertisement efficiency, it will be important to learn how the programs work and implement processes to avoid the types of issues pointed out by HUD.
There are plenty of other instances of agencies investigating discriminatory marketing practices. However, credit unions can use these examples to strengthen their own analyses of marketing strategies to ensure all potential borrowers are treated fairly and presented with opportunities to receive loan products.
NAFCU Compliance Monitor article: Fair Lending and Marketing Programs - Red Flags for Compliance
Consumer Compliance Outlook article: From Catalogs to Clicks The Fair Lending Implications of Targeted, Internet Marketing
About the Author
Loran Jackson joined NAFCU as Regulatory Compliance Counsel in April 2019 and was named Senior Regulatory Compliance Counsel in February 2021. In her role, she provides daily compliance assistance to member credit unions on a variety of topics. She also writes articles for NAFCU publications and presents at NAFCU conferences