-
Though leveraging credit prescreening can be complicated, organizations that are proactive in developing clear policies and processes can safely market themselves to desirable customers, according to consultant Rich Walker.
August 13 -
At some point, the CFPB may start asking if issuers' credit scoring models negatively affect minority credit card applicants more than white applicants.
November 12 -
Expanded reporting requirements under the Home Mortgage Disclosure Act will give regulators access to a panoply of sensitive data. Banks should take steps to address any fair lending issues before the new rules take effect, according to Warren W. Traiger.
August 12 -
The oft-mischaracterized HUD disparate impact rule will discourage any race-based decision making and minimize lawsuits. Why would any mortgage lender want to continue a practice with a discriminatory effect but no business objective?
February 14
Fair lending is a key consideration for any consumer lending program. According to the "effects test" or disparate impact doctrine used by the Consumer Financial Protection Bureau, credit card issuers must avoid not only direct, intentional discrimination but also practices that have the effect of discrimination.
A recent study published in the Journal of Money, Credit and Banking suggests that issuers are engaging in marketing practices that fail the effect test. In "
"My findings imply that marketing is an important area for analysis of discrimination in consumer credit," Firestone writes. "Due to the likely need for confidential information in further analysis, investigation by an appropriate regulatory agency such as the Consumer Financial Protection Bureau would be useful."
Given that issuers' marketing practices, in aggregate, appear to fail the effects test, they are potentially in violation of compliance with the Equal Credit Opportunity Act. The good news is that guidance as to how to fix these issues is available in both the ECOA and in the CFPB's Supervision and Exam Manual.
The best course is the disciplined application of self-tests. Issuers should set up monitoring programs and apply corrective action to practices as needed to ensure compliance. The CFPB affirms this in the manual: "Compliance should be part of the day-to-day responsibilities of management and the employees of a supervised entity; issues should be self-identified; and corrective action should be initiated by the entity."
While particular marketing programs may exhibit some bias, disparate impact is best measured at the enterprise level. This means that issuers should consider the sum total of all efforts and programs, from individual campaigns to broader product sets.
A few issues are worth special attention. Consumer lenders should ensure that they are monitoring the prescreening practices that lead to firm offers of credit;
Many banks and issuers have established Community Reinvestment Act programs to enhance the diversity of their practices and bring equal product sets to their entire region of focus. Issuers should make sure that their fair lending programs coordinate tightly with these CRA efforts. Lastly, they should have the policies and procedures in place to document their monitoring and compliance intentions. This last step gives issuers a set of rules to check their self-tests against.
Rich Walker is a managing director with Winterberry Group, where he leads the financial service practice. Prior to joining Winterberry, he served in various marketing roles at Capital One and led many compliance projects to ensure alignment with the 1996 amendments to the Fair Credit Reporting Act, Fair and Accurate Credit Transactions Act and Card Act.
