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 "Race, Ethnicity, and Credit Card Marketing," Simon Firestone analyzes credit card marketing direct mail data, looking at direct mail received by 78,156 individuals between August 2009 and October 2012. Normalized for income and Vantage credit scores, the sample of issuers profiled had statistically significant racial bias in their marketing efforts.
"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; tight controls over criteria used at the application stage are crucial. They should also pay close attention to the controls and monitoring over manual review of credit applications. While judgmental decisions can be a powerful tool in underwriting, the potential for human error necessarily increases.
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.