What credit unions can learn from BancorpSouth fair lending woes

BancorpSouth Bank, headquartered in Mississippi, took a $10.6 million misstep when its mortgage lending practices allegedly discriminated against African-American consumers. While the bank has not admitted to the allegations, it did agree to a proposed settlement and consent order with the CFPB and the U.S. Department of Justice of charges that the bank’s mortgage lending practices violated the Equal Credit Opportunity Act and the Fair Housing Act.

Fair lending laws and related regulations date back to the civil rights movements of the 1960s, so they’ve been around for a while now. The Fair Housing Act and the Equal Credit Opportunity Act work together to prohibit unfair and discriminatory practices based on traits such as race, color, religion, etc. While some of the allegations against BancorpSouth had to do with redlining, other areas addressed in the complaint against the institution could be levied at credit unions and therefore merit consideration. So what happened at BancorpSouth and what can credit unions learn from its mistakes?

The Allegations

The alleged violations centered on findings that the bank was discriminating against African-American consumers in the underwriting and pricing of certain mortgage loans. CFPB regulators found that loan pricing was found to be higher for African-American borrowers than it was for White applicants.

On top of that, the bank was allegedly found to have practiced general discrimination. The CFPB discovered this through matched-pair testing as well as through something it hadn’t done before. It sent in “mystery shoppers” posing as consumers who reported their experiences back to the CFPB. The CFPB’s verdict from these efforts was that BancorpSouth treated African-American consumers differently than white consumers.

The CFPB further found that the bank allegedly implemented a discriminatory policy that required its employees to deny applications from minorities more quickly than white applicants and to not provide credit assistance to “borderline” applicants or applicants that were neither well-qualified or unqualified. Investigators also found that loan officers and processors were instructed to inform minority applicants of adverse action within 21 days, rather than the maximum 30 days upon receiving a completed application as required by regulation. Perhaps this was a misguided attempt to make sure that all denied applicants, especially minority applicants, were notified within required timeframes. However, what it potentially did in practice from the CFPB’s perspective was to give minority applicants nine fewer days to work through issues with their loan officer that, if available, might have provided needed time to qualify for a loan.

Perhaps the final nail in the case’s coffin came in the form of a recording from a staff meeting. The allegations state that during one particular meeting, a manager presenting the 21-day turn down time frame for minority applicants also included BancorpSouth employees making several racially insensitive comments followed by laughter within the recording.

Key Takeaways

Lesson #1:

Know what’s in your lending data. Your data can tell you if you’re at risk for pricing discrimination. Find out before your examiner does while there is time to implement steps to mitigate or provide a underwriting justification for findings that could look problematic.

Lesson #2:

If your financial institution is a place where employees feel comfortable being insensitive about other classes, races, religious persons, etc., at work—even in “joking”—such practices are likely to leak through their interactions with customers and members no matter how many times you remind them of the fair lending policies. These actions can potentially lead to discriminatory actions even if not fully intended by those individuals. BancorpSouth’s Chairman and CEO James Rollins said in response to the fine and allegation that, “BancorpSouth is dedicated to a culture of respect, diversity and inclusion in both our workplace and communities. We have a longstanding commitment to equal treatment and any form of discrimination will not be tolerated.” While this position is undoubtedly true, it is not enough for an institution’s commitment to fair lending to exist only on paper. Fair lending is not something that can be disregarded behind the counter and then expected to be implemented on the front lines. It requires fundamental commitment across the organization and must be tested by actions that could include even institutional use of mystery shoppers.

Lesson #3:

The fair lending guidelines are to be taken seriously. Not only will violations cost a financial institution in fines, civil money penalties, and restitution payments, they will greatly affect its reputation. “BancorpSouth’s discrimination throughout the mortgage lending process harmed the people who were overcharged or denied their dream of homeownership based on their race, and it harmed the Memphis minority neighborhoods that were redlined and denied equal access to affordable credit,” said CFPB Director Richard Cordray, adding that the action is a reminder that overt discrimination is “not yet remnants of the past, and that federal enforcement is needed to bring real relief to communities and individuals.” Both the CFPB and the Department of Justice have positioned themselves to diligently work together “to root out discrimination in the marketplace and ensure consumers receive fair and equal treatment under the law.”

Another interesting aspect of this case is that the consent order will require BancorpSouth to have a written compliance plan that includes diversity policies and practices to ensure that it does not engage in discrimination. While BancorpSouth is required to implement a discriminatory practices compliance plan in an attempt to make amends, it’s clearly a sound business practice for an institution to have a fair lending compliance plan to ensure that you are never faced with similar allegations.

In short, what happened at BancorpSouth Bank should be a wake-up call to all financial institutions, including credit unions, to make sure that their commitment to fair lending doesn’t just exist on paper, but throughout the organization utilizing appropriate techniques and practices based on risk factors as identified through sound assessments.