CFPB Employs “Mystery Shopper” Strategy in Fair Lending Investigation

The CFPB and the Department of Justice have partnered together to enter into a proposed consent order with BancorpSouth Bank which resolves allegations that the bank engaged in a pattern or practice of redlining in its mortgage lending practice, discriminated in its underwriting and pricing of certain mortgage loans to minorities, and implemented an explicitly discriminatory denial practice.  The investigation marks the first time that the CFPB has used testers or “mystery shoppers” to support an allegation of discrimination. The consent order, if approved, requires the bank to invest $4 million in a loan subsidies, pay $2.78 million in settlement to African-American consumers harmed by the bank’s practices, spend at least $300,000 on targeted advertising in majority-minority neighborhoods in its Memphis MSA, spend at least $500,000 on local partnerships with community or governmental organizations that provide financial literacy and pay a $3 million civil penalty.  The proposed consent order also requires the bank to extend credit offers to previously denied African-American consumers who were denied mortgage loans as a result of the bank’s allegedly discriminatory underwriting policies and add at least one additional branch in a majority-minority neighborhood in its Memphis MSA. 

The complaint alleges that between 2011 and 2013, the bank violated the Equal Credit Opportunity Act and Fair Housing Act. Both Acts prohibit discrimination based upon race, color and national origin.  The agencies alleged that the bank “discriminated in a number of distinct ways through virtually every stage of its lending process.” Complaint, ¶ 3. The complaint makes four key allegations against the bank.  First, the complaint alleges that the bank engaged in redlining in minority neighborhoods in its Memphis MSA. Id. at  ¶4. Secondly, the complaint alleges that the bank illegally discriminated against African-American mortgage applicants in its underwriting of loan by rejecting both their consumer and business purpose loans at significantly higher rates than those of “similarly situated non-Hispanic White applicants” (“White”).  Id. at  ¶5.  Thirdly, the complaint alleges that the bank discriminated against African-American applicants by charging them higher prices than similarly situated White applicants.  Id. at ¶6. Finally, the complaint alleges that the bank implemented a policy and practice that required its employees to treat mortgage applicants differently based upon their race.  Id. at ¶7. 

The bank, while neither admitting nor denying the allegations of the complaint, entered into the consent order “solely for the purpose of avoiding contested litigation with the United States and the Bureau, and to instead devote its resources to providing fair credit services to eligible borrowers with meeting their credit needs.”  The consent order further notes that prior to the entry of the Order, the bank engaged in a number of steps to improve its compliance management system which included:

• Implementing rate sheets to price loans originated by its Community Banking Department;
• Transitioning to centralized underwriting;
• Appoint a Chief Lending Officer with responsibility over the bank’s fair lending compliance program;
• Opening a full time service branch in a minority neighborhood in its Memphis MSA;
• Implementing enhanced fair lending training; and
• Monitoring pricing and underwriting outcomes on a quarterly basis.

Beyond the monetary remediation previously discussed, the consent order requires the bank:

• With the assistance of a third party independent compliance-management-system consultant, develop and submit for approval a written Fair Lending Compliance Plan which includes at a minimum:
• Steps to effectively and promptly revise and revise the bank’s current mortgage lending policies and practices to ensure compliance with ECOA and the FHA;
• Diversity policies and practices;
• Fair lending training on an annual basis to all lending personnel to ensure employees’ conduct themselves in a nondiscriminatory manner;
• Written policies and procedures which insure the bank provides equal information and assistance to all applicants regardless of race or other prohibited characteristics;
• A formal process for ongoing monitoring of defendant’s mortgage lending for compliance with ECOA and the FHA, including conducting periodic fair lending statistical analyses of loan pricing and underwriting outcomes;
• Internal regular audits of the bank’s mortgage lending at least annually; and
• Implementation or revision of a consumer complaint resolution program which addresses complaints alleging discrimination in mortgage lending.
• Implement policies and procedures for the pricing of all mortgage loans that exclusively base pricing on objective credit and borrower characteristics supported by a legitimate business need; and
• Maintain specific race neutral underwriting guidelines, policies and procedures for mortgage loans that are designed to ensure consistent application of legitimate underwriting criteria and avoid unlawful discrimination.

Banks and other lenders should be aware that the CFPB has now embraced the use of “testers” or mystery shoppers – sending individuals (both white and African American) into branch offices to ascertain whether the testers were treated differently.  The CFPB contended in this matter that, in several instances, a Bancorp South Bank loan officer treated the African-American tester less favorably than a white counterpart with similar credit qualifications.