CFPB Secret Shoppers, Disparate Impact

The CFPB sent in secret shoppers. A white woman and an African American woman. The African American woman had a stronger profile than the White woman. She was a manger in her line of work for 10 years, over 800 credit scores, and more than 20% down with reserves. The white woman was an hourly employee (like a food server) with transient hours and tip income. She had a lower credit score than the African American woman and had less money down in the transaction.

They approved the white woman for $35,000 higher purchase price than the more qualified African American woman Equal Credit Opportunity Act (ECOA) and The Fair Housing Act (FHA) prohibit creditors from discriminating on the basis of, among other characteristics, race, color, and national origin in their mortgage lending practices. ECOA and its implementing regulation, Regulation B, 12 C.F.R. pt. 1002, make it illegal for a creditor to discriminate against an applicant in any aspect of a credit transaction, including consumer and business transactions, on the basis of, among other characteristics, race, color, and national origin. 15 U.S.C. I69l(a); 12 C.F.R. 1002.4(a).

ECOA and Regulation B also prohibit any statements, acts, or practices that would or could discourage on a prohibited basis a prospective applicant from applying for credit. 15 U.S.C. 1691(a); 12 C.F.R. 1002.4(b); 12 C.F.R. pt. 1002, Supp. I,~ 1002.4(b)(l).

(FHA) makes it unlawful for any bank to discriminate against any person in making available residential mortgage loans on the basis of, among other characteristics, race, color, and national origin. 42 U.S.C. 3605(a). Bancorp South discriminated in a number of distinct ways through virtually every stage of its lending process.

First, BancorpSouth engaged in unlawful redlining by acting to meet the credit needs of majority-White neighborhoods in the Memphis TN-MS-AR Metropolitan Statistical Area ("Memphis MSA" or "MSA") while avoiding the credit needs of majority-minority neighborhoods, thereby engaging in acts or practices directed at prospective applicants that discouraged people in minority neighborhoods from applying for credit. BancorpSouth generates more mortgage loan applications in the Memphis MSA than any other MSA in which it operates.

Second, the Bank discriminated against African-American applicants in its underwriting of mortgage loans, including loans that the Bank classified as for a consumer purpose and loans that the Bank classified as for a business purpose, by rejecting their applications at significantly higher rates than similarly situated non-Hispanic White ("White") applicants.

Third, the Bank discriminated against African American borrowers in the pricing of mortgage loans, including consumer-purpose and business-purpose transactions, by charging them, on average, 30-64 basis points 2 more for first lien and second lien mortgage loans than similarly situated White borrowers.

Fourth, BancorpSouth implemented a policy and practice that required its employees to treat applicants for mortgage loans differently based on the applicant's race or other prohibited characteristic. Specifically, the Bank instructed its loan officers to deny applications from minorities and other "protected class members" more quickly than other applicants and not to provide credit assistance to "borderline" applicants that other applicants may have received that might have improved their chances of being approved for the loan.

In addition, a series of matched-pair tests at several BancorpSouth branches further demonstrate the Bank's discrimination against African Americans. The tests revealed that the Bank treated African American testers less favorably than similarly situated White testers.

In a case like this, the lender needs to abandon the discretionary lending policy and take steps to ensure that people of certain ethnicities are not arbitrarily discriminated against relating to lending products and services.

1. What laws were violated by BancorpSouth's lending policies?

2. Why were the lending policies in violation of federal law? 3. What could have BancorpSouth done differently to avoid being in violation of federal law?