Digital redlining presents a fair lending risk for financial institutions

Fair lending is considered a high-risk area that regulators will place a greater focus on during examinations. Depending upon the size and loan volume of your financial institution, management may have implemented several of these controls to ensure fair lending compliance:

• On-going department monitoring
• Utilization of automated software systems
• In-house periodic fair lending reviews
• Fair lending compliance audits

However, do these controls identify all types of fair lending violations? The  Equal Credit Opportunity Act (ECOA) and Fair Housing Act (FHA) protect consumers by prohibiting unfair and discriminatory practices. In addition to a fair lending review, an Unfair Deceptive Acts and Abusive Practices (UDAAP) review could aid in identifying predatory lending practices at your institution.

Predatory lending may include the following:

• Collateral or equity “stripping”
• Flipping
• Inadequate disclosure
• Padding or packing
• Risky loan terms and structures
• Single-premium credit insurance

Review of marketing materials

Fair lending monitoring and/or reviews should incorporate marketing material and social media outlets. In addition, the marketing department should be aware of digital redlining. This is a form of discrimination where lenders restrict access to credit or offer credit on unequal terms because of a customer’s digital footprint. Digital redlining in marketing becomes a concern when advertising via digital channels, whether email, text message, website, popup or banner ad, social media, mobile banking application, or otherwise.

When loan products or pricing vary by digital channel, and less favorable terms or conditions are offered (or credit products are not offered at all) to channels with greater minority use, there is digital redlining risk. The converse is also true: when digital channels with greater non-minority usage advertise more favorable terms or pricing, it makes it less likely that a minority consumer will apply for (or even be aware of) a more favorable loan. The result is digital redlining risk.