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.

Any medium or device that serves as a marketing platform is a potential fair lending or UDAAP hazard, including social media sites, digital advertising, emails, text messages, telemarketing scripts, statement stuffers and messages, and even flyers and brochures displayed inside the branch. Institutions should ensure controls are in place to actively monitor postings on social media outlets.

Also, financial institutions should be monitoring and tracking complaints. Analysis of the complaints received will help identify areas of risk that will need to be reviewed in greater detail. Additionally, complaint trends should be reported to senior management.

Lastly, the compliance officer or the fair lending officer should be reviewing results of internal data and compliance monitoring with respect to fair lending laws. With the influx of loans due to the pandemic, the bank’s assessment area should be reviewed to ensure it is still accurate. A detailed review should be completed and documented to identify potential redlining.