Mystery Shoppers Expose Alleged Redlining at BancorpSouth

This month yet another financial institution has entered into a consent order with the Department of Justice and Consumer Finance Protection Bureau over allegations of discriminatory mortgage lending practices.

BancorpSouth Bank, headquartered in Tupelo, Miss., is accused of:

  • Structuring their lending area to avoid and/or discourage mortgage applications from consumers in minority areas (also known as “redlining”).
  • Charging higher annual percentage rates to African-American customers than non-Hispanic white borrowers with similar loan qualifications.
  • Implementing an explicitly discriminatory policy of denying “protected class” applicants and denying credit assistance based on race.

To settle these allegations, BancorpSouth will pay more than $10 million in remediation including payments to a loan subsidy program, targeted marketing and outreach to minority neighborhoods, expanding its physical presence in these neighborhoods, direct payments to African-American customers who were denied mortgages and a $3 million penalty.

Mystery Shopping

More interesting than the allegations against BancorpSouth, however, is the method by which the DOJ and CFPB uncovered these problematic practices.

The CFPB sent both African-American and white “testers” (also commonly referred to as “mystery shoppers”) to several BancorpSouth branches to inquire about mortgages. The testers reported that when two similarly qualified potential customers asked bank employees about loans, the African-American tester received information that would restrict him or her to a smaller loan than the white tester was offered.

While other organizations—like the DOJ and Department of Housing and Urban Development—have long used mystery shopping to identify potential discrimination, this is the first time the CFPB has used information gleaned from mystery shoppers to support discrimination allegations.

The CFPB also cited audio recordings of a September 2012 internal meeting at BancorpSouth where a bank official allegedly “articulates the bank’s policy or practice to reject minority applicants more quickly than white applicants, as well as the bank’s perception of African Americans.”

What Can Compliance Officers Do?

If intentional discrimination is taking place in an institution—or even if the appearance of discriminatory practices is taking place inadvertently—compliance officers may not be there to witness the conversations the way a mystery shopper can.

However, compliance officers can play a role in identifying activity that appears discriminatory by closely and diligently monitoring an institution’s lending data.

A comprehensive monitoring program that includes credit and pricing decision regression analysis may well identify instances where minority borrowers are being charged higher-than-average interest rates or are being turned down for loans at a greater rate than other applicants.

Flagging these anomalies quickly can help an institution act to provide training to employees or implement new practices, so that if a mystery shopper does show up in a branch, they will not experience the kind of discrimination the CFPB alleges took place at BancorpSouth.

Have questions about how your institution can be prepared for these kinds of investigations? Give us a call. We’d be happy to help.

Posted in Fair Lending Blog, Lessons in Fair Lending.

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