VIDEO: Discrimination Based on Religion
In this Compliance Clip (video), Adam discusses one of the topics that is included in our Spring 2022 Quarterly Compliance Update, that is - the CFPB found lenders discriminating against applicants based on religious beliefs. While discrimination based on religion has long been prohibited, Adam explains that release by the CFPB show us a trend in fair lending that all financial institutions should be ready for. In addition, the CFPB also expressed its concern about digital redlining, a topic that Adam also talked about in another recent Compliance Clip.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about discrimination based on religion. The reason we're talking about this is this is a topic that showed up in our Spring 2022 Quarterly Compliance Update, in other words, the CFPB brought this up during the first quarter of 2022. And in our quarterly update, we always cover all the material that took place during the prior quarter, so in our Spring 2022 quarterly update, this was something that took place in the prior quarter.
Specifically, what we're talking about here is the CFPB releasing an article on January 14, 2022. This article talked about discrimination based on religious beliefs. The article emphasized that it is illegal to penalize borrowers for being religious. What the CFPB is concerned about is that some financial companies are unlawfully considering religion when making decisions on financial products. You may be saying, “What? That doesn't happen.” Well, we understand on the consumer side that you really cannot discriminate against religion or any protected class. You really cannot do that. It's not permissible and the regulators look at that, and they monitor for that. However, what the CFPB is saying in their article is that they were finding that lenders violated fair lending laws by improperly inquiring about small business applicants’ religious affiliation by utilizing questionnaires, which contained explicit inquiries about their religious affiliation.
When we think about fair lending, you have to think about the Equal Credit Opportunity Act. The Equal Credit Opportunity Act or ECOA, which is implemented by Regulation B, prohibits discrimination based on religion for all types of credit, not just consumer credit, but of course, business credit. The challenge is that examiners often look mainly at consumer credit, but let me tell you, this is changing. The examiners are now starting to really dig into commercial credit in loans to business customers And they're going to do so more and more as they develop this new rule under Regulation B for small business data collection reporting that I call “HMDA for small businesses”. Now, if you're not aware of that rule, you need to take a look at it because it's coming. It's not a final rule, it's proposed, but it's not even a final rule yet. So this is something that's going to be a big deal when it does become finalized. That said, what that means is that in the future, we're going to see more and more scrutiny on small business discrimination and discrimination in the commercial loan departments. I've been saying this for years that what we're seeing here is that this is now coming to fruition. So the examiners are finding this and they're saying that it's illegal to discriminate based on religion for your business customers. It's a reminder for bankers of this.
In the release, the CFPB said that examiners also found that lenders denied credit to applicants identified as religious institutions, because the applicants did not respond to the questionnaire. As a resolution, these lenders identified the affected applicants and provided an offer for each identified applicant to reapply for a small business loan. In essence, they had discriminated and essentially deterred those applicants from applying and therefore they had to go back and offer them a loan later. That was the restitution for this. So this is a big deal in the fair lending world, something that you need to be paying attention to in your commercial loan departments.
In their article, the CFPB also expressed its concern about how financial institutions might be making use of artificial intelligence and other algorithmic decision tools, such as the use of third party data to analyze geolocation data, to power their credit decision. In other words, the CFPB is concerned about digital redlining. This is a topic we talked about in a prior compliance clip. If you're interested in learning more about digital redlining, take a look at that Compliance Clip that's absolutely free on our site. The link is going to be provided here on our website below this video as it's published. So take a look at that and dig into that a little bit more. There's a lot of things happening in the fair lending world right now. If your institution's not up to snuff on fair lending, make sure you figure out how to do that. One of the ways you can do that is in our store, compliancecohort.com/store, take a look at our Fair Lending Bootcamp. This is a day-long training program on fair lending, where we talk about all types of fair lending topics.
Fair lending is becoming an even hotter topic with the current administration in the CFPB. I really can't reiterate how important it is to make sure your institution is ready to go on fair lending, not just in your consumer loan areas but in your commercial loan areas as well.
That's it for this Compliance Clip.