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Posted by Trey Sullivan
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11 Minute Read

A recent settlement is the first case where the CFPB openly disclosed their use of mystery shoppers to identify Fair Lending and Redlining risk. The Bureau's mystery shopper program is expected to grow and become more active, and may inspire other agencies to adopt similar tactics.

The front page of yesterday's Wall Street Journal "Money & Investing" section highlighted a tactic used by the Consumer Financial Protection Bureau: mystery shopping.

cfpblogo.jpegThe topic rose to the surface in the wake of the high-profile $10.6M settlement between the CFPB and BankcorpSouth Bank. The settlement alleged that the bank illegally redlined in Memphis; charged African-American customers for certain mortgage loans more than non-Hispanic white borrowers with similar loan qualifications; and implemented a discriminatory loan denial policy. 

One of the key allegations is that the bank denied African-Americans equal access to mortgages. One way they determined this? You guessed it: mystery shoppers. 

According to the WSJ, two CFPB mystery shoppers, one black and one white, went to the bank looking for mortgages. An employee of the bank allegedly steered the black customer to a smaller and more expensive loan, despite the fact that the mystery shopper had a higher stated income and credit score.

This is the first regulatory action in which the CFPB has openly disclosed that they used mystery shoppers. The CFPB also used audio recordings of an internal meeting as evidence of discrimination.

Mystery shopping isn't a particularly new concept for compliance. It's a relatively well-accepted practice for community activist groups, some of which get HUD grants to conduct those kinds of investigations. The Justice Department also sometimes uses "testers" for fair housing investigations, though seemingly at a smaller scale than the CFPB. In any event, the topic gets a little more complicated when it comes to regulators. 

compliance-risk-assessment.pngThe Bureau says that they developed the mystery shopping program after considering all the potential legal limitations, including the 1974 Privacy Act, which says that government officials must identify themselves if seeking information from individuals. The CFPB says that, because they use mystery shoppers to gather information that would be available to the public and doesn't require getting information on specific individuals. 

However, some have criticized the CFPB's move into using mystery shoppers.

The former deputy general counsel of the Securities and Exchange Commission, Andrew Vollmer, noted that the use of undercover investigators might be problematic because it looks a lot like the tactics used in criminal investigation, but the civil law enforcement system doesn't have the protections that the criminal system does.

TRUPOINT Viewpoint: The use of mystery shoppers by the regulators is a new and potentially troubling development for banks and financial institutions of all sizes. Over the last few years, we've seen the influence of the CFPB and their enforcement tactics on other regulatory agencies.

In this new and highly charged environment, community banks should be aware that their regulators may now see the value of using mystery shoppers as part of their information gathering.

We'll be watching closely to see how this develops. 

Other Key Takeaways from the Settlement 

  • Redlining a Major Priority: This is the latest settlement where Redlining was a key area of Fair Lending focus. Regulators have levied more than $40M in Redlining-related settlements in the past year. We've been saying it for a year: Redlining is a major focal point. If you aren't analyzing your data for Redlining risk, now is the time to start.
  • Changing Diversity Policies: This settlement is also unique because it required the Bank to "adopt or revise diversity policies and practices as part of a written compliance plan to ensure that it does not engage in discrimination." 
  • Underwriting and Pricing Remain Key Risk Areas: These two risks figure prominently in many Fair Lending settlements, and this is no exception. Fortunately, these are two areas where data analysis is relatively simple and risks are relatively easy to spot. Again, data analysis is essential for managing Fair Lending risk.

 

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Trey Sullivan

Trey Sullivan