Pub. 11 2021 Issue 1

7 PUB. 10 2020 ISSUE 4 Proxy Methodology: Filling a Crucial Data Void With the intent of protecting civil rights, Regulation B prohibits a creditor from ask - ing for, collecting, recording or otherwise retaining prohibited basis group informa- tion, except in the case of residential real estate loans or other limited cases (e.g., Special Purpose Credit Program, Self-Test - ing). Despite this prohibition, banks are still expected to oversee and manage fair lending risk across all credit types. There’s practically no other choice to fill the void when performing data-driven fair lending analysis of disparate treatment or disparate impact for non-mortgage products with prohibited data collection. There’s practically no other choice but to rely upon a proxy to designate an appli- cant’s race. The use of surrogates for an applicant’s prohibited basis group charac- teristics is referenced in the long-standing interagency fair lending examination pro- cedures. For banks regulated by the CFPB, the Bayesian improved surname geocoding or BISG, proxy method — which combines geography- and surname-based informa- tion — is most commonly used for fair lending analysis. There is still room for some customization in how to apply a proxy to real-world situ- ations. This makes the evaluation of your bank’s proxy methodology — to ensure sound support and justification — a fair lending imperative to consider the scope of consumer and business credit products and activities. The CFPB’s planned rulemaking under Section 1071 of the Dodd-Frank Act will require financial institutions to collect, report, and make public certain informa- tion concerning credit applications made by women-owned, minority-owned, and small businesses. Exploring Mystery Shopping Another way to root out disparate treatment is by using mystery shoppers. As a part of a 2016 joint fair lending action by CFPB and the Department of Justice, the CFPB disclosed its first use of “mystery shopping” and noted that other government agen- cies and housing organizations “had used testers for decades as a method of identify- ing discrimination.” In July 2020, a study was released by the National Community Reinvestment Coalition regarding Paycheck Protection Program loans that used matched- pair testing, and it noted past matched-pair “mystery shopper” tests were conducted by the NCRC in 2017, 2019 and earlier in 2020. The twist on this study was that mystery shopping was conducted over the phone. ABA Resources: Diversity, Equity and Inclusion ABA is committed to helping banks of all sizes build diverse, equitable and inclusive work- places that best represent the communities they serve. Our members have access to training, industry-leading practices and other dedicated resources to help them achieve their DEI goals. Learn more at https://www.aba.com/bank - ing-topics/operations/diversity-equity-inclusion. Mystery shopping could be a useful tool to detect inconsistencies that point to potential fair lending risks related to racially cor- related mistreatment. However, there are limitations, costs, scoping and administra- tion complexities, and other uncontrolled factors that arguably diminish the conclu- siveness of results with respect to unlawful credit discrimination. There are also limited examples of banking regulators using mys- tery shopping for fair lending examinations, appearing instead to be a supplemental investigative measure used only in extreme cases. Before considering whether mystery shopping may be an appropriate addition to your bank’s fair lending program, you might find value in first exploring other ways to strengthen existing controls and oversight of pre-application risks, such as through review of branch procedures, banker interviews, branch visits, complaint monitoring and customer experience metrics. Final Thoughts Over the years, I’ve heard people say many times that compliance can be a thankless job. Let me take the opportunity to say “thank you” to all the professionals who work day-in and day-out tirelessly to achieve compliance and to do what is right. As banks continue to renew commitments and assess what more can be done to make more prog- ress to increase fairness, let’s continue to look for opportunities to strengthen our fair and responsible banking programs, as well as to take advantage of synergies with initia- tives occurring among the areas of diversity, human resources, Community Reinvestment Act, ethics, conduct, innovation and corpo- rate social responsibility. Regulatory agencies have multiple initia - tives and efforts to improve diversity, equity and inclusion, such as the CFPB’s request for information on ways to prevent credit discrimination and build a more inclusive financial system. The RFI covers a lot of ground, including disparate impact, limited English proficiency, Special Purpose Credit Programs, affirmative advertising, small business lending, sexual orientation and gender identity discrimination, federal preemption of state law, treatment of public assistance income, artificial intelligence and machine learning and adverse action notices. Essentially, the CFPB asks whether it should provide additional clarity, guid- ance, or interpretation within the context of the Equal Credit Opportunity Act and Regulation B on these topics. This type of regulatory engagement is encouraging and highlights another opportunity for public and private sectors to work alongside one another to make positive change. As Martin Luther King, Jr. said: “The time is always right to do what is right.” w Nicholas Roesler, CRCM, is an SVP and fair and responsible banking officer at Minneapolis-based U.S. Bank. He leads the fair and responsible banking pro - gram and is responsible for overseeing and managing fair lending, UDAAP, and HMDA risk across the enterprise.

RkJQdWJsaXNoZXIy OTM0Njg2