Regulation

CFPB Uses “Mystery Shoppers” To Target Bank Lending Practices

Redlining refers to an unfortunate practice of the late 20th century when banks and realtors would conspire to make it harder for certain buyers – usually minorities – to buy homes, especially in certain areas. “Red lines” were drawn around specific areas which were deemed to be a financial risk in and of themselves – no matter the quality of the individual potential borrower.

Because progress exists, these days redlining is not nearly so prominent a feature of the market place – largely because it is very illegal, and the penalties for being caught in the act are quite steep.

Not steep enough to deter all bad actors, it seems – as the CFPB has recently spent time using some unusual tactics to expose redlining where it still exists.

Tactics like those used against a loan officer at BancorpSouth Bank’s Madison branch in Alabama.

Two different, but essentially similar, borrowers walked in the door – their major distinguishing feature was race.  One was white, one was black – but otherwise, on paper, they seemed nearly identical: similar credit, similar earnings, visiting at roughly the same time (within 10 days of each other). The black applicant had a higher stated income and credit score than the white applicant.

The white applicant got a lager loan for more favorable terms.

But when the CFPB went to court shortly after (this was in 2013) – it turned out that both of those applicants were mystery borrowers who were working for the agency to test for bias.

Undercover investigation is common in criminal law – but not in civil enforcement – because the 1974 Privacy Act states that government officials must identify themselves before seeking information from individuals. Some state agencies view that as basically barring undercover civil investigations. The CFPB interprets that as meaning they can’t seek personal information from government officials by the use of employees working undercover.

Their mystery shopping sprees, they argue, are simple requests for information that would be available to the public for anyone who asked.  Thus, there is no Privacy issue.

Quyen Truong, a partner at Stroock & Stroock & Lavan LLP, was the agency’s deputy general counsel until May.

She notes the program was created  “after evaluating all the potential legal restrictions.”

And, according to CFPB officials, such programs are obviously necessary – as the Bancorp case makes clear.

“To this day, the lines of segregation remain evident and their impact persists,” CFPB Director Richard Cordray said in a July 19 speech. He also vowed to fight “active discrimination.”

BancorpSouth went on to settle with the CFPB and DoJ  for $10.6M without admitting wrongdoing. They also dispute the findings, and complain the CFPB’s methods were essentially unfair.

“We have concerns with the way the information was collected, and selectively released,” the Tupelo, Miss. bank said in a statement, adding that it has “zero tolerance for this type of behavior” from employees.

And they are not the only ones concerned – legal scholars also wonder if the CFPB is opening a dangerous door.

“[Undercover investigators] is a worrisome precedent, because…we see more and more aggressive civil law-enforcement activity by the government, so that civil law enforcement borders on, if not bleeds into, criminal law enforcement,” said Andrew Vollmer, a former deputy general counsel at the Securities and Exchange Commission who now teaches at the University of Virginia’s law school.

 

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