Fair Lending and Social Media

In July of 2020, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit against a Chicago-based nonbank mortgage lender, for violations of the Equal Credit Opportunity Act (ECOA). Among a variety of practices that the lender engaged in that brought on the suit was making statements during its weekly podcasts that illegally discouraged prospective African-Americans throughout the Chicago Metropolitan Statistical Area from applying for loans. These podcasts were regularly streamed on Facebook Live and then further advertised on Facebook, Twitter, and LinkedIn.

This lawsuit is just one illustration of how social media intersects with fair lending laws. To avoid getting into similar hot water, lenders need to understand what fair lending means as a whole, and how the law applies to social media.

An Overview of Fair Lending Laws

Regulation B, which facilitates the implementation of ECOA, makes it unlawful to discriminate against applicants and potential applicants based on race, color, religion, national origin, sex, marital status, age, and receipt of public assistance. This not only includes processing applications, but also in marketing available products.

For example, the practices that the CFPB alleged against the Chicago-based lender engaged in resulted in the appearance of discrimination based on race. This is where careful analysis and monitoring of marketing results becomes important. A lender can get in trouble not only for objectively violating fair lending laws, but also for giving the impression of violating them.

How does this happen? It results from what regulators review when evaluating the fairness of marketing efforts. Among other things, regulators look at:

• Application rates for protected groups
• Available data regarding the geographic distribution of loan originations
• Analyzing potential disparities in pricing and other terms
• Success rates by classification

That means if your marketing isn’t attracting a fair distribution of applicants, then you need to review your marketing materials to determine if there is a fair lending issue at play. Lenders should clearly document the steps they have taken to ensure fair lending is integral to their business operations, including fair lending training for employees, hiring a fair lending officer to promote oversight, and regularly perform internal audits.

The Trouble with Social Media

Social media offers a wide variety of opportunities to spread the word about your products and services. It allows lenders to easily interact with consumers and build crucial brand awareness. One well founded concern is that if you aren’t leveraging social media in your marketing efforts, you may fall behind your competitors who do. However, you also need to be careful in your use of social media tools. There are several pitfalls you can end up in if you aren’t careful. For example:

• The flow of information may be restricted based on perceived characteristics of individuals
• Data unexpectedly may correlate to prohibited characteristics
• A lack of diversity in the data set can result in disparate outcomes

Lenders should take measures that will reduce the chance of unintended discrimination by: limiting the amount of paid advertising used on social media, regularly consulting the legal &compliance departments on the subject, and using technology and/or third party vendors to actively monitor and track fair lending concerns.

Social Media Compliance

Social media isn’t a tool to be feared if safeguards are put into place. There are steps lenders can take to stay on the right side of fair lending laws. The first step is to be aware of the risks inherent in social media advertising. The two that are most associated with targeted social media marketing are redlining and steering.

Redlining is the systematic denial of services to residents of specific neighborhoods or communities. Therefore, make sure that when you place ads in social media, such as Facebook ads, don’t use location-related demographics to filter the placement of ads.

Steering is guiding a client from a minority group away from considering a home in a white neighborhood, which is a violation of the Fair Housing Act, another fair lending regulation. Therefore, make sure that all your communications – and your employees’ communications on social media are nondiscriminatory.

A key activity in remaining compliant with fair lending laws is consistently training employees about the proper use of social media. Well-informed employees are much more likely to comply with the law and company policy, and far less likely to cause lawsuits and other compliance headaches.

Social Media Under Scrutiny

In July of 2020, the New York Senate passed a “Truth in Lending” act for small businesses consumers. State legislators designed the law to make it easier for entrepreneurs and small business owners to understand the costs of borrowing. This new law has also resulted in examinations for New York lenders who participate in paid social media marketing, like Facebook Ads, that allow for targeting specific groups of customers.

While this legislation indicates that fair lending laws are more clearly defining prohibited practices, lenders that remain vigilant and actively monitor the implementation and results of marketing efforts, as well as keep abreast of federal and local laws, can protect their organizations while providing fair and equitable access to the community they serve.