Advertising and Fair Lending – A Balancing Test

When reviewing the overall effectiveness of your fair lending, one of the areas that can often be overlooked is the area of potential discouragement. This area requires a great deal of empathy at best, but knowledge of the community and the history of the community at a minimum. Discouragement can be a matter of interpretation; one persons’ joke can be another’s insult. Moreover, discouragement can often be difficult to recognize. After all, discouraged persons are unlikely to have contact with the bank and it is difficult to know about the people who do not apply for services.  We believe that preventing discouragement is not only a good compliance policy; it also helps a bank reach out to pockets of potential large customers.

Among the areas that it is important to review are the advertising campaigns of the bank. An advertising campaign can be published with the greatest of innocent intent and still have the effect of discouraging members of a community from participating in the bank. When this issue comes up it is often in the context of a bank using people in its advertising. We have been at several banks that have been admonished to make sure that the people used in advertising are diverse.  The thinking here is that the more diverse the people in the advertisements, the more open the bank will appear to be. However, even when widely using people from various ethnicities in advertising, it is possible to discourage potential customers with advertising.

Fair Lending Laws

Discouragement is generally reviewed as part of the fair lending audit performed by the regulators. Fair lending is a combination of a set of regulations that are brought together to make a determination of how a bank avoids overt and unintentional discrimination. The laws that combine to form Fair Lending include:

  • The Equal Credit Opportunity Act ( Regulation B)
  • The Fair Housing Act
  • The Truth in Lending Act
  • Unfair Deceptive Abusive Acts or Practices Act (UDAAP)

Of these regulations, the Equal Credit Opportunity Act specifically prohibits discouragement of applicants.  202.4b says specifically

Discouragement. A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.

Fair Lending laws specifically establish groups of people who are specifically protected by the fair lending laws. The rationale for establishing these groups is that there have been documented instances in the past where banks engaged in behavior that directly discriminated against these groups. When congress was considering these laws there were several studies performed and hearings conducted that showed that certain practices by banks had to be limited. The US Supreme Court has also added to the purview of the fair lending laws by adding definitions for the way banks practices might be interpreted as violating fair lending laws. The Supreme Court has established that there are three types of discrimination that can occur under fair lending laws:

  • Overt Disparate Treatment – a lender discriminates on a prohibited basis.  For example, only making loans to men, or only to Christians
  • Comparative Evidence of Disparate Treatment – a lender treats two sets of people who are similar in different ways. For example, a male lender receives assistance with the completing of his application while a female applicant is left to complete the application on her own
  • Evidence of Disparate Impact – a policy that is neutral on its face but impacts protected groups unequally. For example, a lender decides that it will not count part-time income as income for purposes of loan underwriting.   Although this policy might be applied equally to all applicants, since most part-time employees are women and minorities, the policy would have a more harsh impact on these groups.

Discouragement Comes in Many Forms

Based upon the definitions given by the court, discouragement can take on many different forms. For example, suppose a loan officer made a statement to borrowers that they “really don’t want to make home loans to women, but the law says we have to”.  This sort of statement would be the overt disparate treatment type of discouragement. Very few women who heard such a statement would continue with the loan process. The fact that the loan officer is naming a protected class with their statements makes the discouragement the type that falls under overt disparate treatment.

When lenders advertise and use people in their advertisements, they run the risk of comparative evidence of disparate treatment. Advertising that excludes certain members of a community or implies a preference of one group over another can also be a form of discouragement. This area of fair lending laws is nuanced and requires some level of empathy to navigate successfully.

One case that we came across was particularly instructive. A bank had prepared an advertising campaign that focused on the history of the bank.  Included in the advertisement were various pictures from the time of the formation of the bank which in this case was pre-civil war.  The ad campaign was designed to focus on the significant people in the banks history such as the founder of the bank and his descendants as they ran the bank throughout the years.  The banks compliance staff had reviewed the campaign and approved it. Senior management at the bank was quite proud of the campaign. Imagine the surprise of management when they were informed by the regulators that the posters amounted to a form of discouragement!

As it turned out there were two factors that played into the regulators decision. First, the history that was described in the timeline of the advertising campaign was painful for many of the people of color within the banks’ service area.  Unfortunately during the same time period that bank was growing, many hurtful things were happening to members of the community. This was not to say that the bank was in any way involved in the terrible things that had happened.  However, an advertising campaign that highlighted the time when these things happened was at a minimum, insensitive.  The other factor that played into the judgment of the regulators was that the demographic make-up of the bank’s service area had significantly changed since the opening of the bank.  Therefore, the people depicted in the advertisement did not represent the current universe of potential clients.

In 2010, the Federal Reserve ordered a bank in Oklahoma to take down advertisements that included a cross, a bible verse and the statement “Merry Christmas, God with Us”.  In this case, the advertisement was interpreted to discourage people who were not Christian from applying at the bank.  [1]

Reducing the Possibilities of Discouragement

As you might imagine, in both of the cases described above the management teams were stung and upset. In the Oklahoma case, the bankers went to their members of Congress and did eventually get the decision reversed, but it did not end the scrutiny of the bank’s policies and procedures.

As we mentioned at the outset, discouragement is an area that can be difficult to discern. Of course, the common approach has been for banks to avoid all uses of people in advertising and to limit publications to basic information about the bank. The truth is that even using this approach can result in a finding of discouragement. For example, in the case of USA V First American Bank, one of the practices that were specifically pointed out was:

The Bank has also consistently directed its print media advertising to daily newspapers of general circulation and neighborhood and suburban weekly newspapers serving largely non-minority city neighborhoods and suburbs in the Chicago MSA. Until at least December 2002, the Bank had never advertised in minority-focused publications, many of which have larger circulations than some suburban newspapers the Bank has used. [2]

Excluding advertising form publications in the service are can also be a form of discouragement.  Moreover, avoiding publications that have advertising opportunities within the community is missing opportunities for growth.   We believe that advertising strategy be more aggressively inclusive of the various businesses social and ethnic groups that make up the communities that surround your bank.  To take on such a strategy, we recommend the following steps:

  1. Know the Players:  As part of your community reinvestment act program, the bank should be making attempts at outreach to the various service groups within the assessment area.  It is critical that this effort should include identification of the most influential of the community groups and the ways in which the bank may partner with these groups
  2. Know the History of the Area:   The historical development of an area is often overlooked when developing advertising and products at banks. It is important to know and understand both the good and the bad history of your area.  In this manner, you can prepare the bank for potential complaints and make your outreach more effective
  3. Test the Staff:  It is an excellent idea to get “mystery shoppers” to test staff on the presentations being made to the general community.  A quick and simple review of customer experiences can be illuminating.  Often times, misunderstandings of bank policy can result in fair lending issues that are much unexpected.
  4. Training: It is a best practice to conduct interactive training that is designed to assist staff in their understanding of the history of and intentions of fair lending regulations.  We have found that when staff understands its role in an overall larger scheme. Compliance becomes most effective.


[1] Feds Force Okla. Bank To Remove Crosses, Bible Verse Federal Examiners Say Religious Decoration Inappropriate Read More
[2] CIVIL ACTION NO. 04C 4585 Consent order