Lately, I’ve seen a lot of lenders that are heavily “targeting” certain types of minority markets such as Latino, African American or another race/ethnicity. What they may not be aware of, is the danger of too many marketing initiatives or budget allocations to a community defined by race or ethnicity. When you visit their websites, the pictures align with that minority and are not diverse, the messaging is mission based for a particular minority, their social media presence is promoted as leaders in this segment of the minority market and the majority of their originators are not diverse.
On the surface, lenders who spend the majority of their marketing budget on specific marketing to Latinos, African American, Asian or other markets based on race, or ethnicity may believe that this seems like a pretty good strategy. After all, if you are a minority-owned organization and have many originators who are also of that same minority, it seems natural that you would pursue those markets. What you may not be considering are the Fair Lending implications of this marketing strategy!
Redlining and Reverse Redlining were mentioned as top priorities from the CFPB so I want to shine some light on the least understood of the two, which is reverse redlining. When the regulators mention an issue repeatedly at a conference, it is on their radar screen; and it doesn’t matter how many awards you have or committees that you sit on with States or national associations, because they see the issue through the prism of the consumer, not your business agenda. It truly is a double-edged sword for the unsuspecting lending who believes their market approach is the way to promote home-ownership in the community that they came from.
“As defined, Reverse Redlining occurs when a lender targets minority consumers, not to deny them loans, but rather to charge them more than could be charged to a comparable white consumer.”
Now many of you will read this statement and say “That’s not us. While we may market to predominantly minority markets, we don’t charge them more than comparable white consumers.” When I hear this statement my first question is “Do your numbers tell the same story?”, and this is where the conversation gets tricky!
Those who spend the majority of their marketing on minority based marketing, believe that they are serving the community that they love in order to help bring greater wealth and prosperity to that segment of the community. Okay, that sounds like an admirable cause to me, however, they are missing the point so let me illustrate.
- Fair Lending means that a lender fairly markets ALL areas of their assessment area, not just targeted areas within those assessment areas. Assessment area for non-financial institutions like mortgage bankers, is defined as your MSA. For banks this is your CRA Assessment area. It is not alright to target minority markets and not market non-minority markets. Just like it is not okay to exclusively market non-minority markets and not market minority markets. A white owned lender cannot say that they are more comfortable with the white community, any more than a Latino owner can say they are more comfortable with the Latino market. Either can market those areas, but they must also hire a diverse staff and lend fairly in all areas of their marketplace to demonstrate diverse lending!
- Your second concern when doing heavy minority market lending is how do you look compared to your peers, when it comes to what is being charged to the minority consumer. Does your minority lending show higher interest rates, bigger overlays, higher costs, larger branch margins, or favoring higher cost mortgages like FHA or other programs when a client qualifies for lower costs programs? While this may or may not be intentional, careful understanding of any numerical differences, and precise documentation on the variations of why these costs are different, are mandatory in today’s environment. If the differences are risk based, are they in line with your peers or higher than your peers? Higher would result in higher rates to minorities!
- The sad truth is that the regulators know the majority of Predatory Lending is ethnic on ethnic, because as humans we tend to trust those who are most like us, and some lenders take advantage of that situation. This presents opportunities to charge more than other lenders would normally charge, or place consumers in more high profit loans that cost the consumer more. Unfortunately, many unscrupulous lenders have seized those opportunities, which makes even the best lenders fall under suspicion as well. Yet let’s not underestimate the urge of seemingly upright lenders to feel that they have a competitive edge in their market, and may charge more margin or cost OVERALL as compared to their peers. That’s right, this is just as problematic!
Stay Tuned for Part Two, where I give you the biggest examples of problematic lenders.
If you need assistance with fair lending strategy, pricing/overlay reviews and redlining assistance, I’m just a phone call or email away.