Paired testing or mystery shoppingcan reveal pre-application discriminationand is a tried-and-true testing method that many agencies and organizations use to check for fairness in credit transactions, especially in the housing market.
Fair lending policies at banks are receiving more attention as racial justice is becoming increasingly important in many facets of society and business.
For instance, advancing racial justice and civil rights is one of the Biden administration's top goals right now.
Naturally, this indicates that enforcing fair lending laws is a key priority and will be stressed as such.
However, we'll also take a wider view, going beyond fair lending.
Now is a crucial time for fair lending compliance specialists to start thinking outside typical areas of fair lending focus because of the anticipated increase in the level of scrutiny as well as increased expectations for managing and eradicating unlawful credit discrimination.
One of the pertinent subjects to improve your fair lending IQ is understanding mystery shopping, both as an internal self-testing tool and as a method that your bank might be subjected to by outside organizations.
The basic idea behind this kind of fair lending testing is to have two people walk into a bank and ask for credit after being thoroughly matched for creditworthiness traits (and frequently for similar personal appearance).
However, one of the banned basic group characteristics, like race or sex, should be different for these two people.
The treatment of the pair should then be watched, and the client results should be examined.
The "mystery shoppers" themselves would experience and record their treatment, as opposed to a third party who observes the exchanges.
In many instances, the tester for the forbidden basis group is even in a position to have significantly greater credit than the tester for the control group.
The application or pre-application stage of the credit procedure is when the mystery shopping is primarily concentrated.
In this stage, it will be possible to determine whether the testers' experiences highlight any issues with overt discrimination or unequal treatment, such as discouraging an application, that are relevant to fair lending.
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" as stated in Section 1002.4(b) of Regulation B, which addresses discouragement.
Discouragement is exemplified by statements such, "A statement that the applicant should not bother to apply, when the applicant declares that he is retired," according to the official interpretation of Regulation B.
Overtly discriminatory remarks, varying levels or quality of assistance, varying terms or conditions quoted, such as loan rate, payment, or loan amount, varying information regarding eligibility, and/or other behavior, are additional fair lending concerns that can be assessed during a mystery shopping test.
Lawmakers at the state and federal levels have expressed interest in employing mystery shopping to look into fair lending.
The Fair Lending for All Act was reintroduced in January 2021, and one of its provisions was creating a new unit under the CFPB to conduct testing akin to mystery shopping.
According to the bill, "The Office shall conduct testing of compliance with the Equal Credit Opportunity Act by creditors, through the use of individuals who, without any bona fide intent to receive a loan, pose as prospective borrowers for the purpose of gathering information," in consultation with the Attorney General and the Secretary of Housing and Urban Development.
The New York State Senate passed Bill S.112 on February 11, 2021, requiring the attorney general to conduct annual fair housing testing to determine whether fair housing laws are being followed in all of New York State.
This testing must include covert investigations conducted for the purpose of comparing how members and non-members of a protected class are treated when they are otherwise similarly situated, and gathering evidence of compliance with fair housing provisions pursuant to Hud.
Girl paying with her phone
Incentives for self-testing and self-correction are covered in detail in Regulation B, Section 1002.15.
Because the tester's views and experience in and of itself generate fresh information that is tested for fair lending in accordance with Regulation B, mystery shopping frequently satisfies the regulatory criteria of a self-test.
Reports or findings from voluntary self-testing are protected information, as specified in Regulation B, therefore they do not have to be shared with regulators (or other external entities).
Nonetheless, there are particular requirements that must be completed in order to establish privilege.
First, according to Section 1002.15(a)(1), no test or data that is mandated by a court or other official body qualifies. Second, the results need to be followed up with the proper corrective action.
When the self-test identifies a possible violation of Regulation B or the Equal Credit Opportunity Act, appropriate corrective action is required.
With a few exceptions per 1002.15(c), see the Corrective Action section below, the corrective action prequalification for privilege is essentially automatic if the results don't show a violation.
The creditor conducting the self-test will decide whether corrective action is necessary and whether future corrective action will be necessary.
If a creditor's claim of privilege is challenged, an assessment of the need for corrective action or the kind of corrective action that is appropriate must be based on a review of the self-testing results, which may require an in-camera inspection of the privileged documents," according to the official interpretation of 1002.15(a)(1).
In other words, authorities have the right to contest the confidentially of mystery shopping results. A creditor may also lose their privilege if:
- If specific information, such as that required by 1002.12(b), cannot be submitted to a regulator, privileged information is released as part of a defense to allegations of a Regulation B violation, and/or the results are voluntarily disclosed.
- The methodology, scope, time period, and records pertaining to credit applications or loans, as well as information identifying whether a self-test was undertaken, are all examples of information that is not privileged.
A mystery shopper is a person recruited to pretend to be a customer and provide feedback on the level of customer service and management efficiency at a particular company or chain of stores.
The mystery shopper acts like a normal customer and does things like make a specific purchase or ask specific questions.
Mystery shopping or mystery auditing is a way to check out a product or place, like a bank, business store, shopping mall, hotel, restaurant, etc., while pretending to be a customer or consumer.
Mystery shopping jobs can be found on specific corporate websites (we'll get to those shortly) or on job boards like Indeed.com.
You just need to log in to the company's website after applying and having your application approved to choose the jobs you wish to complete.
Studies have demonstrated that race can frequently be inferred from a person's name alone and can also be heard in their voice, as was discovered in the NCRC PPP testing over the phone.
When branches reopen, mystery shopping over the phone may continue and turn out to be an easier alternative for community groups to perform mystery shopping, even if the testing was apparently done over the telephone due to the pandemic.
Could we ultimately hear about the use of chatbots or artificial intelligence to test these interactions in a very controlled manner?
Even though the future is never guaranteed, it is always worthwhile to challenge your fair lending program's status quo.