VIDEO: Digital Redlining
In this Compliance Clip (video), Adam talks about digital redlining. This is currently a hot topic as the regulators have been focusing their efforts on enforcing fair lending, and redlining is one of the things they have been looking into. In this video, Adam describes how digital redlining often relates to disparate impact. A transcript of this video is now available.
This topic was taken from our Winter 2022 Quarterly Compliance Update, which is also available for premium members. More information can be found on both our premium membership plans as well as our quarterly updates at the links below:
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about digital redlining. What is digital redlining? Digital redlining is redlining that occurs digitally. Well, it's a little more complicated than that, but it's basically redlining that occurs because of something like a computer system, an automated underwriting system, or even artificial intelligence. It's redlining that's occurring in the digital world rather than from a manual underwriting process, which we have traditionally seen in relation to redlining.
In fact, digital redlining often relates to disparate impact where banks are setting hard policies or using computer systems that appear to be fair, but the result, and it's not always intended, but the result is that discrimination occurs. That's really what happens with disparate impact. In fact, disparate impact is a result of policies or procedures that appear to be neutral, but have the effect of redlining or fair lending or discrimination. That's really the concern.
We're bringing this up because in our Winter 2022 Quarterly Compliance Update, we talked about all the regulatory activity that took place in the prior quarter, which was the fourth quarter of 2021. In that quarter, in October of 2022, Rohit Chopra, the new director of the CFPB, made some comments relating to digital redlining. These comments were in the joint press release with the Department of Justice, the CFPB and the OCC in relation to a redlining case against Trustmark National Bank.
In this speech, Director Rohit Chopra gave a warning of digital redlining. What he said was this. He said, “While machines crunching numbers might seem capable of taking human bias out of the equation, that's not what is happening. Findings from academic studies and news reporting raise serious questions about algorithmic bias. For example, statistical analysis of 2 million of mortgage applications found that black families were 80% more likely to be denied by an algorithm when compared to white families with similar financial and credit backgrounds. The response of mortgage companies has been that researchers do not have all the data that feeds into their algorithms or full knowledge of the algorithms. But their defense illuminates the problem, which is this: the algorithms are black boxes behind brick walls. When consumers or regulators do not know how decisions are made by algorithms, consumers are unable to participate in a fair and competitive market free from bias.” That's what he said.
This is a real concern because more and more financial institutions are trying to become efficient through technology. When that occurs, sometimes we're using tools that could potentially get us in a problem. Again, disparate impact is probably the biggest risk here because disparate impact is when you have a mutual or otherwise appropriate policy, it appears appropriate, but it has an effect of discrimination. In this case, we're intending for things to be efficient, intending for things to be fair, but the bottom line result is discrimination. That's what they're talking about. We've seen some different things related to digital redlining over the last several years. The more financial institutions start to rely on technology, the more concerns the regulators are going to have.
Is fair lending gonna be going away anytime soon? Of course not. In fact, the Department of Justice basically announced the launch of a new initiative against redlining. The new initiative represents their most aggressive and coordinated enforcement efforts to address redlining to date. The DOJ is really cracking down on redlining, and so this is their most aggressive and coordinated enforcement effort. I don't think that fair lending is going to go away anytime soon. I've always said that fair lending is always a hot topic, but it's even more so a hot topic when we have some sort of financial crisis or in this case, a pandemic. What the regulators always do is first, for consumer protection, go to fair lending. One of those things that they've really been focusing on is redlining.
The initiative is going to do a number of things. It's really going to be focusing their efforts and trying to up the DOJ’s enforcement on fair lending. Of course you can expect that the DOJ, the Department of Justice, is ramping up their efforts on fair lending. Of course, the other regulators are, too. Maybe you're not regulated by the CFPB because you're not a very large bank, but the other regulators, the FDIC, the OCC, the NCUA and the Federal Reserve, they all take a look at what's being led by the DOJ and the CFPB. There's this trickle down effect in compliance. When one regulator does something, all the other regulators eventually catch when. So fair lending is not going away and digital redlining does appear to be a hot topic moving forward into 2022 and beyond.
That's it. That's all I have for this Compliance Clip.