How Can Banks Avoid "Channel Discrimination"?

Wherever the banking industry goes, fair-lending challenges follow. Lenders are constantly innovating product, policy, price-setting, risk evaluation, marketing, service, and distribution systems and virtually every new approach sets off a new chain of concerns about potential direct or indirect credit discrimination. Of all the many budding controversies, the one that may need the most careful thought is what we might term "channel fairness," or as the regulators call it, "steering discrimination. " New channels, new challenges Banks are delivering their products through a wide variety of channels-- branches; nonbank offices of specialized lending subsidiaries; telephone lending; partnerships with brokers and dealers; affinity marketing relationships and co-branding. And, increasingly and importantly, they deliver services over the Internet. The explosion in new delivery systems intersects with the trend already underway, even within the traditional bank, to treat customers differently based on factors like potential profitability or customer preferences. Customers may get different terms, different add-on options, different pricing, different levels of personal service--even different treatment from the collections staff if payments are late. They also may well be subject to different underwriting criteria or depth of scrutiny when creditworthiness is evaluated. This differentiation process is being made easier and more cost-effective every day thanks to new data management tools. It promises huge benefits to consumers, in the form of products that are bettered tailored, more convenient, and comparatively cheaper. Further, prices should be fairer because they should reflect customers' individual risk profiles and the costs of the way they use the bank's services. However, these changes will produce winners and losers. When the losers are minorities and women, and the subject is credit, fair-lending controversy will ignite. In one area, it is already starting to flame. Example of a "steering" dilemma Imagine three people with identical credit profiles, all wanting a mortgage. One applies in a branch. The second one sees a television ad for that same bank's affiliated sub-prime finance company and calls its toll-free number. The third one logs onto his computer and applies online. All three are dealing with the very same bank and they all have the same creditworthiness. Will they be treated the same? And should they? The answer to the first question is usually "no." They will probably be shown different product sets. They will very likely be evaluated against different underwriting criteria, at least between the subprime customer and the other two. And they will likely receive different pricing, with the subprime loan the highest, and possibly the Internet loan lower than even the traditional option. Now, suppose the customer who approached the subprime channel is a minority. Assuming he or she was treated in a manner consistent with all other applicants to the subprime lender, is it acceptable, from a fair lending standpoint, that this customer received a worse deal than did his counterparts? As usual, fair lending law, regulation, and public policy do not give a clear answer to this. But there is a growing body of enforcement thinking that the answer to this question should be "no." Signs of this are abundant, including in the current interagency fair lending examination procedures. Those guidelines identify three general and six specific types of discrimination, one of which is "disparate treatment by steering. " The agencies direct examiners to check whether applicants are referred to the best product available, and to suspect discrimination if not. The procedures state that one indicator is when "[a] lender has most of its branches in predominantly white neighborhoods. The lender's subprime mortgage subsidiary has branches, which are located primarily in predominantly minority neighborhoods. …