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Equal opportunity marketing.

The way lenders market mortgages to minorities is coming under increased scrutiny. The Decatur Federal case taught lenders who aren't reaching out to minorities that the government is ready to dictate a more inclusive marketing plan.

During the last two years, discrimination in mortgage lending has been a very prominent issue. This fact is clearly evident from media accounts, from documents published by regulators, from the demands and protests of community groups, and from conversations with lenders and trade associations.

One reason so much attention has been focused on the issue is that expanded data on residential lending patterns have only recently become available. Many believe the emphasis and attention garnered by this issue will likely increase.

The recent trends in detecting discrimination, the corrective action that has been required by regulators and the actions lenders can take to prevent discrimination in the lending process all point to a greater emphasis on the marketing function. This article examines the relationship between marketing and these trends and outlines actions that should be taken by lenders to help ensure they are serving all deserving borrowers in their markets.

The new approach

One of the most visible corrective actions taken recently has been the consent decree issued by the Department of Justice involving the Decatur Federal Savings and Loan Association (Decatur Federal), Atlanta. In remarks made in February of this year before the Senate Committee on Banking, Housing, and Urban Affairs, Acting Assistant Attorney General James Turner discussed the approach used by the department in that case and the lessons to be learned from it. He also stated that he believed that other institutions in Atlanta, or other cities, could have been investigated, and if they had, they would have exhibited similar characteristics.

It is clear from subsequent press releases issued by the regulators, and from comments and testimony, that the approach used in the Decatur case is fast becoming the standard approach for regulators and others who are involved in detecting and preventing discrimination in lending. And if that is indeed the case, then all lenders can and should learn from the Decatur experience.

The Decatur lessons

According to Turner's testimony, three basic lessons were learned in the Decatur Federal case:

* Determining whether or not an institution has discriminated is a complex matter. Turner stated, "Mortgage lending discrimination on the basis of race can exist in spite of the fact that management of the lending institution has adopted clear policies against such discrimination. Many aspects of an institution's operation must be evaluated over an extended period of time. Branching, marketing, advertising, hiring, appraising, underwriting and compensation schemes for loan originators, all must be assessed in an analysis of whether or not an institution is denying credit needs on the basis of race."

* One way to approach the issue is through the use of complex statistical methodologies, involving an analysis of a large number of loan applications.

* The historical approaches used to detect discrimination in lending have not been effective.

The first lesson--the complexity in determining discrimination--is an extremely important point. In the Decatur case, the Justice Department looked at various aspects of the institution's mortgage lending activities, putting the findings from its investigation together almost like a jigsaw puzzle. Many pieces of this puzzle were marketing activities. As a result, the consent decree, which outlines remedies to broaden the reach of the institution's lending activities, includes many marketing elements.

It helps to stop and consider what the function of marketing actually entails to realize why the Decatur consent decree dwelled so heavily on it. The scope of a marketing function is much wider than merely advertising. Marketing encompasses the location of a company's distribution points, in this case, the institution's branches; the products it chooses to offer; the methods by which potential customers are informed of the existence and availability of the products; and the price at which the products are offered. In other words, marketing encompasses decisions about place, products, promotion and price, the four "P's" of marketing. The Decatur Federal investigation and consent decree touched on all four of these.


According to the Justice Department complaint, the history of Decatur Federal's operation revealed an intent to serve the white community but not to serve the black community. The investigation included a review of the location of the institution's branches when opened, purchased or acquired through merger activity.

The government's allegation, as stated in the complaint, was that all branch additions were in areas that were majority-white. One branch that had been opened in an area with a population that was more than 25 percent black was closed after three years of operation. Moreover, another branch, which at the time it was opened was in a neighborhood that was 3 percent black, was closed when the neighborhood was 85 percent black. Finally, the branches of other comparably sized institutions were reviewed and found to have many more branches in predominantly black neighborhoods.

Justice Department investigators also reviewed the service territory as defined by the company's delineated community, a definition that is required under the Community Reinvestment Act. This review revealed that the areas in which most of the black population resided were excluded from the company's service territory.

As part of the consent decree, Decatur Federal agreed to:

* open a branch or regional loan office in a part of the county that is predominantly black;

* follow an objective set of criteria to evaluate future branch openings, closings and other significant changes in services;

* consider alternatives to the closing of a branch in a predominantly black area; and

* expand its delineated community to include the entire county, including areas that are predominantly black.


The Justice Department's complaint acknowledged that Decatur Federal offered FHA and VA loans, which were stated by the Justice Department to be in greater demand in black residential areas than in white residential areas. However, in the complaint it was alleged that very few FHA and VA loans were actually made, and of those granted, most were made to white applicants. In addition, the complaint cited the large percentage of FHA and VA loans made by all other lenders in majority-black areas in the same market.

In the consent decree, Decatur Federal agreed to conduct additional efforts to further understand the residential credit needs of the black community, including working with a market research firm or another financial institution to determine product needs in black communities. In addition, it agreed to continue to participate in various government-sponsored loan programs.


In its complaint, the Justice Department stated that nearly all of Decatur Federal's account executives were white, that the business solicited by them was primarily from realty firms owned and operated by whites and that business was rarely solicited from black real estate professionals. The complaint addressed the use of appraisers in much the same way. In terms of advertising, the complaint stated that Decatur Federal rarely or never utilized media oriented to the black community.

These concerns were relatively broad in nature, but the corresponding provisions in the consent decree to address these perceived shortcomings were fairly specific. In addition, a large proportion of the total provisions in the decree addressed promotional efforts.

The decree called for a detailed advertising program, to include the following items:

* A specific volume of advertising in black-oriented publications. Such ads are to be for home mortgage products and are to mention the availability of FHA and VA loans or comparable products.

* Point-of-sale materials to advertise products to be developed and placed in the lobbies of branches in predominantly black neighborhoods.

* A brochure describing certain programs to be developed and distributed through channels that would effectively reach black residents. A minimum number of brochures were to be distributed each year to real estate agencies that serve black areas.

* All advertising to contain the equal housing opportunity logo, statement or slogan as described in the Fair Housing Act.

* Advertising that uses human models to represent black as well as white residents, and black models were to be used in a social setting equal to white models.

* A minimum amount of advertising on black-oriented radio stations and such advertising to note the availability of FHA and VA loans and/or comparable loan programs.

* As appropriate, advertisements for home mortgage loans to include the statement "equal housing lender."

* Best efforts are to be made to appear on talk radio and/or television programs aimed at predominantly black audiences to discuss mortgage lending issues.

In addition to the advertising provisions, other promotional activities addressed in the consent decree for Decatur Federal included targeting sales calls to real estate agents and builders active in predominantly black areas; changing the commission structure to encourage the origination of loans in predominantly black areas; maintaining a log of all sales calls; requiring the institution to use its best efforts to establish relationships with financial institutions serving the black community; and advertising certain job openings in a manner to reach potential black applicants.


The complaint did not specifically address price, and the consent decree addressed price in only one provision. The provision required the continued participation in a lending program that included the making of below-market-rate loans.

The second lesson to be drawn from Turner's Senate testimony earlier this year is that statistical analysis is another piece in the puzzle that was assembled by government investigators to understand Decatur Federal's mortgage lending practices. The analysis used in this case involved collecting lending data from numerous loan applications and statistically determining the key elements. Using a statistical approach allows one to review the results of numerous actual application decisions and theoretically to determine an institution's actual lending policy as opposed to its written loan policy.

Another example of a statistical approach used was the analysis of the race/ethnic background of the loan applicants, the areas in which the proposed collateral was located and the variance of the origination and rejection rates by race. Using these numbers, it was alleged that few applications from blacks were received, few applications where the collateral was in predominantly black neighborhoods were received, and a greater proportion of white applicants were approved and a greater proportion of black applicants were denied.

As noted, analyzing statistical data is a method that allows one to consider the possible discriminatory impact, regardless of intent, of an institution's activities. The activities that have an effect on the volume of loans made to minorities are clearly not just how applications are reviewed and processed, but also how applications are encouraged.

Turner's third lesson to be learned from the Decatur case is obvious: traditional approaches, such as comparing denied applications to stated loan policies, are not enough.

Because marketing clearly plays a significant role in achieving lending results, there is yet another lesson that can be learned from the Decatur Federal case: marketing will be one of the elements, if not the primary element, that lenders should focus on now and in the future to ensure equal access to mortgage credit.

Guidelines and suggestions

In addition to the Decatur Federal case, several other recent actions point to the need to focus on marketing. One is the recently published booklet, "Closing the Gap," prepared by the Federal Reserve Bank of Boston. It sets forth guidelines to assist lenders in reaching their fair-lending goals.

The guidelines cover a broad range of topics, many of which are marketing-related. In the section on hiring and promotion activities, for example, the following statement is made:

"Hiring and promotion practices that foster racial and ethnic diversity can help a financial institution gain a competitive edge in cultivating business in underserved markets. A staff that encompasses a variety of viewpoints and experiences can create an environment in which minority applicants feel welcome, strengthen ties of minority communities, and design policies and products that more effectively meet the needs of minority customers."

Note the emphasis on product development and promotion opportunities.

Another section in the Boston Federal Reserve Bank's booklet addresses compensation structure. It is recommended that the loan production staff review their practices and, if warranted, alert management to policies that may be perceived as encouraging or discouraging the staff from working with applicants that are first-time or lower-income homebuyers. The recognition of the importance of perceptions as they relate to developing business is noteworthy.

With the emphasis continuing on business development, another section in the booklet that addresses underwriting standards and practices states:

"Even the most determined lending institution will have difficulty cultivating business from minority customers if its underwriting standards contain arbitrary or unreasonable measures of creditworthiness."

Marketing remains highlighted in the section concerning alternative lending products. In this section, the key is product development and selection, both of which are to be undertaken with the needs of the applicants in mind.

A separate section is devoted to marketing strategies, and it offers several suggestions. Three of the key points raised are:

* Maintaining a physical presence in a neighborhood can help convince residents that the lender can and is willing to meet their credit needs.

* Reaching new areas and different applicants may require working with organizations, such as community and religious groups that are better established and known to the residents.

* Reflecting, in your marketing materials, the racial and ethnic composition of the targeted market segment is important.

The message here is that different market segments exist, and, consequently, marketing skills and efforts can and should be used to effectively reach the various segments.

Another suggestion offered that is clearly in line with the lessons learned in the Decatur Federal case is that lenders should review their progress and results by analyzing statistical data, particularly the racial and ethnic characteristics of applicants and neighborhoods. The goal is to successfully attract minority applications and make more loans.

Guidance from a press release

Additional guidance is provided by a press release issued on May 27, 1993, by the banking regulators (Federal Reserve Board, Comptroller of the Currency, Office of Thrift Supervision and Federal Deposit Insurance Corporation) that suggests fair-lending activities for institutions to pursue. Of the 11 activities listed, the following echo some of those already discussed:

* Efforts to encourage equal employment opportunity at all levels throughout the institution including lending, credit review and other key positions related to credit applications and decisions.

* Affirmative marketing and sales call programs designed to assure minority consumers, Realtors and business owners that credit is available on an equitable basis. Marketing may involve sustained advertising programs covering publications and electronic media that are targeted to minority audiences.

* Ongoing outreach programs that provide the institution with useful information about the minority community, its resources, credit needs and business opportunities.

* Use of commissions or other monetary or nonmonetary incentives for loan officers to seek and make safe-and-sound consumer and small business loans in minority communities. The mortgage industry is facing a challenge to make nondiscrimination a reality. Attaining this goal requires a comprehensive review of each company's policies and practices and the impact they may have on potential applicants. In such a review, the board of directors and senior management should focus on the role of marketing. The products offered, the locations where they are offered and the manner in which they are promoted, have a clear impact on how a lender is perceived and, therefore, the institution's ability to meet fair lending goals.

But beyond that, the success of a lender's current and future policies and practices must be assessed continually and accurately. This should be approached using statistical analyses and other nontraditional steps that can more truly capture the success of the outreach efforts to underserved borrowers. Finally, findings based on these actions must form the foundation of a plan of action designed to improve future results.

Jeanine Catalano is senior vice president of The Secura Group, San Francisco, specializing in fair lending and Community Reinvestment Act compliance.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Catalano, Jeanine
Publication:Mortgage Banking
Date:Oct 1, 1993
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