How to Combat Discrimination in Banking

By: Diane Banks, Principal Consultant, Capco Academy

From the establishment and collapse of the Freedman’s Savings and Trust Company to the concept of redlining created by the Homeowner’s Loan Corporation and to the bias set against women which limited access to banking products, discrimination in banking has a long and dark history. To combat the issue of discrimination in banking, we must examine the hard, unbiased, but ugly facts and create an inclusive banking environment.

Statistically Unbanked, POC Regularly Experience Discrimination in Banking  

The 2021 FDIC household survey found that almost eleven percent of Black households and nine percent of Hispanic households were unbanked – compared to two percent of white households.  The survey determined that the unbanked rates in 2021 varied considerably across the U.S. population. For example, unbanked rates were higher among lower-income households, less-educated households, Black households, Hispanic households, working-age households with a disability, and single-mother households.

CFPB Proposed Solutions to Reduce Discrimination in Banking

On February 14^th of this year, the CFPB joined with other regulators in asking The Appraisal Foundation (TAF) to clearly instruct appraisers about the federal law forbidding appraisal discrimination. The two-page joint letter urged the entity to revise ethics rules for appraisers and that part of those rules include a statement of the federal prohibitions against discrimination.

This letter is the second time that the regulators raised the same concerns, as is noted by the regulators’ letter of February 2022.  In that letter the regulators asked TAF to provide clear guidance on their existing standards as it regards appraisal bias. The notification of the joint letter stated “For more than 50 years, federal law has forbidden racial, religious, and other discrimination in home appraisals. It is imperative that TAF provide appraisers clear, detailed, and unambiguous warnings about the requirements of federal law covering appraisal standards.”

Steps to Reduce Discrimination in Banking

Each banking institution bares the responsibility of ensuring that all current and potential customers are treated in a fair and ethical manner. Consider the following steps to ensure your institution is an inclusive banking partner in your community:

• Conduct a Fair Lending Risk Assessment.
• Review Your Sales Force.
• Check Your Front-Line Personnel.   
• Be Aware of Perception Bias.

Risk assessments provide management and the board of directors with the means to measure identified risks.  The fair lending risk assessment looks at current and potential risk by examining your compliance with applicable anti-discrimination laws and regulations. A thorough fair lending risk assessment will capture a picture of your organization and show your areas that require additional attention and/or corrective action.

Your sales practice area is one of the main areas where you may have the potential of fair lending issues.  This is an area where the fair lending risk assessment is most effective. A review of processes, procedures, scripts, and complaints will show any indicators of unfair banking practices.

How to Overcome Perception Bias

You only have one time to make a good first impression.  How you treat your branch customer will determine whether the customer feels included and valued by you as a customer. You must be consistent in how you do what you do – not only to eliminate the appearance of discrimination, but to also ensure you are properly covering your institution from potential safety and soundness issues. If you require two forms of verification for customer A, you must require two forms of verification for customer B. 

Perception bias is a type of unconscious bias that occurs when our perception is skewed and based on inaccurate assumptions about a group a person “belongs”. This may include biases or stereotypes about age, gender, and appearance. These attitudes, beliefs, or stereotypes block our ability to make sound decisions. There is never a time when you assume someone doesn’t belong in your branch, doesn’t look like your regular customer, or couldn’t possibly have access to that level of funds. We’re not saying throw caution to the wind and disregard obvious appearance of a fraudulent activity…what we are saying is don’t attach a potentially fraudulent activity to the appearance of the person.

How Capco Academy Can Help You Combat Discrimination in Banking

Discrimination is near the top of examiners' compliance radar today. Our team of compliance experts is here to assist you to stay compliant and avoid discriminatory banking practices. We offer over 120+ courses of comprehensive compliance training, including our thorough training webinar, Discrimination in Banking. This webinar covers Fair Banking Regulations and a variety of issues that examiners are looking for. Capco Academy also offers custom compliance training to accommodate institutions with specific training needs.