On July 25, the United States District Court for the Northern District of Mississippi signed a consent order among BancorpSouth, the United States Department of Justice, and the Consumer Financial Protection Bureau, whereby BancorpSouth agreed to pay an aggregate of $10.6 million and to adhere to non-monetary penalties arising out of the DOJ’s and CFPB’s allegations that BancorpSouth violated the Equal Credit Opportunity Act (“ECOA”) by engaging in discriminatory lending practices against minority borrowers. The government learned about the ECOA violations through its use of “mystery shoppers.” The $10.6 million settlement is comprised of: (1) a $2.8 million payment that will be placed in an interest-bearing escrow account for affected consumers; (2) a minimum of $300,000 that BancorpSouth must spend on targeted advertising and outreach to majority-minority neighborhoods (areas in which one or more racial and/or ethnic minorities, relative to the general population, make up a majority of the local population) in Memphis, Tennessee; (3) $500,000 that will be used in a partnership with community-based organizations to educate minorities in Memphis about their credit; and (4) a $3 million penalty payable to the CFPB.
The non-monetary penalties include requiring an independent compliance management consultant to review BancorpSouth’s compliance with federal mortgage lending rules and inform the CFPB about BancorpSouth’s compliance management systems. After informing the CFPB about the compliance issues, BancorpSouth is required to submit a plan to fix the uncovered issues and submit a report to the CFPB on how BancorpSouth plans to comply with the ECOA and the Fair Housing Act. BancorpSouth must also extend to denied applicants, as determined by the CFPB, an offer to apply for a mortgage at a lower interest rate than what it initially provided to the applicant. Finally, BancorpSouth is required to open a branch or loan office in a majority-minority neighborhood in Memphis.
The Complaint and Consent Order are the result of the use of “mystery shoppers” – a program that the Bureau has been using in addition to its examinations of banks within its supervisory jurisdiction. The mystery shoppers target banks in order to determine whether the banks are engaging in discrimination against minority borrowers. The Bureau’s Complaint against BancorpSouth alleges that the Bureau conducted an investigation in which the Bureau sent two people – one white, the other black – into a BancorpSouth branch to obtain a loan. According to the Complaint, the bank’s employees steered the black customer to a more expensive loan package despite the fact that their stated income and credit score were higher than that of the white applicant. The CFPB alleged several other discriminatory practices at the bank, including redlining in Memphis, discrimination in underwriting certain mortgages, discrimination in pricing certain mortgages, and the implementation of an explicitly discriminatory denial policy.
A government agency’s use of mystery shoppers as undercover operatives is rare in civil enforcement cases because of public concerns and limits imposed by the 1974 Privacy Act. The Privacy Act requires government officials to identify themselves in their official capacities before seeking information from individuals. The CFPB has stated that the Privacy Act does not apply to mystery shoppers because the shoppers seek information that is available to the public and does not seek personal information about individuals.
The CFPB’s use of mystery shoppers to look for ECOA violations reveals that the Bureau does not believe that supervisory examinations and investigations are sufficient to determine whether a bank is complying with the federal laws that the Bureau enforces. Given that the Bureau openly embraces this tactic and does not believe that the Privacy Act applies, it appears that the Bureau’s use of mystery shoppers and undercover investigations will likely increase in the future.