By Kristin Messerli
Federal regulators are making diversity and discriminatory lending a high priority. They have done this through updates to the Home Mortgage Disclosure Act (HMDA), new diversity legislation under Section 342 of the Dodd-Frank Act, and a stronger enforcement of existing fair lending regulations. We are already witnessing a rise in penalties associated with unexpected fair lending violations, and we can expect more from the amendment of Section 342.
Based on conversations with executives and their stress under the existing regulatory environment, companies are not likely to be prepared to undergo the changes that will be expected through the extensive nature of Section 342. Additionally, it is unknown whether there will be a window period in which companies can adjust to the legislation. Stuart Ishimaru, Office of Minority and Women Inclusion (OMWI) Director for the Consumer Financial Protection Bureau (CFPB), says companies should “start now” to become compliant. However, the legislation is not completely clear on what compliance will look like.
This article will discuss current and new regulations associated with diversity in the financial industry, the shift in priorities among regulatory agencies, and advice as to how companies can begin compliance with these changes in legislation.
The Shift in Priorities
Since the passing of the Dodd-Frank Act, the trend shows banks and mortgage companies have significantly reduced their lending in high-minority communities. Although the industry is understandably attempting to walk a fine line between fair lending and tightened lending restrictions, such as the qualified-mortgage rule, and intentional avoidance of specific neighborhoods in marketing or services, this is discriminatory and has become a high priority for regulators.
Many companies are unaware that even their marketing practices and office locations are under scrutiny so as to identify if there is any discrimination in service availability. If companies are not currently marketing in high-minority neighborhoods, they can (and do) receive penalties. While regulators appear to be more aggressive with their penalties, many companies are still unaware of their existing risks.
In addition to fair lending, internal diversity will soon become a critical issue for banks and mortgage companies. Section 342 is a recent law under the Dodd-Frank legislation, in which financial institutions regulated by any of the nine financial agencies (SEC, FDIC, CFPB, etc.) are required to take specific actions to improve diversity and inclusion. This law will likely be amended by the end of the year, but the CFPB has expressed urgency for companies to begin compliance immediately.
Although this may be a short-term challenge, it is an opportunity for growth to reach new and emerging demographics. Culturally related practices will allow lenders to reach the critical millennial market, which is the largest and most diverse generation in U.S. history. According to the 2012 U.S. Census, two in five millennials are Hispanic, and the majority of young millennials are considered “multicultural.”
This shift in demographics is never more apparent than in the mortgage industry. According to the National Association of Hispanic Real Estate Professionals (NAHREP), Hispanics comprised 46% of new home purchases in 2012. At the most recent American Mortgage Conference in North Carolina, industry leaders discussed an increased demand for mortgage options that fit the needs of their growing multicultural homebuyer. Dave Stevens, president of the Mortgage Bankers Association, acknowledged that there is a “systemic shift” as minority homebuyers are driving the market in new homeownership.
Resistance to Diversity Regulations
People often have strong, visceral reactions to the topics of diversity and discrimination. We don’t want to believe that race matters anymore. In a recent article on HousingWire.com, Trey Garrison states that the causes of low homeownership rates in multicultural communities are “to be found in social, cultur[al] and political institutions – not in the housing business.” This is a common (and respectable) sentiment. However, if housing industry leaders want to maintain or increase current rates of homeownership responsibly, we will need to start addressing the unique preferences and barriers that exist for multicultural homebuyers.
Ultimately, what really matters to you is that you continue to have customers, and proper legal, social and moral objectives within our industry are met. If the majority of first time homebuyers are minorities, are you prepared to meet their needs? Do you really understand how they buy, their barriers, and desires in a lender? If you don’t, you may not only be behind, but also out of compliance. HMDA legislation reflects the diverse nature of our business, and the future legal, regulatory and business needs of our industry depends on a more diverse approach to consumers.
Cross-Cultural Barriers in Lending
To illustrate the opportunity for this legislation, I have included a couple of examples of cultural barriers in the lending process and corporate barriers to achieve diversity.
Cultural Barrier for a Homebuyer. Hispanics have traditionally made large purchases in cash and acquired very little debt; in many cultures, debt is a shameful financial circumstance and is to be avoided. In the example of one case, a Hispanic male, age 55, wanted to buy his first home but had been living with his parents his entire life (which is not abnormal in the Hispanic culture). He had a consistent job of twelve years and a 20% down payment, but his FICO score was 0; he was not approved for a loan.
For many of our communities, education is necessary regarding such topics as building credit and to become more familiar with the lending process for homeownership. Rather than spending more money on marketing, companies could spend money and time on providing education in communities of future homebuyers, thus building trust and a good brand.
One challenge is the lack of familiarity of other cultures outside of traditional, white, European historic influences. Each population segment has distinctly different barriers and home buying preferences. If we continue to have one race, gender, and age group dominate a mortgage firm’s leadership, the vast majority of potential homebuyers will be disenfranchised.
Internal Cultural Barriers. Many oppose the idea of recruiting and promoting people in consideration of their contributions to the company’s diversity. A defensive posture often comes with statements such as: “I don’t look at race or gender. I just look at who can get the job done.” In the case of gender diversity, the problem is not that women are underrepresented in the management ranks of mortgage firms. The problem is that companies frequently do not realize they are more inclined to promote someone with a similar background and worldview – someone just like them.
On a personal level, I was sitting in a meeting at a mortgage company where the CEO was making a statement regarding team dynamics. He stated, “Our team must be like-minded. We don’t care if you are blue or yellow; we just need our team to mesh well together.” This is exactly the problem. Of course you want your team to get along, but if everyone immediately connects and finds that they are very similar to one another, you are not including the diverse perspectives and experiences of your customers. Research has proven that corporate diversity improves innovation, increases productivity, and creates products that connect better with your increasingly diverse customer base.
So, what can companies do to be compliant and to embrace a more diverse business industry?
Begin with an Assessment
An assessment of your existing compliance and marketing efforts is not only a great way to organize and prioritize your needs, but it is actually listed as an important aspect of compliance with Section 342. In October of 2013, six of the financial regulators issued a proposed interagency policy statement of Joint Standards for section 342. The standards are broken into four primary segments including: Organizational Commitment, Employment Practices, Supplier Diversity, and Publication of Diversity Measures. While the standards do not indicate the specifics of what the proposed “assessment” should involve, I have developed an assessment based on the policy recommendations, as well as HMDA marketing and outreach needs.
My firm utilizes this assessment to help companies create a starting point to evaluate their diversity and inclusion efforts and demonstrate progress. Below, I have outlined the areas in which we focus our assessments and subsequent training to help guide your efforts.
Organizational Commitment. Organizational commitment, as defined by the Joint Standards, is the commitment to diversity and inclusion by leadership within an entity. This standard is focused on corporate culture and the way the company promotes diversity and inclusion.
Based on these standards, we evaluate the following in our assessment:
Diversity and Inclusion Policy
Regular reporting of progress to senior management
Regular training on Diversity and Inclusion and Equal Employment Opportunity
How diversity efforts are evaluated and promoted within company management
Employment. This standard is designated to promote the fair inclusion of minorities and women in the workforce including through recruitment, hiring, promotion, and mentorship. The Joint Standards propose that companies should evaluate their relationships with professional organizations and educational institutions that predominantly serve minorities or women and metrics for the analysis of diversity and inclusion programs. We evaluate the following:
Metrics utilized from the EEO-1 report to evaluate diversity and inclusion in the company
Metrics utilized to evaluate diversity and inclusion efforts in recruitment, hiring, promotion, and professional support
Accountability practices for diversity and inclusion strategy
Policies and procedures for diversity recruitment strategies
Recruitment efforts in minority and women’s organizations and educational institutions
Participation in conferences, workshops, and events that attract diverse professionals
Procurement and Business Practices – Supplier Diversity. This standard is developed to evaluate the diversity within contractors and subcontractors of businesses. According to HMDA, to be classified as a woman-owned or minority-owned business, respective shareholders must hold at least 51% ownership of the company. In this section, we evaluate the following:
Supplier diversity policy
Outreach efforts to attract woman-owned and minority-owned businesses
Metrics to evaluate the following:
Annual contract spending
Percentage spent with minority and woman-owned businesses
Percentage spent with minority and woman-owned subcontractors
Demographics of contractors and subcontractors
Publicity. The Joint Standards make some strong recommendations regarding the publicity of companies’ diversity and inclusion efforts. This is probably the most important standard for compliance with section 342, but is heavily reliant on adherence to previous standards. The policy statement indicates the regulators will likely be looking at companies’ websites to “monitor diversity and inclusion practices.” It is highly recommended that the results of this portion of the assessment be published on the website as soon as possible to demonstrate progress.
Additionally, the online message given to consumers is one of transparency and value for diversity. For millennials in this post-crisis era, both of those messages are critical to reaching them. As stated in the standards, “Publication of this information can open new markets to new communities and can illustrate the progress that has been made toward an important business goal.”
The information that needs to be published include:
Diversity and inclusion strategic plan
Commitment to diversity and inclusion
Current workforce and supplier demographics
Current (and forecasted) employment and procurement opportunities
The availability of career support to employees and contractors
Marketing
In order to improve compliance with HMDA requirements (and improve top-line revenue), we evaluate companies’ marketing efforts among emerging demographics. First, we evaluate the demographics surrounding each lending office location and the closest metro area. If the majority of offices are located in predominantly White neighborhoods, this will direct future growth. This will also help shape the company’s multicultural marketing strategy. In the assessment, we include race, ethnicity, language, age, gender, and homeownership rate for each office location’s metro area and census tract.
Secondly, we begin to evaluate the company’s effectiveness in marketing to each ethnic community. We utilize focus groups, interviews, and data analysis to evaluate marketing and outreach. We consider the following areas in our assessment:
Website including content, language, and pictures
Location of and involvement with community events
Language and location of ads and marketing materials
Brand symbols including logo and slogan
Connections with multicultural community leaders and providers
Training
I highly advise against beginning a cross-cultural marketing campaign before first improving internal cultural competence. If your staff is not trained in cultural competence and does not at all reflect the community in which you are marketing, you will have the opposite effect. Unknowingly, you may offend your customers and develop a bad reputation.
Compliance with diversity and fair lending legislation will take company-wide participation. Training is a critical aspect to not only become compliant, but to help employees understand the importance and significance behind the legislation. While most cultural competence trainings are helpful, we recommend placing extra emphasis on marketing and customer service. This will help to motivate all team members to become compliant, as it also directly helps them to increase sales and productivity.
Looking Ahead
While I believe the industry is making great strides towards adjusting to the growing multicultural homebuyer, I think we have a long way to go. I know the CFPB has made diversity and inclusion a top priority, but my fear is that banks and mortgage companies are dragging their feet. Many executives do not want to deal with more legislation and so are ignoring the warning signs.
The MBA has begun making steps towards assisting the mortgage industry through diversity and inclusion objectives. They hosted their first annual Strategic Markets and Diversity Summit in June 2014. With such a robust set of standards, I think the MBA will need to take a complete approach in bringing systemic change in adoption of the standards into the mortgage industry. I have found that many executives are completely unaware of diversity and inclusion legislation or of its significance to their business. The more education that can be done regarding the shift in demographics and what that means for purchasing trends, barriers, and marketing will be critical to future development.
I am not sure whether the diversity and fair lending legislation is too far-reaching or whether or not it will ultimately be effective, but naturally, companies need to both be compliant and competitive. Executives have the opportunity to leverage their compliance requirements to create a strong and productive workforce and reach the increasingly diverse communities of homebuyers.
Kristin Messerli is the founder of Cultural Outreach Solutions, specializing in compliance with Dodd-Frank diversity legislation, Section 342, and corporate assessments/training Kristin can be reached at Kristin@CulturalOutreach.net.
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