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5 Lessons from HUD

By: Harrison Shaw on August 22nd, 2018

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5 Lessons from HUD's "Digital Redlining" Complaint Against Facebook

Fair Lending  |  Redlining  |  News & Tips

Last week, the Department of Housing and Urban Development announced a formal complaint against Facebook for alleged "digital redlining." This story has valuable insights to offer financial institution leaders - even if they aren't immediately evident. Learn the three lessons we've learned from this formal complaint.

facebook-computerOver the past 18 months, social media behemoth Facebook has been plagued by scandal. The latest? A formal complaint from the U.S. Department of Housing and Urban Development (HUD) that alleged the company engaged in digital redlining.

More broadly, HUD's formal complaint said that Facebook violated the Fair Housing Act by letting landlords and home sellers use its advertising platform to participate in housing discrimination. The FHA prohibits discrimination in housing transactions including print and online advertisement on the basis of race, color, national origin, religion, sex, disability, or familial status.

Although this complaint is aimed at a non-banking entity, there are still insights for financial institutions here.

Read on to learn five lessons from HUD's digital Redlining complaint against Facebook, and how you can apply them at your bank, mortgage company, or credit union.

By the end of this article, you'll have a clear understanding of digital Redlining, what this complaint could mean for your financial institution, and why it matters that state regulators are involved.

Lesson 1: Make Sure You Know What Digital Redlining Is

Redlining is the act of providing unequal access to or terms of credit to residents of an area where applicant resides or will reside, or the area where the property to be mortgaged is located. Digital Redlining is basically the process of doing that online.

This type of Redlining is still evolving, so for now, it's important to keep a flexible approach to the topic. In addition, it can help to focus on the practical application.

In this instance, HUD alleged that violations of the Fair Housing Act occurred because Facebook's advertising platform allows advertisers to choose to display or not display housing-related ads based on:

  • social-media-usersGender.
    • The platform allows advertisers to show or not show ads based on gender, i.e. to only men or women.
  • Disability.
    • An advertiser can choose to display (or not display) ads to Facebook users who have indicated that they're interested in disability- and accessibility-related topics such as "assistance dog," "mobility scooter," "accessibility" or "deaf culture."
  • Familial status.
    • An advertiser can choose to show or not show ads based on interest in topics like "child care" or "parenting," or to target users based on the age of their children.
  • Religion.
    • Advertisers can display/not display ads to people Facebook determines is interested in a place of worship, religion or tenet, such as the "Christian Church," "Sikhism," "Hinduism," or the "Bible."
  • National origin or identity.
    • An advertiser can choose to show or not show ads to users who are interested in certain countries or regions, such as "Latin America," "Canada," "Southeast Asia," "China," "Honduras," or "Somalia."
  • Location.
    • Facebook allows advertisers to target advertising by geography, by drawing a red line around zip codes. Advertisers can then not display ads to Facebook users who live in specific zip codes.

[Yesterday, we hosted a Redlining webinar. Get those slides here!]

Facebook also promoted its advertising platform using "success stories" of housing-related companies, and how they found customers using the platform. For example, one success story for Quadrant Homes says that "he home design and construction company used strategic audience targeting and ads optimized for higher intent, increasing high-quality leads by 5X compared to optimizing for volume."

Below are some of the features that Facebook advertises:

facebook-ads

These are powerful tools, with a wealth of data supporting them. The ability to identify likely customers, and even target individuals that you believe are likely to appreciate and value your products, is an exciting one. However, as evidenced here, there are real compliance risks involved.

Lesson 2: Digital Redlining is Not Just for Tech Companies

If the concept of digital Redlining can work against Facebook, it can work against financial institutions.

While this political and regulatory environment seems to be slightly more bank- and financial institution-friendly, that's no reason to relax on Redlining. You will need to make sure that you are not accidentally engaging in digital Redlining in your marketing and advertising efforts. We'll spend some more time on this later.

Bottom line: you need to know your Redlining risk.

Lesson 3: Secretary-Initiated Complaints Have a Unique Process

facebook-binocularsThis complaint didn't originate with a consumer, it started with Anna María Farías, HUD's Assistant Secretary for Fair Housing and Equal Opportunity. A Secretary may file a Fair Housing complaint directly against a company or institution when they believe there's evidence of a violation. 

These kinds of formal complaints tend to be used when HUD believes that there's a significant issue posed that has broad national impact and/or public interest. They can also be used when HUD doesn't know of a specific "victim" that is willing or able to speak out.

The process of dealing with a formal complaint is somewhat different when it comes from a Secretary rather than an allegedly injured consumer. It involves:

  • A formal fact-finding investigation from HUD.
  • Notice to the company, institution, or individual against whom the complaint is filed, and a chance to respond.
  • If reasonable cause exists after researching the situation, a charge of discrimination may be filed.

According to HUD's statement, "HUD will seek conciliation and voluntary resolution. Charges may be resolved through settlement, through referral to the Department of Justice, or through an administrative determination."

"The Fair Housing Act prohibits housing discrimination including those who might limit or deny housing options with a click of a mouse. When Facebook uses the vast amount of personal data it collects to help advertisers to discriminate, it's the same as slamming the door in someone's face."

Anna María Farías - Assistant Secretary for Fair Housing and Equal Opportunity, HUD

While a Secretary-started investigation is not a determination of liability, there is still significant risk associated. In this case, HUD identified the problem, will do the research, and eventually come to a conclusion about Facebook's culpability on their own. Well, not entirely alone, but we will get to that next.

Lesson 4: Other Federal and State Officials are Also Involved

HUD is not entirely alone in this formal complaint. According to the statement, "the U.S. Attorney for the Southern District of New York (SDNY) has also filed a statement of interest, joined in by HUD, in U.S. District Court on behalf of a number of private litigants challenging Facebook's advertising platform."

community-teamworkIn addition, the National Fair Housing Alliance, in partnership with three other Fair Housing-focused organizations, also filed a lawsuit against Facebook in March. Their complaint went into detail about their research on Facebook's advertising.

The NFHA is joined by New York City's Fair Housing Justice Center, Miami's Housing Opportunities Project for Excellence, Inc, and the Fair Housing Council of Greater San Antonio. These organizations together engaged in something like "mystery shopping" on Facebook by creating a fake realty group and then building advertisements.

They allege that Facebook provided lists of groups they could prevent from receiving ads, including families with children and moms with children of certain ages.

“Facebook enables a real estate company or landlord to discriminate by selectively targeting housing advertisements to exclude specific populations. Facebook’s platform is the virtual equivalent of posting a for-rent sign that says No Families with Young Kids or No Women, but it does so in an insidious and stealth manner so that people have no clue they have been excluded on the basis of family status or sex.”

- Fred Freiburg - Executive Director, FHJC

Facebook tried unsuccessfully to have that lawsuit dismissed, saying that it was just an "interactive computer service." That said, they have and continue to deny that they have engaged or facilitated any discrimination.

The first allegation against Facebook for a Fair Housing Act violation came in 2016, from ProPublica, a news organization.

(There have been lots of recent headlines about Redlining. To learn more about the media's focus on Redlining compliance, check out this post from earlier in August.)

Lesson 5: Analyze Your Advertising and Marketing Data for Redlining Risk

As we have said repeatedly, financial institutions need to be proactive about identifying and managing their Redlining risk. The only real way to know your Redlining risk is by analyzing your data.

Last month, we heard from the Federal Reserve Board about how important analysis is to managing Redlining risk. We have also heard this from every other regulator over the past 3-5 years.

"Banks can manage risks by reviewing lending patterns and analyzing disparities in applications and originations as potential indicators of redlining risk..."

- Federal Reserve Board, Consumer Compliance Supervision Bulletin

Here are a few steps to take when analyzing your data:

  • First, create a map of your marketing and lending activity that aligns with your REMA. If you’re accepting applications or lending outside of your REMA, make sure to analyze that, too.
    • Go ahead and make sure that you're building a strong and accurate definition of peer and benchmark institutions as well. This can be a challenge, but inaccurately defined peers can artificially increase (or decrease) your risk.
    • Your regulator will ultimately define your REMA, but it's still a good idea to come up with an estimated REMA. Just make sure it doesn't look like a croissant or a donut.
  • Next, geocode your data and review it visually. You’re looking for any gaps or areas where application or origination volume is not as dense. Keep an eye out for areas that stand out or might attract regulatory attention.
  • Then, conduct statistical analysis of your data to identify any disparities. Were any individuals from Low-to-Moderate income or majority-minority census tracts not marketed to, or denied mortgage loans at a higher rate than non-LMI or MM census tract individuals?
    • We recommend that you focus on marketing and underwriting when evaluating your Redlining risk. To evaluate your Marketing and/or Origination risk, you need to analyze:
      • Applications and/or originations in Majority-Minority census tracts,
      • Distribution of applications and/or originations inside market areas, and
      • Application and/or origination market share within the unique market areas.
    • Make sure to compare your performance to peers.

If you want more specific guidance, you may enjoy this blog post, "7 Ways to Analyze Your Data for Redlining Risk."

TRUPOINT Viewpoint: Redlining compliance can seem scary, but it doesn't have to be. Analyzing your data can tell a positive story about your institution’s ability to serve all communities. 

Yesterday, we hosted a really helpful Redlining webinar. In it, we covered the history of Redlining compliance, current regulatory trends, why additional public pressure matters, and how to handle your risks. Even if you couldn't attend, you can get the slides! Just download them here:

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About Harrison Shaw

After graduating from Clemson University, I moved to Charlotte, NC, where I live now with my fiance and our dog. My favorite part of my job is building relationships and getting to know people - it's energizing to hear from new folks all over the US. Outside of work, I enjoy doing anything outdoors, from competitive rock climbing to backpacking, mountain biking, fly fishing, etc. On a recent backpacking trip through the Nantahala National Forest, I came (literally) face-to-face with a black bear in the dead of night.