A research plan you can take to the bank

Editor’s note: Paul C. Lubin, who wrote this article while senior vice president of Informa Research Services, Calabasas, Calif., is now president of Lubin Research, New Rochelle, N.Y.

Market research can be a powerful tool for detecting and resolving problems consumers encounter when applying for credit. These problems and vulnerabilities can manifest themselves in racial profiling and disparate treatment during the loan process. For the consumer seeking credit, he or she may not be able to obtain accurate information to make appropriate credit decisions, and racial profiling and discrimination only magnify the problem and affect the very consumers who need the information the most. For the lender, it can result in business practices that violate the law, reduce revenue and increase risk.

Self-testing through the use of established research methods (such as mystery shopping and matched-pair testing, monadic testing and post-application consumer telephone surveys) can help a financial institution ensure consumer credit decisions are sound and based on receiving understandable and accurate information. These research programs can also help financial institutions adhere to the law and defend against allegations of unfair sales practices and discrimination.

Matched-pair testing and mystery shopping call for testers or mystery shoppers to pose as potential or actual buyers. Unlike statistical procedures which require outcomes (i.e., loan approval, loan denial, pricing) and rely on abstract arguments and statistical principals, mystery shopping provides a record of the treatment or experience. In tests for discrimination, a direct comparison is made of the experiences of minority and non-minority classes of testers.

Post-application consumer telephone surveys measure the assistance and treatment encountered by loan applicants and whether they maximize the opportunity for loan approval - based on the financial circumstances of the borrower. Similar to mystery shopping, direct comparisons of the attitudes, perceptions and experiences recalled by recently-approved and -denied minority and non-minority loan applicants are made (some surveys include withdrawn and approved-not-accepted applicants).

Both approaches measure disparate treatment. In consumer credit, this may manifest itself in discouraging and/or providing different information to a potential black applicant than to a similarly-situated white applicant; rejecting a Latino and accepting the similarly-situated white applicant; or even providing different and unfavorable terms to the black female applicant than the similarly-situated white female applicant.

Overt or subtle

Differential or disparate treatment may be classified as overt or subtle. Overt differences are those actions which are evident to the prospective borrower. Examples include a prospective borrower told to go to another lender, or told that he or she will not qualify for the loan. Subtle differences are those actions which are not noticeable to the borrower but affect the prospective borrower’s access to credit and ability to make an appropriate decision about credit. Examples include telling the black potential borrower that approval time will take 60 days while the white potential borrower is told 30 days; taking longer to approve the black loan applicant than the potential white applicant; or offering the potential Hispanic borrower only loans with lower monthly payments but higher variable interest while offering the potential white borrower a variety of loans, including fixed-rate and adjustable loans.

There are specific steps to take when implementing a market research program designed to help a financial institution adhere to the law and provide fair and equal treatment of consumers during the credit process.

1. A well-defined objective of the market research should be created along with an action standard concerning how the information will be used. An example of a well-defined objective is: “The objective of the program is to determine the existence of disparate treatment of prospective loan applicants on the basis of race or ethnic origin. The program will examine the following areas and non-minority and minority comparisons will be made: access to information; questioning; products offered and recommended; product features and terms discussed; closing costs and rates quoted; courtesy; and invitation to apply. Disparate treatment will be judged based on the existence of statistical differences at the 95 percent confidence level between minority and non-minority testers or mystery shoppers.”

2. An appropriate data collection method should be chosen. The number of mystery shops and/or surveys needs to satisfy the objective and provide information to take appropriate action. Many times the number of interviews conducted is based on cost. Statistical reliability and setting action standards to make decisions can take a backseat to cost and immediacy. This can seriously detract from the credibility of the research. Verifying that the number of mystery shops and interviews will meet the action standards and determining how the data will be used is vitally important.

3. The data collection instrument or questionnaire must be designed properly. The questionnaire should be easy to understand and administer and be free from bias. The mystery shop questionnaire should be in a checklist (yes/no) format with subjective questions at the end, such as overall shopper satisfaction. This helps reduce the bias associated with what the mystery shopper feels is important by keeping him or her focused on what happened during the mystery shop. Ordering the questions to follow the sales and service process can help the shopper remember the experience and accurately record the details. 

The consumer survey, on the other hand, may contain a series of yes/no and rating questions, as well as questions which allow the consumer to express his or her thoughts verbatim. Here the order of the questions is particularly important in order to avoid bias. Asking a customer how satisfied he or she is with the institution at the end of survey may result in a completely different response than asking overall satisfaction at the beginning. Asking customer satisfaction at the beginning of the questionnaire limits bias as the customer will think only of the topics important to him or her when answering the question.

4. Select the right analytical and reporting approach. The analytic approach must meet the objectives of the research. It must describe the results by key decision criteria and point out patterns in the data important to the decision makers. A research program designed to verify compliance with fair-lending laws and ensure fair sales practices should report and quantify the treatment of non-protected and protected classes of potential and/or actual loan applicants (for example, black versus white). Following comparison, make conclusions concerning whether protected and non-protected classes receive similar access to information and whether the information received is similar and appropriate.

5. The financial institution must create an action plan based on the results and assemble a team to develop and implement it. Regulators have provided financial institutions with a self-testing privilege. The privilege protects the information produced by self-testing (mystery shopping and post-application surveys, etc.) and undertaken to ensure compliance with ECOA and FHAct from disclosure to third parties seeking information about the financial institution’s lending practices. However, to maintain the self-testing privilege, the financial institution must create and enact an action plan.

A great ally

Unfair or discriminatory practices left unchecked are a disservice to the consumer and the lender. Remember that research can be a great ally in identifying problems in service at an early stage, when it is still up to the institution to make the correction itself. Research becomes even more crucial when the consequences involve entanglement with the law.