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The Consumer Financial Protection Bureau recently disclosed it's using a new tactic to ferret out racial discrimination at banks. It's sending in people who pose as customers. As NPR's Chris Arnold reports, the move is another sign the young watchdog agency is flexing its regulatory muscles.
CHRIS ARNOLD, BYLINE: When the CFPB looked into the Mississippi-based regional bank Bancorp South, it didn't just review thousands of loan applications. It sent in undercover operatives - some white, some black - who pretended to be customers applying for loans.
RICHARD CORDRAY: They had similar credit scores and similar background and situations.
ARNOLD: CFPB director Richard Cordray...
CORDRAY: Our investigation had found that Bancorp South had engaged in illegal redlining in Memphis, meaning refusing to lend into specific areas of the city.
ARNOLD: That is neighborhoods where most residents were African-Americans or other minorities. Cordray says on top of that, the bank...
CORDRAY: They charged African-American customers higher interest rates for mortgages than similarly situated white applicants. They'd also denied loans to African-American applicants more often than white applicants.
ARNOLD: Regulators getting people to pose as customers is called testing, and this case marks the first time that the CFPB has said it's using testers for enforcement. It just disclosed that earlier this summer when it announced a $10 million settlement with Bancorp South. The bank did not admit wrongdoing and said in the statement, quote, "Bancorp South is fully committed to fair and responsible lending practices."
The CFPB is not disclosing the size and scope of its testing operation, but it says it will continue to use this tool when appropriate, and some consumer groups are happy to hear that.
FRED FREIBERG: Absolutely. I mean it's an incredibly powerful tool.
ARNOLD: Fred Freiburg is the founder of the Fair Housing Justice Center in New York. Before that, for years he ran a testing enforcement program at the U.S. Justice Department. He used his testers to enforce fair housing laws, so they were posing as people looking to buy or rent houses and apartments.
FREIBERG: Testers are the unmarked squad cars in the housing market. It is the most effective way of finding out how people are actually being treated in the marketplace.
ARNOLD: Still, this approach costs money. Freiberg says you need a large, diverse pool of testers. Sometimes they're called mystery shoppers. And some regulatory agencies just don't use this method at all. So he says it's encouraging to him that the CFPB is doing this.
FREIBERG: I hope to see more government agencies understand that this is a tool that they can't do without.
ARNOLD: In the past there's been some pushback against this tool. A few years ago the Department of Health and Human Services scuttled plans for a testing program after Republican lawmakers objected. NPR reached out to one of those lawmakers as well as industry groups, and none of them criticized the CFPB in this case. The industry, though, is definitely aware of the undercover effort, and Richard Cordray says he hopes that that serves as a deterrent.
CORDRAY: I think it's important for institutions to know that we're going to be looking not just at what they say on paper that they're supposed to be doing but what their people are actually doing in individual cases with individual customers.
ARNOLD: As far as when it's legal for regulators to use mystery shoppers or testers, federal privacy law says you can't do that if you're trying to get personal information about individuals. But Cordray says the CFPB is investigating discrimination by entire companies, and he says that makes testing an appropriate and powerful enforcement tool. Chris Arnold, NPR News.