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.
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 advertisements 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.
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.
Redlining is the act of providing unequal access to or terms of credit to residents of an area where the 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:
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 "the 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:
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.
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.
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:
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.
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."
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.)
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.
"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:
If you want more specific guidance, you may enjoy this blog post, "7 Ways to Analyze Your Data for Redlining Risk."
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.