Can you recommend any resources or guidance on using customer data for targeted marketing purposes? We have been using zip codes for targeted marketing promotions. Are there any limitations on data targeting that we should be aware of?

Yes, when considering targeted marketing campaigns, you should consider whether any fair lending laws or UDAAP concerns will be triggered. We recommend carefully considering whether any targeted marketing campaign may be viewed as discriminatory or having a disparate impact on a protected class and thoroughly documenting your business reasons for engaging in such a campaign. A practice of targeting advertisements based on zip codes should be carefully reviewed and analyzed by a bank’s compliance department, as the federal banking agencies have identified this specific practice as an indicator of potential disparate treatment.

The Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against applicants in credit transactions on the basis of their membership in certain protected classes (race, color, religion, national origin, sex, marital status, or age). Regulation B, which implements the ECOA, prohibits banks from making written or oral representations in advertising that would discourage, on a prohibited basis, a reasonable person from applying for credit. Similarly, the Fair Housing Act prohibits discrimination in advertising regarding the sale or rental of a dwelling, including mortgage credit discrimination.

Although individuals who reside within a particular zip code are not a protected class, marketing lending products or deposit accounts that include credit features only to those residing in a particular zip code could have a disparate impact on a protected class. For example, if the majority of individuals who reside in the targeted zip code are non-minorities, the campaign might disproportionately exclude people in neighboring zip codes with higher minority populations.

The FFIEC Interagency Fair Lending Procedures contain a list of indicators of potential disparate treatment in the marketing of residential products, including “advertising only in media serving non-minority areas of the market” and excluding “geographies (e.g., census tracts, ZIP codes, etc.) within the institution’s marketing area that have significantly higher percentages of minority group residents than does the remainder of the marketing area.”

The FFIEC procedures also include a helpful explanation of the disparate impact concept and how institutions can mitigate the risks of a disparate impact finding. Notably, a policy resulting in a disparate impact can be justified by a “business necessity,” with documentation of any factors that went into setting the bank’s policy.

For a resource on digital marketing, we recommend reviewing an article from the Federal Reserve Bank of Philadelphia’s Consumer Compliance Outlook linked to below. The article cautions that “targeted marketing may constrain consumers’ access to the broad range of products and services available” and “in the context of credit, without careful implementing and monitoring, Internet-based targeted marketing may undermine financial inclusion if a consumer is not shown the full range of financial products and services for which she could qualify.” The article also notes that as part of a 2019 settlement between Facebook and civil rights advocates, Facebook agreed to retool its advertising platform and disallow targeting by zip code for ads related to housing, employment, and credit.

Additionally, we note that marketing any product in a discriminatory manner — whether or not it includes a credit feature and is subject to fair lending laws — could be viewed as an unfair, deceptive, or abusive act or practice (UDAAP). The CFPB Supervision and Examination Manual section on UDAAP directs examiners to consider whether an “entity engages in targeted advertising or marketing in a discriminatory way.”

For resources related to our guidance, please see:

Equal Credit Opportunity Act, 15 USC 1691(a) (“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction — (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under this chapter.”)

Regulation B, 12 CFR 1002.4(b) (“A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”)

Fair Housing Act, 42 USC 3605(a) (“It shall be unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.”)

Fair Housing Act, 42 USC 3604(c) (“As made applicable by section 3603 of this title and except as exempted by sections 3603(b) and 3607 of this title, it shall be unlawful . . . (c) To make, print, or publish, or cause to be made, printed, or published any notice, statement, or advertisement, with respect to the sale or rental of a dwelling that indicates any preference, limitation, or discrimination based on race, color, religion, sex, handicap, familial status, or national origin, or an intention to make any such preference, limitation, or discrimination.”)

HUD Fair Housing Act Regulations, 24 CFR 100.75(c)(3) (“Discriminatory notices, statements and advertisements include, but are not limited to: . . . (3) Selecting media or locations for advertising the sale or rental of dwellings which deny particular segments of the housing market information about housing opportunities because of race, color, religion, sex, handicap, familial status, or national origin.”)

Consumer Compliance Outlook, From Catalogs to Clicks: The Fair Lending Implications of Targeted, Internet Marketing (Third Issue 2019) (“The FHA prohibits discrimination in advertising regarding the sale or rental of a dwelling, which includes mortgage credit discrimination.”)

FFIEC Interagency Fair Lending Procedures, page ii (“The courts have recognized three methods of proof of lending discrimination under the ECOA and the FHAct:

Overt evidence of disparate treatment;

Comparative evidence of disparate treatment; and

Evidence of disparate impact.”)

FFIEC Interagency Fair Lending Procedures, pages 11-12 (“Indicators of potential disparate treatment in Marketing of residential products, such as:

M1. Advertising patterns or practices that a reasonable person would believe indicate prohibited basis customers are less desirable.

M2. Advertising only in media serving non-minority areas of the market.

M3. Marketing through brokers or other agents that the institution knows (or has reason to know) would serve only one racial or ethnic group in the market.

M4. Use of marketing programs or procedures for residential loan products that exclude one or more regions or geographies within the institutions assessment or marketing area that have significantly higher percentages of minority group residents than does the remainder of the assessment or marketing area.

M5. Using mailing or other distribution lists or other marketing techniques for prescreened or other offerings of residential loan products that:

[1] Explicitly exclude groups of prospective borrowers on a prohibited basis; or

[2] Exclude geographies (e.g., census tracts, ZIP codes, etc.) within the
institution's marketing area that have significantly higher percentages
of minority group residents than does the remainder of the marketing area.

M6. Proportion of prohibited basis applicants is significantly lower than that group's representation in the total population of the market area.

M7. Consumer complaints alleging discrimination in advertising or marketing loans.”)

FFIEC Interagency Fair Lending Procedures, page iv (“When a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a ‘disparate impact.’ . . . The fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. When an Agency finds that a lender’s policy or practice has a disparate impact, the next step is to seek to determine whether the policy or practice is justified by ‘business necessity.’ The justification must be manifest and may not be hypothetical or speculative. Factors that may be relevant to the justification could include cost and profitability. Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by business necessity, it still may be found to be in violation if an alternative policy or practice could serve the same purpose with less discriminatory effect.”)

Consumer Compliance Outlook, From Catalogs to Clicks: The Fair Lending Implications of Targeted, Internet Marketing (Third Issue 2019) (“[T]argeted marketing may constrain consumers’ access to the broad range of products and services available today. By making assumptions about what products might be the right fit for consumers, targeted marketing has an increasingly significant, though largely invisible, impact on the advertisements shown to consumers online. In the context of credit, without careful implementing and monitoring, Internet-based targeted marketing may undermine financial inclusion if a consumer is not shown the full range of financial products and services for which she could qualify. . . . The marketing of housing and credit products in particular carries obligations under the ECOA and the FHA. As a result, the use of technology reliant on consumer data for this type of marketing should be approached with an awareness of the risks that any selected technologies bring.”)

Consumer Compliance Outlook, From Catalogs to Clicks: The Fair Lending Implications of Targeted, Internet Marketing (Third Issue 2019) (“Facebook’s March 2019 settlement promised significant changes: The company agreed to retool its advertising platform and appeared to acknowledge the risk of digital redlining in its decisions to limit the filtering options available to advertisers, restrict geographic targeting to a minimum geographic radius of 15 miles from a specific address or from the center of a city, and disallow targeting by zip code.”)

ACLC, Summary of Settlements between Civil Rights Advocates and Facebook (March 19, 2019) (“Facebook will establish a separate advertising portal for creating housing, employment, and credit (‘HEC’) ads on Facebook, Instagram, and Messenger that will have limited targeting options, to prevent discrimination. . . . HEC ads must have a minimum geographic radius of 15 miles from a specific address or from the center of a city. Targeting by zip code will not be permitted.”)

CFPB Supervision and Examination Manual, UDAAP Section, pages 14-15 (“Through a high-level assessment of the entity’s products, services, and customer base, identify areas for potential transaction testing. This process should determine whether: . . . The entity engages in targeted advertising or marketing in a discriminatory way.”)