When the Consumer Financial Protection Bureau looked into the Mississippi-based regional bank BancorpSouth, 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.
"They had similar credit scores and similar background and situations," says CFPB Director Richard Cordray. "Our investigation had found that BancorpSouth had engaged in illegal redlining in Memphis, meaning refusing to lend into specific areas of the city."
That is, neighborhoods where most residents were African-Americans or other minorities. Cordray says on top of that, the bank "charged African-American customers higher interest rates for mortgages than similarly situated white applicants."
He also says the bank denied loans to African-American applicants more often than white applicants — nearly twice as often in relative terms, according to the complaint.
When regulators get people to pose as customers, it's called "testing." This case marks the first time the CFPB has said it is using testers for enforcement. It just disclosed that earlier this summer when it announced a $10.6 million settlement with BancorpSouth.
The bank did not admit wrongdoing and said in a statement: "BancorpSouth is fully committed to fair and responsible lending practices."
The CFPB isn't disclosing the size and scope of its testing operation but says it will continue to use testers — also sometimes called "mystery shoppers" — when appropriate. Some consumer groups are happy to hear that.
"It's an incredibly powerful tool," says Fred Freiberg, founder of the Fair Housing Justice Center in New York. For years, he ran a testing enforcement program at the U.S. Justice Department. He used testers to enforce fair housing laws. They posed as people looking to buy or rent houses and apartments.
"Testers are the unmarked squad cars in the housing market," he says. "It is the most effective way of finding out how people are actually being treated in the marketplace."
Still, this approach costs money. Freiberg says you need a large, diverse pool of testers.
Some regulatory agencies just don't use this method at all. Freiberg says it's encouraging that the CFPB is doing this. "I hope to see more government agencies understand that this is a tool that they can't do without," he says.
In the past, there's been some pushback against using testers. 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 is definitely aware of the undercover effort. Cordray says he hopes that serves as a deterrent.
"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," he says.
As far as when it's legal for regulators to use 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 that makes testing an appropriate and powerful enforcement tool.