Navy Federal, the largest credit union in the U.S., is currently facing a lawsuit over a report that it has been rejecting more than half of applications for conventional mortgages by Black borrowers while approving applications for white borrowers with similar income and debt levels.
Banks that overlook minority applicants for loans are missing out on a significant market segment. This exclusion represents not just a moral lapse but a substantial loss in potential revenue. A more inclusive approach to lending can open up new markets, fostering growth and profitability. By ignoring these opportunities, banks are effectively limiting their growth potential.
Discriminatory practices in banking not only result in lost opportunities but also lead to increased legal fees. Lawsuits alleging racial discrimination, like those faced by Navy Federal Credit Union, can be financially draining and time-consuming. The cost of litigation, settlements and associated legal fees can quickly accumulate, becoming a significant financial burden for any financial institution.
The lawsuit accuses Navy Federal of violating the Fair Housing Act and the Equal Credit Opportunity Act after a CNN report that the lender approved a lower percentage of Black and Latino mortgage applicants.
Beyond the direct financial losses, the reputational damage from discrimination cases can be long-lasting and far more damaging. The Navy Federal case exemplifies how allegations of discrimination can tarnish a bank's image, leading to a loss of customer trust and loyalty. In today's socially connected world, such reputational damage can spread rapidly, potentially leading to a decline in new customer acquisitions and retention challenges.
In late 2023, CNN revealed significant racial disparities in mortgage approval rates at Navy Federal Credit Union, with the institution rejecting over half of Black customers' applications. More precisely, the approval rates were 77.1% for white applicants and 48.5% for Black applicants. The credit union, the largest in the nation, was accused of violating fair housing laws and hit with a class action lawsuit. In response, Navy Federal emphasized its commitment to fair lending, going so far as to hire a leading civil rights attorney to conduct a review of their mortgage lending practices.
The banking sector needs to adopt a proactive approach to inclusivity. This involves not only ensuring nondiscriminatory lending practices but also actively seeking to provide services to underserved minority communities. Banks could create financial instruments specifically designed to deal with these issues. For example, as long ago as 1991, I helped create a mortgage-backed security consisting of home mortgage loans originated by minority-owned institutions. At a basic level, they should invest in diversity training, develop fair lending programs and engage with community leaders to understand and address the unique needs of these groups.
As we reflect on the losses incurred by banks due to exclusive practices, it becomes clear that inclusivity is not just a moral imperative but a business necessity. The banking sector must embrace this reality and act swiftly to rectify existing disparities. We call upon banking leaders to champion inclusive practices, ensuring that their institutions serve as engines of economic opportunity for all, regardless of race or ethnicity. This shift is not just about avoiding losses or legal fees; it's about building a more equitable and prosperous society for everyone.
Published January 10, 2024, 10:00 a.m. EST at https://www.americanbanker.com/creditunions/opinion/the-navy-federal-discrimination-case-should-be-a-lesson-for-banks
William Michael Cunningham. Founder, Creative Investment Research