Fair Lending Adds New Dimension to Bank Regulations

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Regulatory burden on banks has taken on a new, onerous dimension under the Clinton administration, according to the Oklahoma City leader of a national group dedicated to helping banks work their way through the rules mine field.

The issue is the elimination of racial discrimination in lending.

"This is the regulatory hot spot today," said William L. Browning, managing partner of the Oklahoma City office of Arthur Andersen Co. and director of the Big Six accounting firm's Regulatory Compliance Consulting Group.

Since Clinton was inaugurated, Browning said, the federal government has taken several steps to beef up its enforcement of existing anti-discrimination laws. Strong statements to that effect have been made by Clinton himself, by newly appointed Comptroller of the Currency Eugene Ludwig, by Secretary of Housing and Urban Development Henry Cisneros and by Attorney General Janet Reno.

The leaders have promised to search out violations of the Equal Credit Opportunity Act, Fair Housing Act and the Home Mortgage Disclosure Act. They also have promised to come down hard on offenders. They have been true to their word in the settlements of cases that have been made public to date.

"These are not new laws; they are new interpretations," said Gary Pitzer, who works with Browning on Arthur Andersen's Compliance Consulting Group.

Those charged with looking for violations are not just the regular examiners banks have become accustomed to dealing with. This new concerted effort has enlisted new groups of compliance checkers known as fair lending specialists, who could be part of Housing and Urban Development or the Justice Department as easily as they could be part of a banking regulatory agency.

Pitzer said most of the regular bank examiner crew lived through the recent banking crisis with its high levels of bad loans, and they approach credit files with that experience in mind. Examiners from Housing and Urban Development who go into a bank to check for violations of fair lending laws do not have that historical balance.

"The special examiners from the housing side have their own bias," Browning added. "The result may be reducing credit standards, and maybe banks will have credit problems down the line."

In a fair lending exam, regulators "try to compare loans approved for whites and loans approved for minorities. They ask, `Did you apply the same standards?'

"It's a tough challenge. The banks we are working with take this very seriously. They all want to comply. Nobody wants to discriminate."

The problem boils down to the basic idea of extending credit _ lending to the person who will pay you back and not lending to the one who won't, in short, discrimination.

Lenders generally base those decisions on the numbers to see if a deal is workable. Beyond that they look for intangible factors which indicate the character of the borrower. What they can't afford is to have too many loans go bad _ a lesson still fresh in the minds of 1980s' survivors.

Compounding the problem is that lending occurs in a production environment where loan officers are pressured to move paper. Such an environment can foster inconsistent results.

What the discrimination settlements that have been brought to light have shown is that banks which monitor themselves and take corrective action can expect more lenient treatment from the feds. Those that choose to look the other way or ignore the possibility of problems can expect results that are more harsh.

One of the settlements involved a bank in Connecticut that was found to have many discrimination problems. Because the bank had already identified the problem and begun to implement corrective actions before the examiners arrived, its penalty was comparatively lighter than that of a Mississippi bank which had its discrimination problems brought to its attention by regulators. …