An OTS Study Rebuts Reports That Sparked Redlining Case

By Seiberg, Jaret | American Banker, February 10, 1995 | Go to article overview

An OTS Study Rebuts Reports That Sparked Redlining Case


Seiberg, Jaret, American Banker


WASHINGTON -- Two government economists are challenging the newspaper reports that Attorney General Janet Reno said had sparked her department's now-famous prosecution of Chevy Chase Federal Savings Bank.

The Office of Thrift Supervision study is the latest in a recent series of critiques that dispute the notion that banks discriminate against minority loan applicants. Until these studies began to appear late last year, the evidence suggesting rampant loan discrimination was virtually unchallenged.

Both the Justice Department and The Washington Post, which conducted the earlier study of lending discrimination, disputed the new analysis.

Justice Department spokesman Myron Marlin said the study does not exonerate Chevy Chase. The department used the Post story as an indicator of possible problems in Washington and then conducted its own research to discover if the allegations were true, he said.

"We would not simply bring a case based on an investigation by an outside source," Mr. Marlin said.

The study said the newspaper's series on lending discrimination, published in June 1993, contained several flaws.

The researchers, who previewed their work Tuesday before the Society of Government Economists, said the newspaper didn't account for nonracial factors that affect whether someone gets a mortgage.

When the researchers included these factors -- such as loan-to-value ratios, the percentage boarded-up properties in the area, and unemployment rates -- the racial disparities disappeared.

"There was no evidence of pervasive redlining," said Clifford Rossi, one of the study's authors.

"I think what we found is that there are economic factors that lead to the observed findings," he added.

The Post study, which examined 130,000 deeds from 1985 and 1991, found that banks and thrifts make loans at twice the rate in white communities as in comparable black neighborhoods. It also found that mortgage companies, which it said charge higher fees and interest rates, try to fill the need that the banks and thrifts are ignoring.

Mr. Rossi said studies like the Post's, which inflame the public and turn out to have been flawed, hurt efforts to eliminate lending discrimination.

"To me, even though they had some pretty good intentions, they did a disservice to the public," Mr. Rossi said of the Post. "In the long run, it may do more harm then good."

The mortgage business is so competitive, Mr. Rossi said, that researchers need to greet any news account of redlining warily.

"If you find bias, be suspect," he said. "The circumstances are such that it would be difficult to find lending bias in the mortgage business."

Mr. Rossi, and his co-author, Fred Phillips Patrick, declined to comment specifically on Chevy Chase. But they did say the Justice Department never would have learned about the Maryland thrift if the paper had gotten its numbers right.

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