Academic journal article ABA Banking Journal

Credit Tampering

Academic journal article ABA Banking Journal

Credit Tampering

Article excerpt

Credit tampering

Call it credit allocation. Call it tampering with sound standards. Call it what you like, we are seeing renewed political interference with the credit-granting process. Such interference not only can distress the workings of the normal market-place but has the potential to do great harm to the banking system as well.

Three recent developments can be cited as examples of this trend:

(1) In October, federal regulators released a million-or-so pages of Home Mortgage Disclosure Act statistics that indicated that lenders may be discriminating against minority borrowers.

(2) The Senate included, in its then-pending banking legislation, an amendment that would have capped credit-card interest rates at 14%, at least currently. (The amendment did not survive.)

(3) The Administration has been jawboning banks to make more loans since last spring, seeking to get the economy moving again.

All three developments imply the use of banks as tools to advance social and economic goals. Let's look briefly at each. Forced lending. The regulators themselves said the HMDA data was inadequate to prove that discrimination exists. The fact that disparities are evident in the granting of home mortgage loans is less an indication of credit discrimination, it seems to us, than it is of underlying problems that result in some segments of the population being proportionately less credit-worthy than others.

If the HMDA numbers motivate lenders to be more vigilant in looking for discriminatory behavior or policies, or if they become an incentive for true reform of, say, public education, then they will have served a useful purpose. But if they are used as a blunt instrument to coerce lending to some politically correct level, greater problems will surely follow. No matter how worthy the motive, giving credit to an individual who is not credit-worthy only results in losses to all parties. A privilege, not a right. The great rate-cap battle is over for now, but it could easily resurface. The reason is simple. Congress (and others) increasingly regard credit availability as an intrinsic right. Viewed this way it becomes a utility warranting price control.

A credit card - indeed any extension of credit - is not a right, but an economic privilege. The fact that some banks and other card issuers have chosen to offer credit cards to large numbers of people does not make the cards the equivalent of electricity. …

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