Academic journal article ABA Banking Journal

Don't Get Soaked by Fair Lending Downpour

Academic journal article ABA Banking Journal

Don't Get Soaked by Fair Lending Downpour

Article excerpt

In the past I have likened the developing issues in credit discrimination compliance to a gathering storm. Today the storm has broken. Moreover, it shows every sign of being the compliance "storm of the century."

In the past few months:

(1) Comptroller Eugene Ludwig, saying "a new wind is blowing," announced major new discrimination detection procedures for national banks. The Office of the Comptroller of the Currency's new methods will include the controversial technique called "testing" and already includes aggressive new examination procedures aimed at detecting subtle discrimination.

(2) The Federal Deposit Insurance Corp. announced new procedures in a move paralleling the OCC, with new examinations aimed at detecting subtle differential treatment.

(3) The Federal Financial Institutions Examination Council is working with a consultant to strengthen procedures for examining all the financial institutions supervised by its five member agencies. While the OCC and FDIC decided not to wait for the results of this report, they may take even tougher steps in response to it.

(4) Both the Justice Department and the Department of Housing and Urban Development are gearing up for the enforcement role given to them by the FDIC Improvement Act, which requires the primary supervisory agencies to refer suspected cases of discrimination to them. The justice Department has been publicizing the guidelines generated by its case against Decatur Federal Savings & Loan, in which the Atlanta thrift agreed to a $1 million settlement to address charges of discrimination.

(5) Studies and investigations, such as that conducted last year by the Boston Federal Reserve Bank, continue.

(6) In June, The Washington Post published a damaging three-part series entitled "Separate and Unequal" claiming to prove a pattern of bias in mortgage lending among Washington, D.C.-area banks and thrifts (see Editor's Column).

Risks banks face

Every bank in the country needs to undertake emergency "stormproofing" measures immediately to put themselves in shape to weather the battering ahead. National banks and those regulated by FDIC are positioned directly beneath the front edge of this storm and are already feeling its effects. The rest of the industry will be hit shortly.

Why is the risk so great? After all, most banks are confident that they do not discriminate.

Unfortunately, that belief underestimates the power and complexity of the forces that are converging:

(1) The issue of credit discrimination has become highly politicized.

(2) Bank lending is widely viewed as a "costless" way to meet urban needs.

(3) The current focus is on subtle and unintentional forms of "discrimination" that are hard to define and detect. On one level, this seems appropriate. Blatant discrimination is almost nonexistent in banking. To the extent that problems exist, they must be subtle. However, indirect discriminatory practices are, by their nature, very difficult to find and prove. Separating subtle illegal discrimination from appropriate practice is an extremely fine art.

(4) The methodology for finding subtle discrimination is in an embryonic stage. Until very recently, examiners normally did not even look for anything but cut-and-dried technical violations. Now, in a very short time, hundreds of examiners are being asked to implement brand new procedures.

(5) Lending is an art, rather than a science. The examiners will be using their new testing methods to second-guess lending decisions and the decisionmaking process. Most, especially those at HUD and justice, have never been lenders and have limited appreciation of the subjective judgments that can rightly come into play. Even people who do appreciate these difficulties will still find it hard to distinguish between judgments made for appropriate reasons and those that might be illegal. …

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