Academic journal article ABA Banking Journal

Are You Discriminating without Meaning To?

Academic journal article ABA Banking Journal

Are You Discriminating without Meaning To?

Article excerpt

The banking industry is scaling a steep learning curve with respect to credit discrimination.

A year ago, most bankers thought all they had to do to stay out of trouble was to avoid procedural violations of Regulation B, which implements the Equal Credit Opportunity Act (ECOA).

Today, most bankers realize the issues are far more complex and far more subtle.

Case in point: An ABA-sponsored training video depicts a bank receptionist offering coffee and a welcoming smile to a white male "yuppie" business customer, while ignoring the Hispanic entrepreneur sitting beside him, whom she has assumed wants a car loan. As it turns out, the Hispanic person is better qualified.

If bankers must deal with discrimination issues at this level of subtlety-- and they must--bank management has its hands full.

Beyond "official" bias

Banks throughout the country are busy responding to a sudden regulatory focus on two complicated, virtually new issues.

The first is whether biases on the part of bank personnel may result in minority group members being "prescreened"--discouraged from submitting an application. The second is whether employee bias comes into play in the evaluation of the loan, resulting in subtle differences in the way applications are handled.

The common denominator in both issues is concern over the personal biases of bank employees.

Another, perhaps even more challenging issue is receiving little notice: the concern that the industry's standard credit underwriting criteria and routine practices are, in and of themselves, discriminatory. If true, say the critics, even if bank personnel apply these standards with perfect even-handedness, minorities will still be the objects of unfair discrimination.

The regulatory name for this concept is the "effects test."

The regulators' thought process and policy stance on the effects test are still developing. The overview offered here is intended to help bankers understand the issue, provide input to the regulators, and manage their banks to avoid problems. Effects tast's origins

The effects test is a civil rights enforcement concept developed years ago in the context of employment discrimination. It involves the use of a threestage evaluation of business practices that, while not discriminatory in intent, have discriminatory effects.

Stage l--Critics of the practice in question challenge it on the grounds that it has a disproportionate negative impact on a "protected class," such as racial minorities or women.

If that accusation can be substantiated through statistical evidence, the test moves to the second stage.

Stage 2--The company involved tries to demonstrate that there is a business necessity for continuing the practice.

If that necessity is demonstrated, those bringing the action can move on to the third stage.

Stage 3--The company offers a substitute practice that would meet the company's need with a less discriminatory effect.

To my knowledge, the effects test has not been applied directly or explicitly to credit issues by either the courts or the regulatory agencies.

However, a footnote to Regulation B indicates that the effects test does apply under ECOA, and the thinking behind it has long operated behind the scenes at the agencies.

Further, it is clear to me from conversations with agency officials and examiners that the effects test is becoming part of the underpinning of the agencies' fair-lending enforcement philosophy.

Examiners are asserting in meetings with bankers, for instance, that practices that have discriminatory effects, even in the absence of discriminatory intent, are violations of law. More and more, examiners are also challenging bank practices that have disproportionate impacts on minorities, using a combination of moral suasion, threats of ECOA and Fair Housing Act enforcement, and criticism under the Community Reinvestment Act. …

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