Magazine article American Banker

Fed Rejects Plan to Uncover Bias by Using Phony Mortgage Seekers

Magazine article American Banker

Fed Rejects Plan to Uncover Bias by Using Phony Mortgage Seekers

Article excerpt

WASHINGTON -- The Federal Reserve Board has unanimously rejected a controversial proposal to send fake mortgage applicants into banks to uncover racial discrimination.

"I have very serious reservations about whether the central bank should be sponsoring deception," said Fed Chairman Alan Greenspan when the plan came up for a vote on Wednesday.

The idea, first floated about two years ago, was formally recommended in June by a panel of citizens who counsel the Fed on consumer issues.

The Fed voted the plan down after concluding it would be unreliable and overly expensive, as well as place the agency in a questionable enthical position.

The Fed's staff estimated that just a pilot study of the idea in three cities would cost $600,000 to $1 million.

Posing as Borrowers

Paul A. Smith, senior federal counsel at the American Bankers Association, praised the decision. "The main thing is, it's too hard to do well," he said of the testing program.

Current reports filed by banks indicate whether they are rejecting more loan applications from minorities than whites.

But the Fed's Consumer Advisory Council was concerned that banks are discouraging minorities from applying for a loan in the first place.

Under the proposal, two people, one a member of a minority group, would pose as borrowers with similar financial backgrounds and separately inquire about getting a mortgage. A bank encouraging the white borrower to apply for a loan but discouraging the minority borrower would be subject to a bias charge. …

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