Magazine article American Banker

Fed Drops Disputed Loan Bias Standard

Magazine article American Banker

Fed Drops Disputed Loan Bias Standard

Article excerpt

In a turnabout, the Federal Reserve Board has dropped a controversial standard of proof for banks trying to fend off lending discrimination cases.

In the new staff commentary on Regulation B, the Fed backed off a proposal that would have specified that banks defending loan decisions adversely affecting minorities or other protected classes under the Equal Credit Opportunity Act must cite a "business necessity."

The retreat was the second piece of positive news in as many weeks for banks that face fair-lending complaints. Late last month, a federal judge rejected the Justice Department efforts to use a standard of proof similar to the Fed's proposal in a housing discrimination case.

Gingerly sidestepping the standard-of-proof question, the Fed said: "The board recognizes this is an evolving area of law, one in which creditors and consumers alike would benefit from more specificity."

The Fed said it would address the issue in a future Reg B commentary; the next compliance road map is to be proposed by yearend and adopted in late spring 1996.

"The bottom line is that the Fed is leaving this for another time," said Leonard Bernstein, a partner in the Philadelphia law firm of Reed Smith Shaw & McClay.

Still, the industry was pleased.

"We'd rather have it muddled than have them come down too strongly," said Karen Thomas, regulatory counsel at the Independent Bankers Association of America.

This means banks may continue to defend credit policies and decisions by arguing that they have a business purpose rather than a business "necessity." The difference is important because it is much easier for a bank to show a business purpose than a business need.

The change applies to "disparate treatment" cases, which arise when a bank policy that is neutral on its face adversely affects a person belonging to a class protected under the Equal Credit Opportunity Act. …

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