Meeting the Challenge of Loan Bias Scrutiny
Stern, Warren R., Coates, John C., IV, Lang, Jeffrey I., American Banker
As has been widely reported, federal regulators are increasing their study of bank lending practices for possible racial discrimination.
Utilizing data released under the Home Disclosure Act, the regulators are targeting institutions for in-depth reviews of their compliance with the fair-lending and the Community Reinvestment Act.
A significant amount of attention was focused on bank lending practices last fall when the Federal Reserve released a length report on the 1990 filings under the disclosure act.
The report provided the first detailed information on relative rejection rates for mortgage applicants categorized by race and income.
Disclosure-act data show rejection rates substantially higher for black and Hispanic applicants than for white.
Prelude to Investigations
Regulators have acknowledged that this statistical information is not sufficient to demonstrate discriminatory lending practices. But they have indicated that they will use the information as a guide in conducting targeted investigations of lending practices.
Using computer-based systems, the regulators can target specific institutions or branches where lending patterns may suggest a discriminatory practice.
Examiners can then conduct an in-depth review of the individual application files underlying disclosure-act data.
The regulators have reportedly referred a small number of cases to the Justice Department for further investigation, and more referrals are possible.
A number of private lawsuits have also been filed against lending institutions charging racial discrimination and redlining. All such investigations and suits should be treated seriously, specially in the current political environment.
The Statutory Framework
Financial institution are required to comply with a wide range of antidiscrimination laws, including the Equal Credit Opportunity Act, the Fair Housing Act, and the Home Mortgage Disclosure Act. This statutory scheme supplements civil rights statutes of general application.
The statutes are supported by extensive regulations, administrative powers, and civil and criminal penalties. The Equal Credit Opportunity Act and the Fair Housing Act also can be cited to support private legal actions.
The fair-lending laws have the potential to reach conduct ranging from intentional overt acts of discrimination by particular employees to policies, procedures, or underwriting standards that may have a disparate impact on minorities.
Structuring a Defense
To defend practices that disparately effect minorities, an institution must establish that the lending practices are nondiscriminatory in intent and a matter of business necessity, and that no less discriminatory means are available that are consistent with prudent lending practices.
The obligations imposed under these fair-lending laws differ substantially from the general duties imposed under the Community Reinvestment Act.
The act was adopted in 1977 to address the general concern that banks were not doing enough to meet the credit needs of all members of their communities.
Under the reinvestment act, every bank must -- consistent with safe and sound banking practices -- help meet the credit needs of its entire community, including low-and moderate-income neighborhoods.
These obligations are enforced by federal bank regulators through on-site examinations and public evaluations and in connection with merger and other applications.
Significant Merger Implications
As witnessed in several recent mergers, including NCNBC&S/Sovran and BankAmerica-Security Pacific, the Federal Reserve gives substantial attention to Community Reinvestment Act issues during the merger approval process. In the past year, the Federal Reserve for the first time denied a merger application on the basis of the act. …