Bank Groups: Bias Plan Could Hurt Minorities

By Rehm, Barbara A. | American Banker, June 24, 1994 | Go to article overview

Bank Groups: Bias Plan Could Hurt Minorities


Rehm, Barbara A., American Banker


WASHINGTON -- Five banking trade groups joined Forces Thursday to protest the way the government is detecting discrimination in lending.

The associations said the fairlending policy statement adopted by 10 federal agencies in April could create a credit scoring system that ended up allotting fewer loans to minorities.

"The statement has the potential to... actually restrict, rather than expand, credit as banks amend underwriting criteria and practices to remove any element of judgment in the lending process," the groups explained in a joint comment letter.

Spotting Violations

The fair-lending parameters were unveiled in April by the banking, thrift, and credit union agencies along with the Housing and Urban Development and Justice departments and the Federal Trade Commission. The government's goal was to lay out how it will identify violations of the Equal Credit Opportunity Act or the Fair Housing Act.

While it took effect April 15, the government accepted comments on the policy until June 14. The groups took an extra week to develop a consensus.

The letter was signed by the American Bankers Association, Consumer Bankers Association, Savings and Community Bankers of America, the Bankers Roundtable, and the Independent Bankers Association of America.

Philosophical Agreement

Together the groups represent nearly every bank and thrift in the country. Their members, the groups said, share the government's goal of ending lending discrimination.

"It is the law, it is the right thing to do, and it is good business," the 14-page letter reads.

But the government's policy has many imperfections that must be fixed, the letter insisted.

The heart of the policy is the premise that all banking customers should be treated the same. The policy says discrimination can occur when a bank's lending policies, though applied equally to all borrowers, have a disproportionate impact on a protected class of people.

This theory is called disparate treatment or disparate impact, and unless the bank can prove that there is a "business necessity"- behind the policy or that no less discriminatory alternative exists, then illegal discrimination has occurred.

Lending by Formula Feared

The banking groups warned that using this measure will lead banks to formula lending because they fear the use of judgment would be interpreted as discrimination.

"The policy statement could force national credit scoring systems, in an effort to demonstrate that all applicants are treated alike," the associations wrote.

The groups explained that every loan and every borrower is different, so an individual's treatment will naturally vary. …

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