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.
"Every potential borrower must withstand the bank's evaluation of that individual's character, creditworthiness, and capability of repaying the debt" the groups wrote.
The associations recommended weakening the "business necessity" test to a "legitimate business purpose."
Safety and Soundness Issue
The associations also warned that the goal of getting more credit to minorities is obscuring the more basic aim of bank regulation: to keep the system safe and sound. Bankers, the groups argued, are caught between compliance examiners looking for lending discrimination and safety and soundness examiners looking for bad loans.
"The industry has too often seen practices welcomed from a Community Reinvestment Act standpoint or a fair4ending perspective criticized by examiners from the safety and soundness perspective," the letter reads.
The government is pressuring banks to test themselves for bias, holding out the possibility that lenders who do discriminate will be treated more leniently if found guilty.
Outside the Parameters
Many bankers fear that the results of these self-tests will be used against them. "Lenders need further protection from liability,'' the associations wrote, asking the agenices to lobby Congress for a change in law that will keep the results of any selftesting confidential.
In writing the new policy, the agencies went beyond the authority granted them by Congress, the associations claimed.
The Equal Credit Opportunity Act and the Fair Housing Act do not give the government any right to proscribe corrective actions for banks that discover discriminatory treatment.
For example, the policy has no legal basis to require a lender that has violated fair-lending laws to notify injured borrowers or applicants of their legal rights, the associations said.
The agencies also lack the power to require banks to recruit lending officers from protected classes, the groups said, noting examples of examiners who are asking banks for the race and gender composition of their loan officers, senior management, or boards of directors.
Fair-lending enforcement has changed dramatically in the last two years, getting stricter every day, the groups argued. So it's only fair that the new policy statement - laying out new rules - be applied prospectively.
"To apply the standards and information of today to the lending decisions of two, five, 10, or even 20 years ago is an invalid use of 'hindsight,'" the groups said.
