5 Fed Banks in Project to Uncover Loan Bias By Studying the Process of

To figure out why banks disproportionately reject minorities for loans, five Federal Reserve banks are launching a project to identify where bias is most likely to occur in the lending process.

Because Home Mortgage Disclosure Act data have consistently shown that lenders turn minorities down for loans twice as often as they do whites, the Fed banks are bringing together lenders, real estate agents, insurers, and appraisers to review each step in the home-buying process.

"The bottom line is we are trying to increase the opportunity for as many qualified people as possible to achieve the American ideal of homeownership," said Richard C. Walker, assistant vice president at the Federal Reserve Bank of Boston.

The five district banks hope to complete the project - which is modeled on a 1994 pilot program run by the Cleveland Fed - within 12 months. The Boston Fed is furthest along in the study; the San Francisco, New York, Chicago, and St. Louis district banks are close behind.

Co-sponsors include the state bankers associations in California and Massachusetts, the Western League of Savings Institutions, and the Long Island Housing Partnership.

Industry officials said they think the project could generate new business from people who previously couldn't get financing. "We want to make more loans," said Tom Hamilton, senior vice president at the Western League. "Affordable housing and first-time-homebuyer loans are profitable. It is that simple."

But Robert Gnaizda, general counsel at the Greenlining Institute, an umbrella organization for advocacy groups in California, said he doesn't expect much from the review. He said the Fed has never been adept at rooting out the causes of fair-lending problems and that he doesn't expect this project to be any different.

"We wish them well, but they are not going to learn anything," Mr. Gnaizda said.

Each reserve bank began the program with organizational meetings among Fed officials, trade groups, and community activists. The groups are establishing agendas for conferences each reserve bank will sponsor. The Boston Fed will hold the first conference, scheduled for next Wednesday.

At each conference, about 100 participants will divide themselves into working groups to look at 18 different parts of the home-buying process, including initial contact with the lender, verification of the borrower's financial data, evaluation of an appraisal, and applying for homeowner's insurance.

The working groups will search for ways in which the current process may unintentionally discriminate against minority borrowers. They then will recommend new procedures the industry can take to correct the problem.

Four of the reserve banks are working together on the project. The Chicago Fed has decided to go it alone.

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