Act to Head Off Charges of Bias

For most bankers in the country, this statement can be honestly and correctly asserted.

However, bank management must not get lulled into thinking that it can't happen at their bank simply because they have the necessary antidiscrimination policies in place, and the bank has always had "clean" exams.

Loan officers and other customer contact employees are only human. And as humans, their personal experiences and backgrounds may affect their dealings with other people.

Financial and Legal Risks

However, a bank and its representatives can be both financially and legally at risk if these natural tendencies result in the appearance of unfair or unequal treatment during the lending process.

Recent highly publicized studies in several regions of the country have raised concerns about possible racial discrimination in home mortgage lending. Although inconclusive, these studies have shown obvious disparities in lending patterns between minorities and nonminorities for home loans.

As a result, Congress, the regulators, and community groups are taking a much closer look at the lending industry's record of fair lending.

Lenders Supplying More Data

This closer scrutiny is taking shape in a number of ways. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 included an amendment to the Home Mortgage Disclosure Act requiring lenders to keep a log of the disposition of all home mortgage applications, as well as the race, sex, and income levels of all home loans applicants.

Civil rights activists and community groups consider the reports a viable and effective means of identifying lenders that may be illegally discriminating, although the mortgage application data alone are insufficient to draw such conclusions.

Illegal lending discrimination will also be more closely examined as the federal regulators continue to refine and improve on their review of banks' Community Reinvestment Act performance record. Two of the 12 CRA assessment criteria used by the agencies involve discrimination analysis.

Now that CRA performance evaluations are available to the public, banks have another reason to concentrate on compliance with anti-discrimination laws.

Some experts believe that "prescreening" is a significant source of illegal discrimination.

In fact, the Federal Reserve Board's Consumer Advisory Council recently issued a resolution urging funding for a research project to test for discrimination.

Testing would involve using two persons of different races, but with fairly equal financial backgrounds, as shoppers for home loans. The test would focus on that point at which potential applicants approach a lender about submitting a formal credit application.

Although the Fed ultimately voted against conducting the nationwide testing program, the Federal Reserve Board vowed to be vigilant in its examinations for illegal discrimination.

Suggested Precautions

With all the attention now given to the issue of lending discrimination, the obvious question for bank management has to be: "What can we do to make sure it doesn't happen here?" Although there is no single safeguard against illegal discrimination allegations, there are a number of steps a bank can take to help assure it is not the target of such claims.

To begin with, a bank should establish formal written and Federal Reserve Board approved policy statements emphasizing the importance of nondiscriminatory lending practices.

Also, training of bank employees to avoid discrimination should not be limited to loan officers, but should be aimed at all personnel who are involved with customers in the lending process.

The training should emphasize the importance of fair and equal treatment to all potential applicants and borrowers, address the penalties for noncompliance with the fair lending laws, and cover the bank's policies and overall commitment to nondiscriminatory practices.

To help in training, the American Bankers Association and BancTraining Video Systems jointly produced a video-based training program entitled "Fair Lending Compliance: Understanding Equal Treatment."

A bank's internal audit program should include methods to assure not only compliance with the letter of the law, but also compliance with the spirit of the fair lending laws. Internal reviews must go well beyond the technical requirements and touch on more nontangible issues, such as employee attitudes and basic understanding of the importance of fair and equal treatment for all potential borrowers.

Learn from Your Own Data

Another important self-assessment technique is to use Home Mortgage Disclosure Act information to analyze the bank's geographic distribution of home mortgage applications and loans. This involves making sure all low- and moderate-income census tracks in a bank's delineated community are being adequately served.

To summarize, a bank's best defense against illegal lending discrimination allegations is a good offense. That is, scrutinize your own record of lending before the federal regulators or community groups do, and make sure your employees are fully trained in the area of fair lending compliance.

Mr. Cook is vice president and compliance manager for Puget Sound Bank, Tacoma, Wash., and a member of the Federal Reserve Board's Consumer Advisory Council.

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