Bank Dilemma: How to Mitigate Loan-Bias Flap
Rep. Barney Frank, a member of the House Banking Committee, has some friendly advice for the industry.
In the wake of a massive Federal Reserve study suggesting that home lenders discriminate against minorities, the Massachusetts Democrat says banks should basically 'fess up.
"If bankers . . . react to this in a wholly defensive, negative way - try to deny it, try to explain it away - then they are really undercutting their credibility," Mr. Frank says.
"What I hope we will see is they will have the brains to say, |Yeah, we have a problem here.'"
Banks may not choose to accept the advice. In fact, so far they and their regulators are mostly arguing that the Fed study, while suggestive, is inconclusive.
But one thing is crystal clear: The release of the study is a watershed event. And so far, it has been a public relations disaster for the industry.
Mounting Pressure to |Do More'
For one thing, it has galvanized community groups and their supporters in Congress. The Fed data - which show that blacks are turned down for mortgages 2.4 times as often as whites of similar incomes - provide powerful ammunition for efforts to force banks to "do more" for the poor.
For another, bank reaction has come off sounding pretty lame. The American Bankers Association has pointed out that the data do not take into account information crucial to credit decisions, such as a loan applicant's credit history, other debts, or employment. Without that, it's impossible to tell if an applicant has been rejected unfairly, the group says.
Bank Evidence in Short Supply
But that message has gotten lost in the shuffle. And what's worse, banks have not been able to produce their own documentary evidence that bias doesn't exist. Instead, they have been forced to argue that the Fed study does not prove discrimination.
The ABA denies it got caught flat-footed by the mortgage lending reports.
"We have had three separate committees working for several years on different ways to lend to minorities," says the group's chief economist, Robert Dugger.
Then why do the numbers look so bad?
"We're not going to get into that question" Mr. Dugger says.
But he adds: "If this was the only problem that was on . . . these bankers' desks . . . the industry's response might well have been more complete."
Regulators, too, have been put on the defensive.
While saying the Fed data were "very worrisome," Fed member John LaWare said Monday that he was "not prepared to say that there is discrimination going on."
That drew the ire of Rep. Joseph Kennedy, D-Mass., who in 1989 hammered an amendment into the thrift bailout law that forced bankers to reveal the income and race of the people being denied mortgages.
"They have before them a mountain of proof but they see not a molehill of a problem," Mr. Kennedy said.
Besides a black eye, the Fed data probably portend stricter compliance exams for banks, longer delays before mergers are approved, and possibly increased reporting requirements.
Gonzalez Hearings on the Way
House Banking Committee Chairman Henry B. Gonzalez has announced he is going to hold hearings to investigate why the regulators are not preventing lending discrimination.
These lawmakers and others are demanding that regulators finally come up with new enforcement tools. If they don't, Congress could dictate new measures.
Allen Fishbein, general counsel for the Center for Community Change, says: "We hope that Congress is going to step in, strip the regulators of their authority, and reassign the authority to another agency such as the Department of Housing and Urban Development."
In any event, there will be more compliance exams for the agencies to do and better training of examiners to detect discriminatory lending.
The agencies could also be directed to do random testing for discrimination at banks, much the way employment discrimination is detected. All these possibilities were mentioned this week by lawmakers.
Industry Reaction Awaited
Meanwhile, Rep. Frank said the final form of banking legislation now before Congress will be determined partly by how the industry reacts to the Fed study.
Finally, the industry will have to deal with invigorated consumer groups. In addition to charging discrimination, community groups this week accused the banking industry of refusing to work with them on programs that might lead to more mortgages for minorities.
"All of the organizations you see here today have found themselves confronted with a hostile, uncooperative industry," says Barry Zigas, executive director of the National Low-Income Housing Coalition.
For its part, the ABA plans to compile a list of recommendations and present them to President Bush.
Commitment to Fairness
"We are very concerned about these numbers and we are absolutely committed to making sure every creditworthy person - regardless of race or ethic origin or anything else - can get a mortgage if they want one," Mr. Dugger says.
"Right now, all over the country, bank lenders are bending over backwards to make sure that every minority loan application gets every possible opportunity for credit approval."
But in the short run, things are likely to get worse for the industry. The information released this week shows only aggregate data. In coming weeks the minority lending performance of individual banks will be disclosed and, for some banks, the news - reported in every local paper - will be negative.