Deservedly or not, banks will be on the hot seat for months and maybe years as a result of the Los Angeles race riots. The political fallout from the unrest has galvanized the government to step up its search for bias by mortgage lenders.
Over the past several weeks, major investigations into discriminatory mortgage lending have been unveiled separately by the Office of the Comptroller of the Currency, the Department of Housing and Urban Development, and the Justice Department.
An elaborate survey of lenders by the Federal Reserve Bank of Boston also has begun in earnest.
While experts say it's too early to predict the outcome of these probes, the banking industry could face embarrassment as well as higher compliance costs and forced lending reforms.
Some lenders continue to hope that they will be vindicated when the tumult and the shouting end.
Support Is Possible
Indeed, the investigations could yield support for their contention that mortgage bias is inadvertent and can be remedied by improved teamwork among lenders, secondary-market agencies, and other market participants.
Whatever the outcome, the pressure is unlikely to let up anytime soon. The investigative boom began last fall when regulatory data from the Federal Reserve revealed that blacks and Hispanics are rejected for home loans far more often than whites.
But it was the recent Los Angeles riots that gave "muscle to all this," said John F. Kain, a Harvard University professor of economics and Afro-American studies.
At the Forefront
The riots, provoked by the April 29 verdict in the Rodney King case, thrust urban issues -- including housing and questions of fairness in mortgage lending -- to the forefront of national debate.
"What people are screaming for - it's almost Republican rhetoric - is to own their own companies and own their own homes," said Rep. Joseph Kennedy 2d, D-Mass., who visited the site of the riots last week. "We're not talking about charity here; we're talking about getting banks to lend money."
A new round of pressure on the mortgage industry is expected this fall when the Fed releases its second annual roundup of mortgage rejection data. It is unlikely that there will be much improvement in the numbers in such a short period of time, many experts say.
"I can't believe there won't be" an outcry, said Rep. Kennedy, who hopes to use the momentum to build bipartisan support for a toughening of the Community Reinvestment Act. The 1977 legislation mandates lending in low-income neighborhoods.
The congressman should not be taken lightly. He shocked bankers in 1989 years ago with a floor victory that dramatically expanded reporting requirements under the Home Mortgage Disclosure Act, leading to the Fed studies. Under the law, banks must now disclose information about applicants' race, gender, and income levels.
The 1990 data showed that blacks were rejected 2.4 times as frequently as whites. Hispanics were rejected at 1.5 times the rejection rate of whites.
The American Bankers Association initially attacked the Fed data as inconclusive for proving bias, noting that it did not take into consideration other factors such as borrowers' credit histories or debt levels. But it began backpedaling last month after meeting with community and consumer groups.
The trade group acknowledged "subtle" patterns of discrimination and launched a campaign to help banks extend more loans to minorities.
"You can't look at the data and say there isn't something wrong," said Gordon Mansfield, assistant secretary for fair housing at the Department of Housing Urban Development.
Agency to Use Testers
HUD recently laid the groundwork for what could prove to be the most potent of the government investigations. It is sponsoring a project that will send pairs of loan applicants into lending offices in three cities to test for bias.
One tester will be white and the other from a minority group, but they will present themselves with similar economic profiles.
The Federal Reserve Board rejected a similar testing plan last year, saying it would raise ethical questions, cost too much, and possibly be unreliable.
But testing may prove to be an ideal tool for weeding out discrimination, especially in the crucial preapplication stage, says Ronald Wienk, a senior researcher at the Urban Institute, a Washington, D.C.-based non-partisan think tank.
The institute is trying to raise funds to launch its own testing project, he said. Unlike the HUD effort, it would be nationwide.
The housing agency will send pairs of testers into lending offices.
Testing is, of course, not the only approach to finding bias. The Federal Reserve Bank of Boston sent surveys two weeks ago to 130 of the most active mortgage lenders in Boston, seeking detailed information about all mortgage applications submitted in 1990 by blacks, Hispanics, and a sampling of whites.
"It's primarily a research project, but the information on the individual institutions will be available to their primary regulator," said Lynn Browne, the Boston Fed's deputy director of research for regional affairs.
Filling out the survey forms could take 300 man-hours for some banks, according to estimates by Boston lenders.
But the Massachussetts Bankers Association supports the effort, saying that it planned a similar project until the Boston Fed took the lead.
The trade group's president, Richard Driscoll, said the bankers are hoping that the Boston Fed completes its study before the Washington Fed gives out its data on 1991 rejection rates in the fall.
Response to Information
"We're going to get a whole lot of questions out of the 1991 figures, and it would be useful to be able to say, 'Well, based on what we're able to determine, we think there are some things that can be done and are being done,'" he said.
But some observers said bankers will be hard-pressed to avoid further criticism when Washington releases its statistics this fall.
"These problems appear to be deeply imbedded in the mortgage lending industry," said Allen Fishbein, general counsel for the Washington-based Center for Community Change. "I think you are going to see a process of a number of years before significant improvements are detected."
The Justice Department, meanwhile, is stepping up its efforts to identify and sue lenders engaged in broad "patterns or practices" of discrimination. In the past, the department's involvement was limited to filing bias suits on behalf of individual mortgage applicants.
The department has enlisted banking regulators to supply information that could lead to enforcement, though that avenue has not been especially fruitful in the past.
Bank and thrift regulators have reported scant evidence of discrimination in their field examinations of banks.
But that may be changing. The Office of the Comptroller of Currency said last month that it was probing some 250 national banks for discriminatory practices.
The investigations should be completed by yearend, an OCC spokeswoman said. The agency will make public its broad findings "if we find anything worth talking about," she said.
Certainly, regulators are under heavy pressure from critics in Congress to find something. Rep. Kennedy characterized their performance to date as "atrocious."
Rep. Esteban Torres, D-Calif., said he may introduce legislation to create a new agency that would monitor banks' compliance with fair lending laws.
Banking regulators are themselves starting to face charges of bias. Just this week, a report from the House Banking Committee criticized bank and thrift regulators for failing to hire and promote women and minorities.