Banks, Instead of Saying It Ain't So, Should Set Up Joint Review Panels

Discrimination against people of color continues to be endemic in America. Some of it is shockingly blatant. Some is subtle. But it is pervasive in hiring, housing, and everyday discourse.

Not everyone discriminates, but sometimes, it almost looks that way.

Nevertheless, the Federal Reserve Board's recent report that members of minority groups are up to 2.4 times as likely as whites to be rejected for a bank mortgage came as a shock. This discrimination cannot make sense to any banker.

What Does Bias Gain?

What could any bank gain by rejecting a qualified applicant for a mortgage loan, even if it believes a minority applicant to be an inferior credit risk to a similarly situated white applicant? The bank is, after all, going to sell the mortgage into the secondary market. Why should it deny itself the fee income?

More work is needed on this subject. Is there some credit reason that minority-group members are being turned down? Or are lower-level bank employees exercising biased instincts in denying loans to creditworthy borrowers - to the detriment of their institutions? Or are senior officers sending subtle signals through the ranks that bias lower-level employees.

In New York in the mid-1970s, some of us tried to step up and take responsibility for making sure that creditworthy loan applicants were not denied.

The savings banks of New York State formed the Mortgage Review Fund to review any mortgage application turned down by a member bank, if the prospective borrower though he was wrongly refused. The more than 90 participating institutions advised every rejected applicant of this recourse.

In its early years, the review fund got many appeals and helped many applicants obtain loans. After the New York usury ceiling was removed, however, the market seemed to do a better job, and appeals to the fund declined significantly.

Having participated in the fund's meetings for its first several years, and as its onetime counsel, I can attest that it bent over backward to make any remotely creditworthy loan, regardless of the applicant's race or national origin.

Evidence of Nondiscrimination

From the relative lack of applications after the change in the usury law, it really did appear that member savings banks were not discriminating.

American bankers need to be, as they say, proactive on this issue. It will not go away until something is done to make sure that people of color are not being discriminated against. Meanwhile, banks will be sitting ducks, politically speaking.

Why not try a variation of our old Mortgage Review Fund? Instead of saying it ain't so, say that, if it is so, we'll fix it.

Set up a mechanism to review all mortgage loans rejected by individual banks. Use the original application form so no further burden is placed on the applicant. And have a fund to make the loans (and sell them into the secondary market, if possible).

Many technical details must be worked out to make such a fund (or funds) work. But if would be worth doing because, if banks are discriminating, we must stop it. If they are not discriminating, statistics alone will not convince many people once basic statistical evidence of discrimination has been found.

Mr. Lowy, counsel to the firm of Rosenman & Colin, is a former vice chairman of Dollar Dry Dock Bank, New York, and author of the recently published "High Rollers: Inside the Savings & Loan Debacle."

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