Banks Told To Brace for Bias Report

SAN FRANCISCO -- The banking industry is being warned to brace for political fallout from a massive Federal Reserve study showing that minorities are two to four times as likely to be rejected for a bank mortgage as whites.

The Fed plans to release 1.2 million pages of data next week that will show the local lending patterns of thousands of institutions. "It'll be dynamite," said a Fed official who refused to be identified.

Impact Weighed

Among the possible ramifications:

* Congressional backing for a comprehensive banking bill may be undermined in the face of negative publicity.

* Efforts to require banks to cash government checks and provide basic checking services to the poor could be bolstered.

* Consumer activists will be given potentially powerful ammunition to challenge merger applications by banks.

* Newspapers in virtually every town will be able to report the local bank's lending habits.

Griffith Garwood, the Fed's director of consumer affairs, discussed the finding of the Fed's study here Monday at the American Bankers Association's

annual convention. Mr. Garwood said he expects that the "dramatic disparities in loan-rejection rates . . . will become quite a national issue."

Preparation Urged

He urged bankers to prepare now for the negative publicity that will follow the study's release next Tuesday.

The ABA plans to release its own study shortly saying that the Fed data is insufficient to determine discrimination, according to Edward L. Yingling, the group's executive director for government relations.

The data "by itself is virtually meaningless," Mr. Yingling said. "The basic problem is that it doesn't cover a lot of variables."

But the ABA lobbyist admitted: "There is going to be a real perception problem."

A Source of Gloom

Reaction from the audience was gloomy. "Banking doesn't need any more bad news right now," said Carter Golembe, chairman of the Secura Group and a director of Florida's Barnett Banks.

But observers said that community activists were eagerly awaiting the Fed report. "I think there are a lot of groups that are looking forward to analyzing this data," said Nicole Kemeny, national housing organizer at the National Training and Information Center in Chicago.

"I think [the study] will certainly be used by many to buttress the argument that there is redlining," said Joseph Feaster, president of the Massachusetts Community and Banking Council, an organization made up of bank members and community groups.

The Fed's data resulted from the 1989 thrift-bailout law. It amended the Home Mortgage Disclosure Act to require banks to report the race, income, sex, address, and loan amount for each mortgage applicant.

Vast Amount of Data Used

The Fed examined 6.5 million loan applications made by whites and minorities at 9,000 banks in 24,000 metropolitan statistical areas.

Mr. Garwood said the data showed minorities are two to four times more likely to be denied a mortgage than whites with the same level of income.

The Fed official noted that the agency, as dictated by Congress, collected only income figures on mortgage applicants. He said other figures are essential in deciding whether to make a loan, such as the borrower's assets and liabilities as well as the repayment record.

No-Win Situation

"To get to the bottom of this you've got to go loan by loan," Mr. Garwood said.

While the banking industry will argue that the Fed data is incomplete, that could lead to another problem, said James McLaughlin, the ABA's director of agency relations. "When you say that, people say: |O.K., let's go get that too.'" he said. "And then banks have more to report."

Bob Harris, executive vice president of the Texas Bankers Association, said bankers were being falsely accused of being racists.

He said many banks have made an effort to attract more minority customers, in part to fulfill the local-lending requirements of the Community Reinvestment Act.

Those promotions are paying off in more loan applications by minorities, he said. The more requests a bank gets, the more loans it rejects, Mr. Harris added.

The Fed's report will be released just as Congress enters its last leg of work on the broad banking reform bill introduced by the Bush administration early this year.

The report is likely to strengthen the hand of lawmakers like Rep. Joe Kennedy, D-Mass., who want to tack on amendments that would force banks to provide services to the poor.

The report also will help Sen. Alan Dixon, D-Ill., in his efforts to get the regulators to test for loan discrimination. The Fed recently rejected a plan to launch a testing project, explaining that the tests would cost too much money.

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