The Federal Reserve Bank of Boston study. which found that racial discrimination plays a major, clearly identifiable role in mortgage lending, will be used as evidence that a special office should be established for enforcement of the Fair Lending Act.

"The report shows that the financial regulatory agencies haven't been doing their job," charged Allen J. Fishbein, general counsel for the Center for Community Change, an advocacy group in Washington that has long been active in promoting fair housing enforcement.

Despite the regulators' pledges to focus more rigorously on loan discrimination, Fishbein is skeptical that they are up to the task. He believes the responsibility should be given to a special unit; one possibility is the Justice Department or the Department of Housing and Urban Development.

"The only thing different is that now these numbers must be made public under (the Home Mortgage Disclosure Act)," Fishbein said. "The evidence of discrimination has been there for years and the regulators have not picked up on it. I have no confidence they will change their stripes."

Another skeptic is Calvin Bradford, president of Community Reinvestment Associates, a Des Haines, Ill., consulting firm. "The compliance staffs Just don't understand fair housing," complained Bradford, whose organization assists law firms in preparing cases brought under the Fair Housing Act.

He said that often, when an examiner challenges a lender about a loan to a minority borrower, the lender easily comes up with a white borrower with similar characteristics who also was rejected. The examiners, he said, don't have expertise in looking for a pattern of turndowns. Moreover, he said, the regulators almost never challenge lenders because they don't offer loan products that would serve minorities even though other lenders in the same area do.

The regulators. commenting after the release of the Boston Fed study, said they have been increasing their examination capability in the area of mortgage loan discrimination.

Nevertheless. in a statement issued by the Federal Financial Institutions Examination Council, the agency responsible for collecting data under the Home Mortgage DIsclosure Act. the regulators explained how difficult It was to establish illegal discrimination.

"The computerized statistical analysis used in the Boston study ... is of very limited use In most bank examinations," the FFIEC statement said. "Very few institutions have a sufficient volume of denials for minority applicants to reliably document whether there is a `double standard' in loan qualification criteria. Nevertheless. these findings make it imperative that the agencies explore every alternative to make bank examinations as reliable as possible in identifying possible discrimination."

The current controversy over mortgage lending discrimination was set off a year ago when the annual report under HMDA for the first time showed the income levels of the applicants. It found that black and Hispanic applicants were as much as four times more likely to be turned down as whites with the same incomes.

Some lenders argued that racial disputes in loan data were anomalies that could be explained away by considering other factors, including credit histories, employment instability and loan-to-value ratios. The Boston Fed study demolished this argument.

"The only personal characteristic that appears to enter into the loan denial decision is the race of the applicant," the study reported. Its analysis shows "that after accounting for obligation ratios, private mortgage insurance and neighborhood characteristics, the race of the applicant still plays a role in the lender's decision to approve or deny the loan."

The report also addresses the industry argument that loan denials based on race do not make economic sense. 'Many observers believe that no rational lender would turn down a perfectly good application simply because the applicant is a member of a minority group," the study said. "The results of the survey confirm this perception: minorities with unblemished credentials are almost (97%) certain of being approved. But the majority of borrowers--both white and minority--are not perfect, and lenders have considerable discretion over the extent to which they consider these imperfections as well as compensating factors."

The study noted that "for the same imperfections, whites seem to enjoy a general presumption of creditworthiness that black and Hispanic applicants do not, and... lenders seem to be more willing to overlook flaws for white applicants than for minority applicants." For a minority individual with the typical economic profile of the average white applicant, "the probability of denial increases 56%." the study found.

"In short. the results indicate that a serious problem exists in the market for mortgage loans. and lenders, community groups and regulators must work together to ensure that minorities are treated fairly," the Boston Fed concluded.

The study covered more than 1,600 banks, thrifts and credit unions and more than 1.400 mortgage companies in the Boston area. Overall. the lenders denied 10.3% of white applicants and 28.1% of black and Hispanic applicants.

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