Community activists are charging that the Federal Reserve has lagged behind the other regulatory agencies in dealing with loan discrimination.

"On the safety and soundness side, almost everybody thinks [the Fed] does the best job," said Deepak Bhargava of the Association of Community Organizations for Reform Now, known as Acorn.

"But when it comes to the fair lending side, they're just lost," Mr. Bhargava said.

However, top Fed official contends it is the rest of the agencies, not the Fed, playing catch-up.

Says Fed Is Leader

Lawrence Lindsey, the Fed governor who oversees community affairs, points to the Office of the Comptroller of the Currency's recent fair lending examination guidelines as proof of the Fed's leadership.

The Comptroller's policies "are being changed into alignment with the way the Federal Reserve has operated," Mr. Lindsey said.

Another example is compliance exams.

"We do a CRA exam every 18 months," Mr. Lindsey said. "Many years can go by between exams at the OCC. I think that's a sign of Fed seriousness in this matter."

Research Efforts

The Comptroller's office is considering more frequent examinations, which have been the rule at the Fed since the Community Reinvestment Act was passed in 1977.

Mr. Lindsey also points to extensive research efforts at the Fed as evidence of its leadership. Not only does the agency analyze all the data in banks' annual Home Mortgage Disclosure Act reports, but it also supports groundbreaking studies on the issue, he said.

It was a Federal Reserve Bank of Boston study last fall that finally silenced many bankers who felt the charges of lending bias were groundless.

Meanwhile, the New York Federal Reserve Bank is testing a statistical matching technique designed to help examiners identify loan files that look suspicious.

The Fed shared this model with the Comptroller's office to use in developing its new exam procedures, Mr. Lindsey said.

Still, critics scoff at the notion that the Fed is ahead of the other agencies.

"You've got to be kidding me," said John Taylor, executive director of the National Community Reinvestment Coalition. "Except for the Boston Fed, which is admittedly a part of their network, you wonder what they're making reference to.

"Their comments are not consistent with history and what we know to be the real situation out there," he added.

"Nothing the Fed is doing compares to the aggressive, proactive fair lending initiatives coming out of the OCC and the Office of Thrift Supervision."

Added Mr. Bhargava, "Culturally speaking, the Fed, which sets the tone for all the agencies, is just not suited to this task of aggressive investigation and enforcement."

Opposition of Testing

Critics note that the Fed still opposes covert bias testing, though other agencies are already doing it, adopting pilot programs, or formally reviewing the possibility. In such testing, regulators dispatch applicants of different racial backgrounds to see if minorities are discriminated against.

Mr. Lindsey, speaking at a recent banking forum, said that while testing can provide useful anecdotal evidence, it is difficult to generate enough data through the process to form a sound basis for anti-bias enforcement.

Fooling loan officers into believing they are dealing with real applicants is not possible without an intricate "web of intrigue," Mr. Lindsey said. "How far are you going to carry the procedure? Are we going to create phony loan folders? Phony phone numbers?"

He added, "If Comptroller [Eugene] Ludwig gets around these problems, I'd be happy to take a look at it."

The Fed has focused on research more than enforcement, Mr. Lindsey said in an interview, because of its available resources.

With only about 1,000 banks to regulate, the Fed governor said, the agency would have relatively little impact through investigations.

"I would imagine while we can do the research, we don't have the cases that would lead to a comparative advantage in the investigation procedures," Mr. Lindsey said.

Education and Outreach

Despite the limited oversight, the Fed has a strong education and outreach programs, he said.

The Boston Fed, for example, recently published a booklet describing strategies to improve lending to minority groups. The guide is expected to be used throughout the Fed system.

And the Fed, along with the other agencies, recently sent all lenders a letter that included specific steps they should take to avoid loan bias.

"I believe firmly that the key to solving this problem is suggesting to individuals changes that are going to lead to them fulfilling more loans," Mr. Lindsey said.

Request from Riegle

But this commitment to outreach only goes so far.

The Fed was recently asked by both community activists and Sen. Donald Riegle, chairman of the Senate Banking Committee, to hold public hearings around the country on lending discrimination and "reverse redlining" in second mortgages.

After heavy debate throughout the Fed system, the Fed deferred decision on discrimination hearings and refused to call hearings on the second-mortgage issue, in which lenders have been accused of overcharging inner-city borrowers.

In a letter to Sen. Riegle, Fed Chairman Alan Greenspan said the Fed Board unanimously decided that hearings on mortgage scams would "not be likely to yield substantial additional information."

"Board members also felt that hearings might promote a misperception that our role in these issues is greater than it actually is," Mr. Greenspan wrote.

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