Bankers may believe they are both helping society and meeting their Community Reinvestment Act obligations when they offer reduced-rate loan products to minorities.

But they may be inviting a legal challenge instead.

That's because a federal appeals court in New Orleans ruled early this summer that the fair-lending laws apply equally to minority and white borrowers.

The U.S. Court of Appeals for the Fifth Circuit held that the Farmers Home Administration's policy of excluding white borrowers from certain loan products violated the Equal Credit Opportunity Act, a 1975 law that prohibits lenders from considering a person's race, religion, or age.

Although the case involved a government agency, banking lawyers said the court's logic directly affects institutions that operate special lending programs based on a person's race or gender.

"It established the concept that these laws are actually neutral rather than intended to protect particular protected groups," said Robert Ledig, a partner at Fried, Frank, Harris, Shriver & Jacobson. "That has a significant impact as to how actual lending practices can be carried out."

Lenders can no longer tailor reduced-rate loan programs for minorities, he said. Now, they must carefully check the terms of each program to ensure that no group is excluded from participating.

Liability questions are "left wide open now," he said.

The fifth circuit's decision has another effect, said Richard Ritter, a former federal prosecutor and now a fair-lending consultant. It squarely applies the anti-bias laws to all U.S.-government-run lending programs, he said.

Previously, government agencies such as the Farmers Home Administration claimed they were immune from ECOA suits.

The case began in December 1989, when Larry Moore applied through the Department of Agriculture to purchase a 183-acre farm in Rayville, La.

Mr. Moore asked to buy the land through the Socially Disadvantaged Applicants Program, which reserves surplus farmland for minority borrowers.

The Farmers Home Administration rejected Mr. Moore's original application, saying he failed to indicate whether he qualified for the program. Mr. Moore, who is white, appealed his decision within the Agriculture Department but lost.

Undaunted, Mr. Moore applied to buy a surplus farm not covered by the special program. FmHA rejected that bid as well, citing his poor credit history.

The case then began weaving its way through the federal courts. Mr. Moore sued the government in September 1990, charging ECOA violations. After bouncing back and forth between the local judge and a federal appeals court, the case went to trial in 1994.

Here is where it gets interesting.

The trial judge dismissed the charges, making two findings. First, he said the federal government is immune from these suits. Second, he said Mr. Moore failed to show that the government discriminated against him. The judge said Mr. Moore could prevail only if he showed that he was a member of a protected class, qualified for credit, and was rejected despite these qualifications.

Litigants suing banks would have to meet these same criteria under the judge's reasoning.

The federal appeals court, however, rejected both prongs of that argument in a June 6 opinion.

First, the court said Congress waived the government's immunity when it passed ECOA, just as it did when it passed the Truth-in-Lending Act.

Second, it said the agency conceded that it couldn't defend the program against ECOA charges. The court, citing past cases, noted that any program that specifically excludes a class of people violates the equal credit law.

Also, in another aspect of this program important to lenders, the court held that the applicant's credit history doesn't matter if the lender had a blanket policy of rejecting all applicants of a particular race.

The court ordered the trial judge to determine what damages, if any, Mr. Moore is entitled to. A decision is expected later this year.

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