WASHINGTON - In a turnabout, the Federal Reserve Board has dropped a controversial standard of proof for banks trying to fend off lending discrimination cases.
In the new staff commentary on Regulation B, the Fed backed off a proposal that would have specified that banks defending loan decisions adversely affecting minorities or other protected classes under the Equal Credit Opportunity Act must cite a "business necessity."
The retreat was the second piece of positive news in as many weeks for banks that face fair-lending complaints. Late last month, a federal judge rejected the Justice Department efforts to use a standard of proof similar to the Fed's proposal in a housing discrimination case.
Gingerly sidestepping the standard-of-proof question, the Fed said: "The board recognizes this is an evolving area of law, one in which creditors and consumers alike would benefit from more specificity."
The Fed said it would address the issue in a future Reg B commentary; the next compliance road map is to be proposed by yearend and adopted in late spring 1996.
"The bottom line is that the Fed is leaving this for another time," said Leonard Bernstein, a partner in the Philadelphia law firm of Reed Smith Shaw & McClay.
Still, the industry was pleased.
"We'd rather have it muddled than have them come down too strongly," said Karen Thomas, regulatory counsel at the Independent Bankers Association of America.
This means banks may continue to defend credit policies and decisions by arguing that they have a business purpose rather than a business "necessity." The difference is important because it is much easier for a bank to show a business purpose than a business need.
The change applies to "disparate treatment" cases, which arise when a bank policy that is neutral on its face adversely affects a person belonging to a class protected under the Equal Credit Opportunity Act.
It also covers "disparate impact" cases, which can arise when a neutral policy adversely affects the entire protected class.
The most recent Reg B guidelines, proposed Dec. 29, 1994, took effect June 5.
The Fed's commentary gave banks this guidance: "Treating individuals differently is not unlawful per se." However, treating ECOA-protected people differently is discrimination "if there is no credible, nondiscriminatory reason that explains that difference in treatment."
The Fed also clarified what "judgmental override" means with respect to credit scoring systems, which are subject to review under the equal credit law.
The central bank changed the term to "individual discretion" and said credit scoring systems that can be altered by judgment calls may lead to disparate impact, the broader of the two forms of discrimination.
For special credit programs developed to meet the needs of protected classes, the Fed insisted on periodic reevaluations. But it deleted a requirement that banks make sure the programs do not hurt people who are not in the class the program was designed to benefit.
Finally, the commentary allows lenders to charge borrowers for appraisal reports.
Under the December proposal, banks - in the case of a "no closing cost" loan - could not charge borrowers who requested a copy of the report.
This revision reverses that.
"The Fed has made an about-face" on this issue, Mr. Bernstein said. "This means a lot of money to the industry," he added, noting that appraisals can cost $200 to $300.
In a separate move, the Fed proposed a commentary June 7 on Regulation C, which enforces the Home Mortgage Disclosure Act. Comments on the changes - which cover treatment of prequalifications, participations, refinancings, home equity lines, mergers, and loan applications received through a broker - are due Aug. 7.