WASHINGTON -- The Federal Reserve Board has unanimously rejected a controversial proposal to send fake mortgage applicants into banks to uncover racial discrimination.
"I have very serious reservations about whether the central bank should be sponsoring deception," said Fed Chairman Alan Greenspan when the plan came up for a vote on Wednesday.
The idea, first floated about two years ago, was formally recommended in June by a panel of citizens who counsel the Fed on consumer issues.
The Fed voted the plan down after concluding it would be unreliable and overly expensive, as well as place the agency in a questionable enthical position.
The Fed's staff estimated that just a pilot study of the idea in three cities would cost $600,000 to $1 million.
Posing as Borrowers
Paul A. Smith, senior federal counsel at the American Bankers Association, praised the decision. "The main thing is, it's too hard to do well," he said of the testing program.
Current reports filed by banks indicate whether they are rejecting more loan applications from minorities than whites.
But the Fed's Consumer Advisory Council was concerned that banks are discouraging minorities from applying for a loan in the first place.
Under the proposal, two people, one a member of a minority group, would pose as borrowers with similar financial backgrounds and separately inquire about getting a mortgage. A bank encouraging the white borrower to apply for a loan but discouraging the minority borrower would be subject to a bias charge.
Bias Problem Acknowledged
Board members expressed sympathy with the proposal's goal. "IT is difficult to live in the real world and not believe that some housing discrimination exists," Mr. Greenspan said.
While rejecting the proposal, he and three of his collegues pledged to commit substantial resources to root out discrimination from the lending process. (John LaWare, the other governor attending the meeting, voted against the plan but did not comment.)
The director of the Fed's consumer affairs division played down the extent of bias in mortgage lending.
"Despite this general public interest in this issue, we have hardly any complaints at all," said the official, Griffith Garwood.
Must Report All Applications
He pointed out that a 1989 amendment to the Home Mortgage Disclosure Act (HUMDA) just coming into effect forces banks to report all loan applications. The applicant's sex, race, and income must be reported to regulators under the new law. Previously, banks had to disclose that information only on loans actually made.
"The industry should be aware that the agencies are going to be looking at HUMDA data very carefully," Mr. Garwood warned.
He also told the governors that when regulators suspect a bank is discriminating, they will talk to executives of the institution. He said that such pressure "helps squeeze discrimination out of system."
