A group of 10 federal agencies ecently issued a statement on tiscrimination in lending and sought comment on it.
The following is an excerpt from a comment letter from Mr. Platt, a partner in a Washington law firm.
The policy statement fails to give practical guidance on several tough policy issues with which lenders must grapple.
These issues include:
* Must lenders offer all types of loan products in all types of markets in order to assure no discriminatory treatment or impact?
* Are lenders responsible for the discriminatory actions or omissions of third-party originators?
* Are lenders permitted to negotiate prices individually, without regard to the characteristics of the applicant, if such negotiations result in different amounts being paid by different loan applicants?
The most fundamental issue is whether the agencies regard residential mortgage lenders as a public utility whose responsibility and legal obligations, as HUD's Assistant Secretary Roberta Achtenberg recently said, go beyond "remedying discrimination to affirmatively making credit available to those who have long been denied it."
We believe that some of the agencies may be using the antidiscrimination laws as a pretext to allocate credit to low- and moderate-income persons.
The policy statement should clearly distinguish between the policy goal of increasing credit flows to underserved markets and the enforcement objective of eliminating unlawful discrimination. The agencies should not dangle the threat of an enforcement action to coerce results that may be desirable from a social perspective but are not required by law.
What Is Unlawful?
A second critical issue is defining, with precision, what actions or omissions constitute unlawful discrimination.
As a threshold matter, the agencies must establish a proper frame of comparison. Comparing the treatment of mortgagors in different loan programs, through different lending channels in different geographic markets does not appear to be relevant, and the policy statement should make this point clear.
Indeed, a recent U.S. Supreme Court case in the context of employment discrimination, Wards Cove Park Co. Inc. v. Antonio, made clear that statistics must relate to qualified persons in the same relevant circumstances.
Next, as we understand the law, mere statistical differences are insufficient to prove a prima facie case of discrimination. Rather, the agencies must demonstrate that such differences appear to be based on or are because of a prohibited basis.
The policy statement refers to the need for a "valid statistical analysis." Our clients now routinely find themselves trying to explain to regulators why mere numerical differences do not suggest differences based on a prohibited basis. Neither mortgage lenders, nor agency representatives performing compliance examinations have any particular expertise in sophisticated quantitative or statistical analysis.
We respectfully request that the agencies develop accepted sampling techniques and statistical analyses and bind themselves to use such standards in determining whether there exists a prima facie case of discrimination and whether they have a "reason to believe" that "pattern and practice" discrimination may have occurred.
A lender's burden of proof in a lending discrimination case also is difficult to determine.
Lenders need a much better understanding of what the agencies consider to be a valid defense. For example, the agencies should indicate that the following practices are valid defenses based on business necessity:
* A lender declining to make FHA-insured loans, because of its perception that such loans are overly regulated or unprofitable.
* A lender electing to concentrate its efforts on higher balance loans, because they are more profitable.
* A lender having more stringent underwriting standards than Fannie Mac or Freddie Mac for nonconforming loans, based on its loss experience or that of its investors.
* A lender having different underwriting standards for different loan programs, based on its loss experience or that of its investors
* A lender employing different eligibility standards for different loan programs.
* A lender concentrating on wholesale over retail lending in a particular geographic market or for its entire business.