Here are the top five reasons why, even in a more conservative political environment, fair-lending laws may challenge banks as no other compliance question ever has.

1. What bankers mean by discrimination and what the government means are two different things. Bankers picturing "credit discrimination" imagine staff turning down a qualified applicant based on race or sex.

Overt discrimination, however, is not what this debate is about. The new enforcement climate assumes that bias today is subtle. The agencies are looking for two types of discrimination.

The first is "disparate treatment" - treating customers differently on a prohibited basis. Bank staff may be more friendly to one customer than another, spend more time with some, or help some overcome problems with an application.

They may make exceptions to policy or forbear on collections for some but not others. If such actions benefit one racial, sex, age, or other "protected" group more than another, the bank may be guilty of discrimination.

Likewise, the government is looking for "disparate impact." Bank practices or policies that are neutral on their face but have a disproportionately adverse effect on a protected group can be illegal unless justified as a "business necessity."

Underwriting standards, appraisal standards, pricing, branch locations - all are vulnerable to disparate-impact challenges. Yet the government standards for defending a business practice in the credit field have not yet been determined.

2. The penalties are enormous. Chevy Chase/B.F.Saul Mortgage Co., a $4.7 billion-asset institution, will pay $11 million in loan subsidies and new offices.

Blackpipe State Bank, with $18 million in assets, had to create a $125,000 loan fund and pay accrued interest up to $50,000 as a penalty.

Civil rights groups are gearing up to sue banks for discrimination; class action penalties under the Equal Credit Opportunity Act can reach $500,00, or 1% of net worth.

And the nexus with the Community Reinvestment Act creates huge risks. Already, CRA protests based on the services-access logic of the Chevy Chase case have been lodged in New York City. Fair-lending problems can clearly block expansion.

The legal risks are compounded by public relations dangers. The regulators' public CRA evaluations comment on any discriminatory practices. Home Mortgage Disclosure Act data are public, too.

And Justice Department actions create huge publicity problems. Banks can be severely damaged by this wide-open controversy, even if never found guilty of discrimination.

3. The issue increasingly is a numbers game - and one that is very hard to win. Like everything else, fair lending has been transformed by technology.

When the nondiscrimination laws were enacted, there were no public data bases to search for patterns of bias. Now, HMDA data are available to everyone and the computer revolution has equipped every player with the ability to analyze and criticize the numbers.

Making the debate data driven is bad news for banks because the statistical controversy implicitly assumes that credit should probably be going about equally to all groups.

News coverage, community groups, regulators, Congress - all focus on the "gap" between approval rates to whites versus minorities and assume the gap is

This oversimplifies the issue. The minority groups that experience lower home-loan approval rates also tend to be economically disadvantaged in ways that affect creditworthiness. These problems are not the fault of the bank and are often not correctable by credit.

Certainly lenders should reduce the approval gap, but probably it can never close until minorities are comparable to whites in job opportunity, income, net worth, and all the factors that underpin financial success.

4. The issue will widen with time. The fair-lending controversy has been focused primarily on alleged racial discrimination in mortgage lending, usually involving disparate treatment. This reflects the fact that HMDA data have driven the issue so far, and show lending disparities based on race and, of course, only for housing loans.

Already, though, concerns are being raised about non-mortgage issues like small business lending and credit cards.

If the new CRA gathers data on race and sex for small business lending, the controversy will widen rapidly to highlight business lending. With it will probably come also a broadening from racial issues to gender.

Unless the new political environment reverses the trend, we should expect the current issues to be just the front point of a wedge.

5. The issues are emotional and hard to manage. Compliance, to most bankers, is layered on top of the "real" business of banking. It has little to do with the core function of deciding what loans to make and on what terms.

But fair-lending is different from other compliance issues. It's all about the core banking function. It is about what loan officers are thinking when they look at a customer; what staff think when they greet and help customers; what appraisers think when they look at houses; what marketing staff think as they allocate ad dollars; and what managers are thinking when they place branches.

The government wants banks to recognize this. But producing this change will involve a fundamental reshaping of culture, with sustained leadership needed from the banks' top management and boards.

Any one of these five factors makes fair-lending a tough issue. Together, they make it by far the most threatening regulatory challenge the industry has ever faced.

What to do? Only one strategy works: just do fair-lending as well as it can be done. Banks need to stay off the defensive in this climate where, once challenged, it is so hard to win and so easy to lose.

They need to capture that invaluable edge in a chaotic environment, the benefit of the doubt. The answer is to get ahead of the regulatory pressure and do fair-lending really well, on your own terms rather than on terms forced through litigation or a CRA protest.

After all, true "fair-lending," in the sense of lending to anyone who will repay, benefits everyone - the customer, the community, and the bank itself. Most banks can do this better, and reap business benefits for their efforts.

Rethinking ancient underwriting assumptions, using fresh marketing strategies, and tapping secondary market and community programs that can bring missing ingredients to the table - all these can produce real rewards. both economic and regulatory.

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