Regulators Take New Approach To Guide Loan Bias Exams

Seeking to concentrate their resources on the worst offenders, federal regulators have adopted risk-focused fair lending examination procedures.

In a two-step process, examiners will first analyze a bank's credit operations to determine the probability that it is discriminating against minority and female applicants. They will then decide how intense the review should be.

The guidelines were generally well received by compliance experts. "If followed, it will provide for the first time some clear guidance to financial institutions about how they will be measured," said Andrew L. Sandler, a partner in the Washington law firm of Skadden, Arps, Slate, Meagher & Flom. "If that happens, it will be a significant improvement over the constantly shifting approach financial institutions have been subjected to over the past several years."

The guidance contains more than a dozen lists of items and policies examiners should review to determine the probability that a bank is discriminating. These vary from out-of-date compliance handbooks, to incomplete data on loan rejections, to customer complaints, to a significant difference in loan approval rates between white and minority applicants.

Based on these reviews, examiners will determine how deep to dig in the fair lending exam. The guidance explains how to evaluate charges of redlining and improperly steering minority applicants to subprime lenders. It also details how to make loan file comparisons, evaluate approved and rejected applications, analyze marketing practices, and review pricing decisions.

Jo Ann S. Barefoot, a partner in the consulting firm KPMG Barefoot Marrinan, urged bankers to compare their operations with the checklists. This will let banks rectify problems before examiners arrive, she said.

Regulators appear to agree with the Justice Department that banks are responsible for fair lending violations committed by third parties, such as loan brokers, Mr. Sandler said.

Regulators also are focusing on small-business lending and credit scoring, he said, but deemphasizing the disparate-impact theory, which holds that a lender may be liable if specific loan policies result in fewer minority group members getting credit, even if the policies themselves are not discriminatory.

A task force from the five federal banking, thrift, and credit union agencies spent two years developing the exam guidelines, the first significant fair lending guidance since March 1994.

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