WASHINGTON -- Whether to test for lending discrimination is a costly question nagging many bankers. Ironically, the answer may be: You can't afford not to.
Saving money now by forgoing testing could cost more later if violations are found, according to Cathy Cloud, program director for the National Fair Housing Alliance.
"View it as an investment," she told bankers attending the Consumer Bankers Association's fair-lending conference last week.
Banks have three main issues to tackle: whether to test at all, how to test, and how to keep the test results from hurting the bank in an exam.
Regulators are putting more pressure on banks to self-test, said D. Jean Veta, a partner at the Covington & Burling law firm here.
Examiners are pushing bankers to tape the interaction between the loan officer and the tester, she said, but warned "that could result in a substantial amount of exposure."
Self-testing usually involves sending two people with the same characteristics - age, sex, income - except for the factor being tested, such as race, to apply for a loan. The testers' experience is then analyzed for discrimination.
Testers submit detailed narratives to the bank about their treatment, but do not make decisions about lending bias.
Deciding just what is discrimination is not easy, Ms. Cloud said.
"Some loan officers are rude to everybody," she said. "That's bad business. But it's okay as long as they are rude to everyone."
Examples of discrimination include steering certain products away from or toward minorities, giving out different deadline dates for application information, and having policies such as a minimum loan amount, Ms. Cloud said.
The level of service given to applicants is also important. Failing to give someone a cup of coffee isn't discrimination, she said, but making him stand instead of inviting him to sit down during an interview could be.
Any acts that discourage people from applying for a loan are clear violations, she said.
After testing, banks should prepare for examiners by analyzing every aspect of lending and making sure there is a business reason for all the policies in place.
"One act of discrimination is a violation of the fair-housing act," Ms. Cloud warned.
Paul Lubin, executive vice president at Barry Leeds & Associates in New York, said its testers go through a six-hour training session that includes role-playing.
The firm looks for information and treatment a normal person would expect from a loan officer, including some amount of encouragement to apply, he said.
"We use a reasonable-person approach," Mr. Lubin said.
Banks should not lump all minorities together, he said, and testing should be divided by race, or the results will be incorrect.
He suggests banks test at least once a year, quarterly if possible.
Banks pay Barry Leeds about $30,000 to do the testing. Mr. Lubin said that although some banks might be tempted to do the work in-house, regulators will wonder if it is biased.
