Federal Booklet on Fair Lending Is Must Reading

A bank regulatory body has issued a pamphlet that should be required reading for every banker concerned about credit As I have argued previously in this space, discrimination is becoming the most turbulent compliance issue banks have ever faced. The new publication from the interagency Federal Financial Institutions Examination Council offers a regimen of measures that can help banks look for and eliminate credit Federal view. The booklet deals with unintended discrimination. Entitled Home Mortgage Lending and Equal Treatment-a Guide for Financial Institutions, it is the product of many months of interagency discussion. Its implicit thesis is that discrimination is still occurring in the credit market, not because lenders are consciously turning down applicants based on characteristics like race and sex, but because lenders' policies and practices are unintentionally negative. Many bankers will find arguments offered here thought-provoking. Case in point: Unwittingly, some lenders may have carried forward common standards that, with time, have lost their race-specific wording but retained their original effects. Lenders may be using loan origination, underwriting, and appraisal standards that have been handed down for many decades and are simply assumed to be there for reasons of safety and Tried, true, and wrong? This argument will make many bankers uncomfortable. Most will be very hesitant to abandon any practice seen as prudent, especially considering the scant forgiveness for credit problems given by either regulators or the marketplace. Banks are being asked to walk a tightrope. They can't afford to make loans to unqualified applicants in order to assure nondiscrimination, for fear of harming loan quality. On the other hand, they cannot risk turning down unqualified applicants (at least in the groups the law seeks to protect) out of fear of stiffened enforcement, legal liability, and the potential for damaging public disclosures. The key is to separate necessary practices and standards from those that are not. This is far easier said than done, but the agencies believe that lenders do not discriminate intentionally. Accordingly, they expect that banks that open-mindedly reevaluate their policies will find voluntary ways to change them so as to promote equality of opportunity, while safeguarding soundness. If many banks make such changes, the hope is that (1) the public win be better served; (2) the lending community will be able to avert significant problems; and (3) the agencies will save themselves time, expense, and political fallout. A matter of effects. Some people feel that lenders should be required to pass an test: if a given policy or practice has a disproportionately negative effect on a protected class--such as minorities, women, divorcees, and so on-the lender should bear a burden of proof that the practice involved is necessary from a business standpoint. If that burden is met, they argue that the lender should still be expected to replace the practice with an equally effective but less discriminatory alternative, if possible. The appropriateness of applying this kind of evaluation to bank lending is a subject of long-standing debate. The agencies have tried to train their examiners to consider the effects test and to encourage banks to voluntarily review their leading standards. They have not, generally, been prepared to call effects-test problems violations. What the guide says. While the evaluation discussed in the fair lending pamphlet is similar to the effects test, that term is never mentioned. It is not clear whether the suggestions in the publication will evolve into mandatory standards. It is clear, however, that banks are expected to review their standards and make them as nondiscriminatory as possible. Here are some of the standards and practices the agencies want banks to reconsider: * Property standards and minimum loan amounts-Many banks that have been through Community Reinvestment Act protests are familiar with the argument that threshold requirements for loan amount, house size, and the like screen out lower-income and minority area homes that may actually be candidates for sound mortgages. …