Sniffing Out Unfair LendersLinda Himelstein
Banks are used to federal regulators making requests for information. But not like this. In May, the Office of the Comptroller of the Currency asked a unit of Los Angeles-based First Interstate Bank Ltd. to sort its data on mortgage lending 180 different ways. Examiners wanted to see how First Interstate evaluated its loan applicants by race, sex, and income level, among other things. The bank's computer system devoted an entire day to satisfying the massive document request.
First Interstate is one of perhaps dozens of banks under review in one of the Clinton Administration's most sweeping regulatory efforts to date. The Administration has made no secret about its intention to snuff out discriminatory lending. But the scope and muscle of the offensive has caught some bankers by surprise. No fewer than six different government entities are rifling through bank-lending records to uncover practices that are unfair to minorities. "There will be casualties in this because the government wants to make an example," says John Relman, director of the Fair Housing Project at the Washington Lawyers Committee for Civil Rights.
"WITCH-HUNT." The full-court press is buttressed by the aggressive tactics used in preliminary inquiries. Examiners are taking sworn testimony. Enforcement attorneys and court reporters are on the scene even before evidence has been amassed. Testers have been deployed to provide case studies of how similarly situated loan applicants from an array of races are judged. And customers are being queried to determine whether race affects the quality of services offered. "It almost seems like they're on a witch-hunt," says one branch manager of a mortgage company under review.
First Interstate officials won't comment except to say they are committed to fair lending. But NationsBank, Charlotte, N.C., which just finished an intensive three-month OCC exam, says the Fed's demands went far beyond the norm. The adversarial nature of these probes has some in the industry wondering whether they are presumed guilty. "In a normal situation, examiners don't feel the need to get each syllable on the record," says Robert H. Ledig, a banking lawyer in Washington. "Sitting there with a court reporter and a raised right hand doesn't exactly encourage the free flow of discussion."
Nonetheless, the strategy is working. The comptroller's office, which has completed 8 of its promised 20 fair-lending examinations this year, has already unearthed enough evidence to warrant referrals to the Justice Dept., confirms Stephen Cross, the OCC's deputy comptroller for compliance. Cross says the agency has found patterns of disparate treatment for whites and blacks as well as instances in which the terms of loans approved for whites are better than those offered minorities. The Justice Dept. is working up about a half-dozen cases of its own, spurred by the interest that Attorney General Janet Reno has shown in fair-lending matters.
MURKY BUSINESS. The government's intensity is setting the stage for a showdown between regulators and bankers. Legal experts contend that the law is murky about how to prove discriminatory behavior. The rub comes from conduct that bankers may view as sound business but regulators consider flagrantly discriminatory. "This is almost a new frontier for the civil-rights enforcement apparatus," says Charles J. Cooper, an alumnus of the Justice Dept.'s Civil Rights Div. under Ronald Reagan.
Further complicating matters is the use of government testers who pose as loan applicants. The Housing & Urban Development Dept. is working with a civil rights group, which uses both whites and minorities to fill out loan applications with identical financial information to see whether they are treated alike. The OCC has plans for similar reviews. Some lawyers question the use of testers because they provide banks with fraudulent data. "If I were defending a bank, I'd want to bring in evidence as to how many crimes the government committed to prove I was a bad guy," says Ledig.
Whatever the government's tactics, the crackdown is sure to inspire bankers to step up lending to minorities and inner-city communities. But there's only so much the regulators can do to alter deeply ingrained attitudes. That aspect of reform may have to be left up to the bankers themselves.
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