Fair-Lending Pressure Builds
Any bankers hoping for the fair-lending controversy to simmer down so they can turn their attention to other things are in for a disappointment. Here's a rundown of recent developments:
* It is possible that before bankers even read this article, the Department of Justice will have settled or will have started litigating with Barnett Banks Inc. for alleged lending discrimination, adding the latest link in a chain of cases well-known to readers of this magazine. If litigation goes forward, this will be the first government fair-lending case that a bank will fight.
This case continues to proceed in spite of the Federal Reserve's decision earlier this year to approve a Barnett merger application over Justice's objections. (In a procedural nicety, the Comptroller's Office approved its portion of the application package, separating its deliberations from Justice's longer-term case by stating it found no evidence of discrimination during the one-year period selected for review.)
* The Savings and Community Bankers of America has formed a war-chest for fair-lending litigation. Meanwhile, ABA has engaged a leading law firm to look into fair-lending issues.
* Federal agencies continue to disagree on details of fairlending enforcement. An addendum to an early 1994 interagency policy on discrimination remains mired in disagreements and is running behind schedule.
* The Federal Reserve Board's final report on 1993 Home Mortgage Disclosure Act numbers found that disparities remain among denial rates for most minorities versus whites, although the disparities were tempered somewhat by year-to-year increases in loans granted to minorities.
This report recounts discussions at recent meetings.
"Best practices" stressed
Last January, on Martin Luther King Day, President Clinton signed an executive order creating a presidential Fair Housing CounCil under the direction of Housing and Urban Development Secretary Henry Cisneros. In response, Cisneros made a commitment to obtain voluntary agreements from 75 private lenders to better comply with federal fair-lending laws.
An early effort to strike such agreements with Washington, D.C., area lenders--many of whom had been tarred by a Washington Post series on alleged racial discrimination in lending-- fell apart. Bank lenders involved in the negotiations complained that HUD representatives were trying to ram the "voluntary" agreements down their throats. Since then, HUD has been trying to convince national lending organizations to strike such agreements with the department on behalf of their members.
ABA has resisted this effort in the belief that banks don't fall under HUD authority and already face a slew of such responsibilities under banking laws, including the Community Reinvestment Act. Yet HUD insists that its program is not duplicative of bank regulators' efforts, and Assistant Secretary for Fair Housing and Equal Opportunity Roberta Achtenberg has stated that she expects that eventually depository institutions will join the best-practices program.
A group of lenders not subject to CRA--and more directly under HUD's purview--are the nation's mortgage banks. In mid-September, the Mortgage Bankers Association of America-whose membership includes many bank-owned mortgage companies, signed a three-year master best-practices agreement with HUD. The agreement consisted of two parts: MBA's agreement to work on fair-lending issues in consultation with HUD and a model best-practices agreement that individual mortgage banks could use to devise their own agreements with HUD. The first such agreement, signed by Countrywide Funding Corp., the nation's largest mortgage bank, is summarized on this page. Many have seen the MBA agreement as a preemptive strike against congressional murmurings that mortgage banks should be pulled under the umbrella of the CRA.
MBA used the occasion of its annual convention, held in October, as the official kickoff for orchestrating the wholesale signing of best-practices agreements. MBA officials--who stressed that signing an agreement didn't give HUD any additional regulatory power over a mortgage bank. Secretary Cisneros and Assistant Secretary Achtenberg commemorated and encouraged participation in speeches--frequently pitching the voluntary nature of the agreements. Often, the agreements were spoken of as partnerships between regulated and regulator. Countrywide president and former MBA president Angelo Mozilo stated in a speech that his firm's agreement was not "a forced march at all."
More HUD pressure
If voluntary agreements are one tool in its kit, HUD has others.
A few days before the MBA conference, Achtenberg spoke at a New York Law School conference on fair-lending.
Referring to the lenders taking part in best-practices agreements, Achtenberg said, "the only court they'd be liable in for breaking these agreements would be the court of public opinion." However, she noted that her office has reorganized itself, setting up ten enforcement centers around the country.
Achtenberg added that her department is still developing fair-lending regulations for lenders. Though it is a matter of controversy among both bankers and their regulators, it is expected that HUD will attempt to have these regulations apply to commercial banks as well as to the mortgage banks it already has authority over. Achtenberg expects the proposed regulations to be completed by year-end.
Private suits in the offing
The handful of carefully selected fair-lending cases pursued and publicized by the Justice Department has created such controversy that lenders may well have forgotten that the government isn't the only possible plaintiff. Private actions are also possible, and the New York Law School conference looked at these as well.
Speaking at the New York Law School conference, Judith Brown, assistant counsel for the National Association for the Advancement of Colored People Legal Defense and Educational Fund, recounted the details of a case her organization is involved in. It concerns alleged discrimination by a mortgage originator that sells many of its loans to a small Georgia bank's mortgage subsidiary. Brown said her group was reviewing data to determine if the case could be expanded into a class-action.
"There are [other] cases out there, just waiting to happen," said Brown. A Justice Department representative speaking on the same panel noted that his department is willing to play a role in such private actions.
Some good news on HMDA
During a free-ranging panel discussion during ABA's Annual Convention in October, Paul Hancock, chief of the Housing and Civil Enforcement Section of Justice's Civil Rights Division, clarified for listeners how his unit uses HMDA numbers.
HMDA statistics are only "a starting point," said Hancock. "We have actually begun investigations of banks that had higher rejection rates, and sometimes we've stopped in our tracks because community groups have said, 'This is a bank that is out there aggressively seeking applications, and don't be misled by their rejection rates'," said Hancock.
