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RACIAL BIAS IN EXTENDING CREDIT.
Term Paper ID:21584
Essay Subject:
Legal & ethical analysis of racist lending policies & regulatory remedies. Types, equal opportunity laws, housing, redlining, 14 bases for assessing banks.... More...
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Paper Abstract:
Legal & ethical analysis of racist lending policies & regulatory remedies. Types, equal opportunity laws, housing, redlining, 14 bases for assessing banks.
Paper Introduction:
ETHICS IN MANAGEMENT: BANKING
Introduction
One area of banking activity that is closely related to ethical practices is the extension of credit. Changes have been leveled at banks and bankers for decades in relation to the extension of mortgage, business, and community development credit to members of minority population groups and to residents of neighborhoods and communities with predominantly minority group populations. The discriminatory and unethical practice of-which banking and bankers are accused is known as redlining. Many bankers and some economists, however, contend that banking is being criticized unfairly, and that loan denials to minorities are neither discriminatory nor unethical. This research examines the issue of discrimination in the context of race and
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Freeland, Cynthia H. 8 (Winter 1992): 54-56.-----------------------Peter Dreier, "Redlining Cities: How Banks Color CommunityDevelopment," Challenge, 34 (November-December 1991): 15-23.Claudia Cummins, "Nader Study Accuses 49 Lenders ofRedlining," American Banker, 158 (13 August 1993): 1-2.Daniel Seligman, "The New Line on Redlining," Fortune, 126(13 July 1992): 111-112.Andrew Holmes and Paul Horvitz, "Mortgage Redlining: Race,Risk, and Demand," Journal of Finance, 49 (March 1994): 81-99.Peter Passell, "Redlining Under Attack," New York Times, 3 August 1994, Cl.M. 5. 2OCanner, Smith, Bowen, Benkovic, Freeland, Johnson,Orndorff, and Schultz, 864 2lIbid. Bowen, Florence M.Benkovic, Sylvia A. The twelfth basis for assessment covers any other factors that,in an agency's judgment, reasonably bear upon the extent to which aninstitution is helping to meet the credit needs of its entire community. "'I Want to Be the Banks' Worst Nightmare." Business Week, 15 May 1993, 65.Stewart, Pearl. The ninth basis for assessment is an institution's originationof residential mortgage loans, housing rehabilitation loans, homeimprovement loans, and small business or small farm loans within itscommunity, or the purchase of those loans originated in the community. The CRA requires regulating agencies to take into account aninstitution's record in meeting its community's credit needs, whenevaluating applications for either the creation or the relocation ofdomestic branch offices or for merger with or acquisition of anotherinstitution.19 The requirements imposed on lending institutions tofacilitate the evaluation of an institution's record in meeting the creditobligations of its community include the following elements: 1. Background on the Problem Bias in lending on the basis of race and ethnic background has anextensive history--both actual and perceived--in the United States.[v] Suchbias is charged and investigated most frequently in relation to homemortgages; however, bias in the extension of business loans has alsoconstituted a significant problem in American society over the decades.[vi] Discrimination in the extension of credit is volatile issue in the UnitedStates. 13Ibid., 859. Overtrefusal to lend money to an individual because of racial or ethnicbackground is not only illegal in the United States it is also relativelyrare. Endnotes 7Dean Foust, "'No Credit Doesn't Necessarily Mean BadCredit,"' Business Week, 14 April 1992, 43. "Redlining Cities: How Banks Color Community Development." Challenge, 34 (November-December 1991): 15-23.Foust, Dean. The CRA was related to these otherlaws, but the act and its provisions were specifically designed to dealwith the problems related to mortgage and business lending, to establishguidelines for bankers, and to provide a mechanism for public review andprotest.12 In the mid-197 s, the concept of equal opportunity was one of theprime societal concerns of the day in the United States. The second basis is the extent of the bank's marketing andspecial credit-related programs to make members of the community aware tothe credit services offered by the bank. The Fair Housing Act is an open housinglaw that prohibits discrimination on the basis of race, color, religion, ornational origin. "Taking A Sharper Look At Bank Examiners." Business Week, 15 May 1993, 99-1 .Henry, Sarah. "'No Credit Doesn't Necessarily Mean Bad Credit."' Business Week, 14 April 1992, 43.Foust, Dean. This finding stemmed from theview that, as society represented by government has granted theseinstitutions special privileges (charters to do business, depositinsurance, and access to the Federal Reserve discount window), theseinstitutions have an obligation to serve the public, particularly thatsegment of the public in the communities in which the institutions arechartered. For the public atlarge, equal employment opportunity, equal education opportunity, equalhousing access, and equal credit access were the specific issues ofoverriding interest within this general conceptual area. 2. 19Schiller, 1 . Smith, 'III Want to Be the Banks' Worst Nightmare,"'Business Week, 15 May 1993, 65.----------------------- 16 That charges ofthe existence of such discrimination persist in the 199 s is evidenceeither that the legislation has not been effectively enforced, or theproblem is misunderstood by some parties.14 Banking Practices and the CRA The CRA may be considered to be the first law that sets standards ofsocial responsibility for the banking industry. "Banks Caught Red-Handed On Redlining." Business and Society Review, No. The tenth basis for assessment is an institution'sparticipation in governmentally insured, guaranteed, or subsidized loanprograms for housing, small businesses, or small farms. Such legal prohibitions are often circumvented in a number of ways,however, such as a failure to offer certain loan programs to certainindividuals, and rejection on the basis of other factors that appearunrelated to racial or ethnic background, but which in fact may becontrived and may not be applied equally to white applicants.8 Althoughillegal, this practice often results in the denial of funds to members ofracial and ethnic minorities, and even to neighborhoods that arepredominantly occupied by members of racial and ethnic minorities.9 Thislatter practice is known as "redlining.11 Housing discrimination on the basis of racial and ethnic backgroundhas existed in the United States from the time of the country's earliesthistory. 4. The fourteenth basis for assessment is an institution'sperformance in helping to meet the credit needs of the institution's entirecommunity, including low- and moderateincome neighborhoods, as suchperformance remains consistent with safe and sound operational practices. 1 Pearl Stewart, "Japanese Banks: Bias," Black Enterprise,22 (June 1992): 33. The eleventh basis for assessment is an institution's abilityto meet various community credit needs based on its financial condition,size, legal impediments, local economic conditions, and other factors. The sixth basis for assessment is any evidence of prohibiteddiscriminatory or other illegal credit practices. Legal Efforts to Address the Problem In 1977, the Community Reinvestment Act (CRA) became law.1 The CRAdeals with two of the specific issues of overriding interest in the equalopportunity area--equal access to housing, and equal access to credit.11The CRA was, in 1977, the latest in a series of federal laws designed toattack the problems of unequal access to credit that were confronting somesegments of the American population. "Redlining Revisited." Financial World, 163 (18 January 1994): 16.Schiller, Zachary. Analyses of HMDA data for 1987 found that mortgage lendinginstitutions in both Atlanta and Detroit "extended roughly three to fourtimes more home purchase loans per single family housing unit in thepredominantly white neighborhoods than in the predominantly minorityareas.,,2 Similar analyses conducted a year later produced similar resultsfor Chicago, Denver, Louisville, Minneapolis, and Washington, D.C. Additionally, the CRA was designed to provide guidance asto how regulatory agencies would assess the records of mortgage lenders inthe satisfaction of their continuing and affirmative obligations to helpmeet the credit needs of their local communities, while continuing tofulfill the conditions of safe and sound financial operations. The thirteenth basis for assessment is an institution's CRAstatement (or statements) and other signed comments retained by theinstitution. Institutions must maintain files of all comments received fromthe public that specifically relate to any of the institution's CRAstatements or to the record of the institution in meeting the credit needsof its community or communities. 7. Adoption of a CRA statement for each of theseparate community descriptions effected by the lending institution.Mandatory components in such statements are a map of the communitydescribed, a listing of the specific types of credit the institution isprepared to extend within the community, and a copy of the public noticeconcerning the CRA. "Home Mortgage Disclosure Act: Expanded Data on Residential Lending." Federal Reserve Bulletin, 77 (November 1991): 859-881.Cummins, Claudia. some provisions of the CRA were intended to rectify thisomission. Johnson, Thomas A. Suchdiscrimination is also based at times on age, sexual preference, behavior,and other factors. 14. Schultz. Lending discrimination exists in the United States withrespect to a variety of factors. 6. 11Glenn B. 1 . Thefirst of the laws comprising this component of the equal opportunitylegislation was the Fair Housing Act, which was actually Title VIII of theCivil Rights Act enacted in 1968. 18Sarah Henry, "Wake Up, Regulators, and Do Something AboutRedlining," American Banker, 157 (23 June 1992): 4. The CRA, thus,had roots in the civil rights and urban renewal policies of the 197 s. 22Ibid. Smith, Nancy E. Orndorff, andMark R. In actualpractice, redlined areas were almost always those in which highconcentrations of minority population groups resided. 24 Jaret Seiberg, "Latest CRA Reform Proposal Draws Fire As WellAs Praise From Bankers," American Banker, 159 (27 September 1994): 1-2. The CRA, thus, was intended to encourage lenders to continuallycommunicate with themembers of their local communities about the credit needs of the community,and to help the members of their local communities to meet those localcredit needs--particularly where low- and moderate-income neighborhoodswere concerned. Such communitydescription may be based on existing political boundaries, its effectivelending territory, or any otherreasonably described local area that fulfills the purpose of the CRA andthat does not unreasonably exclude low- and moderateincome neighborhoods.Further, a bank may describe a single community or a number of localcommunities that, together, make up its entire community. As late as 1969, "white only" housing was openly advertised inthe Southern states, and, in Northern urban areas such as south Boston,violent racial harassment continues in the 199 s in an attempt to deterblacks from moving into the neighborhood. The fifth basis for assessment is the geographic distributionof the bank's credit extensions, credit applications, and credit denials. 9. Schultz, "Home Mortgage Disclosure Act: Expanded Data onResidential Lending," Federal Reserve Bulletin, 77 (November 1991): 859-881. Smith, Nancy E. The equal housinglegislation enacted prior to the CRA focused on the individual applicant,barring, in most instances, consideration of personal characteristics indetermining creditworthiness. The means by which discrimination is applied to lending vary. 8 (Winter 1992): 54-56. This type of loan policy or practice constituted opendiscrimination, and as such was somewhat more easily dealt with legally ifnot in actual practice than were some other forms of discrimination. Benkovic, Sylvia A. ETHICS IN MANAGEMENT: BANKING Introduction One area of banking activity that is closely related to ethicalpractices is the extension of credit.[i] Changes have been leveled atbanks and bankers for decades in relation to the extension of mortgage,business, and community development credit to members of minoritypopulation groups and to residents of neighborhoods and communities withpredominantly minority group populations.[ii] The discriminatory andunethical practice of-which banking and bankers are accused is known asredlining.[iii] Many bankers and some economists, however, contend thatbanking is being criticized unfairly, and that loan denials to minoritiesare neither discriminatory nor unethical.[iv] This research examines theissue of discrimination in the context of race and ethnicity in theextension of credit as an ethical behavior in the banking workplace. "Nader Study Accuses 49 Lenders of Redlining." American Banker, 158 (13 August 1993): 1-2.Dreier, Peter. 9Zachary Schiller, "Minority Lending: BANC One Gets A MoveOn," Business Week, 15 May 1993, 1 . Another serious charge laid against lenders was that they accumulateddeposits from the residents of redlined areas and from members of variousminority population groups, and then refused to extend credit to suchresidents or minority group members, who were, more often than not, one andthe same.18 The CRA was designed, in part, to assure that credit would beextended to those from whom lending institutions accepted deposits,assuming that such individuals were otherwise eligible for such credit. The most publicized form ofdiscrimination is that associated with racial and ethnic background. Freeland, Cynthia H. 12Ibid., 876. The CRA was also motivated by a distrust in Congress of thewillingness of executive departments, specifically, the Departments ofHousing and Urban Development and Justice, to aggressively enforce theprovisions of the Fair Housing Act.16 The most consistent of the criticismsagainst lenders in the mid197 s concerned the practice of redlining--thedenial of credit within specifically defined geographical areas. "Redlining Under Attack." New York Times, 3 August 1994, ClRisen, James. Public concerns related to equal opportunity in housing and creditranged from the ability of some groups to obtain housing and credit incertain areas to the ability of members of many of these same groups toobtain financing for either housing or business in areas where it wasaccessible to them. "The New Line on Redlining." Fortune, 126 ' July 1992): 111-112.Smith, M. A description of the institution's community. 15Dean Foust, "Taking A Sharper Look At Bank Examiners,"Business Week, 15 May 1993, 99-1 . Canner, Delores S. The CRA, the Fair Housing Act, the Community Development Act, and theHMDA should have eliminated discrimination from financing. BibliographyBecker, Gary S. 12. 8Ibid. Orndorff, and Mark R. 23James Risen, "Redlining Revisited," Financial World, 163(18 January 1994): 16. Becker, "The Evidence Against Banks Doesn't ProveBias," Business Week, 15 May 1993, 18. The eighth basis for assessment is an institution'sparticipation, including investments, in local community development andredevelopment projects or programs. At this point, Congress turned its attentionto what were considered to be the arbitrary consideration of geographicfactors in determining creditworthiness. "The Evidence Against Banks Doesn't Prove Bias." Business Week, 15 May 1993, 18.Canner, Glenn B., Delores S. The HMDA Act of 1975 required lendinginstitutions with more than $1 million in assets and an office in ametropolitan area to compile and disclose data on where their loans arebeing made.17 This act, however, did not provide for any governmentalassessment, rewards, or sanctions in relation to any specific mortgagelending practice. 17Canner, Smith, Bowen, Benkovic, Freeland, Johnson,Orndorff, and Schultz, 859. "Minority Lending: BANC One Gets A Move On." Business Week, 15 May 1993, 1 .Seiberg, Jaret. "Mortgage Redlining: Race, Risk, and Demand." Journal of Finance, 49 (March 1994): 81-99.Passell, Peter. The third basis forassessment is the extent of participation by the bank's board of directorsin formulating the bank's policies and reviewing its performance withrespect to the purposes of the CRA. 16Jeffrey Zack, "Banks Caught Red-Handed On Redlining,"Business and Society Review, No. The fourth basis for assessment covers any practices by theinstitution that appear to be intended to discourage applications for typesof credit set forth in the institution's CRA statement or statements. 2. The Home Mortgage Disclosure Act (HMDA) was structured to dealwith discrimination on the basis of geographic criteria, and was perceivedas a means of dealing with the problem of redlining. There are fourteen specific assessment factors that are employed bythe regulatory agencies in the evaluation of an institution's CRA effort.These assessment factors are as follows: 1. Although the existence of statistical disparities between whites andminorities in the extension home mortgage loans is acknowledged by allparties, disagreement exists as to the reasons for these disparities.Equal opportunity activists contend that racial discrimination by mortgagelending institutions "is a contributing, if not the primary, source ofthese patterns.,,21 other parties "suggest that the patterns reflectfundamental differences in the economic circumstances of populationgroups.,,22 Outlook For An Ethical Change President Clinton proposed that the CRA should be broadened and thatpenalties be added to assure compliance by major banks.23 Predictably, manybankers assailed the proposal (one might reasonably ask why these bankersare worried about penalties if they are behaving ethically).24 The electionof a Republican-controlled Congress this month may have doomed reform ofthe CRA; thus assuring a continuation of unethical lending by some bankers. 13. 8. "Wake Up, Regulators, and Do Something About Redlining." American Banker, 157 (23 June 1992): 4.Holmes, Andrew, and Paul Horvitz. Bowen, Florence M. 14 Gary S. Johnson, Thomas A. 3. In 1974, the discrimination provisions were expanded toprohibit the denial of access to housing on the basis of an individualssex, and the denial of access provisions were expanded to housing-relatedcredit extensions. The CRA, therefore, is a component of that group of equal opportunitylegislation that addresses problems related to housing and credit. These expansions of the equal housing opportunitylegislation were implemented via the Community Development Act.Prohibitions against discrimination in housing and credit extension on thebasis of age and handicap were enacted in 1988, as a part of the bill toextend the Civil Rights Act. The first basis for assessment covers those activitiesconducted by the bank to ascertain the credit needs of its communityincluding the extent of the bank's efforts to communicate with members ofthe community regarding the credit services offered by the bank. 11. "Latest CRA Reform Proposal Draws Fire As Well As Praise From Bankers." American Banker, 159 (27 September 1994): 1-2.Seligman, Daniel. Thus, the geographiccriteria were conceived of as indirect means of attacking discrimination incredit against minority population groups that were restricted to livingwithin specific sections of urban areas. Although federal government efforts to end such discriminationhave been pursued for two decades, critics contend that much work is stillrequired.7 Discrimination in lending is a part of the larger problem of housingdiscrimination. "Japanese Banks: Bias." Black Enterprise, 22 (June 1992): 33.Zack, Jeffrey. Official concern with credit extension was expanded again in 1975,with the enactment of the Home Mortgage Disclosure Act.13 This act made ita less difficult for both individuals and public officials to ascertainwhether depository institutions were in fact discriminating in the grantingof credit. Congress determined that lendershad, at times, contributed to the decline of certain neighborhoods by theirfailure to provide financing to qualifiedapplicants in those areas. The CRA includes other actions that lenders are encouraged to take.These actions as follows: a lender is urged to describe how its currentefforts help to meet the credit needs of its local community orcommunities; a lender is encouraged to issue periodic reports assessing theinstitution's efforts in meeting the credit needs of its local community orcommunities; and a lender is encouraged to describe institutional effortsto ascertain the credit needs of its local community or communities. The CRA provides forassessments in connection with examinations and rewards and sanctions inconnection with applications for the creation and expansion of banks andsavings institutions.15 The premise upon which the CRA is based was aCongressional finding that banks and thrifts have a continuing andaffirmative obligation to help meet the credit needs of the localcommunities in which they are chartered. This act was intended to halt the practice of denyingaccess to housing (either purchase or rental) on the basis of personalcharacteristics. The seventh basis for assessment is an institution's record ofopening or closing offices in minority neighborhoods and in providingservices at offices. 3.
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