Inside Financial Services

The Justice. Dept.’s Wrongheaded Investigation Into Banks’ Lending Bias

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Investors Business Daily reports that Washington seems to have uncovered a surge in lending bias.

From 2009 through 2014, HUD, FTC and other federal agencies referred a total of 165 lending-discrimination cases to Justice. That’s an aggressive jump from their 22 referrals during the preceding six-year period from 2003 through 2008.

Now CFPB has joined the crusade, referring 15 discrimination cases just last year. That’s up from six in 2013 and one in 2012. [Emph. added]
One hundred and sixty-five cases of discrimination, up from just 22 before. Shocking! How did this sudden epidemic of lending bias among banks get going, do you suppose? Is there a secret cabal among CEOs? Do they meet regularly at an undisclosed location to hatch their nefarious scheme? Perhaps they communicate in code on a secret Facebook page.

Of course not. There is no deliberate bias against minority borrowers going on. There can’t be: banks often don’t even know a prospective borrower’s race or ethnicity when they consider his application in the first place. All the government can go on in pursuing these cases is bogus “disparate impact” evidence. Minority borrowers get turned down more often and get worse terms on their loans than whites do, the government will argue, which means ipso facto that banks must be discriminating. Except that if you adjust the data for mitigating factors such as FICO score, it turns out that banks treat minority borrowers exactly the same as they treat white ones. Which is to say, no, banks aren’t discriminating. They have done nothing wrong.

And yet that hasn’t prevented the Justice Department from coordinating with other agencies such as the CFPB and HUD to bring the mighty power of the federal government down on the hapless banks, anyway. The IBD says that fully 25 institutions are being investigated for lending bias in, among other areas, mortgage and auto. The banks know (as does the government) that fighting any charges would be an expensive P.R. fiasco. The feds have essentially limitless resources to pursue these cases, while banks have customers and shareholders to answer to. Plus, the banks would continue to be regulated during any challenge. So resistance is futile; there is no choice but to write a check.

That’s what Ally Financial did, at any rate, when it settled with the DOJ and CFPB late last year and agreed to pay $98 million for supposedly discriminating against minority auto-loan borrowers—even though not even a single victim of the purported discrimination has yet to be identified.

This is outrageous. There’s no way to describe what the DOJ is up to as anything but an old-fashioned, mafia-style shakedown—and one that’s set to be expanded on a grand scale. Pay up, or else. There is something deeply unsettling about the federal government using its power to systematically abuse law-abiding individuals and institutions. This isn’t merely unfair; it’s deeply immoral.

It gets worse. The IBD also says that as part of the coming settlements, “[b]anks must also revise lending policies to make it easier for low-income minorities to qualify for prime loans. They must even set aside millions for otherwise uncreditworthy borrowers. These programs include hundreds of millions of dollars in direct down-payment assistance to borrowers.” So banks are essentially being forced by the government to boost their lending to poor credit risks. We tried this once recently. It did not end well. That the government is going down this same road again is insane.

There are enough authentically bad guys to be tracked down and brought to trial to occupy the DOJ’s time, without it also engaging in a sideline of mistreating the banking industry. The DOJ ought to cut out this kind of behavior. Unfortunately, I doubt that’s going to happen any time soon

What do you think? Let me know!

7 Responses to “The Justice. Dept.’s Wrongheaded Investigation Into Banks’ Lending Bias”

  1. jsc173

    Tom, It’s been clear to me that the federal regulators aren’t happy with “color blind” scoring models, unless the end result is an equal percentage of approvals (“pass”) among minorities compared to “white” applicants.

    Though they haven’t said this explicitly, they are pushing the industry towards what could only be described as “affirmative action.” In other words, either a different scoring model for minorities or a different “pass” score for minorities to achieve the same percentage of approval.

    Anyone who builds models knows that nothing related to a person’s race is a factor in any model and hasn’t been for years but if the end result is fewer minorities achieving a “pass” score, the lender will be deemed to be discriminating.

    Intent is irrelevant, results are all that matters.

    Of course, if the new result is unprofitable for the lender, score cut-offs will have to be raised to a point that achieves overall profitability, so otherwise profitable non-minorities will wind up being rejected to achieve a target reject rate.

    What then??

  2. Mark

    About 20 years ago, I read a study that looked at default rates among various races and ethnic groups. (these witch hunts really aren’t anything new) The thinking was that if the bar was being set higher for certain groups that they should have lower default rates. Guess what: despite different approval rates, default rates were identical indicating that underwriters were doing their job.

  3. D

    We are going to end up reverting back to a “cash only” society if this keeps up!

  4. stephen bernes

    This type of behavior by the doj will never end until one institution that is guiltless stands up and says enough is enough and publicly challenges the charges. Someone has to bite the bullet here and do the right thing.

  5. etoleary

    This is a near perfect example of the tyranny of the Federal government’s bureaucracy.
    Most people can’t afford the fight and the big companies, many of which have some soiled linen, only want to put the publicity behind them. What we need are members of our Congressional delegations putting a stop to this.

  6. Pradeep

    Arguably, interest rates are too low and have been too low for a few years.A lttile inflation would go a long way to solving the current economic crisis and help deal with the debt problem. A lttile inflation can be introduced by increasing the money supply. The Fed can create money and then use it to purchase government bonds, for example. This would eventually cause interest rates to rise to more normal levels, would retire some of the government debt, and would put more money in circulation.Currently, a lot of companies and banks are just sitting on their money. If inflation were higher, they would need to invest that money in order to retain its value. Also, inflation makes any debts smaller in comparison to the economy as a whole. Inflation would bring about a rise in housing prices and so fewer mortgages would be underwater.

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