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The Color of Money

Follow-ups and reaction

Federal study finds bias in lending across nation

By Bill Dedman, The Atlanta Journal-Constitution

Published July 17, 1988, Page A1

Copyright 1988, The Atlanta Journal-Constitution

An unreleased study by the Federal Reserve Board documents racial inequities in bank lending -- similar to those in Atlanta -- in dozens of cities across the country, according to the economist who wrote the report.

Federal Reserve economist Glenn Canner referred to the government study in confirming that he had verified an examination of home lending by The Atlanta Journal-Constitution. The newspaper's study, published in May, showed that Atlanta banks and savings and loans made five times as many home loans in middle-class white areas as in black areas of the same income.

Canner said his analysis "basically showed you guys were right in terms of the loan disparities."

But Canner said he wasn't surprised by the unequal lending.

"Anybody who's familiar with it knows that what you found in Atlanta is similar to what we find in any city in the country," Canner said last week in Washington. "Atlanta isn't the worst and it isn't the best. It was somewhere in the middle.

"We've looked over the years at dozens of cities and dozens of cases. For us, the disparities are fairly well known. It might be news to the general public."

The Federal Reserve study was done in 1983 but was never released, Canner said. Canner would not release the study last week, and Federal Reserve officials did not respond Friday to a request for the study.

The study, based on records of every home loan by every bank and savings and loan association in the 100 cities in 1981, found that race strongly affected lending patterns in many cities, Canner said.

The economist said a decision was made not to publish the study because its findings were based on only one year's data.

Also not yet published is a more recent study that found racial inequities in lending in Boston, according to Federal Reserve sources. Publication has been delayed from this year, when Congress is considering strengthening the federal Community Reinvestment Act, until at least next spring. The economist in charge of the government study, Constance Dunham, said she is confident the study was delayed only because of publication schedules.

The findings in such studies appear to be at odds with statements made through the years by the Federal Reserve and other bank regulatory agencies.

Specifically, last year 98 percent of American banks and savings and loans were judged as "satisfactory" on compliance with the Community Reinvestment Act. The 1977 law says deposit gatherers have an "affirmative obligation to help meet the credit needs of their local communities," including minority and working-class areas. A plank in the Democratic platform calls for expansion of the law.

Lending disparities apparently similar to those found in Atlanta and Boston also have been found this summer in a Detroit Free Press study of lending patterns in that city, according to sources in Detroit. The study, scheduled for publication next Sunday, found that racial inequities appear less stark in Detroit than in Atlanta but are increasing faster; racial patterns exist in bank support of government programs; and Detroit banks are last in the country in Small Business Administration lending.

The Atlanta study, published May 1-4 in the Journal-Constitution, included six years of loan reports by 88 financial institutions. These records showed that race, not home value or household income or home sales, most determined the level of lending in an area.

Interviews and bank records also showed that banks had closed branches as neighborhoods switched from white to black, bank branches stayed open fewer hours in black areas, these lenders were not soliciting business from real estate agents in black areas, and the only two institutions that would divulge application figures rejected blacks four times as often as whites.

After the articles were published, Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee, asked the four agencies responsible for regulating banks and savings and loans to "investigate the statistics in this series of articles and report to the committee your findings, as well as any action you intend to pursue."

The other regulatory agencies are the Office of the Comptroller of the Currency, the Federal Home Loan Bank Board and the Federal Deposit Insurance Corp. Their responses, due in August, all will be based on Canner's analysis of the newspaper's statistics.

"We didn't have a problem with your methodology. It was basically accurate," Canner said.

Verifying the disparities is one thing, Canner said, but finding a cause is another.

"One factor could be outright discrimination. I don't think one can look at these numbers and conclude discrimination per se."

Canner said the Federal Reserve did confirm that banks and savings and loans were not soliciting business from real estate agents in black neighborhoods, even high-income black neighborhoods, as vigorously as in white areas.

"In Atlanta I would say that we've established that they aren't marketing aggressively in these areas," Canner said. "Certainly if they don't market it could lead to the results that we find."

Another possibility, Canner said, is that banks could enforce policies, such as minimum loan amounts, that effectively reduce the number of loans in lower-income neighborhoods of either race. The Journal-Constitution found that several banks enforced minimums.

Canner did not survey lenders for such rules, but he said, "I'm sure there are policies out there that have the effect of avoiding lower-value neighborhoods ."

Some Atlanta banks and savings and loans responded to the articles by increasing their contacts with black real estate agents, advertising through minority media, increasing hours at branches in black areas. One bank said it planned to add branches in black areas.

In addition, the nine largest institutions began offering $72 million in home loans at low interest rates with favorable credit terms in working-class neighborhoods.

None of the institutions admitted any past inequities. And most financial institutions reported no changes in policy.

Canner, whose doctoral thesis in economics verified racial patterns of lending in Boston in the mid-1970s, said banks should not be held accountable if they try to serve black areas but are rebuffed.

"What we would expect is for the banks to, first, ascertain community needs. Step two is to dream up some method of meeting those needs. They would be expected to be normally calling on Realtors.

"If they do all this stuff, and applications don't come in, then we would say, `No harm, no foul.' If not, then we would say, `Look, you've got to go out and do these things.' "


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