U.S. presses lenders to serve poorer areas

August 25, 1994|By New York Times News Service

Ever since Americans began moving to the suburbs in droves after World War II, banks and savings and loans have followed them, opening branches on tree-lined Main Streets and at freeway junctions to serve them.

Now the Justice Department, in a groundbreaking settlement of a home loan discrimination case Monday, has told lending institutions that they can't simply choose to serve affluent white suburbs and ignore nearby poor and minority areas.

In its case against the Chevy Chase Federal Savings Bank, the government argued that simply by locating its branches only in affluent, mostly white areas surrounding the District of Columbia, the savings and loan had discriminated against the black population of Washington's inner city and poorer suburbs.

This remedy for discrimination goes beyond government rules that have forced banks to lend without bias in areas in which they operated and sometimes restricted them from closing branches in poor areas.

VTC In the Chevy Chase case, for the first time, the government is forcing a lending institution to open at least one branch in an area it had not previously served.

"Anyone who makes credit unavailable on the basis of race is in violation of the Fair Housing Act," said Paul F. Hancock, chief of the housing and civil enforcement section of the Justice Department. "That includes lenders that say they do not do business in black neighborhoods."

It's a stance that banking lawyers argue extends beyond the scope of the fair lending laws. Indeed, some banking regulators, especially at the Federal Reserve, have fought Justice's effort to dictate where banks do business.

Still, in recent years many big banks have stopped fighting the government's community reinvestment and anti-discrimination initiatives and have concluded that reaching out to low-income people is a necessary cost of doing business. Now, it appears, banks will have to go further.

But if the Justice Department insists on forcing banks to open branches at a time when banks want to close branches, it could significantly raise the cost of complying with community reinvestment rules.

This standard is a particular challenge to the many lending institutions,that have grown in suburban areas. "If you are a suburban bank and there is a diverse population in your general service area, the monkey is now on your back to provide services to all members of your area," said Linda Gallagher, head the compliance training program with KPMG Peat Marwick.

Some banking lawyers argued that the department's emphasis on how Chevy Chase marketed its services is not warranted by the anti-discrimination laws.

"The fair lending laws do not impose the obligation of being out there and establishing branches and having marketing," said James D. McLaughlin, the director of agency relations for the American Bankers Association.

Yet he said the banking industry has no way to challenge the Justice Department because all the banks it has accused of discrimination have settled before trial.

"Justice is developing law by consent decree," he said. "There is no bank or savings and loan willing to stand up and go to court against them."

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