Justice launches small-business lending probes.

The U.S. Department of Justice, which to date has focused its fair-lending enforcement efforts on mortgage lending, has made it clear that small-business lending will be a major new fair-lending focus.

Right now there is no source of data on business loan applications comparable to that

This development does not mean attention to home lending will be diminished. In fact, recent statements by top Justice officials indicate that the concentration on home lending will be expanded. (And the Department of Housing and Urban Development has stepped up its own fair-lending activity, relying particularly on "matched-pair" testers, as recounted in Compliance Clinic, p.32.)

Speaking before a meeting of the National Community Reinvestment Coalition in late March, Attorney General Janet Reno pledged to continue her department's fair-lending push. However, she said, it was time to move beyond home lending only.

"We want to take the successes that we have had and the lessons learned in home-mortgage lending and apply them to business lending," said Reno. 'Just as the availability of credit to purchase, refinance, and improve our homes is critical to the well being of local communities, so is the availability of credit for small business."

Reno said she has been hearing for years anecdotes about obstacles minority borrowers face to obtaining small-business credit. Studies and reports have shown that minority applicants for business loans are more likely to be rejected," said Reno, 'and, when accepted, they receive smaller loan amounts than white applicants with identical borrowing credentials."

In a speech to a Mortgage Bankers Association fair-lending conference, Acting Assistant Attorney General for Civil Rights Bill Lann Lee noted that little to nothing has been done thus far about alleged discrimination in the consumer-lending and small-business arenas.

Lee said he felt the type of applicant monitoring data permitted for mortgage loans, including gender and race, ought to be expanded to other types of lending. The Federal Reserve's Regulation B governs such reporting requirements. In 1996 the Fed dropped a proposal to expand such reporting on a voluntary basis after ABA and other groups complained that what would start out as voluntary would become de facto mandatory as market and peer pressures forced all banks to comply. Indeed, opponents have also pointed out that the ban on collecting such data was originally imposed specifically as an anti-discrimination move. More recently, the Fed has raised the issue again (see nearby item, right).

As it is, recent changes to the Community Reinvestment Act provide certain aggregate data on small business and certain ag loans by census tract for some banks. Reno said that this data isn't sufficient to determine if discrimination is taking place.

Justice has some ideas on improvement. "I would add applicant data collection and reporting of results-or some alternative form of disclosure- on applications for small business and certain consumer loans," said Lee, "but not for revolving credit,"

Even without new data, Lee said, Justice will move ahead. "Without statistical reports to guide us," said Lee, "we will use traditional Civil Rights Division techniques-getting out into the community to find and interview persons who have been denied credit. We have begun to do this with small business lending."

Concerns about credit scoring Credit scoring, seen by some as one of the best hopes for color-blind lending, has taken its share of drubbing from others who fear that discriminatory standards can be built into scoring models either by design or inadvertently. Last year the Comptroller's Office gave bankers warnings about these risks.

Justice, too, has concerns. During a question-and-answer period after Reno's speech, Joan Magagna, acting chief of the housing section of the Civil Rights Division told listeners that her unit was evaluating the implications of credit scoring for fair lending, "but we've not reached any conclusions at this point."

Bill Lann Lee, by contrast, was much stronger on this point. "There is a form of underwriting discrimination-not yet the subject of any of our lawsuits-that may well entail the use of higher standards for minority applicants-the misuse of credit score 'overrides'," said Lee. "We have encountered lenders that seem to mistrust credit scoring. As a consequence, they have developed formal and informal systems for overriding the decision recommended by the credit score."

Continuing, Lee said that lenders were free to use any override system they chose, but that they must make sure it is consistent so that protected groups are not discriminated against.

"When we see disproportionate numbers of white applicants, as compared to minority applicants, approved for credit despite a failing credit score or a disproportionate number of minorities denied credit even with a passing credit score, we become concerned that discrimination may be at work," Lee said.