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BusinessWeek: October 3, 1994 |
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Economic Viewpoint
HOLDING BANKS HOSTAGE IS A ROTTEN WAY TO BATTLE BIAS A study found to be flawed by the Federal Deposit Insurance Corp. and numerous scholars was concocted by the Federal Reserve Bank of Boston. It was used to block Shawmut's expansion plans until the bank agreed to settle a discrimination suit that had no individual complainants. Shawmut was wrongly accused of denying mortgages to minority groups despite its practice of aggressively seeking mortgage business from low-income minority applicants who cannot meet the normal criteria required for a mortgage loan. In the Chevy Chase case, the government didn't bother with a study. The Justice Dept. pronounced the bank guilty of an infraction so new that it is not even on the statute books--the failure to open enough branches in "majority African American census tracts," as the consent decree put it, in the District of Columbia and Prince Georges County. In short, Chevy Chase was told that if it wanted to conduct business in suburban Maryland, it also had to conduct business in black areas of D.C. COERCIVE POWER. The bank's chairman and CEO, B. Francis Saul II, adamantly denied the Justice Dept.'s unsupported charges of racist redlining. He noted that over the past five years, Chevy Chase had made more than 1,100 first mortgage and home-improvement loans in the minority census tracts that it was accused of shunning and that it maintained over $60 million in credit-card lines to 17,000 individuals in the "redlined" census tracts. Ironically, regulators prevented the bank from expanding into a black census tract in 1989 and again in 1990, and its minority loan approval rate is 88%, far above the 69% rate by all lending institutions nationwide. However, the Justice Dept. is not interested in facts but in what James D. McLaughlin of the American Bankers Assn. calls "developing law by consent decree." Justice uses its power to hold a bank's business hostage in order to coerce a settlement equal to the approximate cost of the bank's legal defense. Justice then distributes the money in highly visible political ways. For Chevy Chase and its mortgage subsidiary, this added up to opening four superfluous branches in black areas, budgeting advertising for black publications, more employment quotas, and below-market loans to blacks with interest rates "at either one percent less than the prevailing rate or one-half percent below the market rate combined with a grant to be applied to the downpayment requirements," to quote from Justice's press release. In other words, the bank must hand out special privileges in order to avoid being labeled racist. If the bank's executives had awarded themselves loans on such terms, they would surely have been indicted for self-dealing. RAISING THE STAKES. Cornell University law professor Jonathan R. Macey says that "the government's willingness to proceed with litigation in the absence of evidence of discrimination...is scandalous in a nation that purports to be governed by the rule of law." Justice's behavior is scandalous because it is depraved. The government is substituting coercion for law and creating a status-based legal system in which privileges are granted on the basis of race. In the process of creating this new legal regime by consent decree, Justice has carefully chosen its targets and its price in order to avoid any chance that the victim will fight in court. But once the law is developed by consent decree, the stakes will change. If the basis of the Chevy Chase settlement were to be applied generally, every business with one or more branches that does not have stores in black census tracts is guilty of racial discrimination. In Attorney General Janet Reno's expanded interpretation of disparate impact, businesses without stores in minority census tracts are guilty of shunning "an entire community because of its racial makeup." By striking deals to rescue their businesses from being held hostage by Justice, Shawmut and Chevy Chase are permitting the Clinton Administration to establish the legal interpretation that banks, liquor stores, jewelry stores, car dealerships, and the like that do not have outlets in minority census tracts are guilty of violating the law against racial discrimination. If banks can be forced to lend to "protected minorities" at below-market rates, then it follows that they can be forced to give interest-free mortgages. Justice is developing precedents that will permit government to extend the unpredictable forms of taxation now applicable to banks to all U.S. businesses--a development that has serious implications for their profits and capitalized values. | |
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