Fed Talks Tough About Loans to Poor, Minorities

Banks could face strict, utility-type regulation if they fail to react to criticism that they do an inadequate job of meeting the loan needs of low-income and minority customers, a member of the Federal Reserve Board warned Monday in Long Beach.

In a speech to the annual convention of the California Bankers Assn., Fed Gov. Lawrence B. Lindsey said regulators, who viewed the safety and soundness of banks as the principal issue of the 1980s, are likely to add fairness as a major issue in the 1990s.

Lindsey’s comments were timely. The Los Angeles riots have helped put a spotlight on how well California banks serve consumers in poor and minority neighborhoods and whether their policies have inhibited economic growth and home ownership.

While Lindsey said he chose the topic before the riots, he said the events “can only reinforce the message I am delivering this morning.”

If banks fail to respond to the criticism, Lindsey said, they risk having the government prescribing measures to meet the credit needs rather than leaving it to the discretion of each bank. Lindsey said the “mere perception of unfairness, not to mention its reality, may drive policy-makers to take action.”

Lindsey recommended a four-step plan for banks to improve their programs in low-income areas and defuse the pressure. First, he suggested, executives may assign employees to go undercover to shop for credit, then report back on what they find.

Second, Lindsey said banks need to significantly boost small-business lending, especially to minority-owned businesses. A third recommendation was to set up review boards made up of bankers and community representatives to whom those who are denied loans could appeal. Finally, Lindsey recommended that banks bolster education programs to teach people what they need to do to improve their chances of getting loans.

The state bankers convention was nearly canceled in the wake of the rioting. President Bush was to have addressed the convention via video hookup, but the White House canceled his appearance because of a schedule conflict. The convention has scheduled at least one seminar on the role of banks in rebuilding.