Other people's money - Justice Department uses Fair Housing and Equal Opportunity Acts to attack Chevy Chase Federal Savings Bank F.S.B

National Review, Oct 24, 1994 by Jeff A. Taylor

The Justice Department's case against Chevy Chase Savings Bank has set off warning bells in the banking industry. By claiming that Chevy Chase had violated the Fair Housing and Equal Credit Opportunity Acts without producing any evidence that any actual loan applicants were discriminated against, Justice is saying banks may no longer specialize in serving a market. Industry observers who followed the case closely believe the Justice Department was forced to make the nebulous claim of discrimination against a community, because it failed to find any evidence of bias in specific loans issued. "Justice came up empty, so they went back and took another cut," says one observer.

The Justice Department found something nefarious in the fact that Chevy Chase had located most of its branches in white neighborhoods, as if the bank's motivation were to avoid black customers. The bank was even chastised for the branches it has in minority neighborhoods. The department complained that one branch "was first opened by the defendants at a time when the Census tract was white," while others were acquired through a merger. This complaint suggests that banks can pass Justice scrutiny only by deliberately choosing minority neighborhoods for their new branches.

But such willy-nilly branching would draw frowns from the banking industry's traditional regulators. Before approving a new branch, the Office of Thrift Supervision (OTS) generally wants the bank to show that it will be a profit-making entity. The Justice Department, in contrast, seems to believe that if an institution is profitable as a whole, it should be able to support a few money-losing branches and a few bad loans. In this view, fiduciary responsibility takes a back seat to the political goal of providing large sums of cash to favored groups. Attorney General Janet Reno proudly claims that "$140 million in special financing" will grow out of the Chevy Chase settlement.

S&L analyst Bert Ely, who was "appalled" by the Justice action, is worried about this drift to cross-subsidies in branching and loans. If you charge a below-market interest rate, then I would say that bank is engaged in unsafe lending practices," he says. Below-market loans are an explicit part of the Chevy Chase settlement, with $7 million in loans being offered at rates up to a full point below the market rate. Such deals, which have been fairly common in recent settlements, can be absorbed now, when bank profits are running high. But in leaner times, banks will have to make up the difference by charging other customers more.

Regulators at the OTS and the Fed are worried by the Justice Department's apparent lack of concern for institutional safety and soundness. The genesis of the Chevy Chase case is revealing: it was not referred to Justice by the OTS; rather, the Justice investigation was prompted by a series of stories in the Washington Post on alleged lending bias in the Washington area. The Post's role should send a chill down the spine of bankers everywhere, because the paper is one of the agenda-setters for the nation's news industry. It won't be hard for smaller papers to round up loan data, crunch some numbers, and conclude that Acme S&L is discriminating. The story can win awards, and local activists can send the clips to Justice to start an investigation. There is a special incentive for minority-targeted newspapers to run such stories; Justice will require Chevy Chase to place "at least 960 column inches" of ads in black-targeted publications each year as a condition of the settlement. Smart bankers will take out similar ads at the first phone call from a reporter doing a story on lending bias.

These developments have provoked little comment from Republicans in Congress. One explanation is that Representative Jim Leach (Iowa) and Senator Alfonse D'Amato (N.Y.), the ranking Republicans on the Banking Committees, are preoccupied by Whitewater and the interstate branching bill. Some Republicans also suggest that it's worth waiting to address the matter next year, when they may control the committees. Even if Democrats hold onto the House, Banking Committee Chairman Henry Gonzalez (Tex.) is widely expected to be deposed by fellow Democrats tired of his demagoguery.

Republicans also admit to following the lead of the banking industry, which meekly accepted Justice's ruling. "On something like this, we generally wait to hear from people in the industry," a Senate aide explains. With large banks focused on winning interstate branching, small banks circumspectly resisting it, and no one eager to side with supposed racists, those industry people never materialized.

A potential expansion of the Justice Department's assault could awaken Republicans from their slumber. Given that Justice used the Equal Credit Opportunity Act (ECOA) to clip Chevy Chase rather than the law that deals specifically with red-lining, the department may be gearing up to go after non-bank creditors, a move favored by groups such as the Association of Community Organizations for Reform Now (ACORN). ECOA applies to all institutions that regularly supply credit - including department stores, auto dealerships, and other big-ticket retailers. Applying the logic of the Chevy Chase case, Justice could argue that retailers have shunned entire communities and must open cut-rate stores in minority neighborhoods. More likely is "reform" of the way retailers grant credit. It's always easy to find good uses for other peoples money.