LENDING institutions in Massachusetts are feeling increasingly embattled. Known for their cutting-edge banking practices, the state's bankers now find themselves on another frontier: under prosecution for discriminatory lending.
At the heart of local institutions' discomfort is Attorney General Scott Harshbarger's newly launched investigation into banks' mortgage lending records. Eleven banks and the Massachusetts Bankers Association are challenging the probe in court on the grounds that it is beyond the jurisdiction of the attorney general's office and encroaches on the role of bank regulatory bodies.
"If the attorney general's investigation goes forward it will de facto produce a new level of bank regulation," warns Robert Fichter, vice president of the Massachusetts Bankers Association.
The dispute stems from a study by the Federal Reserve Bank of Boston - released last October and hailed as groundbreaking by the national banking industry - which found a clear racial disparity in mortgage lending, even when credit histories were taken into account.
BANKS voluntarily provided data for the study on the understanding they would only be shared with federal regulators. So when Mr. Harshbarger's office in effect subpoenaed the information, a number of banks balked.
Boston Fed President Richard Syron warned earlier this month that Harshbarger's investigation could prove counterproductive. It could "permanently poison the well" for future cooperation between banks and bank regulators in addressing equal access to credit for all races, he said.
The attorney general's office views the investigation as a question of protecting consumer rights, and cites section 93a of the Consumer Protection Statute to justify its stand. And its goal is broad. "Part of our focus is to ensure systemic reform in the entire mortgage lending industry," says Richard Cole, chief of the civil rights division at the attorney general's office.
First in the country to address loan discrimination on a broad basis rather than case by case, the attorney general hopes to "lead the way for other attorney generals from around the country," Mr. Cole says.
This is just what the banking industry would like to avoid. According to Mr. Fichter of the Massachusetts Bankers Association, banks are being penalized for voluntarily participating in a study that was designed to reveal broad trends and never meant to uncover individual cases of discrimination.
The industry is fully "sensitized" to racial disparity in lending, he says, and is actively addressing the problem. He reels off as evidence the eight new branches and 25 new ATMs in minority neighborhoods, first-time home-buyer programs, and the growing practice among banks of reviewing rejected loan applications a second time.
The bigger issue, however, is defining the nature of discrimination and thus how to deal with it, Fichter says. "In the spirit of the Fed study, this is not conscious, malicious, racial discrimination. It is the problem that occurs when people of different cultures, different classes encounter each other."
The answer, Fichter believes, is education, not civil suits: the carrot rather than the stick approach, and certainly not both.
"I've never had an experience with a donkey," he says. "If you put the carrot over its head and whack him with a stick, I don't know what the donkey does - it probably goes sideways."