Keep Reins Tight on Banks

RECENTLY, bank trade associations launched a campaign to "cut the red tape." Their message: Relax banking regulations and banks will revitalize the economy with renewed lending. This call, however, is a thinly veiled move to dismantle vital consumer-protection laws. Bank trade representatives are seeking to gut critical laws that prevent discrimination and deceptive practices in the delivery of banking services.

In the name of cutting red tape, bank trade associations are seeking exemption from the law created to prevent discrimination - the Community Reinvestment Act. This law affirms that insured financial institutions have an obligation to meet the credit needs of the entire community in which they're chartered, including low income and minority neighborhoods. The law was designed to prevent the practice of red-lining - when bankers examine a map of their community and literally draw a red line around neighbo rhoods they do not wish to serve.

But, recent studies demonstrate the need for stronger enforcement of the Community Reinvestment Act. Data from the 1990 Home Mortgage Disclosure Act revealed that African-Americans and Hispanics were rejected for home loans between two and four times as often as white applicants of comparable income. Two studies, one conducted by the Justice Department in Atlanta and one by the Federal Reserve Bank in Boston, confirmed that in these cities this preferential treatment for whites over minorities was primar ily the result of racial prejudice, not creditworthiness.

The proliferation of check-cashing stores, pawn shops, and loan-shark operations also highlights the need for stronger enforcement of the Community Reinvestment Act. When banks do not meet the credit needs of low-income and minority neighborhoods, the residents are driven to usurious means of obtaining banking services and credit. In the United States today, about 17 million households do not have a bank account, and about 80 percent of these households have annual incomes below $20,000.

Lack of bank branches in low-income neighborhoods and spiraling service fees have made basic banking services unaffordable and inaccessible to these families. Consequently, families in these neighborhoods have no safe place to store their money and are forced to cash their checks at outlets where they can be charged between 1 percent and 10 percent of the face value of the check.

PERHAPS the need for strong consumer protection laws is most readily seen in the prevalence of home-equity scams that target black, elderly, or uneducated homeowners. Approached by unscrupulous mortgage company representatives, these people are tricked into signing a home-mortgage loan or home-improvement loan that they will be unable to repay. When finance charges and exorbitant interest rates (between 20 percent and 39 percent) drain their assets so that they can no longer keep up with monthly payments , they lose their homes.

During the past two years, class-action lawsuits have been brought against a Fleet Finance Corporation mortgage subsidiary in Georgia, accusing it of racial discrimination, loan-sharking, fraud, violation of usury limits, and breaking the Truth-In-Lending Law. Similar suits are being brought against Chrysler First in Alabama, Georgia, New Jersey, and Maryland. Nations Bank is in the process of buying substantially all of the assets of Chrysler First. These practices underscore the need for stronger enfor cement of the Truth-In-Lending Law, which requires banks to disclose the basic features of their loan programs truthfully and fully. In their "anti-red tape" campaign, the banking industry has called for changes that would weaken the ability of consumers to sue a bank for violating this law, leaving the subjects of home-equity scams little legal recourse.

Finally, the newly enacted Truth-In-Savings Law, which stops bankers from lying about the true interest rates consumers receive, is also under attack by banking industry representatives. Under current law, it is legal for a bank to advertise a particular rate, say 4 percent, but only pay that much on a portion, usually 88 percent, of the account. The Truth-In-Savings Law - set to take effect this June - prohibits banks from using tricky methods of balance calculation to prevent consumers from obtaining t he interest they were promised. This law should be maintained in its current status.

The country as a whole would be better served if bankers stopped trying to cut "red tape" and started improving their practices. If laws governing the financial industry are reformed, that should occur on behalf of consumers and taxpayers, not in spite of them.