The WSJ Conflates Lending to Blacks with Imprudent Lending

By William K. Black

The Wall Street Journal has written a revealing editorial entitled:  A Fine for Doing Good: The Justice Department sues a bank for prudent lending.

The WSJ appears to have forgotten the concept of a poll tax as a means to exclude most blacks from voting. 

“Banks have been widely castigated for causing the housing bust by lending too much to borrowers who couldn’t repay, but now Eric Holder’s Department of Justice has taken its antidiscrimination campaign to new lengths by whacking a bank for having been too prudent.

In a complaint filed Wednesday and settled the same day, Justice claimed that California-based Luther Burbank Savings violated the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act by setting a policy that had a “disparate impact” on minorities. Between 2006 and mid-2011, 5.2% of Luther’s single-family residential mortgage loans went to African-Americans and Hispanics, compared to an average of 41.7% for other lenders in the area. The complaint doesn’t cite evidence of intentional discrimination because there wasn’t any.”

But the Justice Department had compelling evidence of intentional discrimination by Luther Burbank Savings (LBS).  LBS had a lending line that required the homeowner to purchase a home with a minimum market value of $400,000.  That equivalent to a massive poll tax was understood by anyone in home lending as certain to exclude the overwhelming majority of blacks and Latinos.  The Justice Department alleged that LBS knew that its lending policy acted like a poll tax to exclude most blacks and Latinos and continued that policy for years despite knowing that the policy did in fact exclude the great bulk of blacks and Latinos.

Paragraph 5 of the complaint reads:

“Luther continued its $400,000 minimum loan amount policy in the face of its knowledge that its low level of lending to African-American and Hispanic borrowers, and in majority-minority census tracts, was attributable to the policy. Luther continued its minimum loan amount policy until June 2011, more than a year after its regulator identified the policy or practice as potentially discriminatory and referred the issue to the Department of Justice pursuant to ECOA.”

Does the WSJ editorial staff really assert that LBS’ management, which specialized in residential lending, was unaware what the inevitable effect of such a poll tax analog would have in excluding minorities?  I can say as a former S&L regulator that we would have never permitted such a poll tax analog, we would have always viewed it as a violation of the fair lending laws.

The WSJ claims that adopting a poll tax analog proves that LBS was determined to make only prudent loans – for the WSJ editors believe that a bank can only lend prudently to the wealthy, who are overwhelmingly white.

“Luther Burbank wasn’t a fly-by-night operator that marketed those loans to any and all. The bank insisted on a minimum $400,000 loan amount and made loans with an average 680 FICO score and 67% loan-to-value. Over the period that Justice examined, Luther Burbank foreclosed on a mere 11 borrowers out of 629 loans outstanding—a loss ratio of 1.75%. In a normal world, Luther Burbank would get a medal from regulators for its risk management, having chosen borrowers even at the height of the housing mania who could meet their monthly payments.

But Assistant Attorney General for Civil Rights Thomas Perez has a different priority: He wants banks to meet lending quotas to minorities—regardless of whether those borrowers can afford the loans. Many minority borrowers have low incomes that make them riskier lending bets. Is that a bank’s fault?”

The WSJ asserts that a lender that only loans to purchasers of extremely expensive homes is not a “fly by night operator.”  The implication is that the WSJ believes that banks that lent to the middle class were “fly by night” operators.  The editorial is financially incoherent.  It is perfectly possible to loan prudently to the middle class to purchase homes within their price range, which would frequently be far less than $400,000.  It is perfectly possible to make prudent home loans to middle class blacks and Latinos who pay far less than $400,000 to purchase a home.  The WSJ conflates lending to blacks and Latinos with imprudent lending.  Perez did not argue that lenders adopt “lending quotas to minorities.”  The WSJ simply makes things up.

LBS began imposing this $400,000 minimum home value in 2006.  The facts show that CRA enforcement by the Office of Thrift Supervision (OTS) became a joke in the run up to the crisis.  The OTS did not reexamine LBS’ “outstanding” CRA rating given in November 2006 until its next CRA examination led to a downgrade to “need to improve” in March 2010.

Due to the Bush administration’s hostility to the CRA, bank and S&L regulators changed their CRA examination schedules.  Banks and S&Ls that had previously received strong CRA ratings were only reexamined for CRA purposes after huge delays (nearly four years in the case of LBS).  Deficient CRA ratings became rare in the Bush administration and CRA enforcement actions virtually ceased.  The LBS case illustrates the type of lending discrimination that can flourish and persist when the regulatory leaders are hostile to fulfilling the agencies’ statutory missions.

The WSJ’s real agenda is revealed only in the last paragraph of its editorial.

“The courts need to address Justice’s use of disparate impact against banks because it is turning into nothing more than a government order to make certain loans—or else.”

If “disparate impact” cannot be used to establish discrimination then lenders will be able to discriminate with impunity by employing “poll tax” style lending standards that they know will exclude the overwhelming majority of disfavored minorities.  The WSJ’s fondest wish is to restore the finance industry’s ability to discriminate with impunity.  Its editors are always nostalgic for the good old days before the anti-discrimination laws.  As the title of their editorial implies, the WSJ thinks it is “imprudent” to loan to Latinos and blacks.   

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