A Ranking Season Would Help Combat Discrimination by Commercial Banks

Last October, the U.S. Department of Justice (DOJ), the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) launched what they are referring to as an aggressive effort to combat deliberate financial discrimination against Black and Hispanic families by banks. Taking things one step further, earlier this month, the NYS Department of Financial Services announced that it plans to start examining banking institutions’ record of helping to meet the credit needs of minority- and women-owned businesses, and their participation in assistance programs for small and mid-size businesses, relying on the department’s Community Reinvestment Act (CRA) evaluations.

The federal regulators’ declaration and New York’s ambitious effort might be new and promising, but regulators’ attempt to fight systemic discrimination in the financial system is not. The Fair Housing Act (FHA), the Equal Credit Opportunity Act (ECOA) and its implementation via Regulation B, the Consumer Financial Protection Act of 2010 (CFPA), and the CRA are  attempts to rid the market of racist business practices, to increase financial inclusion, and to prohibit discriminatory practices in our economic system. Yet banks need to do much more to promote diversity, equity, and inclusion (DEI), as demonstrated by business practices such as those of Trustmark National Bank, which allegedly did not market, offer, and originate loans to minorities. In a recent article, we focus on this issue, suggesting modifications in commercial banks’ behavior in order to better achieve environmental, social, and governance (ESG) goals in general and in particular social objectives, including DEI.

Bank stability and performance are critical to society, which is why regulators judge commercial banks’ financial soundness to operate in the market using a scale known as the CAMELS rating system. Banks found to be financially unsound are asked to create a system that will ensure their long-term viability.[1] However, banks are generally not assessed based on their commitment to DEI, or even more general ESG standards, and since their interests and the government’s interests can be misaligned, they can be ineffective as a conduit through which to transfer government funds. This was clearly the case during the Covid-19 pandemic, when the government used  banks to distribute federal relief funds.[2] Some banks garnished relief checks that were directly deposited into taxpayers’ accounts before customers could access them and made larger customers a higher priority in processing PPP loans, while discriminating against minority and women business owners[3].

To address these problems, we suggest a system similar to the CAMELS, which would asses and rank banks based on how well they fulfill their role of assisting the government in promoting its fiscal agenda, distributing funds, and servicing individuals and businesses in an equal, inclusive, and fair manner. Specifically, we recommend a DEI-based rating similar to the CAMELS ratings, based on agency theory, where banks act strictly as distribution agents of the government.

Much like a bank’s FDIC-insured status, and unlike CAMELS ratings, the DEI-based ratings would be publicly available in an, easy to understand format of a sliding scale. This would give banks and incentive to comply and raise public awareness of their performance In addition, the government should favor banks that have  better ratings when initiating future distribution of government funds and collaboration on government-funded projects.

ENDNOTES

[1] The Federal Financial Institutions Examination Council (FFIEC), which is comprised of several government agencies, has created (and since then revised) the Uniform Financial Institutions Rating System (UFIRS) that is commonly known as the CAMELS rating system. Federal Financial Institutions Examination Council Act of 1978, Pub. L. No. 95-630, 92 Stat. 364 (1978).

[2] See Nizan Geslevich Packin, In Too-Big-To-Fail We Trust: Ethics and Banking in the Era of COVID-19, 2020 Wis. L. Rev. Forward 101 (2020) (explaining that the government needed and trusted the “banks to provide liquidity by distributing funds to individuals and small businesses, but the banks failed in doing so. Instead, the banks prioritized profit-making. . . . on the expense of those who needed liquidity most. In the process, the banks discriminated against minorities, women, and other underserved populations.”).

[3] See, e.g., Emily Flitter & Stacy Cowley, Banks Steered Richest Clients To Federal Aid, N.Y. Times (Apr. 23, 2020).

This post comes to us from Nizan Geslevich Packin, an associate professor of law at Baruch College, City University of New York, a senior lecturer at Haifa University Faculty of Law, a fellow at the Yale Cyber Leadership Forum, and an affiliated faculty member at Indiana University Bloomington’s Program on Governance of the Internet & Cybersecurity, and from  Srinivas Nippani, the Regents Professor of Finance at Texas A&M University-Commerce. It is based on their recent article, “Ranking Season: Combating Commercial Banks’ Systemic Discrimination of Consumers,” forthcoming in the American Business Law Journal and available here.

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