Cyberbanking: a new frontier for discrimination?

Author:Lee, Cheryl R.

    As cyberspace becomes more accessible to the public, cyberbanking(2) becomes more problematic. In fact, cyberbanking, which is becoming ever more popular, may be America's leading economic and civil rights conundrum, raising issues such as lack of access to online credit opportunities, discriminatory lending practices, and security risks.(3) It would seem that federal banking regulation should address these difficulties and, indeed, some legal scholars have put forth just that proposition, stating that:

    the legal requirements associated with financial transactions will apply to those [online] transactions, just as they do for commercial activities in the physical world. As long as those cyberspace transactions are managed by a financial institution, there is little need for concern about compliance with legal requirements as financial institutions have many years of experience working within the framework of those requirements.(4) This is not so, however, since to date, the regulatory banking agencies(5) and financial institutions themselves have largely failed to respond to the challenge posed by cyberbanking. The introduction of computer technology into banking demands a reexamination of the ability of existing legislation to control discrimination in the lending practices of those financial institutions that operate in cyberspace. Regulators must not only re-assess the current legislation, they must act now to prevent further erosion of fair lending and fair access to credit in this country.

    Cyberbanking has become the most cost effective and efficient customer contact for banks, both large and small.(6) Not surprisingly, banks are entering the cyberbanking arena in ever larger numbers, increasing the type of services they offer online and enhancing the level of online technological sophistication.(7) A recent survey of the industry reveals that "[a]bout twenty percent of [the nation's financial institutions] offer[ ] fully transactional websites," through which they permit customers to conduct cyberbanking transactions.(8) While Internet banking is a new and growing activity, several risks associated with the activity have already been identified.(9) Several very specific cyberbanking compliance risks will be explored in this Article. These risks will be elaborated upon and explored within the context of the "digital divide" which makes cyberbanking difficult for many consumers.(10) The "Digital Divide" refers to the gap between those with access to the Internet and those without such access. Because cyberbanking requires a computer, telephone service, and subscription to an online network, it is not available to the consumers who cannot afford these items, which translates into millions of United States citizens.(11) Even for those consumers who can access the Internet, however, there are still several important compliance issues involved with online banking.

    Legislators have raised the first issue: whether cyberbanking(12) creates opportunities for banks to circumvent traditional safeguards from discrimination (such as the CRA, FHA, ECOA and the HMDA), which were designed to ensure that financial institutions provide services to under-served groups and communities. The second issue involves whether the products financial institutions offer through cyberbanking (credit card and residential mortgage loan applications, lines of credit, and business loans) circumvent or dilute the effect of the federal fair lending laws.(13) If there is no specific requirement that financial institutions comply with these laws in their online lending activities, the purpose for which these anti-discrimination laws were enacted may be defeated. The third issue is whether cyberbanking creates new opportunities for banks to treat consumers differently based on their prospective or existing wealth. More specifically, there is a question whether financial institutions' online banking offerings are creating fair access problems that have a disproportionately negative impact on the ability of individuals of color to obtain consumer and mortgage loans, and thereby discriminate. CRA community activist groups have made just that allegation,(14) and it may simply be a matter of time before an individual litigant successfully makes the same assertion.(15)

    Given the complexity of these issues, it is no wonder that those responsible for ensuring equal access to consumer loans have yet to determine how to address them. Financial institutions have not, and will not voluntarily, take responsibility for mitigating the risk of discrimination present in their cyberbanking activities. In fact, regulators are not even certain if a completely online virtual bank is really a bank in the sense that current federal regulations would apply in full and in the same manner as they do in the tradition setting.

    Further, because it is so early in the growth of cyberbanking, federal regulators lack the necessary expertise to appropriately review and control the compliance, security and privacy issues tied to the Internet activities of financial institutions.(16) Federal regulators also acknowledge that failure to control compliance is at least problematic, if not detrimental to the non-cyberbanking public who most need the protections of federal antidiscriminatory banking laws. For over one hundred years, African-Americans, members of other racial and ethnic groups, and women have understood that their banking contacts (credit connected or otherwise) are affected by their gender and ethnicity. For at least the last thirty years, Congress has acknowledged that racial bias exists in the interaction between financial institutions and the above-mentioned groups. The FHA in 1968,(17) ECOA in 1974,(18) HMDA in 1975,(19) CRA in 1977, the CRA revisions in 1997, and the FIRREA's amendments to HMDA in 1989(20) were all Congressional responses to this plight.

    The application of anti-discrimination laws to cyberbanking, then, is necessary in order to insure a financial institution's fair lending law compliance in cyberspace. Of course, in isolation, neither HMDA data, CRA ratings, ECOA evaluation or FHA compliance is sufficient to determine whether a financial institution's cyberbanking loan activities permit or encourage discrimination, but these laws collectively yield important results and data in the enforcement of anti-discrimination legislation.

    The sections that follow will explore in greater detail the challenges presented by cyberbanking, as well as the problems involved with the application and effectiveness of current federal banking legislation to cyberbanking. Specifically, Part II will discuss in detail the problems that arise from cyberbanking. Parts III, IV, V, and VI will examine existing legislation and its failure to adequately regulate discrimination in cyberbanking. Finally, Part VII and VIII will discuss proposed legislation that would help eliminate discrimination in cyberbanking. Because traditional banking appears unable to rid itself of discrimination, it would not be logical to assume that Internet banking can achieve this goal relying solely on existing banking and civil rights legislation.


    1. The Explosion of Cyberbanking Throughout the United States

      Cyberbanking, while relatively new, promises to be the way consumers will bank in the new millennium.(21) As of June 1997, based on information from 185 banks surveyed, the United States General Accounting Office ("GAO") "projected rapid growth in online banking over the next year and a half as the number of U.S. banks implementing online systems is expected to increase about fivefold nationwide."(22) Furthermore, the GAO anticipated that by the end of 1998, nearly half of all U.S. banks would offer online services.(23) More recent data suggest that:

      at least 3,610 federally insured depository institutions -- about 17 percent of all U.S. banks, savings associations and credit unions-offered some form of Internet banking services as of February 1999. About 20 percent of these depository institutions offered fully transactional [w]ebsites ... According to FDIC and NCUA statistics, in the 11 months ending February 1999, the number of banks, thrifts and credit unions with transactional websites almost tripled.(24) In addition to the explosion in the number of banks offering Internet banking, physical banks are combining forces with virtual banks.(25) In 1998, the Royal Bank of Canada, based in Toronto, purchased the banking industry's first online, virtual bank, the Atlanta-based Security First Network Bank ("SFNB"), which began operations in October 1995.(26) Banks continue to explore "whether virtual banks, as aggregates of `automated teller machines, telephone voice response units, personal computers and the Internet,' can adequately supplant physical banks and branches."(27)

      Further, virtual banks are cooperating with other Internet-based service providers. Bank One, a Chicago-based online bank, through "an agreement with Excite, Inc., a leading Internet media company, ... provide[s] an exclusive `full service financial center' for Excite users."(28) The site provides "immediate access to personalized financial information, checking and savings accounts, credit cards, loans, mortgages, insurance, [and] bill payments."(29) Most virtual banks provide a broad range of basic banking services (such as balance inquiries, transaction histories, statements) and products (such as checking and savings accounts, CDs, money market and credit card accounts.)(30) In addition, "loan and mortgage applications, insurance and investment services, bill payment and presentment" are some other available features.(31) Another online banking service allows an account holder to access personal and business accounts, or transfer funds between accounts.(32) Customers can even reorder checks and order check or statement copies.(33)

      Where banks traditionally sought...

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