The American Civil Liberties Union is asking the Federal Reserve Board to stop all bank stress tests in which banks try to gauge a person’s financial condition before giving them a loan.
The tests are intended to help assess the ability of people to repay loans, but they also serve as a test of the banks’ willingness to lend to borrowers in times of financial hardship.
“Bank stress tests can often have a chilling effect on people’s ability to repay their loans,” said Alex Nowrasteh, an ACLU staff attorney.
“We’re calling on the Fed to stop the tests now, and we’re asking the Board to take action immediately.”
“Bank stresses are designed to test your ability to pay back your loan and you know that’s an easy way to get rid of that stress test,” Nowracesaid.
“The stress test is designed to make you feel guilty, like you’re going to fail to repay your loan.”
The stress tests are scheduled to be performed by the Bankers Association and the National Association of Community Banks, respectively.
The Bankers Assn.
and National Association have been working on a resolution to the issue, which the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are expected to vote on later this month.
A resolution to ban the stress tests will come after the Fed’s annual meeting in February.
The resolution is a major victory for Nowradesaid, who believes the stress test can be a chilling tool.
“The stress testing was designed to keep people from getting out of financial distress, and that’s not a healthy thing,” Nowracasaid.
The Fed has been testing people’s financial readiness in order to assess how they might handle the economic downturn.
In February, the Fed began a new program called the Reserve’s First Step, which was designed specifically to test people’s readiness for unemployment benefits.
That program will continue through the end of the year, when it will expand to other types of financial support.
The bank stress test has been controversial in recent years, with critics saying it’s unfair to test a borrower based on a few questions, such as how long they’ve been in the workforce.
In April, a group of high-profile borrowers filed a lawsuit against the Fed, arguing the tests violate the Fifth Amendment right against self-incrimination.
The Federal Reserve has argued that the stress testing is a valid tool for assessing a borrower’s ability and willingness to repay a loan, and the stress levels were not designed to be unfair to people who had been in and out of the workforce or to gauge people’s mental health.