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For release on delivery
10:00 a.m., EST
November 4, 1993
Statement by
Lawrence B. Lindsey
Member, Board of Governors of the Federal Reserve System
before the
Committee on Banking, Housing, and Urban Affairs
United States Senate
November 4, 1993
Introduction
Mr. Chairman, I am pleased to appear before your
Committee today to present the results of the 1992 Home Mortgage
Disclosure Act (HMDA) data.
I also will make some remarks about
the Federal Reserve's fair lending enforcement efforts.
Discrimination tears at the fabric of our democratic
society.
For the Federal Reserve, no single consumer issue is of
greater concern than assuring that the credit granting process in
the institutions that we regulate is free of unfair bias.
Fairness in the assessment of credit applications is absolutely
critical to our nation's well being.
Racial discrimination in
particular--no matter how subtle, and whether intended or not-cannot and will not be tolerated.
The Federal Reserve's primary responsibility with
respect to the HMDA data is to provide the data processing
services for all the agencies under the auspices of the Federal
Financial Institutions Examination Council (FFIEC) as a matter of
operational convenience.
The responsibility for gathering the HMDA information,
and ensuring that institutions follow fair lending practices, is
allocated by law to six federal agencies.
Of the more than 9,000
institutions that reported HMDA data in 1992, the Federal Reserve
supervised approximately 600.
For fair lending compliance--which
applies not just to the institutions that file HMDA data, but to
all depositories--we supervise about 1,000 of the almost 13,000
banks and thrift institutions.
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General Data Description
The most striking feature of the HMDA data for 1992 is
the enormous rise in the total number of housing loans applied
for compared to earlier years.
The HMDA data show that more than
10 million such loans were applied for compared to less than 7
million in 1991 and just 5.2 million in 1990.
There is no
question that a combination of lower interest rates and an
improving and expanding economy in 1992 were the primary
explanations for this growth.
The primary source of the growth in the volume of
reported home lending activity was a dramatic increase in home
refinancing.
In 1992, 5.2 million applications for home
refinancing were reported compared with just 2.1 million in the
previous year.
The total number of home purchase loan
applications also rose by nearly 300,000.
In addition, the
number of applications for home improvement loans rose modestly.
Not only were the number of applications up but so were the
number of approvals.
More than 4 million home refinancing loans
were approved, 77.7 percent of the total applied for, compared
with roughly 1.5 million and a 73.2 percent approval rate in
1991.
Home purchase approval rates for conventional loans were
also up modestly from 71.2 percent in 1991 to 72.9 percent in
1992.
Approval rates for government-backed loans also rose.
This higher approval rate benefited both black and
white applicants.
Conventional home purchase loan approval rates
rose 1.4 percentage points for blacks and 1.9 percentage points
- 3 for whites.
Government-backed mortgage approval rates rose 2.0
percentage points for blacks and 3.0 percentage points for
whites.
Of those individuals refinancing their homes, black
approval rates rose roughly 6 percentage points while white
approval rates rose 4 percentage points.
I would point out that
these rises in approval rates for refinancings are particularly
striking given that the number of applications for both groups
more than doubled.
And finally with regard to home improvement
loans, black approval rates rose 3.5 percentage points while
white approval rates rose 1.9 percentage points.
Approval rates also rose across the board for all
income groups.
Home refinancing loan approval rates rose roughly
4 percentage points for each major income group while home
purchase approval rates rose most dramatically for low-income
borrowers.
The approval rate for applicants with less than 80
percent of the MSA median income went from 59.8 percent in 1991
to 68.9 percent in 1992 for conventional loans.
For government-
backed loans, the same group experienced a rise in approval rate
from 66.2 percent to 74.8 percent.
Approval rates for other
income groups, on the other hand, were up roughly 1 to 2
percentage points.
The disparities between black and white approval and
denial rates persist.
For example, looking at conventional home
purchase loans, about 36 percent of black applicants and 27
percent of Hispanic applicants were denied credit compared to 16
percent of white applicants and 15 percent of Asian applicants--
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roughly the same as in 1991, although a slight improvement for
black applicants.
This continues to be a matter of great
concern.
Before going on, though, it is important to stress what
conclusions can be drawn from the HMDA data.
There is no
question that the differential denial rates and approval rates
for different income groups are troubling.
However, the denial
rates for applicants categorized by their race or national origin
reflect a variety of factors.
One factor relates to differences
in the proportion of each group with relatively low incomes.
In
1992, 21.0 percent of the white applicants for conventional home
purchase loans had incomes that were less than 80 percent of the
median family income for their MSA.
The comparable percentages
for blacks, Hispanics, and Asians were 37.1 percent, 27.6
percent, and 16.1 percent respectively.
Although the distribution of applicants by income may
account for some variation among racial groups in loan
disposition rates looking at the 1992 HMDA data, other factors
account for most of the difference.
completely explain it.
Differences in income do not
This conclusion is evident because, after
controlling for income, white applicants for conventional home
loans in all income groupings have lower rates of denial than
black and Hispanic applicants.
In fact, the denial rate of 21.1
percent for whites in the lowest income category (less than 80
percent of the MSA median family income) is the same as for
- 5 blacks in the highest income category (more than 120 percent of
the MSA median family income)
Differential treatment on the basis of race and
national origin may contribute to the variation, but it too does
not fully explain the disparities in denial rates across racial
and ethnic groups.
For example, the study by the Boston Reserve
Bank of lending patterns in Boston concluded that, after
controlling for all known financial factors, race and national
origin appeared to account for differences in denial rates among
applicants.
At the same time, the study also concluded that
differences in income together with other financial
characteristics alone would have caused black and Hispanic
applicants to be denied credit at nearly twice the rate of white
applicants.
The Boston Study highlighted the limitations of
interpreting the HMDA data.
Such limitations do not in any way
diminish the importance of assuring equal access to credit for
all Americans.
The data merely point out the problems with
relying on purely statistical analysis in reaching conclusions
about the fairness of lending decisions.
As I will note later in
my remarks, the approach taken by the Federal Reserve and other
agencies in developing new analytic techniques for investigating
lending bias strike a balance between traditional investigative
r
In the highest income category, the denial rate was 8.8
percent for whites in 1992; the denial rate for blacks in the
lowest income category was 36.0 percent.
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techniques and computer-assisted statistical analysis.
In
particular, we use statistics to identify specific loan files
that are suspicious and require further investigation.
However,
statistics alone can never and should never be used as the sole
criterion for determining whether discrimination exists in a
particular institution.
The Disclosure Process
Under HMDA, most mortgage lenders with offices in
metropolitan areas, including independent mortgage companies,
disclose information on the disposition of home loan applications
and on the race or national origin, gender, and annual income of
loan applicants and borrowers.
Lenders also disclose, for loans
originated or purchased during a year, the loans they sold,
classified by the type of secondary market purchaser, and may
indicate the reasons for denial of other applications.2
Covered institutions record separately, for each loan
application acted on and each loan purchased, the items of
information required by the Federal Reserve Board's
Regulation C.
Lenders submit this information to their
respective federal regulator, which then sends the data to us for
2
Expanded data collection was required pursuant to
amendments to HMDA in the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (FIRREA). The expansion in coverage
of mortgage companies came with FIRREA and with the amendments to
HMDA in the Federal Deposit Insurance Corporation Improvement Act
of 1991.
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processing.
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Acting through the Federal Reserve, the FPIEC
produces disclosure statements for each covered lender to make
available to the public, plus an aggregate report for each
metropolitan statistical area (MSA).
These reports show the
overall lending activity for covered lenders in each MSA and,
together with the individual disclosure statements for lenders
active in a given MSA, are available to the public at central
data depositories.
This information is also made available to
the public in libraries throughout the country.
In addition to the print versions of the disclosure
statements and aggregate reports, the FFIEC makes HMDA data
available to the public in other forms.
For instance, the HMDA
reports or underlying data are available on microfiche, computer
tape, PC diskette, and soon will be provided on CD ROM.
The CD
ROM format should be much more manageable than paper and
microfiche for many users--especially those who view the data at
central depositories--and will offer selections for viewing the
data by MSA or by institution.
Quality of the Data.
I'd like to say a few words about the quality of the
HMDA data.
Over the years, we and the other agencies who process
HMDA data have had concerns about errors in the data that are
submitted to us.
By and large, errors can be traced to the data
submitted (such as a lender's recording incorrect census tract
numbers), although a few may arise during the agencies' data
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entry of loan register data submitted in hard copy.
In the past
three years, we have improved our capability to identify errors.
As a result, we have succeeded in reducing the data errors in
computer records from roughly 5 percent in 1990 and 1991 to less
than one-half of one percent now.
There are other types of errors that we are unable to
identify at the processing stage.
It is difficult to know, for
instance, whether a financial institution has incorrectly
identified the race of the applicant or has entered a census
tract number that is valid but that is not correct for the
property location to which the loan relates.
our centralized data quality checks.
Such errors evade
Our examiners have stepped
up their efforts to detect these problems during bank
examinations, and we require institutions to correct and resubmit
their HMDA data when we find errors.
Financial institutions are
strongly encouraged to ensure that they report accurate
information; we help them by providing software with edit-check
capabilities and through distribution of the FFIEC's publication,
"A Guide to HMDA Reporting: Getting it Right!"
DETAILED RESULTS OF THE 1992 HMDA DATA COLLECTION
The 1992 HMDA data reflect information submitted by
9,073 lenders, including 5,468 commercial banks, 1,395 savings
and loan associations, 1,706 credit unions, and 504 mortgage
companies {of which 224 were unaffiliated with a depository
institution).
The number of lenders disclosing data fell about 3
- 9 percent from 1991, a reflection of acquisitions, mergers, and
failures.3
But while the number of reporting institutions fell,
the total number of applications and loans reported increased by
more than 50 percent, from 7.89 million in 1991 to 12.0.1 million
in 1992.
Volume
Much of the increase was due to refinancing activity.
Of Application«
artrl r/ianfl
In 1992, lenders covered by HMDA acted on roughly 10.03
million home loan applications--3.54 million for purchasing, 5.22
million for refinancing, and 1.24 million for improving dwellings
for one to four families, and the balance for loans on
multifamily dwellings for five or more families.4
Nearly 78
percent of the reported applications for home purchase loans were
for conventional mortgage loans; the remainder were for
government-backed forms of credit--loans insured or guaranteed by
the Federal Housing Administration (FHA), the Veterans
Administration (VA), or the Farmers Home Administration (FmHA).
The predominant reason for the substantial increase in volume of
home loan applications reported in 1992 was the growth in
refinancing activity.
Spurred primarily by lower interest rates,
3
The total number of reporters will be higher for 1993,
given the increased number of independent mortgage companies that
will report lending activity as a consequence of changes in
coverage that took effect January 1, 1993.
4
In addition to applications, lenders also reported data on
1.98 million loans they purchased during 1992 from other
institutions.
-.10
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the volume of applications to^refinance an existing mortgage loan
increased in 1992 by almost.150 percent over the previous year.
The growth in refinancings also reflects innovations in the
market place, including the greater availability of "no-fee"
loans and more.efficient processing of applications that helped
reduce closing costs.5
Among the different racial and ethnic
groups, the increase in 1992 applications for conventional loans
by Asians was 5 percent; by blacks 22 percent; by Hispanics
8 percent; and by whites 17 percent.
Applications for
government-backed loans decreased by roughly 5 percent for each
group.
The conventional mortgage share of all reported home
purchase loan applications increased by roughly 4 percent from
1991 to 1992.
This change in market share reflects a substantial
decline in FHA activity.
In 1991 the FHA accounted for 20.4
percent of all purchase loan applications and 20.5 percent of all
home purchase loans.
In 1992 these shares were 15.7 percent and
16.3 percent respectively.
Recent increases in the cost to
homebuyers using FHA loans, and greater availability of
conventional loan products designed to reach low- and moderateincome homebuyers, likely account for the reduced reliance on FHA
loans.
5
"No-fee" loans are those where the consumer incurs no out
of pocket expense to pay either closing costs or discount points
on the loan. Such loans are often written with a higher interest
rate to compensate.
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Despite this decline, the FHA program is favored by
many thousands of households, particularly among first-time
homebuyers.
For instance, in 1992 almost half of the homebuyers
using section 203(b) FHA loans (the principal type of FHA singlefamily mortgage loan program) were first-time homebuyers.
The
proportion had been even higher in 1991, when 57 percent of the
FHA borrowers were first-time homebuyers.6
On the other hand,
the program is used infrequently to refinance existing home
loans.
Historically, FHA loans have accounted for only 3 to 4
percent of the refinancings annually.
In 1992, FHA loans
accounted for 3.7 percent of the 3.95 million refinancing loans
reported by lenders covered by HMDA.
One can surmise that
households refinancing a loan often have accumulated sufficient
equity in the home and no longer need the FHA's low-downpayment
feature.
Use of Various Loan Products for Home Purchase
In 1992, 33.4 percent of home purchase loan applicants
with low incomes (income less than 80 percent of the median
family income for their MSA) applied for government-backed loans,
compared with 13.2 percent of applicants with high incomes
(income more than 120 percent of the median family income for
their MSA).
The greater reliance of lower-income households on
Characteristics of FHA Single-Family Mortgage: Selected
Sections of National Housing Act. U.S. Department of Housing and
Urban Development, 1991.
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government-backed loans reflects several factors.
For instance,
low-income households are much more likely to have limited money
available to meet downpayment and closing cost requirements;
hence, they are much more likely to use government-backed home
loan programs. Conversely, the maximum limits on FHA loan
insurance make this program less useful to households seeking to
buy expensive properties.
Among the racial groups, blacks are much more likely to
seek government-backed home purchase loans than other groups.
In
1992, 41.2 percent of black applicants who applied for a home
purchase loan sought government-backed loans; the comparable
figures for Hispanics, whites, and Asians were 31 percent, 20.9
percent, and 10.6 percent respectively.
These differences among
racial groups are not entirely attributable to differences in
income.
For instance, among low-income loan applicants, 53.3
percent of blacks sought FHA or VA loans, while only 40.4 percent
of Hispanic applicants, 31.2 percent of white applicants, and
21.7 percent of Asian applicants applied for a government-backed
loan.
Disposition of Loan Applications
The 1992 HMDA data continue to show that lenders
approve most home loan applications, particularly for buying a
home or refinancing an existing loan.
In regard to home purchase
loans, lenders approved roughly 72.9 percent of applications for
conventional financing and 74.1 percent of applications for
- 13 government-backed financing.
For refinancings, they approved
77.7 percent of the applications.
A comparison of the 1991 and 1992 HMDA data indicates
that, nationally, denied applications for conventional home
purchase loans declined somewhat, dropping from 18.9 percent in
1991 to 17.8 percent in 1992.
Denial rates also were slightly
lower in 1992 for applications for government-backed home
purchase loans and for home improvement loans.
For refinancings,
on the other hand, denial rates dropped significantly-- from 15.9
percent in 1991 to 12.4 percent in 1992.
In general, low
interest rates in 1992 coupled with relatively stable home values
made homeownership more affordable in 1992 than in 1991 and may
account for the lower denial rates.
In addition, innovative
mortgage loan programs by many lenders and greater use of
affordable home loan programs sponsored by secondary market
institutions also may have contributed to the decline in denial
rates.
Disposition Rate for Different Groups of Appl i nant-a
The rates of approval and denial vary considerably
among home loan applicants grouped by their income and racial
characteristics.
Nationwide in 1992, 80.5 percent of the
applicants for conventional home purchase loans who are in the
highest income grouping were approved for loans, compared to 68.9
percent for the lowest income grouping.
A similar relationship
between approval rates and applicant income is found for other
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types of home loans, including government-backed home purchase
loans and loans for refinancing and for home improvement.
As in previous years, the 1992 HMDA data show that
greater proportions of black and Hispanic loan applicants than of
Asian and white applicants are turned down for credit.
Consistent with these findings, the data also indicate that the
rate of loan denial generally increases as the proportion of
minority residents in a neighborhood increases.
Nationwide, for conventional home purchase loans, 35.9
percent of black applicants, 27.3 percent of Hispanic applicants,
15.9 percent of white applicants, and 15.3 percent of Asian
applicants were denied credit in 1992.
By comparison, the denial
rates nationwide in 1991 for conventional loans were 37.4 percent
for blacks, 26.5 percent for Hispanics, 14.9 percent for Asians,
and 17.3 percent for whites.
The numbers for government-backed loans reflect
somewhat lower rejection rates than for conventional loans.
In
1992, 23.8 percent of black applicants, 18.5 percent of Hispanic
applicants, 13.5 percent of Asian applicants, and 12.8 percent of
white applicants were denied credit.
In 1991, by comparison, the
rates of loan denial were 26.4 percent for blacks, 18.9 percent
for Hispanics, 16.3 percent for whites, and 12.5 percent for
Asians.
- 15 -
rhantj(=q in the
amnnnt of Lending
by Income* anri Bare*
In recent years, lenders have targeted low- and
moderate-income households and those seeking to buy homes in lowand moderate-income neighborhoods.
Often such applicants have
the necessary income to purchase homes in the price range they
seek, but lack the money to meet traditional downpayment and
closing cost requirements.
In some special programs, such as
those sponsored by Fannie Mae and Freddie Mac, loan underwriting
guidelines have been made more flexible.
For example, these
agencies' Community Homebuyers Programs have reduced the amount
that must come from the applicant's own funds to cover the
downpayment and closing costs, and lenders may take into account
rent and utility payment records in lieu of other credit history
information.7
Other lender programs also target households with
low asset levels, and help keep monthly payments within the
borrower's reach by waiving the usual requirements for private
mortgage insurance on these very low downpayment loans.
It is difficult to gauge how much these targeted loan
programs have increased homebuying opportunities for low- and
moderate-income households.
Our analysis of the 1992 HMDA data
does, however, reveal a 27.1 percent increase in conventional
home purchase loans to applicants -from the two lowest income
7
0ther changes in the underwriting guidelines pertain to the
treatment of nontaxable income and income from seasonal part-time
or second jobs, income continuity and job stability, debt-toincome ratios, the appraiser's neighborhood and home improvement
analyses, and property condition.
16
groupings (borrowers whose incomes were below the median family
income for their MSA). The number of conventional loans to
borrowers from the two highest income groupings (borrowers whose
incomes were equal to or greater than the median family income
for their MSA) also increased, but by a more modest 12.3 percent
rate.
We have seen some change in the volume of conventional
home purchase loans to different racial groups from 1991 to 1992.
Blacks had the largest growth in the number of loans received,
increasing by 25.9 percent from 1991 to 1992.
The increase in
loans extended to white households was a substantial 2 0.5
percent; the increases for Hispanics and Asians were a more
modest 7.6 percent and 5.6 percent respectively.
The number of
loans made to minorities is not necessarily large, however.
For
example, out of a total of 1,896,000 conventional loans made in
1992 to the four largest racial or ethnic groups, whites received
1,582,030, Asians received 68,416, Hispanics received 66,995, and
blacks received 56,516.
For each group, the largest percentage gains in
conventional home purchase loans occurred among homebuyers with
incomes below the median family income for their MSA.
For
example, among blacks whose incomes were below the median, the
increase was 33.9 percent.
The percentage changes for whites,
Hispanics, and Asians in this income group were 28.2 percent,
25.4 percent, and 42.2 percent respectively.
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CONTINUING EFFORTS TO ELIMINATE LENDING DISCRIMINATION
The HMDA reports reveal that credit history problems
and excessive debt levels relative to income are the reasons most
frequently given for credit denials.
But specific information
for applicants--on their level of debt, debt repayment record,
employment experience, and other factors pertinent to an
assessment of credit risk--is not available from the HMDA data.
Nor do the HMDA data tell us about the specific underwriting
standards used to assess prospective borrowers' applications.
There is a popular tendency to assume that high denial rates are
the result of unfair bias.
In fact, the HMDA data by themselves
do not give us a sufficient basis for assessing the fairness of
the loan process, or whether fair lending laws have been
violated.
The HMDA data do, however, provide a valuable tool to
begin the inquiry into this question.
If you read the HMDA data on denial rates for minority
applicants as synonymous with lending discrimination, then the
similarities in each year's HMDA data would suggest that lending
discrimination may be intractable.
the case.
I do not believe that to be
But it will take new and increased measures to
prevent, root out, and eliminate the problem.
Such measures to
deal with the problem, both directly and indirectly, are under
way--among all the regulatory agencies--through enhancing
examiner capabilities for detecting fair lending violations by
financial institutions, increasing public information about
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discrimination in lending, and reforming the Community
Reinvestment Act regulation.
Fair Lending Enforcement
In our program for enforcing fair lending, the Federal
Reserve follows a coordinated approach.
It focuses on examining
for compliance with fair lending laws, and more broadly on
assuring that credit is made available to low- and moderateincome areas, including those with substantial minority
populations.
Our approach also encompasses an aggressive program
to investigate consumer complaints, provide consumer and creditor
education, and gain insight through research.
Let me describe each segment briefly.
In the research
area, the study by the Federal Reserve Bank of Boston is well
known.
In my view, that study, released in October 1992, has
done more than any other single effort to advance our
understanding about fair mortgage lending and to suggest ways for
us to attack the problem.
It served to shift the focus, I
believe, from an ongoing debate on whether unlawful
discrimination exists in the mortgage markets to a concerted
effort on the part of financial institutions, the regulatory
agencies, and members of the public to search for ways to
eliminate discriminatory practices.
Other research pieces--on HMDA data, household debt,
credit shopping practices, the secondary market, and other
related subjects--also have advanced our knowledge.
And last
- 19 week, the Federal Reserve released a comprehensive report to the
Congress that compares the risks and returns of lending in lowincome,, minority, and distressed neighborhoods with those in
other communities.
In regard to enforcement, the Federal Reserve System
has oversight responsibility for approximately 1,000 state member
banks.
W.e have a comprehensive program of consumer compliance
examinations, established in 1977, that are carried out by
specially trained examiners.
The scope of these examinations
includes the Equal Credit Opportunity and Fair Housing Acts, and
from the beginning our examiners have been trained to place
special emphasis on problems involving potential discrimination
of the kind prohibited by those statutes.
The Federal Reserve examines every state member bank at
periodic intervals and on a regular basis.
On average, about
two-thirds of state member banks are examined each year for
compliance with the fair lending and consumer protection laws.
In general, examinations are scheduled every eighteen months for
banks with a satisfactory record.
For a limited number of banks
with exceptional records, examinations take place every two
years.
Those banks with less than satisfactory records are
examined every six months or every year, depending on the
severity of their problems.
The examination procedures focus primarily on comparing
the treatment of members of a minority or protected class with
other loan applicants.
First, the examiner reviews the bank's
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loan policies and procedures by looking at bank documents and
interviewing lending personnel.
The examiner seeks to determine,
among other things, the bank's credit standards, and then--using
a sample of actual loan applicants--to determine whether bank
personnel have applied those standards uniformly.
Special note
is taken of applications received from minorities, women, and
others whom the fair lending laws were designed to protect.
The
examiner looks at the same information the bank used to make its
credit decision, including credit history, income, and total debt
burden.
If the bank's credit standards appear not to have been
followed, or not applied consistently, these findings are
discussed with lending personnel and a more intensive
investigation is undertaken.
Finally, an overall analysis of the
bank's treatment of applications from minorities, women, and
others within protected classes is conducted to identify any
patterns or individual instances that might indicate applicants
were treated less favorably than other loan applicants.
"When we
find violations through any of these techniques, we will require
correction by the institution, notification to the applicant, and
referral of the matter to the Department of Justice or HUD in
appropriate cases.
Another important part of the examination involves
talking with people in the community knowledgeable about local
credit needs.
Federal Reserve examiners routinely ask members of
the community, local government officials, and the like about
perceptions of credit availability for minorities and low- and
-
moderate-income persons.
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The answers may suggest that a
particular area of the bank needs additional scrutiny; and may
provide insights into how the bank is serving the credit needs of
its local community, particularly among those protected by the
antidiscrimination statutes.
But as you know, even with these procedures, it is
difficult for our examiners to find evidence that we can be sure
proves racial discrimination.
Consequently, we have been
searching for ways to provide them with better detection tools.
Recently, the Federal Reserve System developed a computerized
statistical model for using HMDA data in the fair lending portion
of the examination, and we have shared this tool with the other
financial regulators.
I believe the model we have developed has
the potential to be a substantial step forward, though we are
still making adjustments to make sure it works as we want it to.
Starting with the HMDA data, the model allows the
examiner to select more expeditiously a sample of loans for
review.
Ultimately, it enables us to match minority and
nonminority pairs of applicants with similar credit
characteristics, but different loan outcomes, for a more
intensive fair lending review than would otherwise be possible
for the examiner to make.
Once the pairs are selected, examiners
reexamine the credit files for the individual applicants to
determine if discrimination may have played a part in reaching
different outcomes.
Our field tests of this "regression
analysis" program have demonstrated its promise.
We are working
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to refine the model, reduce the level of examiner resources that
have been needed in some examinations, and implement the program
throughout the Federal Reserve examination system.
While such
comparisons of minority and majority applicants have always been
a part of the Federal Reserve's fair lending examination, we
believe that this computerized selection process will enable
examiners to better focus their efforts and spend their time more
effectively on the actual fair lending review of loan files.
In addition to this "micro" use of the HMDA data, the
Federal Reserve has developed, after discussions with the FFIEC
constituent agencies, a computerized system for analyzing the
expanded data collected under HMDA.
The system is versatile and
allows the data to be segmented by demographic characteristics
such as race, gender, and income levels, or geographic
boundaries.
Examiners can now sort through vast quantities of
data to focus attention on data for specific lending markets and
to compare an individual HMDA reporter's performance against that
of all lenders in the area.
They can more readily determine
whether a bank is effectively serving, through mortgage and home
improvement lending, all segments of its market, including lowand moderate- income and minority neighborhoods.
And examiners
can use this information to get a profile of the bank before they
begin their examination, which gives them a head start in their
investigation.
We have been holding HMDA training sessions on
how to use this system around the country for our examiners, as
well as those from other agencies.
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The Federal Reserve has also developed the capability
to map by computer the geographic location of a bank's lending
products, including mortgage loans.
The mapping integrates
demographic information for the bank's local community.
We
believe that this type of analysis and presentation will enhance
our ability to assess a bank's CRA performance in meeting the
credit needs of its local community, including minority areas.
The mapping should also be helpful in evaluating a bank's
geographic delineation of its local CRA service area to ensure
that it does not exclude low- and moderate-income neighborhoods.
As you know, at President Clinton's behest, the
financial regulatory agencies also are currently at work revising
the regulations that implement the Community Reinvestment Act.
Our of our main goals with CRA reform is to make the standards
used to judge lenders' performance more clear and objective.
We
are also trying to make sure that unwarranted paperwork and
unnecessary regulatory burden are eliminated and that the focus
of our efforts is clearly placed on the lending results achieved.
The CRA obligates financial institutions to ensure that they are
helping to meet the credit needs of their entire community,
including low- and moderate-income areas.
They cannot
effectively meet this standard under the CRA if they discriminate
against some segment of their community in making loans.
It is
our hope that reforming and strengthening the administration of
CRA will result in greater investment in communities which may
have suffered from disinvestment and discrimination.
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24 -
The Federal Reserve's consumer complaint program is
another element in our overall effort to enforce fair lending
laws.
Our procedures provide special guidance for investigating
complaints alleging loan discrimination.
Such complaints can
prompt an on-site investigation by Reserve Bank personnel at the
state member bank accused of discrimination.
We also have a
referral agreement with HUD for mortgage complaints, and have
sent a number of complaints to them for investigation.
As in our
examinations area, we are devoting considerable attention to
strengthening our complaint processing system by increasing
oversight, tightening deadlines for investigation, assuring more
personal contact with complainants, and making the public more
aware of our procedures.
Public education also plays a role in our fair lending
enforcement.
We have distributed a brochure entitled "Home
Mortgage Lending and Equal Treatment" to all the institutions we
supervise.
It identifies lending standards and practices that
may produce unintended discriminatory effects, and it cautions
lenders about their use.
The brochure focuses on race and
includes examples of subtle forms of discrimination, such as
unduly conservative appraisal practices in changing
neighborhoods; property standards such as size and age that may
exclude homes in older neighborhoods; and unrealistically high
minimum-loan amounts.
More recently, a comprehensive booklet was published
and widely circulated by the Federal Reserve Bank of Boston,
- 25 entitled "{Closing The Gap:} A Guide To Equal OpportunityLending."
This is a significant and informative pamphlet
designed to straightforwardly address lending discrimination and
what can be done to avoid it.
It challenges lenders to
reconsider every aspect of their lending operations, from the
hiring of loan officers to the treatment and evaluation of
applicants, to ensure that loan decisions are not made on the
basis of race or ethnicity.
The publication has been widely
distributed, with more than 50,000 copies in circulation.
In an
effort to reach even more people with the information in
"{Closing the Gap:}," the Reserve Banks of Boston, Chicago, and
San Francisco are developing a videotape patterned on the booklet
for use by banks in their in-house fair lending training.
We
hope that the training tape will be available for use in early
1994.
We have also published a brochure, entitled "Home
Mortgages: Understanding the Process and Your Right to Fair
Lending," to inform consumers about the mortgage application
process and about their rights under fair lending and consumer
protection laws.
Several public notices by the financial regulatory
agencies recently too have stressed the need for financial
institutions to provide credit on a nondiscriminatory basis.
example, the joint statements on credit availability discussed
equal credit lending obligations.
And, a recent letter from
Chairman Greenspan and the heads of the other supervisory
agencies to the chief executive officers of all financial
For
26
institutions stressed the importance of compliance with fair
lending laws, and it provided guidance on how each institution
could improve its performance.
One suggestion, which the letter recommended as a
useful way to minimize the opportunity for bias in the evaluation
of loan applications, is the so-called "second review" procedure.
This procedure was suggested to address a concern raised by the
Boston Reserve Bank study which indicated that, among marginally
qualified applicants, white applicants were more likely to
benefit from a lender's discretion in approving loans than black
or Hispanic applicants.
A second review would involve a
financial institution's simply taking a second look at all of the
applications it expects to deny, as well as some loan approvals,
to ensure that its existing credit standards were applied fully
and fairly.
We understand that the procedure provides lenders
with greater comfort that they have made credit decisions in an
unbiased manner.
It can serve as another useful tool for
lenders, suggesting adjustments in institutional behavior to
correct racially disparate loan practices that may be occurring
despite the institution's policies to the contrary.
It also
should assure borrowers who are aware of the procedure that an
institution seeks to treat all applicants fairly.
The Board believes the goal of ensuring fair access to
credit also can be advanced by focusing on positive actions that
a lender may take.
Through our Community Affairs program, the
Federal Reserve conducts outreach and provides educational and
- 27
technical assistance to help financial institutions-and the
;
public understand and address community development and
reinvestment issues.
We have increased resources to Community
Affairs activities at the Reserve Banks--now staffed with more
than 50 people--to enable the Federal Reserve System to respond
to the growing number of requests for information:and assistance
from banks and others on the Community Reinvestment Act, fair">:'
lending, and community development topics.
.Efforts have been
expanded to work with financial institutions, banking
associations, governmental entities, businesses, and community
groups to develop community lending programs that help finance
affordable housing, small and minority business, and other
revitalization projects.
Overall the Reserve Bank's Community
Affairs programs sponsor or cosponsor about a hundred programs a
year, involving thousands of participants, as a way to encourage
economic development and assure fair lending.
CONCLUSION
The 1992 national HMDA data continue to show, like the
data in preceding years, relatively high rates of denial of home
mortgage applications for minorities.
They remain a troubling
cause for concern about racial discrimination in mortgage
lending.
For us and for the other regulatory agencies, the data
provide a starting point for in-depth analyses of the mortgage
lending practices of individual institutions.
We are engaged in
an aggressive effort in our fair lending examinations to identify
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28
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any violations of the fair lending laws for corrective action,
referral to the Department of Justice, or both.
Fairness in assessing credit applications, without
regard to race, sex, or other prohibited bases, is absolutely
critical to our nation's well being.
misunderstanding on that point.
it will not be tolerated.
the best of our ability.
Let there be no
Racial discrimination cannot and
We are committed to its elimination to
@FedFRASER