The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
THE HMDA DEBATE:
CAN WE ACHIEVE EQUITY IN MORTGAGE LENDING?
N
00-
0
z
0
>
z
~
0
c:::Cl
u..
0
~
z<{
c:::Cl
LU
>
Ct::
LU
V)
LU
0.::::
<
Ct::
LU
Cl
LU
u..
LU
:r:
fu..
0
f-
z
LU
~
~
LU
0
V)
Ct::
;1
u..
<{
j'.'.:
z
::::,
~
~
0
u
LU
:r:
f>co
Cl
LU
:r:
V)
:::::;
c:o
::::,
0..
ccording to federal reports
released last year, in 1990 lenders
denied home mortgage loans to
blacks and Hispanics nearly three times
as frequently as they did to whites. In
the ensuing debate over the cause of
this disparity, lenders have argued
that their loan policies are based strictly
on safety and soundness considerations that have nothing to do with
race, while community organizations
have insisted that the lenders' own
data prove the fallacy of their argument.
needs of their entire communities.
As stated explicitly by Congress in
the Community Reinvestment Act, in
return for special privileges, banks
are expected to effectively serve the
communities in which they are chartered. This means understanding the
demographics of their neighborhoods
and the credit needs of the people
who live there; developing products
for their lower-income customers;
ensuring that their marketing programs
reach all parts of their communities,
including poor, minority, and nonEnglish speaking neighborhoods; and,
most importantly, having a plan which
maps out their strategies and goals.
The data in question were compiled
under the Home Mortgage Disclosure
Act (HMDA), a federal law that requires
mortgage lenders to submit
information on the applicaIn her article, Bonnie Heudorfer
tions they receive for home
describes how Bank of Boston
loans to their federal regulahas been able to capture a
tors.
PRESENCE
Changes to HMDA
larger share of the market in
effected in 199::) have enabled
minority communities through
regulators to compare the
an active outreach effort. As
disposition of applications by
PRODUCTS she notes, the primary
race, among otherfactors, and
element of such outreach is a
pick up on such disparities.
visible presence in minority
Initially, it appears that the
neighborhoods. Lenders may
PROMOTION also
central issue in the debate is
find that by modifying
discrimination. Do banks treat
some of their existing loan
all applicants similarly, regardproducts, offering financial
less of race? As the following articles
counseling for prospective homeownsuggest, however, larger and more
ers, or working with public financing
complex issues lie beneath the surface.
programs, applicants previously
assumed to be uncreditworthy become
High denial rates for blacks and
profitable customers.
Hispanics are explained away by some
lenders through the criteria employed
Many, of course, believe that minority
in the application review process.
and white applicants who are equally
Wealth, income, and debt, for
creditworthy are being treated differexample, are commonly cited by
ently because lenders somehow
banks as determinants of the creditperceive minorities as riskier borrowers.
worthiness of a borrower. If minority
HMDA data alone cannot prove or
applicants fare worse than whites in
disprove this argument. Of the three
these categories, as studies indicate,
criteria mentioned above-wealth,
bank lending policies would have a
income, and debt-only income is listed
disparate impact even when appliin the HMDA reports.
Detecting
cants are treated equitably.
discrimination requires a thorough
review of individual bank lending poliAs Harvey Koizim points out in his
cies and practices. Jim McGovern, of
article, however, banks have a
the Federal Reserve Bank of Boston's
responsibility to help meet the credit
Bank Examination Department, describes
CoNnNuEo or✓ PAGE 2
in his article how the Federal Reserve' s
examination process detects inconsistencies in the treatment of applicants
and other discriminatory lending
practices.
COMMUNITY REINVESTMENT:
Do1NG Gooo WHILE Do1NG WELL
HARVEY
The HMDA debate is not just about
what the data do or do not say.
Rather, it concerns the role of
mortgage lenders in providing credit
to all segments of their communities,
including the poor and minorities.
Improvements in the ability to monitor
bank lending practices and increased
public awareness of the issue will help
reduce the likelihood of overt discrimination. The real challenge for banks
lies in developing active and effective
programs that reach the people who
need their services the most.CB
L.
KotZIM, CONNECTICUT URBAN REINVESTMENT ENDOWMENT, INC.
or years, banks and thrifts
have taught people how to save
for definable goals. In the last
ree decades, however, this
potentially powerful message has
not been effectively delivered to
minority communities. As indicated
by recent Home Mortgage
Disclosure Act (HMDA) filings,
African-American and Hispanic
applicants are three or more times
more likely than whites to be
denied home mortgages. In their
defense, bankers argue that many
African-Americans and Hispanics
are ineligible as borrowers for
purely economic reasons.
A
recent Census Bureau study 1 seems
to support their position.
F
ree subscriptions and additional
copies are available upon request
to the Community Affairs Deportment, Federal Reserve Bank of Boston, P.O. Box 2076,Boston, MA
02106-2076, or call Sheryl Snowden
at (617) 973-3097.
The study utilizes information on
income, assets, and debt to
determine whether families and
individuals are capable of
obtaining a home mortgage and
maintaining its payments. It establishes that, on average, minority
families have lower incomes, fewer
assets, and more debt than white
families. As a result, they are less
likely to qualify for a standard
home mortgage loan. Lenders point
to these economic circumstances
and maintain that banks and
thrifts are not social agencies and
cannot be expected to cure the ills
of society.
The views expressed in Communities &
Banking are not necessarily those of
the Federal Reserve Bank of Boston
or the Federal Reserve System.
Information provided on upcoming
events and other organizations should
be viewed as strictly informational and
not as an endorsement of their activities.
Financial institutions, communitybased organizations and other
organizations involved in community
development that have interesting
pro;ects, programs or ideas that they
would like to have mentioned in the
next issue of Communities & Banking
should contact:
Banks and thrifts do, however, have
an affirmative obligation to help
meet the credit needs of all
members of their communities. They
are chartered by state and federal
governments because they serve a
public need.
In return, special
privileges are granted to them by
the government: their deposits are
guaranteed by the U.S. government, they are allowed franchises
offering them protection from
Elizabeth McMurtrie, Editor
Communities & Banking
Community Affairs Department
Federal Reserve Bonk of Boston
P.O. Box 2076
Boston, MA 02106-2076
2
competition, they are entitled to
borrow from government entities
at low rates, and they can sell their
home mortgages to federally
sponsored secondary markets while
retaining profitable servicing.
Congress enacted the Home
Mortgage Disclosure Act and the
Community Reinvestment Act in the
1970s because they concluded
that banks and thrifts were not
meeting the mandates of their
charters fairly and fully to serve
the credit needs of their delineated
communities. CRA directs banks
and thrifts to help meet the
credit requirements of all segments
of the communities they are
chartered to serve. In interpreting
CRA, regulators instruct bankers to
market their products affirmatively
and to actively solicit business
from low- income groups. In their
"Statement of the Federal Financial
Supervisory Agencies Regarding
the Community Reinvestment Act," 2
all the bank regulatory agencies
jointly direct that:
"The CRA plan should include
marketing and advertising
programs for lending products and
services that are responsive to the
needs of the community and that will
inform and stimulate awareness of
those products and services throughout the community, including
low-and moderate-income areas ....
"The Agencies consider it important that financial institutions act
effectively to meet the requirements
of the CRA in a positive and
ongoing manner. The Agencies
believe that this can be done in
a way that will not only benefit
local communities, but also will
be consistent with the safe and
sound operation of financial
BOSTON FIRST BANKING
FANNIEMAPS
BONNIE HEUDORFER, BANK OF BOSTON
W
hen the first of the revised and
expanded HMDA data were
released last October, they
represented the most extensive examination yet of who gets mortgage credit.
Covering nearly 6.5 million 1990 loan
applications taken by 9,500 lenders in
more than 350 metropolitan areas across
the country, the data show that blacks
and Hispanics consistently are turned
down for mortgages more often than
whites, in virtually every part of the
country and at all income levels.
The Federal National Mortgage
Association (Fannie Mae) has developed a new computer software
service, FannieMaps, for lenders
who subscribe to its MORNET service.
Computer-generated maps provide
lenders with the minority and income
compositions of a targeted communityfrom a census tract to a Metropolitan
Statistical Area. All data is based on
the 1990 census. For more information
about FannieMaps, call the:
on the right track. We attribute this
progress to specific measures we have
taken over the past two and one-half
years to serve more effectively the
banking needs of Boston's lowerincome, minority communities.
A number of studies, including those
commissioned by the Federal Reserve
Bank of Boston and the Boston
Redevelopment Authority, had
identified a number of deficiencies in
the banking industry's relationship
with Boston's
Too much of
communities
the
debate
of c o I o r .
since then has
Specifically
centered on
cited were a
whether the
lack of physiHMDA data
cal presence
prove illegal
in these neighdiscrimination.
borhoods,
If nothing else,
insufficient
they document
minority hiring,
that the process
failure to call
of obtaining a
on l o c a l
BANK OF BosiON RELOCATED ITS CODMAN SouARE BRANCH IN
DORCHESTER TO THE RENOVATED LITHGOW BUILDING. THE BANK HELPED
home mortgage
brokers
and
FINANCE THE PROJECT AND (ODMAN 50UARE HOUSING DEVELOPMENT
operates in a
otherwise
(ORPORATION WAS THE DEVELOPER.
way that disadinadequate
vantages minorities. The data indimarketing of products and services,
cate that current lending practices failure to use local appraisers, use
even when applied equally to
of inappropriate loan products
applicants regardless of race - are
and criteria, and the failure to help
having a disparate impact on blacks
mortgage applicants - many of them
and Hispanics. Certainly differential
first-generation homebuyers - undertreatment cannot be tolerated and
stand the ins and outs of the credit
antidiscrimination statutes ought to be
process. These issues concerned us.
rigorously enforced.
Eliminating
Even though Bank of Boston had seven
disparities in denial rates, however,
branches serving the Roxbury,
will require a sustained commitment
Dorchester, Mattapan, and Jamaica
to removing the underlying impediPlain neighborhoods at that time, we
ments, not only to minority
had a low - and declining - share
homeownership but to full economic
of the mortgage market. We were
participation by minorities.
challenged to do better.
Bank of Boston's 1990 HMDA data
suggest that we have made progress
toward addressing some of the historical inequities in the mortgage process.
By no means are we satisfied that
these efforts alone have been
adequate, but they suggest that we are
Public Relations Department
Fannie Mae
Washington, D.C.
(202) 752·3421
HOMEOWNERSHIP
COUNSELING
,!)1'
Homeownership counseling is increasingly viewed as an integral part of a
succesful bank program to target
lower-income homebuyers. A new
publication by the Federal Home Loan
Mortgage Corporation (Freddie Mac),
Working Together to Expand
Homeownership Opportunities, offers
some valuable suggestions for lenders
interested in working with nonprofit
organizations to develop counseling
programs. The publication is the result
of a series of seminars conducted by
Freddie Mac, the Mortgage Bankers
Association of America, and the
National Low Income Housing Coalition. Together, lenders and housing
experts came up with a number of
recommendations in designing such
programs. To order this free publication, write to:
Freddie Mac
Affordable Housing Initiatives Department
Mailstop 240
8200 Jones Branch Drive
Mclean, VA 22102
Or call Cheryl Regan at
(703) 903·2445 or
Katherine Billings at
(215) 748-1220
With considerable community input,
we developed a comprehensive
program called Boston First Banking
that built on some of the bank's key
strengths: an extensive existing branch
network, a commercial as well as
retail banking focus, and a growing
CONTiNUED ON PAGE
4
o"l
l735~(\
3
FED TO SURVEY
BOSTON
MORTGAGE LENDERS
mortgage banking business. MdnThe BO-person staff reflects the ethnic
agement and lending resources for
diversity of the communities served.
the new organizational structure were
Forty percent of the employees live in
centralized under the leadership
the targeted area. Over 25 percent
immigrated here from other countries,
of a 20-year bank veteran and
Roxbury native, Gail Snowden. Other
mostly Caribbean and Asian. Onehalf are minority and two-thirds are
elements of the strategy included:
women - ratios that, significantly, hold
• expansion and upgrading of
true even at the professional and
banking hours and facilities;
• introducmanagerial
levels.
tion of First
Step BankWe believe
ing,a product line of
these efforts
low-cost
are making a
difference.
banking
......... ___ ... ,.,...,.,,-- ...........,
services
Particularly
primarily
encouraging
targeted to
has been our
increased
community
residents
penetration
who were
of minority
not curand lowerBOSTON FIRST BANKING DIRECTOR GAil SNOWD:N, MAYOR RAYMOND
FLYNN, AND ATTORNEY GENERA[ Scorr HARSHBARGER AT THE RIBBON
rently bank
income marCUTT!NG FOR BANK OF BosTON S NEV/ BRANCH IN RoxeuRy1s GROVE HALL.
users;
kets. Between
THE COM.!v'IUi"'ilTY HAD BEEN WITHOUT A BANK FOR TV✓ENTY~iHREE YEARS.
• local job
1987 and
fairs and commitment to a work
1990, the percentage of our total
force reflective of the race and
mortgage lending in Boston metropoliethnicity of the community;
tan area neighborhoods with a greater
• expansion of the First Step Mortthan 80 percent minority population
gage, introduced in the spring of
nearly tripled, from just over 2 percent
1989, and featuring reduced rates,
to just over 6 percent. The resulting
1990 distribution accurately reflects
points and closing costs, more flexthe demographics of this market, in
ible underwriting criteria, and an
which 6 percent of the area's census
automatic second look at marginal
tracts are more than 80 percent minorapplications;
• extension of commercial lending
ity. By comparison, less than 2 percent
of the industry's total Boston area lendactivities;
• creation of a community advisory
ing was in such tracts. Further, blacks
board; and,
represented nearly 13 percent of our
• consumer education and outreach
metropolitan area applicants for home
programs.
purchase mortgages and nearly 36
percent of our City of Boston total,
These efforts were augmented by the
exceeding in both cases their share of
major commitment the bank made to
the population.
the Community Investment Program
negotiated between the Massachusetts
Looking at Bank of Boston's overall
Bankers Association and the Commushare of the mortgage market, we
nity Investment Coalition.
received about 3 percent of the Boston
metropolitan area's total applications
In addition to the normal complement
for mortgage credit, but more than 9
of retail banking personnel serving
percent of the applications submitted by
what is now a 10-branch region with
blacks. Our share of mortgage applicaa deposit base of $280 million, the
tions from homebuyers seeking to
Boston First Banking unit is staffed by
purchase in census tracts with greater
two commercial lenders, two business
than 80 percent minority populations development officers, a consumer
all located in the Roxbury, Dorchester,
finance underwriter, a real estate
and Mattapan neighborhoodslender, and a mortgage originator.
exceeded 16 percent of the market.
------~~ Our Map!
In order to better interpret the results of
the 1990 HMDA reports, the Federal
Reserve System, with support from the
other federal regulatory agencies, is
conducting a survey of the Boston metropolitan area mortgage lending market.
The Boston Fed will be collecting and
analyzing information from a sample of
loan applications from blacks, Hispanics, and whites to evaluate claims that
debt-to-income and other commonly cited
loan criteria account for much of the
disparities in denial rates. The results of
the study will be released to the public
when completed.
.
•
·
:
.
·
:
HOW TO GET
HMDA DISCLOSURE
STATEMENTS
The Federal Financial Institutions
Examination Council has created
disclosure statements for every mortgage
lender required to comply with the Home
Mortgage Disclosure Act (HMDA). These
statements are available to the public at
each institution's main office and in at
least one office in every Metropolitan
Statistical Area (MSA) in which it operates. Disclosure Statements for all lenders that operate in a particular MSA can
be found in the local HMDA depository.
For the name and address of the nearest
HMDA depository, or to get more information on additional HMDA data
sources, call the Community Affairs
Department at (617) 973-3097.
4
~~~.. . .
1
Co,'\J11t,.•u:o o,.._,, PJ..GE
8
PUBLICATIONS
Directories
u,
l&I
ti-
u
* Directory of Community
Development Organizations in Connecticut, The
Banks' Association of Connecticut, Bank Compliance
Association of Connecticut,
and Federal Reserve Bank
of Bosto~ ( 1991 ). A directory of community-based and
government agencies in
Connecticut. Each description includes a mission statement, key accomplishments,
and relationships to local
financial institutions. Write
to Randall Miller, Vice President, New Haven Savings
Bank, 195 Church Street,
New Haven, CT06510. Or
call (203) 787-1111.
$4.00.
* Directory of Community Development Organizations in New
Hampshire, New Hampshire
Bankers Association, Institute of Cooperative Community Development,
and Federal Reserve Bank of Boston
(1991 ). A directory of communitybased and government agencies in
New Hampshire. Each description
includes a mission statement, key
accomplishments, and relationships
to local financial institutions. Write
to Sheryl Snowden, Community Affairs Department, Federal Reserve
Bank of Boston, Boston, MA 021 062076. Or call (617) 973-3097.
Free.
Government Printing Office, Washington, D.C. 20402. Or call (202)
783-3238. $15.00.
Housing
* Affordable Housing Loan Consortia: Financial Institutions Responding to Community Needs,
National Association of Affordable
Housing Lenders ( 1991). A review
of 20 consortia, describing their programs and organizational and financial structure. Write to NAAHL,
43 Commercial Wharf, Suite Nine,
Boston, MA 02110. Or call (617)
7 42-0532. $20.00 for members,
$40.00 for nonmembers.
* Housing Discrimination Study:
Synthesis, U.S. Department of
Housing and Urban Development
(1991). Examines the level and
types of discrimination faced by
blacks and Hispanics in the housing
market - both rental and ownership.
Write to HUD USER, P.O. Box 6091,
Rockville, MD 20850. Or call (301)
251-5154. $4.00.
* AFL-CIO Survey of UnionSponsored Housing, AFL-CIO
(1991). Profiles union-affiliated affordable housing projects, including
cooperatives, special needs housing,
and urban homesteading. Write to
AFL-CIO, Department of Economic
Research, 815 16th Street N.W.,
Washington, D.C. 20006. Or call
the Economic Research Department
at (202) 637-5000. Free.
* Building on Success: A Report
* Census Catalog and Guide:
1991, U.S. Bureau of the Census
( 1991). A guide to census products,
including reports, microfiche, maps,
tapes, and on-line services. The
catalog provides prices, descriptions,
and data sources. The phone numbers and addresses of bureau specialists, local affiliates, and other
data providers are also listed. (GPO
Stock No. 003-024-07271-8). Write
to Superintendent of Documents, U.S.
on State Capacity-Building Programs Targeted to Nonprofit
Housing Developers, Low-Income
Housing Information Service and
National Housing Law Project
(1991 ) . Thirty-seven states were
surveyed to assess their efforts to
provide technical assistance, administrative grants, and predevelopment
loans to nonprofit housing developers. Call LIHIS at (202) 662-1530.
$20.00.
* A Compendium of Affordable
Housing Finance Programs, Massachusetts Housing Partnership
( 1990). Describes innovative private
financing strategies and tools for
affordable housing development that
have been successful in Massachusetts and across the nation. Write to
MHP, 88 Broad Street, Boston, MA
02110. Or call (617) 338-7868.
$5.00.
* Unraveling the Mortgage Loan
Mystery, Fannie Mae (1991). A
brochure designed to help
homebuyers understand the steps
involved in the mortgage loan process. Write to Fannie Mae, Public
Affairs, 3900 Wisconsin Avenue,
NW, Washington, DC 200162899. Or call (202) 752-7124. Free.
Community Development
* Exchanging Ideas Across the
Globe: Successful Economic Development in the U.S. and Abroad,
National Council for Urban Economic
Development ( 1991 ) . Covers econom ic development programs in Japan, Germany, the United Kingdom,
Canada, several Third World nations, the United States, and other
countries. Write to CUED, 1730 K
Street N.W., Suite 915, Washington, D.C. 20006. Or call (202)
223-4735. $22.50.
* A Salute to Imaginative Economic Development Programs,
National Council for Urban Economic
Development ( 1989). Highlights 45
economic development programs
recognized by a panel of Economic
Development Administration and
CUED experts for their outstanding
creativity. Programs were evaluated
on their ability to create jobs, diversify the local economy, and improve
incomes, among other criteria. Write
to CUED, 1730 K Street, N.W.,
Suite 915, Washington, D.C.
20006. Or call (202) 223-4735.
$25.00 for members, $27.50 for
nonmembers, plus $3.00 postage.
* The Silent Partner: The Insurance Industry's Potential for
Community
Reinvestment,
Woodstock Institute (1989). Makes
the case for increased community
reinvestment by the insurance industry, and traces the industry's reinvestment history. Write to Woodstock
Institute, 53 W. Jackson Blvd., Chicago, IL 60604. Or call (312) 4278070. $10.00 for government
agencies, univer;ities and nonprofits,
or $20.00 for individuals and forprofits
Contested Ground: Collective Action and the Urban Neighborhood, John Emmeus Davis (1991 ).
Explores the reasons why community-based action in western nations
over the last three decades has tended
to be organized where people live,
rather than where they work. Highlights the arguments with a case
study from Cincinnati, and assesses
the implications for those involved in
neighborhood politics and planning.
Write to Cornell University Press,
124 Roberts Place, P.O. Box 250,
Ithaca, N.Y. 14851-0250.
efforts by metro area and by organization. Write to CUED, 1730 K
Street, N.W., Suite 915, Washington, D.C. 20006. Or call (202) 2234735.
$145.00 for members,
$225.00 for nonmembers, plus
$3 .00 postage.
CRA
* Considering Supportive Services
in a CRA Examination, Federal
Reserve Bank of New York (1991 ).
Discusses ways in which lenders and
examiners should assess the community economic development value of
specific projects, the role that supportive services play, and how a
lender's financial support of these
services should be assessed. Write
to the Federal Reserve Bank of New
York, Community Affairs Unit, 33
Liberty Street, New York, N.Y.
10045. Free.
* Denotes publicotions available for review in the
Community Affairs Deportment Resource Library.
CONFERENCES
* Expanding Horizons II, Council
March 14-16
for Community-Based Development
(1991 ). A follow-up to the 1989
study that examines foundation support of community-based development. The report ranks 307 foundations according to the number and
amount of grants made in the area of
community development. Write to
Council for Community-Based Development, 1070 Thomas Jefferson St.
N.W., Washington, D.C. 20007.
Or call (202) 342-9262. $18.00.
"Building Housing Resources: From
Your Community to Capitol Hill,"
National Low Income Housing Coalition and National Low Income
Housing Information Service.
Washington, D.C. Topics to be
covered include current national
housing policies, developing effective organizations, and accessing
available resources. Participants will
also have the opportunity to meet
with their Senators and Representatives. For more information, call the
National Low Income Housing Coalition at (202) 662-1530.
Trends in Economic Development
Organizations: A Survey of Selected Metropolitan Areas, National Council for Urban Economic
Development(l 991 ). This580-page
report details and analyzes the findings of a comprehensive national
survey of 1 14 economic development organizations in 35 metropolitan areas. Describes key initiatives
and successes. Examines marketing
April 4-6
"National People's Action Annual
Conference," Washington, D.C. lssues to be addressed include affordable housing, community reinvestment, health care, and crime. For
more information, call National
People's Action at (312) 243-3038.
April 5-8
"Transitions to the Future American
Economy," National Council for Urban Economic Development.
Washington, D.C. Focus will be on
keeping America competitive through
local economic development strategies. Policy discussions and case
studies will be utilized. For more
information, call Jenny Murphy of
CUED at (202) 223-4735.
June 18-19
"Real Estate Public/Private Partnerships," National Council for Urban
EconomicDevelopmentand National
Association of Industrial and Office
Parks. Newark, N.J. Exact date to
be announced. Will focus on issues
surrounding public/private partnerships, including financing and negotiation. For more information, call
CUED at (202) 223-4735.
THE COMMUNITY REINVESTMENT AcT
AND FAIR LENDING LAWS:
THE ROLE OF THE BANK EXAMINER
)!M McGOVERN, FEDERAL RESERVE BANK OF BOSTON
he 1 990 Home Mortgage
however, is found in the Loan ApplicaDisclosure Act (HMDA) data
tion Register (LAR). Revisions to HMDA
indicate a severe disparity in the
effected in 1990 require virtually all
denial rates of white and minority
mortgage lenders to record every
applicants for home mortgage loans.
application they receive for a home
Since the data were released, various
loan, whether or not it is actually
groups have been trying to determine
approved.
The race, gender, and
their significance. Community advoincome of the applicant are recorded,
cates posit that the HMDA findings
as are the amount and type of the loan
clearly indicate discrimination, and
requested. The new LAR data can be
have called on federal regulatory
used to create tables that allow examagencies to get tough with banks
iners to detect disparities in lending
and enforce community reinvestment
patterns suggestive of violations of fair
and fair lending laws. Financial
lending laws. In the adjacent example,
institutions, on the other hand, argue
the examiner has created a table that
that the HMDA data are flawed,
aggregates LAR data by race to deterin that they do not
mine if black applicapture key factors
cants
are being
on which credit decitreated differently
sions are based, such
For CRA purposes, a bank's community
than white applias the applicant's debtdelineation is o geographic area in which
cants.
As Table 1
to-i ncome ratio and
it is physically located. A very large bank
shows, denial rates
credit history. Into this
may have a whole state as its delineated
were significantly
community, while a small, single office
fray steps the bank
higher at "Big City
bank may have no more than a few
examiner.
Bank" for black applitowns. Medium sized banks with several
cants than for white.
branches may have a delineated com muThe Exam Process*
When the on-site
nity
around each branch. In each case,
Before an examiner
examination is conan examiner will look at the reasonableeven sets foot inside a
ducted, the examiner
ness of the delineation, and will _espebank, he or she will
will ask the bank to
cially nate any attempts to exlude lowerreview myriad pieces
explain this disparity.
income neighborhoods or towns.
of information to get a
sense of the size and
Computer-based
scope of the bank's activities and the
analysis is also used to assess a bank's
type of community in which it does
compliance with the Community
business. Among other things, the
Reinvestment Act. The examiner is
examiner will review the bank's most
primarily concerned with the georecent balance sheet and income stategraphic distribution of the bank's
ment, its Community Reinvestment Act
credit applications, extensions, and
(CRA) statement, and recent census
denials (although compliance with
data. This information enables the
antidiscrimination and other related
examiner to determine the bank's
credit laws are an integral part of the
financial condition, its delineated comexamination). A majority of credit
munity (see box), the products it
applications and extensions should
offers, the location of its branches,
come from within the bank's delinand the size and location of lowereated community. In addition, an adincome and minority neighborhoods.
equate number of applications received
and loans originated should come
Perhaps the most important informafrom low- and middle-income census
tion on bank lending activities,
tracts. Table 2 combines LAR and
T
CONTINUED ON PAGE
6
BIG CITY BANK
Disposition of Home Mortgage
Applications by R~pplicant
Applicant
Race
Total
Applications
Originated
Approved
Not Accepted
Denied
5
White
Black
65
52
{80%)
23
(62%)
2
9
{14%)
11
{30%)
Withdrawn
0
Incomplete
2
C::"r,,•:.,,' c,::•., ,,c, 5 T~, Cc•.1·.u•:1,r
R,,,,..,,s,,.,,,,,- Ac,
census data to compare the distribution of Big City Bank's loans in low-,
moderate-, and high-income census
tracts to all other HMDA reporters in
the same market. Big City Bank made
a disproportionately small percentage
of loans in low- and moderate-income
census tracts. Again, the examiner
will request an explanation from the
bank for this disparity.
The second step in the on-site examinaThe examiner will also review the
tion involves a review of the bank's
bank's marketing and advertising
records and lending documentation.
programs during the on-site examinaAt this point, any issues raised in the
tion.
Is the bank's advertising
initial phase of the examination will be
program directed at all segments of
addressed. For example, if prelimithe community, including low- and
moderate-income neighborhoods?
nary analysis indicated that the denial
rate for middle-income black
Does the bank review its advertising
applicants was two times higher than
program for compliance with applithat for middle-income white applicable fair lending laws and
cants, theexaminermighthypothesize
regulations?
Does the bank
The On-Site E"amination
that the bank discriminates against
provide staff assistance to individuals
The initial phase of the examination
blacks. The examiner will then review
and groups in understanding and opplying for credit? Is the bank's senior
typically elicits questions that can only
the files of a sample of denied black
be answered by conducting - - - - - - - - - - - - - - - - - - - - - - - ~ management and board of direca thorough internal review of
tors involved in all aspects of its
the institution's lending records,
CRA program, from planning to
marketing plans and strategy,
monitoring? The examiner will
Mortgage Loans Originated by income
evaluate the bank's effectiveness
advertising material,lettersreceived
of Census Tracts
in all of these areas.
from the public, and other related
materials. Before discussing the
on-site phase of the examination,
Public Participation:
two precautionary statements are
An Integral Part
in order. First, examiners cannot
of the Process
and do not conclude that disparate
Once the on-site phase of the
impact (for example, higher denial
examination is completed, the
Institution Report for Big City Bank
rates for blacks than for whites)
examiner prepares a CRA Perforautomatically means illegal
mance Evaluation and sends a
Low-Income
20
27
discrimination. If the examiner
copy
to the examined institution
Middle-Income
32
42
determines that the disparate
to place in the public comment
High-Income
23
31
impact results from purely ecofile. Community residents, whether
75
100
nomic factors, then the impactwhile
Market Total
or not they are customers of the
unfortunate, is not illegal. Second,
bank, are encouraged to read
examiners can only evaluate appliboth the CRA Performance Evalucations for loans that are actually
ation
and the bank's CRA StateAggregate Report for All HMDA Reporters
submitted and maintained in the
ment. They are also strongly enLow-Income
761
36
bank's records. If a potential
couraged to comment in writing
Middle-Income
1120
53
candidate did not submit an
about their perception of the
High-Income
231
11
application because of actual or
bank's performance in meeting
perceived discouragement, the
the
credit needs of the commu2112
100
Market Total
examiner cannot review the situanity. Comments on a bank's
tion since no record exists.
record provide the bank with a
community-based view of how it
During the on-site examination, the exapplicants and approved white
is doing its job, and assist it in develaminer first reviews the bank's written
applicants to determine if the bank's
oping credit services that are responlending policy to determine whether it,
lending policy is consistently applied.
sive to community needs. Comments
in and of itself, discriminates against an
Because the applicant's entire file is
also provide examiners with valuable
applicant on the basis of race, gender,
available for review, the examiner,
input about a bank's CRA performance
national origin, or the like. The lending
unlike the public-at-large, is in a unique
and play a significant role in the expolicy should be based strictly on ecoposition. The file includes the comamination process. Developing strong
nomic or other relevant factors, such as
pleted application form; income,
community-oriented banking programs
length of employment, stability of inemployment and resident verification
is a three-way effort among examincome, and length of residency. If the
data; credit bureau report(s); and
ers, bankers, and the communities
bank cannot substantiate the reasonproperty appraisals. If the examiner
they serve.CB
ableness of its policy, the examiner will
notes inconsistencies in the applicarecommend a change in policy. Any
*The examination process refers here specifically
tion of the bank's lending standards,
to that of the Federal Reserve System. Other
direct and continued violation of fair
corrective action by the bank will be
federal regulatory agencies may use different
lending laws may result in substantial penrequired.
methods when examining for compliance with
CRA and fair lending laws.
alties and regulatory enforcement action.
6
C ~--. · ." ,: ": ... ,,:;, 2 C:0•.•,•.•,
" " RE ,ViES:,•.:E•:T
institutions .... An institution's
processes for meeting the credit
needs of its community must reflect
an understanding of those needs
and take into account changes
that may occur in the community's
credit needs. By applying sound
management techniques to the challenges presented by the CRA,
financial institutions can be agents
of positive change for the cities,
towns and rural areas of this coun•
try-thereby benefiting themselves
as well as the communities that
they serve. (italics added)
11
As the agencies note, banks and
minority group consumers have
common interests. Yet, notonlydo
banks rarely market their products
in minority neighborhoods, they
place barriers in the path of urban
minority customers who could do
business with them. For example,
banks make it difficult for members
of minority groups to open and
maintain checking and savings
accounts by frequent restrictions
imposed as normal bank requirements, such as balance maintenance standards, inconvenient
banking hours, and few branch
locations in minority neighborhoods. As a result, many members
of minority groups, for want of
banking services and through lack
of sophistication, deal exclusively
in a cash economy.
has new programs to benefit urban
areas and low-income consumers.
Bankers can also develop cooperative programs with community
loan funds, and with community
development corporations, foundations, and government entities.
They can do equity participations
earning more than 1 8 percent at
little or no risk by taking advantage
of federal low income housing tax
credits, and they can utilize the tax
credit programs offered by various
states. Federal Home Loan Bank
members can profitably partake in
the Affordable Housing Program
and Community Investment Program for relending at under-market rates. Banks can "be tough
minded about loans, qualify borrowers according to strict standards, satisfy the most demanding
federal bank examiners, make a
profit, and still transform an innercity neighborhood without driving
out those who lived there. " 3
NEW
FED
PUBLICATIONS
As part of a
training
course for
bank loan officers on community development finance, the
Federal Reserve
Bank of Boston has
developed a Glossary
of Community Develop·
ment Terms and a Com·
pendium of State Financing Programs
for Housing and Community Develop·
ment in New England, which should
prove useful for lenders, nonprofits,
and other organizations involved in
community development.
For their mutual benefit, banks and
thrifts must make common cause with
urban communities. Servicing communities by offering substantial, useful, much needed banking services to
targeted markets in minority neighborhoods is not only profitable but also
fair and just. In the words of Martin
Luther King: "We must learn to live
together as brothers or perish together
as fools."CB
A further impediment to the development of programs that effectively
target communities of color is the
fact that few members of minority
groups become senior officers or
sit on boards of banks. Therefore,
at the level where policy is made,
minorities have no effective representation.
Mr. Koizim is President of CURE, a nonprofit
organization that works to ensure and promote equality in lending, and of Housing
Operations Management Enterprises, Inc., a
low-income housing development and management organization.
fn addition, he
teaches a course on housing and community
development at Yale Law School. Mr. Koizim
formerly worked in the banking industry.
It may very well be that some,
maybe quite a few, members of
minority groups lack the assets or
credit history to qualify for home
mortgage loans sold into secondary markets. Some is not all! And
alternatives exist for those who
may not qualify under traditional
mortgage programs. Fannie Mae
Afford to Buy a House? Government Printing
Office, Washington, D.C., 1991.
2. "Statement of the Federal Financial Supervisory Agencies Regarding the Community Reinvestment Act," (a comprehensive
road map to CRA compliance, sometimes
referred to as the "Joint Statement."). March
21 , 1989 (Xerox).
3. Ronald Grzywinski, "The New OldFashioned Banking," Harvard Business Review, May/June 1991.
The Glossary provides brief definitions
of alternative financing sources, alternative housing structures, consumer
credit laws, and other terms often used
in the community development field.
The Compendium is a five-volume directory summarizing the financing programs of every state agency in New
England involved in housing and economic development. In addition to
providing a brief description of the
agencies, the compendium gives a
overview of each of the programs they
offer, including eligibility criteria, terms
and rates, and a contact name.
Endnotes
Both publications are available free
of charge from the Community Affairs
Department. To order, write to:
1. U.S. Bureau of the Census, Current Housing Report, Series H 121 /91-1, Who Can
Community Affairs
Federal Reserve Bank of Boston
P.O. Box 2076
Boston, MA, 02106-2076
Or call (617) 973-3097
7
CONilNUED FR0,\1 PAGE
4
BOSTON fF{ST BANKING
These targeted initiatives in Boston's
inner-city neighborhoods are an
integral part of the bank's overall effort
to serve all of its communities more
effectively. Fully 30 percent of the
mortgages the bank wrote in New
England in 1990 had affordability
features specifically designed to meet
the needs of people with low and
moderate incomes, and first-time
homebuyers. These include state
housing finance agency and FHA
loans, in addition to the bank's First
Step Mortgage.
COMMUNITIES &BANKING
0
O-
N
0
'-l
0--
This progress notwithstanding, a
differential in approval rates persists,
with black applicants turned down at
a higher rate than whites. Our ongoi ng monitoring of 1991 activity
suggests that minorities seeking to purchase homes last year had an even
more difficult time qualifying for mortgages. These concerns prompted us
to take a closer look at whether the
pool of black applicants is different
from the pool of white applicants.
Preliminary indications are that it is.
• There is a significant difference in
incomes between black and white
applicants which is obscured by the
HMDA Disclosure Statement
presentation of data in low-, moderate-, middle-, and high-income
categories. Closer examination
reveals that only 7 percent of the
white applicants earned less than
$30,000 annually, versus 13
percent of the black applicants. At
the upper end of the spectrum, more
than one-third of all white applicants, but only 5 percent of black,
reported annual incomes of more
than $80,000.
• A sampling done in early 1990
found that nearly 90 percent of the
black applicants seeking First Step
mortgages requested 90 or 95
percent financing, whereas only onehalf of the white applicants required
such high ratios, suggesting that
black applicants had less wealth
than whites of comparable income.
• Nearly two-thirds of the so-called
high-income black applicants (those
with incomes greater than 120
8
percent of the median) sought financing for homes in low-or moderate-income neighborhoods. The
corresponding figure for whites in
that income category was 7 percent. This disparity reflects a regionally segregated housing market in which blacks comprise 26
percent of the City of Boston's population and only 7 percent of the
population of the metropolitan area.
The aggregated HMDA statistics for
all lenders in the Boston metropolitan
area indicate that blacks accounted
for little more than 4 percent of the
applicants for home purchase mortgages. Recent studies help explain the
disproportionately lower number of
applications. In The State of the
Nation's Housing 1990, Harvard's
Joint Center for Housing Studies found
that during the mid-1980s, only 4
percent of the nation's black renters,
versus 20 percent of the white, had the
required income and accumulated cash
to purchase a typical starter home with
a 10 percent downpayment. The
eligible pool of homebuyers drops to
1 .5 percent of blacks and 17 percent
of whites when a 20 percent downpayment is required.
These findings are a sobering reminder
that as a society we have a long way
to go toward leveling the playing field.
Narrow focus on loan approval rates
does not address the root causes of the
problem or promote lasting change.
The disparities evident in the HMDA
data reflect the effects of past inequities that have limited minorities' employment opportunities, mobility, and
accumulation of wealth, as well as the
fragility of the emerging black middle
class. These circumstances will not be
easy to change, but Bank of Boston is
committed to being part of the
solution.CB
Bonnie Heudorfer is a Vice President of the Bank
of Baston and has been instrumental in developing
and implementing the Boston First Banking Program.
The model is now being expanded to other New
England urban centers. As a loaned executive
from the Bank of Boston, Ms. Heudorfer served as
the first executive director of the Boston Housing
Partnership. In addition, she is co-founder of the
Women's Institute for Housing and Economic Development and former president of the Citizens
Housing and Planning Association.
@FedFRASER