Full text of District Notices (Federal Reserve Bank of Dallas) : Fair Treatment of Applicants for Mortgage Loans, Notice 92-108

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal Reserve Bank
OF DALLAS
ROBERT

D. M C T E E R , J R .

P R E S ID E N T
AND

C H IE F

E X E C U T IV E

O F F IC E R

November

6,

1992

d a lla s , te x a s

75222

Notice 92-108

TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Fair Treatment of Applicants
fo r Mortgage Loans
DETAILS

The Federal Financial Institutions Examination Council has issued a
statement on behalf of the regulatory agencies to emphasize concerns about
fair treatment of applicants for mortgage loans and their continuing efforts
to assure such treatment.
ATTACHMENT

Attached is a copy of the regulatory agencies’ statement.
MORE INFORMATION

For more information, please contact Marion White at (214) 922-6155.
For additional copies of this Bank’s notice, please contact the Public Affairs
Department at (214) 922-5254.
Sincerely yours,

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Federal Financial Institutions Examination Council

2100 Pennsylvania Avenue, NW, Suite 200 . Washington, DC 20037 . (202) 634-6526 . FAX (202) 634-6556

Press Release
For immediate release

The
issuing

federal
this

October 9, 1992

financial

statement

to

institutions regulatory agencies are
emphasize

treatment of applicants for mortgage
efforts to assure such treatment.

their

concerns

about

fair

loans and their continuing

Increasing evidence indicates

that differences in loan approval rates between white and minority
home

mortgage

applicants,

apparently

unwarranted

by

economic

factors, characterize some lending.
<>

<>

<>

<>

BACKGROUND
On October 8, 1992, the Federal Reserve Bank of Boston, with
the cooperation of the federal financial institutions regulatory
agencies and the U.S. Department of Housing and Urban Development
(HUD), released a detailed study on mortgage loan denial rates in
the Boston area.

The

study examined whether racial

and ethnic

disparities in mortgage loan denial rates reflect even handed use
of legitimate credit standards.
That question arose because the Home Mortgage Disclosure Act
(HMDA) data released in October 1991 revealed disparities in denial
rates.
lending

Those

data

showed

patterns

of

relatively

low

mortgage

in minority areas and indicated that black and Hispanic

Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration,
Office of the Comptroller of the Currency, Office of Thrift Supervision

2

-

-

applicants were denied loans two to three times as often as whites.
The disparity in denial rates in the Boston metropolitan area was
among the highest in the country.
STUDY RESULTS
The study by the Federal Reserve Bank of Boston incorporated
data submitted voluntarily by about 130 Boston lenders.

The data

came from application and loan files for 1,013 minority and 3,123
nonminority

applicants

applications,

credit

and

included

reports,

and

information

lenders'

from

worksheets.

loan
The

statistical analysis performed for the study took into account an
applicant's
stability.

debt

ratios,

The

analysis

wealth,
also

credit

included

history,

and

loan-to-value

income
ratios,

information about private mortgage insurance sought or approved,
the neighborhood characteristics of the property being financed,
and other factors.
The

study

found

that

economic

differences

account

for

a

substantial part of the disparities in the HMDA data, but that they
do not explain those differences entirely.

Minority applicants in

the study had, on average, lower income, fewer liquid assets, more
late

and delinquent

credit

ratios than white applicants.

accounts,

and higher debt to

income

However, even after controlling for

differences in relevant economic and financial variables, black and
Hispanic mortgage applicants were more

likely to be turned down

than similarly situated whites.

Specifically,

basis,

credit-related

minority

applicants

with

on a statistical
characteristics

identical to those of an average white applicant would experience
a 17 percent denial rate, as compared to the white denial rate of

3

-

-

11 percent.
The

study

applicants

also

found

obtained

that

loans,

the

and

vast

that

majority

loan

of

approval

minority

rates

for

well-qualified and clearly unqualified applicants of all races were
essentially what would be expected in a nondiscriminatory system.
Disparities appeared to be most common among applicants who have
some imperfections or flaws in credit qualifications.
applicants can —

and do —

Many such

qualify for a loan if a lender acts

diligently, creatively, and flexibly on their behalf.

However, the

study's results suggest that applicants of different races do not
all benefit equally from such discretionary efforts in the lending
process.
also

This tentative explanation of the study's findings

consistent

with

investigation-based

allegations

is

recently

reported by the U. S. Department of Justice.
SUPERVISORY INITIATIVES
This

recent

evidence

suggests

that

lenders

and

regulators

should continue their efforts to ensure that minorities have equal
access

to

credit.

Several

actions

by

the

agencies

to

improve

enforcement of fair lending laws and prevent discrimination already
have been taken or are underway.
Enforcement-oriented analysis.

The agencies are analyzing the

Boston data at the level of individual lenders.
analysis —

If statistical

or follow-up review of applications and loan files —

yields reliable evidence indicating loan decisions by particular
lenders were based on race or ethnicity, that information will be
forwarded to the Department of Justice or HUD, as appropriate.
HMDA-based

targeting.

The

agencies

are

continuing

to

4

-

-

emphasize the need for examiners to use HMDA data, as well as other
information, to identify institutions that should be subjected to
follow-up

procedures

appropriate,

to

examiners

ensure
are

fair

lending

conducting

practices.

detailed

Where

reviews

and

comparisons of loan and application files as part of fair lending
examinations.
New computer programs and analytical tools are being developed
to make HMDA data more useful to examiners.

This software, when

fully developed and available to examiners, will help them identify
geographic and other discrepancies
suggest further inquiry.
efforts

to

develop

in mortgage lending that may

The agencies are also continuing their

additional

software

capabilities

to

assist

examiners and institutions to analyze HMDA data.
Revision
statistical

of

examination

analysis

used

strategies.

in

the

The

Boston

study

computerized
(and

by

the

Department of Justice in its investigation) is of very limited use
in most bank examinations.
volume

of

whether

denials

there

criteria.

is

Very few institutions have a sufficient

for minority
a

"double

applicants
standard"

to reliably document

in

loan

qualification

Nevertheless, these findings make it imperative that the

agencies explore every alternative to make bank examinations as
reliable as possible in identifying possible discrimination.
Under

the

Examination

auspices

Council

comprehensive,

of

the

(FFIEC),

Federal

the

Financial

agencies

have

Institutions
initiated

a

coordinated review of their examination policies,

procedures, and examiner training to determine whether they can be
strengthened

to

help

deter

and

detect

racially-based

disparate

5

-

-

treatment of applicants by financial institutions.

A key part of

this process will be the use of a third-party consultant who can
provide an objective review of existing agency efforts and make
recommendations for changes to policies and procedures.
Industry

education.

Lending

institutions may need additional

personnel

of

financial

information and training about

fair lending laws, and greater sensitivity to cultural and racial
differences

among

applicants

for

credit.

Consumers

information about the credit granting process —

need

how it works and

what is expected in order to be a successful applicant for mortgage
credit.
efforts

In
to

this
expand

regard,
and

the

agencies

intensify

believe

educational

that

programs

additional
for

both

lenders and consumers will be required.
The agencies themselves will continue to develop informational
materials and participate in conferences and seminars for financial
institution representatives concerning their responsibilities.

The

agencies have distributed a guide for financial institutions, Home
Mortgage Lending and Equal Treatment. The guide highlights lending
standards and practices that may adversely impact the capacity of
institutions to serve minorities and other protected classes of
borrowers,

and

alerts

them

to

behavior that should be avoided.
the agencies.

subtle

forms

of

discriminatory

Copies are available from each of

For mortgage applicants, a brochure, Home Mortgages:

Understanding the Process and Your Rights, is available from the
agencies to assist borrowers in knowing what to expect in applying
for a loan and what their rights are if they suspect mistreatment.

6

-

-

LENDING PRACTICES
The agencies call on financial institutions and their trade
associations to intensify their equal credit opportunity education
programs
should

for management,
include

successful

lending personnel and consumers.

efforts

techniques

to

identify

used

by

and

promote

institutions

to

This

examples
ensure

of

equal

treatment of loan applicants.
These

techniques

might

include use

of

internal

systems

to

conduct independent second reviews of applications from minorities
initially recommended for denial to assure equal treatment with
nonminorities.

One lender recently reported making

loans to 35

percent of initially rejected applicants after instituting such a
review procedure.

A similar kind of review underwriter is also an

element of the Department of Justice settlement.
Other

initiatives

might

include

development

of

training

programs to ensure fair treatment of prospective borrowers, credit
counseling education for groups of prospective

loan applicants,

participation on mortgage review boards, and the use of "shoppers"
hired by the institution itself to test its personnel's adherence
to its own lending procedures.
Despite the many commendable efforts of lenders, the data from
the Boston Study demonstrate that unequal treatment of applicants
still occurs in some instances.

The message from Boston is that

the initiatives many lenders instituted in response to the release
of the HMDA data cannot now be abandoned.
initiated such efforts,

the message

For lenders who have not

is that they must do so to

assure that all prospective borrowers are considered fairly.

#

#

#