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Summer 2005
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Federal Reserve
Monetary Policy Report to the Congress
New Information Reported under HMDA and
Its Application in Fair Lending Enforcement
Report on the Condition of the U.S. Banking
Industry: First Quarter, 2005
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Volume 91 • Number 3 • Summer 2005
Federal Reserve
BULLETIN
Board of Governors of the Federal Reserve System, Washington, D.C.
PUBLICATIONS COMMITTEE
Lynn S. Fox, Chair • Scott G. Alvarez • Sandra Braunstein • Marianne M. Emerson
• Jennifer J. Johnson • Karen H. Johnson • Stephen R. Malphrus • Vincent R. Reinhart
• Louise L. Roseman • Richard Spillenkothen • David J. Stockton
T h e Federal
Reserve
Bulleiin
is issued quarterly u n d e r the direction of the staff publications c o m m i t t e e . This c o m m i t t e e is r e s p o n s i b l e for o p i n i o n s e x p r e s s e d
e x c e p t in official s t a t e m e n t s and signed articles. It is assisted by the P u b l i c a t i o n s D e p a r t m e n t u n d e r the direction of Lucretia M . Boyer.
Change in Publishing Format of the
Federal Reserve Bulletin
In response to the increased use of the Internet to
access information and in the interest of publishing
on a timely basis, beginning in 2006 the content of
the Federal Reserve Bulletin will only be available
on the Federal Reserve Board's public web site
(www.federalreserve.gov). Publishing articles on
the web as they are released will allow the more
timely introduction of research and information to
the public as topics are relevant to current economic conditions and useful to our readers.
The online version of the Bulletin will continue
to include topical research articles, the Board's
semiannual Monetary Policy Reports, Reports on
the Condition of the U.S. Banking Industry, Legal
Developments, and links to other features such as
lists of advisory councils, committees, and maps of
the Federal Reserve Districts.
Online access to the Bulletin will continue to be
free of charge. A free e-mail notification service
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as they are released. Information about ways to
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follow.
If you have any questions, you may contact the
Publications Fulfillment staff by phone at 202-4523245, by fax at 202-728-5886, or you may mail
your inquiries to Publications Fulfillment, MS 127,
Board of Governors of the Federal Reserve System, Washington DC 20551.
Table of Contents
3 1 9 MONETARY
POLICY
REPORT
TO THE
CONGRESS
The U.S. economy continued to expand at a
solid pace over the first half of 2005 despite the
restraint imposed on aggregate demand by a
further rise in crude oil prices. Household spending trended up, propelled by rising wealth and
income and by low interest rates, and business outlays received ongoing support from
favorable financial conditions, rising sales, and
increased profitability. Moreover, the earlier
declines in the foreign exchange value of
the dollar shifted some domestic and foreign
demand toward U.S. producers. Overall, the economic expansion was sufficient to create jobs at
roughly the same pace as in late 2004 and to
lower the unemployment rate further over the
first half of this year.
Higher oil prices boosted retail prices of a
broad range of consumer energy products and,
as a result, continued to hold up the rate of
overall consumer price inflation in the first half
of 2005. With financial conditions advantageous
for households and firms, a solid economic
expansion in train, and some upward pressure
on inflation, the Federal Open Market Committee (FOMC) continued to remove policy accommodation at a measured pace over the first half
of the year, raising the intended federal funds
rate an additional 1 percentage point, to 3'A percent, by the end of June. At the June FOMC
meeting, the Committee judged that policy
remained accommodative. With appropriate
monetary policy, however, the upside and downside risks to output and inflation were viewed
as balanced, and the Committee underscored its
commitment to respond to changes in economic
prospects as needed to fulfill its obligation to
maintain price stability.
The fundamental factors that supported the
U.S. economy in the first half of 2005 should
continue to do so over the remainder of 2005
and in 2006. Despite the upward pressure on
costs and prices over the past year or so, core
consumer price inflation is likely to remain contained and longer-run inflation expectations are
still well anchored. Of course, substantial uncertainties surround this economic outlook. A further sharp rise in crude oil prices would have
undesirable consequences for both economic
activity and inflation, and the possibility that
housing prices, at least in some locales, have
moved above levels that can be supported by
fundamentals remains a concern.
3 4 4 NEW INFORMATION REPORTED
UNDER
HMDA AND ITS APPLICATION
IN FAIR
LENDING
ENFORCEMENT
In 2002 the Federal Reserve Board amended
its Regulation C, which implements the Home
Mortgage Disclosure Act of 1975, to expand the
types of information that lenders covered by the
law must disclose to the public about their
home-lending activities. The amendments are
intended to improve the quality, consistency,
and utility of the reported data and to keep the
regulation in step with recent developments in
home-loan markets. Data reported for 2004 are
the first to reflect the changes in the reporting
rules.
This article presents a first look at these
greatly expanded data and considers some of
their implications for the continuing concerns
about fair lending. The analysis highlights some
key relationships revealed in an initial review of
the types of data that are new for 2004. Some
parts of the analysis focus on nationwide statistics, and others examine patterns across groups
of lenders, loan products, and various groupings
of applicants, borrowers, and neighborhoods.
The authors explore, in particular and in some
depth, the strengths and limitations of the information on loan pricing. They also describe how
the new data are being used to enhance fair
lending enforcement activities.
3 9 5 REPORT ON THE CONDITION OF THE U.S.
BANKING INDUSTRY: FIRST QUARTER, 2005
Assets of reporting bank holding companies
grew at a healthy pace, increasing $355.0 billion, to $10.7 trillion. Securities and money market assets accounted for most of the asset
growth, particularly at the fifty large bank holding companies as these large companies added
mortgage-backed securities and adjusted their
interest rate risk exposures. Loans and unused
commitments to lend grew less robustly, rising
1.4 percent and 1.7 percent respectively. Residential mortgage loans, including home-equity
lines of credit, contributed significantly to this
increase, as did commercial loans and commercial real estate loans. Weakness was evident in
credit card balances, attributable to a seasonal
slowdown in credit card spending and significantly accelerated repayments by which, in
effect, households have transferred some credit
card balances to the rapidly growing homeequity loan category.
Nondeposit borrowings increased sharply, rising 6.8 percent, as strong asset growth exceeded
deposit increases. The increase in borrowings
was mostly in short-maturity instruments. Regulatory capital ratios remained strong but tightened slightly during the quarter. Problem assets
continued to decline from already low levels,
reaching 0.76 percent of loans and related assets.
Net charge-offs and provisions for loan losses
also declined. Fueled by asset growth and
improved asset quality, net income rose to
$32.9 billion. Net interest margins narrowed significantly and non-interest income surged, supported by strong trading revenues and mortgage
servicing income.
4 0 0 ANNOUNCEMENTS
Federal Reserve Banks announce changes to
cash infrastructure
Guidance on banking services for money services businesses
Banking agencies to perform additional analysis
before issuing notice of proposed rulemaking
Agencies issue credit-risk management guidance for home-equity lending
Agencies issue FACT Act interim final rules on
medical information
Banking agencies announce financial institution
enrollment schedule for Central Data Repository
Banking agencies issue host state loan-todeposit ratios
Bank Secrecy Act/Anti-Money
interagency outreach events
Laundering
Banking agencies issue final Community Reinvestment Act rules
Agencies propose rules on post-employment
restrictions for senior examiners
Bank Secrecy Act/Anti-Money Laundering
interagency outreach event webcast
Financial education web site redesigned
Publication of the International Journal of Central Banking
May 2005 update to the Commercial
Examination Manual
Bank
Statement by Chairman Alan Greenspan on
Wim Duisenberg, Former First President, European Central Bank
Agencies release Bank Secrecy Act/Anti-Money
Laundering Examination Manual
Resignation of Governor Edward M. Gramlich
Minutes of the Board's discount rate meetings
Federal Open Market Committee statements
Minutes of the Federal Open Market Committee
Federal Open Market Committee schedule for
2006
Consumer Advisory Council meeting
Amendments to Regulation CC, appendix A
Board seeks nominations for appointments to
Consumer Advisory Council
Final amendments to Regulation DD
Enforcement actions
Annual adjustment of fee-based trigger amount
for additional disclosure requirements
Changes in Board staff
Request for comment on imputing return on
capital
Federal Reserve Banks announce changes to
increase efficiency in check services
Online financial education project
4 1 8 LEGAL
DEVELOPMENTS
Various bank holding company, bank service
corporation, and bank merger orders
4 5 5 MEMBERSHIP
OF THE BOARD OF
GOVERNORS
OF THE FEDERAL RESERVE
SYSTEM,
4 5 8 BOARD
STAFF
1913-2005
OF GOVERNORS
AND OFFICIAL
4 6 0 FEDERAL OPEN MARKET COMMITTEE
STAFF; ADVISORY COUNCILS
4 6 2 FEDERAL
RESERVE
BOARD
4 6 4 ANTICIPATED
DATES FOR PERIODIC
RELEASES
4 6 6 MAPS
AND
PUBLICATIONS
SCHEDULE
OF THE FEDERAL
4 6 8 FEDERAL RESERVE
AND OFFICES
OF RELEASE
STATISTICAL
RESERVE
BANKS,
SYSTEM
BRANCHES,
Monetary Policy Report to the Congress
Report submitted to the Congress on July 20, 2005,
pursuant to section 2B of the Federal Reserve Act
MONETARY
POLICY
ECONOMIC
OUTLOOK
AND THE
The U.S. economy continued to expand at a solid
pace over the first half of 2005 despite the restraint
imposed on aggregate demand by a further rise in
crude oil prices. Household spending trended up,
propelled by rising wealth and income and by low
interest rates, and business outlays received ongoing
support from favorable financial conditions, rising
sales, and increased profitability. Moreover, the earlier declines in the foreign exchange value of the
dollar shifted some domestic and foreign demand
toward U.S. producers. Overall, the economic expansion was sufficient to create jobs at roughly the same
pace as in late 2004 and to lower the unemployment
rate further over the first half of this year.
Higher oil prices boosted retail prices of a broad
range of consumer energy products and, as a result,
continued to hold up the rate of overall consumer
price inflation in the first half of 2005. In addition,
the rise in energy prices this year, coupled with
increases in the prices of some other commodities,
imported goods, and industrial materials, put upward
pressure on the costs of many businesses. A portion
of these costs was passed on to consumers, which
contributed to a higher rate of inflation in core consumer prices (that is, total prices excluding the food
and energy components, which are volatile). As measured by the price index for personal consumption
expenditures excluding food and energy, core inflation increased from an annual rate of 1VI percent in
2004 to about 2 percent between the fourth quarter of
2004 and May 2005. While survey measures of nearterm inflation expectations have edged up this year,
surveys, as well as readings from financial markets,
suggest that expected inflation at longer horizons has
remained contained.
With financial conditions advantageous for households and firms, a solid economic expansion in train,
and some upward pressure on inflation, the Federal
Open Market Committee (FOMC) continued to
remove policy accommodation at a measured pace
over the first half of the year, raising the intended
federal funds rate an additional I percentage point,
to VA percent, by the end of June. At the most
recent FOMC meeting, the Committee judged that
policy remained accommodative. With appropriate monetary policy, however, the upside and downside risks to output and inflation were viewed as
balanced, and the Committee underscored its commitment to respond to changes in economic prospects
as needed to fulfill its obligation to maintain price
stability.
The fundamental factors that supported the U.S.
economy in the first half of 2005 should continue to
do so over the remainder of 2005 and in 2006. In the
household sector, the combination of further gains
in employment, favorable borrowing terms, and generally healthy balance sheets should keep consumer
spending and residential investment on an upward
path. In the business sector, expanding sales, the low
cost of capital, and the replacement or upgrade of
aging equipment and software should help to maintain increases in capital spending. And, although
economic performance has been uneven across countries, continued growth overall in the economies
of U.S. trading partners should sustain the demand
for U.S. exports. In contrast, ongoing increases in
imports will likely continue to subtract from the
growth of U.S. gross domestic product. In addition,
high energy prices remain a drag on aggregate
demand both here and abroad, though this drag
should lessen over time if prices for crude oil level
out in line with quotes in futures markets.
Despite the upward pressure on costs and prices
over the past year or so, core consumer price inflation is likely to remain contained in 2005 and
2006. Longer-run inflation expectations are still well
anchored, and because businesses are adding to their
stocks of capital and are continuing to find ways to
use their capital and work forces more effectively,
structural productivity will likely rise at a solid pace
over the foreseeable future. In addition, barring a
further increase in oil prices, the boost that higher
energy costs have given to core inflation should wane
in coming quarters, while the recent appreciation of
the dollar, as well as the deceleration in global materials prices, will likely reduce the impetus to inflation
from rising import prices.
320
Federal Reserve Bulletin • Summer 2005
Of course, substantial uncertainties surround this
economic outlook. A further sharp rise in crude oil
prices would have undesirable consequences for both
economic activity and inflation, and the possibility
that housing prices, at least in some locales, have
moved above levels that can be supported by fundamentals remains a concern. As another example, if
the recent surge in measured unit labor costs were
to prove more persistent than currently appears likely,
the outlook for inflation would be adversely affected.
Economic growth and inflation will also be shaped
importantly by the evolution of the imbalance in the
U.S. current account.
The Conduct of Monetary Policy
over the First Half of 2005
Despite increases in the federal funds rate totaling
1 lA percentage points in 2004, monetary policy was
still judged to be accommodative at the start of 2005.
At the time of the February FOMC meeting, the
available information indicated that the economy had
expanded at a robust pace through the end of 2004
and retained considerable momentum. Accordingly,
the Committee voted to raise its target for the federal
funds rate from 2V4 percent to 2Vi percent and to
make minimal changes to the text of the accompanying statement. The statement reiterated that "the
Committee believes that policy accommodation can
be removed at a pace that is likely to be measured."
Members noted, however, that this forward-looking
language was clearly conditioned on economic developments and therefore would not stand in the way of
either a pause or a step-up in policy firming depending on events.
By March, the data were pointing to a further solid
gain in activity during the first quarter, fueled especially by continued increases in consumption expenditures and residential investment. In addition, private nonfarm payrolls were posting widespread
advances, and slack in resource utilization appeared
to be diminishing. The Committee voted at its March
meeting to raise the federal funds rate another
25 basis points, to 2% percent. In view of the rise in
prices of energy and other commodities and recent
elevated readings on inflation in core consumer
prices, the Committee altered the text of the policy
statement to note the pickup in inflationary pressures. The Committee also decided to modify the
assessment of the balance of risks to make it explicitly conditional on an assumption of "appropriate"
monetary policy, so as to underscore that maintaining balanced risks would likely require continued
removal of policy accommodation.
The evidence that had accumulated by the spring
pointed to some moderation in the pace of activity.
Retail spending flattened out for a time, likely in
response to higher energy prices, and the growth of
capital spending dropped back from its elevated pace
of late last year. Nonetheless, with long-term interest
rates still quite low and with employment and profits
continuing to rise, economic activity appeared to
retain considerable momentum, suggesting that the
softness would be short lived. Against this backdrop,
the FOMC decided to raise the federal funds rate
another 25 basis points at its May meeting and to
make few changes to the text of the accompanying
statement.
In the weeks after the May meeting, incoming
indicators supported the view that the underlying
Selected interest rates
T e n - y e a r Treasury
Intended federal f u n d s rate
1/30
3/19
5/7
6/26
2002
j
8/13 9/24 11/6 12/10 1/29
3/18
6/25 8/129/16 10/28 12/9
2003
1/28
3/16
5/4
6/30 8/10 9/21
2004
11/1012/14
2/2
3/22
5/3
2005
6/30
NOTE: The data are daily and extend through July 13, 2005. T h e ten-year Treasury rate is the constant-maturity yield based on the most actively traded
securities. The dates on the horizontal axis are those of F O M C meetings.
SOURCE: Department of the Treasury and the Federal Reserve.
Monetary
pace of activity was not faltering. The information
that the Committee reviewed at the time of the June
FOMC meeting showed that consumer spending and
business investment had turned up, on balance, and
that demand for housing continued to be strong. With
economic activity remaining firm and crude oil prices
ratcheting higher, the FOMC voted to raise the funds
rate an additional 25 basis points, to VA percent,
and to make only minimal changes to the text of the
accompanying statement. This action brought the
cumulative increase in the target federal funds rate
since June 2004 to 2Va percentage points.
Economic
Projections
for 2005 and 2006
In conjunction with the FOMC meeting at the end of
June, the members of the Board of Governors and the
Federal Reserve Bank presidents, all of whom participate in the deliberations of the FOMC, were asked
to provide economic projections for 2005 and 2006.
In general, Federal Reserve policymakers expect the
economy to continue to expand at a moderate pace
and core inflation to remain roughly stable over this
period. The central tendency of the FOMC participants' forecasts for the increase in real (that is, inflation adjusted) GDP is 3!/2 percent over the four
quarters of 2005 and 314 percent to
percent in
2006. The civilian unemployment rate is expected to
average 5 percent in both the fourth quarter of 2005
Economic projections for 2005 and 2006
Perccnt
Indicator
Policy
Report
to the Congress
and the fourth quarter of 2006. FOMC participants
project that the chain-type price index for personal
consumption expenditures excluding food and energy
will increase between PA percent and 2 percent both
this year and next.
ECONOMIC
AND
FINANCIAL
DEVELOPMENTS
IN 2005
The economic expansion entered 2005 on a solid
footing and was led by ongoing increases in consumption, residential investment, and business spending on equipment and software. Although the pace
of expansion slowed somewhat in the early spring,
activity has picked up again more recently. On average, real GDP appears to have increased a little less
rapidly over the first half of 2005 than in the second
half of 2004, a reflection in part of reduced fiscal
stimulus and the drag on economic activity from
higher energy prices. Industrial production has also
risen more slowly so far this year than in 2004: The
increase totaled 3 percent at an annual rate between
December 2004 and June 2005, down from 5 percent
during the previous six months. Nevertheless, the
economic expansion has been sufficient to gradually
absorb slack in labor and product markets. Nonfarm
payroll employment has continued to increase, and
the unemployment rate has moved down further since
the beginning of the year, to 5 percent in June.
Similarly, the rate of capacity utilization in the manufacturing sector stood at 78.4 percent in June, up
from 77.9 percent at the end of 2004 and just a little
below its long-term historical average.
Federal Reserve G o v e r n o r s
and
Reserve B a n k presidents
Central
tendency
Range
Change in real G D P
Percent, annual rate
2005
Change, fourth quarter
to fourth quarter1
Nominal G D P
Real G D P
P C E price index
excluding f o o d and energy
Average level, fourth quarter
Civilian u n e m p l o y m e n t rate
321
5-6'/4
3-3%
5>/2-5V4
3'/a
l</2-2>/4
6
m - 2
5-5'/ii
5
2006
Change, fourth quarter
to fourth quarter1
Nominal G D P
Real G D P
P C E price i n d e x
excluding food and energy
5-6
V/A-VA
5 '/4-5 Vi
3'/4-3'A
Vh-Vh
PA-2
5
5
1999
Average level, fourth quarter
Civilian u n e m p l o y m e n t rate
1. Change f r o m average fur fourth quarter of previous year to average for
fourth quarter of year indicated.
2001
2003
2005
NOTE: H e r e a n d in s u b s e q u e n t charts, except as noted, c h a n g e for a given
period is m e a s u r e d to its final quarter f r o m the final quarter of the p r e c e d i n g
period.
SOURCE: D e p a r t m e n t of C o m m e r c e , Bureau of E c o n o m i c Analysis.
322
Federal Reserve Bulletin • Summer 2005
Change in real income and consumption
Change in PCU chain-type price index
P e r c e n t , a n n u a l rate
•
•
Percent, a n n u a l r a t e
[ J Disposable personal income
• Personal consumption expenditures
Total
Excluding food and energy
—
3
—
— 6
ill II
1 i
1999
2001
2003
2005
NOTE: The data are for personal consumption expenditures (PCE). The
changes for 2005 are from 2004:Q4 to May 2005.
SOURCE: Department of Commerce, Bureau of Economic Analysis.
Rising energy prices continued to boost consumer
price inflation in the first half of 2005. With consumer energy prices having climbed more than
13 percent at an annual rate so far this year, the price
index for personal consumption expenditures (PCE)
increased at an annual rate of about 2'A percent
between the fourth quarter of 2004 and May 2005,
the same pace as in 2004. Meanwhile, the core PCE
price index rose at an annual rate of about 2 percent
in the first half of 2005, up from 1 xh percent in 2004.
The Household
Sector
Consumer Spending
Consumer spending continued to move higher in the
first half of this year, though not as rapidly as in the
second half of 2004. After increasing at an average
annual rate of 4'/2 percent in the third and fourth
quarters of last year, real personal consumption
expenditures rose at a 3V2 percent rate in the first
quarter and appear to have advanced at a roughly
similar pace in the second quarter. Household spending this year has been supported by rising employment and household wealth as well as by the low
level of interest rates. However, higher costs for
consumer energy products have eroded households'
purchasing power.
Sales of light motor vehicles, which had been
buoyed in the second half of last year by a variety of
sales inducements, dropped back in the first quarter
after many of the inducements expired. However,
sales firmed again in the second quarter to an average
annual pace of more than 17 million units, a level
similar to that in the fourth quarter of last year.
— 2
i
lJ
1999
2001
2003
2005
SOURCE: Department of Commerce, Bureau of Economic Analysis.
Underlying demand for light motor vehicles has
remained relatively strong, though sales likely have
also been boosted recently by sizable price discounts.
Excluding motor vehicles, consumer spending
posted strong gains in early 2005, flattened out in
March, and picked up again in the spring. On a
quarterly average basis, the rate of increase in nonauto spending appears to have stepped down in the
second quarter, largely because of a deceleration in
outlays for consumer goods. Meanwhile, real outlays
for services rose at an annual rate of about 3 percent
in the first quarter, and the available data point to an
increase of about the same magnitude in the second
quarter.
If the effect of Microsoft's $32 billion special
dividend payment in December 2004 is excluded
from the calculation, real disposable personal income
C o n s u m e r sentiment
1985 = 100
1966 = 100
140
120
140
Confercncc Hoard
—
—
100
120
100
Michigan SRC
80
1993
1996
1999
2002
2005
NOTE: The Conference Board data are monthly and extend through June
2005. The Michigan SRC data are monthly and extend through a preliminary
estimate for July 2005.
SOURCE: The Conference Board and University of Michigan Survey
Research Center.
Monetary Policy Report to the Congress
Wealth-to-income ratio
Ratio
—
1985
1989
1993
1997
2001
4
323
half of this year; the small increase in the wealthto-income ratio comes on the heels of substantial
increases in 2003 and 2004. Although stock prices
have changed little, on net, thus far this year, home
prices have continued to rise sharply. Because
changes in wealth influence consumer spending with
a lag, both the earlier and the more-recent increases
in household net worth have supported consumption
this year. As wealth increased and interest rates
remained quite low, the personal saving rate edged
down to just V2 percent of disposable income in April
and May. Over the previous two decades, the personal saving rate averaged close to 5 percent.
2005
NOTE: The data are quarterly and extend through 2005:Q1. T h e wealthto-income ratio is the ratio of household net worth to disposable personal
income.
SOURCE: For net worth. Federal Reserve Board, flow of f u n d s data; for
income, Department of Commerce, Bureau of Economic Analysis,
(that is, after-tax income adjusted for inflation) rose
at an annual rate of about 2 percent between the
fourth quarter of 2004 and May 2005, a slower pace
than in 2004. Although increases in employment and
earnings pushed up wage and salary income over the
first half of 2005, the rise in real income was damped
to some degree by the energy-driven increase in
consumer prices. Higher energy prices also appear
to have weighed on consumer confidence for much
of this year. Surveys by both the Michigan Survey
Research Center (SRC) and the Conference Board
indicate that household sentiment edged down
through the early spring, though readings from these
surveys turned up again more recently.
Household wealth appears to have increased a bit
faster than nominal disposable income over the first
Residential Investment
Activity in the housing market continued at a strong
pace in the first half of 2005. Real expenditures on
residential structures increased at an annual rate of
11 '/2 percent in the first quarter and appear to have
posted another gain in the second quarter. In the
single-family sector, starts of new units averaged
1.69 million at an annual rate between January and
June—nearly 4 percent above the pace posted over
the second half of 2004. Similarly, starts of multifamily units averaged 360,000 over the first six months
of 2005, about 3'/4 percent higher than in the previous six months.
As in 2004, the demand for housing during the first
half of 2005 was supported by rising employment
and income and by low mortgage rates. Rates on
thirty-year fixed-rate mortgages have fluctuated
between 5>/2 percent and 6 percent in recent months
and are currently near the low end of that range.
In addition, demand reportedly has been boosted
Personal saving rate
Private housing starts
Percent
Millions of units, annual rate
Single-family
—
Multifamily
0
1985
1990
1995
2000
2005
1993
NOTE: The data arc quarterly; the reading for 2005:Q2 is the average of
April and May.
SOURCE: Department of Commerce, Bureau of Economic Analysis.
1995
1997
1999
2001
2003
NOTE: The data are quarterly and extend through 2005:Q2.
SOURCE: Department of Commerce, Bureau of the Census.
2005
.8
324
Federal Reserve Bulletin • Summer 2005
Mortgage rates
Percent
Fixed rate
Adjustable rate
—
2001
2002
2003
2004
3
transactions price index for existing homes (limited
to purchase-transactions only), which is published by
the Office of Federal Housing Enterprise Oversight
and partially adjusts for changes in the quality of
homes sold, was nonetheless up 10 percent relative
to its year-earlier level. Price appreciation has been
especially sharp over the past year in some large
metropolitan areas, including Las Vegas, Miami,
San Francisco, and New York, but rapid increases in
home prices have been observed in other areas as
well. In many of these locales, recent price increases
have far exceeded the increases in rents and household incomes.
2005
NOTE: T h e data, which are weekly and extend through July 13, 2005, arc
contract rates o n thirty-year mortgages.
SOURCE: Federal Home Loan Mortgage Corporation.
by a rise in purchases of second homes—either as
vacation units or as investments—and by the greater
availability of less-conventional financing instruments. These financing instruments, including
interest-only mortgages and adjustable-rate mortgages that allow borrowers a degree of flexibility in
the size of their monthly payments, have enabled
some households to buy homes that would otherwise
have been unaffordable. As a result, both new and
existing home sales have remained remarkably robust
this year, and both were at or near record levels in
May.
The strong demand for housing has continued to
push up home prices this year. Although rates of
house price appreciation were a little slower in the
first quarter of this year than in 2004, the repeat-
Household Finance
Supported by rising house prices and continued economic expansion, household debt increased at an
annual rate of about 9VA percent in the first quarter of
2005. This advance was paced by a rise in mortgage
debt of IOV2 percent at an annual rate. However, even
that rapid rise in mortgage debt represented a slight
deceleration from the torrid pace in 2004, a development in line with the small slowdown in the pace
of house price appreciation. Despite the increase in
mortgage debt, net housing wealth rose. Refinancing
activity has remained subdued, as rates on fixed-rate
mortgages are a little above levels at which many
households would currently find refinancing to be
attractive.
Consumer credit expanded at an annual rate of
about 4V2 percent over the first quarter of the year
and was about unchanged in April and May. The
growth of consumer credit has continued to be
Change in h o u s e prices
Delinquency rates on selected types of household loans
Percent
Percent
—-
12
Credit card pools
Repeat-transactions index
Auto loans at domestic auto finance companies
Mortgages
1985
1989
1993
1997
2001
2005
LLJ
L_J
1993
NOTE: The data are quarterly and extend through 2005:QL. Change is over
four quarters. For the years preceding 1991, changes are based on an index
that includes appraisals associated with mortgage refinancings. Beginning in
1991, changes are based on an index that includes purchase transactions only.
SOURCE: O f f i c e of Federal Housing Enterprise Oversight.
1995
I
1 L__l
1997
1999
2001
L_J
I
2003
2005
1_J
NOTE: The data arc quarterly and extend through 2005 :Q1.
SOURCE: For credit cards, M o o d y ' s Investors Service; for auto loans, the
fiaancing subsidiaries of the three major U.S. automobile manufacturers; for
mortgages, Mortgage Bankers Association.
Monetary Policy Report to the Congress
325
C h a n g e in real business fixed investment
Household financial obligations ratio
Percent, annual rate
•
•
Structures
Equipment and software
20
19
j _l
18
17
U
Ml
l
Qi
10
+
0
—
16
J
I
I
L
1993
1996
1999
I
I
2002
I I
10
20
i I
U_
2005
NOTE: The data arc quarterly and extend through 2005:Q1. The financial
obligations ratio equals the sum of required payments on mortgage and consumer debt, automobile leases, rent on tenant-occupied property, homeowners' insurance, and property taxes, all divided by disposable personal
income.
SOURCE: Federal Reserve Board.
restrained by substitution toward home equity debt as
a means to finance household expenditures.
Measures of household credit quality have
remained favorable. Delinquency rates on credit card
debt and auto loans have continued to decline from
already low levels. The pace of bankruptcy filings
has run a little higher than at the same time last year;
however, that pace has probably been boosted by a
rush to file before the new rules in the Bankruptcy
Abuse Prevention and Consumer Protection Act of
2005 take effect in October. Reflecting the rapid pace
of household debt growth, the ratio of household
financial obligations to disposable personal income
has edged up from a year earlier, though this ratio
remains a bit below the peak level reached in late
2002.
The Business Sector
Fixed Investment
After posting a robust gain in the second half of
2004, real business fixed investment rose at a more
moderate pace over the first half of 2005, as the rate
of increase in expenditures on equipment and software (E&S) dropped back and outlays for nonresidential structures remained lackluster. Nonetheless,
economic and financial conditions appear to be supportive of capital spending: Sales and corporate profits have continued to increase, businesses have ample
liquid assets at their disposal, and financial market
participants appear willing to finance new investment
projects at favorable terms.
•
•
High-tech equipment and software
Other equipment excluding transportation
Q1
—
30
20
I
J
—
2000
2001
10
_L
_L
1999
i
10
2002
2003
2004
2005
NOTE: High-tech equipment consists of computers and peripheral equipment and communications equipment.
SOURCE: Department of Commerce, Bureau of Economic Analysis.
Real E&S spending rose at an annual rate of 6 percent in the first quarter after having advanced at
an 18 percent pace in the second half of 2004. Led
by large increases in purchases of computers and
communications equipment, spending on high-tech
equipment posted a sizable gain in the first quarter.
In contrast, outlays for transportation equipment
dropped back early in the year because of a small
decline in business expenditures on motor vehicles
and a sharp drop in aircraft purchases after a surge in
the fourth quarter of 2004. Investment in equipment
other than high-tech and transportation goods, a category that accounts for about 40 percent of E&S in
nominal terms, also edged down in the first quarter
after registering a sizable gain in the second half of
last year. The types of equipment in this category of
investment tend to be sensitive to trends in business
sales, but the timing of business spending may have
been influenced by the provisions of the partialexpensing tax incentive, which encouraged capital
spending to be pulled forward in advance of the
incentive's expiration at the end of 2004.
More-recent indicators of E&S spending point to
another moderate rise in investment in the second
326
Federal Reserve Bulletin • Summer 2005
quarter. In particular, outlays for transportation equipment appear to have turned up, on net, as a step-up
in purchases of aircraft more than offset a further
decline in business spending on motor vehicles. At
the same time, the evidence on high-tech spending
has been mixed: Real spending on computers appears
to have registered another large gain in the second
quarter, while the rate of increase in outlays for
communications equipment apparently fell back.
Indicators of spending on equipment other than transportation and high tech have looked more favorable
recently, as shipments and imports for this broad
category increased noticeably, on balance, in April
and May. In addition, unfilled orders for such equipment remain at high levels.
Real nonresidential construction continued at a low
level in the first half of this year, but fundamentals
are starting to show signs of improvement. The construction of office buildings and industrial facilities
has been restrained for some time by elevated
vacancy rates, weak demand, and higher costs for
construction materials. However, vacancy rates in
these sectors have recently turned down, and construction outlays for these types of buildings appear
to have edged higher, on net, so far this year. Commercial building—which includes retail outlets and
warehouses—also appears to have increased this year,
in part because of strong growth in the construction
of large retail stores. Meanwhile, investment in the
drilling and mining sector has trended up, on balance,
over the past year, as higher prices for natural gas
boosted the demand for new drilling rigs.
C h a n g e in real business i n v e n t o r i e s
Billions of chained ( 2 0 0 0 ) dollars, annual rate
l_L
1999
2001
2003
2005
SouKcfi: Department of Commerce, Bureau of E c o n o m i c Analysis.
recent surveys, businesses have been reporting that
they and their customers are increasingly comfortable
with current levels of stocks, whereas in 2004 and
early 2005, many were still characterizing inventory
positions as too lean.
One important exception to this characterization is
the motor vehicle industry, for which dealer stocks—
especially of light trucks—were high by historical
standards in recent months. In response, several major motor vehicle manufacturers reduced production
in the second quarter, and, more recently, some have
introduced price discounts on many 2005 models.
These efforts appear to have helped, in that inventories of light vehicles at the end of June fell to
sixty-five days of supply, a level more in line with
historical norms.
Inventory Investment
Corporate Profits and Business Finance
As in 2004, businesses accumulated inventories at an
appreciable pace early this year. Outside the motor
vehicle industry, nonfarm inventories increased at an
annual rate of $66 billion in real terms in the first
quarter of 2005. The rapid rate of inventory accumulation late last year and early in 2005 appears primarily to have been the result of efforts by firms to
replenish stocks that had been depleted by the strong
pace of sales in 2003 and 2004; apart from firms in a
limited number of sectors, such as steel and paper,
most businesses do not appear to be holding excess
stocks, even taking into account the downward trend
in inventory-sales ratios that has resulted from the
improvement in supply-chain management capabilities. The rebuilding of inventories in most industries appears to have been largely completed, and the
available data for April and May point to a noticeable
step-down in the pace of stockbuilding. Indeed, in
Corporate profits have continued to rise so far this
year, though at a slower pace than in 2003 and 2004.
Earnings per share for S&P 500 firms in the first
quarter of 2005 were up about 13 percent since the
same time last year, a pace in line with the profit
figures reported in the national income and product
accounts (NIPA). The ratio of before-tax profits of
nonfinancial corporations to that sector's gross value
added was about flat in the first quarter after having
moved up in 2003 and 2004. In the first half of this
year, the petroleum and gas industries benefited from
higher oil prices, but corporate earnings in the automobile sector declined sharply.
Given continued strong corporate profits and the
accompanying strength in cash flow, nonfinancial
firms' demand for external financing to fund capital
expenditures has remained somewhat subdued. Net
Monetary Policy Report to the Congress
327
Selected c o m p o n e n t s of net business financing
Beforc-tax profits of nonfinancial corporations
as a percent of sector G D P
Billions of d o l l a r s
Percent
Bonds
•
14
Commercial paper
•
—
•
Bank loans
400
Sum of selected
components
200
—
_J
2002
ll I I I I I I M I I M I M I I I I 1 I 1 I I
1981
1985
1989
1993
1997
2001
2005
NOTE: The data are quarterly and extend through 2005:Q1. Profits are from
domestic operations of nonfinancial corporations, with inventory valuation
and capital consumption adjustments.
SOURCE: Department of Commerce, Bureau of Economic Analysis.
equity issuance has stayed negative so far this year,
and share retirements have been boosted by considerable stock buybacks and cash-financed merger and
acquisition activity. Gross corporate bond issuance
has been limited, and the proceeds have been used
mainly to pay down existing debt. Short-term debt
financing, however, continued to pick up in the first
half of 2005. Both commercial and industrial loans
and commercial paper expanded at a brisk pace
that was likely in part the result of firms' need to fund
the rapid rate of inventory accumulation earlier in
the year. The Federal Reserve's Senior Loan Officer
l
i
2003
l
i
i
i
2004
I
i
200
i
2005
NOTE: Seasonally adjusted annual rate for nonfinancial corporate business.
The data for the sum of selected components are quarterly. The data for
2 0 0 5 :Q2 are e s t i m a t e d .
SouRCii: Federal Reserve Board; Securities Data Company; and Federal
Financial Institutions Examination Council, Consolidated Reports of Condition and Income (Call Report).
Opinion Survey on Bank Lending Practices conducted in April 2005 indicated that demand for business loans had strengthened over the previous three
months and that substantial fractions of banks had
eased standards and terms on these loans. In response
to special questions regarding longer-term changes in
lending practices, most banks reported that standards
on business loans were somewhat tighter, but that
terms were somewhat easier, than they had been in
1996 and 1997.
Net percentage of domestic banks tightening
standards on commercial and industrial loans
to large and medium-sized borrowers
Financing gap and net equity retirement
at nonfinancial corporations
Billions of dollars
Percent
Financing gap
N e t equity retirement
—
—
j
1991
1993
1995
1997
1999
2001
2003
20
50
2005
NOTE: The data are annual through 2004; for 2005, they are estimates
based on data from 2005:Q1. The financing gap is the difference between
capital expenditures and internally generated funds. Net equity retirement is
the difference between equity retired through share repurchases, domestic
cash-financed mergers, or foreign takeovers of U.S. firms and equity issued
in public or private markets, including funds invested by venture capital
partnerships.
SOURCE: Federal Reserve Board, flow of funds data.
i
1991
i
i
1993
i
L_I_J
1995
1997
i
i
1999
i
i
2001
i
i
2003
i
i
i
2005
NOTB: The data are drawn from a survey generally conducted four times
per year; the last observation is for the April (Q2) 2005 survey. Net
percentage is the percentage of banks reporting a tightening of standards less
the percentage reporting an easing. The definition for firm size suggested for,
and generally used by, survey respondents is that large and medium-sized
firms have sales of $50 million or more.
SOURCE: Federal Reserve, Senior Loan Officer Opinion Survey on Bank
Lending Practices.
328
Federal Reserve Bulletin • Summer 2005
Net interest payments of nonfinancial corporations
as a percent of cash flow
Percent
ll
I I I II I I I I IJ_l I I 1 M I II I I II I I I I I I
1981
1985
1989
1993
1997
2001
2005
investment-grade rating with all the rating agencies
except Standard & Poor's.
Expansion of commercial-mortgage debt continued apace in the first half of the year and was accompanied by record issuance of commercial-mortgagebacked securities. Likely because of that heavy
issuance, spreads of yields on commercial-mortgagebacked securities over those on comparable-maturity
Treasuries have turned up recently, but these spreads
remain relatively low. The credit quality of
commercial-mortgage debt remains quite strong, as
delinquency rates on holdings of commercial mortgages at banks and insurance companies and on loans
that back mortgage securities have been declining
from already low levels.
NOTE: T h e d a t a are q u a r t e r l y and extend t h r o u g h 2 0 0 5 : Q 1 .
SOURCE: D e p a r t m e n t of C o m m e r c e , B u r e a u of E c o n o m i c Analysis.
The Government Sector
Federal Government
Indicators of credit quality in the nonfinancial business sector have stayed generally very strong amid
continued growth of profits and corporate balance
sheets that remain flush with liquid assets. Both the
default rate on outstanding corporate bonds and the
delinquency rate on business loans stand at the low
end of their historical ranges. However, the automobile sector has been an exception to the pattern of
solid corporate credit quality. All three major credit
rating agencies downgraded the debt of both Ford
and General Motors this year in response to disappointing earnings news. General Motors' debt
now has a below-investment-grade rating from both
Standard & Poor's and Fitch, though it is still rated
as investment-grade by Moody's. Ford retains an
The deficit in the federal unified budget narrowed
over the past year. Over the twelve months ending
in June, the unified budget recorded a deficit of
$336 billion, $99 billion less than during the comparable period last year. Both revenues and outlays rose
faster than did nominal GDP over this period, but
the rise in receipts was especially strong. Even at
its lower level, the deficit was still equal to about
23/4 percent of nominal GDP.
Nominal federal receipts during the twelve months
ending in June were 14 percent higher than during the
same period a year earlier and reached 17 percent
of nominal GDP. Revenues were boosted by a large
Default rate on outstanding corporate bonds
Federal receipts and expenditures
Percent
—
Percent of nominal G D P
—
4
24
Expenditures
Expenditures
e x c l u d i n g net interest
) i i i i i i i i i i i i i i i i i i i i i i i
1991
1993
1995
1997
1999
2001
2003
2005
NOTE: T h e d a t a are m o n t h l y and extend through J u n e 2 0 0 5 . T h e rate for a
g i v e n m o n t h is t h e f a c e value of b o n d s that d e f a u l t e d in the t w e l v e m o n t h s
e n d i n g in that m o n t h d i v i d e d by the f a c e value of all b o n d s o u t s t a n d i n g at the
end of the c a l e n d a r quarter i m m e d i a t e l y p r e c e d i n g the t w e l v e - m o n t h period.
SOURCE: M o o d y ' s Investors Servicc.
1985
1990
1995
2000
2005
NOTE: T h e b u d g e t data are f r o m the unified b u d g e t through 2 0 0 4 and are
for fiscal years ( O c t o b e r tiirough S e p t e m b e r ) , and G D P is for Q 4 to Q3. For
2 0 0 5 , the b u d g e t data are for the t w e l v e m o n t h s e n d i n g in June, and G D P is
for 2 0 0 4 : Q 4 to 2 0 0 5 : Q 1 .
SOURCE: O f f i c e of M a n a g e m e n t and B u d g e t .
Monetary
Change in real government expenditures
on consumption and investment
Percent, annual rate
O
•
Federal
State and local
1I
J
Ql
_Q_
l_L
2001
1999
2003
2005
SOURCE: Department of Commerce, Bureau of Economic Analysis.
increase in corporate receipts that was driven by the
strength of corporate profits. In addition, individual
income and payroll taxes rose nearly 12 percent,
twice as fast as the growth of household income.
However, s o m e of this rise was d u e to the features of
the Jobs and G r o w t h Tax Relief Reconciliation Act of
2003 that altered the timing of tax p a y m e n t s in a w a y
that temporarily reduced the level of tax collections
last year.
Nominal federal outlays during the twelve m o n t h s
ending in J u n e were 7 percent higher than during
the s a m e period a year ago and stood at 20 percent
of nominal G D R Spending for national d e f e n s e continued to trend up at a rapid clip, and outlays
f o r M e d i c a r e also posted a sizable increase. In addition, federal net interest payments, boosted both by
higher interest rates and by the higher level of fedNet saving
Percent of nominal G D P
Nonfederal saving
Federal saving
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
NOTE: The data are quarterly and extend through 2005:Q1. Nonfederal
saving is the sum of personal and net business saving and the net saving of
state and local governments.
SouRCii: Department of Commerce, Bureau of Economic Analysis.
Policy Report to the Congress
329
eral debt, rose m o r e than 13 percent over this period.
Real f e d e r a l e x p e n d i t u r e s f o r c o n s u m p t i o n a n d
i n v e s t m e n t — t h e part of g o v e r n m e n t spending that is
a c o m p o n e n t of real G D P — i n c r e a s e d at an annual
rate of j u s t V2 percent in the first calendar quarter of
2005 after h a v i n g risen 4 percent in 2004. A l t h o u g h
d e f e n s e spending c h a n g e d little in real terms in t h e
first quarter, it has risen considerably in recent years
and is likely to increase f u r t h e r in c o m i n g quarters.
N o n d e f e n s e spending in the first quarter edged up in
line with its recent trend, and enacted legislation is
consistent with its continuing to rise at a subdued
pace.
T h e deficit in the federal b u d g e t has depressed
national saving in the past few years. T h e narrowing
of the deficit of late has lessened this reduction in
national saving f r o m a little m o r e than 3 percent of
nominal G D P in 2003 and 2 0 0 4 to roughly 2 percent
in the first quarter of 2005. E v e n so, as business a n d
personal saving rates changed little, on average, over
the past year, net national saving rose to just 3!4 p e r cent of nominal G D P in the first quarter, well b e l o w
the long-term historical average of about 7 percent
and b e l o w recent levels of net domestic investment.
If not reversed, such a low level of net national
saving will necessitate either slower capital f o r m a tion or continued heavy b o r r o w i n g f r o m abroad. T h e
pressures on national saving will intensify greatly
with the retirement of the b a b y - b o o m generation and
the associated increases in Social Security and Medicare benefit p a y m e n t s .
Federal B o r r o w i n g
B e c a u s e of the need to finance the sizable federal
b u d g e t deficit, federal debt held by the public
expanded at a seasonally adjusted annual rate of
133/4 percent in the first quarter of the year. T h e ratio
of this debt to nominal G D P increased to more than
37 percent for the first time since 2000. The average
maturity of outstanding marketable Treasury debt has
been declining for several years and reached fiftythree m o n t h s at the end of the first quarter of 2005,
d o w n f r o m about seventy months in 2000. However,
in the M a y mid-quarter r e f u n d i n g statement, the
Treasury announced that it was considering reintroducing regular issuance of a thirty-year nominal bond
in February 2006, a m o v e that would presumably
slow or arrest this downtrend.
Indicators of d e m a n d for Treasury securities by
foreign investors h a v e been mixed so far this year;
d e m a n d by foreign official institutions seems to have
moderated, but d e m a n d by foreign private investors
330
Federal Reserve Bulletin • Summer 2005
State and local government net saving
Federal g o v e r n m e n t debt held by the public
Percent of nominal G D P
—
55
—
Perccnt of n o m i n a l G D P
35
LLI I I I I I I I LI I I I I I I II IJ I 1 I I I l-l I I 1 li-U-LI II I I II IL II IJ _ L J _ I
II
1965
1975
1985
1995
. 2005
NOTE: The final observation is for 2005:Q1. For previous years, the data
for debt are as of year-end, and the corresponding values for G D P are for Q 4
at an annual rate. Excludes securities held as investments of federal government accounts.
SOURCE: Federal Reserve Board, flow of funds data.
appears to have remained robust. Indirect bidders at
Treasury auctions—which include foreign official
institutions that place bids through the Federal
Reserve Bank of New York—have been awarded an
average of 33 percent of coupon securities issued
at auctions held so far this year, down from 42 percent in 2004. Treasury securities held in custody at
the Federal Reserve Bank of New York on behalf
of foreign official institutions have grown only about
$25 billion so far this year after an increase of more
than $200 billion in 2004. Data from the Treasury
International Capital System also suggest an ebbing
of demand for Treasury securities from foreign official investors during the first five months of the year.
These data, however, indicate that foreign private
investors have continued to accumulate Treasury
securities at a rapid pace.
1981
1984
M l
1987
i_L_L
1990
1993
LI II I I I
1996
1999
2002
2005
NOTE: The data, which are quarterly, are on a national income and product
account basis and extend through 2005:Q1. Net saving excludes social
insurance funds.
SOURCR: Department of Commerce, Bureau of Economic Analysis.
four states. Nevertheless, lingering fiscal concerns
are still evident in some jurisdictions; these concerns
are related primarily to rising Medicaid costs, the
termination of temporary federal grants that were
appropriated in fiscal year 2004, and pressures to
restore funding to programs—such as elementary and
secondary education—that were cut back earlier in
the decade.
Real consumption and investment spending by
state and local governments edged down in the first
quarter of 2005 after having changed little in 2004.
Real outlays for consumption items increased at an
annual rate of less than Vi percent, a reflection of
some slowing in the pace of hiring. Nominal spending on investment rose at a moderate rate in the first
quarter, but because construction costs escalated,
investment spending declined a little in real terms.
State and Local Government Borrowing
State and Local Governments
The fiscal positions of states and localities have
improved this year. Ongoing gains in income and
consumer spending, along with sharp increases in
property values, have continued to boost tax receipts.
Although many jurisdictions have increased their
spending moderately, some are also using the additional revenues to rebuild reserve funds. On a NIPA
basis, net saving by state and local governments
equaled $34 billion at an annual rate in the first
quarter (roughly ]A percent of nominal GDP), double
the 2004 average. In addition, virtually all states
registered surpluses in their general fund budgets in
fiscal year 2005, which ended on June 30 for all but
State and local government debt held by the public
expanded at a rapid pace in the first quarter of the
year, rising at a seasonally adjusted annual rate of
16!A percent, up from 5lA percent in the fourth quarter of last year. However, much of this borrowing was
for the advance refunding of existing debt, as state
and local governments continued to take advantage
of low long-term interest rates. A significant portion
of the proceeds of these advance refundings were
invested in U.S. Treasury instruments tailored to meet
the cash management needs of municipal governments. In addition, financing of transportation- and
education-related projects boosted issuance of longterm municipal bonds for new capital.
Monetary Policy Report to the Congress
The credit quality of municipal borrowers
improved last year, and this trend has generally
continued so far in 2005, as upgrades of municipal
bonds by Standard & Poor's continued to outpace
downgrades.
Change in real imports and exports of goods and services
Percent, annual rate
•
Imports
| Exports
. n
The External Sector
The U.S. current account deficit expanded in the first
quarter of 2005 to $780 billion at an annual rate, or
about 6.4 percent of nominal GDP. The deficit in
trade in goods continued to widen, increasing $17 billion from the previous quarter. The deficit on net
unilateral transfers also widened in the first quarter,
largely because of an increase in government grants.
In contrast, the surplus on trade in services rose
$7 billion, and the surplus on net investment income
rose $2 billion.
International Trade
Real exports of goods and services accelerated in
the first quarter of 2005 to an annual rate of about
9 percent, roughly twice as fast as the rate in the
second half of last year. The dollar's decline in recent
years has raised the competitiveness of U.S. relative
prices and has continued to provide a mounting boost
to exports. Support from foreign economic activity,
though still substantial, moderated after the first
half of 2004 as growth abroad slowed. Increases in
exports of U.S. goods were widespread across major
U.S. trading partners, with the exception of Japan,
and were concentrated in capital goods and consumer
goods. Real exports of services rose at an annual rate
of about 13 '/4 percent.
U.S. trade and current account balances
Percent of nominal G D P
Trade
Current
account
1997
1998
1999
2000
2001
2002
2003
2004
NOTE: The data are quarterly and extend through 2005:Q1.
SOURCE: Department of Commerce.
2005
331
15
n
Q1
•
— 10
I all. ill ,
\
5
. 10
_L
1997
1999
,2001
2003
2005
SOURCE: Department of Commerce.
Real imports of goods and services rose at an
annual rate of about 9'/2 percent in the first quarter, a
pace similar to the average in 2004. The growth of
real oil imports ebbed after surging late last year.
Increases in imports of non-oil goods were widespread across categories. The expiration of the Multifibre Arrangement and the resulting elimination of
quotas shifted the source of some U.S. textile and
apparel imports among U.S. trading partners, but
these events appear to have had a limited effect on
the overall level of imports of these goods. Real
imports of services reversed their fourth-quarter
decline, posting a gain of 7 percent at an annual rate,
as some travel-related expenditures and also royalties
and license fees recovered from a very weak fourth
quarter.
Boosted by substantial increases in the prices of
primary commodities and industrial supplies, prices
of total exports rose at an annual rate of 4'A percent
in the first quarter. Prices of U.S. agricultural exports
rebounded in the first quarter after good harvests in
the second half of 2004 had caused prices to fall
sharply. The available data for the second quarter
point to continued increases in export prices.
Prices of imported non-oil goods rose at an annual
rate of 3 % percent in the first quarter, almost 1V2 percentage points faster than in the second half of 2004.
Prices of material-intensive items, such as industrial
supplies and foods, steadily increased in the last
quarter of 2004 and in the first quarter of 2005. In
part, this rise reflected higher prices for nonfuel primary commodities, as strength in global demand for
many commodities outstripped a slow expansion of
supply. Prices for finished goods, such as consumer
goods and many kinds of capital goods, also turned
noticeably higher. Available data for the second quar-
332
Federal Reserve Bulletin • Summer 2005
Prices of m a j o r nonfuel c o m m o d i t i e s
J a n u a r y 2 0 0 1 = 100
Food
Agricultural
raw materials
2002
2001
2003
2004
2005
NOTE: The data are monthly and extend through June 2005. The category
of agricultural raw materials consists of timber, cotton, wool, rubber, and
hides; food includes cereals, vegetable oils and protein meals, seafood, and
meat; and metals includes aluminum, copper, and iron ore.
SOURCE: International Monetary Fund.
ter show that the increases in prices of both materialintensive and finished goods have slowed.
The spot price of West Texas intermediate (WTI)
crude oil began 2005 near $43 per barrel, but it
climbed above $50 per barrel in late February and
breached $60 per barrel in late June. The increase in
the spot price of WTI largely reflects several global
factors: continued strong demand for oil, limited
spare production capacity, and concerns about the
reliability of supply from some foreign sources. In
contrast to the market outlook during last October's
peak in oil prices, futures contracts indicate that
market participants now expect oil prices to remain
near their current high levels, a view consistent with
Prices of oil and of nonfuel commodities
J a n u a r y 2001 - 100
the belief that demand will remain strong and production will have difficulty keeping pace. The price of
the far-dated NYMEX oil futures contract (currently
for delivery in December 2011) rose from about
$38 per barrel as of last October to about $56 per
barrel in late June.
OPEC spare production capacity appears to be
near historical lows, with only Saudi Arabia able to
increase production substantially. Many other OPEC
producers are either pumping close to capacity or
encountering production problems. Venezuela and
Indonesia cannot meet their production quotas, and
Iraqi production this year has averaged less than in
2004. In addition, several governments have moved
to increase their control of the energy industry as oil
prices have risen. Russian oil production, which had
provided most of the growth in non-OPEC supply
over the previous five years, has stagnated since last
September amid the partial nationalization of Yukos,
formerly Russia's largest oil company. Venezuela has
also increased the taxes and royalty payments of
foreign oil firms.
The Financial Account
Foreign official inflows, which accounted for more
than half of all net financial inflows to the United
States in 2004, slowed significantly in the first quarter but showed signs of renewed strength in April and
May. In contrast, private inflows moderated in April
and May after having increased substantially in the
preceding six months. As has been the case for several years, the U.S. current account has been financed
primarily by foreign purchases of U.S. debt securities. U.S. residents' purchases of foreign securities
increased after a temporary lull in the fourth quarter
D o l l a r s per barrel
U.S. net financial inflows
Billions of dollars
140
•
—
Official
200
H Private
175
12(1
150
Oil
—
Nonfuel
80
2001
2002
2003
2004
2005
NOTE: The data are monthly and extend through June 2005. The oil price is
the spot price of West Texas intermediate crude oil. The price of nonfuel
commodities is an index of forty-five primary-commodity prices.
SOURCE: For oil, Wall Street Journal; for nonfuel commodities, International Monetary Fund.
2001
2002
2003
SOURCE: Department of Commerce.
2004
2005
125
—
100
100
Monetary Policy Report to the Congress
Net c h a n g e in p a y r o l l e m p l o y m e n t
U . S . net i n t e r n a t i o n a l s e c u r i t i e s t r a n s a c t i o n s
Billions of dollars
T h o u s a n d s of j o b s , monthly a v e r a g e
Nonfarm
Net private foreign purchases of U.S. securities
—
•
|
Bonds
Equities
—
— I
g
11
—
Q2
I 111
H
2002
2003
2004
2005
SOURCE: Department of C o m m e r c e and the Federal Reserve Bank of New
York.
and have been more heavily weighted toward purchases of equities.
Net direct investment outflows in the first quarter
were well below their levels in the fourth quarter;
direct investment into the United States was roughly
unchanged, but U.S. direct investment abroad fell
back after a surge in new equity late last year. There
is little evidence to date that U.S. companies have
repatriated earnings from their foreign subsidiaries
using the temporarily reduced tax rate available
under the American Jobs Creation Act of 2004. However, there are indications that these remittances may
pick up in the second half of this year.
The Labor Market
Employment and Unemployment
Labor markets have continued to improve this year,
albeit at an uneven pace from month to month. On
average, nonfarm payroll employment expanded
roughly 180,000 per month over the first half of
2005, about the same pace as in the fourth quarter of
2004. At the same time, the civilian unemployment
rate, which had declined from 53/4 percent to just
below 5V5s percent over 2004, continued to move
down. The jobless rate stood at 5 percent in June, the
lowest level since September 2001.
The increases in payrolls over the first half of 2005
were relatively widespread across industries. Particularly sizable gains were registered at providers of
health-care services and leisure and hospitality services and at establishments that provide business
services, such as professional and technical assistance and administrative and support services (a category that includes temporary help). In addition, con-
300
— 200
—
1999
2001
2003
100
—
—
2001
333
200
2005
SOURCE: Department of Labor, Bureau of Labor Statistics.
struction employment continued to climb at a steady
pace, a reflection of the buoyant residential housing
market and increased spending on infrastructure by
state and local governments. In contrast, manufacturing employment continued to trend down, as cutbacks in industries that produce wood products, furniture, and a variety of nondurable goods more than
offset hiring at producers of fabricated metals and
machinery. Employment in retail trade has advanced
at a moderate pace this year. Increases in employment at state and local governments slowed somewhat in the first half of this year from the pace in the
second half of last year, and federal civilian employment changed little.
The gradual rise in job opportunities appears to be
attracting some potential workers back into the labor
market. The labor force participation rate, which had
declined noticeably between 2000 and 2004, edged
up over the first half of 2005. Nevertheless, the
Civilian u n e m p l o y m e n t rate
— 2
1975
1985
1995
NOTK: T h e data are monthly and extend through June 2005,
SOURCE: Department of Labor, Bureau of Labor Statistics.
2005
334
Federal Reserve Bulletin • Summer 2005
C h a n g e in o u t p u t p e r h o u r
Labor f o r c e participation rate
Percent, annual rate
—
5
67
64
—
I
I I I I I J - L I 1,1 1. I I _I_L I I I I
1975
1985
IIII IMI
1995
61
JJJ
2005
NOTE: The data are monthly and extend through June 2005.
SOURCE: Department of Labor, Bureau of Labor Statistics.
participation rate in June, at 66 percent, remained
well below the high of 67 XA percent reached in early
2000. To some extent, both the high level of the
participation rate in 2000 and the more recent decline
are likely related to cyclical developments in the
economy: The tight labor markets of the late 1990s,
perhaps coupled with the introduction of work
requirements for many welfare recipients, undoubtedly drew additional people into the labor force at
that time, while the subsequent recession and slow
recovery in the labor market have discouraged many
job seekers in recent years. However, the downtrend
in the aggregate participation rate also appears to be
associated with structural developments that seem
likely to limit future increases. For example, the large
baby-boom cohorts are now entering ages at which
labor force participation rates typically drop off
sharply. And, in contrast to patterns observed in
previous decades, participation rates for women
between 25 and 54 years of age no longer appear to
be trending up.
Productivity and Labor Costs
Gains in labor productivity have slowed, on balance,
in recent quarters. According to currently published
data, output per hour in the nonfarm business sector
rose 2Vi percent over the year ending in the first
quarter of 2005, down from the 5'/2 percent pace
registered in the comparable period a year earlier. A
deceleration in productivity is not unusual as an
economic expansion matures and as businesses—
which become increasingly confident about future
prospects for sales—step up their pace of hiring. In
addition, the recent slowdown in productivity growth
11 ill II
1948-73
1973-95 1995-2000
2003
2005
NOTE: Nonfarm business sector.
SOURCE: Department of Labor, Bureau of Labor Statistics.
was from the unusually rapid average rate that prevailed between 2002 and early 2004. That elevated
rate likely reflected both an atypical reluctance to
hire—as employers reacted to a succession of economic and geopolitical shocks—and newfound efficiencies brought about by the better use of high-tech
capital purchased by businesses in earlier years and
by organizational changes implemented to maintain
profitability when the economy was relatively weak.
As the impetus from these influences has waned,
productivity growth has fallen back.
Measures of labor compensation for recent quarters suggest that the remaining slack in labor markets
continued to restrain increases in base wage rates but
that large increases in some of the more flexible
components of worker pay and for some types of
employer-provided benefits added to labor costs. In
particular, compensation per hour in the nonfarm
business sector, which is based on the data from the
national income and product accounts, rose 7 percent
over the four quarters ending in the first quarter of
this year, having registered a particularly large bulge
in the final quarter of 2004. Much of this sharp rise
may be the result of the exercise of a large number of
stock options late last year, a development perhaps
induced by an increase in equity prices that boosted
the number of options that were "in the money" and
by a proposed change in accounting regulations that
led some companies to accelerate the vesting of
options that had been previously granted. In addition,
the strong performance of profits in 2004 may have
been associated with sizable nonproduction bonus
payments at the end of last year.
A more modest rate of increase in hourly compensation is indicated by the employment cost index
(ECI), which is based on a quarterly survey of private
Monetary Policy Report to the Congress
335
C h a n g e in unit labor costs
Measures of c h a n g e in hourly compensation
Percent, annual rate
Nonfarm compensation
per h o u r
Employment
cost i n d e x
J
1995
1997
L
1999
I
2001
2003
L
2005
2001
1999
2003
2005
NOTE: T h e d a t a are quarterly a n d e x t e n d t h r o u g h 2 0 0 5 : Q 1. F o r n o n f a r m
NOTE: N o n f a r m b u s i n e s s sector. T h e c h a n g e in unit l a b o r c o s t s is d e f i n e d
c o m p e n s a t i o n , c h a n g e is o v e r f o u r quarters; for t h e e m p l o y m e n t c o s t i n d e x
as t h e i n c r e a s e in n o n f a r m c o m p e n s a t i o n p e r h o u r Jess t h e g r o w t h in l a b o r
productivity.
( E C I ) , c h a n g e i s o v e r the t w e l v e m o n t h s e n d i n g in the last m o n t h o f e a c h
quarter. N o n f a r m c o m p e n s a t i o n is for t h e n o n f a r m b u s i n e s s sector; t h e E C I is
SOURCE: D e p a r t m e n t o f L a b o r , B u r e a u o f L a b o r S t a t i s t i c s .
for private i n d u s t r y e x c l u d i n g farm a n d h o u s e h o l d w o r k e r s .
SOURCE: D e p a r t m e n t o f L a b o r , B u r e a u o f L a b o r Statistics.
nonfarm establishments conducted by the Bureau of
Labor Statistics and which excludes income received
from the exercise of stock options. In particular, the
ECI measure of hourly compensation rose 3'/2 percent over the twelve months ending in March 2005,
about '/2 percentage point less than the increases over
the preceding two years. The wages and salaries
component of the ECI was up just 2Vi percent over
the twelve months ending in March, a pace similar to
that in the preceding year, while employer costs for
benefits increased 53A percent, a bit below the pace of
the previous year but a sizable gain nonetheless. Part
of the outsized rise in benefit costs stemmed from the
need by many companies to rebuild their definedbenefit pension assets to make up for earlier losses in
those plans. In addition, health insurance costs have
continued to rise more rapidly than wages, although
the 7'/2 percent increase in these costs over the year
ending in March of this year was down from the
double-digit rates of growth in 2002 and 2003.
The acceleration in the nonfarm business measure
of hourly compensation, coupled with the deceleration in productivity, has contributed to a noticeable
pickup in unit labor costs in recent quarters. In particular, unit labor costs rose 4lA percent over the four
quarters ending in the first quarter of 2005 after
having declined 1 percent over the preceding four
quarters. However, to the extent that the acceleration
in compensation was the result of a temporary bulge
in stock option exercises in late 2004, unit labor costs
should moderate significantly this year. Moreover,
the implications of such a spike in unit labor costs for
price inflation are probably minimal, at least as
judged by previous spikes of this nature. For example, the sharp rise in unit labor costs in 2000 had little
or no subsequent effect on price inflation.
Prices
Higher energy prices continued to show through to
overall consumer price inflation this year. The chaintype price index for personal consumption expenditures rose at an annual rate of about 2'/2 percent
between the fourth quarter of 2004 and May 2005, a
rate of increase similar to that over the four quarters
of 2004. Within that total, core PCE prices accelerated over that period to an annual rate of about
C h a n g e in consumer prices
Percent, annual rate
•
C o n s u m e r price index
•
Chain-type price index f o r P C E
—
1999
2001
2003
2
2005
NOTE: F o r 2 0 0 5 , t h e c h a n g e for t h e P C E p r i c e i n d e x is f r o m 2 0 0 4 : Q 4 to
M a y 2 0 0 5 ; for the c o n s u m e r p r i c e i n d e x , it is f r o m 2 0 0 4 : Q 4 to 2 0 0 5 : Q 2 .
SoURcn: F o r c o n s u m e r price i n d e x , D e p a r t m e n t of L a b o r , B u r e a u o f L a b o r
Statistics; for c h a i n - t y p e m e a s u r e , D e p a r t m e n t o f C o m m e r c e , B u r e a u o f
Economic Analysis.
336
Federal Reserve Bulletin • Summer 2005
Alternative measures of price change
Perccnt
Price measure
Chain-type (Q1 to Ql)
Gross domestic product (GDP)
Gross domestic purchases
Personal consumption expenditures ( P C E ) . . .
Excluding food and energy
Market-based PCE excluding food
and energy
Fixed-weight (Q2 to Q2)
Consumer price index
Excluding food and energy
2003 to 2004
2004 to 2005
1.7
1.7
1.7
1.4
2.4
2.8
2.2
1.6
1.3
1.7
2.9
1.8
2.9
2.2
NOTE: Changes are based on quarterly averages of seasonally adjusted data.
SOUKCE: For chain-type measures, Department of Commerce, Bureau of
Economic Analysis; for fixed-weight measures, Department of Labor, Bureau of
Labor Statistics.
2 percent, from 1 xh percent in 2004. However, data
for the consumer price index (CPI), which are available through June, suggest that core inflation has
moderated in recent months; the core CPI rose at an
annual rate of 1 XA percent in the three months ending
in June after having increased at a 3'/4 percent pace
over the first three months of this year.
The PCE price index for energy, which moved up
more than 18 percent in 2004, increased at an annual
rate of nearly 14 percent between the fourth quarter
of 2004 and May 2005, having been pushed higher
by a further run-up in crude oil prices. Gasoline
prices climbed especially rapidly between February
and April, when higher crude costs were accompanied by a significant widening in retail margins.
Although these margins subsequently dropped back,
retail gasoline prices in June were still nearly 10 percent above their level at the end of last year, and they
moved up further in early July. Electricity prices also
rose sharply over the first half of 2005 because of
higher input costs for electricity generation.
Consumer food prices increased at an annual rate
of about 2Vi percent over the first half of 2005, a bit
less than in 2004. Prices for fruits and vegetables
dropped back early in the year, as supplies recovered
from the damage associated with last year's succession of hurricanes. Although these prices turned up a
little in the spring, they remain below their fourthquarter levels. In contrast, meat prices rose at an
annual rate of 3 percent over the first half of the year;
relatively strong domestic demand has lifted prices
despite increases in the number of cattle being fed
for slaughter and ample supplies of other meats and
poultry. Prices for beef were also influenced by a
variety of trade restrictions associated with concerns
about mad cow disease: Both the full resumption of
imports from Canada (which would tend to push
down prices) and the resumption of exports to other
important trading partners (which would tend to push
up prices) were delayed. Prices of food away from
home, for which labor costs are more important than
raw food costs, rose at an annual rate of about
3Vi percent over the first half of this year, a little
higher than the recent trend.
The pickup in core PCE inflation this year is due
both to the sharp run-up in energy prices and to
higher prices for other intermediate materials; these
developments have raised production and distribution
costs for a wide range of domestically produced
goods and services. In addition, the decline in the
exchange value of the dollar into early 2005 continued to push up prices of core nonfuel imports this
year, both for items used in the domestic production of other goods and services and for items sold
directly to consumers. Partially offsetting these influences have been the gains in productivity, which have
enabled firms to absorb a portion of the higher costs.
Moreover, although the price of crude oil remains
high, prices for some other industrial materials have
decelerated or edged down of late: The Journal of
Commerce industrial price index—which excludes
energy items—has fallen 6 percent since the beginning of April, while the producer price index for core
intermediate materials rose at an annual rate of just
VA percent in the second quarter of this year after
having increased at roughly a 7 percent pace, on
average, in the preceding few quarters.
Measures of shorter-term inflation expectations
have edged higher this year, while those of longerterm expectations have held steady or moved lower.
Most notably, the Michigan SRC survey indicates
that households' median expectations for inflation
over the next twelve months have ranged between
3 percent and VA percent in recent months, up from
just under 3 percent at the beginning of the year. In
contrast, households' median expectations for inflation over the next five to ten years, at a little under
3 percent, are similar to readings in recent years. The
latest Survey of Professional Forecasters likewise
shows that inflation is expected to average IVi percent over the next ten years, a figure unchanged since
2001. Readings of longer-term inflation compensation from financial markets show a more pronounced
decline: Inflation compensation as measured by the
spread of the yield on nominal Treasury securities
over their indexed counterparts for the period five to
ten years ahead has fallen about 50 basis points since
the end of 2004.
U.S. Financial
Markets
Financial market conditions remained generally
accommodative during the first half of 2005, as Trea-
Monetary Policy Report to the Congress
sury and private interest rates stayed low. Risk
spreads on speculative-grade debt had bccome very
tight by the end of the first quarter, but they subsequently rose, on balance, after the downgrades of
Ford and General Motors; current levels suggest
more-typical compensation for default risk. Banks
continued easing terms and standards on lending to
businesses. The pace of business borrowing, which
had been sluggish, picked up last year and remained
fairly robust in the first half of 2005. Nevertheless,
strong corporate profits and the large stockpile of
liquid assets already on firms' balance sheets continued to limit their demand for external financing.
Debt of the federal government, of state and local
governments, and of households continued to expand
briskly. Broad equity price indexes were little
changed on net; higher oil prices boosted share prices
in the energy sector but weighed on other stocks.
Interest Rates
The F O M C boosted the intended federal funds rate
25 basis points at each of its four meetings in the first
half of the year. Judging from federal funds futures
quotes, these policy actions had all been widely
anticipated by investors for some time before each
meeting. Since the start of the year, rates on interest rate futures contracts that will expire at the end
of 2005 have moved up about 60 basis points in
response to evidence of robust economic growth and
concerns about the possible emergence of inflationary pressures. Two-year nominal Treasury yields
have risen about 80 basis points over that period,
reflecting both the firming of policy expectations and
actual monetary policy tightening.
Nevertheless, ten-year nominal Treasury yields
have edged down so far this year and are now about
60 basis points below their level just before the
F O M C meeting in June 2004. Moreover, this fall in
long-term yields is a global phenomenon: Long-term
yields have declined in most foreign industrialized
economies, in several cases by more than in the
United States. From the term structure of interest
rates, the ten-year Treasury yield can be decomposed
into a series of ten consecutive one-year forward
rates. The last of these—the one-year forward rate
ending ten years hence—now stands about 160 basis
points below its level just before the June 2004
FOMC meeting.
Several potential explanations have been offered
for the decline in long-term yields and distant-horizon
forward rates in the United States since mid-2004.
Among these is the possibility that long-term infla-
337
Interest rates on selected Treasury securities
Percent
6
Ten-year
— 5
—
4
— 3
—
Three-month
2002
2
— 1
2003
2004
2005
NOTE: T h e data are daily and extend through July 13, 2005.
SOURCE: Department of the Treasury.
tion expectations have fallen and become more firmly
anchored. Indeed, longer-term inflation compensation, measured by the spread between the yields on
ten-year Treasury inflation-protected securities and
their nominal counterparts, has fallen about 30 basis
points over this period. A second possible explanation is investors' willingness to accept smaller risk
premiums on long-term securities amid declining
macroeconomic and interest rate uncertainty. The
volatility of short-term interest rates and Treasury
yields implied by option prices has indeed declined
to historically low levels. A third possibility is that
several factors have spurred an excess of global saving over planned investment, such as rising incomes
in countries with high saving rates, the desire by the
aging citizens of many industrialized countries to
TIPS-based inflation compensation
Percentage points
~ 3 , 5
Five-year, five-year ahead
—
—-
2003
1.5
—
2004
2.0
—-
2002
2.5
—
Five-year
3.0
1.0
2005
NOTE: The data are daily and extend through July 13, 2005. Based on a
comparison of the yield curve for Treasury inflation-protected securities
(TIPS) to the nominal off-the-run Treasury yield curve.
SOURCE: Federal Reserve Board calculations based on data provided by the
Federal Reserve Bank of New York and Barclays.
338
Federal Reserve Bulletin • Summer 2005
Stock price indexes
Spreads of corporate bond yields over
comparable off-the-run Treasury yields
January 2,20()2 = 100
Percentage points
—
140
Russell 2000
High-yield
BBB
W i l s h i r e 5000
AA
0
Li
2002
1997
1998
1999
2000
2001
2002
2003
2004
2005
NOTE: The data are daily and extend through July 13, 2005. T h e high-yield
index is compared with the five-year Treasury yield, and the B B B and A A
indexes are compared with the ten-year Treasury yield.
SOURCE: Merrill Lynch A A and BBB indexes and Merrill Lynch Master II
high-yield index.
2003
2004
2005
NOTE: T h e data are daily and extend through July 13, 2005.
SOURCE: Frank Russell Company; D o w Jones Indexes.
Implied S & P 500 volatility
Percent
save for retirement, and apparently diminished investment prospects in many industrialized and developing economies.
Spreads of yields on investment-grade corporate
debt over those on comparable-maturity Treasury
securities fell during the first quarter of 2005, and
risk spreads on high-yield corporate debt reached
very low levels. However, in March, news about
difficulties in the domestic motor vehicle industry
apparently became a focal point for a revision of
investors' assessment of risks. Further revelations
of accounting irregularities in the insurance industry
also seem to have made investors somewhat charier
of risk. As a result, risk spreads on corporate bonds
and credit default swaps have widened; speculativegrade bond spreads are now about 50 basis points
higher than at the start of the year.
Equity Markets
Broad equity price indexes fell modestly in the first
quarter, but they rebounded and are now little
changed, on net, since the start of 2005. Thus far this
year, stock prices have been buoyed by continued
strong profits and low long-term interest rates, but
higher oil prices and a few high-profile earnings
disappointments have weighed on share prices outside the energy sector. The forward earnings-price
ratio held about steady despite the fall in real interest
rates. Equity price volatility implied by quotes on
stock options declined, as the implied volatility on
the S&P 500 index dropped to a record low level of
less than 11 percent.
1997
1998
1999
2000
2001
2002
2003
2004
2005
NOTE: T h e data are daily and extend through July 13, 2005. The series
shown is the implied thirty-day volatility of the S&P 500 stock price index as
calculated from a weighted average of options prices.
SOURCE: Chicago Board Options Exchange.
Net inflows into equity mutual funds were moderate in the first half of 2005, down from the rapid pace
during the same period last year. These flows likely
followed the pattern set by share prices, which surged
about 30 percent in 2003, rose about 10 percent in
2004, and have been flat so far this year.
Debt and Financial Intermediation
The aggregate debt of the domestic nonfinancial sectors expanded at an annual rate of about 10 percent
in the first quarter of 2005, up from an 814 percent
pace in the fourth quarter of 2004, mainly because of
faster growth of federal government debt and state
and local government debt. The mix of household
and business debt growth has shifted modestly since
Monetary Policy Report to the Congress
C h a n g e in d o m e s t i c n o n l ' i n a n c i a l d e b t
Percent
—
10
Total
339
runoffs, accelerated to a 15 percent annual rate of
growth in the first quarter of 2005, supported in part
by strong demand for short-term financing to fund
rising accounts receivable, inventories, and merger
and acquisition activity.
Credit market assets held by governmentsponsored enterprises declined in the first quarter
of this year, as Freddie Mac and Fannie Mae
reduced their outright holdings of mortgage-backed
securities.
The M2 Monetary Aggregate
Percent
—
15
Federal,
held by public
J
1991
1993
I
J
1995
I
I
1997
1
I
1999
L
J
2001
2003
L
2005
NOTE: F o r 2 0 0 5 , c h a n g e is f r o m 2 0 0 4 : Q 4 t o 2 0 0 5 : Q 1 at a n a n n u a l r a t e . F o r
earlier years, the data are annual and are computed by dividing the annual
flow for a given year by the level at the end of the preceding year. The total
consists of nonfederal debt and federal debt held by the public. Nonfederal
debt consists of the outstanding credit market debt of state and local governments, households, nonprofit organizations, and nonfinancial businesses.
Federal debt held by the public excludes securities held as investments of
federal government accounts.
SOURCE: Federal Reserve Board, flow of funds data.
In the first half of 2005, M2 grew at a 2Vi percent
annual rate—probably slower than nominal GDP and
down from a 5]A percent pace last year. Slower
growth in liquid deposits—likely a consequence of
their rising opportunity cost—accounted for most of
this deceleration. Yields on retail money market
mutual funds rose noticeably in the first half but
continued to lag interest rates on market instruments,
and assets in these funds continued their prolonged
runoff. Small time deposits, whose yields have better
kept pace with rising market interest rates, rose
briskly during the same period. Currency expanded at
a slow rate, apparently a reflection in large measure
of weak demand from abroad. On net, the velocity of
M2 is estimated to have moved up in the first half at a
somewhat slower pace than would be expected from
the historical relationship between money, income,
and opportunity cost.
M 2 growth rate
the same time last year. Household debt decelerated,
though it continued expanding at a rapid pace, and
the growth of business-sector debt picked up even
though ample internal funding continued to limit
firms' need for external financing.
Commercial bank credit expanded at an annual rate
of 13 percent in the first quarter of 2005. Financing
secured by residential real estate, including home
mortgages, home equity loans, and mortgage-backed
securities, extended its long, robust expansion. In
May, the Federal Reserve Board and other federal
agencies that regulate depository institutions issued
guidance on sound underwriting and effective creditrisk-management practices for home equity lending.
Recently there has been increased use of potentially
riskier types of mortgages, including adjustable-rate
and interest-only loans, which could pose challenges
to both lenders and borrowers. Business loans, which
had begun to grow in 2004 after several years of
Percent
1991
1993
1995
1997
1999
2001
2003
2005
NOTE: For 2005, growth is estimated using monthly data through May; for
earlier years, the data are annual averages. M2 consists of currency, traveler's
checks, demand deposits, other checkable deposits, savings deposits
(including money market deposit accounts), small-denomination time
deposits, and balances in retail money market funds.
SOURCE: Federal Reserve Statistical Release H.6, "Money Stock
Measures."
340
Federal Reserve Bulletin • Summer 2005
International
Y i e l d s 011 b e n c h m a r k g o v e r m e n t b o n d s i n s e l e c t e d
Developments
foreign industrial countries
Foreign economic activity has expanded a bit less
rapidly this year than in the second half of 2004, as
measured by an export-weighted average of growth
among U.S. trading partners. The pace of expansion
in the industrial economies has generally increased,
but, with the important exception of China, this
increase has been offset by moderating growth in
many developing economies. Inflation has remained
well contained in most countries.
The stance of monetary policy has not changed this
year in most major foreign economies. The European
Central Bank has held its policy rate constant since
June 2003, and both the Bank of England and the
Bank of Canada have kept policy rates unchanged
after having raised them in the latter half of 2004.
The Bank of Japan has maintained its commitment
to a policy of quantitative easing until deflation
ends, but in late May it made what it described as
a technical change to allow temporary deviations
below the target range for reserve accounts if banks'
demand for funds is too weak to satisfy the target.
Reserve account balances temporarily fell below
¥30 trillion, the lower end of the target, in early June.
Monetary policy has also remained unchanged in
most emerging Asian economies; however, several
Latin American monetary authorities have continued
tightening cycles that began last year in efforts to
restrain inflationary pressures.
After having edged up during the first three months
of this year, long-term interest rates in the major
foreign industrial economies have fallen and now
stand below their levels at the start of the year. As in
Percent
Canada
United K i n g d o m
Germany
—
3
Japan
2002
2003
2004
2005
NOTE: The data are for ten-year bonds and are daily. The last observation
is for July 13, 2005.
SOURCE: Bloomberg L.P.
the United States, the decline in foreign long-term
interest rates continues a trend that began in mid2004. However, long-term rates in the major foreign
industrial economies have fallen more than rates in
the United States this year. The decline in European
long-term rates occurred amid weak economic news
and a shift away from market expectations of a policy
rate increase. In contrast, long-term rates in Canada
and the United Kingdom have trended down despite
policy rate increases in the second half of last year by
both countries' central banks, though market perceptions that the Bank of England may cut rates have
recently increased. Although the decline in Japanese
rates last year was consistent with both the weak
U.S. dollar n o m i n a l e x c h a n g e rate, broad index
January 2001 = 100
O f f i c i a l i n t e r e s t r a t e s in s e l e c t e d f o r e i g n i n d u s t r i a l c o u n t r i e s
—
6
—
5
United K i n g d o m
Canada
2002
I
2002
I
2003
L
2004
J
2005
NOTE: The data are as of month-end; the last observation for each series is
for July 13, 2005. The data shown are the call money rate for Japan, the
overnight rale for Canada, the refinancing rate for the euro area, and the
repurchase rate for the United Kingdom.
2003
2004
2005
NOTE: The data arc monthly and are in foreign currency units per dollar.
The last observation is the average of trading days from July 1, 2005, through
July 13, 2005. The broad index is a weighted average of the foreign exchange
values of the U.S. dollar against the currencies of a large group of major U.S.
trading partners. The index weights, which change over time, are derived
from U.S. export shares and from U.S. and foreign import shares.
SOURCE: Federal Reserve Board.
Monetary Policy Report to the Congress
341
Equity i ndexes in selected emerging-market economies
U.S. dollar exchange rate against
selected m a j o r currencics
W e e k ending January 3 , 2 0 0 3 = 100
Week ending January 4, 2002 - 100
Canadian
dollar
_
ioo
Argentina
—
90
exico
Japanese yen
—
80
Brazil
—
U.K.
pound
LJ
I
2002
2002
I
I
2004
70
v
V
i
2003
Asian emergingm a r k e t economies
2005
NOTE: T h e d a t a are w e e k l y and are in f o r e i g n c u r r e n c y units p e r dollar.
T h e last o b s e r v a t i o n for e a c h series is the a v e r a g e of July 11, 2 0 0 5 , t h r o u g h
July 13,2005.
SOURCE: B l o o m b e r g L.P.
performance of the economy and the persistence of
deflation, long-term rates fell further this year despite
solid growth in the first quarter.
As foreign interest rates have fallen in recent
months, the value of the dollar has risen. Most of this
rise has been against the currencies of the major
industrial countries; the dollar is largely unchanged
against the currencies of the United States' other
important trading partners. The dollar has appreciated
about 12 percent against the euro and about 9 percent
against the yen and sterling since the start of the year.
Some of the appreciation against the euro occurred
after voters in France and the Netherlands rejected
the proposed constitution for the European Union by
unexpectedly large margins in May.
2003
2004
2005
NOTE: T h e data are w e e k l y . T h e last o b s e r v a t i o n for e a c h series is t h e
a v e r a g e of July 11, 2005, t h r o u g h July 13, 2 0 0 5 . T h e A s i a n e m e r g i n g - m a r k e t
e c o n o m i e s are C h i n a , H o n g K o n g , India, I n d o n e s i a , M a l a y s i a , Pakistan, t h e
Philippines, S i n g a p o r e , S o u t h K o r e a , T a i w a n , a n d T h a i l a n d ; the index w e i g h t
for e a c h of these e c o n o m i e s is its m a r k e t capitalization as a share of t h e
g r o u p ' s total.
SOURCE: F o r Asian e m e r g i n g - m a r k e t e c o n o m i e s , M o r g a n Stanley Capital
International ( M S C I ) index; for others, B l o o m b e r g L.P.
European, British, and Canadian stock indexes
have risen more than 8 percent since the start of the
year. The rise in European stock prices is notable
because indicators of economic activity have been
fairly weak. In contrast, Japanese stock prices are
now little changed after having reversed first-quarter
gains. Equity prices in the majority of emerging
markets began the year on a strong note but reversed
course late in the first quarter and currently stand
close to their January levels. Despite these swings,
intraday volatility has remained subdued in most
equity markets.
Industrial Economies
Equity indexes in selected foreign industrial countries
Week ending January 4 , 2 0 0 2 = 100
130
115
Japan
—
100
United Kingdom
E u r o area
2002
2003
2004
2005
NOTE: T h e data are w e e k l y . T h e last o b s e r v a t i o n for c a c h series is the
a v e r a g e of July 11, 2005, t h r o u g h July 1 3 , 2 0 0 5 .
SOURCE: B l o o m b e r g L.P.
Real GDP in Japan increased at an annual rate of
nearly 5 percent in the first quarter of 2005, bouncing
back from last year's recession. Personal consumption spending reversed its recent declines, pushing
the household saving rate down further. Private
investment also rose sharply after having grown
tepidly in the second half of 2004. In contrast, the
external sector made a small negative contribution to
GDP, as imports rose modestly but exports fell. While
Japanese manufacturers of high-tech goods reduced
their levels of inventories from last year's peak,
inventory stocks of firms outside the high-tech sector
increased, perhaps because of the slowdown in
exports. The labor market has steadily improved: The
unemployment rate has reached a seven-year low,
and the ratio of j o b offers to j o b applicants is at a
342
Federal Reserve Bulletin • Summer 2005
twelve-year high. Despite the pickup in economic
activity and continuing inflation in wholesale prices,
consumer price deflation has worsened slightly. The
GDP price deflator returned to a year-over-year rate
of deflation of more than 1 percent after having
temporarily registered a more modest decline in the
fourth quarter of 2004.
The pace of activity in the euro area appears to
have slowed after a stronger start to the year. Real
GDP grew at a 2 percent annual rate in the first
quarter, as private consumption rose moderately and
both households and firms switched expenditures
away from imports and toward domestically produced goods. Both Germany and Spain grew at rates
above the area average in the first quarter. In contrast,
real GDP in both Italy and the Netherlands declined,
while French growth was slower than in most of
2004. Measures of activity point toward slower
growth in the euro area in the second quarter. Retail
sales, which had risen in the first quarter, were
roughly flat, on average, in April and May. The trade
balance fell in April, threatening a main engine of
growth, though the recent rise in the dollar against
the euro should help stimulate export demand going
forward. Twelve-month consumer price inflation
edged up in June to just above the European Central
Bank's target ceiling of 2 percent for inflation over
the medium term. The European Central Bank's measure of core inflation, which excludes energy and
unprocessed foods, has eased since January to an
annual rate comfortably below 2 percent.
Consumer spending in the United Kingdom
increased only modestly in the first quarter, slowing
real GDP growth to V/2 percent. Nevertheless, the
labor market remains tight, as unemployment is at its
lowest levels since the mid-1970s and real earnings
continue to trend up. The twelve-month rate of consumer price inflation ticked up in June to the Bank of
England's target of 2 percent. In its May Inflation
Report, the Bank of England forecast that inflation
would temporarily rise but stay near the target over a
two-year period. House prices have been fairly stable
this year, and household net mortgage borrowing has
also been subdued.
Growth in Canada remains moderate. Continuing a
pattern that has largely held for the past two years,
private consumption and investment demand rose in
the first quarter while net exports fell. Activity in the
second quarter appears to have been solid. Data on
housing starts indicate that construction spending
grew further, and the merchandise trade surplus
improved in April, as exports rose and imports
decreased slightly. Twelve-month consumer price
inflation fell in May to about 1V2 percent after having
averaged slightly above 2 percent in the first quarter.
The Bank of Canada's measure of core inflation has
stayed below 2 percent throughout this year.
Emerging-Market Economies
Chinese real GDP continues to rise rapidly following
strong growth in 2004. Economic expansion has been
led by investment, exports, and, more recently, a
surge in domestic production of goods that had previously been imported. Investment expenditure has
remained vigorous despite the government's attempts
early last year to slow its rate of increase. Import
growth slowed in the first quarter, but the rise of
exports was unabated, leading to a significant widening of the trade surplus. Although recent attention has
focused on China's exports of textiles, export growth
has remained strong across most major categories
of goods. The slowdown in imports has also been
broadly based. Despite China's strong rate of economic expansion, consumer price inflation fell to less
than 3 percent in the first quarter and has remained
low, as declining food prices have offset modest
increases in nonfood prices.
Economic developments in other Asian emergingmarket economies have varied. Hong Kong maintained its strong performance. As in China, growth in
Hong Kong has been driven by both investment and
exports. Export growth has also played an important
role in supporting growth in most of the other countries in this region, but domestic demand, particularly
inventory investment, has declined in many economies so far this year. Inflation has risen slightly,
reflecting higher food and energy prices, but remains
well contained and under 3 percent in most countries.
The Mexican economy has slowed so far this year,
as demand for its manufacturing exports has weakened and monetary tightening has tempered investment and consumption demand. The Bank of Mexico
has left monetary policy unchanged since March, but
its tightening over the preceding twelve months
raised short-term interest rates 500 basis points.
Twelve-month consumer price inflation has fallen
from its levels of late last year but still stands above
the Bank of Mexico's target range of 2 percent to
4 percent. After having risen in the second half of last
year, core inflation has also trended down in recent
months.
Economic growth in most South American economies has also slowed compared with the pace of
activity at the end of 2004. Brazil's real GDP rose at
only a 1V4 percent annual rate in the first quarter, as
both private consumption and investment declined in
Monetary Policy Report to the Congress
the wake of the Brazilian central bank's decision to
begin raising its policy rate in the second half of 2004
to counter inflationary pressures. Exports, which rose
rapidly and outpaced imports, provided the only
bright spot. Twelve-month inflation has remained
above 7 percent, and the central bank has continued
to raise its policy rate this year. Argentina has gradually recovered from its 2001 crisis, but real GDP
sharply decelerated in the first quarter. The unemployment rate, which had steadily fallen over the past
343
few years, also edged up slightly. Twelve-month
consumer price inflation appears to have stabilized
after having been pushed up by food price increases
earlier in the year, but it still lies above the central
bank's unofficial target range of 5 percent to 8 percent. The Argentine government recently completed
the final settlement of its debt exchange but has not
yet resolved the treatment of the remaining investors
(holders of roughly one-fourth of all defaulted government bonds) who rejected the agreement.
•
344
New Information Reported under HMDA and
Its Application in Fair Lending Enforcement
Robert B. Avery and Glenn B. Canner, of the Division
of Research and Statistics, and Robert E. Cook, of the
Division of Consumer and Community Affairs, prepared this article. Shannon C. Mok and Caitlin G.
Coslett provided research assistance. Patricia J.
Dykes and Sylvia A. Freeland assisted in preparing
the 2004 HMDA data for analysis.
Most lending institutions with offices in metropolitan
statistical areas are required by the Home Mortgage
Disclosure Act of 1975 (HMDA) to disclose information to the public about applications for home loans
and the home loans that they originate or purchase
during each calendar year. The law's requirements
arose from concerns that, in some cases, lenders were
contributing to the decline of certain neighborhoods
by failing to provide adequate home financing to
qualified applicants on reasonable terms and conditions. The disclosure of lending activity is intended to
help determine whether lenders are adequately serving their communities' housing finance needs, to
facilitate enforcement of the nation's fair lending
laws, and to guide investment activities in both the
public and the private sectors. HMDA is implemented by the Federal Reserve Board's Regulation C.
Underlying HMDA's disclosure requirements is a
presumption that more publicly available information
will improve market performance and help prevent
market failures. The data reported under HMDA are
certainly extensive: Taken together, the 8,853 lenders
covered by the law as of the end of 2004 are estimated to have accounted for about 80 percent of
home loans extended that year.
The Congress has amended HMDA on several
occasions to extend the reach of the law to more
lenders and to expand the types of information that
must be disclosed. Amendments passed in 1989 have
been the most sweeping to date. They require that
lenders disclose the disposition of each application
they process for home loans and the income, race,
ethnicity, and sex of the individuals applying for the
NOTE: Gr e g o r y Elliehausen, of the Credit Research Center of
G e o r g e t o w n University, prepared a special analysis for this article.
loans. As this new information became available, it
revealed wide differences in rates of approval of loan
applications across racial and ethnic lines and thereby
heightened concerns about whether lending decisions
complied with the nation's fair lending laws. The
disclosures triggered a continuing debate about the
proper interpretation of the data and the significance
of the differences in lending decisions. Many lending
institutions have responded to the concerns raised in
the debate by adopting new loan-underwriting procedures to help ensure fair treatment of all applicants
and by initiating a wide variety of community outreach and affordable lending programs intended to
benefit minority borrowers and lower-income individuals and neighborhoods.
In 2002, in its most recent review of Regulation C,
the Federal Reserve Board made a number of important changes to the disclosure requirements that substantially increase the types and amount of information made available through HMDA. 1 The revisions
are intended to better advance the purposes of the law
by keeping the regulation in step with recent developments in home-loan markets and by incorporating the
revised standards of classification for the collection
of information on race and ethnicity as established by
the Office of Management and Budget (OMB).
Most of the recent changes in the information that
is required to be reported under HMDA apply to data
relating to loans extended in 2004. Individual lenders
covered by HMDA were required to make their 2004
data available to the public beginning on March 31,
2005. However, only the September 2005 release of
the data will have been comprehensively checked by
the supervisory agencies for the errors and omissions
that are detectable from a review of the data.
Perhaps the most important change to Regulation C is the requirement that lenders now disclose
pricing (interest rates and fees) for loans with prices
1. See H o m e Mortgage Disclosure Act (12 U.S.C. 2801), Regulation C (12 C.F.R. pt. 203), and the staff c o m m e n t a r y a c c o m p a n y i n g
Regulation C (12 C.F.R. pt. 203, Supp. I). T h e B o a r d ' s revisions to
Regulation C that are the focus of this article were issued in 2002.
See the following issues of Federal Register (2002), vol. 67: February 15, p. 7222; M a y 8, p. 30771; and June 27, p. 4 3 2 1 8 ; and Federal
Register (2003), vol. 68 (May 28), p. 31589.
345
above designated thresholds. Loans with prices above
the thresholds are referred to here as "higher-priced
loans." Other important new information being
reported under the revised regulation is whether
the loan is a first lien, a junior lien, or unsecured
(characteristics referred to here as a loan's lien status), whether it is secured by a manufactured home,
and whether it is subject to the protections of the
Home Ownership and Equity Protection Act of 1994
(HOEPA). These new pieces of information allow for
a better understanding of lending activity in the
higher-priced segment of the home-loan market, a
segment that was virtually nonexistent a decade or so
ago and is now a substantial part of the market. The
growth of this market segment, while affording some
consumers greater access to credit, has been accompanied by concerns about abusive lending practices,
often referred to as "predatory lending." 2 These concerns lend importance to a better understanding of
the higher-priced segment of the market and a greater
ability to monitor the activities of the individual
lenders involved in it.
This article presents a first look at the greatly
expanded 2004 HMDA data and considers some of
their implications for the continuing concerns about
fair lending. 3 The analysis highlights some key relationships revealed in an initial review of the types of
data that are new for 2004. Some parts of the analysis
focus on nationwide statistics, and others examine
patterns across groups of lenders, loan products, and
various groupings of applicants, borrowers, and
neighborhoods. The authors explore, in particular and
in some depth, the strengths and limitations of the
information on loan pricing.
We also describe how the Federal Reserve uses the
HMDA data as part of a screening tool to facilitate
2. T h e F e d e r a l Reserve has adopted no specific definition of predatory lending, but the term is often considered to encompass a variety
of lending practices involving fraud, deception, or unfairness. S o m e
predatory l e n d i n g practices are illegal; others, although legal, are still
considered a b u s i v e in certain circumstances. S o m e of the practices
considered questionable or in s o m e cases illegal include (1) m a k i n g
loans that are based on the asset value of the collateral but are
unaffordable given the c o n s u m e r ' s ability to pay the obligation;
(2) inducing repeated refinancing a c c o m p a n i e d by high fees that
provide no material benefit to the c o n s u m e r (sometimes referred to as
"loan flipping"); (3) inducing the consumer, through deception or
fraud, to accept loan add-ons, such as single-premium credit insurance; (4) " s t e e r i n g " borrowers qualified for lower-rate loans into
higher-priced loans; and (5) purposely overestimating the value of the
collateral to overstate available equity or induce a consumer to pay an
inflated price for a home.
3. For additional information, see Board of G o v e r n o r s of the Federal Reserve System, Department of Housing and Urban Development, Federal Deposit Insurance Corporation, National Credit Union
Administration, Office of the Comptroller of the Currency, and Office
of Thrift Supervision (2005), "Agencies A n n o u n c e A n s w e r s to Frequently Asked Q u e s t i o n s about N e w H M D A Data," press release,
March 31, www.federalreserve.gov/boarddocs/press/all/2005/.
the enforcement of the fair lending laws. In this
regard, we discuss the way the expanded H M D A
data, particularly the information on loan pricing,
enhance the utility of the screening tool. At the same
time, we emphasize that, although these data present
valuable new opportunities for researchers and others
to learn more about the home-loan market and for the
regulatory agencies to improve the enforcement of
fair lending laws, the data are not sufficient by themselves for drawing conclusions about the fairness of
the lending process or the activities of any individual
lender. For example, credit history scores and other
factors not included in the H M D A data can be critical in determining loan prices. With regard to this
issue, we collaborated with researchers at the Credit
Research Center of Georgetown University, which
has data on credit history scores and other loan-level
factors relevant to loan pricing. The loan-level data
were supplied to the Credit Research Center by a
small group of lenders that are covered by HMDA
and are active originators of loans in the higherpriced segment of the home-loan market.
Our examination of the 2004 data also focuses on
the newly reported information about loans on manufactured homes. The disposition of applications for
loans to buy, refinance, or improve such units has
an important influence on the pattern of denial rates
of all loans reported under H M D A . We also discuss
the new information on HOEPA-related lending and
certain requests for pre-approvals of home-purchase
loans and assess their overall significance in the
market. Finally, in the article's summary and conclusions, we review our key findings and emphasize that
users of the data should exercise particular caution
in drawing conclusions about lending patterns from
H M D A data alone.
THE REQUIREMENTS
OF REGULATION
C
The Federal Reserve Board's Regulation C, which
implements HMDA, applies to most depository institutions (commercial banks, savings institutions, and
credit unions—hereafter, " b a n k s " ) with a home or
branch office in a metropolitan area. Banks that are
exempt from Regulation C are small (currently those
with assets of less than $34 million), or are not in
the home-lending business, or have offices exclusively in rural (nonmetropolitan) areas. 4 Regula4. Although coverage of financial institutions under H M D A is
limited to those with offices in metropolitan statistical areas, covered
institutions must report on all their home-lending activities whether
the properties involved in the loan are located in a metropolitan or
nonmetropolitan area.
346
Federal Reserve Bulletin • Summer 2005
tion C also extends to mortgage and consumer finance
companies—hereafter, "mortgage c o m p a n i e s " —
whether such companies are independent or are subsidiaries of banks or affiliates of bank holding companies. Coverage of mortgage companies applies
mainly to those that are active in the home-loan
market—that is, those that extend 100 or more homepurchase or home-refinancing loans per year and
operate in at least one metropolitan area. 5
The H M D A data include information about applicants and borrowers, the home-loan products they
seek, the disposition of their requests for credit, and
details about the location of the property that relate to
the application. For information about the channels
through which the HMDA data are released and for a
description of the data that were required of lenders
before the 2002 revisions, see box "Distribution of
HMDA Data and Pre-2004 Requirements of Regulation C."
The New
Reporting
Requirements
The 2002 revisions to Regulation C are intended to
improve the quality, consistency, and utility of the
data reported under HMDA; they are also intended
to ease regulatory burden, primarily by clarifying
and simplifying parts of the regulation. The new
requirements
• expand coverage to more nondepository lenders
• streamline the definitions of refinancing and homeimprovement loan
• revise the definition of application to include certain requests for pre-approvals (however, in this
article, applications are defined as being for a loan
on a specific property; they are thus distinct in our
analyses from requests for pre-approval, which are
unrelated to a specific property)
• mandate for the first time the collection of lien
status; property code (to distinguish between oneto four-family dwellings that are site-built and
those that are manufactured homes); loan pricing;
and HOEPA status
• incorporate changes to the rules on collecting and
reporting information on race and ethnicity to conform to guidance issued by the OMB
5. For the details of the coverage rules and for additional information about the data collection and reporting requirements, see A Guide
to HMDA Reporting:
Getting It Right! published annually by the
Federal Financial Institutions Examination Council (www.ffiec.gov/
h m d a /g u id e . h t m ) .
• require lenders to request the race, ethnicity, and
sex of prospective borrowers who apply by mail,
Internet, or telephone
• revise the categories that identify the type of institution to which loans are sold
The disclosure of additional data and the revised
definitions for some currently reported items serve
several purposes. For example, the revised definition
of refinancing is intended to reduce inconsistency in
the data and to simplify reporting. 6 Some of the new
data items—such as lien status and identification of
loans for manufactured homes—allow more-precise
differentiation among loan products and consequently
reduce the possible analytical biases that arise when
dissimilar loan products are grouped together. To
ensure that nondepository institutions that are active
home lenders are subject to the same reporting regime
as are other lenders, coverage rules were changed by
adding an annual dollar-volume threshold of $25 million of home-loan originations to the current criterion
of 10 percent of total loan originations measured in
dollars.
Pricing information increases the scope of analysis
of HMDA data in support of fair lending enforcement
and makes possible an assessment of pricing patterns
in the higher-priced segment of the home-loan market. In addition, designation of HOEPA status can
be used to identify lenders involved in that type of
lending, to measure its incidence in the market, and
to aid in fair lending evaluations and HOEPA compliance. Finally, the new information on requests
for pre-approvals provides more data on consumers'
experiences in the early stages of shopping for a loan
to buy a home, a phase of the loan process that has
heretofore gone largely unreported, and thus should
also facilitate fair lending enforcement.
Transition Rules
To minimize reporting burden and to help ensure
the quality and usefulness of the expanded data,
the Federal Reserve established transition rules for
HMDA compliance that generally did not require
lenders to collect some of the new information for
requests for pre-approval and applications submitted
before January 1, 2004. Among the new information
6. Reporting institutions had been allowed to choose f r o m four
scenarios in deciding which refinancings to report. T h e new rules
define a refinancing simply as a secured h o m e loan that satisfies and
replaces another secured home loan by the same borrower. The
reporting of h o m e equity lines of credit (extended for any purpose) is
voluntary.
New Information
Reported
under HMDA
and Its Application
in Fair Lending
Enforcement
347
Distribution of HMDA Data and Pre-2004 Requirements of Regulation C
Under the Home Mortgage Disclosure Act (HMDA), lenders use a "loan/application register" (HMDA/LAR) to
report information annually to their federal supervisory
agencies for each application and loan acted on during the
calendar year. Lenders must make their HMDA/LARs available to the public by March 31 following the year to which
the data relate, and they must remove the two date-related
fields to help preserve applicants' privacy.1
The Federal Financial Institutions Examination Council
(FFIEC), acting on behalf of the federal supervisory agencies, compiles the reported information and prepares an
individual disclosure statement for each institution—one for
each metropolitan statistical area (MSA) and metropolitan
division (MD) in which it has offices—as well as aggregate
reports for all covered lenders in each MSA and other
reports. 2 The disclosure and aggregate reports are detailed
tables of data on individual loans and applications.
The disclosure statements and reports are available to the
public at the FFIEC website for HMDA (www.ffiec.gov/
hmda), from the covered lenders themselves, and from
depositories (such as public libraries and other government
offices) in each MSA. 3 In addition, a copy of the HMDA/
LAR for each institution is available to the public on
CD-ROM for a nominal charge. The FFIEC also makes
available a copy of the file of population characteristics of
each census tract covered by the tables on individual institutions and by the aggregate tables. The 2004 census tract file
is derived from the 2000 decennial census. MSA and MD
identifiers included on that file are based on the designations of MSAs issued by the Office of Management and
Budget. 4
1. Lenders must make their date-modified register available to the public
for a period of three years.
2. MSAs that have a single core with a population of 2.5 million or more
and meet certain other requirements contain MDs. Of the 370 MSAs in the
United States, 11 have a population of at least 2.5 million and have a total of
29 MDs. Starting with the release of the 2004 HMDA data, disclosure reports
will follow the guidance provided by the Office of Management and Budget
(OMB) regarding the appropriate use of statistical-area definitions; see Office
of Management and Budget (2003), OMB Bulletin, no. 03-04 (June),
www.whitehouse.gov/omb/bulletins/b03-04.html. In conformance with OMB
guidance, the FFIEC will prepare disclosure reports for each MSA and MD.
3. The FFIEC maintains the most recent three years of HMDA data. Data
for earlier years can be obtained from the National Technical Information
Center, Springfield, Virginia, www.ntis.gov.
4. See Office of Management and Budget, OMB Bulletin.
i t e m s a f f e c t e d by the transition rules w e r e the d a t a
on pricing; t h e i n f o r m a t i o n o n w h e t h e r an application
or loan i n v o l v e d a r e q u e s t f o r p r e - a p p r o v a l and on
w h e t h e r the d w e l l i n g i n v o l v e d w a s a m a n u f a c t u r e d
h o m e ; a n d t h e classifications of r a c e a n d ethnicity.
Of all a p p l i c a t i o n s i n v o l v i n g o n e - to f o u r - f a m i l y
units in the 2 0 0 4 H M D A data, a b o u t 2 million, or
7 p e r c e n t , w e r e filed b e f o r e 2 0 0 4 , a n d thus the data
reported o n t h o s e a p p l i c a t i o n s ( p e r t a i n i n g to about
Before the most recent revisions, in 2002, the Federal
Reserve Board's Regulation C required lenders to report the
following information on home-purchase and homeimprovement loans and on the refinancing of such loans:
For each application or loan
• application date and the date an action was taken on the
application
• action taken on the application
— approved and originated
— approved but not accepted by the applicant
— denied (with the reasons for denial—voluntary for
some lenders)
— withdrawn by the applicant
— file closed for incompleteness
• loan amount
• income relied on in loan underwriting
• loan type
— conventional
— insured by the Federal Housing Administration
— guaranteed by the Veterans Administration
— backed by the Farm Service Agency or Rural Housing
Service
• loan purpose
— home purchase
— refinance
— home improvement
• type of purchaser (if the lender subsequently sold the
loan)
For each applicant or co-applicant
• race or ethnicity
• sex
For each property
• location, by state, county, and census tract
• type (one- to four-family dwelling or dwelling with five
or more units)
• occupancy status (owner-occupied or nonowneroccupied)
Information is also reported on home loans purchased by an
institution during a calendar year. Under the 2002 revisions
to Regulation C, additional items became required beginning in 2004.
1 m i l l i o n l o a n s ) m i g h t not reflect the n e w r e p o r t i n g
rules. U s e r s of the 2 0 0 4 d a t a s h o u l d b e a w a r e of this
limitation.
T o h e l p u s e r s of the H M D A d a t a better d i s t i n g u i s h
l o a n s s u b j e c t to the transition rules, the F e d e r a l
F i n a n c i a l Institutions E x a m i n a t i o n C o u n c i l ( F F I E C )
h a s a d d e d a d a t a i t e m to the 2 0 0 4 C D - R O M that
c o n t a i n s a c o p y of the H M D A / L A R f o r e a c h institution that i n d i c a t e s w h e t h e r o r not an a p p l i c a t i o n w a s
348
Federal Reserve Bulletin • Summer 2005
filed before January 1, 2004 (see box "Distribution
of HMDA Data and Pre-2004 Requirements of
Regulation C"). Users of the 2004 data can make
assumptions or restrict their analysis in various ways
to address problems created by the transition rules.
For example, in preparing the institution and aggregate MSA disclosure reports for 2004, the FFIEC
excluded applications filed before January 1, 2004,
from all tables reporting pricing (but not other)
information.
The transition rules should have little effect on the
data in future HMDA filings. However, because some
applications have application filing dates that precede
a decision on the application by more than a year, a
few applications subject to the transition rules may be
included when the 2005 HMDA data are reported in
2006.
property. 7 The expanded HMDA data allow such
distinctions to be made and consequently help avoid
the double counting of loans in the home-purchase
market.
Second, lien status is essential for interpreting
loan-pricing information and in conducting fair lending investigations. Regarding fair lending reviews,
the historical lack of information on lien status in
the HMDA data has hampered analyses focusing
on potential differences in the pattern of the disposition of applications because distinguishing properly among loan products using only HMDA data
has been difficult or impossible. 8 Because the use of
various loan products and patterns of application
disposition can vary across racial and ethnic groups,
an inability to distinguish products can lead to spurious correlations and potentially inappropriate conclusions about the fairness of the application of creditunderwriting policies.
Lien Status
Information on lien status differentiates home loans
secured by a first lien, those secured by a junior
(second or third) lien, and those not secured. (The last
category arises only among home-improvement
loans, for which a security interest in a property may
or may not be taken.) Knowledge of lien status is
basic to credit underwriting because loans secured by
first liens have a lower incidence of default than loans
secured by junior liens or unsecured loans; consequently, loans secured by a first lien are generally
offered at the lowest rates of interest.
The information on lien status serves a number
of public policy interests. First, the information
improves the measurement of the overall size of the
home-loan market and particular segments within
that market, such as home-purchase lending.
Although HMDA data have always included information about the purpose of a loan, recent market developments have made that information less useful for
measuring lending. Today, many home purchases
involve both first- and junior-lien loans. The juniorlien loan in such transactions is often used to avoid
requirements to purchase private mortgage insurance
(PMI) or to avoid exceeding the loan-size limits used
by some secondary-market purchasers, especially
Fannie Mae and Freddie Mac (see the appendix for
more information about PMI and the availability of
data on loans backed by PMI). In the past, a loan
backed by a junior lien could not be distinguished
directly in the home-purchase loan data from one
backed by a first lien and was therefore often assumed
to represent a separate home-purchase loan rather
than to be one of two used to purchase a single
Manufactured-I-Iome Status
Available evidence indicates that the credit profiles of
individuals seeking loans backed by manufactured
homes differ from those of individuals borrowing for
site-built homes. 9 On the whole, loans to purchase
manufactured homes involve relatively high credit
risk, in part because the buyers of such homes tend to
have weaker financial profiles than do those purchasing other single-family properties. This evidence has
important implications for denial rates and pricing.
Analysis of past HMDA data implied that lenders
denied about 60 percent of all applications for conventional home-purchase loans for manufactured
homes, whereas they denied only about 12 percent of
7. O n e technique used to identify loans backed by junior liens was
to assume that all loans below a given a m o u n t were junior-lien loans.
This approach is flawed because s o m e homes, including many m a n u factured h o m e s , have low prices and purchasers of these properties
often need only a small loan. Similarly, some borrowers m a k e substantial d o w n p a y m e n t s when they buy a home, and in such circumstances, the amount of the first-lien loan may be small.
8. During s o m e fair lending reviews, lenders have provided e x a m iners with information that has allowed the separation of first and
junior liens.
9. A manufactured h o m e is a single-family house constructed
under a federal building code administered by the U S . Department of
Housing and Urban D e v e l o p m e n t ( H U D ) . T h e Federal M a n u f a c t u r e d
H o m e Construction and Safety Standards ( c o m m o n l y known as the
H U D code) took effect on J u n e 15, 1976. T h e result of federal
regulation was lo m o r e clearly define mobile h o m e s as buildings
rather than vehicles—although the H U D code imposes standards to
m a k e sure the units can be transported by truck to the placement site.
T h e Housing Act of 1980 officially adopted this change, mandating
that, for h o m e s built under the H U D code, the term manufactured
housing (factory-built h o m e s ) replace the term mobile homes in all
federal law and literature.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
applications for other conventional home-purchase
loans. 10 Until now, the general inability to accurately
distinguish manufactured-home loans from loans
related to site-built homes complicated the determination of whether differences in denial rates across
groups of applicants arose from differences in underwriting practices across the groups or simply from
different mixes of loan products sought by the groups.
Identification of applications and loans involving
manufactured homes in the expanded HMDA data
allows for more-refined analysis of the sources of
different denial rate patterns and for greater understanding of financing activities in this important market segment.
Loan Pricing
The home-loan market has evolved in a number of
important respects over the past decade or so. Traditionally, lenders offered consumers a relatively limited array of products at prices that varied according
to the characteristics of the loan and property but not
according to the creditworthiness of the borrower.
Effectively, borrowers either did or did not meet the
underwriting criteria for a particular product, - and
those who met the criteria paid about the same price.
This market characterization may explain why the
congressional revisions to HMDA in 1989 focused
on the disclosure of data on the disposition of applications rather than on loan prices.
Since then, improvements in information processing and the maturation of a robust secondary market
for loans have spurred changes in the home-loan
market. Prominent among these changes has been
an evolution toward an explicitly risk-based pricing
of credit. Now the creditworthiness of individual
borrowers can lead to different prices for the same
product. Less-creditworthy applicants, or those either
unwilling or unable to document their creditworthiness or income, are increasingly less likely to be
turned down for a loan; rather, they are offered credit
at higher prices.
Borrowers in the higher-priced market generally
fall into one of two market segments, "near prime"
and "subprime," with individuals in the latter category paying the highest prices because they pose the
10. In the past, loans on manufactured homes were identified using
information about the l e n d e r ' s main line of business. This proxy is
helpful only for lenders focused mainly on m a n u f a c t u r e d - h o m e lending. A large n u m b e r of other lenders also extend such credit, but
because m a n u f a c t u r e d - h o m e lending does not constitute their main
line of business, determining which of their loans involve manufactured h o m e s has been impossible. See www.huduser.org/datasets/
manu.html.
349
greatest risk of default. In practice, the dividing line
between these two " n o n p r i m e " markets is becoming
increasingly amorphous, as is the line between the
prime (lower-price) and nonprime markets.
Estimates of the annual volume of subprime lending vary, but all sources agree that this market has
grown substantially in recent years. 11 One industry
source estimates that over the period 1994-2004,
the annual dollar volume of subprime home loans
increased from about $35 billion to more than
$530 billion. Consequently, subprime lending is no
longer a minor segment of the market. Subprime
loans are estimated to have accounted for about
19 percent of all home-loan originations in 2004, up
from less than 5 percent in 1994. 12
As significant pricing variability has emerged in
the market, so have concerns about the fairness of
creditor decisions in this regard. Little information
has been available to assess the merits of these concerns, and only a few fair lending investigations
focusing on pricing issues have been pursued by the
federal banking agencies or the Department of Justice. In its review of R e f l a t i o n C that led to the 2002
revisions, the Federal Reserve Board averred the
importance of gathering information to facilitate
assessments of the fairness of loan-prit ing decisions,
particularly for nondei .isitory institutions, which
are less likely to be s u h c c t to periodic fair lending
examinations. Recogni, ing the costs incurred by
lenders to comply with ueh a reporting and disclosure requirement, the Bi ird limited the scope of the
regulation to the disclosu re of pricing on loan originations (not loans purchased from other entities or
applications that did not result in a loan origination)
in the higher-priced segment of the loan market and
to focus within that segment only on dwellingsecured loans subject to Regulation Z (which does
not cover "business purpose" loans—including some
loans to individuals who do not intend to occupy the
dwelling being financed).13
Specifically, the 2002 revisions to Regulation C
require the reporting of the spread between the annual
percentage rate (APR) on a loan and the rate on
11. O n e method of estimating the annual volume of subprime loans
is based on a list of subprime lenders that was developed by H U D and
has been released each year since 1993. T h e number of loans in the
H M D A data originated by lenders on the H U D list has been used as
an estimate of subprime lending volume. T h e list has also been used
to support other analyses of subprime lending activity. Of the 224
lenders on the list for 2003, 191 appear under the same n a m e and
identification n u m b e r as reported in the H M D A filings f o r 2004.
12. Estimates pertain to h o m e loans backed by one- to four-family
homes; see Inside Mortgage Finance Publications (2005), Mortgage
Market Statistical Annual 2005, 2 vols. (Bethesda, Md.: IMFP).
13. Regulation Z, 226.3(a). T h e Federal Reserve B o a r d ' s Regulation Z (12 C.F.R. pt. 226) implements the Truth in Lending Act.
350
Federal Reserve Bulletin • Summer 2005
Treasury securities of comparable maturity for loans
with spreads above designated thresholds. The APR
was selected as the measure of the loan's pricing
because it was regarded as the best single measure of
the " t r u e " cost of a loan. The thresholds for reporting
differ by lien status: 3 percentage points for first liens
and 5 percentage points for junior liens. To calculate
the rate spread, the lender uses the yield on Treasury
securities as of the fifteenth day of a given month
depending on when the interest rate was set on the
loan. 14
In establishing this disclosure rule, the Federal
Reserve sought to select thresholds that would
exclude the vast majority of prime rate loans and
include the vast majority of subprime loans. The
selection of specific thresholds was based on loanprice data from several sources. 1 5 The analysis
revealed that roughly 98 percent of prime first-lien
loans have APRs that would likely fall below the
threshold of 3 percentage points for reporting first
liens. 16 The analysis also indicated that this threshold
would require reporting for about 98 percent of the
subprime loans backed by first liens and that the
5 percentage point threshold would capture about
95 percent of the subprime loans backed by junior
liens. Overall, data from the Annual Housing Survey
covering prime, near-prime, and subprime loans suggested that, in a typical year, the thresholds would fall
somewhere in the near-prime range and would
require the reporting of about 10 percent of all home
loans backed by first liens and about 22 percent of all
loans backed by junior liens.
In a given year, various factors may influence the
proportion of loans that have prices placing them
above or below the pricing thresholds. A change in
interest rates can influence the volume and types of
loans that exceed the pricing thresholds. With generally rising interest rates, for example, refinancing
14. For such calculation, the rule directs creditors to use the fifteenth day of a given month for any loan on which the interest rate
was set on o r after that day through the fourteenth day of the next
month. T h e relevant date is when the interest rate on the loan was
determined, w h i c h is often, but not always, set pursuant to a lock-in
agreement b e t w e e n the borrower and the lender. T h e A P R used in
the calculations is the one determined and disclosed to the consumer
under section 226.6 or section 226.18 of Regulation Z. To ease
reporting b u r d e n s and to help ensure high-quality data, the FF1EC
m a k e s available a " R a t e Spread C a l c u l a t o r " that lenders can use to
determine whether they must report the spread on a given loan and, if
so, what the spread is; see www.ffiec.gov/ratespread/default.aspx.
15. See the U.S. Census B u r e a u ' s 1998 and 1999 A n n u a l Housing
Surveys, the Federal Reserve B o a r d ' s 2001 Survey of C o n s u m e r
Finances, the Federal Housing Finance B o a r d ' s 1999 Mortgage Interest Rate Survey, and data on subprime lending f r o m the Credit
Research Center of Georgetown University.
16. See B o a r d of Governors of the Federal Reserve System (2002),
"Regulatory Analysis of Proposed A m e n d m e n t s to Regulation C , "
staff m e m o r a n d u m , Division of Research and Statistics, January 15.
activity will be reduced, and consequently a larger
proportion of loans reported above the thresholds will
involve home purchases. Moreover, borrowers who
refinance during a period of rising interest rates are
likely to differ from those who borrow when rates
are falling. When rates are rising, borrowers seeking
to refinance their outstanding loans are likely to have
more-urgent needs for additional funds that can be
raised by a cash-out refinancing or are seeking to
lower their total monthly payment obligations by
lengthening the terms of their outstanding debt.
Changing interest rates also may affect the proportion of adjustable-rate versus fixed-rate loans originated over the course of a year and thus the mix
of loans reported with rates above the threshold. To
compensate borrowers for bearing the additional
interest rate risk associated with adjustable-rate loans,
such loans typically have lower initial APRs than do
fixed-rate loans with the same term to maturity. If
market participants expect interest rates to rise, these
expectations tend to be built into the term structure
of interest rates (the "yield curve") and to widen
the difference between the initial rates on adjustablerate and fixed-rate loans. This widening can increase
the proportion of fixed-rate loans with APRs above
the threshold because the APRs for longer-term
adjustable-rate loans will not rise as much in such a
market as will those for fixed-rate longer-term loans.
HOEPA Status
Long-standing concerns about predatory lending led
the Congress to enact the Home Ownership and
Equity Protection Act of 1994, the first federal statute
to explicitly target such lending practices. HOEPA,
which amends the Truth in Lending Act, applies to
closed-end home loans (excluding home-purchase
loans) bearing an APR or dollar-amount fees above
specified thresholds. 17 The act imposes restrictions
on certain loan features, including balloon payments
and prepayment penalties, and requires improved
disclosures for consumers. HOEPA, like most other
federal consumer protection statutes, overrides
weaker state laws but permits states to enact stricter
rules.
17. Unlike lines of credit, closed-end loans are amortizing—they
require fixed monthly payments against both principal and interest—
and are thus scheduled to close at the end of a given term to maturity,
when the balance will reach zero. A balloon payment might be
involved if the amortization schedule leaves a relatively large balance
owed at the end of the l o a n ' s term. In contrast, a home equity line of
credit ( H E L O C ) is a revolving account that permits borrowing f r o m
time to time at the account h o l d e r ' s discretion, up to the a m o u n t of the
credit line. Under a H E L O C , a c o n s u m e r may repeatedly pay the
balance down to zero and then redraw against the line.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
The Federal Reserve Board, which has authority to
modify some of the requirements of HOEPA (implemented by the Board's Regulation Z), made such a
modification in 2001. The 2001 revisions to the regulation lowered the APR trigger for coverage of
first-lien loans from 10 percentage points above the
comparable-maturity Treasury security to 8 percentage points (the threshold for junior liens was left
at 10 percentage points), adjusted the calculation of
the dollar-amount trigger for fees to include amounts
paid at closing for optional credit insurance products,
prohibited or restricted certain practices, and required
improved disclosures. 18 Although these amendments
addressed some concerns, predatory lending continues to some degree. Since 1999, about thirty states
and numerous local governments have enacted laws
regarding predatory lending to address certain practices and contract terms. The Congress has also considered amendments to HOEPA to broaden its scope
and to preempt state laws, but to date, no final action
has been taken.
In its 2002 amendments to Regulation C (the
HMDA regulation), the Board required lenders to
report whether a loan is subject to HOEPA. In so
doing, the Board recognized that obtaining information on the volume and pattern of lending covered
under HOEPA would be useful for a better understanding of the size of the HOEPA-related segment
of the market and would allow regulators to focus
examinations on the loans and creditors posing the
greatest concern. The HOEPA status of loans at banks
could always be obtained through on-site examinations; but nondepository lenders are not subject to
regular examinations, and thus the extent of their
HOEPA-related lending has been largely unknown.
Moreover, although banks are examined regularly,
the collection of data on HOEPA status on the
HMDA/LAR is a much more efficient way for the
enforcement agencies to obtain the data and allows for some
types of analysis to precede an on-site compliance
examination.
Requests for Pre-Approvals
Prospective homebuyers are often asked by sellers to
demonstrate that they are likely to qualify for financing. In recent years, many lending institutions have
developed pre-approval programs to respond to that
request. Such programs typically provide qualified
prospective homebuyers with a binding written com18. For further details, see section 226.32 of Regulation Z.
351
mitment to finance their purchase, subject to certain
conditions related primarily to the property to be
purchased and any changes in their financial circumstances. The request for a pre-approval does
not generally identify a specific property so that, if
granted, it can be used by the prospective buyer with
more than one prospective seller. In the past, the
HMDA records did not include data on requests for
pre-approvals unless they ultimately resulted in an
application related to a specific property. Under the
expanded reporting requirements, lenders must also
report requests for pre-approval that were denied.
Disclosure of denials of pre-approval requests is
intended to provide more-complete information on
the availability of home financing and to facilitate
fair lending enforcement. Lenders have the option
of reporting pre-approvals that were granted but not
acted on by the consumer. 19
Changes in the Collection of Data Regarding
Race and Ethnicity
The 2004 HMDA data incorporate the revised standards of classification for government collection of
information on race and ethnicity as established by
the OMB. 20 Perhaps the most important OMB revision allows individuals to select multiple racial and
ethnic identifications, and HMDA reporting rules
were modified to conform to these changes. For
HMDA data collected before 2004, applicants for
credit had no opportunity to designate both race and
ethnicity but had to categorize themselves as being
of Hispanic origin or as being in one of five racial
categories (American Indian or Alaskan Native,
Asian or Pacific Islander, black, white, or other). As
of 2004, applicants may designate more than one
racial category (American Indian or Alaska Native,
Asian, black or African American, Native Hawaiian
or other Pacific Islander, or white) and may designate
one of two ethnicities (either "Hispanic or Latino" or
19. The only pre-approval programs covered by HMDA are those
in which the decision to grant or deny the request is based on a
comprehensive credit underwriting process in which a lender collects
and reviews the information it typically considers in making credit
decisions in a traditional application (that is, an application for a
specific property). For a pre-approval program to be covered, the
lender must issue binding written commitments (subject only to very
limited conditions) for consumers whose requests were granted.
Because requests for pre-approval typically do not identify a specific
home for purchase, the HMDA data do not show the property location
for pre-approvals that do not ultimately result in an application for
credit related to a specific property.
20. See Office of Management and Budget (1997), "Revisions to
the Standards for the Classification of Federal Data on Race and
Ethnicity," Federal Register, vol. 62 (October 30), pp. 58782-90.
352
Federal Reserve Bulletin • Summer 2005
"not Flispanic or Latino"). (Hereafter, for concision,
we refer to the category "black or African American" as black and to the category "Hispanic or
Latino" as Hispanic.)
The changes regarding race and ethnicity will make
it difficult to align the H M D A data for 2004 with
those for earlier years. Most important, applicants
who in 2003 were classified as Hispanic were not
also classified by their race. Consequently, a comparison of lending activity by race between 2004 and
earlier years might lead some to conclude that lending to certain racial groups may have changed when,
in fact, the only change was in the classification
system.
Changes in the Data-Collection Requirements for
Sales in the Secondary Market
The secondary market for home loans is the arena in
which loans already originated are bought and sold.
HMDA requires that, for a given year, covered institutions report the sales of loans that they originated in
that year as well the sales of loans that they purchased in that year. For each sale, the institution must
also report the type of purchaser.
HMDA data have long been one of the few sources
of loan-level information describing secondarymarket activities. The 2004 data are reported using
codes that represent revised categories for identifying
the secondary-market purchasers. For the first time,
the H M D A data identify loans placed in private securitizations, which represent a growing segment of the
secondary market. The revisions in the reporting
categories are intended to improve the utility of the
data.
SUMMARY
OF RESULTS
THE 2004
HMDA
FROM
DATA
For 2004, the FFIEC prepared disclosure statements
for 8,853 HMDA-reporting lenders—3,946 commercial banks, 1,017 savings institutions, 2,030 credit
unions, and 1,860 mortgage companies. Of the mortgage companies, most (1,464) were independent
entities—that is, institutions that were neither subsidiaries of banks nor affiliates of bank holding companies (table 1). The disclosure statements consisted
of 72,246 distinct reports, each covering the lending
activity of a particular institution in each metropolitan statistical area (MSA) in which it had a home
or branch office (table 2). The number of reporting
institutions was up 9 percent from 2003, in part
1.
Distribution of h o m e
lenders covered
by H M D A ,
by type of institution, 2 0 0 4
Type
Number
Percent
3,946
1,017
2,030
6,993
44.6
11.5
22.9
79.0
Mortgage company
Independent
Affiliated1
All
1,464
396
1,860
16.5
4.5
21.0
All institutions
8,853
Depository institution
Commercial bank
Savings institution
Credit union
All
'...
100
I. S u b s i d i a r y of a d e p o s i t o r y i n s t i t u t i o n o r an affiliate of a b a n k h o l d i n g
company.
SOURCE: In t h i s a n d s u b s e q u e n t t a b l e s e x c e p t a s n o t e d , F e d e r a l F i n a n c i a l
I n s t i t u t i o n s E x a m i n a t i o n C o u n c i l , d a t a r e p o r t e d u n d e r the H o m e M o r t g a g e
Disclosure Act (www.ffiec.gov/hmda).
because O M B ' s revision of MSA boundaries added,
on net, 242 previously rural counties to MSAs. 2 1
The number of lenders covered by H M D A is large;
however, most of these institutions, whether measured by number of reported applications or loans
or by asset size, are small. For 2004, 60 percent of
reporting institutions provided information on fewer
than 250 loans or applications, accounting for 1.7 percent of the reported data (table 3). Sixty-three percent of the reporting banks had assets of less than
$250 million, and they accounted for only 2.2 percent
of the applications and loans in the 2004 H M D A
data. 22
At the other end of the spectrum, the twenty-five
lenders reporting the largest number of applications
accounted for about 42 percent of all the applications
reported in the 2004 data (data not shown in table). If
HMDA reporters are further aggregated to their highest level of corporate organization (such as a bank
holding company), lending is even more concentrated. The twenty-five largest organizations reporting the largest number of applications accounted for
55 percent of the applications in the 2004 data (data
not shown in table).
Volume
of Applications
and Loans
For 2004, lenders covered by HMDA reported
on roughly 28.1 million home-loan applications
(table 2)—9.8 million for purchasing one- to fourfamily homes, 16.1 million for refinancing existing
21.
T h e O M B c h a n g e d M S A b o u n d a r i e s to e n c o m p a s s 2 8 8 previ-
o u s l y rural c o u n t i e s a n d to e x c l u d e 4 6 c o u n t i e s p r e v i o u s l y in M S A s .
22.
B e c a u s e of t h e r e p o r t i n g r u l e s , a s s e t s i z e is g e n e r a l l y a m e a n -
ingful m e a s u r e of
size only
for depository
m e a s u r e d as of D e c e m b e r 31, 2004.
institutions. Assets are
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
2.
353
Home loan and reporting activity of home lenders covered under H M D A , 1990-2004
Number
A p p l i c a t i o n s received for h o m e loans, and h o m e l o a n s p u r c h a s e d f r o m o t h e r l e n d e r s
(millions)
Year
Reporters
Applications
Loans
purchased
Disclosure
reports2
Total
Home
purchase
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Total1
1,07
2.11
5.24
7.72
3.80
1.16
1.18
1.23
1.40
1.69
5.51
6.55
10.01
13.64
10.69
1.15
1.36
1.98
1.80
1.48
6.66
7.91
12.00
15.44
12.17
9,332
9,358
9,073
9,650
9,858
24,041
25,934
28,782
35,976
38,750
5.51
6.33
6.75
7.96
8.43
2.70
4.54
5.39
11.42
9.37
1.75
2.14
2.16
2.04
2.05
9.96
13.01
14.30
21.43
19.85
1.28
1.82
2.08
3.23
3.01
11.24
14.83
16.38
24.65
22.86
9,539
9,328
7,925
7,836
7,832
36,611
42,946
47,416
57,294
56,966
8.28
7.69
7.40
8.15
9.79
..
Home
improvement
3.27
3.26
3.54
4.52
5.20
1990
1991
1992
1993
1994
Refinance
6.54
14.29
17.48
24.60
16.10
1.99
1.85
1.53 .
1.51
2.20
16.81
23.83
26.41
34.26
28.13
2.40
3.77
4.83
7.23
5.14
19.21
27.59
31.24
41.49
33.27
7,713
7,631
7,771
8,121
8,853
52,776
53,066
56,506
65,808
72,246
NOTE: H e r e a n d in all s u b s e q u e n t tables e x c e p t tables 3 and 8, a p p l i c a t i o n s
e x c l u d e r e q u e s t s f o r pre-approval that w e r e d e n i e d by the lender or w e r e
a c c e p t e d by the l e n d e r but not actcd u p o n by the borrower.
In this article, applications are d e f i n e d as b e i n g for a loan on a specific
property; they are thus distinct f r o m r e q u e s t s for p r e - a p p r o v a l , w h i c h are not
r e l a t e d to a s p e c i f i c property.
1. A p p l i c a t i o n s for m u l t i f a m i l y h o m e s are included only in the " t o t a l "
c o l u m n ; f o r 2 0 0 4 these applications n u m b e r e d a b o u t 6 2 , 0 0 0 .
2. A report c o v e r s the m o r t g a g e lending activity of a l e n d e r in a s i n g l e
m e t r o p o l i t a n statistical area in w h i c h it had an office d u r i n g the year.
home loans, 2.2 million for improving one- to fourfamily dwellings, and 62,000 related to multifamily
dwellings (structures for five or more families). Lenders also reported on about 5.1 million loans they
purchased from other institutions. In addition, lenders reported on roughly 330,000 requests for preapprovals of home-purchase loans that were either
turned down by the lender at the time the preapproval was sought or granted but not acted on by
the applicant (data not shown in table). In either case,
those 330,000 requests for pre-approval did not reach
the stage of an application for a loan for a specific
property. 23 The 2004 volume of applications for refinancing fell about one-third from 2003, primarily
because of a rise in interest rates.
involving the Federal Housing Administration (FHA)
(table 4). An even higher share of applications for
refinancings (and home-improvement loans) were for
conventional loans, an indication that borrowers with
government-backed loans either tend to refinance into
a conventional loan or tend not to refinance.
The share of HMDA-reported loans backed by the
FHA has been declining over the past several years,
from about 16 percent in 2000 to about 8 percent in
2004 (data not shown in tables). New, more flexibly
underwritten conventional loan products are likely
attracting borrowers that would otherwise seek FHA
backing. Among these products are interest-only
loans, adjustable-rate products that offer flexible payment options, and products that allow smaller down
payments, a wider range of credit histories, and
reduced documentation of incomes.
Conventional and Government-Backed Loans
Among the reported applications for loans to purchase owner-occupied one- to four-family homes
(both site-built and manufactured), about 90 percent were for conventional loans—that is, loans not
involving a government backing for the lender—
most of which involve first liens; the remainder were
for government-backed forms of credit, mostly
23. A m o n g t h e l o a n o r i g i n a t i o n s in t h e 2 0 0 4 d a t a , a b o u t 4 7 0 , 0 0 0
Lien Status
The 2004 data, which include for the first time information on the lien status of a loan, indicate that a
significant minority of reported loans involve junior
liens, particularly loans for home purchases. Among
the loans to purchase owner-occupied homes, 13 percent involved junior (subordinate) liens (data not
shown in tables). 24
w e r e reported as being initiated through a pre-approval program. This
figure
likely u n d e r s t a t e s the n u m b e r of originations that b e g a n
in
p r e - a p p r o v a l p r o g r a m s b e c a u s e the transition rules did not require the
r e p o r t i n g o f t h i s i t e m o n a p p l i c a t i o n s t a k e n b e f o r e J a n u a r y 1, 2 0 0 4 .
24. T h e
HMDA
data do not include a code indicating whether
t h e j u n i o r - l i e n h o m e - p u r c h a s e l o a n r e p o r t e d in t h e d a t a is a s s o c i a t e d
354
3.
Federal Reserve Bulletin • Summer 2005
D i s t r i b u t i o n of h o m e lenders c o v e r e d by H M D A , by type of lender a n d the n u m b e r of a p p l i c a t i o n s they receive, 2 0 0 4
Number of applications
Type of lender,
and subcategory
(asset size in millions of
dollars, or affiliation)
] 00-249
1 -99
250-999
Percent of
subcategory 2
Percent of
type 1
Percent of
subcategory 2
Percent
of type 1
Percent of
subcategory 2
80.2
Depository institution
Commercial bank
Less than 250
250-999
1,000 or more
AH
Percent of
type 1
56.7
24.5
13.4
42.8
71.4
25.9
2.7
100
31.6
24.2
6.6
26.8
31.3
57.2
11.5
100
11.0
42.4
22.6
21.2
16.4
3.4
100
Savings institution
Less than 250
250-999
1,000 or more
All
85.1
10.7
4.1
too
40.9
7.2
6.5
23.8
71.2
25.3
3.6
100
35.7
17.8
5.8
24.9
30.6
60.8
8.6
100
20.4
57.1
18.8
33.1
Credit union
Less than 250
250-999
1,000 or more
All
96.9
3.0
.1
100
62.9
7.6
1.0
49.1
84.7
14.7
.6
100
27.5
18.4
3.0
24.5
35.9
58.0
6.0
100
9.3
58.3
24.0
19.6
86.3
11.4
2.3
too
57,1
17.7
10.0
41.9
75.1
22.7
2.2
100
30.6
21.8
5.9
25.9
32.3
58,2
9.5
100
11.5
48.5
22.0
22.5
78.9
21.1
100
21.5
21.2
21.4
75.0
13.1
88.1
10.7
13.1
11.2
83.3
16.7
100
26.2
19.4
24.8
All depository institutions
Less than 250
250-999
1,000 or more
All
Mortgage company
Independent
Affiliated
All
—
All lenders
37.6
22.8
23.0
1.2
3.6
MEMO
All applications, by number reported
by lender .. —
NOTE: See table 1, note 1, and general note to table 2.
1. Distribution sums vertically.
Homebuyers have various reasons for taking out
subordinate loans when they purchase their homes.
Some are seeking to raise funds to cover the down
payments and closing costs of the first-lien loans used
to buy their homes. In some cases, funds raised
through the subordinate liens allow homebuyers to
avoid the requirement to purchase PMI for first-lien
loans with high loan-to-value ratios. In other cases,
borrowers take out junior-lien loans to keep the
amounts borrowed on their first-lien loans within the
loan-size limits used by Fannie Mae and Freddie Mac
(discussed below).
Owner Occupancy
Some commentators have attributed part of the
strength in housing markets for the past several years
w i t h a n y p a r t i c u l a r first-lien loan. T h e j u n i o r - l i e n loan m a y b e in t h e
r e p o r t e d data, b u t the first-lien loan m a y not be. T h i s distinction c a n
arise if, f o r e x a m p l e , t h e l e n d e r e x t e n d i n g t h e first-lien loan is not
c o v e r e d by H M D A . W e e s t i m a t e that a b o u t 6 2 p e r c e n t of the j u n i o r lien h o m e l o a n s u s e d to p u r c h a s e o w n e r - o c c u p i e d h o m e s in the
r e p o r t e d data a r e likely a s s o c i a t e d with a r e p o r t e d first-lien h o m e loan
of the s a m e l e n d e r — t h e s e " p a i r e d l o a n s " w e r e e x t e n d e d by the s a m e
lender in t h e s a m e c e n s u s tract to b o r r o w e r s of the s a m e sex, race, a n d
ethnicity, a n d t h e a c t i o n s taken on each l o a n in the loan p a i r w e r e
within a c o u p l e of d a y s of e a c h other.
2. Distribution sums horizontally.
. . . Not applicable.
to a growing number and share of home sales to
investors or individuals purchasing second homes as
distinct from those who intend to reside in the units
being purchased. HMDA reports help document the
role of investors in the housing market because the
data indicate whether the property to which an application or loan relates is intended as the borrower's
principal dwelling (that is, as an owner-occupied
unit). 25 The HMDA data indicate that the share of
reported lending for nonowner-occupied purposes
remained steady from 1990 through 1995, primarily
in the 4.5 percent to 5.5 percent range (whether
measured in number of loans or dollar amount of
loans), and then began rising. In 2004, the nonowneroccupied share of the home-purchase market in terms
of number of loans was about 15 percent and in terms
of dollar amount was roughly 13 percent (data not
shown in tables).
25. A n i n v e s t m e n t p r o p e r t y is a n o n o w n e r - o c c u p i e d d w e l l i n g that
is i n t e n d e d to be c o n t i n u o u s l y r e n t e d . S o m e n o n o w n e r - o c c u p i e d
u n i t s — v a c a t i o n h o m e s and s e c o n d h o m e s — a r e for the p r i m a r y u s e of
the o w n e r and w o u l d t h u s not b e c o n s i d e r e d i n v e s t m e n t p r o p e r t i e s .
T h e H M D A data d o not, h o w e v e r , d i s t i n g u i s h b e t w e e n t h e s e t w o
t y p e s of n o n o w n e r - o c c u p i e d d w e l l i n g s .
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
355
3.—Continued
Number of applications
Type of lender,
and subcategory
(asset size in millions of
dollars, or affiliation)
1,000-4,999
5,000 or more
Percent of
type1
Percent of
subcategory 2
6.3
35.7
58.1
100
8.6
37.3
6.9
1.1
4.4
94.4
100
Savings institution
Less than 250
250-999
1,000 or more
All
11.0
48.0
40.9
100 ,
2.8
17.0
33.8
12.5
Credit union
Less than 250 . . . . . . . . . . —
. 250-999
1,000 or more
•AII ;
3.1
47.7
49.2
100 .
All depository institutions
Less than 250
250-999
1,000 or more
All
.
:
All lenders
Percent of
type 1
Any
Number of
lenders
Percent of
applications
2,391
1,131
424
3,946
1.1
1.8
19.6
22.5
Percent of
type1
Percent of
subcategory 2
.0
.4
20.1
2-3 ,
60.6
28.7
10.8
100
100
100
100
100
1.7
5.2
93.1
100
.2
.8
35.1
5.7
49.6
35.3
15.1
100
100
100
100
100
504
359
154
1,017 .
.3
15.4
63.0
6.3
.0
10.0
90.0
100
.0
.3
9.0
•5
75.6
19.5
4.9
100
100
100
100
100
1,534
396
100
2,030
6.6
41.6
51.8
100
.
Depository institution
Commercial bank
Less than 250
250 999
1,000 or more
AH...
Mortgage company
Independent
Affiliated
All...,....;
MEMO
.8
11.6
40.3
7.5
1.3
5.1
93.7
100
.1
.4
21.8
2.3
63.3
27.0
9.7
100
100
100
100
100
4,429
1,886
678
6,993
81.8
18.2
100
27.3
22.5
26.2
14.4
23.7
16.4
78.7
21.3
100
100
100 :
100
1,464
- 396
1,860
100
8,853
.7
11.5
.
69.2
30.8
100
Percent of
subcategory 2
.
.
5.2
.
.
.4
.9
11.9
, 13.2
.
.
.6
.9
1.1
2.5
2.2
3.5
32.6
38.3
44.2:
17.6'
61.7
100
MEMO
- All applications, by number reported1
by lender
7.6
Lender Specialization
Different types of lending institutions tend to specialize in different types of home loans. Mortgage companies, which extended 54 percent of all the home
loans reported in 2004, accounted for roughly 67 percent of government-backed originations. Depository
institutions extended 71 percent of reported homeimprovement loans and about 89 percent of multifamily loans. Commercial banks and mortgage companies together accounted for about 90 percent of loans
on manufactured homes in 2004.
Secondary-Market
Activity
HMDA data document the importance of the secondary market for home loans. Of the 20.2 million home
loans originated or purchased in 2004 by lenders
covered by HMDA, 14.1 million, or roughly 70 percent, were sold in 2004 (data not shown in tables). 26
87.1
/
100
100
Prominent in the secondary market are
government-sponsored enterprises (GSEs)—in particular, Fannie Mae and Freddie Mac. 27 For the most
part, the purchases of Fannie Mae and Freddie Mac
in 2004 consisted of conventional loans originated to
purchase homes or to refinance existing loans. These
two institutions accounted for nearly 35 percent of
the loans purchased by secondary-market institutions.
Other types of purchasing institutions active in the
secondary market include banks (8 percent of loans
sold), private securitization pools (5 percent), and
mortgage and insurance companies (9 percent). In
some cases, the purchasing institution is affiliated
with the originating lender—directly, as a subsidiary,
or indirectly, as an affiliate of the holding company
that owns the lender. Affiliated institutions accounted
for 11 percent of loans sold in the secondary market.
Loans for Manufactured
Homes
In the past, users of HMDA data had no certain way
to identify which applications and loans involved
26. T h e H M D A d a t a t e n d to u n d e r c o u n t t h e v o l u m e of s e c o n d a r y m a r k e t sales s o m e w h a t . O n e r e a s o n is that, f o r e x a m p l e , s o m e l o a n s
o r i g i n a t e d in 2 0 0 4 will b e sold to a s e c o n d a r y - m a r k e t institution in
2 0 0 5 or later a n d t h u s will n e v e r b e r e p o r t e d a s a sale. A n o t h e r is that,
as with o t h e r H M D A d a t a , a b o u t 2 0 p e r c e n t of h o m e l o a n s o r i g i n a t e d
in 2 0 0 4 w e r e e x t e n d e d b y l e n d e r s n o t c o v e r e d b y H M D A .
27. G S E s are privately o w n e d i n s t i t u t i o n s that blend t h e c h a r a c t e r istics of p u b l i c and private institutions. T h e y r e c e i v e certain benefits
f r o m g o v e r n m e n t s p o n s o r s h i p in e x c h a n g e f o r their a d v a n c e m e n t of
certain p u b l i c policy g o a l s such as h o m e o w n e r s h i p a m o n g l o w e r i n c o m e h o u s e h o l d s and in targeted c o m m u n i t i e s .
356
4.
F e d e r a l R e s e r v e Bulletin • S u m m e r 2 0 0 5
D i s t r i b u t i o n of h o m e loan a p p l i c a t i o n s and h o m e l o a n s , by p u r p o s e , lien status, and t y p e of l o a n
and b y t y p e and o c c u p a n c y status of h o m e , 2 0 0 4
Applications
One- to four-family home
Loan category
(purpose and Hen status)
and loan type
(government-backed or
conventional)
Owner occupicd
Percent
of loan
category 1
Percent
of loan
type 2
Home purchase
First lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
8.3
2.3
A
89.0
100
MEMO: Number
6,899,878
Junior lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
MEMO: Number
94.2
97.8
98.9
94.3
94.4
.1
96.1
99.4
*
too
*
99.S
100
99.6
99.6
1,134,740
96.5
100
MEMO: Number
13,695,847
*
Junior lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
99.9
100
MEMO: Number
1,003,316
.1
*
*
.5
.1
*
99.4
100
100
99.1
99.1
95.2
97.8
100
97.4
97.4
727,677
Junior lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
*
MEMO: Number
Unsecured
Government backed
FHA
VA
FSA/RHS
Conventional
Total
MEMO: Number
MEMO: Total number
*
99.4
too
99.7
100
100
98.7
98.7
950,082
.4
*
*
99.6
100
*
99.9
100
Percent
of loan
category 1
96.0
100
100
97.2
97.2
Percent
of loan
type 2
8.6
.9
.1
90.5
100
5.8
2.2
1.2
5.7
5.6
411,500
Total
Nonowner
occupied,
perccnt
of loan
category 1
.1
*
*
99.9
100
26,640
Owner occupied
Percent
of loan
category 1
Percent
of loan
type 2
100
100
100
100
100
8.3
2.2
.4
89.1
100
7,311,378
*
1.5
*
*
3.9
.6
*
*
*
*
*
*
*
99.8
100
99,8
100
450
.4
.4
4,126
.6
.6
3.7
.6
*
•
98.8
100
95.7
100
975,583
2.8
1.2
3.6
1.9
1.9
266,184
.1
.2
.2
.3
,3
2.6
1.0
*
*
99.4
100
96.4
100
10,020
1.9
1.1
.1
*
•
*
*
K
'
*
*
*
*
99.9
100
99.9
100
24,991
too
267
8,703
98.9
100
99.9
1.0
.1
4.9
2.2
*
*
*
*
*
*
99.9
100
98.9
100
99.6
100
99.4
100
.1
2.6
2.7
19,784
58,664
.9
.3
.1
*
#
*
*
99.1
100
99.9
100
17,049
1.3
1.3
12,702
.1
.6
.4
1,275
*
*
.6
.1
#
*
99.9
100
99.5
100
100
100
too
too
100
*
*
*
*•
100
100
*
*
99.0
100
99.4
100
100
100
100
100
4.0
962,784
.4
.3
*
*
*
*
*
*
#
•
*
*
99.9
100
99.5
100
99.7
100
99.6
100
99.9
100
.6
.6
.8
*
*
*,
99.2
100
27,558
985,603
.1
.2
•
*
*
*
99.9
100
99.8
100
887
.1
•
+
99.9
100
*
*
100
100
2,751
.1
.9
*
*
•
*
99.1
100
99.9
100
17,240
100
100
100
100
100
795
98.8
100
too
*
.1
*
59,939
.6
1.1
*
28,345
25,258
747,461
191
2.8
2.8
100
100
100
100
100
.5
*
too
100
100
100
100
1,012,019
*
.1
*
84,076 .
13,962,031
*
.9
.9
100
100
100
100
100
.1
Multifamily
home,
percent
Nonowner
of loan
occupied,
category 1
percent
of loan
category 1
1,183,428
1,138,866
98.5
100
100
100
98.2
too
MEMO: Number
.6
.1
*
Owner occupied
83,626
97.2
98.8
96.4
98.1
98.1
2.5
1.0
Nonowner
occupied,
perccnt
of loan
category 1
1,156,788
Refinance
First lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
Home improvement
First Hen
Government backed
FHA
VA
FSA/RHS
Conventional
Total
Manufactured
Site built
1,070
.1
*
*
*
*
*
99.9
100
100
100
372,385
21,780
10,785
713
383,170
22,493
489
24,783,925
2,338,481
733,784
39,556
25,517,709
2,378,037
61,895
NOTE: For one- to four-family homes, excludes applications for which occupancy status was missing.
FHA Federal Housing Administration
VA Veterans Administration FSA/RHS Farm Service Agcncy and Rural Housing Service
1. Distribution sums verticaly.
2. Distribution sums horizontally.
* Less than 0.05 percent.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
357
4.—Continued
Loans
One- to four-family h o m e
Loan category
(purpose and lien status)
and Jo an type
(government-backed or
conventional)
O w n e r occupied
Percent
of loan
category 1
Percent
of loan
type 2
Home purchase
First lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
8.8
2.6
.5
88.2
100
MEMO: Number
4,654,243
Junior lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
.1
*
*
99.8
100
95,1
97.9
99.0
97.5
97.3
96.8
99.1
100
99.7
99.7
MEMO: N u m b e r
3.2
1.5
95.4
100
MEMO: N u m b e r
6,405,770
MEMO: N u m b e r
Home improvement
First lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
97.3
98.7
96.8
98.8
98.7
*
*
99.9
100
98.0
100
100
99.4
99.4
461,649
.7
.1
#
99.3
100
96.4
98.5
100
97.7
97.7
MEMO: N u m b e r
352,066
Junior lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
*
.6
*
99.4
100
99.6
100
100
98.8
98.8
MEMO: N u m b e r
393,226
Unsecured
Government backed
FHA
VA
FSA/RHS
Conventional
Total
*
MEMO: N u m b e r
MEMO: Total number
.4
*
99.6
100
.1
*
*
99.9
100
O w n e r occupied
Percent
of ioan
category 1
95.4
100
100
97.1
97.1
Percent
of loan
type2
16.4
2.0
.2
81.5
100
4.9
2.1
1.0
2.5
2.7
129,150
*
1.4
*
3.2
.9
*
*
*
98.6
100
100
100
.3
.3
6.7
1.5
*
*
98.8
100
91.8
100
578,753
2.7
1.3
3.2
1.2
1.3
83,946
.1
•
Nonowner
occupied,
percent
of loan
category 1
.1
*
*
99.9
100
O w n e r occupied
Pcrcent
of loan
category 1
Pcrcent
of loan
type
9.0
2.5
.4
88.0
too
*
0.2
*
*
>
K
*
99.8
100
100
100
3.2
1.5
*
99.5
100
.7
*
*
*•
99.9
100
.6
.6
99.3
100
99.9
100
.4
.7
.1
*
*
•
*
*
•
98.9
100
2.3
2.3
99.6
100
99.3
100
.2
787
.4
2.7
*
*
*
•
*
*
*
99.3
100
99.8
100
1.2
1.2
97.3
100
99.4
100
4,599
7,058
.6
75
.6
*
4.6
•
*
*
*
•
*
*
*
*
*
99.9
100
99.4
100
2.9
2.9
100
100
100
100
100
100
100
99.8
100
625
.5
.7
.8
100
100
100
100
100
.4
99.6
100
.3
*
•
*
*
99.9
100
99.7
100
580
.1
•
*
•
99.9
100
100
100
2,058
.2
.7
*
*
•
*
99.3
100
99.9
100
7,133
100
100
100
100
100
*
*
36,622
100
100
100
100
100
•
21,703
11,568
397,825
*
.1
100
100
584,733
360,315
*
.6
*
100
464,463
138
99.9
100
*
*
*
50,647
6,489,716
*
8,249
*
*
*
35,835
.2
*
99.2
100
*
3.6
1.5
22,247
*
*
1.1
.1
99.5
100
98.8
100
•
.1
99.9
too
100
100
*
*
.5
*
•
•
5,980
2,814
.1
*
*
95.3
100
*
11,430
100
100
100
100
100
Multifamily
home,
percent
of loan
category 1
too
too
#
100
100
Nonowner
occupied,
percent
of loan
category 1
827,088
737,871
.2
.4
2.0
100
100
100
100
100
4,783,393
285
2,510
.5
.7
Total
15,272
*
50,362
735,361
*
Nonowner
occupied,
percent
of loan
category 1
811,816
Refinance
First lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
Junior lien
Government backed
FHA
VA
FSA/RHS
Conventional
Total
Manufactured
Site built
653
.1
*
*
*
*
*
99.9
100
100
100
147,510
6,302
4,399
267
151,909
6,569
284
13,149,825
1,501,556
235,667
22,804
13,385,492
1,524,360
48,150
358
Federal Reserve Bulletin • Summer 2005
manufactured homes. To help overcome this limitation, the Department of Housing and Urban Development (HUD) produced annually a list of reporting
institutions (typically about twenty) that it believed
were primarily in the business of extending such
credit. 28 Users of the H M D A data often relied on the
HUD list to identify, albeit imperfectly, loans and
applications related to manufactured homes. This
practice had its own limitations—it could not be used
to identify applications and loans related to manufactured homes reported by lenders not on the H U D list,
and users often assumed that all loans by the lenders
on the list were for manufactured homes when some
were not. The expanded H M D A data resolve this
problem by explicitly including a code to identify
applications and loans for manufactured homes. For
background information on manufactured homes, see
box "Manufactured Homes in the U.S. Housing
Market."
Loans for manufactured homes entail more credit
risk than do most other forms of credit extended to
consumers. 2 9 For example, the proportion of loans
for manufactured homes that are thirty days or more
past due is far higher than for most other consumer
credit products and is about twice the rate for conventional loans secured by one- to four-family homes. 3 0
In part, the elevated credit risk arises from more
uncertainty about whether the collateral backing the
loan will retain its original value. Much of the credit
risk arises from the poorer credit history profiles of
the typical borrowers in the manufactured-home loan
market compared with those in the site-built homeloan market.
An individual's credit history score (a statistical
characterization of an individual's creditworthiness
based exclusively on information in a credit record
maintained by a credit-reporting agency) is a com-
28. See www.huduser.org/datasets/manu.html.
29. Unless otherwise indicated, information in this section is
derived f r o m the following sources: U.S. Bureau of the Census (for
H U D ) , A m e r i c a n Housing Survey (formerly the Annual Housing
Survey) and the Residential F i n a n c e Survey w w w . h u d u s e r . o r g /
datasets/pdrdatas.html; M a n u f a c t u r e d Housing Institute 2004,
w w w . m a n u f a c t u r e d h o u s i n g . o r g ; and U.S. Census Bureau 2000 census, w w w . c e n s u s . g o v / m a i n / w w w / c e n 2 0 0 0 . h t m l . I n f o r m a t i o n on the
default experience regarding loans secured by m a n u f a c t u r e d h o m e s
and on the credit history scores of individuals were derived f r o m the
J u n e 30, 2003, credit records of a nationally representative sample of
approximately 3 0 0 , 0 0 0 individuals (with all personal identifying information re m o v e d ) ; the sample was obtained by the Federal Reserve
Board f r o m o n e of the three national credit-reporting agencies. See
Robert B. Avery, Paul S. Calcm, and Glenn B. C a n n e r (2004), " C r e d i t
Report A c c u r a c y and Access to Credit," Federal Reserve Bulletin,
vol. 90 ( S u m m e r ) , pp. 2 9 7 - 3 2 2 .
30. See A m e r i c a n Bankers Association, Consumer Credit Delinquency Bulletin, www.aba.com.
Manufactured Homes in
the U.S. Housing Market
More than 23 million individuals, or roughly 8 percent of
the U.S. population, live in manufactured housing. Typically, about 10 percent to 20 percent of all construction
starts for single-family housing each year are for manufactured homes. Most manufactured homes are assembled
in factories, shipped to a home site, and never moved
once installed. Nearly 80 percent of all the manufactured
homes are owner occupied, a rate more than 10 percentage points higher than that for site-built homes.
Manufactured housing is a significant source of affordable housing. The average new unit cost about $55,000
in 2003, although prices varied, averaging about $32,000
for single-section homes and nearly $60,000 for multisection ("double wide") units (excluding land costs).
Because the price of a manufactured home is generally
lower per square foot than that of a site-built home, the
manufactured home is particularly attractive to households with lower incomes. The average annual income of
households owning manufactured homes is less than half
that of those owning site-built homes and about the same
as that of households that rent their homes.
mon metric of credit risk. 31 Among individuals who
have manufactured-home loans (whether home loans
or, as is the case for most manufactured homes,
personal-property loans), the average credit history
score as of June 30, 2003, was 666, a score nearly
70 points lower than the average among individuals
with loans secured by one- to four-family site-built
homes. Moreover, nearly 25 percent of the individuals with loans secured by manufactured homes
had credit history scores below 600, a threshold that
is often associated with high-risk lending, compared
with only about 5 percent of the individuals with
loans backed by site-built units.
Lenders recognize the elevated risks related to
loans backed by manufactured homes and factor these
risks into the interest rates they charge borrowers. 3 2
Lender caution is also reflected in the very high
denial rates on applications for loans backed by
manufactured homes.
31. To facilitate this discussion, we have adjusted the credit history
scores assigned to the individuals in the Federal Reserve sample of
300,000 credit records (see text note 30) to match the distribution
of the more-familiar F I C O credit history scores developed by Fair
Isaac Corporation, for which information is publicly available. See
www.myfico.com/myfico/CreditCentral/ScoringWorks.asp.
32. In recent years, the m a n u f a c t u r e d - h o m e lending industry has
been adversely affected by the excessive production of units in the late
1990s and the reliance on the relaxed credit underwriting that accompanied the sales of these units. See Neil J. M o r s e (2004), " M a n u f a c turing the D r e a m , " Mortgage Banking (August), pp. 5 0 - 5 6 .
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
359
The 2004 HMDA Data on Manufactured Housing
The 2004 HMDA data indicate that, on the basis
of applications that lenders received after January 1,
2004, nearly 4,400 lenders extended more than
242,000 manufactured-home loans.33 About 57 percent of these loans were for home purchases; most
of the rest were for refinancing an earlier loan (data
derived from table 5). Commercial banks, the largest
source of loans on manufactured homes, extended
46 percent of the total number; mortgage companies
extended 44 percent.
The data indicate further that manufactured-home
lending is a relatively concentrated business. The
ten lenders that extended the largest number of
manufactured-home loans in 2004 accounted for onethird of all such loans that year, and the top twenty
such lenders accounted for 42 percent (data not
shown in tables). Likewise, 60 percent of the lenders
that extended manufactured-home loans in 2004
extended ten or fewer such loans. The 2004 data
indicate that thirty-five lenders could reasonably be
considered to have specialized in manufactured-home
lending that year (see box "The HUD List of Specialists in Manufactured-Home Lending and the 2004
HMDA Data").
For a number of the largest lenders that extended
manufactured-home loans (measured by the number
of such loans), that business segment was only a very
small portion of their lending activity, according to
the 2004 data. In fact, among the twenty-five firms
that extended the largest number of manufacturedhome loans, only three could be characterized as
focused primarily on that business segment. For
virtually all the rest, manufactured-home lending
amounted to 5 percent or less of their total lending
activity.
Of those obtaining loans to purchase manufactured
homes, 41 percent were of lower income, whereas of
those borrowing to purchase site-built homes, about
33. A s noted, the transition rules regarding the reporting of data
p o s e difficulties for evaluating the 2004 H M D A data for manufactured
homes. Consequently, applications governed by the transition rules
are excluded f r o m tables 5 and 6. Despite the reporting exceptions
created by the rules, s o m e lenders chose to report information on
m a n u f a c t u r e d - h o m e status for applications submitted b e f o r e January 1, 2004. However, it is not clear whether these lenders identified
all, or only s o m e , of the pre-2004 applications for loans on m a n u factured h o m e s , and so we exclude these additional data f r o m the
analysis.
T h e 2004 data include information on applications or loans related
to m a n u f a c t u r e d h o m e s f r o m an additional 4 0 0 or so lenders—about
4,800 in a l l — w h i c h indicates that some institutions chose to identify
manufactured h o m e s on applications taken during the transition period
(before J a n u a r y 1, 2004).
The HUD List of Specialists
in Manufactured-Home Lending
and the 2004 HMDA Data
Before 2004, H M D A reporters were not required to identify which of their applications and loans involved manufactured homes, and identifying all of the lenders offering
such credit was impossible. For 2003, H U D ' s list of
manufactured-home loan specialists who are also HMDA
reporters identified 19 such lenders. Only 13 of the
19 lenders that reported 2003 HMDA data provided
2004 HMDA data under the same name and identification number. These 13 lenders accounted for 15 percent
of all the manufactured-home loans reported in the 2 0 0 4
data. Among the 6 manufactured-home lenders on the
2003 H U D list that did not report in 2004 under the same
name or identification number, 2 reported under different names and identification numbers. These 2 lenders
reported information on only about 9 5 0 loans related
to manufactured homes (about 0.4 percent of the total).
Of the 15 manufactured-home loan specialists on the
H U D list that reported data for 2004, only 11 were in fact
primarily involved in extending loans on manufactured
homes.
For 35 lenders that supplied 2004 data (including the
11 on the 2003 H U D list), lending for manufactured
homes constituted at least 80 percent of their reported
lending activity, and so they may reasonably warrant
consideration as specialists in manufactured-home lending. Among the rest of the approximately 4,400 reporting
lenders that had extended at least one manufacturedhome loan in 2004, about 500 indicated that the proportion of their originations related to manufactured homes
was at least 20 percent but less than 80 percent, and the
remaining 3,900 indicated that the proportion was less
than 20 percent.
24 percent had lower incomes (table 6).34 On average, minority borrowers have lower incomes than do
non-Hispanic white borrowers, but only about 18 percent of manufactured-home purchasers were members of a racial or ethnic minority group, whereas
about 30 percent of purchasers of site-built homes
were minorities (data derived from table 6).35
34. T h e i n c o m e category of a purchaser is relative to the median
family income of the area ( M S A or statewide n o n - M S A ) in which the
property being purchased is located, and the income category of a
census tract is the median family income of the tract relative to that of
the area ( M S A or statewide n o n - M S A ) in which the tract is located:
" L o w " is less than 50 percent of the median; " m o d e r a t e " is 50 percent to 79 percent (in this article, " l o w e r i n c o m e " encompasses the
low and moderate categories); " m i d d l e " is 80 percent to 119 percent;
and " h i g h e r " is 120 percent or more.
35. For loans with t w o or m o r e applicants, H M D A - c o v e r e d lenders
report data on only two. I n c o m e for two applicants is reported jointly.
360
5.
Federal Reserve Bulletin • Summer 2005
D i s t r i b u t i o n of loans on m a n u f a c t u r e d h o m e s , by type of loan and t y p e of h o m e lender, 2 0 0 4
Home purchase
First lien
1 ype of lender
Percent
of
loan
type'
Percent
of
lender
type^
Refinance
Junior Hen
Percent
of
loan
type 1
First lien
Percent
of
lender
type 2
Percent
of
loan
type 1
Home improvement
Junior Hen
Percent
of
lender
type 2
Percent
of
loan
type 1
Percent
of
lender
type 2
Firsi lien
Percent
of
loan
type 1
Junior lien
Percent
of
lender
type 2
Percent
of
loan
type 1
Percent
of
lender
type 2
Unsecured
Percent
of
loan
type 1
Percent
of
lender
type2
Government backed
Depository institution
Commercial bank ..
Savings institution .
Credit union
28.1
7.5
.1
5.2
10.1
.3
18.8
12.5
*
*
*
Mortgage company
Independent
Affiliated
45.6
18,8
11.2
18.0
59.4
9.4
*
All lenders
100
8.6
*
*
. *
*
*
18.2
31.8
*
1
1.2
3.1
.1
55.3
14.1
*
100
45.5
4.6
*
*
22.5
7.9
.2
*
3.9
3.8
50.0
*
*
2.5
100 ,
#
100
. *
*
25.0
25.0
*
*
92.9
*
+
*
*
*
3.6
•
*
.1
100
50.0
30.0
20.0
*
*
3.6
*
*
*
*
*
100
*
100
*
MEMO
Number of loans
20,909
32
5,940
NOTE: Excludes transition-period loans (those for which the application was
submitted before 2004). For definition of manufactured home, see text note 9.
Sec also table 1, note 1.
Requests for Pre-Approval
The 2004 data for the first time include information
on certain types of requests for pre-approval of homepurchase loans.. Since pre-approval programs pertain
only to requests for loans to purchase a home, the
HMDA data do not include pre-approval information
for applications involving a refinancing or homeimprovement loan. Although all requests for preapproval that are turned down must be reported,
lenders have the option of reporting requests for
pre-approval that were approved but not acted on
by the consumer. Because many lenders apparently
chose not to report any optionally reportable requests
for pre-approval, the new data do not account completely for pre-approval activity. Nonetheless, the
new reporting scheme is sufficiently comprehensive
to identify which individuals were denied at the preapproval stage and which successful borrowers initiated the borrowing process through a pre-approval
program.
Nearly half of all lenders reported some preapproval activity, although the volume of such activ-
4
f o l l o w i n g d e s i g n a t i o n s are m a d e : If at least t w o m i n o r i t y races are
r e p o r t e d , the a p p l i c a t i o n is d e s i g n a t e d as two or more minority races;
if the first p e r s o n listed on an application reports t w o races, and o n e is
w h i t e , the a p p l i c a t i o n is c a t e g o r i z e d u n d e r the m i n o r i t y race.
10
28
1. Distribution sums vertically.
2. Distribution sums horizontally.
* Less than 0.05 percent.
ity varied greatly across lenders. 3 6 The five lenders
that reported the greatest number of requests for
pre-approval accounted for one-third of all such
requests. Some differences in the propensity to
offer pre-approval programs were found by type of
institution; more than half of the reporting credit
unions, savings institutions, and mortgage companies
reported requests for pre-approval, but only about
one-third of the commercial banks reported such
information.
Although requests for pre-approval are far fewer in
number than home-purchase loan applications that
do not begin through this channel, they are not rare
events. The 2004 data include information about
1 million requests for pre-approval for first-lien loans
to buy homes and about 100,000 for junior liens. Of
those institutions with pre-approval programs, 82 percent did not report any pre-approval requests that
were approved but not acted on by the consumer, an
indication that these institutions chose not to report
all their requests for pre-approval.
DENIALS
A l t h o u g h , as of 2 0 0 4 , a p p l i c a n t s m a y c h o o s e m o r e than o n e race as
well as o n e of t w o ethnicities, a p p l i c a t i o n s are p l a c e d f o r the p u r p o s e s
of table 6 a n d t a b l e s 9 t h r o u g h 13 u n d e r only o n e c a t e g o r y for race
and ethnicity, g e n e r a l l y a c c o r d i n g to the r a c e a n d ethnicity of the
p e r s o n listed first o n the a p p l i c a t i o n . H o w e v e r , u n d e r race, the application is d e s i g n a t e d a s joint if o n e a p p l i c a n t r e p o r t e d the s i n g l e d e s i g n a tion of w h i t e a n d the other r e p o r t e d o n e or m o r e m i n o r i t y races. If
the application is not j o i n t but m o r e than o n e r a c e is r e p o r t e d , the
88
AND PRICING
IN THE 2004
DATA
A central element of the 1989 revisions to HMDA
was the collection of loan-level data on the disposition of home-loan applications, and the 2002 revisions to Regulation C expanded this concept to
include loan-level information on pricing. This
36. P r e - a p p r o v a l s w e r e s u b j e c t to t h e transition rules; c o n s e quently, t h e s e n u m b e r s and the o t h e r s in this section e x c l u d e a p p l i c a tions s u b m i t t e d b e f o r e 2004.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
361
-Continued
Home purchase
First lien
Type of lender
Refinance
Junior lien
First lien
Home improvement
Junior lien
First lien
Junior lien
Unsecured
MEMO
Percent Percent Percent Percent Percent Percent Percent Percent Percent Percent Percent Percent Percent Percent Number
of
of
of
of
of
of
of
of
of
of
of
of
of
of
of
loans
lender
loan
lender
loan
lender
loan
loan
lender
loan
lender
loan
lender
loan
lender
type 1
type 2
type 1
type 2
type 1
type 2
type 1
type 2
type 1
type 1
type 1
type 2
type 2
type 2
Conventional
Depository institution
Commercial bank
Savings institution
Credit union . . . . . .
48.4
6.9
3.0
49.1
50.9
44.6
24.2
3.4
17.8
Mortgage company
Independent
Affiliated
35.9
5.8
48.2
30.2
51.2
3.4
All lenders . . . . .
100
47,1
100
6.2
45.8
5,8
3.5
31.6
29.0
35.9
41.9
6.2
7.0
1.2
2.7
61.6
5.5
3.5
4.8
3.1
4.0
63.9
3.9
6.2
2,6
1.2
3.8
89.7
2.5
4.0
1.6
.4
33.4
11.5
30.5
40.9
36.6
8.3
1.3
, 1.1
21.2
8.2
2.2
3.3
19.0
7.0
1.0
1.5
.3
3.5
1.1
. 100 .
32.0
.6
.6
100
1.1
1.2
100
3.6
100
1.9
100
3.7
.8
2.5
*
112,385
15,391
7,632
.8
84,940
21,849
1,9
242,197
MEMO
Number of loans
114,021
2,653
77,571
section summarizes the aggregate outcomes on both
points. Because the transition rules regarding the
reporting of data create problems for assessing some
of the 2004 data regarding loan pricing, as they do for
manufactured homes and pre-approvals, the analysis
that follows excludes "transition" applications—
those submitted before January 1, 2004 (data on these
applications are shown as memo items in tables 7
and 8). Otherwise, information is given on all applications reported under HMDA. For presentation,
applications were grouped into twenty-five product
categories based on loan and property type, purpose
of the loan, and lien and owner-occupancy status.37
For each product category, information is provided
on the number of total and pre-approval applications,
application denials, originated loans, loans with
prices above the thresholds, loans covered by
HOEPA, and the mean and median spreads for loans
priced above certain thresholds.
Denial Rates
For the past fifteen years or so, the HMDA data have
been the primary source of publicly available data on
the disposition of applications for home loans. The
expanded HMDA data for 2004 provide new opportunities to assess patterns in the disposition of applications at different stages of the lending process and
across product lines and applicant groups.
37, A p p l i c a t i o n s in w h i c h t h e l e n d e r r e p o r t e d that the race, ethnicity, and sex of the a p p l i c a n t o r c o - a p p l i c a n t w e r e " n o t a p p l i c a b l e "
w e r e a s s u m e d to h a v e b e e n m a d e by b u s i n e s s e s ( i n c l u d i n g trusts)
rather t h a n by i n d i v i d u a l s .
2,908
8,739
4,633
4,661
242,197
Denial Rates across Products
The incidence of denials differs substantially across
loan products. Lenders deny only about 15 percent
of the applications for home-purchase loans on oneto four-family site-built homes, whether the loans
are secured as a first lien or a junior lien and whether
they are conventional or government backed
(table 7). In contrast, about 30 percent to 36 percent
of refinancings and home-improvement loan applications involving first liens are denied, as are about
50 percent of the applications for manufactured
homes. The main exception to this pattern is applications for government-backed first-lien loans for refinancings, which have a denial rate similar to that of
home-purchase loans.
Of particular importance are the disposition patterns for applications for manufactured homes. As
noted, past HMDA data did not distinguish applications for manufactured homes from those for
site-built properties. Analysis of the HUD list of
manufactured-home loan specialists suggested that
such lenders had very high denial rates, and that for
lenders offering both manufactured-home loans
and other home loans a distorted picture of their
propensity to deny credit could easily be drawn. The
2004 data confirm the importance of distinguishing
applications for manufactured homes from those
for site-built properties. For example, adding the
applications for conventional home-purchase first
liens for manufactured homes to those for one- to
four-family site-built homes would increase the
number of total lender actions on applications only
7 percent but the number of denials more than 25 percent. The denial rate for the category "conventional
362
6.
Federal Reserve Bulletin • Summer 2005
D i s t r i b u t i o n of h o m e - p u r c h a s e loans f o r one- to f o u r - f a m i l y o w n e r - o c c u p i e d h o m e s , by c h a r a c t e r i s t i c of b o r r o w e r
and of c e n s u s tract and by t y p e of h o m e , 2 0 0 4
Site built
Characteristic
and status
Manufactured
Total
MEMO
Number
P e r c e n t of
characteristic1
Percent of
status 2
Percent of
characteristic'
P e r c e n t of
status2
P e r c e n t of
characteristic'
Percent of
status
4.7
18.9
29.4
46.9
100
93.3
95.8
97.2
98.3
97.3
12.2
29.1
30.1
28.7
100
6.8
4.2
2.8
1.7
2.8
4.9
19.2
29.5
46.4
100
100
100
100
100
100
205,771
798,602
1,227,091
1,933,772
4,165,236
Missing5
Total
.8
4.9
7.1
.5
74.9
.1
1.4
10.4
100
96.1
99.7
97.9
98.3
96.9
97.9
98.0
98.1
97.3
1.2
.5
5.4
.3
84.4
.1
1.0
7.2
100
3.9
.3
2.1
1.7
3.1
2.1
2.0
1.9
2.8
.8
4.7
7.0
.5
75.2
.1
1.4
10.3
100
100
100
100
100
100
100
100
100
100
36,650
206,716
305,432
23,246
3,280,354
3,282
59,524
447,970
4,363,174
Ethnicity
Hispanic or L a t i n o
Not H i s p a n i c or Latino
Joint6
Missing5
Total
11.2
76.4
1.3
11.1
100
98.2
97.1
97.9
97.7
97.3
7.4
82.1
1.0
9.5
100
1.8
2.9
2.1
2.4
2.8
11.1
76.6
1.3
11.1
100
100
100
100
100
100
483,253
3,341,979
55,914
482,028
4,363,174
Minority status
Minority
Non-Hispanic white
Missing5
Total
26.0
62.6
11.4
100
98.3
96.8
97.5
97.3
15.9
73.7
10.3
100
1.7
3.2
2.5
2.8
25.7
62.9
11.4
100
100
100
100
100
1,120,646
2,745,937
496,591
4,363,174
1.6
13.2
49.2
36.0
100
99.1
96.7
96.2
99.1
97.3
.5
16.8
71.4
11.4
100
.9
3.4
3.8
.9
2.7
1.5
13.3
49.8
35.3
100
100
100
100
100
100
65,777
575,070
2,149,842
1,524,643
4,315,332
Racial or ethnic composition
(minorities
as percentage
of population)
Less than 10
10-19
20-49
50-79
80-100
Total"
32.5
22.9
27.7
10.2
6.6
100
96.5
97.6
97.5
98.0
99.1
97.3
43.4
21.1
25.7
7.6
2.2
100
3.5
2.5
2.5
2.0
0,9
2.7
32.8
22.9
27.7
10.2
6.5
100
100
100
100
100
100
100
1,417,201
988,062
1,193,394
438,175
279,509
4,316,341
Location
Central city
Noncentral city
Rural o r o n l y state k n o w n
Total"
38.5
52.7
8.8
100
98.8
97.6
90.0
97.3
17.1
47.3
35.6
100
1.2
2.4
10.0
2.7
38.0
52.5
9.5
100
100
100
100
100
1,642,184
2,272,738
411,822
4,326,744
BORROWER 3
Income ratio (percent
Less than 5 0
50-79
80-119
120 o r m o r e
Total"
of area median)
Race
A m e r i c a n Indian or A l a s k a N a t i v e
Asian
Black or African American
Native H a w a i i a n or other Pacific Islander
White
T w o or m o r e minority races
CENSUS TRACT OF PROPERTY
Income ratio (percent
Less than 5 0
50-79
80-119
120 o r m o r e
Total4
of area median)
NOTE: E x c l u d e s t r a n s i t i o n - p e r i o d l o a n s ( t h o s e f o r w h i c h t h e a p p l i c a t i o n w a s
s u b m i t t e d b e f o r e 2 0 0 4 ) . For d e f i n i t i o n of i n c o m e c a t e g o r i e s f o r b o r r o w e r a n d
c e n s u s t r a c t , s e e t e x t note 34. C e n s u s tract is f o r t h e p r o p e r t y s e c u r i n g the l o a n .
C a t e g o r i e s f o r r a c e a n d e t h n i c i t y r e f l e c t t h e r e v i s e d s t a n d a r d s e s t a b l i s h e d in
1997 b y t h e O f f i c e of M a n a g e m e n t a n d B u d g e t ( O M B ) ; f o r d e t a i l s , s e e tex t
1. D i s t r i b u t i o n s u m s vertically.
2. Distribution s u m s horizontally.
3. F o r d e t a i l s on t h e i d e n t i f i c a t i o n of b o r r o w e r i n c o m e , r a c e , a n d e t h n i c i t y ,
m e a n s H i s p a n i c or Latino ethnicity or any race
see text n o t e 3 5 .
4 . E x c l u d e s l o a n s f o r the i n f o r m a t i o n f o r t h e c h a r a c t e r i s t i c w a s m i s s i n g o n
the a p p l i c a t i o n .
other than white. Census-tract data reflect the 2 0 0 0 decennial census; they also
r e f l e c t d e f i n i t i o n s f o r m e t r o p o l i t a n s t a t i s t i c a l a r e a s e s t a b l i s h e d b y t h e O M B in
5. I n f o r m a t i o n f o r t h e c h a r a c t e r i s t i c w a s m i s s i n g on t h e a p p l i c a t i o n .
6. O n the applications for these loans, o n e applicant reported " H i s p a n i c or
d i s c u s s i o n . T h e t e r m minority
J u n e 2 0 0 3 a n d u s e d in H M D A f o r the first t i m e in the 2 0 0 4 data ( s e e n o t e 2 in
m a i n - t e x t b o x " D i s t r i b u t i o n of H M D A D a t a a n d P r e - 2 0 0 4 R e q u i r e m e n t s of
L a t i n o , " and the other reported " n o t Hispanic or Latino."
Regulation C " ) .
home-purchase first liens" would increase from
14.9 percent to 17 percent (data derived from table).
Although this change might not appear large in the
aggregate, for some lenders it could create a major
distortion.
Denials of Requests for Pre-Approval
Denial rates for applications that begin with requests
for pre-approval can be computed in different ways,
especially since lenders need not report approved
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
requests for pre-approval not acted on by the borrowers. One way to assess the disposition of applications
received through the pre-approval process is to compute denial rates for requests for pre-approval separately from the denial rates for subsequent applications related to a specific property. Another way of
assessing denial rates is to combine the two stages
(pre-approval requests and subsequent applications
for a specific property) and to treat a denial at either
stage as a denial.
The denial rates for pre-approval requests (column 3 of table 8) are similar to the denial rates for
all applications for home loans on specific properties (column 4 of table 7). Not surprisingly, the
denial rates on applications for a specific property
that began as requests for pre-approval (derived
from columns 5 and 6 of table 8) are lower than
the denial rates on pre-approval requests and on
applications for a specific property that did not
come through the pre-approval process. But although
they are relatively low, the denial rates for preapproved borrowers are not zero: More than
8 percent of pre-approved applicants for conventional first-lien home-purchase loans are turned
down when they apply for a loan on a specific
property.
If we view requests for pre-approval and applications for loans to purchase a specific property as
elements of a single process, the data suggest that
the overall denial rates for applicants for home loans
on specific properties who came through the preapproval process are about the same as for applicants
who did not first request a pre-approval. Seventeen
percent of the applicants for conventional first-lien
home-purchase loans who came through the preapproval process were denied versus 15 percent of
those who did not first request a pre-approval (data
derived from tables 7 and 8).
However, origination rates for the two groups were
very different. Only 49 percent of the applicants for
conventional first-lien home-purchase loans who
began the process with a request for a pre-approval
ended up with a loan, compared with 67 percent
of other applicants. This difference appears to stem
not from lender actions but from markedly different
rates of withdrawal from the process by applicants.
Thirty-four percent of applications for conventional
first-lien home-purchase loans that started at the preapproval stage are withdrawn by the applicant at
some point (or not acted on by the lender). The
withdrawal rate for other applications is much lower
(19 percent).
363
Reported Reasons for Denial
The HMDA data include information from lenders on
why they turned down an application. Lenders generally provide the information voluntarily; however,
two federal bank supervisory agencies, the Office of
Thrift Supervision and the Office of the Comptroller
of the Currency, require the institutions they supervise to report this information. 38
Institutions are allowed to cite up to three reasons
(from a list of nine) that an application was turned
down. Overall, one or more reasons for denial were
provided for about 81 percent of the denials across all
loan products and for about 75 percent of the denials
for home-purchase loans (data not shown in tables).
Poor or no credit history was the most frequently
cited reason for denying applications: Credit-related
issues were cited in about 26 percent of the denials
of applications for conventional first-lien loans to
purchase one- to four-family site-built homes and
in about 52 percent of the denials of applications for
such loans to purchase manufactured homes. Other
reasons often cited for credit denials involved excessive debt-to-income ratios, issues related to collateral, and unverifiable or incomplete information on
applications; a catch-all category in the HMDA data
labeled "other" was also frequently cited.
Loan Pricing
Because of the transition rules, some unknown proportion of higher-priced loans was reported in the
same way as loans that did not meet the threshold
requirements. 39 The inability to identify higher-priced
loans that were originated in 2004 but had application
dates preceding that year means that users of the data
need to take special account of these applications
when conducting analyses.
Reasons for Loan-Price Variation
The HMDA data on loans in the higher-priced segment of the home-loan market do not include much
38. Reasons for denial are not provided for requests for preapprovals that are denied.
39. Analysis of the data is further complicated because loans not
subject to the Federal Reserve's Regulation Z—that is, business
loans—are reported with the same code as loans with spreads below
the threshold. Some, perhaps most, of these loans are identifiable,
however, because, as explained in text note 37, an application can be
identified as being from a trust or other organization rather than from a
person.
364
7.
Federal Reserve Bulletin • Summer 2005
D i s p o s i t i o n of a p p l i c a t i o n s for h o m e loans, and o r i g i n a t i o n and p r i c i n g of l o a n s , by type of h o m e and type of loan, 2 0 0 4
Applications
Loans originated
Loans with annual percentage rate (APR)
spread above the threshold1
Acted upon by lender
Type of home and loan
Number
submitted
Percent distribution,
by percentage points
of APR spread
Number
Number
Number
Number
denied
Percent
Percent
denied
3-3.99
4-4.99
ONE- T O FOUR-FAMILY
NONBUSINESS RELATED4
O w n e r occupied
Site built
Home purchase
Conventional
First lien
Junior lien
G o v e r n m e n t backed
First lien
Junior lien
Refinance
Conventional
First lien
Junior lien
G o v e r n m e n t backed
First lien
Junior lien
Home improvement
Co n v e ntional
First lien
Junior lien
G o v e r n m e n t backed
First lien
Junior lien
Conventional or governmentb a c k e d , unsecured
Manufactured
Conventional, first lien
Home purchase
Refinance
Other
5,559,099
1,072,726
4,938,892
964,662
737,756
164,750
14.9
17.1
3,745,490
701,078
432,364
270,688
11.5
38.6
58.0
27.5
652,281
1,563
583,299
1,254
79,253
171
13.6
13.6
479,498
1,036
6,298
29
1.3
2.8
58.3
24.4
12,261,720
954,842
9,641,212
785,067
2,973,609
270,594
30.8
34.5
5,708,965
439,495
884,108
120,500
15.5
27.4
53.9
28.1
427,105
766
347,785
451
51,661
172
14.9
38.1
269,349
268
4,084
12
1.5
4.5
69.5
19.8
706,594
915,901
619,012
784,857
224,727
332,508
36.3
42.4
339,836
376,785
74,584
65,185
21.9
17.3
49.0
25.9
3,876
5,505
3,361
4,899
820
2,372
24.4
48.4
2,350
2,142
90
1,133
3.8
52.9
48.9
21.1
364,947
348,629
182,505
52.3
143,856
359,129
239,999
99,144
347,524
201,876
88,765
186,618
104,276
33,661
53.7
51.7
37.9
98,864
71,508
48,565
56,498
34,171
9,807
57.1
47.8
20.2
22.9
32.9
24.3
21.8
27.3
13.4
1,112,330
937,424
234,450
1,003,071
808,515
208,729
156,925
193,158
70,590
15.6
23.9
33.8
760,796
539,758
122,321
92,715
75,537
36,442
12.2
14.0
29.8
59.0
53.4
10.7
26.8
27.4
5.9
54,944
55,051
29,115
50,213
47,590
26,444
3,062
5,952
3,638
6.1
12.5
13.8
45,339
38,922
21,427
4,244
3,997
1,952
9.4
10.3
9.1
49.9
45.7
6.3
24.7
29.0
4.7
24,593
23,424
5,662
22,599
21,619
5,067
2,372
2,306
954
10.5
10.7
18.8
19,294
18,468
3,942
861
886
279
4.5
4.8
7.1
60.2
58.8
14.0
23.2
23.5
10.8
26,102,190
21,855,392
5,784,410
26.5
13,999,352
2,176,464
15.5
41.4
21.3
Nonowner occupied5
Conventional, first lien
Home purchase
Refinance
Other
BUSINESS RELATED"
Conventional, first lien
Home purchase
Refinance
Other
MULTIFAMILY 6
Conventional, first lien
Home purchase
Refinance
Other
Total
NOTE: E x c l u d e s transition-period applications (those submitted before 2004)
and transition-period loans (those for which the application was submitted
b e f o r e 2004).
1. APR spread is the difference between the APR on the loan and the yield
on a comparable-maturity Treasury security. The threshold for first-lien loans is
a spread of 3 p e r c e n t a g e points; for junior-lien loans, it is a spread of 5 percentage points.
2. Loans c o v e r e d by the H o m e O w n e r s h i p and Equity Protection Act of
1994, which does not apply to home-purchase loans (for details, sec text).
3. N u m b e r denied divided by n u m b e r (not shown) acted upon.
4. Business-related applications and loans are those for which the lender
reported that the race, ethnicity, and sex of the applicant or co-applicant arc " n o t
applicable"; all other applications and loans are nonbusiness related.
5. Includes applications and loans for which occupancy status was missing.
6. includes business-related and nonbusiness-related applications and loans
for owner-occupied and nonowner-occupied properties.
. . . Not applicable.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
365
7.—Continued
Loans originated
MEMO
Transition-period applications (those submitted before 2004)
Loans with annual percentage rate (APR)
spread above the threshold 1
Percent distribution,
by percentage points
of A P R spread
APR spread
(percentage points)
Loans originated
N u m b e r of
HOEPAcovered
loans1
Number
submitted
Number
denied
Percent
denied3
Number
Percent with
APR spread
above
threshold
N u m b e r of
HOEPAcovered
loans2
5-6.99
7-8.99
9 or more
Mean
Median
13.2
76.2
1.2
21.7
.2
2.1
4.1
6.4
3.8
6.2
490,846
47,351
41,115
5,230
9.9
13.4
303,881
26,475
5.1
23.1
12,7
69.0
4.3
17.2
.3
13.8
4.2
7.1
3.9
6.0
85,896
226
8,172
16
11.5
9.8
56,693
134
.7
2.2
15.7
58.3
2.2
28.9
.2
12.9
4.2
7.3
3.9
6.7
7,249
3,987
813,761
36,965
106,316
6,184
18.5
21.6
333,550
16,479
10.7
23.7
322
177
9.4
58.3
1.0
41.7
.3
3.9
6.7
3.6
6.6
496
2
49,849
63
6,008
6
15.9
21.4
23,485
19
.8
106
0
0
19.4
41.5
4.5
27.9
1.1
30.7
4.4
8.0
4.0
7.6
1,965
5,046
13,773
21,962
1,733
4,342
14.6
24.0
7,912
10,646
14.6
13.0
21.1
23.1
7.8
29.3
1.1
47.6
4.7
9.2
4.0
8.9
4
1,002
391
273
74
67
25.0
30.9
189
88
3.7
43.2
4,881
1,209
27.1
2,132
.
63
158
'
17
32.4
28.9
30.5
16.8
8.2
16.4
6.0
2.8
15.4
5.7
5.0
6.4
5.2
4.6
5.5
1,830
904
9,595
12,252
6,679
1,177
2,370
722
13.8
25.0
12.5
5,003
4,590
4,308
22.2
21.2
4.9
'
41
24
11.6
16.4
50.9
1.8
2.4
25.6
.8
.5
6.8
4.1
4.2
6.4
3.8
3.9
6.1
' 6\2
218
84,952
82,569
8,684
7,864
11,682
1,120
10.8
17.3
15.7
53,019
42,145
4,739
7.8
9.1
24.9
'
34
6
20.7
21.6
64.3
3.5
3.2
20.9
1.2
.5
3.8
4.4
4.4
6.2
4.0
4,1
6.1
' 104
29
87,425
117,852
42,414
11,520
25,941
7,973
14.9
25.4
22.0
50,885
54,936
21,444
5.7
10.5
9.8
'
36
121
13.9
16.0
57.7
2.1
1.4
15.1
.6
.3
2.5
4.1
4.1
5.9
3.7
3.8
5.8
29
7
3,607
3,920
689
169
262
35
5.2
7.3
5.6
2,838
3,060
548
3.1
3.0
2.7
' ' 3
2
27.2
7.7
2.5
4.8
4.3
23,484
2,026,875
251,307
15.7
1,029,198
8.4
1,110
'
366
8.
Federal Reserve Bulletin • Summer 2005
Home-purchase lending that began with a request for pre-approval: Disposition and pricing, by type of home, 2004
Applications preceded by
requests for pre-approval5
Requests for pre-approval
Loan originations whose applications were
preceded by requests for pre-approval
Loans with annual percentage
rate (APR) spread
above the threshold 3
Acted upon by lender
Type of home
Number
denied
Number
submitted
Percent
denied 2
Number
submitted
Number
Number
Number
denied
Number
Percent
O N E - T O FOUR-FAMILY
NONBUSINESS RELATED
. O w n e r occupied
Site built
Conventional
First lien
153,773
15,423
22.5
17,4
448,77!
67,757
396,998
61,771
34,665
4,728
332,804
52,671
27,340
14,865
8.2
28.2
100,118
147
26,682
35
26.7
23.8
71,632
118
64,214
99
7,218
13
53,527
83
662
7
1.2
8.4
39,791
3,714
23,838
935
59.9
25.2
37,592
2,912
35,700
2,351
22,039
419
7,430
1,787
4,735
94
63.7
5.3
84,763
7,003
15,252
1,067
18.0
15.2
58,101
5,953
51,548
5,040
5,457
487
41,564
4,000
3,478
1,307 . ,
8.4
32.7
3,667
1,540
350
117
9.5
7.6
3,317
1,419
2,791
1,208
244
90
2,417
1,079
364
149.
15.1
13.8
226
16
29
4
12.8
25.0
207
14
186
13
14
2
167
11
19
6
11.4
54.5
1,014,084
237,505
23.4
697,793
621,919
75,376
497,540
53,026
10.7
684,306
88,793
G o v e r n m e n t backed
First lien
Junior lien
Manufactured
Conventional, first lien
.
.
N o n o w n c r occupied
Other
,
B U S I N E S S RELATED
Conventional, first lien
Other
MULTIFAMILY • '
'
Conventional, first lien
: Other
Total
.
;
NOTE: E x c l u d e s transition-period requests for pre-approval (those submitted before 2004). See also notes 4, 5, and 6 of table 7 for details on businessrelated, nonowner-occupied, and nuiltifamily properties and general note to
table 2.
1. These applications are included in the total of 26,102,190 reported in
table 7.
of the information that might explain variations in the
prices of reported loans. Among the factors reflected
in loan pricing are the cost of the funds to be lent,
credit risk, prepayment risk, overhead expenses, loanservicing costs, the negotiating abilities and inclinations of the creditor and borrower, the possibility of
discriminatory pricing, and variations in the channels
through which a loan application at a given lender
may be processed (see box "Reasons for Loan Price
Variation").
Issues Raised by Expanding the Disclosure
of Pricing-Related Items
Although disclosures that are more comprehensive
could improve the understanding of loan pricing, it
would impose new costs on lenders to collect and
report the additional data, raise difficult reporting
issues, and might pose privacy concerns for consumers and reveal otherwise nonpublic information about
•
2. N u m b e r denied divided by n u m b e r (not shown) acted upon,
3. See table 7, note 1.
. . . Not applicable.
lenders' business strategies. Adding new data elements to mandated disclosures would require institutions to train staff, modify data collection and reporting software, and expand controls to ensure the
reporting of correct data.
Further, the fact that lenders differ in the factors
they consider in setting loan prices makes it difficult
to select additional data elements that would allow
a complete understanding of the determinants of a
particular lender's pricing method. Also, some loanpricing items that might be added to the HMDA data
raise technical issues about what, precisely, to report.
For example, if lenders were required to report credit
scores, getting consistent data across lenders would
be difficult because institutions rely on different types
of credit scores in underwriting—for example, some
lenders rely on generic FICO credit history scores
(see text note 31), whereas others use proprietary
credit scores developed from information on their
own experience with lending.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
367
8.—Continued
Loan originations whose applications were
preceded by requests for prc-approval
MEMO
Applications with transition-period requests for pre-approva)
(request submitted before 2004)
Loans with annual percentage rate (APR) spread above the threshold 3
APR spread
(percentage points)
Percent distribution,
by percentage points of APR spread
Loans originated
Number
Number
Number
denied
Percent
with APR
spread
above
threshold
4.3
3.4
13,382
919
3.8
9.6
351
1
7,2
10.0
3,770
9
1.4
0
22.0
3-3.99
4-4.99
5-6.99
7-8.99
9 or more
Mean
Median
49.2
28.4
20.0
81.3
2.0
16.7
.5
2.0
4.3
6.2
4.0
6.0
20,444
1,269
731
37
34.1
7.4
29.5
71.4
28.5
14.3
.5
14.3
5.6
6.4
6.3
5.3
5,866
11
Percent
denied 3
19.6
23.4
33.5
15.2
20.2
0
77.7
2.1
8.3
5.8
5.3
172
23
18.4
91
0
5.0
5.3
508
26
6.5
335
48.0
0
21.8
0
17.0
53.8
7.7
38.5
5.4
7.7
4.8
7,0
4.0
6.8
2,406
184
107
8
5.4
5.8
1,493
81
4.8
18.5
36.8
.7
19.8
0
31.0
82.6
8.2
11.4
4.1
5.4
5.1
6.4
4.6
6.3
1,800
570
75
21
4.6
4.2
1,393
450
3.2
4.7
47.4
0
31.6
0
10.5
50.0
0
50.0
10.5
0
5.1
6.8
4.1
6.9
16
1
0
0
15
1
6.7
0
31.0
18.4
39.5
9.0
2.1
5.1
5.0
33,247
1,380
21,939
3.8
The potential for compromising consumer privacy
is also a consideration. More than 90 percent of
the loan records in a given year's HMDA data are
unique—that is, an individual lender reported only
one loan in a given census tract for a specific loan
amount. These unique loan records can be matched
with other publicly available information, such as
property deed records, to determine the identities
of individual borrowers. With such a match, any data
item in the HMDA database, such as loan pricing,
becomes publicly known. During the Board's review
of Regulation C, some commenters cited this circumstance as a reason not to require the reporting of price
information. Expanding HMDA to include data items
such as credit scores that may be considered highly
personal would likely also raise privacy concerns.
Finally, requiring lenders to disclose additional
information about their lending activities may result
in the disclosure of otherwise nonpublic information
about lenders' business strategies. H M D A now
requires disclosure of information about lending
patterns—for example, pricing patterns—that other-
0
0
5.0
0
wise would not be public. In general, such disclosure
is pro-competitive because it helps possible entrants
to the market identify business opportunities and
lowers the information advantage of market incumbents. An argument could be made that disclosing
detailed information about lenders' business strategies through HMDA might discourage lenders from
testing new products or entering new markets by
creating a risk that, because of such disclosure, a
lender would lose its competitive advantage before
it had recouped the fixed costs of entry. The likelihood of such discouragement would depend critically
on whether potential competitors could discern the
essential elements of a lender's business strategy
(a discernment that would depend, in part, on which
data items had to be disclosed) and, further, distinguish successful business strategies from unsuccessful ones (a distinction that could not be made on the
basis of HMDA data alone). Ultimately, any decision
to add data items to the reporting requirements of
H M D A should be based on a careful weighing of the
costs and benefits of such additional reporting.
368
Federal Reserve Bulletin • Summer 2005
Reasons for Loan Price Variation
As in credit underwriting, loan pricing reflects a wide
variety of factors.
Cost of funds. The cost of funds is the largest element in the
overall cost of extending prime-market home loans and a
significant factor for loans in the higher-priced segment of
the market. Funding costs vary with the expected duration
of the debt and the creditworthiness of the borrower. Also,
many creditors originate loans for subsequent sale in
the secondary market; consequently, the prices offered by
secondary-market participants for home loans bear heavily
on the pricing decisions for such loans.
Credit risk. Credit risk is the probability that a loan will go
into default. Loans that involve greater credit risk carry
higher prices. On average, loans in the prime market entail
substantially lower credit risk than do those in the subprime
market.' Interest rates on loans increase with the rate of
serious delinquency, even for subprime loans, an indication
that loans that pose greater credit risk carry higher rates of
interest (chart A),
Credit risk is a function of the creditworthiness of the
borrower, the equity in the home securing the loan, and the
likelihood that proceeds of a foreclosure sale of the home
will satisfy the obligation if default occurs. In general, the
1. See A m y Crews Cutts and Robert Van Order (2004), "On the Economics of Subprime Lending," Freddie Mac Working Paper 04-01 (Washington:
Freddie Mac, January), www.freddiemac.com/corporate/reports..
A.
Percentage of selected subprime loans delinquent
ninety days or more or in foreclosure, by interest rate
on loan, May 2005
Percent
creditworthiness of borrowers is related to their income and
employment prospects; available assets if financial problems arise; claims on their income from servicing other
debts; and credit history, which, in part, reflects their willingness and ability to repay credit. As noted, in underwriting loans, credit history is often summarized and measured
by a credit history score. Equity in a home is measured at
the time of loan origination by a loan-to-value ratio (LTV).
The importance of credit history in loan pricing is illustrated by the fact that interest rates are higher for loans with
lower credit history scores (chart B). For the most part,
borrowers in the prime segment of the market have credit
history scores that indicate they pose relatively little credit
risk. Borrowers in the higher-priced segment of the market
typically have weaker credit history profiles for one or
more of several reasons; previous failures to make loan
payments as scheduled, collection agency actions, bankruptcy or adverse court judgments, or little or no previous
experience with credit.
Prepayment risk. Prepayment risk measures the possibility
that a loan will be repaid before the end of the loan term.
Most early payoffs of home loans are attributable either to
the sale of the home or the refinancing of the loan, typically
when rates have fallen sufficiently from the rate on the
existing loan. Because a prepayment results in payment of
the principal ahead of schedule, the lender (or secondarymarket investor) must reinvest the funds at the new market
rate, which may be lower than the old rate, particularly in
the case of a refinancing.
B.
Interest rates offered on thirty-year fixed-rate
mortgages, by credit history score of borrower,
July 2005
Interest rate (percent)
25
8.0
or less
8.018.50
8.519.00
9.019.50
9.5110.00
10.0110.50
10.5!
or more
620-639
640-659
660-679
680-699
700-759
760-850.
Interest rate on loan
Range of credit history scores
NOTE: T h e loans, which consist of 1.5 million home loans from among
twenty-five active subprime lenders, are first- and second-lien homepurchase and home-refinancing loans originated in the second quarter of
2001, Performance is as of May 2005.
SOURCE: LoanPerformance database (www.loanperfomiance.com).
NOTE: Based on a nationwide tabulation of lenders; loan amount is
$150,000.
SOURCE: Fair Isaac Corporation (www.myfico.com, accessed on July 18,
2005).
1
New Information
Reported
under HMDA
and Its Application
in Fair Lending
Enforcement
369
Reasons for Loan Price Variation—Continued
Although the possibility of prepayment is well understood, estimating when it will happen is quite difficult. For
this reason, lenders compensate for the risk either by including prepayment penalties in their loan contracts or by pricing the risk in their calculation of the interest rate on the
loan. The first of these options, the prepayment penalty, is
rare in the prime segment of the market but is more common in the subprime segment.
Borrowers in the higher-priced segment of the home-loan
market have higher prepayment rates than others because
many of them improve their credit profiles over time as they
make regular payments, and this improvement in turn
allows them to qualify for a lower-rate loan. Our review of
depersonalized credit record information from one of the
three national credit-reporting agencies indicates that, as of
June 30, 2003, almost one-fourth of those with outstanding
home-loan debt and with credit history scores between 5B0
and 620 (a credit score range associated with individuals
with subprime credit quality) increased their credit scores
40 points or more over the ensuing eighteen-month period.
A change in credit score of this magnitude would typically
be sufficient to move their credit risk profiles into the
near-prime or prime segment of the market. 2
The effect of even a small improvement in the credit
history score is much larger for borrowers in the higherpriced segment of the home-loan market than for those
in the prime segment. For a higher-priced loan, a small
improvement in the borrower's credit history score may
translate into a substantial reduction in interest rates and
may encourage prepayment (chart B). 3 Because pricing in
the prime segment varies little by credit score, borrowers in
the prime market are less likely to obtain a lower-priced
loan if their credit scores improve.
Another factor that may result in elevated rates of prepayment in the higher-priced portion of the market is the
practice referred to as "loan flipping." Flipping is inducing
a borrower to refinance a loan repeatedly—even though
the refinancing may not be in the borrower's interest—and
charging high fees with each refinancing.
Overhead expenses. Overhead expenses represent a fairly
small component of the cost of lending for most home
loans. However, borrowers who have experienced payment
problems in the past, or who have little or no credit history,
or who are unable or unwilling to document their employment histories or income are likely to require more time to
underwrite. The higher cost of underwriting may be passed
on to such borrowers and can result in prices that place their
loans in the higher-priced segment of the market. Marketing
2. The
three
national
credit-reporting
agencies
are
Equifax
(www.equifax.com), Experian (www.experian.com), and Trans Union Corporation (www.transunion.com).
3. Of course, prepayment penalties may deter prepayment among some
borrowers in the higher-priced segment of the market even when their credit
scores improve.
and other expenses incurred to identify market opportunities and solicit customers may also differ across segments of
the home-loan market.
Servicing costs. Servicing costs are expenses incurred to
process and distribute loan payments, monitor accounts,
and deal with borrowers who fall behind in their payments.
Servicing costs can be particularly high if the loan involves
a foreclosure-—that is, a forced sale. Because the higherpriced segment of the market has high rates of serious
delinquency, servicing costs are higher than in the prime
market. And because higher-priced loans tend to be smaller
than prime loans, the costs of servicing and the costs of
extra underwriting efforts (noted earlier) must be spread
over a smaller dollar volume of loans. Borrowing a relatively small amount increases the possibility that elevated
costs will lead to a higher-priced loan because any given
amount of fixed costs passed on to the borrower increases
the APR more on a smaller loan than on a larger loan.
Hence, these costs have a larger effect on loan prices in the
higher-priced segment of the market than in the prime
segment.
In general, the cost and risk-related factors noted earlier
may be measured in an objective way and are demonstrably
related to the costs, and hence the prices established, for
credit. Two additional, and related, pricing factors are not
necessarily objective and, moreover, are more likely than
others to raise fair lending concerns: discretionary pricing
by loan officers and price negotiations between creditor and
applicant.
Discretionary pricing. Many creditors provide their loan
officers and agents working on their behalf (for example,
mortgage brokers) with rate sheets that indicate the creditors' minimum prices by product (for example, for conventional loans of various types or with various types of
government backing), loan characteristics (for example,
term to maturity and LTV ratio), and borrower creditworthiness (for example, credit history score and debt-to-income
ratio). In some cases, loan officers and brokers are allowed
to deviate from these prices as market conditions warrant
or allow. A loan officer may quote a prospective borrower
a price above the rate sheet (sometimes referred to as an
"overage"), and if the consumer accepts the price without
demanding cash back to offset loan fees or other closing
costs, the contract interest rate or loan fees on such "overaged loans" will be higher than they might otherwise have
been.
Discretionary pricing can be a legitimate business practice and can help ensure that markets allocate resources
in the most efficient way. However, when loan officers are
permitted latitude in establishing prices, the lender runs the
risk that differential treatment on a basis prohibited by law
may arise. Obtaining overages more often, or in higher
370
Federal Reserve Bulletin • Summer 2005
Reasons for Loan Price Variation—Continued
amounts, from minority borrowers or targeting only minorities for overaging may constitute a fair lending violation
unless some legitimate, nondiscriminatory reason exists for
the result.
Price negotiations. Price variation can also arise because
less sophisticated or less knowledgeable borrowers are not
as likely to shop for credit or to realize that they may
negotiate with the lender over the interest rate and fees.
Moreover, lower-income borrowers may be disproportionately represented in the category of less sophisticated borrowers. Given that minority borrowers have disproportionately lower incomes, there is some likelihood that they will
be overrepresented among borrowers with overaged loans.
Such results may be interpreted by some as demonstrating
unlawful discriminatory pricing by lenders.
Differences in the extent to which borrowers negotiate or
shop for the best deal may result in a pattern of overage
loans that is not illegal but that nonetheless may be difficult
for a lender to document and explain. Moreover, instances
of different negotiating strengths among borrowers can be
difficult to distinguish from illegal discriminatory treatment
in which loan officers quote loan rates or provide information or assistance that varies according to the race, ethnicity,
sex, or other prohibited characteristic of the borrower.
Variations in loan-processing channels. The delivery channels through which borrowers obtain loans vary widely
The Interest Rate Situation in 2004
The interest rates prevailing in a given year can
significantly affect the proportion of loans that exceed
the thresholds established by the Federal Reserve for
determining whether a loan is "higher-priced." For
2004, the rate on Treasury securities used to calculate
the spread for home loans with thirty-year terms
varied f r o m 4.67 percent to 5.54 percent. This variation implies that the threshold for reporting a firstlien loan as higher-priced ranged from 7.67 percent
to 8.54 percent over the year. For junior liens, which
typically have a shorter term to maturity than do
first liens, the reporting threshold ranged from about
8.78 percent to 9.79 percent for a fifteen-year loan
(different terms to maturity would yield somewhat
different ranges).
Data derived by Freddie Mac from its Primary
Mortgage Market Survey show that the spread for
average interest rates for first-lien conforming mortgages extended in 2004 imply a typical gap between
the thirty-year Treasury rate and an estimated APR
for prime-rate loans of between 1 percent and
across lenders. On the one hand, underwriting and pricing
may be centrally controlled even though the application
may begin on the Internet or with a mailed solicitation or
at a bank branch. On the other hand, in complex financial
organizations with bank branches, multiple affiliates, decentralized loan production offices, indirect brokerage operations, and nonbank subsidiaries, each application may
be subject to a different underwriting and pricing regime
depending on its point of initiation. The 2004 HMDA
pricing data suggest that the delivery channel through
which a borrower obtains a loan may matter. As discussed elsewhere in this article (see section "Incidence
of Higher-Priced Lending for Selected Subgroups"), the
incidence of higher-priced lending is higher for borrowers
who live outside the assessment areas of lenders covered by
the Community Reinvestment Act of 1977 (CRA) than for
those who live inside these areas. 4 This difference may be
due to a reliance on different delivery channels for loans
within and outside these lenders' assessment areas.
4. The assessment areas of lenders covered by the CRA include principally the locales in which a lender has its main or branch offices and its
deposit-taking automated teller machines. For a more complete definition
of CRA assessment areas, see the Federal Reserve Board's Regulation BB,
section 228.41. See also Robert B. Avery, Glenn B. Canner, Shannon C.
Mok, and Dan S. Sokolov (2005), "Community Banks and Rural Development: Research Relating to Proposals to Revise the Regulations That Implement the Community Reinvestment Act," Federal Reserve Bulletin, vol. 91
(Spring), pp. 202-35.
1.25 percent. 40 This gap implies that a thirty-year
first-lien home loan would have to have been priced
between 1.75 percentage points and 2 percentage
points above a prime-rate home loan to exceed the
HMDA price-reporting threshold. Such a price spread
was around the upper end of the near-prime market,
but it was probably still below the levels associated
with most subprime loans. In future years, the thresholds may cover a greater proportion of the near-prime
segment of the market.
Results: The Incidence of Higher-Priced Lending
Several patterns are revealed in the 2004 HMDA
pricing data (table 7). First, in almost all cases,
government-backed loan products show lower incidences of higher-priced lending than do comparable
conventional loan products. For example, among
first-lien home-purchase loans for site-built homes,
11.5 percent of conventional loans have APRs above
40. See www.freddiemac.com.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
the pricing threshold versus only 1.3 percent of
government-backed loans. Second, with few exceptions, first-lien loans have a substantially lower incidence of higher-priced lending than do junior-lien
loans for the same purposes. For example, nationally
the incidence of higher-priced lending for conventional first-lien refinance loans was 15.5 percent
whereas for comparable junior-lien loans it was
27.4 percent. Third, manufactured-home loans exhibit
the greatest incidence of higher pricing across all
loan products, a result consistent with the elevated
credit risk associated with such lending. For example,
57.1 percent of conventional first-lien loans used to
purchase manufactured homes were higher priced, in
sharp contrast to the 11.5 percent rate for comparable
loans for site-built homes. Finally, the lower incidence of higher-priced lending (shown in the memo
item in table 7) for loans initiated in the transition
period reinforces the decision to exclude such loans
from the pricing analysis.
Rate spreads for higher-priced loans. Variation in
mean and median spreads across products for loans
with rates above the threshold is much smaller than
variation in the incidence of higher-priced lending.
Because the threshold for reporting is set higher for
junior liens than for first liens, higher-priced juniorlien products have higher mean and median spreads.
Once again, manufactured-home loans stand out in
that they have the highest average spreads among all
the loan products with comparable lien status.
Except for loans backed by manufactured homes,
the vast majority of higher-priced loans have prices
within 1 or 2 percentage points of the pricing thresholds. Only a very small proportion of higher-priced
first-lien loans have spreads that exceed 7 percentage
points. Similarly, only a small proportion of juniorlien loans have spreads of 9 percentage points or
more: But home-improvement loans provide two
exceptions—30.7 percent of conventional juniorlien home-improvement loans and 47.6 percent of
government-backed junior-lien home-improvement
loans have spreads of 9 percentage points or more.
Reflecting these distributions, the mean and median
spreads for most loan products fall within 2 percentage points of the reporting thresholds. The exceptions
include loans backed by manufactured homes and
junior-lien home-improvement loans, for which the
distribution of prices is more even.
Lenders of higher-priced loans. Most lenders covered
by HMDA reported extending few if any higherpriced loans for 2004 (data not shown in tables).
Nearly 3,300 lenders reported making no such loans,
371
and an additional 2,300 reported making between one
and nine such loans. Nearly 500 lenders reported
making more than 100 higher-priced loans; these
more-active lenders accounted for 96 percent of all
reported higher-priced lending of this type. Moreover, the 10 lenders with the largest volume extended
38 percent of all higher-priced loans.
Variation across metropolitan areas. The analysis of
separate geographic markets shows that higherpriced lending varies considerably across MS As. 4 1
For this exercise, the focus is on the incidence of
higher-priced lending among conventional first-lien
home-purchase loans for site-built, owner-occupied
homes. The MSA with the lowest incidence of
higher-priced lending for this product is the San Francisco-San Mateo-Redwood City area in California,
at 2 percent; the MSA with the highest incidence
is the McAllen-Edinburg-Pharr area in Texas, at
42 percent. 4 2 A review of the full list of MSAs
indicates that most of the areas with the highest
incidence are in the southern region of the country,
whereas those with the lowest incidence are much
more dispersed.
Although a comprehensive analysis of the reasons
for such wide variation in the incidence of higherpriced lending is beyond the scope of this article, a
review of data from one of the three national creditreporting agencies finds a close association between
the proportion of individuals in an MSA county with
a low credit score and the incidence of higher-priced
lending in that area.
Loans Covered by HOEPA
The 2004 HMDA data indicate whether a loan is
subject to the Home Ownership and Equity Protection Act of 1994. Before 2004, little information was
publicly available about the extent of such lending
or the number or type of institutions involved in
such activities. However, H M D A data do not capture
all HOEPA-related lending. Some HOEPA loans are
extended by institutions not covered by HMDA, and
some HOEPA loans that are made by HMDA-covered
institutions are not reported under the Federal
41. Reporting institutions are required to report all their lending in
M S A s as well as in the nonmetropolitan portions of states. However,
b e c a u s e institutions operating exclusively in nonmetropolitan areas
are not covered by H M D A , loans in nonmetropolitan areas are underrepresented in the data. For this reason, the geographic analysis here is
focused on M S A s .
42. In N o v e m b e r 2004, the O M B redesignated this Texas M S A as
M c A l l e n - E d i n b u r g - M i s s i o n (see www.whitehouse.gov/omb/bulletins/
fy05/b05-02_attachment.pdf).
372
Federal Reserve Bulletin • Summer 2005
Reserve Board's Regulation C, which implements
HMDA. In particular, if the proceeds of a homesecured loan are not used to refinance an existing
home loan or to finance home improvement, then the
loan may be covered by HOEPA but is not reportable
under Regulation C. 4 3
Incidence of HOEPA-Related Lending
For 2004, 1,948 lenders reported extending 24,594
loans covered by HOEPA (table 7). The HOEPA
loans accounted for only 0.003 percent of all the
originations of home-secured refinance or homeimprovement loans reported for 2004 (derived from
the table). 44
HOEPA lending is relatively concentrated: The ten
lenders that reported the largest number of HOEPA
originations accounted for 37 percent of all reported
HOEPA loans (data not shown in tables). At the other
extreme, 801 institutions reported only one HOEPA
loan, and 327 reported only two such loans. Most
HOEPA loans were extended by banks (50 percent of
the total) or by bank subsidiaries or affiliates of bank
holding companies (14 percent of the total); independent mortgage companies extended the rest.
average size of a first-lien loan was $98,650, and
the average size of a junior-lien loan was $31,705. In
contrast, the average sizes of such loans not covered
by HOEPA were $173,125 for a first-lien loan and
$54,581 for a junior-lien loan.
Reported HOEPA lending varies among borrowers
sorted by borrower income, race, and ethnicity and
among census tracts sorted by census tract income,
population, and location. However, the data do not
indicate that HMDA-reportable HOEPA lending is
focused primarily on lower-income or minority individuals or on those residing in lower-income neighborhoods or neighborhoods with high concentrations
of minority individuals. For example, although
reported HOEPA loans were extended to borrowers
in all income groups, about three-fourths were
extended to middle- and higher-income borrowers
(data not shown in tables). Similarly, most reported
HOEPA loans were extended to non-Hispanic white
borrowers. Most of the homes secured by reported
HOEPA loans were in middle- or higher-income areas
and in areas with a minority population that was less
than 20 percent of the total population.
LENDING
OUTCOMES
BY RACE,
ETHNICITY,
AND SEX
Characteristics of HOEPA-Related Lending
As noted, HOEPA applies only to closed-end home
loans (whether for refinancing or home improvement) and not to home-purchase loans or home equity
lines of credit. The vast majority of HOEPA loans
reported in the 2004 data involved conventional products: Only 7 percent of reported HOEPA loans were
government backed (derived from table 7). About
50 percent of the reported HOEPA loans involved
first-lien conventional loans (more than 80 percent
of these were for refinancings, and the rest were for
home improvement), and about 40 percent involved
junior-lien conventional loans (more than half of
these were for home improvement).
On average, reported HOEPA loans are not large
(data not shown in tables). For example, for conventional refinancing loans covered by HOEPA, the
43. For e x a m p l e , if a h o m e o w n e r takes out a HOEPA-covered loan
to pay off outstanding credit card debt or some other type of consumer
credit, and the loan does not involve the refinancing of an existing
h o m e loan or h o m e improvement, then the loan is not covered by
Regulation C and is thus not required to be part of an institution's
H M D A reporting.
44. T h e H M D A data also include information on loans purchased
by covered institutions during 2004: A m o n g purchased loans, about
2,700 were designated as H O E P A loans.
One of the primary purposes of the HMDA data is
to allow comparison of the outcomes of the lending
process for applicants and borrowers grouped along
many dimensions, including by race, ethnicity, and
sex. Outcomes reported in the HMDA data include
the disposition of applications (denial rates) and, as
of 2004, the pricing of loans. Gross outcomes for
different groups of borrowers can be compared, but
HMDA data include information on a number of
items whose presence or absence for borrowers can
be made consistent ("controlled for") in conducting
the comparisons. Clearly the HMDA data do not
include all the factors that are involved in credit
underwriting and pricing. However, by controlling
for variations so as to make borrowers as similar as
possible on the dimensions of the data that are available, one can account for some of the factors that
may explain differences in the outcomes of the lending process among groups.
The HMDA data allow individuals to be matched
by loan type and purpose, type of property securing
the loan, lien status, owner-occupancy status, property location (for example, same MSA or even same
census tract), income relied on for underwriting, loan
amount, and time of year when the loan was made as
well as by whether the loan involved a co-applicant.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
373
In comparing lending outcomes across racial and
ethnic groups, one can match for the sex of the
applicant and co-applicant, and in comparing outcomes by sex, one can match for race and ethnicity.
Comparisons in outcomes across groups can be
conducted at the level of an individual institution,
groups of institutions (for example, manufacturedhome lending specialists), geographic market, or
populations as a whole. Further, a variety of statistical methodologies can be used to control for the
effects of the credit-related or other factors in HMDA
noted above. The full range of these comparisons is
beyond the scope of this article. However, to gain an
understanding of the differences that are likely to be
important, we analyzed the 2004 data using statistical
matching criteria similar to those used in the Federal
Reserve's statistical analysis program (described in
the section "Using the Expanded HMDA Data as a
Screening Tool for Fair Lending Enforcement").
We restrict the analysis to denial rates, the incidence of higher-priced lending, and the mean spreads
paid by borrowers with higher-priced loans, and we
compare these outcomes across eleven groups—nine
racial or ethnic groups and the two sexes. We conduct
the analysis for thirteen of the twenty-five loan products covered in table 7.45
We present the comparisons at three levels, one
unadjusted and two adjusted. The first level for each
group is the raw, or unadjusted, average outcome.
The second level is the average outcome as adjusted
for the borrower-related factors reported in the
HMDA data—income, loan amount, location (MSA)
of the property, presence of a co-applicant, and (in
the comparisons by race and ethnicity) sex or (in the
comparisons by sex) race and ethnicity; applying this
adjustment is hereafter termed "adjusting (or controlling or accounting) for borrower-related factors." The
third level is the average outcome as adjusted for all
the items in the second level (the borrower-related
factors) plus the lending institution—applying this
adjustment is hereafter termed "adjusting (or controlling, or accounting) for borrower-related factors plus
lender."
Applications subject to the transition rules were
excluded from the pricing comparisons; however,
they were included for the denial-rate comparisons. 46
Also excluded from the sample are applicants residing outside the fifty states and the District of Columbia, applications deemed to be business-related, and
requests for pre-approval that were denied by the
lender or that were granted by the lender but not
acted upon by the borrower. Otherwise, the sample
includes all 2004 HMDA applications acted upon by
the lender in the thirteen product areas.
Unadjusted and adjusted comparisons for lending
outcomes across groups are discussed in the sections
below. For purposes of presentation, the adjusted
outcomes shown in the tables are normalized so that,
for the base comparison group (non-Hispanic whites
in the case of comparison by race and ethnicity, and
males in the case of comparison by sex), the adjusted
mean at each adjustment level is the same as the
unadjusted mean. Consequently, the adjusted outcomes for any other group represent the expected
average outcome if the members of that group had
the same distribution of control factors as that of the
base comparison group.
45. The analysis was not conducted for unsecured loans because
pricing data w e r e not collected for these loans. Eleven other product
areas were not used because they accounted for so few loans that
matching was difficult.
46. T h e action date on an application is used to determine the
reporting year f o r H M D A data. T h e gap between the application date
and the action date is generally shorter for denied applications than for
originated loans. For example, applications received and acted upon in
D e c e m b e r (and therefore reported in H M D A for that year) are more
likely to be denials than acceptances. Similarly, applications acted
upon in January but received in the previous year are more likely to be
acceptances. In analyzing denial rates for 2004, excluding applications covered by the transition period (that is, applications received
before 2004) is therefore likely to disproportionately exclude acceptances. This can be seen in the m e m o item in table 7, where the denial
rates are lower for applications filed during the transition period. For
this reason, transition-period applications are included in the denialrate analysis in tables 9 and 14.
Denial Rates across Groups
Unadjusted mean denial rates vary across loan categories for all groups of borrowers (table 9). For
example, the mean unadjusted denial rate for Asians
is lowest for government-backed first-lien homepurchase loans (12.4 percent) and highest for conventional junior liens for home improvements
(46.1 percent).
For every loan category, American Indians, blacks,
Hispanic whites, and the group for which race was
missing have higher unadjusted mean denial rates
than non-Hispanic whites, with the highest rates generally for blacks and the rates for Hispanic whites
lying about halfway between those for blacks and
those for non-Hispanic whites. The denial rates for
each of the other minority groups vary in their relationship with the rates for non-Hispanic whites.
With few exceptions, controlling for borrowerrelated factors reduces the differences among racial
and ethnic groups. (Although the effect of controlling
for borrower-related factors can widen the racial and
ethnic differences in denial rates.) Accounting for
374
9.
Federal Reserve Bulletin • Summer 2005
U n a d j u s t e d a n d a d j u s t e d d e n i a l r a t e s o n a p p l i c a t i o n s f o r l o a n s o n o n e - to f o u r - f a m i l y h o m e s ,
by t y p e of l o a n a n d b y r a c e a n d e t h n i c i t y a n d s e x o f a p p l i c a n t , 2 0 0 4
A. H o m e p u r c h a s e , o w n e r - o c c u p i e d site-built h o m e
Percent except as noted
Conventional
Government backed, first lien
Junior lien
First lien
Race and ethnicity
and sex
Race and ethnicity
American Indian or
Alaska Native . . .
Asian
Black or African
. American . . . . . . .
Native Hawaiian or
other Pacific
Islander
Two or more
minority races . . .
Adjusted denial rate,
Adjusted denial rate,
Adjusted denial rate,
by adjustment factor
by adjustment factor
by adjustment factor
Number
Number Unadjusted
Unadjusted
Number Unadjusted
denial
BorrowerBorrowerof
of
of
denial
denial
Borrowerrate
BorrowerBorrowerrelated
applications
related
applications
Borrowerapplications
rate
relatcd
rate
related
plus
related
plus
related
plus
lender
lender
lender
42,460
288,060
21.1
13.5
20.4
12.7
15.7
12.9
11,211
48,970
22.7
18.6
22.6
17.4
402,090
24.7
22.3
18.2
96,741
21.9
30,866
17,5
15.3
15.4
9,312
3,768
64,744
Race missing
696,276
Hispanic white
...
423,395
Non-Hispanic white .. 3,309,353.
13.8
12.0
21.8
18.4
10.9
12.3
15.0
20.1
15.8
10.9
15.7
12.4
15.1
14.8
10.9
Sex
One male
One female
Two males
Two females
16,8.
16.0
15.6
15.2
16.8
. 15.3
15.6
14.0 •
16.8
15.8
15.6
14,4
1,636,413
1,217,287
.55,264
45,100
.
18.3
16.3
6,425
7,645
15.5
12.4
14.4
12.2
. 14.7
13.2
21.2
18.8
85,845
17.2
16.9
16.0
18.3
17.2
15.6
' 3,629
13.8
12.9
.11.7
975
12,224
156,504.
124,483
532,260
12.5
13.1
20.4
20,0
13.7
11.8
15.3
19.6
18.0
13.7
15.5
13.8
17.7
16.0
13.7
534
12,807
63,179
59,172
396,856
15.4
9.6
20.0
15.6
10.4
15.8
12.5
17.0
13,8
10.4
12.1
11.8
16.6
13.5
10.4
344,552
235,350
11,311 '
8,591
18.7
18.3
18.3
17.5
18.7
18.2
18.3
16.4
18.7
18.4
18.3
16.1
195,671
133,456
13,409
9,121.
14.0
14.4 •
11.2
12.1
.
14.0
13.2
11.2 :
10.9
NOTE: Includes transition-period applications (those submitted before 2004);
for explanation, see text note 46. For explanation of adjustment factors, see text.
For method of allocation into racial and ethnic categories and definitions
of categories, see general note to table 6 and text note 35. Applications made
.
14.0
13.5
11.2
,11.8
jointly by a male and female are not tabulated here because they would not be
directly comparable with applications made by one applicant or by two applicants of the same sex.
9.—Continued
B . R e f i n a n c e , o w n e r - o c c u p i e d site-built h o m e
Percent except as noted
Conventional
Government backed, first lien
First lien
Race and ethnicity
and sex
Adjusted denial rate,
by adjustment factor
Number Unadjusted
Number Unadjusted
denial
of
Borrowerof
denial
applications
rate
applications
Borrowerrelated
rate
related
plus ,
lender
Race and ethnicity
American Indian or
Alaska Native . , .
93,068
Asian
321,978
Black or African
American
897,836
Native Hawaiian or
. other Pacific
Islander
55,859
Two or more
minority races . . .
8,340
Joint
108,225
Race missing
2,084,368
Hispanic white
639,075
Non-Hispanic white .. 5,916,294
Sex
One
One
Two
Two
male
female
males
females
Junior lien
2,683,328
2,161,057
69,113
78,731
NOTE: See note to table 9.A.
Adjusted denial rate,
by adjustment factor
Borrowerrelated
Adjusted denial rate,
by adjustment factor
Number Unadjusted
Borrowerof
denial
Borrowerrelated
applications
Borrowerrelated
rate
plus
plus
related
lender
lender
38.2
18.7
40.1
25.7
32.3
27.3
6,529
20,194
40.8
33.1
38.6
36.1
34.9
35.2
3,222
3,698
15.7
15.0
13.8
15.4
13.3
16.1
41.9
39.8
32.4
54,132 .
44.5
42.2
37.3
69,607
17.6
18.5
17.2
29.7
33.5
31,2
4,518
36.3
36.3
37.3
2,204
12.2
12.0
14.1
28.2
25.7
43.9
29.6
24.3
32.9
33.0
47.3
31.3
24.3
31.3
27.3
32.3
28.6
24.3
704
9,382
193,182
38,892
475,471
31.5
28.9
43.8
37.9
28.4
37.3
33.9
41.1
37.0
28.4
39.8
31.7
35.2
33.8
28.4
442
7,857
55,907
29,182
206,851
13.6
11.0
21.4
15.8
12.4
13.6
13.8
17.8
15.1
12.4
14.3
14.0
17.1
16.2
12.4
35.1
32.2
26.9
30.1
35.1
31.0
26.9
27.0
35.1
32.8
26.9
26.1
179,812
131,172
5,471
5,370
37.4
37.9
32.7
34.4
37.4
35.5
32.7
32.8
37.4
36.0
32.7
34.2
91,609
71,666
4,995
4,740
16.1
16.1
17.4
15.5
16.1
15.2
17.4
14.6
16.1
16.3
17.4
14.7
New Information Reported under HMDA and Its Application
9.
in Fair Lending Enforcement
375
U n a d j u s t e d a n d a d j u s t e d d e n i a l r a t e s 011 a p p l i c a t i o n s f o r l o a n s 011 o n e - t o f o u r - f a m i l y h o m e s ,
by t y p e o f loan a n d by r a c e a n d e t h n i c i t y a n d sex of a p p l i c a n t , 2 0 0 4 — C o n t i n u e d
C. H o m e i m p r o v e m e n t , c o n v e n t i o n a l loan, o w n e r - o c c u p i e d site-built h o m e
Percent except as noted
First lien
Race and ethnicity
and sex
Number
of
applications
Unadjusted
denial
rate
8,843
15,204
67,098
Junior lien
Adjusted denial rate,
by adjustment factor
Number
of
applications
Unadjusted
denial
rate
Borrowerrelated
Borrowerrelated
plus lender
47,1
27.8
49.1
47.1
34.8
47.2
40.3
33.4
41.7
7,712
16,276
62,045
Race missing
Hispanic white
Non-Hispanic white
4,402
677
6,832
102,716
54,319
360,959
38.3
41.5
32.6
53.0
37.5
28.6
42.7
43.0
40.2
56.0
37.7
28.6
38.9
40.7
34.1
39.5
36.2
28.6
Sex
One
One
Two
Two
159,817
143,959
5,024
5,788
43.4
38.4
39.1
38.4
43.4
37.0
39.1
37.5
43.4
39,9
39.1
34.6
Race and ethnicity
American Indian or Alaska Native ..
Asian
Black or African American
Native Hawaiian or other
Pacific Islander
Two or more minority races
male
female
males
females
Adjusted denial rate,
by adjustment factor
Borrowerrelated
Borrowerrelated
plus lender
54.7
46.1
60.1
48.2
45.7
55.6
47.3
44.3
52.0
4,538
656
10,842
159,984
39,529
494,636
50.1
62.0
40.6
49.6
51.4
36.3
46.4
57.0
47.1
48.4
46.4
36.3
43.8
48.8
42.2
42.1
45.1
36.3
189,244
143,026
5,588
6,261
51.1
50.0
46.3
44.3
51.1
47.3
46.3
42.9
51.1
49.4
46.3
44.9
NOTE: See note to table 9.A.
9.—Continued
D. M a n u f a c t u r e d h o u s i n g , c o n v e n t i o n a l loan, first lien, o w n e r - o c c u p i e d h o m e ,
Percent except as noted
Refinance
Home purchase
Race and ethnicity
and sex
Number
of
applications
Unadjusted
denial
rate
Adjusted denial rate,
by adjustment factor
Borrowerrelated
Borrowerrelated
plus lender
Number
of
applications
Unadjusted
denial
rate
Adjusted denial rate,
by adjustment factor
Borrowerrelated
Borrowerrelated
plus lender
Race and ethnicity
American Indian or Alaska Native ..
Asian
Black or African American
Native Hawaiian or other
Pacific Islander
Two or more minority races
Joint
Race missing
Hispanic white
Non-Hispanic white
4,785
1,736
28,363
57.3
44.4
64.2
55.9
44.1
62.4
52.7
40.2
57.7
1,670
641
9,535
58.0
49.5
63.9
57.9
48.4
61.6
51.5
51.6
53.8
1,351
121
3,398
33,385
20,820
238,698
57.3
68.6
53.5
60.9
55.1
48.0
55.2
63.5
58.3
58.4
55.9
48.0
50.2
74.7
57.5
54.7
52.5
48.0
346
73
1,549
39,237
6,760
149,366
59.8
56.2
50.7
64.2
51.0
46.2
60.3
68.4
50.4
68.5
51.3
46.2
56.5
50.2
47.9
52.7
49.3
46.2
Sex
One
One
Two
Two
101,964
82,536
4,483
5,766
52.7
54.9
50.3
56.7
52.7
52.3
50.3
53.4
52.7
52.1
50.3
49.9
54,294
39,726
1,271
1,792
52.8
52.7
43.2
50,0
52.8
52.1
43.2
51.4
52.8
52.9
43.2
43.3
male
female
males
females
NOTE: See note to table 9.A.
376
9.
Federal Reserve Bulletin • Summer 2005
U n a d j u s t e d and adjusted denial rates on applications for loans on one- to f o u r - f a m i l y h o m e s ,
by t y p e of loan and by race and ethnicity and sex of applicant, 2 0 0 4 — C o n t i n u e d
E. Nonowner-occupied site-built home
Percent cxcept as noted
Conventional, first lien
Other1
Home purchase
Adjusted denial rate,
by adjustment factor
Race and ethnicity
and sex
Number
Unadjusted
denial
of
applications
rale
Race and ethnicity
American Indian or
Alaska Native . . .
Asian
Black o r A f r i c a n
American
Native H a w a i i a n or
other Pacific
Islander
T w o or m o r e
minority races . . .
Joint
Race m i s s i n g
Hispanic w h i t e
Non-Hispanic white . .
600
11,839
123,905
56,912
659,022
Sex
One
One
Two
Two
318,461
164,107
25,564
8,813
male
f e m a l e .1
males
females
Refinance
Borrower'
related
Adjusted denial rate,
by adjustment factor
Unadjusted
Number
Borrowerdenial
of
related
rate
applications
plus
lender
Borrowerrelated
Borrowerrelated
plus
lender
27.0
22.2
2,183
6,716
25.4
26.4
6,881
48,246
37.5
15.0
28.5
13,3
16.2
12.9
5,674
30,317
30.5
20.4
30.5
22.3
80,051
24.1
19.6
17.1
87,234
30.6
28.6
5,127
18.2
15.6
13.3
4,401
24.8
. 25.2
14.8
11.1
18.2
18.7
11.0
13.1
13.4
17.2
14.9
11.0
10.8
12.6
14.2
661
7,957
132,928
44,640
484,333
24.4
18.1
32.5 .
26.8
17.8
17.2:-'
17.5
10.7
12.2
17.2
16.3
10.7
9.6
17.2
. i6.3
10.7
10.8
264,494
143,972.
13,387
5,283 '
24.5
25.5
16.2
21.5
.
.
14.2;
11.0
NOTE: See n o t e to table 9.A.
lender almost always reduces differences further,
although statistically significant differences remain
between non-Hispanic whites and most of the other
racial and ethnic groups.
For example, for conventional first-lien homepurchase loans, the unadjusted mean denial rate for
blacks was 24,7 percent and for non-Hispanic whites
10.9 percent, a difference of 13.8 percentage points.
Accounting for income, loan amount, and other
borrower-related factors in the H M D A data reduces
the difference 2.4 percentage points. Controlling for
borrower-related factors plus lender significantly
reduces the gap further, to 7.3 percentage points.
The reduction for conventional first-lien refinancing is even more dramatic. The unadjusted difference
between black and non-Hispanic white denial rates is
17.6 percentage points, a difference cut by more than
half, to 8.1 percentage points, when adjusted for
borrower-related factors plus lender.
Differences in denial rates exhibit no consistent
pattern with regard to the sex of the applicant. For
some products, males have higher denial rates, and
for others, females do; but in general, the size of the
difference by sex is small. Furthermore, controlling
for borrower-related factors plus lender has an inconsistent (but generally small) effect. In fact, in some
'
Adjusted denial rate,
by adjustment factor
Number
Unadjusted
of
denial
applications
rate
.28.3 :'
23.0
30.9
24.4
17.8
24.5
24.0
.16,2
17.6
.
30.6
20.1
26.2
22.7
17.8
24.5
23.8
16.2
14.9
49.7
30.0
44.5
32.1
38.9
28.4
44.8
38.4
34.1
1,611
:
Borrowerrelated
plus
lender
26,017
.
Boirowerrelated
40.5
33.7
32,4
214
2,293
31,499
14,508
133,098
42.1
24.7
40.3
37.9
25.5
33.5
31.9
37.6
34.9
25.5
46.2
27.5
31.5
31.8
25.5
74,353
43,267
4,006
1,881
33.6
39.3
24.0
35.3
33.6
34.6
24.0
29.5
33.6
33.6
24.0
24.6
1. " O t h e r " consists of g o v e r n m e n t - b a c k e d loans of ail types, j u n i o r liens,
h o m e - i m p r o v e m e n t loans, and unsecured loans.
cases adjustment reverses the sign of the difference—
that is, for example, some denial rates that were
higher for females than for males before adjustment
become higher for males than for females after
adjustment.
Incidence of Higher-Priced
Racial and Ethnic Groups
Lending across
Although most borrowers do not have higher-priced
loans, the incidence of higher-priced lending varies
substantially across racial and ethnic groups
(table 10). Moreover, both the overall incidence of
higher-priced lending and the differences across
groups varies substantially across loan product categories. For government-backed loan products, small
proportions of borrowers have higher-priced loans,
and no meaningful differences appear across racial
and ethnic groups. At the other extreme, the majority
of borrowers for manufactured homes have higherpriced loans; and for this product, significant differences appear across racial and ethnic groups
(although these differences are smaller than for some
other products).
Differences in the incidence of higher-priced lending across loan products make it difficult to identify
New
10.
Information
Reported
under
HMDA
and Its Application
in Fair
Lending
Enforcement
377
Unadjusted and adjusted incidence of higher-priced lending for loans on one- to four-family homes,
by type of loan and by race and ethnicity and sex of borrower, 2004
A. H o m e p u r c h a s e , o w n e r - o c c u p i e d s i t e - b u i l t h o m e
Percent e x c e p t as noted
Conventional
Government backed, first lien
junior lien
First lien
Adjusted incidence,
by adjustment factor
Race and ethnicity
and sex
Number
of
loans
Race and ethnicity
American Indian or
Alaska N a t i v e . . .
28,107
199,359
Asian
Black or A f r i c a n
232,688
American
Native Hawaiian or
other Pacific
Islander
20,293
T w o or m o r e
minority r a c e s . . .
2,613
47,299
Joint
R a c e missing
390,136
Hispanic white
301,915
Non-Hispanic w h i t e . . 2,476,255
Sex
One
One
Two
Two
male
female
males
females
1,129,781
850,213
38,170
31,083
Unadjusted
incidence
Adjusted incidence,
by adjustment factor
Number
of
loans
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus
lender
18.1
5.9
17.2
7.4
11.8
8.1
7,618
32,444
32.4
26.7
15.7
15.7
16.3
22.9
6.9
13.4
20.3
8.7
15.3
15.3
9.5
10.4
Adjusted incidence,
by adjustment factor
Number
of
loans
Borrowerrelated
Borrowerrelated
plus
lender
50.2
34.4
47.5
30.8
33.6
29.9
4,751
5,402
62,434
61.9
58.3
37.1
11.1
6,195
49.6
44.9
22.2
10.8
16.8
16.6
8.7
12.2
9.4
11.1
11.6
8.7
699
9,090
96,140
87,612
394,357
43.2
29.3
40.7
58.0
30.4
15.3
14.4
9.5
9.0
15.3
15.0
9.5
9.8
237,097
162,680
7,879
6,064
46.1
47.8
34.4
37.3
NOTE: E x c l u d e s transition-period loans (those for which the application was
submitted before 2 0 0 4 ) . For definition of higher-priced lending and explanation of adjustment factors, see text. For method of allocation into racial and
ethnic categories and definitions of categories, see general note to table 6
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus
lender
4.9
2.5
4.1
1.7
1.1
.8
59,275
1.5
1.3
1.1
33.5
2,373
2.3
1.6
1.4
44.3
36.7
43.5
49.9
30.4
26.6
31.3
33.2
35.1
30,4
400
' 10,035
35,547
47,055
304,809
20.5
1.1
1.4
2.1
1.1
17.0
1.1
1.3
1.1
1.1
1.2
1.4
.9
1.1
1.1
46,1
46.9
34.4
34.5
46.1
46.7
34.4
35.2
145,275
98,428
10,094
6,716
1.3
1.6
1.2
1.2
1.3
1.5
1.2
1.3
1.3
1.3
1.2
1.1
.
and text note 35. L o a n s taken out jointly by a m a l e and female are not tabulated
here because they would not be directly c o m p a r a b l e with loans taken out by one
borrower or by t w o borrowers of the s a m e sex.
10.—Continued
B. R e f i n a n c e , o w n e r - o c c u p i e d site-built h o m e
Percent except as noted
Conventional
Government backed, first lien
First lien
Junior lien
Adjusted incidence,
by adjustment factor
Race and ethnicity
and sex
Number
of
loans
Unadjusted
incidence
Adjusted incidence,
by adjustment factor
Number
of
loans
Borrowerrelated
Borrowerrelated
plus
lender
20.2
5.9
21.0
9.7
14.7
12.1
2,981
10,519
34.6
29.5
17.6
Unadjusted
incidence
Adjusted incidence,
by adjustment factor
Number
of
loans
Borrowerrelated
Borrowerrelated
plus
lender
26.8
25.4
24.4
24.9
26.1
24.3
2,216
2,348
24,292
45.2
41.3
26.4
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus
lender
4.4
3.9
4.2
2.0
1.0
1.0
46,603
1.0
1.2
1.5
Race and ethnicity
American Indian or
Alaska N a t i v e . . .
44,503
Asian
207,114
Black or A f r i c a n
American
391,524
Native H a w a i i a n or
other Pacific
Islander
31,381
T w o or m o r e
minority r a c e s . . .
5,089
Joint
67,199
Race missing
827,590
Hispanic white
378,826
Non-Hispanic w h i t e . . 3,698,309
16.4
18.6
14.5
2,267
35.8
33.2
24.6
1,547
6.1
4.1
1.4
21.1
10.4
19.3
19.3
12.9
22.4
14.7
25.4
18.5
12.9
15.0
13.5
15.3
14.3
12.9
394
5,609
82,329
20,687
285,505
19.3
23.3
32.7
35.1
23.9
25,4
26.5
42.1
28.7
23.9
24,7
24,8
24.8
25.2
23.9
347
6,100
30,603
21,804
152,619
18.7
.9
2.0
1.9
1.3
19.6
1.1
2.0
1.2
1.3
2.3
1,2
1.3
1.4
1.3
Sex
One
One
Two
Two
18.6
19.8
12.1
17.3
18.6
18.5
12.1
14.5
18.6
18.7
12.1
13.4
90,991
67,266
3,024
2,887
34.0
32.6
23.6
31.7
34.0
32,6
23,6
26,6
34.0
33.9
23.6
22.6
63,536
49,282
3,103
3,053
1.4
1.7
2.2
1.8
1.4
1.6
2.2
1.5
1.4
1.4
2.2
1.6
male
female
males
females
1,360,350
1,173,835
40,012
43,208
NOTE: See note to table 10.A.
378
10.
Federal Reserve Bulletin • Summer 2005
U n a d j u s t e d and a d j u s t e d i n e i d c n c e of h i g h e r - p r i c e d l e n d i n g f o r loans on o n e - to f o u r - f a m i l y h o m e s ,
by t y p e of loan and by race and ethnicity and sex of b o r r o w e r , 2 0 0 4 — C o n t i n u e d
C. H o m e i m p r o v e m e n t , conventional loan, o w n e r - o c c u p i e d site-built h o m e
Percent except as noted
First lien
Race and cthnicity
and sex
Race and ethnicity
American Indian or Alaska Native . .
Asian
Black or African American
Native Hawaiian or other
Pacific Islander
Two or more minority races
Joint
Race missing
Hispanic white
Non-Hispanic white
Sex
One
One
Two
Two
male
female
males
females
Number
of
loans
Junior lien
Adjusted incidence,
by adjustment factor
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus lender
Number
of
loans
Adjusted incidence,
by adjustment factor
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus lender
3,775
8,907
27,677
23.4
8.4
42.5
25.8
16.3
39.2
22.5
18.8
24.6
2,628
6,467
19,520
18.8
13.5
37.9
17.4
15.1
31.3
17.5
16.6
18.0
2,237
341
3,894
36,877
28,395
221,213
17.7
22.3
15.5
21.5
26.7
19.5
22.4
22.6
20.7
32.2
27.6
19.5
21.9
18.6
19.2
21.4
21.0
19.5
1,749
193
5,280
61,005
15,464
259,771
26.5
16.6
15.2
17.4
21.0
15.6
22.6
15.1
18.3
23.1
20.0
15.6
16.9
14.1
16.3
15.9
16.5
15.6
74,062
74,479
2,545
3,053
26.1
• 27.0
17.2
23.9
26.1
25.8
17.2
18.5
26.1
26.5
17.2
21.2
71,519
57,771
2,390
2,807
24.4
22.3
19.1
19.0
24.4
21.4
19.1
18.1
24.4
23.6
19.1
19.2
NOTE: See note to table 10.A.
10.—Continued
D . M a n u f a c t u r e d h o u s i n g , c o n v e n t i o n a l l o a n , first lie n , o w n e r - o c c u p i e d h o m e
Percent except as noted
Home purchase
Race and ethnicity
and sex
Refinance
Adjusted incidence,
by adjustment factor
Number
of
loans
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus lender
Adjusted incidence,
by adjustment factor
Number
of
loans
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus lender
Race and ethnicity
American Indian or Alaska Native ..
Asian
Black or African American
Native Hawaiian or other
Pacific Islander
Two or more minority races
Joint
Race missing
Hispanic white
Non-Hispanic white
1,168
537
5,175
68.2
62.8
78.5
58.3
62.6
64.8
54.8
61.9
60.0
513
210
2,316
51.9
42.9
67.7
53.5
47.8
56.1
50.6
56.0
50.1
315
21
918
6,535
5,598
76,324
70.8
47.6
58.3
57.2
67.5
54.7
69.2
51.2
56.8
56.6
65.2
54.7
65.3
57.0
60.3
55.4
60.7
54.7
102
26
568
7,420
2,274
56,713
48.0
42.3
41.2
59.0
46.2
46.0
44.5
54.3
49.3
51.6
56.7
46.0
45.5
-9.8
48.7
46.3
50.0
46.0
Sex
One
One
Two
Two
28,100
22,177
1,566
1,547
61.0
60.5
65.1
65.0
61.0
60.2
65.1
64.6
61.0
59.8
65.1
65.1
17,181
12,772
560
622
48.6
49.8
56.3
47.3
48.6
49.0
56.3
50.8
48.6
49.2
56.3
53.6
male
female
males
females
NOTE: See note to table 10.A.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
10.
379
U n a d j u s t e d a n d a d j u s t e d i n c i d e n c e of h i g h e r - p r i c e d l e n d i n g f o r l o a n s o n o n e - to f o u r - f a m i l y h o m e s ,
by l y p e o f l o a n a n d by r a c e a n d e t h n i c i t y a n d s e x of b o r r o w e r , 2 0 0 4 — C o n t i n u e d
E. N o n o w n e r - o c c u p i e d s i t e - b u i l t h o m e
Percent e x c e p t as n o t e d
Conventional, first lien
Other 1
Refinance
Home purchase
Adjusted incidence,
by adjustment factor
Adjusted incidence,
by adjustment factor
Race and ethnicity
and sex
Number
of
loans
Unadjusted
incidence
3,576
33,592
46,260
Number
of
loans
Unadjusted
incidence
11.1
8,6
3,166
18,809
24.2
14,7
46,900
Borrowerrelated
Bonowerrelated
plus
lender
16.9
7.4
15.6
8.5
38.6
Adjusted incidence,
by adjustment factor
Number
of
loans
Unadjusted
incidence
14.1
11.3
828
3,785
16.7
Borrowerrelated
Borrowerrelated
plus
lender
19.7
7.0
21.5
10.9
33.5
27.7
Bonowerrelated
Borrowerrelated
plus
lender
34.8
37.5
25.2
32.1
31.2
30.4
11,099
46.8
43.2
33.6
Race and ethnicity
American Indian or
Alaska N a t i v e . . .
Asian
B l a c k or A f r i c a n
American
N a t i v e H a w a i i a n or
other P a c i f i c
Islander
T w o or m o r e
minority r a c e s , . .
Joint
Race missing
Hispanic white
Non-Hispanic white ..
3,407
15.8
14.6
11.2
2,666
14.6
17.3
13.0
731
40.8
33.5
29.5
424
8,971
76,434
40,643
502,030
25.7
7.1
11.5
16.8
9.4
23.5
U.O
14.1
15.4
9.4
11.4
9.9
10.6
10.9
9.4
424
5,421
64,341
28,011
330,979
24.8
8.2
15.5
17.9
10.9,
27.5
13.5
22.2
18.1
10.9 .
15.9
11.3
13.5
13.3
10.9
97
1,466
13,877
7,522
81,408
38.1
27.2
41.1
49.4
30.2
19.9
31.8
40.0
40.1
30,2
55.4
28.6
32.0
34.5
30.2
219,700
111,338
19,437
6,428
17.7
17.4
8.3
7,6
17.7
16.9
8.3
6.8
17.7
16.9
8.3
7.9
161,011
85,278
9,083
3,307
17.9
19.8
7.9
12.0
17.9
19.8
7.9
9.3
17.9
18.4
7.9
10.2
39,283
20,416
2,526
984
42.5
43.0
27.2
35.6
42,5
42.5
27.2
33.5
42.5
43.1
27.2
32.0
Sex
One
One
Two
Two
mate
female
males
females
NOTE: S e e note to t a b l e 1 0 . A .
consistent patterns across all types of lending. Conventional home-purchase lending and conventional
refinance lending include most of the borrowers covered by the H M D A data, and consequently those loan
types are the main focus of the discussion of higherpriced lending that follows. In general, unadjusted
differences in the incidence of higher-priced lending between non-Hispanic whites, on the one hand,
and blacks, on the other, are large, but these differences are substantially reduced after controlling for
borrower-related factors plus lender.
Most of the reduction in the difference in the
incidence of higher-priced lending across groups
comes from adding the control for lender to the
control for borrower-related factors. For conventional
first-lien home-purchase loans, the mean unadjusted
incidence of higher-priced lending was 32.4 percent
for blacks and 8.7 percent for non-Hispanic whites,
a difference of 23.7 percentage points. Borrowerrelated factors account for about one-fourth of the
difference. Adding to this adjustment the control for
lender reduces the remaining gap markedly, to 7 percentage points. For conventional first-lien refinancings, the unadjusted difference between blacks and
non-Hispanic whites is 21.7 percentage points; this
difference is reduced to 4.7 percentage points after
1. " O t h e r " c o n s i s t s of g o v e r n m e n t - b a c k e d l o a n s of all types, j u n i o r liens,
h o m e - i m p r o v e m e n t loans, a n d u n s e c u r e d loans.
controlling borrower-related factors plus lender, and
about two-thirds of that reduction comes from the
addition of the control for lender. Similar patterns for
differences between black and non-Hispanic white
borrowers are found for the junior-lien products.
The picture for Asians differs greatly from that for
blacks. Asians have a lower unadjusted mean incidence of higher-priced lending for first-lien conventional home-purchase and refinance loans than do
non-Hispanic whites. The gap is narrowed by controlling for borrower-related factors plus lender, although
the incidence of higher-priced lending remains lower
for Asians than for non-Hispanic whites. Hispanic
whites show a pattern similar to that of blacks, but
with smaller differences relative to non-Hispanic
whites. For first-lien conventional loan products, the
adjusted differences for Hispanic whites are less than
one-half those for blacks; for conventional homepurchase junior liens, the differences for Hispanic
whites are close to those for blacks.
The foregoing analysis indicates that the information in the HMDA data—that is, adjusting the HMDA
data for borrower-related factors plus lender—is
insufficient to account fully for racial or ethnic differences in the incidence of higher-priced lending; significant differences remain unexplained. Explaining
380
11.
Federal Reserve Bulletin • Summer 2005
U n a d j u s t e d and a d j u s t e d i n c i d e n c e of h i g h e r - p r i c e d l e n d i n g i'or c o n v e n t i o n a l , lirst-lien l o a n s o n site-built,
o w n e r - o c c u p i e d , one- to f o u r - f a m i l y h o m e s , b y selected r a c e and e t h n i c i t y for selected c h a r a c t e r i s t i c s
of b o r r o w e r , property, and lender, 2 0 0 4
P e r c e n t cxccpl as noted
H o m e purchase
Selected characteristic,
by race and ethnicity of borrower
Number
of
loans
Refinance
Adjusted incidence,
by adjustment factor
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus lender
Number
of
loans
A d j u s t e d incidence,
by adjustment f a c t o r
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus l e n d e r
INCOME OF BORROWER
Lower
Black o r A f r i c a n American
Hispanic w h i t e
N o n - H i s p a n i c white
87,841
83,642
637,019
39.2
23.6
12.9
35.2
21.2
12.9
21.7
16.3
12.9
161,762
120,253
961,571
42.1
22.5
19.3
39.6
24.2
19.3
25.9
20.4
19.3
Middle
Black or A f r i c a n American
H i s p a n i c white
N o n - H i s p a n i c white
66,997
84,988
648,853
33.9
22.1
9.9
31.1
19.5
9.9
18.1
13.3
9.9
112,007
118,699
989,420
34.8
20.8
14.9
33.8
21.5
14.9
20.1
16.6
14.9
Higher
Black o r A f r i c a n A m e r i c a n
Hispanic w h i t e
N o n - H i s p a n i c white
70,247
118,728
1,099,544
23.9
17.4
5.8
19.8
12.5
5.8
10.9
7.8
5.8
104,662
123,101
1,539,336
26.0
16.9
9.0
22.8
14.6
9.0
12.7
10.4
9.0
Lower
Black or A f r i c a n American
Hispanic w h i t e
N o n - H i s p a n i c white
69,713
85,791
254,231
40.9
26.0
15.0
34.7
25.0
15.0
22.7
18.8
15.0
141,851
126,577
383,904
42.5
23.3
21.7
37.5
25.6
21.7
27.4
22.9
21.7
Middle
Black o r A f r i c a n American
Hispanic w h i t e
N o n - H i s p a n i c white
107,177
137,291
1,229,899
32.0
20.5
10.3
29.0
17.7
10.3
17.8
13.0
10.3
175,784
167,456
1,936,163
33.4
19.2
15.0
31.2
19.6
15.0
19.5
16.0
15.0
Higher
Black or A f r i c a n American
Hispanic w h i t e
N o n - H i s p a n i c white
55,401
78,431
984,982
22.7
13.6
5.2
18.2
10.5
5.2
9.8
7.0
5.2
73,571
84,151
1,370,653
22.2
13.6
7.4
18.1
11.2
7.4
10.2
8.2
7.4
78,331
100,290
1,010,824
31.9
16.7
7.4
25.5
14.3
7.4
17.7
11.1
7.4
121,253
105,634
1,419,662
28.3
13.6
8.8
23.3
12.6
8.8
14.8
10.3
8.8
43,680
68,101
620,870
12.7
9.6
2.8
9.9
5.6
2.8
6.6
4.0
2.8
79,403
113,714
964,166
13.3
7.7
3.9
10.9
5.3
3.9
6.4
4.6
3.9
INCOME OF CENSUS TRACT
C R A ASSESSMENT AREA
Property not in assessment area
Black or A f r i c a n A m e r i c a n
Hispanic w h i t e
N o n - H i s p a n i c white
Property in assessment area
Black or A f r i c a n American
Hispanic w h i t e
N o n - H i s p a n i c white
Notes a p p e a r at end of table.
the remaining differences is likely to require more
details about such factors as the specific credit circumstances of each borrower, the specific loan products they seek, and the business practices of the
institutions they approach for credit.
Understanding the patterns within the HMDA data
is also likely to require more information. Two somewhat offsetting patterns are shown in the data. On
the one hand, minority borrowers (except for Asians)
tend to disproportionately use government-backed
products, which show a much lower incidence of
higher-priced loans. The implication is that the difference in the incidence of higher-priced lending
between minorities and non-Hispanic whites is lower
for the combined loan product, conventional and
government-backed loans, than for each product
separately. On the other hand, for a given loan type,
whether government-backed or conventional, nonAsian minorities tend to disproportionately borrow
from lenders that have higher incidences of higherpriced loans, a tendency on the part of minority
borrowers that accounts for much of the aggregate
difference in outcomes between them and nonHispanic white borrowers.
The disproportionate borrowing by non-Asian
minorities from higher-priced lenders could occur
because of often benign factors such as a "segmented" marketplace in which different lenders offer
different products and borrower groups self-select the
product-lender combination that best matches their
credit or other circumstances. Such a marketplace
does not necessarily raise public-policy concerns
regarding fair lending: For example, compared with
non-Hispanic whites, minority groups on average
New Information Reported under HMDA and Its Application
in Fair Lending Enforcement
381
11.—Continued
Percent exccpt as noted
Refinance
Home purchase
Selected characteristic,
by race and ethnicity of borrower
Number
of
loans
Adjusted incidence,
by adjustment factor
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus lender
Number
of
loans
Adjusted incidence,
by adjustment factor
Unadjusted
incidence
Borrowerrelated
Borrowerrelated
plus lender
DISPOSITION
Sold to GSE'
Black or African American
Hispanic white
Non-Hispanic white
43,683
67,768
808,454
9.0
3.9
1.6
6.7
3.2
1.6
5.2
2.9
1.6
71,439
87,929
1,200,878
1.1
.4
.4
1.0
.4
.4
.7
.4
.4
Sold to others
Black or African American
Hispanic white
Non-Hispanic white
137,679
160,188
1,065,255
40.5
26.3
13.8
33.3
24.0
13.8
20.6
17.5
13.8
196,055
179,549
1,427,539
43.6
27.3
20.0
36.7
27.9
20.0
25.9
22.1
20.0
Retained
Black or African American
Hispanic white
Non-Hispanic white
51,326
73,959
602,546
30.7
22.2
9.3
25.6
17.5
9.3
13.2
10.5
9.3
124,030
111,348
1,069,892
39.6
21.4
17.4
34.3
21.7
17.4
21.0
18.5
17.4
Less than 10
Black or African American
Hispanic white
Non-Hispanic white
121,500
182,503
1,993,900
10.6
5.7
2.3
8.5
4.8
2.3
8.4
4.5
2.3
171,423
212,021
2,589,887
6.6
2.6
1.8
5.1
2.5
1.8
4.3
2.3
1.8
10-49
Black or African American
Hispanic white
Non-Hispanic white
69,894
78,695
366,709
44.3
31.0
25.3
40.9
33.0
25.3
35.9
31.2
25.3
139,090
111,898
763,119
46.1
32.1
27.3
42.2
32.9
27.3
36.9
30.6
27.3
50 or more
Black or African American
Hispanic white
Non-Hispanic white
41,189
40,393
115,646
76.6
65.4
66.5
75.6
70.7
66.5
74.8
71.6
66.5
80,743
54,639
345,303
74,4
58.2
64.2
71.8
65.8
64.2
71.7
67.1
64.2
T Y P E O F LENDER,
BY P E R C E N T A G E OF
L E N D E R ' S LOANS TO
NON-HISPANIC WHITES
T H A T A R E H I G H E R PRICED
NOTE: For discussion of CRA assessment areas and the identification of
higher-priced lenders, see text note 47. See also general note to table 10.A.
1. Government-sponsored enterprise; virtually all were to Fannie Mae and
Freddie Mac.
may seek loans with higher loan-to-value ratios (perhaps because on average they may have less savings
to meet down-payment and closing cost requirements), which are typically higher priced and which
are the specialty of certain lenders. This explanation
could account for differences in lender choice, but
demonstrating it requires loan-specific information—
such as loan-to-value ratios—as well as other information that is not in the H M D A data.
However, a situation that might suggest an inadequately functioning marketplace—and that could
trigger fair lending concerns—would occur if minority borrowers are incurring prices on their loans that
are higher than is warranted by their credit characteristics. Such a problem could arise in one or both of
the following circumstances: (1) neighborhoods with
high proportions of minority residents may be less
well served by lenders offering prime products, a
circumstance that would make obtaining lower-priced
loans more difficult for well-qualified minorities, or
(2) some minority borrowers may be steered to lenders who typically charge higher prices than the credit
characteristics of these borrowers warrant. The data
reported under HMDA are insufficient to tell us
whether either explanation (or any other) is correct,
nor do they tell us why minorities disproportionately
use government-backed products.
Incidence of Higher-Priced
Selected Subgroups
Lending
for
Although, for reasons discussed above, we cannot
definitively explain the racial and ethnic pricing
differences that remain after adjusting for borrowerrelated factors plus lender or the reasons that minorities may disproportionately obtain credit from higherpriced lenders, some additional insights may be
gained by analyzing subgroups of lenders and borrowers (table 11). We present data only for blacks
382
Federal Reserve Bulletin • Summer 2005
and Hispanic whites because they are the two minority groups whose outcomes differ most from those of
non-Hispanic whites in the incidence of higher-priced
lending. We also restrict the comparison to the two
loan-products that account for the largest number of
loans—conventional home-purchase loans and refinancings. We analyze these two minority groups and
the two loan products with regard to five factors:
(1) the borrower's relative income; (2) the relative
income of the census tract in which the property
related to the loan is located; (3) the location of the
property relative to the lender's assessment area as
defined under the Community Reinvestment Act of
1977 (CRA); (4) the disposition of the loan—that is,
whether the loan was retained or sold and, if it was
sold, to whom; and (5) the proportion of the lender's
loans that are higher priced (less than 10 percent,
1 0 ^ 9 percent, or 50 percent or more—the last proportion being taken to indicate that the lender specializes in higher-priced lending). 47
Results for borrowers grouped by their relative
income and their census tract income classification
offer little evidence that unexplained racial differences in pricing or lender choice vary by income.
Although the incidence of higher-priced loans is
higher for lower-income borrowers and those who
live in lower-income census tracts, the same is
true for all three racial groups. Thus, although unexplained price differences are somewhat lower for
higher-income borrowers, price patterns are generally
similar to those of the overall decompositions.
The decompositions for CRA assessment area and
loan sales provide evidence on whether the channel
through which a loan was obtained and the subsequent disposition of the loan affect racial or ethnic
groups differently. Although the overall incidence of
higher-priced loans reported in the 2004 HMDA data
is much lower for loans sold to the GSEs, the data
offer scant evidence that the disposition (sold or
retained) is related to unexplained racial differences.
However, whether the loan was originated by an
institution in its CRA assessment area does matter.
47. L a r g e r depository institutions covered by the C R A (generally
those with assets of $ 2 5 0 million or more) are required to identify the
census tracts in their C R A assessment areas as of the end of each
calendar year. That i n f o r m a t i o n was used to determine which loans in
the H M D A d a t a were for properties within the lenders' C R A assessment areas. W h e n lenders were part of a bank holding company, the
combined assessment areas of all banks in the holding c o m p a n y were
used for the analysis. For a definition of " a s s e s s m e n t area," see note 4
to box " R e a s o n s for Loan Price Variation."
The identification of specialists in high-priced lending was based
solely on the incidence of higher-priced loans for non-Hispanic whites.
This restriction prevented the identification f r o m being affected by
differences between the pricing outcomes of blacks and Hispanics, on
the one hand, and those of non-Hispanic whites, on the other.
Differences across groups for lending within an
assessment area are about one-third of those for lending outside the assessment area. Moreover, for all
racial and ethnic groups, lending within an assessment area exhibits a much lower incidence of higherpriced lending.
One possible explanation for the assessment-area
effect may be that the channel through which loans
are originated matters. Loans extended to borrowers
outside an institution's assessment area may be more
likely to have come through mortgage brokers, who
may price differently or who operate in areas with
different market conditions than do institutions that
originate loans directly. Although this pattern may
suggest that brokers charge higher prices, particularly
to minorities, it is not necessarily evidence of unfair
treatment or that the existence of the broker channel
adversely affects minorities. It may indicate that
brokers serve markets or individuals who are more
costly to serve, or whose credit profiles are weaker,
and price accordingly. If so, then were it not for
broker activity, some of these borrowers might not be
served at all or might pay higher prices. Determining
whether brokers treat minority borrowers fairly is
a complex undertaking and requires information
unavailable in the HMDA data. The same can be said
about lenders that originate loans through different
channels.
Finally, although the aggregate lending patterns of
specialists in higher-priced lending exhibit unexplained racial or ethnic differences, so do the aggregate patterns of other lenders to approximately the
same degree. And for the higher-priced specialists
with the highest incidence of higher-priced lending,
differences across racial and ethnic groups are, in
some instances, lower than for other lenders. Regarding the racial and ethnic differences in the lending
patterns that do exist among higher-priced lending
specialists, the analysis shows that income, loan
amount, and other HMDA factors appear to explain
little of those differences.
Differences in Mean Price Spreads
Racial and Ethnic Groups
across
Patterns across racial and ethnic groups for the mean
spreads paid by those with higher-priced loans are
quite different from patterns across such groups for
the incidence of higher-priced lending (table 12). For
the loan products with the largest numbers of borrowers, the unadjusted mean spreads are lower for all
minority groups except blacks than they are for nonHispanic whites. Typically, Asian borrowers have the
New
12.
Information
Reported
under
HMDA
and Its Application
in Fair Lending
Enforcement
383
Unadjusted and adjusted mean APR spreads for higher-priced loans on one- to four-family homes,
by type of loan and by race and ethnicity and sex of borrower, 2004
A. H o m e purchase, owner-occupied site-built h o m e
Percent except as noted
Conventional
Government backed, first lien
First lien
Race and ethnicity
and sex
Race and ethnicity
American I n d i a n or
Alaska N a t i v e . . .
Asian
Black or A f r i c a n
American
Native H a w a i i a n or
other Pacific
Islander
T w o or m o r e
minority r a c e s . . .
Joint
R a c e missing
Hispanic white
Non-Hispanic w h i t e . .
Sex
One
One
Two
Two
male
female
males
females
Number
of
higherpriced
loans
Junior lien
Adjusted mean spread,
by adjustment factor
Unadjusted
mean
spread
Borrowerrelated
Borrowerrelated
plus
lender
Adjusted mean spread,
by adjustment factor
Number
of
higherpriced
loans
Unadjusted
mean
spread
Borrowerrelated
Borrowerrelated
plus
lender
Number
of
higherpriced
loans
Adjusted mean spread,
by adjustment factor
Unadjusted
mean
spread
Borrowerrelated
Borrowerrelated
plus
lender
5,101
11,771
4.0
3.8
4.1
4.0
4.1
4.0
3,828
11,164
6.3
6.2
6.4
6.4
6.4
6.4
235
137
4,2
4.3
4,0
4.2
4.1
4.2
75,427
4.2
4.2
4.2
38,657
6.6
6.5
6.5
911
4.1
4.0
4.2
3,186
4.0
4.1
4.1
3,070
6.3
6.5
6.5
55
4.3
4.3
4.5
598
3,242
52,094
61,248
216,409
4.1
4.0
4.1
3.9
4.1
4.3
4.1
4.1
4.0
4.1
4.1
4.1
4.1
4.1
4.1
302
2,662
39,130
50,817
119,879
6.4
6.4
6.4
6.3
6.4
6.5
6.5
6.5
6.4
6.4
6.5
6.5
6.5
6.4
6.4
82
114
515
973
3,214
3.9
4.2
4.2
4.7
4.1
3.6
4.1
4.2
4.2
4,1
4.1
4.2
4.1
4.2
4.1
173,166
130,250
3,632
3,246
4.0
4.1
4.1
4.1
4.0
4.0
4.1
4.0
4.0
4.0
4.1
4.1
109,257
77,785
2,711
2,261
6.4
6.4
6.3
6.4
6.4
6.4
6.3
6.3
6.4
6.4
6.3
6.3
1,924
1,555
126
83
4.2
4.2
4.1
4.0
4.2
4.3
4.1
3.8
4.2
4.3
4.1
3.9
NOTE: For definition of A P R spread, sec table 7, note 1. See also note to table 10.A.
12.—Continued
B. Refinance, owner-occupied site-built h o m e
Percent except as noted
Conventional
Government backed, first lien
First lien
Race and ethnicity
and sex
Race and ethnicity
American Indian or
Alaska N a t i v e . . .
Asian
Black or A f r i c a n
American
Native Hawaiian or
other Pacific
Islander . . . . . . . . .
T w o or more
minority r a c e s . . .
Joint
Race missing
Hispanic white
Non-Hispanic w h i t e . .
Sex
One
One
Two
Two
male
female
males
females
Number
of
higherpriced
loans
Junior lien
Adjusted mean spread,
by adjustment factor
Unadjusted
mean
spread
Borrowerrelated
Borrowerrelated
plus
lender
Adjusted mean spread,
by adjustment factor
Number
of
higherpriced
loans
Unadjusted
mean
spread
Borrowerrelated
Borrowerrelated
plus
lender
Number
of
higherpriced
loans
Adjusted mean spread,
by adjustment factor
Unadjusted
mean
spread
Borrowerrelated
Borrowerrelated
plus
lender
8,977
12,250
4.1
3.9
4.2
4.1
4.1
4.1
800
2,675
7.2
6.5
6.8
6,9
7.1
7.1
98
91
4.1
4.4
4.0 .
3.7
3.8
3.8
135,467
4.3
4.3
4.3
10,974
7.5
7.2
7.2
456
3.7
3.8
3.8
5,153
4.1
4.2
4.2
811
6.8
7.1
7.1
94
5.1
3.7
3.6
1,072
6,973
159,741
73,181
476,034
4.0
4.1
4.2
4.0
4.2
4.1
4.2
4.2
4.1
4.2
4.1
4.2
4.2
4.2
4.2
76
1,308
26,915
7,255
68,211
6.8
7.0
7.6
6.9
7.1
7.0
7.1
7.3
7.0
7.1
7.3
7.1
7.2
7.1
7.1
65
56
603
408
2,002
3.9
3.9
3.8
4.4
3.8
3.9
3.8
3.9
4.0
3.8
3.9
3.6
3.9
3.9
3.8
252,618
232,583
4,833
7,479
4.1
4.2
4.2
4.3
4.1
4.2
4.2
4.2
4.1
4.1
4.2
4.2
30,905
21,919
714
914
7.1
7.1
7.0
7.2
7.1
7.1
7.0
6.9
7.1
7.1
7.0
7.0
895
823
68
55
3.9
3.9
4.1
3.9
3.9
3.9
4.1
4.0
3.9
3.8
4.1
4.3
NOTE: See note to table 12.A.
384
12.
Federal Reserve Bulletin • Summer 2005
U n a d j u s t e d and a d j u s t e d m e a n A P R s p r e a d s for h i g h e r - p r i c e d l o a n s oil one- to f o u r - f a m i l y h o m e s ,
by t y p e of loan and by race and ethnicity and sex of b o r r o w e r , 2 0 0 4 — C o n t i n u e d
C. Home improvement, conventional loan, owner-occupied site-built home
Percent exccpt as noted
First lien
R a c e and ethnicity
and sex
Number
of
higherpriced
loans
Unadjusted
mean
spread
Junior lien
Adjusted mean spread,
by adjustment factor
Borrowerrelated
Borrowerrelated
plus lender
Number
of
higherpriced
loans
Unadjusted
mean
spread
Adjusted mean spread,
by adjustment factor
Borrowerrelated
Borrowerrelated
plus lender
Race and ethnicity
American Indian or Alaska Native ..
Asian
Black or African American
Native Hawaiian or other
Pacific Islander
Two or more minority races
Joint
Race missing
Hispanic white
Non-Hispanic white
883
752
11,770
4.5
3.9
4.6
4.6
4.3
4.6
4.4
4.4
4.5
493
875
7,389
7.7
7.5
8.4
7.6
7.8
8.3
7.8
7.9
8.1
397
76
605
7,920
7,572
43,209
4.2
4.4
4.4
4.5
4.3
4.4
4,4
4.3
4.5
4.6
4.3
4.4
4.5
4.3
4.4
4.5
4.4
4.4
463
32
800
10,633
3,255
40,410
7.9
7.7
7.8
7.9
7.7
7.9
8.0
7.9
8.1
8.2
8.1.
7.9
7.7
6.6
8.2
8.0
8.0
7.9
Sex
One
One
Two
Two
19,340
20,104
438
729
4.4
4.4
4.3
4.6
4.4
4.4
4.3
4.4
4.4
4.4
4.3
4.1
17,425
12,873
457
532
8.2
8.1
7.9
8.0
8.2
8.1 '
7.9
8.0
8.2
8.1
7.9
7.9
male
female
males
females
-
NOTE: See note to tabic 12,A.
12.—Continued
D. Manufactured housing, conventional loan, first lien, owner-occupied home
Percent except as noted
Home purchase
Race and ethnicity
and sex
Number
of
higherpriced
loans
Unadjusted
mean
spread
796
337
4,060
Refinance
Adjusted mean spread,
by adjustment factor
Number
of
higherpriced
loans
Borrowerrelated
Borrowerrelated
plus lender
6.0
5.4
6.0
6.0
5.5
5.9
5.9
5.5
5.9
266
90
1,567
Race missing
Hispanic white
Non-Hispanic white
223
10
535
3,738
3,777
41,725
5.8
5.6
5.6
5.9
6.0
5.6
6.1
6.8
5.8
5.9
6.1
5.6
6.6
5.3
5.7
5.7
6.0
5.6
Sex
One
One
Two
Two
17,145
13,413
1,019
1,005
5.8
5.7
5.9
5.7
5.8
5.7
5.9
5.6
5.8
5.7
5.9
6.0
Race and ethnicity
American Indian or Alaska Native ..
Asian
Black or African American
Native Hawaiian or other
Pacific Islander
Two or more minority raccs
male
female
males
females
Unadjusted
mean
spread
Adjusted mean spread,
by adjustment factor
Borrowerrelated
Borrowerrelated
plus lender
5.4
4.9
5.4
5.3
5.7
5.3
4.9
5.7
5.3
49
11
234
4,379
1,051
26,104
4.8
3.9
4.9
4.8
5.0
5.0
5.0
4.0
5.1
4.7
5.0
5.0
5.1
3.2
5.1
4.9
5.1
5.0
8,350
6,363
315
294
5.0
5.1
5.4
5.4
5.0
5.0
5.4
5.3
5.0
5.0
5.4
5.7
NOTK: See note to table 12.A,
lowest mean spreads. Furthermore, adjusting for differences in loan amounts, incomes, and other HMDA
factors plus lender either does little to the average
spreads or changes them in different directions for
different groups. One consistent difference that persists after adjustment is the difference between blacks
and non-Hispanic whites. After adjustment, the gap
in the mean spreads between these groups for the
most common loan products is between 0.10 and
0.15 percentage points.
Differences
in Pricing by Sex of Borrower
As with denial rates, there is little evidence of systematic differences in pricing when borrowers are
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
12.
385
Unadjusted and adjusted mean APR spreads for higher-priced loans on one- to four-family homes,
by type of loan and by race and ethnicity and sex of borrower, 2004—Continued
E. N o n o w i i e r - o c c u p i e d s i t e - b u i l t h o m e
Percent except as noted
Conventional, first lien
Other 1
Home purchase
Race and ethnicity
and sex
Refinance
Adjusted mean spread,
by adjustment factor
Number
of
higherpriced
loans
Unadjusted
mean
spread
603
2,476
Number
of
higherpriced
loans
Borrowerrelated
Borrowerrelated
plus
lender
3.9
3.9
4.1
3.9
4.1
4.0
623
1,319
17,841
4.2
4.1
4.1
Adjusted mean spread,
by adjustment factor
Unadjusted
mean
spread
Adjusted mean spread,
by adjustment factor
Number
of
higherpriced
loans
Unadjusted
mean
spread
Borrowerrelated
Borrowerrelated
plus
lender
4.1
3.9
4.3
4.0
4.3
4.1
288
1,419
15,731
4.3
4.3
4.3
Borrowerrelated
Borrowerrelated
plus
lender
6.5
6.5
6.2
6.2
6.3
6.1
5,197
6.5
6.3
6.2
Race and ethnicity
American Indian or
Alaska N a t i v e . . .
Asian
Black or A f r i c a n
American
Native H a w a i i a n or
other Pacific
Islander . . .
T w o or m o r e
minority r a c e s . . .
Joint
R a c e missing
Hispanic white
Non-Hispanic w h i t e . .
539
4.0
4.0
3.9
388
4.2
4.4
4.8
298
6.7
6.3
6.2
109
637
8,816
6,831
47,211
4.1
4.0
4.1
3.9
4.0
4.4
4.0
4.1
4.0
4.0
4.1
3.9
4.1
4.0
4.0
105
444
9,995
5,002
35,920
3.9
4.2
4.2
4.)
4.1
3.9
4.2
4.3
4.2
4.1
3.7
4.0
4.2
4.2
4.1
37
399
5,698
3,718
24,622
6.7
6.5
6.7
6.3
6.1
6.2
6.4
6.3
6.2
6.1
6.7
6.0
6.3
6.1
6.1
Sex
One
One
Two
Two
38,917
19,349
1,605
489
4.0
4.0
4.1
4.1
4.0
4.0
4.1.'
4.2
4.0
4.0
4.1
5.4
28,824
16,904
718
396
4.2
4.2
4.1
4.4
4.2
4.2
4.1
4.1
4.2
4.2
4.1
4.0
16,711
8,774
688
350
6.4
6.3
6.3
6.5
6.4
6.3
6.3
6.2
6.4
6.4
6.3
6.4
male . . .
female
males
females
:..
NOTE: Sec note to table 12.A.
1. See table 10.E., note 1.
distinguished by sex (table 10). The differences in the
unadjusted incidence of higher-priced lending are
almost always small across loan products and generally narrow when HMDA factors plus lender are
taken into account. Of the nineteen loan product
comparisons with evidence of some pricing difference by sex, males have a higher incidence of higherpriced loans in nine cases, while females do in ten
cases. Nearly identical patterns are exhibited for
mean spreads, and there is no evidence that one sex
consistently pays more than the other (table 12).
The Role of Factors
Not Included
in HMDA
An important limitation of the decompositions
reported earlier is that controls were possible only for
borrower-related factors included in the HMDA data
plus lender when assessing differences in loan pricing
among racial, ethnic, or other groups. As noted, many
factors relevant to underwriting and pricing are not
included in the HMDA data and thus cannot be
accounted for in analyses that rely exclusively on
the data. To provide some insight into how important controlling for these other factors might be in
accounting for pricing differences across borrower
groups, we collaborated with Georgetown Univer-
sity's Credit Research Center (CRC) to perform additional analyses using a CRC database. The CRC data
consist of both HMDA data and a wide range of other
loan-level factors not in the HMDA data that may
relate to credit underwriting and pricing.
The CRC data, which were provided by eight
lenders that specialize in subprime lending, are
equivalent to the 2004 HMDA filings of those lenders
(for the loans they originated) plus non-HMDA information on many other characteristics of the loans and
borrowers. 48 The non-HMDA information consists of
credit history scores (in this instance, FICO scores),
loan-to-value ratios for first-lien loans, the appraised
value of property, and information on whether the
interest rate on the loan was adjustable or fixed,
whether underwriting for the loan waived certain
certifications by the borrower (that is, whether the
loan was a "low documentation" product), whether
the loan carried a prepayment penalty, and whether
the loan was originated through a broker. Unlike the
HMDA data, the CRC data are not disaggregated
48. T h e eight s u b p r i m e m o r t g a g e lenders are subsidiaries of large
financial institutions. T h e 2 0 0 4 data f r o m these lenders consist of
a b o u t 6 2 6 , 0 0 0 loans that they originated; m o r e than 60 p e r c e n t of the
l o a n s in t h a t g r o u p a r e h i g h e r - p r i c e d . T h e d a t a f r o m t h e s e s u b p r i m e
l e n d e r s h a v e b e e n u s e d in v a r i o u s r e s e a r c h i n i t i a t i v e s a n d p u b l i c
policy deliberations.
386
13.
Federal Reserve Bulletin • Summer 2005
L o a n pricing by eight s u b p r i m e specialists, conventional first-lien loans on o w n e r - o c c u p i e d
o n e - to f o u r - f a m i l y h o m e s , by t y p e of loan a n d by selected r a c e a n d ethnicity of b o r r o w e r , 2 0 0 4
A . U n a d j u s t e d a n d a d j u s t e d i n c i d e n c e of h i g h e r - p r i c e d l e n d i n g
Percent except as noted
Home purchase
Refinance
Adjusted incidence,
by adjustment factor
Race and ethnicity
Black or African American
Hispanic white
Non-Hispanic white
Number
of loans
Unadjusted
incidence
6,369
6,110
30,224
85.8
72.6
82.9
Borrowerrelated
Borrowerrelated
plus
non-HMDA
credit
factors
84.4
83.2
82.9
83.9
83.1
82.9
NOTE: Includes transition-period loans (those for which the application was
submitted before 2004). For details on higher-priced lending, the subprime lenders, and the adjustment factors, see text and text note 49. For method of alloca-
Adjusted incidence,
by adjustment factor
Unadjusted
incidence
37,354
12,800
135,667
Borrowerrelated
Borrowerrelated
plus
non-HMDA
credit
factors
81.9
78.8
80.7
Number
of loans
80.7
80.9
80.7
82.9
71.7
80.7
tion into racial and ethnic categories and definitions of categories, see general
note to table 6 and text note 35.
SOURCE: Credit Research Center, Georgetown University.
13.—Continued
B. U n a d j u s t e d and a d j u s t e d m e a n A P R s p r e a d s f o r h i g h e r - p r i c e d l o a n s
Percentage points except as noted
Home purchase
Refinance
Adjusted spread,
by adjustment factor
Race and ethnicity
Black or African American
Hispanic white
Non-Hispanic white
Number
of
higherpriced
loans
Unadjusted
spread
5,463
4,437
25,053
5.1
4.7
4.9
Borrowerrelated
Borrowerrelated
plus
non-HMDA
credit
factors
5.1
4.9
4.9
5.0
4.9
4.9
Adjusted spread,
by adjustment factor
Number
of
higherpriced
loans
Unadjusted
spread
30,959
9,183
109,524
5.1
4.7
5.0
Borrowerrelated
Borrowerrelated
plus
non-HMDA
credit
factors
5.1
4.8
5.0
5.0
4.9
5.0
NOTE: For definition of APR spread, see table 7, note 1. See also notes to
table 13.A.
by individual lender; consequently, the analysis of
the data could not control for lender. Together, the
eight lenders accounted for about 22 percent of the
higher-priced conventional first- or junior-lien homepurchase or refinance loans related to owner-occupied
properties reported by HMD A filers for 2004.
The CRC analyzed pricing differences among the
combined filings of the eight lenders in a manner
identical to that used to prepare table 10—that is,
using only data reported in HMDA—and then it
extended the adjustment of differences by using the
non-HMDA items in its database. 49 The number of
loans in the CRC database was sufficient to allow
meaningful analysis of conventional home-purchase
and refinance loans on one- to four-family, site-built,
owner-occupied homes for two minority groups—
49. O n l y l o a n s with c o m p l e t e i n f o r m a t i o n o n all r e l e v e n t f a c t o r s
w e r e u s e d in the a n a l y s i s . L o a n s with m i s s i n g i n f o r m a t i o n f o r a n y
f a c t o r h a d a s o m e w h a t l o w e r i n c i d e n c e of h i g h e r - p r i c e d l e n d i n g than
d i d the l o a n s u s e d in t h e a n a l y s i s .
blacks and Hispanic whites—and for non-Hispanic
whites.
For pricing outcomes for conventional first-lien
home-purchase loans from the eight lenders, as
adjusted for borrower-related factors (that is, using
only the HMDA data), the incidence of higher-priced
lending differs between black and non-Hispanic white
borrowers by 1.5 percentage points and between Hispanic white and non-Hispanic white borrowers by
0.3 percentage point (table 13). When additional factors available only in the CRC data are taken into
account, the differences between black and nonHispanic white borrowers and between Hispanic
white and non-Hispanic white borrowers falls about
one-third. For refinance loans, the 1.2 percentage
point gap between black and non-Hispanic white
borrowers that remains after controlling for HMDA
data items is removed when additional factors in the
CRC database are controlled for. With respect to
mean APR spreads for these loan products, gross
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
differences across racial or ethnic groups (that is,
differences that exist in the raw, or unadjusted, data)
are de minimus, a fact little changed by adding more
controls from either the HMDA or the CRC data.
These results suggest that an analysis employing
comprehensive information on specific loan products
(for example, different types of adjustable-rate loans)
from specific lenders—information unavailable in the
HMDA or CRC data—would be required to draw
firm conclusions about racial or ethnic differences in
pricing.
USING
THE EXPANDED
SCREENING
HMDA
TOOL FOR FAIR
DATA
387
the statistical analysis beyond the disposition of
applications to differences in loan pricing. The data
can be reviewed for differences across groups in the
incidence of higher-priced lending and in average
spreads paid by borrowers with loans priced above
the thresholds. The pricing data can also be reviewed
for broader patterns that may indicate fair lending
issues. For example, an institution's overall lending
activity can be reviewed to identify geographic variations in pricing that may be associated with neighborhood racial or ethnic population characteristics. Each
of these approaches will improve the fair lending
analyses conducted by examiners.
AS A
LENDING
ENFORCEMENT
Screening
Using the 2004 HMDA Data
Ensuring compliance with the nation's fair lending
laws is one of the responsibilities of the federal and
state agencies that regulate financial institutions. For
some time, the Federal Reserve has been using a
statistical analysis system that relies on the HMDA
data to help assess fair lending compliance by highvolume mortgage lenders. The system identifies
which supervised institutions and which loan products and geographic markets show meaningful differences in the denial rates of loan applications by the
race, ethnicity, or sex of the borrower and thus warrant greater supervisory attention. The statistical
analysis system measures differences in denial rates
by comparing applications for a specific loan product
filed by applicants who differ by race, ethnicity, or
sex but who are matched on the basis of the limited
set of items in the HMDA data. For example, the
analysis can focus on denial rates of whites, Hispanic
whites, and blacks by comparing the denials of applicants from each of those groups who sought the same
loan product for about the same loan amount, are
from the same metropolitan area, and have similar
incomes, dates of application, and number of applicants in the transaction. The statistical analysis system also provides compliance examiners with a specific list of matched application files to review during
the on-site part of an examination.
The expanded data provide opportunities to
improve the statistical analysis system in two ways.
First, some of the new data items can be used to
refine the existing system of analyzing denial rates
of loan applications by allowing more precise differentiation among loan products. Lien status and
manufactured-home designation are prominent
examples because both typically have significant
roles in loan underwriting. Second, the new loanpricing information provides opportunities to expand
As of this writing, the Federal Reserve has modified
its statistical analysis system for fair lending examinations to incorporate the new information available
in the expanded HMDA data. To examine the potential utility of the enhanced system, we used a streamlined version of the system to conduct a review of the
lending activity of the 8,853 institutions reporting
2004 HMDA data. The approach here and in the
earlier sections of this article are related, but unlike
the earlier sections, which involved an analysis of
aggregate patterns that included a control for lender,
this exercise uses the data to identify patterns in the
lending of individual institutions.
The streamlined analysis starts by evaluating the
statistical significance of differences across racial or
ethnic lines in the unadjusted (or gross) incidence of
denial rates, incidence of higher-priced lending, and
average spreads paid by those with higher-priced
loans for each lender separately. This procedure produces a series of lender-product combinations. For
each Jender-product combination, further analysis
matches each minority applicant (or borrower) with
nonminority applicants (or borrowers) on the basis
of a variety of factors available in the HMDA data,
including loan product, borrower income and loan
amount, geographic market (for example, specific
MSA), and number of applicants (one or more than
one).
Adjusted differences are computed by comparing
the denial rates, incidence of higher-priced lending,
and average APR spreads of minorities with those of
the nonminorities matched to them. This procedure is
designed to remove the effects of these other factors
from the calculations of the differences. The adjusted
differences are an estimate of the expected differences in outcomes if a minority and a nonminority
with the same income, loan amount, and number of
388
Federal Reserve Bulletin • Summer 2005
applicants applied for the same loan product, at the
same institution, in the same market.
The streamlined analysis used for purposes of this
article relies on publicly available data as well as data
filed under HMDA that are not subject to public
disclosure (the dates an application was filed and
acted on). A picture of the outcomes of the statistical
analysis system with regard to the analysis of denial
rates or pricing can be conveyed by reviewing the
number of loan products for which the system indicates a statistically significant difference between
blacks and Hispanics (as a group) and non-Hispanic
whites in denial rates, in the incidence of higherpriced lending, or in the mean differences in pricing
for those with higher-priced loans. 50 The focus of the
streamlined analysis is on the eight owner-occupied
product areas that account for the vast majority of
owner-occupied loans in the 2004 H M D A data. 51
In total, there are 13,260 lender-product combinations for the 8,853 HMDA reporting institutions that
have at least one black or Hispanic borrower who can
be matched (for comparison) to at least one nonHispanic white borrower. Of the 13,260 le nde rproduct combinations, 2,418 have at least fifty black
or Hispanic borrowers and at least fifty non-Hispanic
white borrowers, numbers that provide a more meaningful basis for comparison.
For the black and Hispanic group and the nonHispanic white group, we have calculated, for the
13,260 lender-product combinations, the distribution
across the categories of the statistical significance
of three indicators—the difference in denial rates
(table 14), in the incidence of higher-priced lending
(table 15), and in the mean spreads for loans above
the threshold (table 16). We differentiate between
situations in which the black and Hispanic group has
50. Black and Hispanic borrowers were selected for this review
because these groups generally showed the greatest differences f r o m
non-Hispanic whites. T h e groups were combined to have sufficient
numbers for a meaningful statistical comparison. T h e " H i s p a n i c "
category used here includes all borrowers designated as Hispanic
regardless of their race. This definition differs f r o m that used in the
previous section, which restricted the category of " H i s p a n i c s " to
white Hispanics.
51. T h e eight products are virtually the s a m e as those portrayed in
table 9 with the modifications of (1) adding refinance and h o m e improvement first liens to the manufactured-housing product area and
(2) c o m b i n i n g the h o m e - i m p r o v e m e n t and junior-lien refinancing
products and expanding the category to include g o v e r n m e n t - b a c k e d
loans. C o m b i n i n g products for this exercise was d o n e purely for the
purpose of paralleling the way products are grouped in the Federal
R e s e r v e ' s statistical analysis system. T h e key product areas are identical to those u s e d for tables 7 and 8. The product groupings d o not
affect the actual matching procedure because minority borrowers are
always m a t c h e d with non-Hispanic white borrowers with exactly the
s a m e product as defined using all the information available in H M D A .
Transition-period applications were used in the denial-rate comparison but not in the comparisons for pricing.
an indicator (denial rate, incidence of higher-priced
loans, or mean spread) that is greater than that for the
non-Hispanic white group and situations in which an
indicator is lower for the black and Hispanic group
than for the non-Hispanic white group. Differences
are presented in two ways: (1) as the distribution of
the statistical significance of the unadjusted rate or
incidence and (2) for each unadjusted category, as the
distribution of the statistical significance that remains
after the statistical analysis system has been applied.
The categories of statistical significance are, from
highest to lowest level of significance, 1 percent,
5 percent, 10 percent, and not statistically significant.
Denial Rates
Of the 13,260 lender-product combinations, 3,075,
or 23 percent, are those in which the minority group
has an unadjusted denial rate that is different from
that of the non-Hispanic white group by a statistically
significant amount. In almost all of these cases, the
black and Hispanic denial rate is higher, although the
reverse holds in 4 percent of the cases. Eleven percent of the lender-product combinations show a statistically significant difference in denial rates after
the matching procedure is employed (6 percent at
the 1 percent significance level), and only 2 percent
of the 11 percent show a lower denial rate for blacks
and Hispanics.
Incidence of Higher-Priced Loans
Of the 13,260 lender-product combinations, 1,148, or
9 percent, have a statistically significant difference
between the minority and nonminority groups in the
unadjusted incidence of higher-priced lending. Most
of the significant differences show a higher incidence
for the black and Hispanic group, although about
8 percent show a lower incidence. Employing the
matching process to control for differences in income,
loan amount, and other H M D A factors reduces the
number of statistically significant differences by more
than one-half. Of the lender-product combinations
that are statistically significant at the 1 percent level
when unadjusted differences are evaluated, fewer
than one-half (2 percent of the total number of
lender-product combinations) are statistically significant at the 1 percent level after adjustment. A similar
reduction occurs in the number of lenders with at
least one loan product with a statistically significant minority-nonminority difference—the matching
procedure reduces the number of lenders almost
50 percent (data not shown in tables).
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
14.
389
D i s t r i b u t i o n of the d i f f e r e n c e b e t w e e n denial rates on a p p l i c a t i o n s by black and H i s p a n i c a p p l i c a n t s as a g r o u p
and s u c h denial rates for n o n - H i s p a n i c w h i t e applicants, by l e n d e r - p r o d u c t c o m b i n a t i o n , 2 0 0 4
Percent except as noted
Distribution of percentage of lender-product combinations after adjustment
Type of unadjusted difference
Number of
lender-product
combinations
before
adjustment
Black and Hispanic denial rate is higher
and difference is statistically significant,
by degree of significance
Difference
is not
statistically
significant
Non-Hispanic
white denial
rate is higher
and difference
is statistically
significant
at least at the
10 percent level
Total
1 percent
Black and Hispanic denial rate is
higher and difference is statistically
significant, by degree of significance
I percent
5 percent
10 percent
Difference is not statistically
significant
Non-Hispanic white denial rate is
higher and difference is statistically
significant, by degree of significance
1 percent
5 percent
10 percent
5 percent
10 percent
1,642
758
557
43.8
4.1
.7
16.4
12.4
5.7
8.6
9.5
8.8
31.1
74.0
84.7
10,185
.3
48.0
1.0
98.1
.4
100
48
34
36
2.1
0
0
2.1
0
0
0
0
0
45.8
94.1
80.6
50.0
5.9
19.4
100
100
100
0
0
0
100
100
100
NOTE: includes transition-period applications (those submitted before 2004);
for explanation, sec text note 46. The adjustment factors and the racial and
ethnic categories differ from those in tables 9 through 13. For explanation of
adjustment factors and for method of allocation into racial and ethnic categories and definitions of categories, see text and text notes 50 and 51.
The effect of employing the statistical procedures
is particularly dramatic for those products for which
the black and Hispanic group shows an unadjusted
incidence that is lower by a statistically significant
amount. Only 7 percent of such cases remain statistically significant after the matching procedures are
employed—and none are at the 1 percent significance
level.
The reduction in the number of statistically significant differences results primarily from a reduction in
the magnitude of the differences. For example, on
average, the minority-nonminority difference in the
incidence of higher-priced loans for those lenderproduct combinations in which the unadjusted difference is positive and statistically significant falls
4.5 percent, or about one-fourth, after matching.
dure is employed, and about one-sixth of those show
a lower spread for blacks and Hispanics. The number
of lenders with a statistically significant difference in
mean spread for at least one product also falls about
60 percent when adjustments are made.
Mean Pricing Spreads
The matching procedure yields a similar reduction in
the number of lender-product combinations showing
a statistically significant difference in the mean
spreads for blacks and Hispanics versus those for
non-Hispanic whites. Of the 13,260 lender-product
combinations, 5 percent show a statistically significant minority-nonminority difference in the mean
spread; about one-third of these show a lower spread
for blacks and Hispanics. The number of statistically
significant differences for lender-product combinations is reduced 60 percent after the matching proce-
Overall Patterns
A high degree of overlap exists among lenders with
statistically significant adjusted differences between
the minority and nonminority groups in denial rates,
the incidence of higher-priced lending, and mean
spreads. For example, 60 percent of the lenders with
a difference in the adjusted mean spread that is statistically significant at the 1 percent level also have a
statistically significant difference in the incidence of
higher-priced lending for at least one product. Almost
80 percent of the lenders with an adjusted difference
in the incidence of higher-priced lending that is statistically significant at the 1 percent level also have a
statistically significant difference in the denial rates
for at least one product. However, the presence of
statistically significant differences in multiple outcome measures does not necessarily imply a more
serious fair lending concern; it may simply reflect
differences in the distribution of credit characteristics
of the minority and nonminority populations served
by the lender.
We emphasize that the Federal Reserve's statistical
analysis system is only a screening tool. The HMDA
390
15.
Federal Reserve Bulletin • Summer 2005
D i s t r i b u t i o n of the d i f f e r e n c e b e t w e e n i n c i d e n c e of h i g h e r - p r i c e d loans for black and H i s p a n i c b o r r o w e r s as a g r o u p
and t h e i n c i d e n c e for n o n - H i s p a n i c w h i t e b o r r o w e r s , b y l e n d e r - p r o d u c t c o m b i n a t i o n , 2 0 0 4
P e r c e n t e x c e p t as n o t e d
D i s t r i b u t i o n of p e r c e n t a g e of l e n d e r - p r o d u c t c o m b i n a t i o n s a f t e r a d j u s t m e n t
Type of unadjusted difference
N u m b e r of
lender-product
combinations
before
adjustment
B l a c k a n d H i s p a n i c i n c i d e n c e is h i g h e r
a n d d i f f e r e n c e is s t a t i s t i c a l l y s i g n i f i c a n t ,
b y d e g r e e of s i g n i f i c a n c e
Difference
is n o t
statistically
significant
Non-Hispanic
white incidence
is h i g h e r
and difference
is s t a t i s t i c a l l y
significant
at least at t h e
10 p e r c e n t l e v e l
1 percent
B l a c k a n d H i s p a n i c i n c i d e n c e is
h i g h e r a n d d i f f e r e n c e is s t a t i s t i c a l l y
s i g n i f i c a n t , b y d e g r e e of s i g n i f i c a n c e
1 percent
5 percent
10 p e r c e n t
D i f f e r e n c e is n o t statistically
significant
N o n - H i s p a n i c w h i t e i n c i d e n c e is
h i g h e r a n d d i f f e r e n c e is statistically
s i g n i f i c a n t , b y d e g r e e of s i g n i f i c a n c e
1 percent
5 percent
10 p e r c e n t
5 percent
10 p e r c e n t
532
285
241
43.0
4.9
1.2
15.4
11.9
-6
7.5
8.4
9.1
34.0
74.7
85.1
12,112
.1
.3
.4
99.0
.2
93.9
96.2
90.3
6.1
3.8
9.7
Total
33
26
31
0
0
0
:
4
0
0
0
•
0
0
0
0
0
0
100
100
100
100
,
1
100
100
100.
NOTE: E x c l u d e s t r a n s i t i o n - p e r i o d l o a n s ( t h o s e f o r w h i c h the a p p l i c a t i o n w a s
s u b m i t t e d b e f o r e 2 0 0 4 ) . T h e a d j u s t m e n t f a c t o r s a n d the r a c i a l a n d e t h n i c c a t e g o r i e s d i f f e r f r o m t h o s e in t a b l e s 9 t h r o u g h 13. F o r e x p l a n a t i o n of a d j u s t m e n t
f a c t o r s a n d f o r m e t h o d of a l l o c a t i o n i n t o r a c i a l a n d e t h n i c c a t e g o r i e s a n d d e f i n i tions of c a t e g o r i e s , s e e text a n d tex t n o t e s 5 0 a n d 5 1 .
data alone, no matter how much they are manipulated, cannot be used to conclude whether a particular
applicant was treated adversely on the basis of a
prohibited factor regarding either the disposition of
the application or the pricing of the loan. The data
reveal little about an individual's financial circumstances and nothing about the condition or value of
the property offered as collateral. Furthermore, the
data reveal nothing about the underwriting standards
used by a lender to assess the creditworthiness of an
individual or to set loan price. Moreover, the data do
not reveal how a lender's credit decisions relate to its
overall business strategy. For example, the data do
not account for the possibility that an institution's
outreach efforts may attract a larger proportion of
applicants with weaker credit profiles than do other
institutions. Consequently, the data do not provide a
final basis on which to draw conclusions regarding
either the existence or the absence of fair lending
violations.
conduct the analysis and tailor it to the specific
circumstances relevant to the institution in ways that
reflect the institution's product offerings, its compliance risk-management systems, and the Federal
Reserve's overall supervisory experience with the
institution. Thus, the system used as a screening tool
to analyze fair lending compliance for a particular
institution is more complex than the streamlined
analysis used in this article.
If an institution is targeted for more-intensive
review, follow-up procedures can take one or more
forms, including soliciting more information from the
institution regarding its lending and underwriting procedures; gathering additional loan-level data, such as
credit scores and loan-to-value ratios; performing
detailed reviews of loan-file data; and conducting
interviews with current or past bank personnel or
borrowers. The follow-up can be integrated into the
normal consumer examination cycle or can become a
special review of fair lending compliance. The Federal Reserve has already applied the expanded statistical management system that includes the 2004
HMDA data to many of the institutions it supervises
and has contacted those that exhibited relatively large
pricing differences by race, ethnicity, or sex to learn
more about their lending practices and to improve
compliance oversight.
In addition, a review of the 2004 data by other
agencies is under way. The Federal Reserve is sharing the screening procedures with other agencies so
that, if they wish, they may integrate them into their
The Use of Screening in the
Enforcement Process
As implemented in the Federal Reserve's bank supervisory process, the statistical analysis system is used
as a screening procedure to identify those institutions
and their specific products that warrant closer review
for fair lending concerns. Examiners familiar with
the procedures and products of a given institution
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
16.
391
D i s t r i b u t i o n of the d i f f e r e n c e b e t w e e n m e a n A P R s p r e a d of priccs f o r loans a b o v e the t h r e s h o l d for black and H i s p a n i c
b o r r o w e r s as a g r o u p and the m e a n spread for n o n - H i s p a n i c w h i t e b o r r o w e r s , by l e n d e r - p r o d u c t c o m b i n a t i o n , 2 0 0 4
P e r c e n t e x c e p t as n o t e d
D i s t r i b u t i o n of p e r c e n t a g e of l e n d e r - p r o d u c t c o m b i n a t i o n s a f t e r a d j u s t m e n t
N u m b e r of
lender-product
combinations
before
adjustment
T y p e of u n a d j u s t e d d i f f e r e n c e
B l a c k a n d H i s p a n i c m e a n s p r e a d is h i g h e r
a n d d i f f e r e n c e is s t a t i s t i c a l l y s i g n i f i c a n t ,
b y d e g r e e of s i g n i f i c a n c e
Difference
is n o t
statistically
significant
Non-Hispanic
white mean
s p r e a d is h i g h e r
and difference
is s t a t i s t i c a l l y
significant
at least at t h e
10 p e r c e n t level
Total
0
0
0
100
100
100
1 percent
D i f f e r e n c e is n o t statistically
significant
N o n - H i s p a n i c w h i t e m e a n s p r e a d is
h i g h e r a n d d i f f e r e n c e is statistically
significant, by degree of significance
1 percent
5 percent
10 p e r c e n t
10 p e r c e n t
172
145
127
28.5
5.5
4.7
18.6
8.3
6.3
6.4
9.0
7.1
40.7
77.2
81.9
12,611
B l a c k a n d H i s p a n i c m e a n s p r e a d is
h i g h e r a n d d i f f e r e n c e is s t a t i s t i c a l l y
s i g n i f i c a n t , by d e g r e e of s i g n i f i c a n c e
1 percent
5 percent
10 p e r c e n t
5 pcrcent
.1
.2
.3
99,3
.2
100
75
57
73
1.3
1.8
0
1.3
1.8
0
0
0
1.4
84.0
91.2
97.3
13.3
5.3
1.4
100
100
100
NOTE: F o r d e f i n i t i o n of A P R s p r e a d , s e e t a b l e 7 , n o t e 1. S e c a l s o n o t e t o t a b l e 15.
supervisory programs. It is also responding to agency
requests for additional, more detailed analysis of
individual institutions that may be of concern to the
agencies.
Follow-Up
Differences
Procedures
Are Found
When Unexplained
Experience with fair lending reviews indicates that
widely used and largely noncontroversial, objective
underwriting factors, such as credit scores and loanto-value ratios, can often account for some or perhaps
all of the pricing differences by race, ethnicity, and
sex that are not explained by the HMDA data. Thus,
generally the first step in a compliance examination
in which pricing differences are at issue is to gather
additional information on the factors that are used in
underwriting and pricing but that are not included in
the HMDA data. These factors can vary from institution to institution and from product to product. This
step is generally taken after consultation with the
lending institution and after a review of its underwriting policies and procedures. If accounting for these
objective factors explains all racial or ethnic pricing
differences remaining after controlling for HMDArelated factors, the examination will typically be
closed unless other pricing issues remain. If, however, not all differences can be explained by controlling for these factors, further steps will typically be
taken.
Ordinarily examiners will ask the institution to
provide any evidence it has for the remaining differ-
ences. Supervisory experience shows that these differences frequently arise in institutions that employ
discretionary pricing programs. Lenders who indicate
to examiners that pricing differences are the result of
either (1) the use of discretionary pricing to adjust for
varied market factors, such as a competitor's pricing
or individualized credit-risk or pricing-related factors
not encompassed in a rate sheet, or (2) differences in
the extent to which borrowers negotiate for the best
available pricing on their loans should expect to be
asked to provide credible evidence to support such
explanations. Such evidence could include contemporaneous documentation from loan files, credible
statements by participating loan personnel, and nondiscriminatory underwriting policies and procedures,
such as internal audits of discretionary pricing patterns or training that focuses on a loan officer's
responsibility to avoid setting pricing overages
according to the perceived susceptibility of a given
group to such pricing.
A particularly complex arena in which evidence of
pricing differences may arise involves institutions
having multiple loan origination channels, particularly channels that involve indirect loans (for example, those supplied by brokers or wholesalers). These
channels can include multiple origination sources
within a particular institution, including the institution's own loan officers along with those of its affiliates or subsidiaries, as well as indirect lending in
which an institution originates loans referred to it by
brokers or loan correspondents or purchases loans or
pools of loans from unaffiliated, third-party origina-
392
Federal Reserve Bulletin • Summer 2005
tors. Such channels can encompass significant variety
in the nature of the relationships between a given
lender and the affiliates, brokers, or third-party originators that deliver loans to the lender. Indeed, such
relationships may range across a spectrum from a
prime-rate lender that also operates a subprime business in the same geographic market through a direct
subsidiary to a regional bank in one section of the
country that makes fully " a r m ' s length" purchases of
closed loans from an unaffiliated mortgage company
operating solely in a different area.
From a fair lending perspective, a lender whose
different channels of lending serve either borrowers
or geographic areas that differ by race, ethnicity, or
other prohibited characteristic is likely to be further
reviewed. That will certainly be the case if these
different channels produce loan pricing that also differs by race, ethnicity, or other prohibited characteristic. 52 A full review of fair lending compliance in
multiple-channel situations will turn on complex factual analyses that are beyond the scope of this article.
It is sufficient to note here that such analyses will
cover the type and degree of pricing differences, the
nature of the various channels, the lender's legal and
business relationships with other entities (for example, affiliates, brokers, correspondents, or wholesalers), the lender's business or economic basis for
operating through those channels, and the lender's
explanation for the pricing differences.
The process of examining an institution for which
pricing differences based on race, ethnicity, or sex are
statistically significant and for which purely objective
pricing factors, such as credit scores or loan-to-value
ratios, cannot explain the differences, will include a
review of loan files; discussions with management or
loan personnel about possible reasons for the differences; a review of evidence put forth to support their
explanations; interviews with customers, where necessary, regarding their experiences with the lender;
and a careful vetting of an institution's policies and
procedures and actual practices. If, after conducting
an examination, there is no credible nondiscriminatory explanation for such differences, examiners will
consider what supervisory action will be appropriate
to address the issue. Moreover, a lender that cannot
account for differences in pricing across groups may
also be exposed to private rights of action under
52. T h e e x p a n d e d H M D A data can be used to roughly differentiate
the pricing of an institution's retail lending operations from the
pricing of loans obtained f r o m other channels by comparing the
locations of borrowers with the locations of an institution's assessment areas. L o a n s outside an institution's assessment areas are m o r e
likely to have been initiated by third-party brokers or through other
indirect channels.
applicable fair lending laws and may face adverse
effects on its reputation.
HOEPA Enforcement
For the agencies that evaluate compliance with
HOEPA, the expanded HMDA data provide the first
opportunity to readily identify which lenders extend
home loans subject to that law and to measure the
extent of their involvement in such lending. The new
information also provides examiners with the data
needed to efficiently select samples of loan files for
review. The data can also be used to examine patterns
of HOEPA-related lending across borrowers and
neighborhoods, arrayed by their racial and ethnic
profiles. Such analysis may reveal possible fair lending issues and may indicate communities where credit
counseling activities could be targeted.
The Federal Reserve's statistical analysis system
has been augmented to include several screens to aid
HOEPA-related enforcement. These screens include
the identification of HOEPA loans that are potentially
unaffordable given a comparison of the applicant's
income and the estimated monthly loan payments,
the identification of loans with APR spreads that
would appear to have triggered HOEPA coverage but
were not reported as such, and the calculation of
differences across racial and ethnic groups in the
incidence of HOEPA lending. 53
SUMMARY
AND
CONCLUSIONS
In 2002 the Federal Reserve Board amended its
Regulation C to expand the types of information that
lenders covered by HMDA must disclose to the public about their home-lending activities. The amendments are intended to improve the quality, consistency, and utility of the reported data and to keep the
regulation in step with recent developments in homeloan markets, Data reported for 2004 are the first to
reflect the changes in the reporting rules.
As anticipated, the expanded data provide new
opportunities to assess home-lending activity. Newly
available information on lien status and on whether a
loan is for a site-built or manufactured home, as well
as more uniformity in the information on homeimprovement and refinancing loans, allows analyses
that are more relevant to the current state of the
53. The estimated monthly loan payment is derived f r o m H M D A
data using the reported loan amount and an estimated A P R that
assumes a fixed-rate thirty-year loan.
New Information Reported under HMDA and Its Application in Fair Lending Enforcement
market. Most prominently, the new information provides the first publicly available loan-level information on loan pricing in the higher-priced segment of
the home-loan market, a segment that was virtually
nonexistent a decade or so ago but is now an important part of the overall home-loan market.
This article presents an analysis of the 2004
HMDA data. The analysis is conducted with the
national H M D A database and is designed to provide
an understanding of the overall patterns in the data
rather than patterns that pertain to any individual
market or lender. Much of the presentation focuses
on the new items in the data. On balance, the analysis
suggests that the information on lien status, manufactured homes, requests for pre-approval, and refined
product definitions provides a much improved basis
for describing lending activity and the disposition of
applications for credit. Much of the initial public
review of the data will, however, undoubtedly focus
on loan pricing and particularly on the incidence of
higher-priced lending and the comparison of prices
paid by borrowers grouped by race, ethnicity, and
sex.
The most likely initial public focus will be on the
incidence of higher-priced lending among minorities
(particularly blacks) and among non-Hispanic whites.
In the raw data, the differences between these two
groups in the incidence of higher-priced lending are
generally more than 20 percentage points for various
loan products. Our analysis shows, however, that
more than two-thirds of the aggregate difference in
the incidence of higher-priced lending between black
and non-Hispanic white borrowers can be explained
by differences in the groups' distributions of income,
loan amounts, other borrower-related characteristics
included in the HMDA data, and the choice of lender.
Further, analysis at the level of individual lenders
suggests that about 2 percent of the 8,853 lenders
covered by H M D A exhibited a statistically significant difference in the incidence of higher-priced loans
between black and Hispanic borrowers, on the one
hand, and non-Hispanic white borrowers, on the
other, after accounting for factors included in the
HMDA data.
Thus, we see a sizable narrowing, at both the
aggregate and institution levels, in the unexplained
differences in the the incidence of higher-priced lending between minority and nonminority groups. This
narrowing suggests that controlling for credit-related
factors not found in the H M D A data, such as credit
history scores and loan-to-value ratios, might further
reduce unexplained racial or ethnic differences.
Whether controlling for such additional factors will
completely account for all remaining differences is
393
unclear. In that regard, our collaborative study with
the Credit Research Center on the lending activities
of eight large subprime lenders, reported here, suggests that controlling for credit-related factors not
included in the data can make a difference. Our
analysis demonstrated that for some products the
racial or ethnic differences were fully accounted for,
whereas for other products, unexplained differences
remained. Clearly, reaching convincing conclusions
about whether institutions treat individuals differently on a prohibited basis requires institutionspecific analysis.
Hence, our analysis strongly indicates that the raw
data alone can lead to inaccurate conclusions, which
in turn may be unfair to particular institutions and
may lead to unnecessary restrictions on the availability of loans to less-creditworthy applicants. Riskbased pricing has greatly expanded the availability of
home loans to borrowers who, because of weaknesses
in their credit profiles, had previously been unable
to qualify. It would be unfortunate if unwarranted
accusations of illegal bias, stemming from improperly analyzed pricing differences, discouraged
lenders from participating in this segment of the
market.
The primary responsibility for ensuring compliance with fair lending laws falls on lenders. H M D A
data may help lenders analyze and monitor their
lending patterns. In addition, the regulatory agencies use the data for screening purposes to identify
individual lenders that warrant heightened scrutiny
regarding their loan-pricing activities. Where warranted, such reviews include gaining a fuller understanding of the institution's loan-pricing practices,
analyzing loan-level data, and interviewing appropriate personnel to determine whether pricing differences identified through the HMDA screening process are explained by controlling for these additional
data or by other objective factors.
To improve its fair lending examination capabilities, the Federal Reserve has modified its statistical analysis tool to use the new data to screen
institutions for significant differences in lending outcomes across borrowers grouped by race, ethnicity,
or sex. The Federal Reserve has already applied this
expanded statistical management system to many
of the institutions it supervises. It has also contacted
those institutions that exhibit relatively large pricing
differences to learn more about their lending practices and to improve its compliance oversight. Moreover, a review of the 2004 data by other agencies
is under way, and the Federal Reserve is sharing the
screening procedures with other agencies to facilitate
their efforts.
394
Federal Reserve Bulletin • Summer 2005
Institution-specific evaluations, which are not possible with the HMDA data alone, are essential to
determining whether loan-pricing differences in fact
reflect discriminatory treatment of minority groups.
However, the aggregate data can nonetheless provide
valuable, broader insights into the experience of such
groups in the home-loan market. For example, black
and Hispanic borrowers taken together are much
more likely than non-Hispanic white borrowers to
obtain credit from institutions that report a higher
incidence of higher-priced loans. On the one hand,
this pattern may be benign and reflect a sorting of
individuals into different market segments by their
credit characteristics. On the other hand, it may be
symptomatic of a more serious issue. Lenders that
report a lower incidence of higher-priced products
may be either less willing or less able to serve minority neighborhoods. More troubling, these patterns
may stem, at least in part, from borrowers being
steered to lenders or to loans that offer higher prices
than the credit characteristics of these borrowers warrant. Reaching accurate determinations among these
alternative possible outcomes is one goal of the
supervision system. Moreover, we hope that future
research using the new H M D A data will provide
insights that will facilitate this process.
APPENDIX:
ENHANCED
DATA
ON PRIVATE
M OR 'I 'GA GE INS URANCE
Historically, mortgage lenders have required prospective borrowers to make a down payment of at least
20 percent of a home's value before they will extend
a home-purchase loan. Such down payments are
required because experience has shown that homeowners with little equity are substantially more likely
to default on their mortgage. Private mortgage insurance (PMI) emerged as a response to both creditors'
concerns about the elevated credit risk of lending
backed by little equity in a home and the difficulties that some consumers encounter in accumulating
sufficient savings to meet required down-payment
and closing costs.
PMI protects a lender if a borrower defaults on a
loan: It reduces a lender's credit risk by insuring
against losses associated with default up to a contractually established percentage of the claim amount.
The costs of the insurance are typically paid by the
borrower through a somewhat higher interest rate on
the loan.
In 1993 the Mortgage Insurance Companies of
America (MICA) asked the Federal Financial Institutions Examination Council (FFIEC) to process data
from PMI companies on applications for mortgage
insurance and to produce disclosure statements for
the public based on the data. 54 The PMI data largely
mirror the types of information submitted by lenders covered by HMDA. However, because the PMI
companies do not receive all the information about a
prospective loan from the lenders seeking insurance
coverage, some H M D A items are not included in the
PMI data. In particular, loan-pricing information,
requests for pre-approval, and HOEPA status are
unavailable in the PMI data.
For 2004 the seven PMI companies that were writing private mortgage insurance submitted data to
the FFIEC through MICA. In total, these companies
acted on nearly 2 million applications for insurance: 1.3 million to insure mortgages for purchasing homes and about 650,000 to insure mortgages
for refinancing existing mortgages. PMI companies
approved more than 90 percent of the applications
they received. Approval rates are high because lenders are familiar with the underwriting standards used
by PMI companies and generally submit applications
for insurance only if the applications are likely to be
approved.
•
54. Founded in 1973, M I C A is the trade association for the P M I
industry. T h e F F I E C prepares disclosure statements for cach of the
P M I companies. The statements are available at the corporate headquarters of each company and at a central depository in each M S A in
which H M D A data are held. T h e central depository also holds aggregate data for all the P M I companies active in that M S A . In addition,
the P M I data are available f r o m the Federal Reserve Board through its
H M D A Assistance L i n e (202-452-2016).
395
Report on the Condition of the U.S. Banking
Industry: First Quarter, 2005
Assets and earnings of reporting bank holding companies continued to show healthy growth in the first
quarter of 2005. Total assets reached $10.7 trillion,
an increase of $355.0 billion from year-end 2004,
while net income rose 13.8 percent, to $32.9 billion
over the same period.
Securities and money market assets accounted for
more than two-thirds of the total growth in assets.
Most of this increase occurred at the fifty large bank
holding companies (up $185.4 billion, an increase of
6.4 percent) as these large companies added to their
holdings of mortgage-backed securities. These acquisitions were made in large part to investment portfolios as companies adjusted their interest rate risk
exposures—responding to long-term interest rates
that remained unexpectedly low through the quarter
despite significant increases in short-term rates—
although some firms expanded the securities and
other assets they held in trading portfolios. In addition to the fifty large bank holding companies,
insurance-oriented financial holding companies added
significantly to their securities holdings (up $76.6
billion, an increase of 18.4 percent).
Loans grew somewhat less robustly, rising
$71.6 billion, or 1.4 percent, as did unused commitments to lend (up $83.4 billion, or 1.7 percent).
Residential mortgage loans, including home equity
lines of credit, contributed significantly to this
increase. Commercial loans also increased modestly,
although some of that rise was due to one-time technical factors and reclassifications. Weakness was evident in credit card balances, attributable to a seasonal
slowdown in new credit card spending and significantly accelerated repayments as households shifted
some credit card balances to the rapidly growing
home-equity loan category. Commercial real estate
lending, especially for construction, again was a significant source of growth for the industry.
Nondeposit borrowings increased sharply, rising
6.8 percent ($209.2 billion), as strong asset growth
outstripped deposit increases (up $95.7 billion, or
1.8 percent). Although long-term rates remained
low, the increase in borrowings was mostly in shortmaturity instruments. Regulatory capital ratios
remained strong but tightened slightly during the
quarter, as Tier 1 and leverage ratios declined 8 basis
points and 11 basis points respectively.
Problem assets continued to decline from alreadylow levels, reaching 0.76 percent of loans and related
assets. Net charge-offs also declined to 0.57 percent
of average loans, and provisions for loan losses followed suit.
Fueled by asset growth and improved asset quality,
net income rose to $32.9 billion, representing a return
of 14.84 percent on average equity and 1.24 percent
on average assets. Net interest margins narrowed
significantly to 3.18 percent compared with 3.28 percent in the fourth quarter of 2004, a constriction that
was attributable to the flattening of the yield curve
and, to a lesser extent, competitive pressures on loan
and deposit spreads. Non-interest income surged,
supported by strong trading revenues and mortgage
servicing income.
Assets of the securities broker-dealer subsidiaries
of reporting bank holding companies jumped
29.8 percent (or $214.2 billion), to $933.4 billion.
Nearly all of that increase was from a single large
bank holding company (Citigroup), resulting from
a clarification of reporting instructions rather than a
change in the underlying volumes.
Tables start on page 396.
396
1.
Federal Reserve Bulletin •
Summer 2005
Financial characteristics of all reporting bank holding companies in the United States
Millions of dollars e x c e p t as noted, not seasonally a d j u s t e d
2003
A c c o u n t or r a t i o 1 ' 2
2000
2001
2002
2003
Q3
Balance
2004
2005
2004
Q4
Q1
Q2
Q3
Q4
Q1
sheet
Total assets . .
6,745,836
7,486,951
7,990,945
8,880,547
10,339,734
8,751,182
8,880,547
9,358,869
9,712,116
9,960,476
Loans
Securities and m o n e y m a r k e t . .
A l l o w a n c e f o r l o a n losses
Other
3,728,569
2,197,434
-60,376
880,209
3,832,553
2,568,705
-68,833
1,154,528
4,080,049
2,866,857
-74,798
1,118,837
4,435,863
3,302,240
-73,835
1,216,279
5,109,788
3,799,443
-74,619
1,505,123
4,376,319
3,190,602
-73,926
1,258,187
4,435,863
3,302,240
-73,835
1,216,279
4,615,601
3,542,873
-76,629
1,277.024
4,803,609
3,580,335
-76,415
1,404,588
4,949,498
3,628,275
-75,917
1,458,620
10,339,734 10,694,696
5,109,788
3,799,443
-74,619
1,505,123
5,181,398
4,047,682
-73,364
1,538,981
Total liabilities .
,227,975
6,901,281
7,350,200
8,177,563
9,450,580
8,063,922
8,177,563
8,614,689
8,938,434
9,107,551
9,450,580
9,803,120
Deposits . . .
Borrowings
Other3 . . . .
771,749
,991,564
464,662
4,025,769
2,073,770
801,742
4,357,245
2,244,331
748,624
4,705,043
2,630,168
842,352
5,249,505
3,088,885
1,112,190
4,605,545
2,572,084
886,293
4,705,043
2,630,168
842,352
4,847,914
2,902,949
863,826
5,005,099
2,955,221
978,114
5,064,773
3.054,677
988,102
5,249,505
3,088,885
1,112,190
5,345,178
3,298,122
1,159,820
Total equity
517,861
585,670
640,745
702,984
889,154
687,260
702,984
744,180
773,682
852,925
889,154
891,576
Off-balance-sheet
U n u s e d c o m m i t m e n t s to l e n d 4
Securitizations o u t s t a n d i n g 5
Derivatives ( n o t i o n a l value, b i l l i o n s ) 6 . .
297,511
n.a.
43,608
3,481,745
276,717
48,276
3,650,669
295,001
57,886
4,097,531
298,348
72,914
4,823,337
353,978
89,115
3,887,356
290,328
69,452
4,097,531
298,348
72,914
4,350,963
308,543
79,273
4,420,773
314,258
83,109
4,569,881
313,436
84,723
4,823,337
353,978
89,115
4,906,709
366,430
92,601
Income statement
Net income7
Net interest i n c o m e
Provisions f o r loan losses .
Non-interest i n c o m e
Non-interest e x p e n s e
Security g a i n s or losses . .
73,168
197,695
27,604
200,872
258,213
-606
66,510
224,470
40,661
218,984
302,140
4,338
85,731
246,048
45,107
221,532
296,964
4,598
107,949
257,537
33,075
250.639
316,330
5,771
113,483
284,745
28,788
273,677
360,961
5,524
28,177
66,120
8,246
65,423
81,678
596
29,545
68,072
8,944
69,991
86,323
655
30,673
67,441
7,165
67,724
83,237
1,980
25,893
71,815
6,994
73,698
101,051
1,011
29,097
72,426
7,489
67,657
89,118
1,981
28,910
71,485
7,843
68,389
90,479
480
32,902
72,764
6,574
73,536
91,436
413
Ratios (percent)
R e t u r n on a v e r a g e e q u i t y
R e t u r n on a v e r a g e a s s e t s
N e t interest m a r g i n 8
Efficiency r a t i o 7
N o n p e r f o r m i n g a s s e t s to loans and
related a s s e t s
N e t c h a r g e - o f f s to a v e r a g e loan.s . ,
L o a n s to d e p o s i t s
15.19
1.13
3.58
63.95
11.86
.91
3.61
66.92
14,11
111
3.74
62.38
16.28
1.26
3.51
61.72
14.27
1.16
3.39
63.67
16.81
1.29
3.53
62.43
17.25
1.34
3.59
62.62
17.05
1.33
3.42
61.37
13.52
1.07
3.49
67.01
14.03
1.18
3.46
63.34
13.37
1.12
3.28
64.51
14.84
1.24
3.18
60.79
1.09
.64
98.86
1.44
.89
95,20
1.44
1.04
93.64
1.15
.84
94.28
,82
.67
97.34
1.23
.86
95.02
1.15
.98
94.28
1.09
.72
95,21
.96
.66
95.97
.89
.61
97.72
.82
,71
97,34
.76
.57
96.94
Regulatory
capital
T i e r I risk-based
Total risk-based
Leverage
8.84
11.80
6.81
8.92
11.92
6.68
9.22
12.28
6.72
9.58
12.60
6.87
9.41
12.28
6.64
9.53
12.54
6.77
9.58
12.60
6.87
9.55
12.47
6 88
9.40
12.26
6.67
9.38
12.22
6.75
9.41
12.28
6.64
9.34
12.21
6.53
1,727
1,842
1,979
2,134
2,254
2,120
2,134
2,193
2,211
2,240
2,254
2,280
ratios
N u m b e r of r e p o r t i n g bank holding
companies
Footnotes a p p e a r on p. 399.
Report
2.
on the Condition
of the U.S. Banking
Industry
397
Financial characteristics of fifty large bank holding companies in the United States
Millions of d o l l a r s e x c e p t as noted, not seasonally a d j u s t e d
2003
A c c o u n t o r ratio 2 - 9
2000
2001
2002
2003
2004
2005
2004
Q3
Balance
Q4
Q1
Q2
Q3
Q4
Q1
sheet
T o t a l assets
5,509,320
5,883,032
6,244,695
6,903,426
7,940,887
6,826,533
6,903,426
7,348,179
7,539,139
7,741,040
7,940,887
8,206,462
Loans
Securities and m o n e y m a r k e t
A l l o w a n c e f o r loan l o s s e s
Other
2,936,756
1,849,393
-49,224
772,404
2,956,272
2,053,128
-56,575
930,207
3,140,427
2,282,894
-61,180
882,553
3,387,295
2,629,416
-59,343
946,058
3,929,885
2,909,296
-59,484
1,161,189
3,353,598
2,534,530
-59,343
997,748
3,387,295
2,629,416
-59,343
946,058
3,548,140
2,855,674
-61,854
1,006,218
3,683,748
2,841,338
-61,434
1,075,487
3,791,894
2,880.574
-60,811
1,129,382
3,929,885
2,909,296
-59,484
1,161,189
3,979,933
3,094,734
-58,123
1,189,918
T o t a l liabilities
5,098,769
5,434,925
5,758,200
6,373,455
7,252,392
6,306,793
6,373,455
6,781,436
6,949,713
7,084,305
7,252,392
7,513,951
Deposits
Borrowings
Other3
2,847,117
1,814,179
437,474
3,022,829
1,878,346
533,750
3,261,241
2,040,891
456,068
3,512,801
2,358,645
502,010
3,948,310
2,713,445
590,637
3,436,283
2,314,486
556,024
3,512,801
2,358,645
502,010
3,629,595
2,614,743
537,099
3,759,012
2,642,532
548,170
3,793,285
2,742,512
548,509
3,948,310
2,713,445
590,637
4,019,042
2,898,498
596,411
410,560
448,107
486,496
529,971
688,495
519,740
529,971
566,743
589,426
656,735
688,495
692,511
3,072,864
n.a.
43,544
3,235,807
271,825
48,159
3,385,143
289,905
57,768
3,800,219
293,046
72,725
4,485,138
348,986
88,675
3,595,070
284,850
69,278
3,800,219
293,046
72,725
4,047,520
304,545
79,044
4,104,527
307,878
82,844
4,236,822
307,325
84,463
4,485,138
348,986
88,675
4,557,059
361,524
92,140
60,388
153,455
24,013
181,585
216,983
-603
52,530
166,652
35,786
174,378
224,502
4,319
68,308
183,796
• 39,416
172,642
215,915
5,039
87,644
192,298
28,587
195,668
229,336
5,186
90,155
212,404
25,360
213,283
264,069
4,628
23,116
50,003
7,075
51,693
60,279
478
24,422
51,232
7,877
55,543
63,226
632
25,159
50,689
6,396
53,732
61,045
1,610
19,494
52,809
6,212
56,466
74,500
697
22,998
54,067
6,704
51,882
64,388
1,723
23,595
53,262
6,752
54,995
67,059
524
26,392
53,462
5,769
57,844
66,332
221
15.86
1.14
3.44
64.09
12.22
.91
3.39
64.61
14.71
1.13
3.56
59.55
17.49
1.31
3.35
58.70
14.73
1.18
3.23
60.96
18.24
1.35
3.40
59.72
18.85
1.42
3.47
59.40
18.31
1.39
3.26
58.34
13.34
1.03
3.29
64.90
14.33
1.19
3.31
60.29
14.05
1.19
3.16
61.89
15.30
1.29
3.03
57.57
1.17
.73
103.15
1.57
1.01
97.80
1.56
1.21
• 96.30
1.22
.97
96.43
.84
.80
99.53
1,30
1.00
97.59
1.22
1.13
96.43
1.14
.88
97.76
1.00
.78
98.00
.91
.72
99.96
.84
.83
99.53
.78
.69
99.03
8.20
11.45
6.43
8.22
11.57
6.24
8.51
11.94
6.25
8.80
12.18
6.36
8.57
11.84
6.16
8.81
12.17
6.29
8.80
12.18
6.36
8.77
12.05
6.36
8.63
11.88
6.14
8.60
11,82
6.22
8.57
11.84
6.16
8.52
11.79
6.09
Total equity
Off-balance-sheet
U n u s e d c o m m i t m e n t s to l e n d 4
Securitizations o u t s t a n d i n g 5
Derivatives ( n o t i o n a l value, b i l l i o n s ) 6 . .
Income statement
Net income7
Net interest i n c o m e
Provisions f o r l o a n losses
Non-interest i n c o m e
Non-interest e x p e n s e
Security gains or l o s s e s
Ratios (percent)
R e t u r n on a v e r a g e e q u i t y
R e t u r n on a v e r a g e a s s e t s
Net interest m a r g i n 8
Efficiency r a t i o 7
N o n p e r f o r m i n g a s s e t s to l o a n s and
related assets
Net c h a r g e - o f f s to a v e r a g e loans
L o a n s to deposits
Regulatory capital
T i e r 1 risk-based
T o t a l risk-based
Leverage
ratios
Footnotes a p p e a r o n p. 399.
398
3.
Federal Reserve Bulletin •
Summer 2005
Financial characteristics of all other reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2(103
Account'-10
2000
2001
2002
2003
2004
2005
2004
Q3
Balance
Q4
Qi
Q2
Q3
Q4
Qi
sheet
1,178,273
Total assets
Loans
Securities and m o n e y market
A l l o w a n c e f o r l o a n losses
Other
1,290,686
1,414,391
1,549,979
1,709,085
1,517,067
1,549,979
1,590,705
1,636,305
1,674,216
1,709,085
1,722,328
767,464
319.514
-10,884
102,179
822,127
359,293
-11,894
121,160
885,466
408,750
-13,181
133,355
969,249
449,241
-14,075
145,565
1,097,601
474,035
-14,735
152,184
945,603
443,645
-14,098
141,917
969,249
449,241
-14,075
145,565
996,874
465,449
-14,383
142,765
1,034,675
463,381
-14,627
152,875
1,069,966
465,577
-14,799
153,471
1,097,601
474,035
-14,735
152,184
1,119,845
460,222
-14,805
157,066
1,076,381
1,174,315
1,283,635
1,407,777
1,550,877
1,377,795
1,407,777
1,444,384
1,490,587
1,519,327
1,550,877
1,565,804
Deposits
Borrowings
Other3
912,804
142,782
20,794
988,825
159,804
25,687
1,078,022
174,398
31,214
1,169,677
203,755
34,345
1,281,283
228,929
40,665
1,147,564
196,562
33,669
1,169,677
203,755
34,345
1,202,669
201,409
40,306
1,228,499
223,675
38,413
1,253,522
224,912
40,893
1,281,283
228,929
40,665
1,306,451
217,206
42,147
Total equity
101,892
116,371
130,756
142,202
158,208
139,272
142,202
146,321
145,718
154,889
158,208
156,525
Off-balance-sheet
U n u s e d c o m m i t m e n t s to l e n d 4
Securitizations o u t s t a n d i n g '
Derivatives ( n o t i o n a l value, b i l l i o n s ) 6 . .
215,583
n.a.
47
235,764
4,567
87
253,620
4,358
86
284,399
4,159
92
324,828
2,877
140
278,562
4,400
97
284,399
4,159
92
290,060
2,875
118
301,229
3,000
109
315,742
2,757
117
324,828
2,877
140
335,250
2,792
73
12,485
43,509
3,420
16,181
38,118
-9
13,841
46,215
4,438
22,434
44,389
729
16,634
51,029
5,059
24,591
46,957
639
17,904
53,139
4,271
27,754
51,486
993
19,663
57,389
3,196
26,654
53,586
559
4,560
13,166
1,051
7,009
12,711
136
4,220
13,639
1,127
6,754
13,440
187
4,826
13,867
802
6,768
13,160
310
4,847
14,014
786
6,707
13,143
111
5,042
14,539
798
6,616
13,319
134
4,948
14,968
810
6,562
13,964
5
5,233
15,206
675
6,679
13,941
100
Total liabilities
Income statement
Net i n c o m e 7
Net interest i n c o m e
Provisions for l o a n losses
Non-interest i n c o m e
Non-interest e x p e n s e
Security g a i n s o r losses
Ratios (percent)
Return on a v e r a g e equity
Return on a v e r a g e assets
Net interest m a r g i n 8
Efficicncy r a t i o 7
N o n p e r f o r m i n g a s s e t s to loans and
related a s s e t s
Net c h a r g e - o f f s to average loans
Loans to d e p o s i t s
13.09
1.12
4.31
62.24
12.53
1.13
4.20
63.80
13.53
1,25
4.26
61.12
13.10
1.21
4.00
62.94
13.23
1.21
3.93
62.67
13.35
1.22
3.92
62.67
12.06
1.10
3.97
65.72
13.52
1.24
3.97
63.02
13.29
1.21
3.89
62.80
13.45
1.22
3.92
62.91
12.71
1.17
3.95
63.88
13.38
1.23
3.99
62.56
.77
.32
84.08
.97
.43
83.14
1.02
.46
82.14
.98
.39
82.86
.76
.25
85.66
1.03
.35
82.40
.98
.51
82.86
,96
.23
82.89
.87
.25
84.22
.84
.23
85,36
.76
.31
85.66
.73
17
85.72
Regulatory
capital
T i e r 1 risk-based
Total risk-based
Leverage
11.83
13.29
8.52
12.27
13.83
8.81
12.50
14.11
8.93
12.59
14.30
9.06
12.45
14.09
9.16
12.59
14.29
8.99
12.59
14.30
9.06
12.62
14.31
9.12
12.48
14.15
9.10
12.46
14.11
9.15
12.45
14.09
9.16
12.30
13.92
9.13
1,652
1,779
1,916
2,071
2,057
2,071
2,131
2,149
2,182
2,199
2,225
ratios
N u m b e r of o t h e r r e p o r t i n g b a n k holding
companies
Footnotes a p p e a r on p. 399.
2,199
Report
4.
on the Condition
of the U.S. Banking
Industry
399
Nonfinancial characteristics of all reporting bank holding companies in the United States
M i l l i o n s o f d o l l a r s e x c e p t as n o t e d , n o t s e a s o n a l l y a d j u s t e d
2003
Account
2000
2001
2002
2003
2004
2005
2004
Q3
Bank holding companies that qualify as
financial holding companies 1 '•12
Domestic
Number
Total assets
Foreign-owned 13
Number
Q2
Q3
Q4
Ql
Assets associated with nonbanking
activities 12'15
Insurance
Securities broker-dealers
Thrift institutions 16
Foreign nonbank institutions
Other nonbank institutions
300
4,497,781
389
5,440,842
435
5,921,277
4.52
6,610,314
474
7,462,508
449
6,451,785
452
6,610,314
465
6,856,173
471
7,082,367
477
7,279,239
474
7,462,508
471
7,635,666
9
502,506
10
621,442
11
616,254
12
710,441
14
1,376,333
11
729,244
12
710,441
13
994,672
14
1,117,266
14
1,193,984
14
1,376,333
15
1,526,167
6,415,909
6,897,447
7,397,818
8,207,091
7,293,920
7,397,818
7,614,504
7,850,644
8,040,967
8,207,091
8,400,147
5,657,210
229,274
243,050
5,942,575
230,464
242,870
6,429,738
227,017
240,692
6,940,992
219,222
237,604
7,785,428
209,181
212,482
6,842,727
217,035
234,157
6,940,992
219,222
237,604
7,165,651
213,193
235,660
7,409,186
211,725
229,733
7,599,384
208,696
232,887
7,785,428
209,181
212,482
7,988,330
204,799
207,019
n.a.
n.a.
102,218
132,629
1,234,714
By ownership
Reporting bank holding companies . .
Other bank holding companies ,
Independent banks
Foreign-owned
companies 13
Number
Total assets
Ql
6,129,534
Total US. c o m m e r c i a l b a n k
assets 14
Number of bank holding companies
engaged in nonbanking activities
Insurance
Securities broker-dealers
Thrift institutions
Foreign nonbank institutions
Other nonbank institutions
Q4
426,462
n.a.
91,170
138,977
1,674,267
372,405
630,851
107,422
145,344
561,712
437,503
656,775
133,056
170,600
686,367
579,111
719,242
191,201
216,758
1,128,184
419,575
686,049
143,578
162,789
736,515
437,503
656,775
133,056
170,600
686,367
468,168
713,794
139,713
184,334
853,276
583,073
710,485
156,033
226,064
870,833
579,785
756,869
162,396
230,569
887,848
579,111
719,242
191,201
216,758
1,128,184
574,466
933,479
193,647
219,828
1,044,441
50
25
633
143
n.a.
38
32
743
96
47
32
37
880
102
50
27
41
1,042
97
43
27
39
1,026
102
46
29
39
992
102
50
27
41
1,042
100
49
29
41
1,010
101
48
27
40
1,030
98
45
25
40
1,050
97
43
27
39
1,026
97
41
26
38
929
21
636,669
23
764,411
26
762,901
27
934,085
29
1,537,208
27
947,253
27
934,085
27
1,145,476
28
1,271,378
28
1,349,900
29
1,537,208
29
1,690,118
1,859,930
1,985,981
1,992,559
2,034,358
2,162,118
2,031,029
2,034,358
2,099,126
2,085,733
2,133,267
2,162,118
2,165,347
5,509,329
* 3)9,129
5,883,032
5,732,621
6,244,695
6,032,000
6,903,426
6,666,488
7,940,887
7,940,955
6,826,533
6,602,255
6,903,426
6,666,488
7,348,179
7,045,844
7,539,139
7,385,384
7,741,040
7,644,504
7,940,887
7,940,955
8,206,462
8,206,462
78.90
76.60
75.50
75.10
76.80
75.40
75.10
75.30
76.00
76.70
76.80
76,70
15
n.a.
n.a.
bank holding
Employees of reporting bank holding
companies (full-time equivalent) . .
Assets of fifty large bank holding
companies9'17
Fixed panel (from table 2)
Fifty large as of reporting date . . . . . . .
Percent of all reporting
bank holding companies
NOTE: All data are as of the most recent period shown. The historical figures may not
match those in earlier versions of this table because of mergers, significant acquisitions or
divestitures, or revisions or restatements to bank holding company financial reports. Data for
the most recent period may not include all late-filing institutions.
1. Covers top-tier bank holding companies except (I) those with consolidated assets of less
than $150 million and with only one subsidiary bank and (2) multibank holding companies
with consolidated assets of less than $150 million, with no debt outstanding to the general
public and not engaged in certain nonbanking activities,
2. Data for all reporting bank holding companies and the fifty large bank holding companies reflect merger adjustments to the fifty large bank holding companies. Merger adjustments account for mergers, acquisitions, other business combinations and large divestitures
that occurred during the time period covered in the tables so that the historical information on
each of the fifty underlying institutions depicts, to the greatest extent possible, the institutions as they exist in the most recent period. In general, adjustments for mergers among bank
holding companies reflect the combination of historical data from predecessor bank holding companies,
The data for the fifty large bank holding companies have also been adjusted as necessary to match the historical figures in each company's most recently available financial statement.
In general, the data are not adjusted for changcs in generally acccpted accounting
principles.
3. Includes minority interests in consolidated subsidiaries.
4. Includes credit card lines of credit as well as commercial lines of credit.
5. Includes loans sold to securitization vehicles in which bank holding companies retain
some interest, whether through recourse or seller-provided credit enhancements or by servicing the underlying assets. Securitization data were first collected on the FR Y-9C report for
June 2001.
6. The notional value of a derivative is the reference amount of an asset on which an interest rate or price differentia] is calculated. The total notional value of a bank holding
company's derivatives holdings is the sum of the notional values of each derivative contract
regardless of whether the bank holding company is a payor or recipient of payments under the
contract. The actual cash flows and fair market values associated with these derivative
contracts are generally only a small fraction of the contract's notional value.
7. Income statement subtotals for all reporting bank holding companies and the fifty large
bank holding companies exclude extraordinary items, the cumulative effects of changes in
accounting principles, and discontinued operations at the fifty large institutions and therefore
will not sum to Net income. The efficiency ratio is calculated excluding nonrecurring income
and expenses.
8. Calculated on a fully-taxable-equivalenl basis.
9. In general, the fifty large bank holding companies arc the fifty largest bank holding
companies as measured by total consolidated assets for the latest period shown. Excludes a
few large bank holding companies whose commercial banking operations account for only a
small portion of assets and earnings.
10. Excludes predecessor bank holding companies that were subsequently merged into
other bank holding companies in the panel of fifty large bank holding companies. Also
excludes those bank holding companies excluded from the panel of fifty large bank holding companies because commercial banking operations represent only a small part of their
consolidated operations.
11. Exclude qualifying institutions that are not reporting bank holding companies.
12. No data related to financial holding companies and only some data on nonbanking
activities were collected on the FR Y-9C report before implementation of the G r a m m Lcach-Bliley Act in 2000.
13. A bank holding company is considered "foreign-owned" if it is majority-owned by a
foreign entity. Data for foreign-owned companies do not include data for branches and agencies of foreign banks operating in the United States.
14. Total assets of insured commercial banks in the United States as reported in the commercial bank Call Report (FF1EC 031 or 041, Reports of Condition and Income). Excludes
data for a small number of commcrcial banks owned by other commercial banks that file
separate call reports yet are also covered by the reports filed by their parent banks. Also
excludes data for mutual savings banks.
15. Data for thrift, foreign nonbank, and other nonbank institutions are total assets of each
type of subsidiary as reported in the FR Y-9LP report. Data cover those subsidiaries in which
the top-tier bank holding company directly or indirectly owns or controls more than
50 percent of the outstanding voting stock and that has been consolidated using generally
accepted accounting principles. Data for securities broker-dealers are net assets (that is, total
assets, excluding intercompany transactions) of broker-dealer subsidiaries engaged in activities pursuant to the Gramm-Leach-Bliley Act, as reported on schedule HC-M of the
FR Y-9C report. Data for insurance activities are all insurance-related assets held by the bank
holding company as reported on schedule HC-I of the FR Y-9C report.
Beginning in 2002:Q1, insurance totals exclude intercompany transactions and subsidiaries engaged in credit-related insurance or those engaged principally in insurance agency
activities. Beginning in 2002:Q2, insurance totals include only newly authorized insurance
activities under the Gramm-Leach-Bliley Act.
16. Aggregate assets of thrift subsidiaries were affected significantly by the conversion of
Charter One's thrift subsidiary (with assets of $37 billion) to a commercial bank in the second
quarter of 2002 and the acquisition by Citigroup of Golden State Bancorp (a thrift institution with assets of $55 billion) in the fourth quarter of 2002.
17. Changes over time in the total assets of the time-varying panel of fifty large bank holding companies are attributable to (1) changcs in the companies that make up the panel and
(2) to a small extent, restatements of financial reports between periods.
n.a. Not available
SOURCE: Federal Reserve Reports FR Y-9C and FR Y-9LP, Federal Reserve National
Information Center, and published financial reports.
400
Announcements
STATEMENT BY CHAIRMAN ALAN GREENSPAN
ON WIM DUISENBERG,
FORMER FIRST
PRESIDENT,
EUROPEAN
CENTRAL
BANK
"Wim Duisenberg earned respect and admiration
worldwide for his successful launching of the euro
and his effective leadership as the first president
of the European Central Bank. On a personal level,
I valued his friendship and I will miss him."
RESIGNATION
OF GOVERNOR
EDWARD
M.
GRAMLICH
Governor Edward M. Gramlich submitted his resignation on May 18, 2005, as a member of the Board of
Governors of the Federal Reserve System, effective
August 31, 2005. Governor Gramlich, who has been
a member of the Board since November 5, 1997,
submitted his letter of resignation to President Bush.
In view of his impending departure and in keeping
with Federal Open Market Committee practice, he
did not attend the August 9, 2005, meeting of the
FOMC.
"Ned has contributed powerfully to the work of
the Board and of the F O M C for nearly eight years,"
said Federal Reserve Board Chairman Alan
Greenspan. "Our deliberations have been enriched
by his keen insights, his good humor, and his lively
mind."
Gramlich resigned to pursue several teaching and
research interests. He will become the Richard A.
Musgrave collegiate professor in the Gerald R. Ford
School of Public Policy at the University of Michigan, teaching in that program and in the new Michigan in Washington Program. He will also hold a
part-time appointment as senior fellow at the Urban
Institute.
Gramlich, 65, was first appointed to the Federal
Reserve Board by President Clinton to a term that
expires on January 31, 2008. For most of this time he
has served as chair of the Board's Committee on
Consumer and Community Affairs. During his tenure
the committee proposed, and the Board adopted,
important changes in the Home Owner Equity Protection Act and the Home Mortgage Disclosure Act. The
committee has also proposed a revision to the Community Reinvestment Act.
He has also been the Board's delegate to, and chair
of, the Airline Transportation Stabilization Board, a
board set up to administer the $10 billion loan guarantee program enacted in response to the September 11, 2001, disaster.
Governor Gramlich has chaired the board of the
Neighborhood Reinvestment Corporation, a partnership that has generated more than $8.5 billion in
reinvestment and helped more than 500,000 families
of modest means purchase or improve their homes or
secure rental or mutual housing.
Before coming to the Board, Governor Gramlich
was dean of Michigan's School of Public Policy,
now renamed as the Gerald R. Ford School of Public
Policy. He also chaired the 1994-96 Quadrennial
Advisory Council on Social Security and was staff
director for the 1992 Economic Study Committee on
Major League Baseball.
FEDERAL OPEN MARKET
STATEMENTS
COMMITTEE
The Federal Open Market Committee decided on
May 3, 2005, to raise its target for the federal funds
rate 25 basis points, to 3 percent.
The Committee believes that, even after this action,
the stance of monetary policy remains accommodative and, coupled with robust underlying growth
in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid
pace of spending growth has slowed somewhat,
partly in response to the earlier increases in energy
prices. Labor market conditions, however, apparently
continue to improve gradually. Pressures on inflation
have picked up in recent months and pricing power
is more evident. Longer-term inflation expectations
remain well contained.
The Committee perceives that, with appropriate
monetary policy action, the upside and downside
risks to the attainment of both sustainable growth and
price stability should be kept roughly equal. With
underlying inflation expected to be contained, the
Committee believes that policy accommodation can
401
be removed at a pace that is likely to be measured.
Nonetheless, the Committee will respond to changes
in economic prospects as needed to fulfill its obligation to maintain price stability.
Voting f o r the F O M C monetary policy action were:
Alan Greenspan, Chairman; Timothy F. Geithner,
Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M . Gramlich;
Donald L. Kohn; Michael H. M o s k o w ; Mark W.
Olson; A n t h o n y M. Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the
discount rate, to 4 percent. In taking this action, the
Board approved the requests submitted by the boards
of directors of the Federal Reserve Banks of Boston,
New York, Philadelphia, Cleveland, R i c h m o n d ,
Atlanta, Chicago, St. Louis, Minneapolis, Kansas
City, Dallas, and San Francisco.
The Federal Open Market Committee decided on
June 30, 2005, to raise its target for the federal f u n d s
rate 25 basis points, to 3 l A percent.
The C o m m i t t e e believes that, even after this action,
the stance of monetary policy remains a c c o m m o dative and, coupled with robust underlying growth
in productivity, is providing ongoing support to economic activity. Although energy prices have risen
further, the expansion remains firm and labor market
conditions continue to improve gradually. Pressures
on inflation have stayed elevated, but longer-term
inflation expectations remain well contained.
The C o m m i t t e e perceives that, with appropriate
monetary policy action, the upside and downside
risks to the attainment of both sustainable growth
and price stability should be kept roughly equal.
With underlying inflation expected to be contained,
the Committee believes that policy accommodation
can be r e m o v e d at a pace that is likely to be measured. Nonetheless, the Committee will respond to
changes in e c o n o m i c prospects as needed to fulfill its
obligation to maintain price stability.
Voting for the F O M C monetary policy action were:
Alan Greenspan, Chairman; Timothy F. Geithner,
Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich;
Donald L. Kohn; Michael H. Moskow; Mark W.
Olson; Anthony M. Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the
discount rate, to AVA percent. In taking this action, the
Board approved the requests submitted by the boards
of directors of the Federal Reserve Banks of Boston,
New York, Philadelphia, Cleveland, Richmond,
Atlanta, Chicago, St. Louis, Minneapolis, K a n s a s
City, Dallas, and San Francisco.
The Federal Open Market Committee decided on
August 9, 2005, to raise its target for the federal
f u n d s rate 25 basis points, to 3!/2 percent.
The Committee believes that, even after this action,
the stance of monetary policy remains a c c o m m o dative and, coupled with robust underlying growth
in productivity, is providing ongoing support to
economic activity. Aggregate spending, despite high
energy prices, appears to have strengthened since late
winter, and labor market conditions continue to
improve gradually. Core inflation has been relatively
low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.
The Committee perceives that, with appropriate
monetary policy action, the upside and downside
risks to the attainment of both sustainable growth and
price stability should be kept roughly equal. With
underlying inflation expected to be contained, the
Committee believes that policy accommodation can
be removed at a pace that is likely to be measured.
Nonetheless, the Committee will respond to changes
in economic prospects as needed to fulfill its obligation to maintain price stability.
Voting for the F O M C monetary policy action were:
Alan Greenspan, Chairman; Timothy F. Geithner,
Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn;
Michael H. M o s k o w ; Mark W. Olson; Anthony M.
Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the
discount rate, to AV2 percent. In taking this action, the
Board approved the requests submitted by the boards
of directors of the Federal Reserve Banks of Boston,
N e w York, Philadelphia, Cleveland, R i c h m o n d ,
Atlanta, Chicago, St. Louis, Minneapolis, Kansas
City, Dallas, and San Francisco.
FEDERAL OPEN MARKET COMMITTEE
SCHEDULE FOR 2006
The Federal Open Market Committee announced on
June 29, 2005, its tentative meeting schedule for
2006: January 3 1 - F e b r u a r y 1 (Tuesday-Wednesday),
March 28, May 10, June 2 8 - 2 9 ( W e d n e s d a y Thursday), August 8, September 20, October 24,
D e c e m b e r 12, 2005, and January 3 0 - 3 1 , 2007
(T uesday-Wednesday).
402
Federal Reserve Bulletin • Summer 2005
AMENDMENTS
APPENDIX A
TO REGULATION
CC,
The Federal Reserve Board announced on April 19,
2005, amendments to appendix A of Regulation CC
(Availability of Funds and Collection of Checks) that
reflect the restructuring of the Federal Reserve's
check-processing operations in the Tenth and Twelfth
Districts. These amendments are part of a series
of amendments to appendix A that will take place
through the first quarter of 2006, associated with the
previously announced restructuring of the Reserve
Banks' check-processing operations.
Appendix A provides a routing number guide that
helps depository institutions determine the maximum
permissible hold periods for most deposited checks.
As of June 18, 2005, the Salt Lake City Branch office
of the Federal Reserve Bank of San Francisco will no
longer process checks, and banks that are served by
that office have been reassigned to the Denver Branch
office of the Federal Reserve Bank of Kansas City. To
ensure that the information in appendix A accurately
describes the structure of check-processing operations within the Federal Reserve System, the final
rule deletes the reference in appendix A to the
San Francisco Reserve Bank's Salt Lake City Branch
office and reassigns the routing numbers listed thereunder to the Kansas City Reserve Bank's Denver
Branch office. To coincide with the effective date of
the underlying check-processing changes, the amendments will become effective June 18, 2005. As a
result of these changes, some checks deposited in the
affected regions that were nonlocal checks became
local checks subject to shorter permissible hold
periods.
The Federal Reserve Board announced on
August 9, 2005, amendments to appendix A of Regulation C C (Availability of Funds and Collection of
Checks) that reflect the restructuring of the Federal
Reserve's check-processing operations in the Twelfth
District. These amendments are part of a series of
amendments to appendix A that will take place
through the first quarter of 2006, associated with the
previously announced restructuring of the Reserve
Banks' check-processing operations.
Appendix A provides a routing number guide that
helps depository institutions determine the maximum
permissible hold periods for most deposited checks.
As of October 22, 2005, the Portland Branch office of
the Federal Reserve Bank of San Francisco will no
longer process checks, and banks that are served by
that office have been reassigned to the Seattle Branch
office of the Federal Reserve Bank of San Francisco.
To ensure that the information in appendix A accurately describes the structure of check-processing
operations within the Federal Reserve System, the
final rule deletes the reference in appendix A to the
San Francisco Reserve Bank's Portland Branch office
and reassigns the routing numbers listed thereunder to the Reserve Bank's Seattle Branch office.
To coincide with the effective date of the underlying check-processing changes, the amendments
will become effective October 22, 2005. As a result
of these changes, some checks deposited in the
affected regions that were nonlocal checks became
local checks subject to shorter permissible hold
periods.
FINAL AMENDMENTS
TO REGULATION
DD
The Federal Reserve Board published on May 19,
2005, final amendments to Regulation D D (Truth
in Savings), which implements the Truth in Savings
Act, and the regulation's official staff commentary to
improve the uniformity and adequacy of information
provided to consumers when they overdraw their
deposit accounts. The final amendments, in part,
address a specific service provided by many depository institutions to pay checks and allow other transactions when there are insufficient funds in an
account. This service is often referred to as bouncedcheck protection or courtesy overdraft protection.
Depository institutions sometimes provide overdraft services to deposit account customers as an
alternative to a traditional overdraft line of credit. To
address concerns about the marketing of this service,
the final rule expands the regulation's prohibition
against misleading advertisements to cover institutions' communications with current customers about
their existing accounts. The staff commentary provides examples of advertisements that would ordinarily be misleading.
Other revisions to Regulation DD require additional disclosures about fees and other terms for
overdraft services, including in advertisements. To
assist consumers in understanding the financial effect
of overdrawing their accounts, the final rule requires
institutions that promote the payment of overdrafts in
an advertisement to disclose on periodic statements
the total dollar amount imposed for overdraft fees
and the total dollar amount imposed for returned-item
fees, both for the statement period and for the calendar year to date.
The final rule became effective on July 1, 2006.
Announcements
ANNUAL
AMOUNT
ADJUSTMENT
OF FEE-BASED
FOR ADDITIONAL
TRIGGER
DISCLOSURE
REQUIREMENTS
The Federal Reserve Board published on August 4,
2005, its annual adjustment of the dollar amount that
triggers additional disclosure requirements under the
Truth in Lending Act for home mortgage loans that
bear rates or fees above a certain amount.
The dollar amount of the fee-based trigger has
been adjusted to $528 for 2006 based on the annual
percentage change reflected in the consumer price
index that was in effect on June 1, 2005. The adjustment is effective January 1, 2006.
The H o m e Ownership and Equity Protection Act
of 1994 restricts credit terms such as "balloon payments" and requires additional disclosures when total
points and fees payable by the consumer exceed the
fee-based trigger (initially set at $400 and adjusted
annually) or 8 percent of the total loan amount,
whichever is larger.
REQUEST FOR COMMENT
RETURN ON CAPITAL
ON IMPUTING
The Federal Reserve Board requested on May 18,
2005, public comment on alternative approaches to
imputing a private-sector-like return on capital that
would be considered in setting fees for certain payment services provided to depository institutions.
Specifically, the Board requests comment on the targeted return on equity (ROE) capital measure contained in the private-sector adjustment factor (PSAF).
The Monetary Control Act of 1980 requires the
Federal Reserve to set fees for the services it provides
to depository institutions at a level sufficient to
recover, over the long run, the actual costs of providing these services, as well as the imputed costs and
profits. The P S A F is an allowance for imputed costs,
including financing costs, return on equity capital,
taxes, and certain other expenses that are not explicitly incurred by the Reserve Banks but would be
incurred by a private business firm providing the
services. The methodology underlying the PSAF is
reviewed periodically to ensure that it is appropriate
and relevant in light of changes that may have
occurred in Reserve Bank priced-services activities,
accounting standards, finance theory, and regulatory
and business practices.
The Board is requesting comment on alternative
approaches to the current method used to compute a
target ROE, including the analytical models used and
403
the model assumptions and inputs. The Board is also
requesting comment on implementing a longer-term
planning horizon for targeting the PSAF ROE, and
the effect that future regulatory and industry changes
could have on the PSAF method.
Comments were requested by July 22, 2005.
FEDERAL
CHANGES
IN CHECK
RESERVE BANKS ANNOUNCE
TO INCREASE EFFICIENCY
SERVICES
As part of their ongoing effort to respond to the
significant shift away from the use of paper checks
and toward the much greater use of electronic payments, the Federal Reserve Banks will discontinue
check processing at the Federal Reserve Bank of
New York's East Rutherford Operations Center. That
volume will be processed at the Federal Reserve
Bank of Philadelphia. No firm date for the transition
has yet been determined, but it is expected to take
place in the second half of 2006. The change is aimed
at increasing the efficiency of the Reserve Banks'
check-processing operations, while continuing to provide high-quality services to depository institutions
throughout the country.
"The step announced [on May 25, 2005,] will help
the Reserve Banks reduce our check service operating costs in line with the continuing shift in consumer and business preferences for electronic payments," said Gary Stern, chairman of the Reserve
Banks' Financial Services Policy Committee and
president of the Federal Reserve Bank of Minneapolis. "Today's announcement marks the third annual
review of our check infrastructure, which has resulted
in a reduction in the number of locations processing
checks. We will continue to evaluate our checkprocessing infrastructure annually to ensure that we
are well positioned to meet the needs of the nation's
payment system."
Since 2003 the Reserve Banks have reduced the
locations where they process checks from forty-five
to twenty-nine as of May 25, 2005. An additional six
locations, previously announced, will no longer process checks by early 2006, further reducing the number to twenty-three. After this step is completed, the
Reserve Banks will process checks from twenty-two
locations nationwide.
"The changes that we have implemented over the
past three years have been good for the nation's
payments system but difficult for our organization
as we have been required to reduce our staff," said
Stern. To assist affected staff, the Reserve Banks will
404
Federal Reserve Bulletin • Summer 2005
offer a variety of programs, including separation
packages, extended medical coverage, and career
transition assistance.
As a result of the action announced on May 25,
2005, the Reserve Banks will reduce their overall
check staff by approximately eighty positions, representing about 2 percent of the Reserve Banks' current
check employees. At the East Rutherford location,
about 140 positions will be affected. Some staff
reductions may occur through attrition and there may
be some opportunities for reassignment. The Reserve
Banks estimate that they will add approximately sixty
positions in Philadelphia to help process the additional volume.
In 2004 Reserve Banks' check volume declined at
about a 12 percent rate. During 2005 check volumes
have continued to decline; further decline is anticipated in the coming years. A 2004 study revealed that
about thirty-seven billion checks were paid in the
United States in 2003, down from forty-two billion in
2001 and fifty billion in 1995. Electronic payments,
including those made by credit cards, debit cards,
and through the automated clearinghouse system
increased from about thirty billion transactions in
2001 to more than forty-four billion transactions in
2003.
The Federal Reserve Banks' long-term checkprocessing strategy will allow them to better meet the
expectations of the 1980 Monetary Control Act. That
act requires the Federal Reserve to set prices to
recover, over the long run, its total operating costs of
providing payment services to financial institutions,
as well as the imputed costs it would have incurred
and the profits it would have expected to earn had the
services been provided by a private business firm.
The Federal Reserve System 2005 Check Restructuring Fact Sheet can be viewed online at
www.federalreserve.gov/boarddocs/press/other/2005/
20050525.
FEDERAL
CHANGES
RESERVE BANKS ANNOUNCE
TO CASH INFRASTRUCTURE
The Federal Reserve Banks announced on June 28,
2005, changes to cash services that are intended to
improve operating effectiveness by providing cash
services at some locations using different distribution
methods.
The Reserve Banks plan in the next six to twelve
months to switch from branch-based cash services
to cash depots in Birmingham, Alabama; Oklahoma
City, Oklahoma; and Portland, Oregon. These
changes are part of a broader effort to update the
Federal Reserve's infrastructure for processing
currency.
" W e ' v e looked at, and will continue to look at,
major metropolitan markets where we do not have a
Federal Reserve presence and at smaller markets
where we do have a presence but where different
service models might be more effective," said Gary
Stern, chairman of the Reserve Banks' Financial Services Policy Committee and president of the Federal
Reserve Bank of Minneapolis.
" W e want to ensure that we're making the best
use of resources while satisfying the need for cash
services. We want to emphasize that the Federal
Reserve will continue to make cash services available
to depository institutions throughout the country,
although in some cases we will do so with a different
business model," he said.
In 2004 and early 2005 the Federal Reserve discontinued cash services through Branches in Little
Rock, Arkansas; Louisville, Kentucky; and Buffalo,
New York, and established cash depots in those
cities.
A cash depot is an alternative market presence for
Federal Reserve cash services. With a cash depot, the
Federal Reserve contracts with a third party—usually
an armored carrier—that acts as a secure collection
point for Federal Reserve currency deposits from the
region's depository institutions. The depot also distributes currency orders that depository institutions
have placed with the Reserve Bank. The work of
counting deposits and preparing orders is done by a
Federal Reserve office in another city. The Federal
Reserve pays for the transportation between the
Reserve Bank office and the depot operator. The
operator follows strict procedures developed by the
Federal Reserve.
The Birmingham cash depot will be serviced by
the Federal Reserve Bank of Atlanta's head office,
the Oklahoma City cash depot will be serviced by the
Federal Reserve Bank of Dallas' head office, and the
Portland cash depot will be serviced by the Federal
Reserve Bank of San Francisco's Seattle office.
Approximately fifty cash employees work at the
Birmingham, Oklahoma City, and Portland Branches
combined, but the number that will be affected by
these changes is undetermined at this time. The
Reserve Banks will offer a variety of programs to
staff that are affected by these decisions, including
separation packages, extended medical coverage, and
career transition assistance.
The Federal Reserve will continue its evaluation of
cash services and plans to announce further changes
as recommendations are approved, including the possibility of serving new markets.
Announcements
Cash remains a vital component of the nation's
payment system. While studies show that the use of
electronic payments is growing, cash use also continues to grow, and the dollar amount of U.S. currency
in circulation worldwide has increased almost 88 percent since 1994, to $720 billion at the end of 2004.
During the same period, the amount of deposits
and orders processed through Reserve Banks has
increased nearly 70 percent, to seventy-five billion
bank notes, in 2004.
"These changes and others that may come later in
the review process will help the Federal Reserve
provide cash services more effectively, both when
transitioning out of our own cash processing facilities
and when establishing a first-time presence in a market," Stern said.
GUIDANCE ON BANKING SERVICES
FOR MONEY SERVICES BUSINESSES
The Financial Crimes Enforcement Network
(FinCEN), along with the Board of Governors of
the Federal Reserve System, the Federal Deposit
Insurance Corporation, the National Credit Union
Administration, the Office of the Comptroller of the
Currency, and the Office of Thrift Supervision (collectively, the "Federal Banking Agencies"), issued
on April 26, 2005, interpretive guidance designed to
clarify the requirements for, and assist banking organizations in, appropriately assessing and minimizing
risks posed by providing banking services to money
services businesses.
FinCEN also has issued a concurrent advisory to
money services businesses to emphasize their Bank
Secrecy Act regulatory obligations and to notify them
of the types of information that they will be expected
to provide to a banking organization in the course of
opening or maintaining account relationships.
Although recognizing the importance and diversity
of services provided by money services businesses,
the guidance to banking organizations specifies that
FinCEN and the Federal Banking Agencies expect
banking organizations that open and maintain
accounts for money services businesses to apply the
requirements of the Bank Secrecy Act, as they do
with all account holders, on a risk-assessed basis.
Registration with FinCEN, if required, and compliance with any state licensing requirements represent
the most basic of compliance obligations for money
services businesses.
Based on existing Bank Secrecy Act requirements
applicable to banking organizations, the minimum
compliance expectations associated with opening and
405
maintaining accounts for money services businesses
are to
• apply the banking organization's Customer Identification Program;
• confirm FinCEN registration, if required;
• confirm compliance with state or local licensing
requirements, if applicable;
• confirm agent status, if applicable; and
• conduct basic risk assessment to determine the
level of risk associated with the account.
Through the interpretive guidance, FinCEN and
the Federal Banking Agencies confirm that banking
organizations have the flexibility to provide banking
services to a wide range of money services businesses while remaining in compliance with the Bank
Secrecy Act. Although banking organizations are
expected to manage risk associated with all accounts,
including money services business accounts, banking
organizations are not required to ensure their customers' compliance with all applicable federal and state
laws and regulations.
The guidance contains examples that may be
indicative of lower and higher risk within money
services business accounts to assist banking organizations in identifying the risks posed by a money services business customer and in reporting known or
suspected violations of law or suspicious transactions
relevant to possible violations of law or regulation.
In addition, the guidance addresses the recurring
question of the obligation of a banking organization to file a suspicious activity report on a money
services business that has failed to register with
FinCEN, if required to do so, or failed to obtain a
license under applicable state law, if required. The
guidance states that a banking organization should
file a suspicious activity report if it becomes aware
that a customer is operating in violation of the registration or state licensing requirements. This approach
is consistent with long-standing practices of FinCEN
and the Federal Banking Agencies under which banking organizations file suspicious activity reports on
known or suspected violations of law or regulation.
The concurrently issued FinCEN advisory to
money services businesses emphasizes the importance of compliance with Bank Secrecy Act regulatory requirements by money services businesses. The
advisory is designed to assist money services businesses by outlining the types of information that they
should have and be prepared to provide to a banking
organization in the course of opening or maintaining
account relationships. The advisory also makes clear
that money services businesses that fail to comply
406
Federal Reserve Bulletin • Summer 2005
with the most basic requirements of the Bank Secrecy
Act, such as registration with FinCEN, if required,
will be subject to regulatory and law enforcement
scrutiny, and that continued noncompliance will
likely result in the loss of banking services.
More information is available on the Board's public web site at www.federalreserve.gov/boarddocs/
press/bcreg/2005/20050426/attachment.pdf and at
www.federalreserve.gov/boarddocs/press/bcreg/
2005/20050426/attachment2.pdf.
BANKING
AGENCIES
ANALYSIS
BEFORE ISSUING
PROPOSED
TO PERFORM
NOTICE
ADDITIONAL
OF
RULEMAKING
The four federal banking agencies (the Office of the
Comptroller of the Currency, the Board of Governors
of the Federal Reserve System, the Federal Deposit
Insurance Corporation, and the Office of Thrift
Supervision) agreed on April 29, 2005, that additional analysis is needed before publishing a notice
of proposed rulemaking (NPR) with respect to the
U.S. implementation of the "International Convergence of Capital Measurement and Capital Standards: A Revised Framework," generally known as
the Basel II Framework.
The agencies had intended to publish the NPR at
midyear 2005, but agreed to a delay to better assess
the results of a recently completed quantitative
impact study (QIS4). The agencies agreed to issue
the NPR at the earliest possible date after considering
issues raised by the QIS4 results.
In a joint release published on June 26, 2004, the
agencies described U.S. efforts to implement the
Basel II Framework through revisions to our existing
capital adequacy regulations. Among the key features
in that implementation plan was an assessment of
the implications of the framework on U.S. regulatory
capital requirements through QIS4 and the solicitation of public comments on necessary revisions
to existing capital adequacy regulations through an
NPR. The QIS4 process was designed to provide the
agencies with a better understanding of the ways
the implementation of the Basel II Framework might
affect minimum required risk-based capital within
the U.S. banking industry overall, at consolidated
U.S. institutions, and for specific portfolios. The
agencies believe that the QIS4 results are critical
inputs in the assessment of (1) the implications of
Basel II for the safety and soundness of the banking
system and (2) the competitive effects of adopting the
Basel II Framework. Both are fundamental to the
formulation of the NPR.
The agencies have received QIS4 submissions
from participating institutions and have completed a
preliminary analysis of those materials. The agencies
have determined that additional analysis beyond that
previously contemplated is necessary before publication of an NPR. The QIS4 submissions evidence
material reductions in the aggregate minimum
required capital for the QIS4 participant population
and significant dispersion of results across institutions and portfolio types. Additional work is necessary to determine whether these results reflect differences in risk, reveal limitations of QIS4, identify
variations in the stages of bank implementation
efforts (particularly related to data availability), and,
or suggest the need for adjustments to the Basel II
Framework.
The agencies remain committed to moving forward
with the implementation of Basel II while retaining
Prompt Corrective Action and leverage requirements.
The delay in issuing the NPR is intended to ensure
that any proposed changes to the risk-based capital
framework are consistent with safety and soundness,
good risk-management practices, and the continued
competitive strength of the U.S. banking system. The
agencies encourage institutions that seek to adopt
Basel II-based rules at their inception to continue
with their implementation efforts. The agencies continue to target the existing implementation timeline
for Basel II. However, the additional work noted
above may cause the agencies to revisit this timeline.
The agencies will provide additional information on
the timing and other aspects of Basel II implementation as it becomes known.
AGENCIES ISSUE CREDIT-RISK
GUIDANCE FOR HOME-EQUITY
MANAGEMENT
LENDING
The federal bank, thrift institution, and credit union
regulatory agencies issued guidance on May 16,
2005, that promotes sound risk-management practices for home-equity lines of credit and loans. The
agencies have found that in some cases credit-risk
management practices for home-equity lending have
not kept pace with the product's rapid growth and
eased underwriting standards.
The rise in home values, coupled with low interest
rates and favorable tax treatment, have made homeequity lines of credit and loans attractive to consumers. To date, delinquency and loss rates for homeequity portfolios have been low, due at least in part
to the modest repayment requirements and relaxed
structures of this lending. However, the agencies
have identified risk factors that, along with vulner-
Announcements
ability to interest rate increases, have attracted scrutiny, including
• interest-only features that require no amortization of principal for a protracted period;
• limited or no documentation of a borrower's
assets, employment, and income;
• higher loan-to-value (LTV) and debt-to-income
ratios;
• lower credit-risk scores for underwriting homeequity loans;
• greater use of automated valuation models and
other collateral evaluation tools for the development
of appraisals and evaluations; and
• an increased number of transactions generated
through a loan broker or other third party.
The agencies note that active portfolio management is especially important for financial institutions
that project or have already experienced significant
growth or concentrations in higher-risk products,
such as high LTV, limited documentation and no
documentation interest-only, and third-party generated loans.
Like most other lending activity, home-equity lending can be conducted in a safe and sound manner
with appropriate risk-management systems. This
guidance outlines the agencies' expectations for
sound underwriting standards and effective creditrisk management practices for a financial institution's
home-equity lending activity.
AGENCIES
RULES
ISSUE FACT
ON MEDICAL
ACT INTERIM
FINAL
INFORMATION
The federal bank, thrift institution, and credit union
regulatory agencies issued on June 6, 2005, interim
final rules under the Fair Credit Reporting Act
(FCRA) that create exceptions to the statutory prohibition against obtaining or using medical information
in connection with credit eligibility determinations.
The interim final rules also address the sharing of
medically related information among affiliates.
The effective date for these rules is nine months
after the date of publication in the Federal Register,
which was on June 10, 2005.
Section 411 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) amended the FCRA
to provide that a creditor may not obtain or use
medical information in connection with any determination of a consumer's eligibility, or continued eligibility, for credit except as permitted by regulations or
the FACT Act. However, the FACT Act also requires
407
the agencies to prescribe regulations that permit
creditors to obtain and use medical information for
credit eligibility purposes when necessary and appropriate to protect legitimate operational, transactional,
risk, consumer, and other needs. A proposed rule was
published for comment on April 28, 2004.
The interim final rules create exceptions to the
general statutory prohibition on obtaining and using
medical information. The provisions are similar to
those contained in the proposed rule and include
exceptions for the use of medical information that
is also financial information typically considered in
credit underwriting. As authorized by the FACT Act,
the agencies have expanded the scope of the rules
so that the exceptions will apply to all creditors, not
just to creditors ordinarily regulated by one of the
agencies.
Section 411 of the FACT Act also amended the
FCRA to limit the ability of creditors and others to
share medically related information among affiliates
except as permitted by the statute, regulation, or
order. The interim final rules specify the circumstances in which creditors may share medically
related information among affiliates without becoming consumer reporting agencies.
The interim final rules are being issued by the
Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the
National Credit Union Administration, the Office of
the Comptroller of the Currency, and the Office of
Thrift Supervision. The rules of each agency are
substantively identical.
The rules are being issued as interim final rules to
allow for public comment on their expanded scope.
The agencies requested comment within thirty days
after publication in the Federal Register.
BANKING
AGENCIES
ANNOUNCE
FINANCIAL
INSTITUTION ENROLLMENT SCHEDULE
CENTRAL DATA REPOSITORY
FOR
The Federal Financial Institutions Examination
Council (FFIEC) Call Report agencies—the Federal
Deposit Insurance Corporation (FDIC), the Board
of Governors of the Federal Reserve System (FRB),
and the Office of the Comptroller of the Currency
(OCC)—announced on June 30, 2005, the schedule
for financial institutions to enroll in the Central Data
Repository (CDR). The CDR is a new Internet-based
system created to modernize and streamline the way
the agencies collect, validate, manage, and distribute
financial data submitted by banks in quarterly "Call
Reports." The new system is scheduled for imple-
408
Federal Reserve Bulletin • Summer 2005
mentation for the third quarter 2005 Call Report and
will be the only method available for banks to submit
their Call Reports.
In preparation for implementation of the CDR,
financial institutions were assigned to one of eight
week-long enrollment windows that began July 11,
2005. T h e implementation and enrollment plan was
developed in cooperation with industry representatives, including software vendors, trade associations,
and a n u m b e r of banks f r o m across the country that
participate in the Financial Institutions Focus Group
for the C D R project. Additional information on the
CDR and the Call Report data modernization initiative is available at www.FFIEC.gov/FIND.
BANKING
AGENCIES
LOAN-TO-DEPOSIT
ISSUE HOST STATE
RATIOS
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency issued
on July 7, 2005, the host state loan-to-deposit ratios
that the banking agencies will use to determine compliance with section 109 of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994.
These ratios update data released on August 26,
2004.
In general, section 109 prohibits a bank from establishing or acquiring a branch or branches outside of
its h o m e state primarily for the purpose of deposit
production. Section 109 also prohibits branches of
banks controlled by out-of-state bank holding companies f r o m operating primarily for the purpose of
deposit production.
Section 109 provides a process to test compliance
with the statutory requirements. The first step in the
process involves a loan-to-deposit ratio screen that
compares a b a n k ' s statewide loan-to-deposit ratio to
the host state loan-to-deposit ratio for banks in a
particular state.
A second step is conducted if a b a n k ' s statewide
loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at
the bank to conduct the first step. The second step
requires the appropriate banking agency to determine
whether the bank is reasonably helping to meet the
credit needs of the communities served by the b a n k ' s
interstate branches.
A bank that fails both steps is in violation of
section 109 and is subject to sanctions by the appropriate banking agency.
The updated list of host state loan-to-deposit
ratios are available on the B o a r d ' s web site at
www.federalreserve.gov/boarddocs/press/bcreg/
2005/20050707/attachment.pdf.
BANK SECRECY ACT/ANTI-MONEY
LAUNDERING
INTERAGENCY
OUTREACH EVENTS
The federal banking and thrift institution agencies,
along with the Financial Crimes E n f o r c e m e n t Network (FinCEN), announced on July 18, 2005, registration details for the u p c o m i n g outreach events
related to the Bank Secrecy Act/Anti-Money
Laundering Examination
Manual {BSAJAML Examination
Manual) that was released on June 30, 2005. T h e
events included
• three nationwide conference calls to be held
August 2 - 4 , 2005; and
• five regional half-day outreach meetings, including a simulcast of one of the meetings via the Internet. These meetings were held in San Francisco,
Dallas, Chicago, New York, and Miami.
Banking organizations were encouraged to participate in these voluntary sessions. T h e content of the
events was similar. During the events, the BSA/AML
Examination Manual was discussed and examination
expectations were provided. There was also an opportunity to provide feedback, ask questions, and address
implementation issues.
Participating in the outreach sessions was the
Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, the Office of
Thrift Supervision, the Office of Foreign Assets Control, and FinCEN.
T h e BSA/AML Examination Manual emphasizes a
banking organization's responsibility to establish and
implement risk-based policies, procedures, and processes to comply with the B S A and safeguard its
operations f r o m money laundering and terrorist
financing.
For questions on the outreach events or the BSA/
AML Examination
Manual, banking organizations
should contact the local office of their federal banking agency.
BANKING
AGENCIES
REINVESTMENT
ISSUE FINAL COMMUNITY
ACT RULES
The federal banking agencies approved on July 19,
2005, final C o m m u n i t y Reinvestment Act ( C R A )
rules that are intended to reduce regulatory burden on
Announcements
community banks while making CRA evaluations
more effective in encouraging banks to meet community development needs. The final rules are essentially as the agencies proposed them in March 2005.
The final rules raise the small bank asset-size
threshold to assets of less than $1 billion without
regard to holding company affiliation. Accordingly,
the new rules reduce data collection and reporting
burden for "intermediate small banks" (banks with
assets between $250 million and less than $1 billion)
and, at the same time, encourage meaningful community development lending, investment, and services
by these banks.
The following policies are under the new rules:
• Intermediate small banks will no longer need
to collect and report CRA loan data. Nevertheless,
examiners will continue to evaluate bank lending
activity in the CRA examinations of intermediate
small banks and disclose results in the public
evaluation.
• Intermediate small banks will be evaluated under
two separately rated tests: the small bank lending
test; and a flexible new community development test
that includes an evaluation of community development loans, investments, and services in light of
community needs and the capacity of the bank. Satisfactory ratings are required on both tests to obtain an
overall satisfactory CRA rating.
In addition, the following policies apply to banks of
any size:
• The new rules expand the definition of community development to include activities that revitalize
or stabilize designated disaster areas and distressed
or underserved rural areas. By including designated
distressed or underserved rural areas, the agencies
intend to recognize and encourage community development in more rural areas. (Designated distressed or
underserved rural areas are to be listed by the agencies on the Federal Financial Institutions Examination Council web site at www.FFIEC.gov/cra.)
• The regulations also clarify when discrimination
or other illegal credit practices by a bank or its
affiliate will adversely affect an evaluation of the
bank's CRA performance.
The rules, which are being issued jointly by the
Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, and the
Office of the Comptroller of the Currency, became
effective on September 1, 2005. The agencies had
409
interim CRA examination procedures for intermediate small banks in place by August 1, 2005.
AGENCIES PROPOSE RULES ON
POST-EMPLOYMENT
FOR SENIOR
RESTRICTIONS
EXAMINERS
The federal banking regulatory agencies issued proposed rules on August 4, 2005, to implement a special post-employment restriction on certain senior
examiners employed by an agency or Federal Reserve
Bank, as required by the Intelligence Reform and
Terrorism Prevention Act of 2004.
Under the proposal, if an examiner serves as the
senior examiner for a depository institution or depository institution holding company for two or more
months during the examiner's final twelve months
of employment with an agency or Reserve Bank, the
examiner may not knowingly accept compensation as
an employee, officer, director, or consultant from that
institution or holding company, or from certain
related entities. The restriction applies for one year
after leaving the employment of the agency or
Reserve Bank. If an examiner violates the one-year
restriction, the act requires the appropriate federal
banking agency to seek an order of removal and
industry-wide employment prohibition for up to five
years, a civil money penalty of up to $250,000, or
both.
The agencies' proposed rules are substantively
similar and vary slightly to reflect differences in
the supervisory programs and jurisdictions of the
agencies.
Comments on the proposed rules are due sixty days
after publication in the Federal Register, which was
on August 5, 2005.
BANK SECRECY
INTERAGENCY
ACT/ANTI-MONEY
OUTREACH
EVENT
LAUNDERING
WEBCAST
The federal banking and thrift institution agencies,
along with the Financial Crimes Enforcement Network (FinCEN), announced registration details on
August 8, 2005, for a live webcast of the Bank
Secrecy Act/Anti-Money
Laundering
Examination
Manual outreach event that was held in New York on
August 22, 2005.
The webcast was open to all parties interested in
BSA/AML compliance issues, but registration was
required. The outreach event was held from 9 a.m. to
noon EDT and will be available for on-demand viewing for three months after the presentation.
410
Federal Reserve Bulletin • Summer 2005
The event is part of a series of briefings for the
banking industry and field examiners on the BSA/
AML Examination Manual. The host organizations
are the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation,
the Office of the Comptroller of the Currency, the
Office of Thrift Supervision, and FinCEN. Also participating in these outreach events are state banking
agencies, the Office of Foreign Assets Control, banking organizations, and banking trade associations.
FINANCIAL
EDUCATION
WEB SITE REDESIGNED
The Federal Reserve System announced on April 18,
2005, that it has redesigned its financial education
web site to increase the use of Federal Reserve educational materials and promote financial education in
the classroom. The new web site incorporates four
Federal Reserve web sites under one main Federal
Reserve Education web site.
The redesigned web site
(www.FederalReserveEducation.org) has material
intended for the general public, as well as materials
specifically geared toward teachers and high school
and college students. The site includes a new look
and feel, while providing easier access to free educational materials, a teacher resource search engine,
personal financial education, as well as new multilevel games for various ages and knowledge levels.
"The Federal Reserve has a long history of promoting economic education and financial literacy.
In that tradition, this new online tool offers students
easier access to a wealth of information in the areas
of economics, banking, and financial services," said
Federal Reserve Board Chairman Alan Greenspan.
The redesigned web site includes four sections:
• Federal Reserve Education, which provides
instructional materials and tools to increase teachers'
and students' understanding of the Federal Reserve,
economics, and personal finances. Resources include
publications and videos, online learning, and links to
Federal Reserve System and other economic education web sites.
• Fed 101, an interactive site that provides an
overview of the history and organization of the
Federal Reserve System, monetary policy and federal regulations, and services provided to depository
institutions.
• Personal Financial Education, which helps
people make informed decisions about their money
and provides guidance for building a stable financial
future. The site includes information on topics such
as consumer banking, consumer protection, homes
and mortgages, interest rates, loans, and credit.
• Teacher Resources, a new site that provides a
search tool to allow teachers to locate Federal
Reserve System education materials that meet
national education standards for incorporation in their
lesson plans. The resources on the site include comic
books, brochures, teaching guides, magazines, and
newsletters on a variety of financial education topics.
PUBLICATION OF THE INTERNATIONAL
OF CENTRAL BANKING
JOURNAL
The Federal Reserve Board, along with the other
sponsoring organizations of the International Journal
of Central Banking (IJCB), announced on May 19,
2005, the publication of the journal's first issue and
the launch of a web site (www.ijcb.org) hosted by the
Bank for International Settlements. 1
The IJCB, a new quarterly publication, features
articles on central bank theory and practice, with a
special emphasis on research relating to monetary
and financial stability. The IJCB web site provides
additional information about the journal as well as
free access to journal articles.
Subscribers to the printed version of the journal
will receive issues for 2005 at no cost. Beginning
in 2006, print subscriptions will be available for
an annual fee of U.S.$100. Subscription orders may
be placed online at www.ijcb.org, or by telephone
(202) 452-3245, facsimile (202) 728-5886, or e-mail
(BDM-IJCB-Editor@frb.gov). Written correspondence should be directed to IJCB—Publications Fulfillment, Mail Stop 127, Board of Governors of the
Federal Reserve System, 20th and C Streets, N.W.,
Washington, DC 20551.
M A Y 2 0 0 5 UPDATE TO THE COMMERCIAL
BANK EXAMINATION
MANUAL
The May 2005 update to the Commercial Bank
Examination Manual has been published (supplement no. 23). The Manual comprises the Federal
1. Sponsoring organizations are the following: Bank of Algeria,
National Bank of Belgium, Central Bank of Brazil, Bank of Canada,
P e o p l e ' s Bank of China, Bank of England, European Central Bank,
Bank of France, Deutsche Bundesbank, Bank of Greece, Hong K o n g
Monetary Authority, Central Bank of Iceland, Bank of Italy, Bank of
Japan, Netherlands Bank, Norges Bank, Bank of Portugal, Central
Bank of R u s s i a n Federation, Monetary Authority of Singapore, Bank
of Spain, Sveriges Riksbank, Swiss National Bank, Central Bank
of Turkey, Federal Reserve Board, and Bank for International
Settlements.
Announcements
Reserve System's supervisory and examination guidance for state member banks. The new supplement
includes guidance on the following subjects:
1. Interagency
Statement on the Purchase and Risk
Management of Life Insurance, A new section discusses
this December 7, 2004, statement placing emphasis on the
safety and soundness and risk-management implications
of purchases and holdings of life insurance by banks. T h e
agcncies issued the guidance because they were concerned
that some institutions may not have an adequate understanding of the risks associated with bank-owned life insurance (BOLI), including liquidity, operational, reputational,
and compliance or legal risks. Further, institutions may
have committed a significant amount of capital to BOLI
holdings without properly assessing the associated risks.
When an institution is planning to acquire B O L I that will
result in an aggregate cash surrender value in excess of
25 percent of its tier 1 capital plus the allowance for loan
and lease losses, the agencies expect the institution to
obtain the approval of its board of directors or its designated board committee. The guidance addresses the need
for institutions to conduct a comprehensive pre- and postpurchase analysis of BOLI, including its unique characteristics, risks, and rewards. Institutions are expected to have
comprehensive risk-management processes for their BOLI
purchases and holdings; these processes should be consistent with safe and sound banking practices. See SR letters
04-4 and 04-19.
2. Interagency Advisory on Accounting for Deferred
Compensation
Agreements and Bank-Owned Life Insurance. A new section, "Deferred Compensation Agreements" provides guidance from this February 11, 2004,
interagency advisory. The advisory was issued because the
agencies, through the examination process, had identified
many institutions that had incorrectly accounted for the
obligations under a type of deferred compensation agreement commonly referred to as a revenue neutral plan or an
indexed retirement plan. The advisory informs institutions
that they need to review their accounting for deferred
compensation agreements to ensure that they have been
appropriately measured and reported. Since institutions
often purchase life insurance in conjunction with established deferred compensation programs, the advisory also
discusses the appropriate accounting treatment for BOLI.
The revised " O t h e r Assets and Other Liabilities" section
includes the accounting treatment for BOLI. See SR letters
04-04 and 04-19.
3. Interagency Joint Guidance on Overdraft Protection
Programs. T h e sections entitled "Consumer Credit" have
been revised to discuss the various types, characteristics,
and fee structures of a bank's ad hoc and automated
overdraft programs. The sections also include the February 18, 2005, interagency guidance that addresses the agencies' concerns about the potentially misleading implementation, marketing, and disclosure practices associated with
the operation of these programs. Financial institutions are
encouraged to review their overdraft-protection policies
and procedures to make certain that their marketing and
communications do not mislead consumers or encourage
irresponsible consumer financial behavior that could
increase the institution's risk. The guidance also addresses
411
the safety and soundness considerations, risk-based capital
treatment, and legal risks associated with overdraftprotection programs.
The sections entitled "Deposit A c c o u n t s " have also
been revised to discuss this interagency guidance, which
was issued to assist banks in the responsible disclosure and
administration of their overdraft-protection programs. T h e
guidance states that banks should establish and monitor
written policies and procedures for ad hoc and automated,
or other overdraft-protection programs. A b a n k ' s policies
and procedures should be adequate to address the credit,
operational, and other risks associated with these types of
programs. T h e examination procedures and internal control
questionnaires have been updated to incorporate the guidance. See SR letter 05-3 and CA letter 05-2.
4. Foreign
Correspondent
Accounts.
The " B a n k Related Organizations" section has been revised to incorporate the U.S. Department of the Treasury's regulation
regarding foreign correspondent accounts. See 31 CFR
103.177 (amended December 24, 2002) and 103.185. The
regulation became effective October 28, 2002, and implemented sections 313 and 319(b) of the USA Patriot Act. A
covered financial institution (CFI) is prohibited f r o m establishing, maintaining, administering, or managing a correspondent account in the United States for, or on behalf of,
a foreign shell bank (a foreign bank that has no physical
presence in the United States or other jurisdictions) that is
not affiliated (1) with a U.S.-domiciled financial institution
or (2) with a foreign bank that maintains a physical presence in the United States or a foreign country and is
supervised by its home-country banking authority. A CFI
that maintains a correspondent account for a foreign bank
in the United States must maintain records in the United
States identifying the owners of the bank. See SR letter
03-17 and the October 2003 Bank Secrecy Act Examination Procedures for Correspondent Accounts for Foreign
Shell Banks; Recordkeeping and Termination of Correspondent Accounts for Foreign Banks. See also SR letter
01-29.
5. Interagency
Guidelines
Establishing
Information
Security Standards and Interagency Guidance on Response
Programs for Unauthorized Access to Customer Information and Customer Notice. The sections entitled, "Information Technology" have been revised to include the Board's
December 16, 2004, adoption of rule changes (effective
July 1, 2005) that implement section 216 of the Fair and
Accurate Credit Transactions Act of 2003, and amend the
Interagency Guidelines Establishing Standards for Safeguarding Customer Information. See the Board's December 21, 2004, press release. To address the risks associated
with identity theft, financial institutions are required to
make modest adjustments to their information security
programs to develop, implement, maintain, and monitor, as
part of their existing information security program, appropriate measures to properly dispose of consumer and customer information derived from credit reports. Each financial institution must contractually require its service
providers to develop appropriate measures for the proper
disposal of the institution's consumer and customer information and, when warranted, monitor its service providers to confirm that they have satisfied their contractual
obligations.
412
Federal Reserve Bulletin • Summer 2005
The sections have also been revised to include the
Board's March 21, 2005, adoption of the jointly issued
Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer
Notice. See the Board's March 23, 2005, press release.
Financial institutions are to develop and implement a
response program designed to address incidents of unauthorized access to sensitive customer information, maintained by the institution or its service provider, that could
result in substantial harm or inconvenience to the customer.
Each financial institution has the flexibility to design a
risk-based response program tailored to the size, complexity, and nature of its operations. Customer notice is a key
feature of an institution's response program. See Regulation H, appendix D-2, supplement A (12 CFR 208,
appendix D-2, supplement A). The examination objectives,
examination procedures, and the internal control questionnaire have been updated to incorporate or reference the
rule changes and the interagency guidance.
6. Interagency Advisory on the Confidentiality of the
Supervisory
Rating and Other Nonpublic
Supervisory
Information. The February 28, 2005, advisory reminds
banking organizations of the statutory prohibitions on the
disclosure of supervisory ratings and other confidential
supervisory ratings to third parties. See SR letter 05-4.
7. Customer Identification
Programs. The "Private
Banking" section has been revised to incorporate new and
enhanced statutory requirements of the USA Patriot Act
(the act). The requirements are designed to prevent, detect,
and prosecute money laundering and terrorist financing.
For banking organizations, the act's provisions are implemented through regulations issued by the U.S. Department
of the Treasury (31 CFR 103). Section 326 of the USA
Patriot Act (codified in the BSA at 31 U.S.C. 5318)(/)
requires financial institutions to have customer identification programs, that is, programs to collect and maintain
certain records and documentation on customers. Institutions should also develop and use identity verification
procedures to ensure the identity of customers. See
SR letter 04-13, which describes the BSA examination
procedures for customer identification programs; examiners should follow these procedures when evaluating compliance with the regulation. See also SR letters 03-17 and
01-29. Relevant interagency interpretive guidance, in a
question-and-answer format, addresses the customer identification rules. See SR letter 05-9.
A m o r e detailed summary of changes is included
with the update package. Copies of the new supplement were shipped directly by the publisher to the
Reserve Banks for distribution to examiners and other
System staff members. The public may obtain
the Manual
and the updates (including pricing
information) f r o m Publications Fulfillment, Mail
Stop 127, Board of Governors of the Federal Reserve
System, 20th and C Streets, N.W., Washington, D C
20551; telephone (202) 452-3244; or send a facsimile to (202) 728-5886. The Manual
is also
available on the B o a r d ' s public w e b site at
www.federalreserve.gov/boarddocs/supmanual/.
AGENCIES
ANTI-MONEY
MANUAL
RELEASE BANK SECRECY ACT/
LAUNDERING
EXAMINATION
The Federal Financial Institutions Examination
Council (FFIEC) released on June 30, 2005, the Bank
Secrecy Act/Anti-Money
Laundering
Examination
Manual (FFIEC BSA/AML Examination
Manual).
The m a n u a l ' s release marks an important step forward in the effort to ensure the consistent application
of the B S A to all banking organizations, including
commercial banks, savings associations, and credit
unions.
The FFIEC BSA/AML Examination Manual was
developed by the Board of Governors of the Federal Reserve System (Board), the Federal Deposit
Insurance Corporation (FDIC), the National Credit
Union Administration (NCUA), the Office of the
Comptroller of the Currency (OCC), and the Office
of Thrift Supervision (OTS) (collectively referred
to as the federal banking agencies) in collaboration
with the Financial Crimes Enforcement Network
(FinCEN), the delegated administrator of the BSA.
In addition, through the Conference of State Bank
Supervisors, the state banking agencies played a
consultative role. The Office of Foreign Assets
Control (OFAC) collaborated on the development
of core overview and examination procedures
addressing compliance with regulations enforced
by OFAC.
The FFIEC
BSA/AML
Examination
Manual
emphasizes a banking organization's responsibility
to establish and implement risk-based policies,
procedures, and processes to comply with the B S A
and safeguard its operations from money laundering and terrorist financing. The B S A / A M L examination procedures will guide examiners through
an evaluation of a banking organization's BSA/
A M L compliance program regardless of its size
or business lines. The majority of the FFIEC BSA/
AML
Examination
Manual
provides narrative
guidance and resource materials rather than specific examination procedures. This includes an
overview of the B S A requirements and the federal
banking agencies' supervisory expectations in this
area.
The Board, the FDIC, the OCC, the OTS, and
FinCEN have planned a series of events to brief the
banking industry and field examiners on the FFIEC
BSA/AML Examination Manual. These events include
nationwide conference calls, regional outreach meetings, and a simulcast via the Internet. Banking organizations are encouraged to participate in these voluntary sessions.
Announcements
ONLINE FINANCIAL
EDUCATION
PROJECT
The Federal Reserve Board launched on July 26,
2005, a new online project with USA Today that
teaches middle-school and high-school students about
economics and personal finances by challenging them
to construct a newspaper front page.
Students are provided with instructions and a
template of the front page of The Fed Today. Over
four weeks, they are expected to consult the Federal Reserve's recently redesigned education web
site—FederalReserveEducation.org—for information
needed to complete all of the elements of the page,
including headlines, photos, captions, graphs, and
statistics. T h e project helps teachers meet national
and state academic contcnt standards for highschool economics and personal finance courses.
The online project may be found on the web at
www.usatoday.com/educate/federalreserve/
index__new2. html.
MINUTES OF THE BOARD'S
MEETINGS
DISCOUNT
RATE
The Federal Reserve Board released on April 19,
2005, the minutes of its discount rate meetings from
February 7, 2005, through March 22, 2005.
On May 31, 2005, the Board released the minutes
of its discount rate meetings from April 4, 2005,
through May 3, 2005.
On July 28, 2005, the Board released the minutes
of its discount rate meetings from May 23, 2005,
through June 30, 2005.
MINUTES OF THE FEDERAL
COMMITTEE
OPEN MARKET
The Federal Reserve Board and the Federal Open
Market Committee, released on May 24, 2005, the
minutes of the Committee meeting held on May 3,
2005.
On July 21, 2005, the Federal Reserve Board and
the Federal Open Market Committee released
the minutes of the Committee meeting held on
June 29-30, 2005.
The minutes for each regularly scheduled meeting
of the Committee are made available three weeks
after the day of the policy decision and subsequently
are published in the Board's Annual Report. The
summary descriptions of economic and financial conditions contained in the minutes are based solely on
the information that was available to the Committee
at the time of the meetings.
413
F O M C minutes can be viewed on the Board's w e b
site at www.federalreserve.gov/fomc.
CONSUMER
ADVISORY
COUNCIL
MEETING
The Board of Governors of the Federal Reserve System announced on June 3, 2005, that the Consumer
Advisory Council would hold its next meeting on
Thursday, June 23, 2005. The meeting, which was
open to public observation, took place at the Federal
Reserve Board's offices in Washington, D.C., in Dining Room E on the Terrace level in the Board's
Martin Building.
The Council's function is to advise the Board on
the exercise of its responsibilities under various consumer financial services laws and on other matters on
which the Board seeks its advice. Time permitting,
the Council planned to discuss the following topics:
• Truth in Lending Act
• Information security
• Community Reinvestment Act and community
development
Reports by committees and other matters initiated
by the Council members were also discussed. The
Board invited comments from the public on any of
these matters.
BOARD
SEEKS NOMINATIONS
APPOINTMENTS
TO CONSUMER
FOR
ADVISORY
COUNCIL
The Federal Reserve Board announced on June 15,
2005, that it is seeking nominations for appointments
to its Consumer Advisory Council.
The Council advises the Board on the exercise of
its responsibilities under various consumer financial
services laws and on other matters on which the
Board seeks advice. The group meets in Washington, D.C., three times a year.
Ten new members will be appointed to serve threeyear terms beginning in January 2006. Nominations
should include a resume and the following information about nominees:
• complete name, title, mailing address, e-mail
address, telephone, and fax numbers;
• organization's name, brief description of organization, address, telephone, and fax numbers;
• past and present positions, dates, and description
of responsibilities;
414
Federal Reserve Bulletin • Summer 2005
• knowledge, interests, or experience related to
community reinvestment, consumer protection regulations, consumer credit, or other consumer financial
services; and
• positions held in community and banking associations, councils, and boards.
Nominations should also include the nominator's
complete name, organization name, title, mailing
address, e-mail address, and telephone and fax
numbers.
Letters of nomination with complete information,
including a resume for each nominee, were to be
received by August 26, 2005.
ENFORCEMENT
Assessments
ACTIONS
of Civil Money
Penalties
The Federal Reserve Board announced on April 21,
2005, the issuance of a consent order of assessment
of a civil money penalty against the Irwin Union
Bank, Columbus, Indiana, a state member bank. Irwin
Union Bank, without admitting to any allegations,
consented to the issuance of the order in connection
with its alleged violations of the Board's regulations
implementing the National Flood Insurance Act.
The order requires Irwin Union Bank to pay a civil
money penalty of $22,300, which will be remitted
to the Federal Emergency Management Agency for
deposit into the National Flood Mitigation Fund.
The Federal Reserve Board announced on April 21,
2005, the issuance of a consent order of assessment
of a civil money penalty against The Bank, Warrior,
Alabama, a state member bank. The Bank, without
admitting to any allegations, consented to the issuance of the order in connection with its alleged
violations of the Board's regulations implementing
the National Flood Insurance Act.
The order requires The Bank to pay a civil money
penalty of $46,050, which will be remitted to the
Federal Emergency Management Agency for deposit
into the National Flood Mitigation Fund.
The Federal Reserve Board announced on June 9,
2005, the issuance of a consent order of assessment
of a civil money penalty against the Bank of Pontiac,
Pontiac, Illinois, a state member bank. The Bank of
Pontiac, without admitting to any allegations, consented to the issuance of the order in connection with
its alleged violations of the Board's regulations
implementing the National Flood Insurance Act.
The order requires the Bank of Pontiac to pay
a civil money penalty of $32,550, which will be
remitted to the Federal Emergency Management
Agency for deposit into the National Flood Mitigation Fund.
The Federal Reserve Board announced on June 9,
2005, the issuance of a consent order of assessment
of a civil money penalty against the First Bank and
Trust Company, Lebanon, Virginia, a state member
bank. The First Bank and Trust Company, without
admitting to any allegations, consented to the issuance of the order in connection with its alleged
violations of the Board's regulations implementing
the National Flood Insurance Act.
The order requires the First Bank and Trust Company to pay a civil money penalty of $7,750, which
will be remitted to the Federal Emergency Management Agency for deposit into the National Flood
Mitigation Fund.
The Federal Reserve Board announced on July 6,
2005, the issuance of a consent order of assessment
of a civil money penalty against the Frontier Bank,
Everett, Washington, a state member bank. Frontier
Bank, without admitting to any allegations, consented to the issuance of the order in connection with
its alleged violations of the Board's regulations
implementing the National Flood Insurance Act.
The order requires Frontier Bank to pay a civil
money penalty of $12,500, which will be remitted
to the Federal Emergency Management Agency for
deposit into the National Flood Mitigation Fund.
The Federal Reserve Board announced on July 6,
2005, the issuance of a consent order of assessment
of a civil money penalty against the Security Bank,
Ralls, Texas, a state member bank. Security Bank,
without admitting to any allegations, consented to the
issuance of the order in connection with its alleged
violations of the Board's regulations implementing
the National Flood Insurance Act.
The order requires Security Bank to pay a civil
money penalty of $3,250, which will be remitted
to the Federal Emergency Management Agency for
deposit into the National Flood Mitigation Fund.
Written Agreements
The Federal Reserve Board announced on April 25,
2005, the execution of a written agreement by and
between the Civitas BankGroup, Inc., Franklin, Tennessee, and the Federal Reserve Bank of Atlanta.
Announcements
The Federal Reserve Board announced on April 29,
2005, the execution of a written agreement by and
among Banco Industrial de Venezuela, C.A., Caracas,
Venezuela; Banco Industrial de Venezuela, C.A. New
York Agency, New York, New York; Banco Industrial de Venezuela, C.A. Miami Agency, Miami,
Florida; the New York State Banking Department,
New York, New York; the State of Florida Office of
Financial Regulation, Tallahassee, Florida; the Federal Reserve Bank of New York; and the Federal
Reserve Bank of Atlanta.
The Federal Reserve Board announced on July 14,
2005, the execution of a written agreement by and
among the First Citizens Bank of Butte, Butte,
Montana; the Montana Division of Banking and
Financial Institutions; and the Federal Reserve Bank
of Minneapolis.
Final Decisions and Orders
The Federal Reserve Board announced on May 13,
2005, the issuance of a final decision and order of
prohibition against Donald K. McKinney, a former
vice president of American National Bank, Wichita
Falls, Texas. The order, the result of an action brought
by the Office of the Comptroller of the Currency,
prohibits Mr. McKinney from participating in the
conduct of the affairs of any financial institution or
holding company.
The Federal Reserve Board announced on June 7,
2005, the issuance of a final decision and cease and
desist order against eighteen former institutionaffiliated parties of First Western Bank, Cooper City,
Florida, and an order of prohibition against Carl V.
Thomas, one of the former institution-affiliated parties. The orders were the result of an action brought
by the Board to address violations of the Change
in Bank Control Act in connection with the respondents' acquisition of shares of First Western Bank in
1997 and 1998.
The Federal Reserve Board announced on June 17,
2005, the issuance of an order of prohibition against
Frank G. Caton, previously branch manager of the
former Farmers Bank of Maryland, Annapolis,
Maryland.
Mr. Caton, without admitting to any allegations,
consented to the issuance of the order based on his
alleged participation in violations of law and breaches
of fiduciary duty to the bank and its customers in
connection with embezzlement of funds and falsification of the b a n k ' s books and records.
415
The Federal Reserve Board announced on June 28,
2005, the issuance of an order of prohibition and
order to cease and desist against Matthew T.
Stromgren, a former financial adviser at J.R Morgan
Chase and Company, New York, New York.
Mr. Stromgren, without admitting to any allegations, consented to the issuance of the order based
on his alleged participation in violations of law and
breaches of fiduciary duty to the bank and its customers in connection with embezzlement of funds, forgery, and falsification of the bank's books and records.
The order requires Mr. Stromgren to make restitution
to the bank in the amount of $31,000.
The Federal Reserve Board announced on July 21,
2005, the issuance of an order of prohibition against
Stefanie Milmine, a former employee of Fifth Third
Bank in Grand Rapids, Michigan.
Ms. Milmine, without admitting to any allegations,
consented to the issuance of the order based on her
alleged participation in violations of law and breaches
of fiduciary duty in connection with embezzlement of
funds at the bank, as well as similar violations and
breaches at other banks.
The Federal Reserve Board announced on
August 1, 2005, the issuance of a cease and desist
order and order of assessment of a civil money penalty against Frank French, a former institutionaffiliated party of the Montana State Bank, Plentywood, Montana.
Mr. French, without admitting to any allegations,
consented to the issuance of the order for alleged
violations of the Board of Governors' Regulation O,
which governs loans to executive officers, directors,
and principal shareholders of member banks. The
order also requires Mr. French to pay a civil money
penalty of $10,000.
Termination of Enforcement Actions
The Federal Reserve Board announced on April 21,
2005, the termination of the enforcement actions
listed below. The Federal Reserve's enforcement
action web site, www.federalreserve.gov/boarddocs/
enforcement, reports the terminations as they occur.
• Bank of the Orient, San Francisco, California
Cease and desist order dated May 7, 2002
Terminated April 18, 2005
• Gold Bank, Leawood, Kansas, and Gold Banc
Corporation, Inc., Leawood, Kansas
Written agreement dated August 26, 2003
Terminated April 19, 2005
416
Federal Reserve Bulletin • Summer 2005
CHANGES IN BOARD STAFF
Herbert A . Biern, senior associate director, in the
Division of Banking Supervision and Regulation,
retired f r o m the Board on M a y 13, 2005, after twentyfive years of service.
The Board of Governors approved on May 4, 2005,
the appointment of Robin L. Lumsdaine as associate
director f o r Quantitative Risk Management, Division
of Banking Supervision and Regulation. Ms. Lumsdaine will now report to Deputy Director Stephen M.
H o f f m a n . In her new position, Ms. Lumsdaine will
establish a Quantitative Risk M a n a g e m e n t section
that will w o r k with Reserve Banks and other financial
market authorities to implement Basel II and oversee
advanced risk-management and risk-measurement
techniques.
Ms. L u m s d a i n e recently served as director, Global
Real Rates and Agency Strategist and Global Econometric Strategist for Deutsche Bank. Previously, she
was a senior economist at the White H o u s e Council
of E c o n o m i c Advisers and a professor of economics
at B r o w n University. Earlier in her career, she was
an assistant professor at Princeton University.
Ms. L u m s d a i n e holds a BS in mathematics f r o m
Brown University and a master's degree and doctorate in e c o n o m i c s f r o m Harvard University.
After forty-one years of service with the Federal
Reserve Board, including thirty-four years as a m e m ber of the B o a r d ' s official staff, Mr. Edward Ettin
retired on July 29, 2005.
The B o a r d of Governors approved on June 16,
2005, the following officer actions in the Division of
Research and Statistics in conjunction with a reorganization of the division:
Patrick M. Parkinson was promoted to deputy
director. H e will have oversight responsibilities for
the micro-financial functions of the division and play
a leadership role throughout the Board and the System on issues relating to financial regulations and
financial stability. Mr. Parkinson joined the Board in
1980 as an economist in the Division of International
Finance and moved to the Division of Research and
Statistics in 1984. In 1986 he joined the Division of
Banking Supervision and Regulation as the manager
of the Financial Analysis section. H e returned to
Research and Statistics in 1988 as chief of the Capital
Markets section. He was promoted to assistant director in 1989 and to associate director in 1994. Mr. Par-
kinson received his PhD in economics from the University of Wisconsin-Madison.
Myron L. Kwast was promoted to senior associate
director. He will share responsibility with Mr. Parkinson for the Division's work on issues related to
financial regulations and financial stability, with a
special focus on banking analysis and competition
policy. Mr. Kwast joined the Board in 1978 as an
economist in the Financial Studies section. H e was
promoted to chief of that section in 1985, to assistant
director in 1987, and to associate director in 1994.
Mr. Kwast received his P h D in economics f r o m the
University of Wisconsin-Madison.
A. Patricia White was promoted to associate director for the Risk Analysis, Microstatistics, and Financial Reports sections. Ms. White joined the Board in
1979 as an economist in the Financial Structure section. She served as special assistant to Governor
Wallich in 1982 and then returned to the Division of
Research and Statistics. She was promoted to chief
of the newly created Trading Risk Analysis section
in 1993, to assistant director in 2000, and to deputy
associate director in 2004. Ms. White received her
PhD in economics f r o m Yale University.
S. W a y n e Passmore was promoted to deputy associate director of the Financial Studies and the Financial Structure sections. In 1984 Mr. Passmore began
his career at the Federal Reserve Bank of New York.
H e worked briefly at the Board as a staff economist in
1987 before taking a management position with the
Federal H o m e Loan Bank in San Francisco. Mr. Passmore returned to the Board in 1990 as a senior
economist in the Capital Markets section. He was
promoted to chief of the newly formed Household
and Real Estate Finance section in 1997 and, in 2000,
was promoted to assistant director and chief.
Mr. Passmore received a PhD in economics from the
University of Michigan.
Janice Shack-Marquez was promoted to deputy
associate director. She will continue to provide oversight for the Research Library, the Automation and
Research Computing (ARC) section, and Administration. Ms. Shack-Marquez joined the Board in 1986 as
an economist in the Economic Activity section (now
M a c r o e c o n o m i c Analysis). She was promoted to
chief of the A R C section in 1994 and to assistant
director in 1997. In 2001 she assumed responsibility
for the Research Library. Ms. Shack-Marquez
received her P h D in public policy analysis from the
University of Pennsylvania.
Robin A. Prager was appointed assistant director
and chief of the Financial Structure section.
Ms. Prager joined the Board in 1994 as an economist
Announcements
in the Financial Structure section. She was promoted
to senior economist in 1998 and to chief in 2000.
Before joining the Board, she taught in the business
schools of Vanderbilt University, Boston University,
and the Massachusetts Institute of Technology (MIT).
Ms. Prager received her PhD in economics from
MIT.
Michael S. Cringoli was appointed assistant director and chief of the Automation and Research Computing (ARC) section. Mr. Cringoli began his career
at the Board in 1983 as a computer applications
programmer in the Division of Data Processing. In
1985 he transferred to the Division of Research and
Statistics as part of the new ARC section that
designed and built the original Unix network that
supported the computing work of the division.
Mr. Cringoli was promoted to chief of the ARC
417
section in 2000. Before joining the Board, he worked
as a project planner for the Maryland National Capital Park and Planning Commission and as a manager
with Dames and Moore Engineering Consultants.
Mr. Cringoli received his bachelor's degree in geography from Rutgers University.
Jim Houpt, associate director in the Division of
Banking Supervision and Regulation, retired from the
Board at the end of August after thirty-two years of
service and nearly four years in the United States
Army.
Irene (Shawn) McNulty, senior adviser in the Division of Consumer and Community Affairs, will retire
on September 30, 2005, after more than thirty-three
years of service.
•
418
Legal Developments
ORDERS ISSUED
COMPANY ACT
UNDER BANK HOLDING
O r d e r s I s s u e d U n d e r S e c t i o n 3 of the B a n k H o l d i n g
Company Act
Capital City Bank Group,
Tallahassee,
Florida
Inc.
Capital City Bank
Tallahassee,
Florida
Order A p p r o v i n g the Merger of Bank Holding
Companies, Merger of Banks, and Establishment of
Branches
Capital City Bank Group, Inc. ("Capital C i t y " ) , a financial
holding c o m p a n y within the meaning of the Bank Holding
Company Act ( " B H C A c t " ) , has requested the B o a r d ' s
approval u n d e r section 3 of the B H C Act 1 to merge with
First A l a c h u a Banking Corporation ( " F i r s t A l a c h u a " ) ,
with Capital City as the surviving entity, and thereby
indirectly acquire First A l a c h u a ' s wholly o w n e d subsidiary, First N a t i o n a l B a n k of Alachua ( " F i r s t National
B a n k " ) , both of Alachua, Florida. In addition, Capital
City's subsidiary bank, Capital City Bank, a state m e m b e r
bank, has requested the B o a r d ' s approval under section 18(c) of the Federal Deposit Insurance A c t 2 ( " B a n k
Merger A c t " ) to merge with First National Bank, with
Capital City B a n k as the surviving entity. Capital City
Bank has also applied under section 9 of the Federal
Reserve A c t ( " F R A " ) to retain and operate branches at the
locations of First National B a n k ' s main office and
branches. 3
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (69 Federal Register 71,056 (2004)) and
locally in accordance with the relevant statutes and the
B o a r d ' s R u l e s of Procedure. 4 As required by the B H C Act
and the B a n k Merger Act, reports on the competitive
effects of the mergers were requested f r o m the United
States Attorney General and the appropriate banking agencies. T h e t i m e for filing c o m m e n t s has expired, and the
1.
2.
3.
4.
1 2 U . S . C . § 1842.
12 U.S.C. § 1828(c).
12 U.S.C. § 3 2 1 . These branches are listed in the appendix.
12 C F R 262.3(b).
Board has considered the applications and all c o m m e n t s
received in light of the factors set forth in section 3 of the
B H C Act, the B a n k Merger Act, and the F R A .
Capital City, with total consolidated assets of approximately $2.4 billion, is the 28th largest insured depository
organization in Florida, controlling deposits of approximately $1.4 billion. 5 First Alachua, with total consolidated
assets of approximately $231.8 million, is the 111th largest
insured depository organization in Florida, controlling
deposits of approximately $207 million. On c o n s u m m a t i o n
of the proposal, Capital City would b e c o m e the 26th largest insured depository organization in Florida, controlling
deposits of approximately $1.6 billion, which would represent less than 1 percent of total deposits of insured depository institutions in the state. 6
Competitive
Considerations
Section 3 of the B H C Act and the Bank Merger Act
prohibit the Board f r o m approving a proposal that w o u l d
result in a monopoly or would be in furtherance of an
attempt to monopolize the business of banking in any
relevant banking market. The B H C Act and the B a n k
Merger Act also prohibit the Board f r o m approving a bank
acquisition that would substantially lessen competition in
any relevant banking market unless the anticompetitive
effects of the proposal are clearly outweighed in the public
interest by the probable effect of the proposal in meeting
the convenience and needs of the community to be served. 7
Capital City Bank and First National Bank c o m p e t e
directly in the Gainesville and Palatka banking markets in
Florida. 8 The Board has carefully reviewed the competitive
effects of the proposal in these banking markets in light of
all the facts of record, including the number of competitors
that would remain in the markets, the relative shares of
total deposits in depository institutions in each market
( " m a r k e t d e p o s i t s " ) controlled by Capital City Bank and
5. Asset data are as of D e c e m b e r 31, 2004, and deposit data and
statewide ranking data are as of June 30, 2004. Ranking data are
adjusted to reflect merger and acquisition activity through M a r c h 4,
2005.
6. In this context, the term " i n s u r e d depository i n s t i t u t i o n s "
includes insured c o m m e r c i a l banks, savings banks, and savings
associations.
7. See 12 U.S.C. § 1842(c)(1); 12 U.S.C. § 1828(c)(5).
8. T h e Gainesville banking market is defined as Alachua, Gilchrist,
and Levy Counties. T h e Palatka banking market is defined as P u t n a m
County and the town of Hastings in St. Johns County.
419
First National Bank, 9 the concentration level of market
deposits and the increase in this level as measured by the
Herfindahl-Hirschman Index ( " H H I " ) under the Department of Justice Merger Guidelines ( " D O J Guidelines"), 1 0
and other characteristics of the markets.
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in the Gainesville banking market. This banking market would remain moderately concentrated, and the
post-merger H H I would increase 67 points, to 1,293. Fourteen competitors would remain in the banking market. 1 1
In the Palatka banking market, the HHI would slightly
exceed DOJ Guidelines on consummation. Capital City
Bank is the fifth largest depository institution in the market, controlling approximately $63.8 million in deposits,
which represent approximately 13.5 percent of market
deposits. First National Bank is the sixth largest depository
institution with deposits of approximately $42.7 million,
which represent approximately 9 percent of market deposits. On consummation of the merger, Capital City Bank
would b e c o m e the largest depository institution in the
market, controlling deposits of approximately $106.5 million, which represent approximately 22.5 percent of market
deposits. T h e HHI would increase 242 points, to 1,808.
In reviewing the competitive effects of this proposal, the
Board has considered that several factors appear to mitigate the likely effect of the proposal on competition in the
Palatka banking market. The Palatka banking market has
five commercial banking organizations and one thrift organization that would remain in the market after consummation. Two commercial bank competitors each would con-
9. Deposit a n d market share data are as of June 30, 2004, and are
based on calculations in which the deposits of thrift institutions are
included at 5 0 percent. T h e Board previously has indicated that thrift
institutions h a v e b e c o m e , or have the potential to b e c o m e , significant
competitors of c o m m e r c i a l banks. See, e.g.. Midwest Financial Group,
75 Federal Reserve Bulletin 3 8 6 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the market share calculation on a 50 percent
weighted basis. See, e.g.. First Hawaiian, Inc., 11 Federal Reserve
Bulletin 5 2 (1 9 9 1 ) .
10. U n d e r the D O J Guidelines, a market is considered moderately
concentrated if the post-merger H H I is between 1000 and 1800, and a
market is c o n s i d e r e d highly concentrated if the post-merger H H I is
more than 1800. T h e De p a r t m e n t of Justice ( " D O J " ) has informed the
Board that a b a n k merger or acquisition generally will not be challenged (in the a b s e n c e of other factors indicating anticompetitive
effects) unless the post-merger HHI is at least 1800 and the merger
increases the H H I by m o r e than 200 points. T h e D O J has stated that
the higher-than-normal H H I thresholds for screening bank mergers
and acquisitions for anticompetitive effects implicitly recognize the
competitive e f f e c t s of limited-purpose and other nondepository financial entities.
11. Capital City Bank operates the seventh largest depository institution in the market, controlling deposits of approximately $148.1 million, which represent approximately 5.5 percent of market deposits.
First National B a n k operates the fifth largest depository institution in
the market, controlling deposits of approximately $164.3 million,
which represents approximately 6.1 percent of market deposits. On
c o n s u m m a t i o n o f the proposal, Capital City Bank would b e c o m e the
third largest depository institution in the market, controlling deposits
of approximately $312.4 million, which represents approximately
11.6 percent of m a r k e t deposits.
trol approximately 20 percent of market deposits and local
branch networks as large as Capital City's.
The Board also has considered that this banking market
has two active community credit unions in Palatka that
offer a wide range of consumer banking products. The First
Coast Community Credit Union controls $45.9 million in
deposits in the Palatka banking market, and the Putnam
County Federal Credit Union controls $22.5 million in
deposits in the market. Almost all residents in the Palatka
banking market are eligible for membership in each credit
union, and both credit unions operate street-level branches
with drive-up service lanes. The Board concludes that
these credit unions exert a competitive influence that mitigates, in part, the potential anticompetitive effects of the
proposal. 1 2
The Board concludes that the foregoing considerations,
including the presence of two accessible credit unions, the
number and size of competitors that would remain in the
Palatka banking market after consummation, and other
factors, mitigate the transaction's potential anticompetitive
effects. The DOJ has advised the Board that consummation
of the proposal is not likely to have a significantly adverse
competitive effect in the Palatka banking market. T h e
Board also has received no objections to the proposal f r o m
the other federal banking agencies.
Based on all the facts of record, the Board concludes that
consummation of the proposed transaction would not likely
result in a significantly adverse effect on competition or on
the concentration of banking resources in any relevant
banking market and that competitive factors are consistent
with approval.
Financial and Managerial
Considerations
Resources and Supervisory
In reviewing the proposal under section 3 of the BHC Act,
the Bank Merger Act, and the FRA, the Board has carefully considered the financial and managerial resources and
future prospects of the companies and depository institutions involved in the proposal and certain other supervisory
factors. The Board has considered these factors in light of
all the facts of record including, among other things, confidential reports of examination and other supervisory information received f r o m the federal and state banking supervisors of the organizations involved, publicly reported and
other financial information, and information provided by
the applicants.
12. T h e Board previously has considered the competitiveness of
certain active credit unions as a mitigating factor. See F.N.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway Bank & Trust
Co., 90 Federal Reserve Bulletin 547 (2004). With deposits of these
credit unions included at 50 percent, Capital City Bank would be the
fifth largest of nine depository institutions in the market, with approximately 12.6 percent of market deposits, and First National Bank
would be the sixth largest depository institution in the market, controlling approximately 8.4 percent of market deposits. On c o n s u m m a t i o n
of the proposal, Capital City Bank would be the largest depository
institution in the market with deposits of approximately $106.5 million or approximately 21 percent of market deposits. The H H I would
increase 211 points, to 1,598.
420
Federal Reserve Bulletin • S u m m e r 2005
In evaluating financial factors in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of areas, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial condition of the combined organization, including its
capital position, asset quality, and earnings prospects and
the impact of the proposed funding of the transaction.
Based on its review of these factors, the Board finds that
Capital City has sufficient financial resources to effect
the proposal. The transaction would be effected through
a combination of cash and an exchange of shares. Capital
City would fund the cash consideration by issuing trust
preferred securities. Capital City and Capital City Bank are
well capitalized and would remain so on consummation of
the proposal.
The Board also has evaluated the managerial resources
of the organizations involved and of the proposed combined organization. The Board has reviewed the examination records of Capital City, First Alachua, and their subsidiary depository institutions, including assessments of
their management, risk-management systems, and operations. In addition, the Board has considered its supervisory
experience and that of the other relevant banking supervisory agencies with the organizations and their records of
compliance with applicable banking law. The Board also
has considered Capital City's plans to integrate First Alachua and First National Bank and the proposed management, including the risk-management systems, of the
resulting organization.
Based on all the facts of record, the Board has concluded
that the financial and managerial resources and future
prospects of the organizations and the other supervisory factors involved are consistent with approval of the
proposal.
Convenience
and Needs and Other Considerations
In acting on the proposal, the Board also must consider its
effects on the convenience and needs of the communities to
be served and take into account the records of the relevant
insured depository institutions under the Community Reinvestment Act ("CRA"). 1 3 Capital City Bank received an
overall rating of "satisfactory" at its most recent CRA
performance evaluation by the Federal Reserve Bank of
Atlanta, as of November 17, 2003. First National Bank also
received a "satisfactory" rating at its most recent CRA
performance evaluation by the Office of the Comptroller of
the Currency, as of October 7, 2002. The Board notes that
the proposal would provide the combined entity's customers with access to a broader array of products and services
13. 1 2 U . S . C . § 2 9 0 1 e t s e q .
in expanded service areas, including access to expanded
branch and automated teller machine networks. Based on
all the facts of record, the Board concludes that the considerations relating to the convenience and needs of the communities to be served and the CRA performance records
of the institutions involved are consistent with approval of
this proposal.
As previously noted, Capital City also has applied under
section 9 of the FRA to establish branches at the locations
listed in the appendix. The Board has assessed the factors
it is required to consider when reviewing an application
under section 9 of the FRA, including section 208.6 of the
Board's Regulation H, which implements section 9(4) of
the FRA, and finds those factors to be consistent with
approval. 14
Conclusion
Based on the foregoing and all facts of record, the Board
has determined that the applications should be, and hereby
are, approved. In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the B H C Act, the Bank
Merger Act, and the FRA. The Board's approval is specifically conditioned on compliance by Capital City with the
conditions imposed in this order, the commitments made to
the Board in connection with the applications, and receipt
of all other regulatory approvals. For puiposes of this
action, the conditions and commitments are deemed to be
conditions imposed in writing by the Board in connection
with its findings and decision herein and, as such, may be
enforced in proceedings under applicable law.
The proposed transactions may not be consummated
before the fifteenth calendar day after the effective date of
this order, or later than three months after the effective date
of this order, unless such period is extended for good cause
by the Board or the Federal Reserve Bank of Atlanta,
acting pursuant to delegated authority.
By order of the Board of Governors, effective April 28,
2005.
V o t i n g f o r this action: C h a i r m a n G r e e n s p a n , V i c e C h a i r m a n F e r g u son, and G o v e r n o r s G r a m l i c h , Bies, O l s o n , B e r n a n k e , and K o h n .
R O B E R T DEV. FRIERSON
Deputy Secretary of the Board
Appendix
Addresses of Main Office and Branches in Florida to be
Acquired by Capital City
Alachua
15000 N.W. 140th Street
14. 12 U.S.C. § 3 2 2 ; 12 C F R 2 0 8 . 6 ( b ) .
Legal Developments
Gainesville
4000 N. M a i n Street
6360 N.W. 13th Street
4040 N.W. 16th Boulevard
4041 N.W. 37th Place, Suite A
Hastings
207 N. Main Street
High Springs
660 N.E. Santa Fe Boulevard
Jonesville
14009 W. Newberry Road
Newberry
24202 W. Newberry Road, Suite F
C-B-G, Inc.
West Liberty,
Iowa
Order Approving the Acquisition of Shares of a Bank
Holding Company
C-B-G, Inc. ( " C - B - G " ) , a bank holding company within
the meaning of the Bank Holding Company Act ( " B H C
Act"), has requested the Board's approval under section 3
of the B H C Act 1 to acquire up to 24.35 percent of the
voting shares of Washington Bancoip ( " W a s h i n g t o n " ) and
thereby indirectly acquire an interest in Washington's subsidiary bank, Federation Bank, both of Washington, Iowa.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(69 Federal Register 78,028 (2004)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in section 3 of the B H C Act.
C-B-G, with consolidated assets of approximately
$189 million, is the 63rd largest depository organization
in Iowa, controlling deposits of $160 million, which represent less than 1 percent of total deposits of insured depository institutions in Iowa ("state deposits"). 2 Washington, with total consolidated assets of $106 million, is the
154th largest depository organization in Iowa, controlling
$75 million in deposits. If C-B-G were deemed to control
Washington on consummation of the proposal, C-B-G
would become the 43rd largest depository organization in
Iowa, controlling approximately $235 million in deposits,
which represents 1 percent of state deposits.
1. 1 2 U . S . C . § 1 8 4 2 .
2. Asset data are as of D e c e m b e r 31, 2004. Statewide deposit
and ranking data are as of June 30, 2004. Deposit data reflect the total
of the deposits repotted by each organization's insured depository
institutions in their Consolidated Reports of Condition and I n c o m e
or Thrift Financial Reports. In this context, insured depository institutions inciude c o m m e r c i a l banks, savings banks, and savings
associations.
421
The Board received comments f r o m Washington and
a local resident objecting to the proposal and expressing
concern that the proposal would result in C - B - G controlling and potentially harming Washington. 3 T h e Board has
considered carefully these comments in light of the factors
that the Board must consider under section 3 of the B H C
Act.
The Board previously has stated that the acquisition of
less than a controlling interest in a bank or bank holding
company is not a normal acquisition for a bank holding
company. 4 However, the requirement in section 3(a)(3) of
the B H C Act that the B o a r d ' s approval be obtained before
a bank holding company acquires more than 5 percent of
the voting shares of a bank suggests that the Congress
contemplated the acquisition by bank holding companies
of between 5 percent and 25 percent of the voting shares of
banks. 5 On this basis, the Board previously has approved
the acquisition by a bank holding company of less than a
controlling interest in a bank or bank holding company. 6
C-B-G has indicated that it does not propose to control
or exercise a controlling influence over Washington or
Federation Bank. C-B-G has agreed to abide by certain
commitments previously relied on by the Board in determining that an investing bank holding company would not
be able to exercise a controlling influence over another
bank holding company for purposes of the B H C Act. 7 For
example, C-B-G has committed not to exercise or attempt
to exercise a controlling influence over the management or
policies of Washington or any of its subsidiaries; not to
seek or accept representation on the board of directors of
Washington or any of its subsidiaries; and not to have any
director, officer, employee, or agent interlocks with Washington or any of its subsidiaries. C-B-G also has committed
not to attempt to influence the dividend policies, loan
decisions, or operations of Washington or any of its subsidiaries. The Board notes that the B H C Act prohibits C - B - G
from acquiring additional shares of Washington or attempt-
3. Washington requested a private meeting with C - B - G about the
proposal. U n d e r the B o a r d ' s Rules of Procedures, the Reserve B a n k
may arrange a private meeting between a protestant and the applicant for the purposes of clarifying and narrowing issues and resolving differences when both parties agree to such a meeting. 12 C F R
262.25(c). T h e parties ultimately declined the invitation of the Federal
Reserve B a n k of Chicago to participate in a private meeting.
4. See, e.g., Brookline Bancorp, MHC, 86 Federal Reserve Bulletin
52 (2000) ("Brookline")',
North Fork Bancorporation,
Inc., 81 Federal Reserve Bulletin 734, 7 3 5 (1995) ( " N o r t h F o r k " ) ; First Piedmont
Corp., 59 Federal Reserve Bulletin 456, 4 5 7 (1973).
5. 12 U.S.C. § 1842(a)(3).
6. S&T Bancorp,
Inc., 91 Federal Reserve Bulletin 74 (2005)
(acquisition of up to 24.9 percent of the voting shares of a bank
holding c o m p a n y ) ; Brookline
(acquisition of up to 9.9 percent of
the voting shares of a bank holding c o m p a n y ) ; GB Bancorporation, 83 Federal Reserve Bulletin 115 (1997) (acquisition of u p to
24.9 percent of the voting shares of a bank).
7. See, e.g., S&T Bancorp; Brookline; FleetBoston Financial Corp.,
86 Federal Reserve Bulletin 751, 7 6 6 (2000). T h e c o m m i t m e n t s are
set forth in the appendix. Washington also has expressed concern that
C - B - G might in the future seek relief f r o m some of these c o m m i t ments. A n y such request would be evaluated by the Board in light of
all facts and circumstances at that time.
422
F e d e r a l Reserve Bulletin • S u m m e r 2 0 0 5
ing to exercise a controlling influence over Washington
without the Board's prior approval.
The Board has adequate supervisory authority to monitor compliance by C-B-G with its commitments and can
take enforcement action against C-B-G if it violates any of
the commitments. 8 The Board also has authority to initiate
a control proceeding against C-B-G if facts presented later
indicate that C-B-G or any of its subsidiaries or affiliates in
fact controls Washington for purposes of the BHC Act. 9
Based on these considerations and all other facts of record,
the Board has concluded that C-B-G would not acquire
control of, or have the ability to exercise a controlling
influence over, Washington through the proposed acquisition of voting shares. 10
Competitive
and Convenience
and Needs Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be
in furtherance of any attempt to monopolize the business of
banking in any relevant banking market. Section 3 also
prohibits the Board from approving a proposal that would
substantially lessen competition in any relevant banking
market, unless the Board finds that the anticompetitive
effects of the proposal clearly are outweighed in the public interest by the probable effect of the proposal in meeting the convenience and needs of the community to be
served. 11
The Board previously has stated that one company need
not acquire control of another company to lessen competition between them substantially. 12 C-B-G and Washington,
however, do not compete directly in any relevant banking market. Based on all the facts of record, the Board
has concluded that consummation of the proposal would
have no significant adverse effect on competition or on the
concentration of banking resources in any relevant banking
market and that competitive factors are consistent with
approval of the proposal.
8. See 12 U.S.C. § 1818(b)(1).
9. See 12 U.S.C. § 1841(a)(2)(C).
10. W a s h i n g t o n asserted that the proposal is inconsistent with the
B o a r d ' s source of strength doctrine. A s explained above, the Board
previously h a s permitted a bank holding c o m p a n y that meets the
requirements of section 3 of the B H C Act to acquire shares of a bank
or bank holding c o m p a n y in a transaction that d o e s not trigger the
B o a r d ' s source of strength regulation.
Washington also expressed concern that the proposal could subject Federation Bank to liability under the cross-guarantee provision
of the Federal Deposit Insurance Act, 12 U.S.C. § 1815(e) ( " F D I
A c t " ) , if a subsidiary bank of C - B - G were to fail or require assistance
f r o m the Federal Deposit Insurance Corporation ( " F D I C " ) . T h e B o a r d
notes that the application of this provision of the FDI Act is a matter
for the F D I C to decide.
11. 12 U.S.C. § 1842(c)(1).
12. T h e B o a r d has f o u n d that noncontrolling interests in directly
competing depository institutions may raise serious questions under
the B H C Act and has concluded that the specific facts of each case
will d e t e r m i n e whether the minority investment in a c o m p a n y would
be anticompetitive. See, e.g., BOK Financial
Corp., 81 Federal
Reserve Bulletin 1052, 1 0 5 3 - 5 4 (1995); Mansura Bancshares,
Inc.,
79 Federal Reserve Bulletin 37, 38 (1993).
In addition, considerations relating to the convenience
and needs of the communities to be served, including
the records of performance of the institutions involved
under the Community Reinvestment Act ("CRA"), 1 3 are
consistent with approval. C-B-G's subsidiary banks each
received "satisfactory" ratings, and Federation Bank
received an "outstanding" rating, at their most recent
evaluations for CRA performance by the FDIC. 1 4
Financial,
Managerial,
and Supervisory
Considerations
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered carefully these factors in light of all
the facts of record, including confidential reports of examination, other confidential supervisory information from the
federal and state banking supervisors of the organizations
involved, publicly reported and other financial information,
information provided by C-B-G, and comments received. 15
In evaluating financial factors in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary depository institutions and significant
nonbanking operations. In this evaluation, the Board considers a variety of areas, including capital adequacy, asset
quality, and earnings performance. In assessing financial
factors, the Board consistently has considered capital adequacy to be especially important. The Board also evaluates
the financial condition of the combined organization on
consummation, including its capital position, asset quality,
and earnings prospects and the impact of the proposed
funding of the transaction. 16
Based on its review of these factors, the Board finds that
C-B-G has sufficient financial resources to effect the proposal. C-B-G and its subsidiary banks currently are well
capitalized and would remain so on consummation of this
proposal. The proposed transaction is structured as a cash
transaction, and the consideration to be received by the
Washington shareholders who are selling their shares to
C-B-G would be funded from issuance of trust preferred
securities.
13. 12 U.S.C. § 2 9 0 1 e t s e q .
14. T h e most recent C R A p e r f o r m a n c e evaluations of C o m m u n i t y
Bank, Muscatine, Iowa, the larger of C - B - G ' s subsidiary banks, and
Wilton Savings Bank, Wilton, Iowa, C - B - G ' s other subsidiary bank,
were as of February 2004 and July 2 0 0 3 respectively. Federation
B a n k ' s most recent C R A p e r f o r m a n c e evaluation was as of August
2004.
15. Washington also expressed concern that C - B - G could seek
access to W a s h i n g t o n ' s confidential records. T h e Board notes that
Iowa law delineates the rights of shareholders to access an Iowa
c o r p o r a t i o n ' s records. See Iowa C o d e § 4 9 0 . 1 6 0 2 .
16. A s previously noted, the current proposal provides that C - B - G
would acquire only up to 24.35 percent of Washington. Under these
circumstances, the financial statements of C - B - G and Washington
would not be consolidated for purposes of Federal Reserve reporting
requirements.
Legal Developments
The Board also has considered the managerial resources
of the organizations involved. The Board has reviewed
the examination records of C-B-G, Washington, and their
subsidiary depository institutions, including assessments of
their management, risk-management systems, and operations. In addition, the Board has considered its supervisory
experiences and those of the other relevant banking agencies with the organizations and their records of compliance
with applicable banking laws. C-B-G, Washington, and
their subsidiary depository institutions are considered well
managed.
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of the organizations
involved in the proposal arc consistent with approval, as
are the other supervisory factors the Board must consider
under the B H C Act.
Other Considerations
Washington has asserted that the proposal would violate an
Iowa statute that requires a bank holding company making
an offer to purchase, directly or indirectly, shares of an
Iowa-chartered bank to extend the same offer to all shareholders of the bank. 1 7 If a bank is wholly owned by a bank
holding company, as in this case, Washington argues that
the same offer must be made to all the shareholders of the
parent holding company. C-B-G, which made an offer only
to some shareholders of Washington, has responded that
the Iowa statute does not apply to the proposal because it
is acquiring shares of a bank holding company, and not a
bank, and that no additional shares of Federation Bank
exist to purchase.
The Board may not approve a proposal that is prohibited
by a valid state law. 1 8 The Board is not, however, the
arbiter of disputes regarding the applicability or meaning
of state corporate law.
The Board has reviewed the state law in this case and the
submissions f r o m C-B-G and Washington regarding the
interpretation of the Iowa statute. In addition, the Board
has consulted with the Iowa Superintendent of Banking
and the Iowa Attorney General's Office.
Based on this review, it appears that the proposed acquisition of Washington shares is not prohibited under state
law and can be consummated without violating state law.
Under C - B - G ' s interpretation, the transaction would be
permitted as structured. Even under Washington's interpretation, C - B - G would be permitted to acquire the shares at
issue if it m a d e a similar offer to all Washington shareholders. Accordingly, state law does not prohibit C - B - G f r o m
acquiring shares of Washington under either interpretation.
The Board conditions its action in this case on C - B - G ' s
compliance with applicable state law. 19 If C-B-G must
17. Iowa C o d e § 5 2 4 . 1 8 0 3 .
18. Whitney National Bank in Jefferson Parish v. Bank of New
Orleans and Trust Co., 3 7 9 U.S. 411 (1965).
19. See also Centra! Pacific Financial Corp., 9 0 Federal Reserve
Bulletin 9 3 ( 2 0 0 4 ) ; Brookline
Bancorp, MHC, 86 Federal Reserve
423
offer to purchase and then acquire additional shares of
Washington, further review and approval by the Federal
Reserve may be required under the B H C Act at that time.
Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the B H C Act and other
applicable statutes. The Board's approval is specifically
conditioned on compliance by C-B-G with the conditions
imposed in this order and all the commitments made to the
Board in connection with the application. For purposes of
this transaction, those conditions and commitments are
deemed to be conditions imposed in writing by the Board
in connection with its findings and decision herein and, as
such, may be enforced in proceedings under applicable
law.
The acquisition of Washington's voting shares may not
be consummated before the fifteenth calendar day after the
effective date of this order, or later than three months after
the effective date of this order, unless such period is
extended for good cause by the Board or the Federal
Reserve Bank of Chicago, acting pursuant to delegated
authority.
By order of the Board of Governors, effective April 26,
2005.
Voting for this action: Chairman Greenspan, V i c e Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
Appendix
In connection with its application to acquire up to
24.35 percent of Washington, C - B - G commits that it will
not, directly or indirectly:
(1) take any action that would cause Washington 1 to
become a subsidiary of C-B-G;
(2) acquire or retain shares that would cause the combined interests of C-B-G and its officers, directors,
and affiliates to equal or exceed 25 percent of the
outstanding voting shares of Washington;
(3) exercise or attempt to exercise a controlling
influence over the management or policies of
Washington;
(4) seek or accept representation on the board of directors of Washington;
Bulletin
Reserve
5 2 ( 2 0 0 0 ) ; Security
Bulletin 6 4 0 (1999).
Pecos
Bancshares,
Inc.,
85 Federal
1. All references to Washington in these commitments include any
subsidiary of Washington.
424
F e d e r a l R e s e r v e Bulletin • S u m m e r 2 0 0 5
(5) have or seek to have any representative serve as an
officer, agent, or employee of Washington;
(6) propose a director or slate of directors in opposition to a nominee or slate of nominees proposed
by the management or board of directors of
Washington;
(7) solicit or participate in soliciting proxies with
respect to any matter presented to the shareholders
of Washington;
(8) attempt to influence the dividend policies or practices; the loan, credit, or investment decisions
or policies; the pricing of services; any personnel
decisions; any operations activities, including the
location of any offices or branches or their hours of
operation; or any similar activities or decisions of
Washington;
(9) dispose or threaten to dispose of shares of Washington in any manner as a condition of specific
action or nonaction by Washington; or
(10) enter into any other banking or nonbanking transactions with Washington, except that C-B-G may
establish and maintain deposit accounts with bank
subsidiaries of Washington, provided that the
aggregate balances of all such accounts do not
exceed $500,000 and that the accounts are maintained on substantially the same terms as those
prevailing for comparable accounts of persons
unaffiliated with Washington.
The PNC Financial Services
Pittsburgh, Pennsylvania
Group,
Inc.
Order Approving the Merger of Bank Holding
Companies
The PNC Financial Services Group, Inc. ( " P N C " ) , a financial holding company within the meaning of the Bank
Holding Company Act ( " B H C Act"), has requested the
Board's approval under section 3 of the B H C Act 1 to
acquire Riggs National Corporation ( " R i g g s " ) , Washington, D.C., and its subsidiary bank, Riggs Bank National
Association ( " R i g g s Bank"), McLean, Virginia. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(69 Federal Register 50,382 (2004)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in section 3 of the B H C Act.
1. 1 2 U . S . C . § 1 8 4 2 .
2. Immediately after the merger of Riggs into P N C , P N C would
contribute all the shares of Riggs Bank to P N C Bancorp, Inc., Wilmington, Delaware, a subsidiary bank holding c o m p a n y of P N C . P N C ' s
lead subsidiary bank, P N C Bank, National Association ( " P N C
B a n k " ) , Pittsburgh, Pennsylvania, then would acquire substantially all
the assets and a s s u m e substantially all the liabilities of Riggs Bank.
This proposed transaction by P N C Bank is subject to approval by
the Office of the Comptroller of the Currency ( " O C C " ) under section 18(c) of the Federal Deposit Insurance Act. 12 U.S.C. § 1828(c).
PNC, with total consolidated assets of approximately
$80 billion, is the 20th largest depository organization in
the United States, controlling deposits of approximately
$52.2 billion, which represent less than 1 percent of the
total deposits of insured depository institutions in the
United States. 3 P N C operates subsidiary insured depository
institutions in Delaware, Florida, Indiana, Kentucky, N e w
Jersey, Ohio, and Pennsylvania.
Riggs, with total consolidated assets of approximately
$6 billion, controls deposits of $3.8 billion through Riggs
Bank, its only subsidiary depository institution. On consummation of this proposal, P N C would become the
19th largest depository organization in the United States,
with total consolidated assets of approximately $85.5 billion and total deposits of $56 billion, which represent less
than 1 percent of the total amount of deposits of insured
depository institutions in the United States.
Interstate
Analysis
Section 3(d) of the B H C Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the h o m e
state of such bank holding company if certain conditions
are met. 4 For purposes of the B H C Act, the home state
of P N C is Pennsylvania, and Riggs's subsidiary bank is
located in Washington, D.C., Maryland, and Virginia. 5
Based on a review of all the facts of record, including a
review of relevant state statutes, the Board finds that all the
conditions for an interstate acquisition enumerated in section 3(d) of the B H C Act are met in this case. 6 Accordingly, based on all the facts of record, the Board is permitted to approve the proposal under section 3(d) of the B H C
Act.
Competitive
Considerations
Section 3 of the B H C Act prohibits the Board from approving a proposal that would result in a monopoly or would be
3. Asset, deposit, and nationwide ranking data are as of D e c e m ber 31, 2004. Deposit data reflect the unadjusted total of the deposits
reported by each organization's insured depository institutions in their
Consolidated Reports of Condition and Income or Thrift Financial
Reports. In this context, insured depository institutions include c o m mercial banks, savings banks, and savings associations.
4. A bank holding c o m p a n y ' s h o m e state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on the later of July 1, 1966, or the date on which the company b e c a m e
a bank holding company. 12 U.S.C. § 1841(o)(4)(C).
5. For purposes of section 3(d), the Board considers a bank to be
located in the stales in which the bank is chartered or headquartered or
operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(1)(A)
and (d)(2)(B).
6. 12 U.S.C. §§ 1842(d)(1)(A) & (B), and (d)(2)(A) & (B). P N C is
adequately capitalized and adequately managed, as defined by applicable law. Riggs Bank has been in existence and operated for the
m i n i m u m period of time required by applicable law. On c o n s u m m a tion of the proposal, P N C would control less than 10 percent of the
total amount of deposits of insured depository institutions in the
United States. All other requirements of section 3(d) would be met in
this case.
Legal Developments
in furtherance of any attempt to monopolize the business of
banking in any relevant banking market. The BHC Act also
prohibits the Board from approving a proposed bank acquisition that would substantially lessen competition in any
relevant banking market, unless the Board finds that the
anticompetitive effects of the proposal clearly are outweighed in the public interest by the probable effect of the
proposal in meeting the convenience and needs of the
community to be served. 7
PNC and Riggs do not compete directly in any relevant
banking market. Accordingly, the Board concludes, based
on all the facts of record, that consummation of the proposal would not have an adverse effect on competition or
on the concentration of banking resources in any relevant
banking market and that competitive factors are consistent
with approval of the proposal.
Financial,
Managerial,
and Supervisory
Considerations
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and banks involved in the proposal and
certain other supervisory factors. In reviewing these factors, the Board has considered, among other things, confidential reports of examination and other supervisory information received from the primary federal supervisors of
the organizations involved in the proposal. In addition, the
Board has consulted with the relevant supervisory agencies, including the OCC and the Federal Deposit Insurance
Corporation ("FDIC"). The Board also has considered
publicly available financial and other information on the
organizations and their subsidiaries, all the information
submitted on the financial and managerial aspects of the
proposal by PNC, and public comment received by the
Board about the financial and managerial resources of PNC
and Riggs.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of areas, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the effect of
the transaction on the financial condition of the applicant
and the target, including their capital positions, asset quality, and earnings prospects and the impact of the proposed
funding of the transaction.
The Board has reviewed these factors carefully in this
case and believes that financial factors are consistent with
approval of this application. The Board notes that PNC and
its subsidiary depository institutions are well capitalized
and would remain so on consummation of the proposal. 8
7. 12 U.S.C. § 1842(c)(1).
8. One c o m m e n t e r questioned the basis for the selection by R i g g s ' s
board of directors of P N C ' s bid f r o m among the competing offers and
425
The Board also finds that PNC has sufficient financial
resources to effect the proposal. 9 The proposed transaction
is structured as a partial share exchange/partial cash purchase of shares, and PNC will use existing cash resources
to fund the cash purchase of shares.
The Board also has considered the managerial resources
of PNC, Riggs, and the banking institutions and nonbanking subsidiaries to be acquired, and the effect of the proposal on these resources. 10 In reviewing this proposal, the
Board has assembled and considered a broad and detailed
record, including substantial confidential and public
information about PNC and Riggs. The Board has carefully
reviewed the examination records of PNC, Riggs, and
their subsidiaries, including assessments of their riskmanagement systems by relevant supervisors. The Board
also reviewed confidential supervisory information on the
policies, procedures, and practices of PNC and Riggs for
complying with the Bank Secrecy Act ("BSA"), and other
anti-money-laundering laws, and has consulted with the
appropriate federal financial supervisory agencies of PNC's
subsidiary banks and Riggs Bank about their records of
compliance with anti-money-laundering laws.
In assessing these matters, the Board notes that PNC is
considered well managed overall. The Board has taken
account of the experience and capability of PNC's senior
management; the enterprise-wide risk-management programs used to identify, measure, and control corporate and
business line risks; and the adequacy of the organization's
internal controls and audit procedures as well as other
management programs and matters. The Board also has
considered PNC's plans for integrating Riggs into the PNC
organization, including the experience of the management
team PNC has named to run the banking operations to be
acquired from Riggs. 11
expressed concern that certain senior m a n a g e m e n t officials of R i g g s
Bank m a y receive excessive severance payments. T h e Board notes
that the transaction may be c o n s u m m a t e d only if approved by the
Riggs shareholders, that information concerning the selection of
P N C ' s bid and the m a n a g e m e n t officials' severance payments has
been disclosed to shareholders, and that P N C would remain well
capitalized on consummation. T h e Board also notes that the price or
consideration received by shareholders is not, by itself, within the
limited statutory factors the Board may consider when reviewing an
application under the B H C Act. See Western Bancshares, Inc. v. Board
of Governors, 4 8 0 F.2d 749 (10th Cir. 1973).
9. T h e c o m m e n t e r expressed concern about P N C ' s disclosure in a
recent filing with the Securities and Exchange Commission that it m a y
have to adjust its tax treatment for certain leveraged leases, based on
an Internal R e v e n u e Service ( " I R S " ) audit of P N C ' s tax returns for
the years 1998 to 2000. P N C has stated in its filing that it believes that
its tax treatment of these leases was appropriate under federal tax law
and that it plans to file an appeal with the IRS. The Board notes that
the IRS and the federal courts, and not the Board, have jurisdiction to
adjudicate compliance with federal tax laws. T h e Board has taken
account of this matter, including the effect of both the current treatment and potential adjustment on the financial resources of P N C .
10. T h e c o m m e n t e r expressed concern about lending by P N C to
unaffiliated payday lenders. P N C stated that neither it nor any of its
subsidiaries currently have any banking or similar financial relationships with any payday lenders.
11. T h e c o m m e n t e r expressed concerns about P N C ' s managerial
record in light of past enforcement actions against the organization,
including enforcement actions by the Department of Justice ( " D O J " ) ,
426
F e d e r a l R e s e r v e Bulletin •
Summer 2005
The Board has taken into account that Riggs Bank
pleaded guilty to a criminal violation of the BSA and paid
a $16 million fine,12 and that Riggs and Riggs Bank were
subject to enforcement actions by the Board and the OCC,
respectively, that included payment by Riggs Bank of a
$25 million civil money penalty for BSA violations. 1 3 The
Board continues to monitor investigations of Riggs and
Riggs B a n k by various U.S. governmental authorities and
is consulting with the DOJ and the O C C about the ongoing
investigations of former and current management officials
of Riggs and its subsidiaries. 1 4
the Federal Reserve Bank of Cleveland ( " R e s e r v e B a n k " ) , and the
O C C . T h e B o a r d previously considered these e n f o r c e m e n t actions in
its order a p p r o v i n g P N C ' s application to acquire United National
Bancorp, Bridgewater, New Jersey (order dated N o v e m b e r 19, 2003)
(the " U n i t e d National O r d e r " ) . As noted in the United National
Order, P N C has developed a new ethics policy and training program,
an enterprise-wide r i s k - m a n a g e m e n t program, and enhanced credit
administration procedures, internal controls, and corporate governance p r o c e d u r e s . The Board notes that the Federal Reserve and the
O C C terminated their respective e n f o r c e m e n t actions with P N C in
September 2 0 0 3 . In addition, the D O J ' s complaint against P N C was
dismissed in June 2004, with the D O J ' s concurrence, after P N C ' s
compliance with the deferred prosecution agreement that P N C and the
DOJ entered into in June 2003. U.S. v. PNC IC.LC Corp., C R I M .
No. 0 3 - M - 1 8 7 (W.D. Pa. June 2, 2003). Based on its review of the
record in this case, the Board hereby reaffirms and adopts the facts and
findings detailed in the United National Order with respect to these
e n f o r c e m e n t matters. See 90 Federal Reserve Bulletin 72, 74 n.9
(2004).
12, See United States of America v. Riggs Bank N.A., Cr. 05-35
( R M U ) . T h e c o m m e n t e r objected to the size of the fine and to other
terms of the plea agreement. T h e Board notes that the United States
District C o u r t for the District of C o l u m b i a , and not the Board, has
jurisdiction t o adjudicate the criminal complaint against Riggs Bank
and that the court has approved the fine amount and the other terms of
Riggs B a n k ' s plea agreement.
13, T h e C o n s e n t Orders entered into in M a y 2004 required Riggs
and Riggs B a n k to improve m a n a g e m e n t and internal controls, in
addition to enhancing compliance with B S A and other anti-moneylaundering requirements and requiring Riggs Bank to pay the $25 million civil m o n e y penalty. T h e Board and the O C C modified their
consent o r d e r s with Riggs and Riggs Bank in January 2005 to reflect
the progress m a d e in fulfilling the requirements of the May 2004
Consent O r d e r s and to add provisions reflecting the most recent
examinations of the institutions. T h e Board notes that the reviews
required by the May 2004 Consent Orders of certain Riggs accounts to
ensure that suspicious activity reports were properly filed have been
completed.
14, As a matter of practice and policy, the Board has generally not
tied consideration of an application or notice to the scheduling or
completion of an investigation if the applicant has an overall satisfactory record of p e r f o r m a n c e and the issues being reviewed can be
resolved in the examination and supervisory process. See 62 Federal
Register 9 , 2 9 0 (1997) (Preamble to the B o a r d ' s Regulation Y). In this
case, as explained above, the Board has also considered the progress
and cooperation shown by Riggs as well as the plans and ability of the
acquiring institution to address these matters. As the Board has
indicated previously, it has broad supervisory authority under the
banking laws to address matters that are found in the examination and
supervisory process. See Citigroup Inc., 91 Federal Reserve Bulletin
2 6 2 (2005). Moreover, many issues are m o r e appropriately and adequately addressed in the supervisory process, where particular matters and violations of law can be identified and addressed specifically,
rather than in the application process, which requires a weighing of
the overall record of the companies involved. The Board further notes
that c o n s u m m a t i o n of the proposed transaction would not impede the
ability of the Congress, the DOJ, or the appropriate federal banking
T h e Board notes that most of R i g g s ' s supervisory issues
arose f r o m its international banking and foreign embassy
banking business. In 2004, Riggs announced its intention
to exit those lines of business, and Riggs Bank has substantially completed the sale or termination of those activities. 15 The Board has reviewed the progress of Riggs, and
has consulted with the O C C about the progress of Riggs
Bank, in complying with the Consent Orders. In addition,
the Board has consulted with the O C C about enhancements
Riggs Bank has m a d e to its programs f o r complying with
the requirements of the BSA.
T h e Board has also reviewed and taken account of
proposals by P N C as the acquiring institutions to implement enhanced risk-management and BSA-compliance
programs at Riggs after consummation of this proposal.
The Board has considered P N C ' s record of enhancing its
own risk-management and BSA-compliance programs and
its plans for implementing those programs at Riggs. These
considerations included P N C ' s proposed management
personnel and implementation of corporate-wide riskm a n a g e m e n t systems for compliance, including B S A compliance programs, for the expanded P N C operations
after consummation and P N C ' s record of successfully integrating acquired institutions into its existing operations. As
previously noted, the banking operations of Riggs Bank
will be merged into P N C Bank after consummation of the
proposal.
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of P N C and the depository
institutions involved in the proposal are consistent with
approval, as are the other supervisory factors under the
B H C Act. 1 6
Convenience
and Needs Considerations
In acting on this proposal, the Board must consider the
effects of the proposal on the convenience and needs of the
agencies to gain access to the records of Riggs or otherwise to
complete investigations of these matters.
15. Specifically, Riggs has represented that it has terminated all
banking relationships with foreign embassies and is in the process
of closing or selling its operations outside the United States. Riggs
terminated the operations of Riggs International Banking Corporation
( " R I B C " ) , M i a m i , Florida, the E d g e Act subsidiary of Riggs Bank,
during the third quarter of 2004, and R I B C surrendered its permit in
D e c e m b e r 2004.
16. T h e c o m m e n t e r also noted press reports about litigation against
Riggs, including suits claiming Riggs was negligent in failing to alert
authorities to suspicious financial transactions allegedly related to the
September 11, 2001, terrorist attacks and criminal and civil claims in
a Spanish court asserting R i g g s ' s concealment of assets and m o n e y
laundering in connection with Riggs accounts held for the benefit of
former Chilean President A u g u s t o Pinochet. T h e Board notes that the
Spanish civil and criminal claims were dismissed after Riggs reached
a settlement with the plaintiffs in the civil suit in Spain. A s previously
noted, the courts, and not the Board, have jurisdiction to adjudicate
legal claims against Riggs. In considering the financial and managerial factors in this case, the Board has considered how these
litigation matters might affect the future prospects of the c o m b i n e d
organization.
Legal Developments
communities to be served and take into account the records
of the relevant insured depository institutions under
the Community Reinvestment Act ("CRA"). 1 7 The CRA
requires the federal financial supervisory agencies to
encourage financial institutions to help meet the credit
needs of local communities in which they operate, consistent with their safe and sound operation, and requires the
appropriate federal financial supervisory agency to take
into account an institution's record of meeting the credit
needs of its entire community, including low- and
moderate-income ( " L M I " ) neighborhoods, in evaluating
bank expansionary proposals.
The Board has considered carefully the convenience and
needs factor and the CRA performance records of PNC's
subsidiary banks and Riggs Bank in light of all the facts of
record, including public comment received on the proposal. One commenter opposed the proposal and alleged,
based on data reported under the Home Mortgage Disclosure Act ("HMDA"), 1 8 that PNC Bank and Riggs Bank
engaged in disparate treatment of minority individuals in
home mortgage lending in the banks' assessment areas.
The commenter also expressed concern about possible
branch closures.
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance
evaluation is a particularly important consideration in
the applications process because it represents a detailed,
on-site evaluation of the institution's overall record of
performance under the CRA by its appropriate federal
supervisor. 19
PNC Bank. PNC Bank, PNC's largest subsidiary bank
as measured by total deposits, received an "outstanding"
rating at its most recent CRA performance evaluation
by the OCC, as of April 15, 2002 ("2002 Evaluation"). 20
Riggs Bank received an "outstanding" rating at its most
recent CRA performance evaluation by the OCC, as of
April 7, 2003 ("2003 Evaluation"). The Board consulted
with the OCC about the CRA performance of PNC Bank
and Riggs Bank since their most recent CRA evaluations.
PNC has indicated that after the merger of PNC Bank and
Riggs Bank, PNC Bank's CRA program will be implemented at the resulting bank.
The 2002 Evaluation was discussed in the United
National Order. 21 In that evaluation, PNC Bank received a
17. 12 U.S.C. § 1842(c)(2); 12 U.S.C. § 2 9 0 1 et seq.
18. 12 U.S.C. § 2 8 0 1 e t s c q .
19. See Interagency
Questions and Answers Regarding Community
Reinvestment,
6 6 Federal Register 36,620 and 36,639 (2001).
20. P N C B a n k , Delaware, P N C ' s other subsidiary bank, also
received an " o u t s t a n d i n g " rating at its most recent C R A p e r f o r m a n c e
evaluation by the F D I C , as of January 21, 2003.
21. 90 Federal Reserve Bulletin at 7 4 - 7 7 .
ATI
"high satisfactory" rating under the lending test and "outstanding" ratings under the investment and service tests. 22
Examiners reported that the bank had excellent lending
activity in its major markets and good distribution of loans
by geography and borrower income. They noted that the
bank had developed a bank-wide lending program to assist
LMI borrowers through expanded credit criteria, reduced
minimum loan amounts, and closing cost assistance. Examiners further stated that the bank's record of community
development lending for affordable housing, community
services, and economic revitalization was strong. Examiners also reported that PNC Bank made more than $169 million of qualifying community development investments
during the evaluation period, a level examiners characterized as excellent. In addition, they reported that the bank's
services were readily accessible to LMI individuals and
geographies and that the bank was a leader in providing
community development services in its assessment areas.
Riggs Bank, In the 2003 Evaluation, Riggs Bank
received "outstanding" ratings under the lending, investment, and service tests. 23 Examiners reported that the percentage of home purchase loans by Riggs Bank to LMI
borrowers exceeded the percentage of LMI families in the
bank's assessment area and that the bank's market share of
home purchase loans to LMI borrowers exceeded its overall market share of home purchase loans in that area.
Examiners stated that the bank made use of innovative and
flexible loan products, which provide relaxed underwriting
standards for LMI borrowers. Examiners also indicated
that the bank had a high level of community development
lending.
Examiners characterized Riggs Bank's level of qualified
investments as excellent and stated that the bank played
a vital role in increasing the level of funds available
for affordable mortgages in the bank's assessment area.
In addition, examiners reported that the bank provided a
relatively high level of community development services,
which included participation in or sponsorship of seminars
that provided training and assistance on home buying,
consumer loans, debt and credit management, and building financial knowledge and relationships with financial
institutions.
B. H M D A Data and Fair Lending Record
The Board has carefully considered the lending record of
PNC in light of public comment received on the proposal.
The commenter alleged, based on a review of 2003 HMDA
data, that PNC Bank and Riggs Bank disproportionately
22. T h e evaluation period for the lending test was January 1, 1998,
through D e c e m b e r 31, 2001, except for community d e v e l o p m e n t
loans, which were evaluated f r o m July 6, 1998, through D e c e m b e r 31,
2001. T h e evaluation period for the investment and service tests was
July 6, 1998, through M a r c h 31, 2002.
23. T h e evaluation period for the lending test was f r o m S e p t e m ber 1, 1999, through D e c e m b e r 31, 2002, except for c o m m u n i t y
development lending, which was evaluated f r o m September 1, 1999,
through April 7, 2003. For the investment test and the service test, the
evaluation period was f r o m S e p t e m b e r 1, 1999, through April 7, 2003.
428
Federal Reserve Bulletin • S u m m e r 2005
excluded or denied African-American or Hispanic applicants for home mortgage loans in various Metropolitan
Statistical Areas ( " M S A s " ) . 2 4 The Board reviewed the
HMDA data for 2002 and 2003 reported by PNC Bank and
PNC Bank, Delaware (collectively " P N C Banks"), and
by Riggs Bank for the states or MSAs where the banks'
primary assessment areas were located. 25
The H M D A data indicate that the PNC Banks' denial
disparity ratios 2 6 for African-American and Hispanic applicants for the banks' total HMDA-reportable loans in Delaware, New Jersey, and Pennsylvania, which together
accounted for more than 77 percent of the banks' combined HMDA-reportable loans in 2003, were generally
comparable with the ratios for the aggregate of lenders
("aggregate lenders") in those areas. 27 In addition, the
percentages of the PNC Banks' total HMDA-reportable
loans to African Americans and Hispanics in these states in
2003 were generally comparable with the percentages for
the aggregate lenders. The data also indicate that the PNC
Banks increased the percentages of their total HMDAreportable loans originated to African Americans and Hispanics in each of these states from 2002 to 2003. 2 8
The H M D A data indicate that Riggs Bank's denial disparity ratios for African-American applicants in its assessment area were higher than those ratios for the aggregate
lenders in both years. The data indicate, however, that
Riggs Bank significantly reduced its denial disparity ratios
for African-American applicants and increased the number
and percentage of its total HMDA-reportable loans to
African Americans in 2003.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials among members of different racial groups in certain local areas, these data generally do not demonstrate
that either PNC Bank or Riggs excluded any racial group
on a prohibited basis. The Board nevertheless is concerned
when H M D A data for an institution indicate disparities in
lending and believes that all banks are obligated to ensure
that their lending practices are based on criteria that ensure
not only safe and sound lending, but also equal access to
24. Specifically, the c o m m e n t e r cited H M D A data on lending by
P N C ' s subsidiary banks to African A m e r i c a n s or Hispanics in the
W i l m i n g t o n M S A in Delaware, N e w a r k and Jersey City M S A s in
N e w Jersey, Harrisburg and Pittsburgh M S A s in Pennsylvania, Philadelphia M S A in Pennsylvania and N e w Jersey, and N e w b u r g h M S A
in New York. T h e c o m m e n t e r cited H M D A data on Riggs B a n k ' s
lending to A f r i c a n A m e r i c a n s in the Washington M S A in Washington, D.C., M a r y l a n d , and Virginia.
25. The B o a r d reviewed H M D A data for the P N C Banks in Delaware, N e w Jersey, and Pennsylvania, and in the Newark, Philadelphia,
and Pittsburgh M S A s .
26. The denial disparity ratio equals the denial rate of a particular
racial category (e.g., African American) divided by the denial rate for
whites.
27. T h e l e n d i n g data of the aggregate lenders represent the cumulative lending for all financial institutions that have reported H M D A
data in a particular area.
28. T h e c o m m e n t e r also c o m m e n t e d on H M D A data it derived
f r o m 2004 loan application registers of P N C Bank and Riggs Bank.
T h e Board notes that such data are preliminary and that 2 0 0 4 data for
lenders in the a g g r e g a t e are not yet available.
credit by creditworthy applicants regardless of their race or
income level. The Board recognizes, however, that H M D A
data alone provide an incomplete measure of an institution's lending in its community because these data cover
only a few categories of housing-related lending. H M D A
data, moreover, provide only limited information about
covered loans. 29 H M D A data, therefore, have limitations
that make them an inadequate basis, absent other information, for concluding that an institution has not assisted
adequately in meeting its community's credit needs or has
engaged in illegal lending discrimination.
Because of the limitations of HMDA data, the Board has
considered these data carefully in light of other information, including examination reports that provide an on-site
evaluation of compliance by PNC and its subsidiary banks
and Riggs Bank with fair lending laws. The Board also
consulted with the OCC, which has responsibility for enforcing compliance with fair lending laws by PNC Bank
and Riggs Bank, about this proposal and the compliance
record of these banks. 3 0
The record indicates that PNC has taken steps to ensure
compliance with fair lending laws. P N C ' s fair lending
policy includes a commitment to provide full and equal
access to credit while maintaining safe and sound credit
standards. To implement this commitment, PNC's fair
lending compliance program includes employee training
and review by senior management of credit decisions,
pricing, marketing, and fair lending-related polices and
procedures.
The Board has also considered the HMDA data and the
overall performance records of the subsidiary banks of
PNC and Riggs under the CRA. Their established efforts
demonstrate that the banks are actively helping to meet the
credit needs of their entire communities.
C. Branch Closings
PNC has indicated that it has no plans to close any
branches of PNC Bank or Riggs Bank as a result of the
proposed transaction. 31 The Board has considered PNC
Bank's branch banking policy and its record of opening
29. T h e data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
w h o was denied credit was, in fact, creditworthy. Credit history
p r o b l e m s and excessive debt levels relative to income (reasons most
frequently cited for a credit denial) are not available f r o m H M D A
data.
30. In addition, the Board consulted with the FDIC, the primary
supervisor of P N C Bank, Delaware, about the b a n k ' s record of c o m pliance with fair lending laws.
31. T h e c o m m e n t e r also expressed concern about possible j o b
losses resulting f r o m this proposal. The effect of a proposed acquisition on e m p l o y m e n t in a c o m m u n i t y is not a m o n g the limited factors
the Board is authorized to consider under the B H C Act, and the
convenience and needs factor has been interpreted consistently by the
federal banking agencies, the courts, and the Congress to relate to the
effect of a proposal on the availability and quality of banking services
in the c o m m u n i t y . See, e.g., Wells Fargo & Company, 82 Federal
Reserve Bulletin 445, 457 (1996).
Legal Developments
and closing branches. In the 2002 Evaluation, examiners
concluded that PNC Bank's record of opening and closing
branches had not adversely affected the bank's delivery of
services in LMI areas or to LMI individuals.
The Board also has considered the fact that federal
banking law provides a specific mcchanism for addressing
branch closings. 32 Federal law requires an insured depository institution to provide notice to the public and to the
appropriate federal supervisory agency before closing a
branch. In addition, the Board notes that the OCC, as the
appropriate federal supervisor of PNC Bank, will continue
to review the bank's branch closing record in the course of
conducting CRA performance evaluations.
D. Conclusion on Convenience and Needs Factor
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by PNC, public
comments on the proposal, and confidential supervisory
information. PNC has stated that the proposal would provide PNC and Riggs customers with expanded products
and services, including access to expanded branch and
ATM networks. Based on a review of the entire record, and
for the reasons discussed above, the Board concludes that
considerations relating to the convenience and needs factor, including the CRA performance records of the relevant
depository institutions, are consistent with approval.
429
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and other
applicable statutes. 34 The Board's approval is specifically
conditioned on compliance by PNC with the conditions
imposed in this order and the commitments made to the
Board in connection with the application. 35 For purposes
of this transaction, these conditions and commitments are
deemed to be conditions imposed in writing by the Board
in connection with its findings and decision and, as such,
may be enforced in proceedings under applicable law.
The merger with Riggs and the acquisition of Riggs
Bank may not be consummated before the fifteenth calendar day after the effective date of this order or later than
three months after the effective date of this order, unless
such period is extended for good cause by the Board or the
Federal Reserve Bank of Cleveland, acting pursuant to
delegated authority.
By order of the Board of Governors, effective April 26,
2005.
Voting for this action: C h a i r m a n G r e e n s p a n , Vice C h a i r m a n F e r g u son, and G o v e r n o r s Gramlich, Bies, Olson, B e r n a n k e , and Kohn.
R O B E R T DEV. F R I E R S O N
Deputy Secretary of the Board
Republic Bancorp,
Munden, Kansas
Inc.
Conclusion
Order Approving the Formation of a Bank Holding
Company
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. 33 In reaching its conclusion, the Board
Republic Bancorp, Inc. ("Republic") has requested the
Board's approval under section 3 of the Bank Holding
32. Section 4 2 of the Federal Deposit Insurance Act (12 U.S.C.
§ 1 8 3 1 r - l ) , as i m p l e m e n t e d by t h e Joint Policy Statement R e g a r d i n g
B r a n c h C l o s i n g s (64 Federal Register 3 4 , 8 4 4 (1999)), requires that a
b a n k provide t h e public with at least thirty d a y s ' notice and the
appropriate f e d e r a l supervisory agency and c u s t o m e r s of the branch
with at least ninety d a y s ' notice b e f o r e the date of the p r o p o s e d branch
closing. T h e b a n k also is required to provide r e a s o n s and other
supporting data f o r the closure, consistent with the institution's written policy f o r b r a n c h closings.
33. T h e c o m m e n t e r requested that the Board hold a public meeting
or hearing on t h e proposal. Section 3(b) of the B H C Act d o e s not
require the B o a r d to hold a public hearing on an application unless the
appropriate s u p e r v i s o r y authority for the bank to be acquired m a k e s a
timely written r e c o m m e n d a t i o n of denial of the application. T h e
Board has not r e c e i v e d such a r e c o m m e n d a t i o n f r o m the appropriate
supervisory authority. U n d e r its regulations, the Board also may, in its
discretion, hold a public m e e t i n g or hearing on an application to
acquire a b a n k if a m e e t i n g or hearing is necessary or appropriate to
clarify factual i s s u e s related to the application and to provide an
opportunity for testimony. 12 C F R 225.16(e). T h e Board has considered carefully t h e c o m m e n t e r ' s request in light of all the facts of
record. In the B o a r d ' s view, the c o m m e n t e r has had a m p l e opportunity to submit its views, and in fact, c o m m e n t e r has submitted written
c o m m e n t s that t h e Board has considered carefully in acting on the
proposal. T h e c o m m e n t e r ' s request fails to d e m o n s t r a t e w h y written
c o m m e n t s do not present its v i e w s adequately. T h e request also fails
to identify d i s p u t e d issues of fact that are material to the B o a r d ' s
decision that would b e clarified by a public meeting or hearing. F o r
these reasons, and based on all the f a c t s of record, t h e Board h a s
determined that a public meeting or hearing is not required or warranted in this case. Accordingly, the request for a public meeting or
hearing o n t h e proposal is denied.
34. T h e c o m m e n t e r also requested that the Board extend the c o m ment period and delay action on the proposal. As previously noted, the
Board has a c c u m u l a t e d a significant record in this case, including
reports of e x a m i n a t i o n , confidential supervisory information, public
reports and i n f o r m a t i o n , and public c o m m e n t . In the B o a r d ' s view, the
c o m m e n t e r has had a m p l e opportunity to submit its views and, in fact,
has provided multiple written s u b m i s s i o n s that the Board has considered c a r e f u l l y in acting on the proposal. Moreover, the B H C Act and
Regulation Y require the Board to act o n proposals submitted under
those p r o v i s i o n s within certain time periods. Based on a review of all
the facts of record, the Board has c o n c l u d e d that the record in this case
is sufficient to warrant action at this time and that neither an extension
of the c o m m e n t period nor further delay in considering the proposal is
warranted.
35. T h e c o m m e n t e r asked that the B o a r d ' s C h a i r m a n r e c u s e
himself f r o m consideration of the application. T h e Board and the
C h a i r m a n have carefully considered this request and c o n c l u d e d that
recusal is not required by any law or warranted. T h e c o m m e n t e r also
expressed c o n c e r n about c o m p l i a n c e by staff with the B o a r d ' s ex parte
c o m m u n i c a t i o n s policies in this case. T h e Board has carefully considered this c o n c e r n and c o n c l u d e s that Federal Reserve System staff did
not e n g a g e in any inappropriate c o m m u n i c a t i o n s .
430
F e d e r a l R e s e r v e Bulletin •
Summer 2005
Company Act ( " B H C A c t " ) 1 to become a bank holding
company and acquire 99.7 percent of the voting shares of
National Family Bank ( " N F B " ) , Munden, Kansas. 2
Notice of the proposal, affording interested persons an
opportunity to comment, has been published (70 Federal
Register 10,402 (2005)). The time for filing comments has
expired, and the Board has considered the application and
all comments received in light of the factors set forth in
section 3 of the B H C Act.
Republic is a newly organized corporation formed for
the purpose of acquiring control of NFB. NFB, with total
assets of approximately $15.5 million, is the 287th largest
insured depository institution in Kansas, controlling deposits of approximately $14.8 million, which represent less
than 1 percent of the total amount of deposits of insured
depository institutions in the state. 3
Competitive
Considerations
Section 3 of the B H C Act prohibits the Board from approving a proposal that would result in a monopoly or that
would be in furtherance of an attempt to monopolize the
business of banking. The BHC Act also prohibits the Board
from approving a bank acquisition that would substantially
lessen competition in any relevant banking market, unless
the anticompetitive effects of the proposal are clearly outweighed in the public interest by the probable effect of the
proposal in meeting the convenience and needs of the
community to be served. 4
This proposal represents Republic's initial entry into
retail banking in Kansas. Based on all the facts of record,
the Board has concluded that consummation of the proposal would not have a significantly adverse effect on
competition or on the concentration of banking resources
in any relevant banking market and that competitive considerations arc consistent with approval.
In evaluating financial factors in proposals involving
newly formed small bank holding companies, the Board
reviews the financial condition of both the applicant and
the target depository institution. The Board also evaluates
the financial condition of the pro f o r m a organization,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
Based on its review of these factors, the Board finds that
Republic has sufficient financial resources to effect the
proposal. NFB is well capitalized and would remain so on
consummation of this proposal. Republic proposes to fund
this transaction through a combination of debt and equity.
The Board has recognized that the transfer of ownership of
small banks often requires the use of acquisition debt. 5
It appears that Republic would have sufficient financial
flexibility to service this debt without unduly straining the
resources of Republic or NFB.
The Board also has considered the managerial resources
of the applicant, including the proposed management of the
organization. The Board has reviewed the examination
record of NFB, including assessments of its current
management, risk-management systems, and operations. In
addition, the Board has considered its supervisory experiences and those of the other relevant banking agencies with
NFB and the management officials and principal shareholders of Republic. The Board also has considered Republic's
plans to implement the proposal, including its proposed
expansion of N F B ' s products and services and the changes
in management at NFB after the acquisition.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of Republic and NFB are
consistent with approval, as are the other supervisory factors under the B H C Act.
Convenience
Financial,
Managerial,
and Supervisory
Considerations
Section 3 of the B H C Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record, including information provided by Republic,
confidential reports of examination, and other confidential
supervisory information from the Office of the Comptroller
of the Currency ( " O C C " ) , the primary federal supervisor
of NFB.
1. 12 U.S.C. § 1 8 4 2 .
2. Admiral Family Banks, Inc., Alsip, Illinois, currently o w n s
99.7 percent of the voting shares of N F B , and Republic has applied to
acquire all these shares.
3. Asset data are as of December 31, 2004. Deposit data and state
rankings are as of J u n e 30, 2004. In this context, insured depository
institutions i n c l u d e commercial banks, savings banks, and savings
associations.
4. .See 12 U.S.C. § 1842(c)(1).
and Needs Considerations
In acting on proposals under section 3 of the B H C Act, the
Board is also required to consider the effects of the proposal on the convenience and needs of the communities
to be served and to take into account the records of the
relevant insured depository institutions under the C o m m u nity Reinvestment Act ( " C R A " ) . 6 The CRA requires the
federal financial supervisory agencies to encourage financial institutions to help meet the credit needs of the local
communities in which they operate, consistent with their
safe and sound operation, and requires the appropriate
federal financial supervisory agency to take into account an
institution's record of meeting the credit needs of its entire
community, including low- and moderate-income neighborhoods, in evaluating proposals under section 3 of the
BHC Act.
The Board has considered carefully the convenience and
needs factor and the CRA performance record of NFB
5. Small Bank Holding C o m p a n y Policy Statement, 12 C F R
Part 225, Appendix G.
6. 12 U.S.C. § 2 9 0 1 e t s e q .
Legal Developments
in light of all the facts of record, including public comment
received regarding the proposal and the bank's CRA
record. The Board received one comment from an individual suggesting that NFB was not serving the needs of its
community, particularly its agricultural lending needs, and
that Republic also might not serve the community's needs. 7
NFB received an "outstanding" rating at its most recent
CRA performance evaluation by the OCC, as of November 25, 2002 ("2002 Examination"). Examiners reported
that the bank's record of lending to borrowers of different
income levels and farms of different revenue amounts was
excellent. They also noted that the bank's average loan-todeposit ratio of 70 percent was comparable to the ratio for
its peer group. Since the examination, however, NFB's
lending volume and average loan-to-deposit ratio has significantly declined.
Several factors have affected NFB's overall lending
activity in its assessment area, which is Republic County,
Kansas, a nonmetropolitan area in north central Kansas.
This area has experienced a population decline of 9 percent
since 2000. Of the six depository institutions in the assessment area, NFB is the smallest bank in terms of deposits,
and its deposits decreased from 2003 to 2004. Moreover, the main business in Republic County is agriculture,
and drought conditions have had a negative impact on
lending during the past two years. These factors have
affected NFB's ability to make loans to its community and
resulted in a marked decrease in lending since the 2002
Examination.
Republic's proposed business plan includes several
improvements to services and products that should
strengthen the bank's overall condition and its ability to
serve the community's lending and other banking needs.
The Board has consulted with the OCC about Republic's
proposed business plan for NFB. The business plan
includes a strategy for growth through enhanced product
offerings and by hiring employees and management officials with agricultural lending experience and a familiarity
with the community and its banking needs. Republic also
proposes to update the bank's processing systems and
introduce internet banking, ATMs, and debit and credit
cards, as well as other banking products in the future. In
addition, the proposed principals of Republic and its management are residents who are familiar with the community and its needs and who have banking experience. 8
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of the institutions involved, the business
plan and other information provided by Republic, public
information about the economic conditions of NFB's community, and confidential supervisory information. Based on
7. T h e c o m m c n t e r also questioned the identity of the proposed
purchasers. R e p u b l i c has disclosed its o w n e r s h i p structure, as required
by the B H C Act, and has stated that the c o m m c n t e r has met with some
of R e p u b l i c ' s principal shareholders.
8. T h e p r o p o s e d president and vice president of N F B recently
served as m a n a g e m e n t officials at a b a n k that received an "outstandi n g " C R A rating at its last examination.
431
a review of the entire record, and for the reasons discussed
above, the Board concludes that considerations relating
to the convenience and needs factor and the CRA performance records of the relevant depository institution are
consistent with approval.
Conclusion
Based on the foregoing and all facts of record, the Board
has determined that the application should be, and hereby
is, approved. In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act. The Board's
approval is specifically conditioned on compliance by
Republic with the condition imposed in this order and the
commitments made to the Board in connection with the
application. For purposes of this transaction, the condition
and commitments are deemed to be conditions imposed
in writing by the Board in connection with its findings
and decision and, as such, may be enforced in proceedings
under applicable law.
The proposed transaction may not be consummated
before the fifteenth calendar day after the effective date of
this order, or later than three months after the effective date
of this order, unless such period is extended for good cause
by the Board or the Federal Reserve Bank of Kansas City,
acting pursuant to delegated authority.
By order of the Board of Governors, effective April 26,
2005.
Voting for this action: C h a i r m a n G r e e n s p a n , Vice C h a i r m a n F e r g u son, and G o v e r n o r s Gramlich, Bies, Olson, B e r n a n k e , and Kohn.
R O B E R T DEV. F R I E R S O N
Deputy Secretary of the Board
Wells Fargo & Company
San Francisco, California
Order Approving the Acquisition of a Bank Holding
Company
Wells Fargo & Company ("Wells Fargo"), a financial
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act to acquire First
Community Capital Corporation ("FCCC"), Houston, and
its subsidiary banks, First Community Bank, National
Association, Houston, and First Community Bank
San Antonio, National Association, San Antonio, all in
Texas. 1
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(69 Federal Register 60,877 (2004)). The time for filing
comments has expired, and the Board has considered the
1. 12 U.S.C. § 1842.
432
Federal Reserve Bulletin •
Summer 2005
proposal and all c o m m e n t s received in light of the factors
set forth in the B H C Act.
Wells Fargo, with total consolidated assets of approximately $ 4 3 4 . 6 billion, is the fifth largest depository organization in the United States, 2 controlling deposits of approximately $ 2 6 7 . 8 billion, which represents a p p r o x i m a t e l y
4.7 percent of the total a m o u n t of deposits of insured
depository institutions in the United States. 3 Wells Fargo is
the third largest depository institution in Texas, controlling
$22.7 billion in deposits, which represents approximately
7.3 percent of the total a m o u n t of deposits of insured
depository institutions in the state ( " s t a t e d e p o s i t s " ) .
Wells F a r g o operates subsidiary depository institutions in
23 states, including Texas, and engages in numerous nonbanking activities that are permissible under the B H C Act.
F C C C , with total consolidated assets of approximately
$604.6 million, is the 76th largest depository organization
in Texas, controlling deposits of $446 million. F C C C operates subsidiary insured depository institutions only in
Texas. O n c o n s u m m a t i o n of the proposal, Wells Fargo
would remain the third largest depository organization in
Texas, controlling deposits of approximately $23.2 billion,
which represents 7.5 percent of state deposits.
Interstate
Analysis
Section 3(d) of the B H C Act allows the Board to approve
an application by a bank holding c o m p a n y to acquire
control of a bank located in a state other than the h o m e
state of such bank holding c o m p a n y if certain conditions
are met. 4 For purposes of the B H C Act, the h o m e state of
Wells F a r g o is Minnesota, and F C C C ' s subsidiary b a n k s
are located in Texas. 5
Based on a review of all the facts of record, including a
review of relevant state statutes, the Board finds that all the
conditions f o r an interstate acquisition e n u m e r a t e d in section 3(d) of the B H C Act are met in this case. 6 Accordingly, in light of the facts of record, the Board is permitted
2. Asset d a t a are as of March 31, 2005, and national ranking data
are as of D e c e m b e r 31, 2004, and reflect consolidations through that
date.
3. Deposit data reflect the total of the deposits reported by each
o r g a n i z a t i o n ' s insured depository institutions in their Consolidated
Reports of Condition and Income or Thrift Financial Reports for
June 30, 2 0 0 4 . In this context, insured depository institutions include
commercial b a n k s , savings banks, and savings associations.
4. A bank holding c o m p a n y ' s h o m e state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July 1, 1966, or the date on which the company b e c a m e a bank
holding c o m p a n y , whichever is later. 12 U.S.C. § 1841(o)(4)(C).
5. For p u r p o s e s of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(1)(A)
and (d)(2)(B).
6. See 12 U.S.C. §§ 1842(d)(1)(A) & (B), and (d)(2)(A) & (B).
Wells Fargo is adequately capitalized and adequately managed, as
defined by applicable law. F C C C ' s subsidiary depository institutions
have been in existence and operated for the m i n i m u m period of time
required by applicable law. On consummation of the proposal, Wells
Fargo would control less than 10 percent of the total amount of
to a p p r o v e the proposal u n d e r section 3(d) of the B H C
Act.
Competitive
Considerations
Section 3 of the B H C Act prohibits the B o a r d f r o m a p p r o v ing a proposed bank acquisition that would result in a
m o n o p o l y or would be in f u r t h e r a n c e of any attempt to
m o n o p o l i z e the business of b a n k i n g in any relevant b a n k ing market. In addition, section 3 prohibits the Board f r o m
approving a proposed bank acquisition that would substantially lessen competition in any relevant banking m a r k e t
unless the a n t i c o m p e t i t i v e e f f e c t s of the proposal are
clearly o u t w e i g h e d in the public interest by its p r o b a b l e
effect in meeting the c o n v e n i e n c e and n e e d s of the c o m m u nity to be served. 7
Wells Fargo c o m p e t e s directly with F C C C ' s subsidiary
banks in the Brazoria, G r i m e s County, Houston, and
San A n t o n i o b a n k i n g m a r k e t s in Texas. 8 T h e Board has
reviewed the competitive effects of the proposal in each of
these banking markets in light of all the facts of record. In
particular, the Board has considered the number of c o m petitors that would remain in the banking markets, the
relative shares of total deposits in depository institutions in
the m a r k e t s ( " m a r k e t d e p o s i t s " ) controlled by Wells F a r g o
and F C C C , 9 the concentration level of market deposits and
the increase in thif* level as m e a s u r e d by the HerfindahlHirschman Index ( " H H I " ) under the D e p a r t m e n t of Justice
M e r g e r Guidelines ( " D O J G u i d e l i n e s " ) , 1 0 and other characteristics of the markets.
C o n s u m m a t i o n of the proposal would be consistent with
Board precedent and the D O J Guidelines in each of these
deposits of insured depository institutions in the United States and less
than 30 percent of the total a m o u n t of deposits of insured depository
institutions in Texas. All other requirements pursuant to section 3(d)
of the B H C Act also would be met on c o n s u m m a t i o n of the proposal.
7. 12 U.S.C. § 1842(c)(1).
8. T h e s e banking markets are described in Appendix A.
9. Deposit and market share data are as of J u n e 30, 2004, adjusted
to reflect mergers and acquisitions through M a y 20, 2005, and on
calculations in which the deposits of thrift institutions are included at
50 percent, The Board previously has indicated that thrift institutions
have b e c o m e , or have the potential to become, significant competitors
of commercial banks. See, e.g., Midwest Financial Group, 75 Federal
Reserve Bulletin 386 (1989); National City Corporation,
70 Federal
Reserve Bulletin 7 4 3 (1984). Thus, the Board regularly has included
thrift deposits in the market share calculation on a 50 percent weighted
basis. See, e.g.. First Hawaiian, Inc., 11 Federal Reserve Bulletin 52
(1991).
10. Under the D O J Guidelines, 49 Federal Register 26,823 (1984),
a market is considered unconcentrated if the post-merger H H I is less
than 1000, moderately concentrated if the post-merger HHI is between
1000 and 1800, and highly concentrated if the post-merger H H I is
more than 1800. T h e Department of Justice has informed the Board
that a bank merger or acquisition generally will not be challenged
(in the absence of other factors indicating anticompetitive effects)
unless the post-merger HHI is at least 1800 and the merger increases
the H H I by m o r e than 2 0 0 points. T h e Department of Justice has
stated that the higher than normal HHI thresholds for screening bank
mergers for anticompetitive effects implicitly recognize the competitive effects of limited-purpose lenders and other nondepository financial institutions.
Legal
banking markets. 1 1 After consummation of the proposal,
the Brazoria and San Antonio banking markets would
remain moderately concentrated, and the Grimes and Houston banking markets would remain highly concentrated, as
measured by the HHI. 1 2 In each of the four banking markets, the increase in market concentration would be small,
and numerous competitors would remain.
The Department of Justice also has conducted a detailed
review of the anticipated competitive effects of the proposal and has advised the Board that consummation of
the proposal would not likely have a significantly adverse
effect on competition in any relevant banking market. In
addition, the appropriate banking agencies have been
afforded an opportunity to comment and have not objected
to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the four banking markets where
Wells Fargo and F C C C compete directly or in any other
relevant banking market. Accordingly, based on all the
facts of record, the Board has determined that competitive
considerations are consistent with approval.
Financial,
Managerial,
and Supervisory
Considerations
Section 3 of the B H C Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. In
reviewing these factors, the Board has considered, among
other things, confidential reports of examination and other
supervisory information from the primary federal and state
supervisors of the organizations involved in the proposal.
The Board also has considered publicly reported and other
financial information, comments received on the proposal,
and information provided by Wells Fargo. 1 3 In addition,
the Board has consulted with the Office of the Comptroller
of the Currency ( " O C C " ) , the primary supervisor of Wells
Fargo's lead bank, Wells Fargo Bank, N.A. ( " W F Bank"),
Sioux Falls, South Dakota ( " W F Bank"), and F C C C ' s
subsidiary banks.
11. The e f f e c t s of the proposal on the concentration of banking
resources in these b a n k i n g markets are described in Appendix B.
12. Analysis o f the Houston banking market is based on the Summary of Deposits for J u n e 30, 2004, without the adjustments reflected
in the B o a r d ' s analysis of the Houston Market in J.P. Morgan Chase,
9 0 Federal Reserve Bulletin 352, 354 (2004). If such adjustments
were made to the deposit data for the Houston banking market, the
market would be moderately concentrated on c o n s u m m a t i o n of the
proposal.
13. A c o m m e n t e r criticized Wells F a r g o ' s relationships with
unaffiliated p a y d a y and car title lenders and other nontraditional
providers of financial services. Wells Fargo represented that it has
acted as a lender or provider of credit facilities and in other ordinary
business relationships to unaffiliated consumer finance businesses,
which may include payday and title lenders. Wells Fargo stated that it
does not participate in the credit review process of such lenders and
customarily requires the entities to represent, warrant, and covenant
to Wells Fargo in credit agreements that such entities have and will
comply with all applicable laws in the conduct of their business.
Developments
433
In evaluating financial factors in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis and the financial condition
of the subsidiary banks and significant nonbanking operations. In this evaluation, the Board considers a variety of
areas, including capital adequacy, asset quality, and earnings performance. In assessing financial factors, the Board
consistently has considered capital adequacy to be especially important. The Board also evaluates the financial
condition of the combined organization on a pro f o r m a
basis, including its capital position, asset quality, and earnings prospects, and the impact of the proposed funding of
the transaction.
Based on its review of the financial factors in this case,
the Board finds that Wells Fargo has sufficient financial
resources to effect the proposal. Wells Fargo, FCCC, and
their subsidiary depository institutions currently are well
capitalized and the resulting organization and its subsidiary
banks would remain so on consummation of the proposal.
The proposed transaction is structured primarily as a share
exchange.
The Board also has considered the managerial resources
of Wells Fargo, FCCC, and the banking subsidiaries to be
acquired and the effect of the proposal on these resources.
In reviewing this proposal, the Board has assembled and
considered a broad and detailed record, including substantial confidential and public information about Wells Fargo,
FCCC, and their subsidiaries. The Board has carefully
reviewed assessments and examinations of the organizations' management, risk-management systems, and compliance records by, and consulted with, relevant federal and
state supervisors. 1 4 In addition, the Board has considered
Wells Fargo's plans for implementing the proposal, including its proposed management after consummation, and the
c o m p a n y ' s record of successfully integrating acquired
institutions into its existing operations.
In evaluating the managerial resources of a banking
organization in an expansion proposal, the Board considers
assessments of an organization's risk management—that
is, the ability of the organization's board of directors and
senior management to identify, measure, monitor, and control risk across all business and corporate lines in the
organization—to be especially important. 1 5 As part of an
appropriate risk-management system, the Board expects
each banking organization, including Wells Fargo, to
implement and operate effective, enterprise-wide compliance risk assessment and management programs and internal audit programs to identify, manage, address, and monitor the risks of the organization's activities. As part of
compliance risk management, banking organizations operating in the United States are required to implement and
operate effective anti-money-laundering programs.
14. This included consultations with relevant state agencies with
oversight authority for Wells F a r g o ' s nonbank consumer finance subsidiaries and the appropriate functional regulators of Wells F a r g o ' s
securities-related activities.
15. See Revisions
to Bank Holding
Company
Rating System,
69 Federal Register 70,444 (2004).
434
Federal R e s e r v e Bulletin • S u m m e r 2 0 0 5
In this case, the Board has considered the existing compliance risk-management systems and internal audit programs at Wells Fargo and the assessment of these systems
and programs by the relevant federal and state supervisory
agencies. The Board has also considered additional information provided by Wells Fargo on enhancements it has
made and is currently making to its systems and programs
as part of the ongoing review, development, implementation, and maintenance of effective enterprise-wide riskmanagement systems.
Based on all the facts of record, including a review of
the comments received, the Board concludes that considerations relating to the financial and managerial resources
and future prospects of Wells Fargo, FCCC, and their
respective subsidiaries are consistent with approval, as are
the other supervisory factors under the B H C Act. 1 6
Convenience
and Needs Considerations
Section 3 of the B H C Act requires the Board to consider
the effects of a proposal on the convenience and needs of
the communities to be served and to take into account the
records of the relevant insured depository institutions
under the Community Reinvestment Act ( " C R A " ) . 1 7 The
CRA requires the federal financial supervisory agencies
to encourage financial institutions to help meet the credit
needs of the local communities in which they operate,
consistent with their safe and sound operation, and requires
the appropriate federal financial supervisory agency to take
into account an institution's record of meeting the credit
needs of its entire community, including low- and
moderate-income ( " L M I " ) neighborhoods, in evaluating
depository institutions' expansionary proposals. 1 8
The Board has considered carefully the convenience and
needs factor and the CRA performance records of the
subsidiary depository institutions of Wells Fargo and
F C C C in light of all the facts of record, including public
comments received on the proposal. A coinmenter opposing the proposal asserted, based on data reported under the
Home Mortgage Disclosure Act ( " H M D A " ) , 1 9 that Wells
Fargo engages in discriminatory treatment of AfricanAmerican and Hispanic individuals in its home mortgage
operations. 2 0
16. A c o m m e n t e r expressed concern about Wells F a r g o ' s and
W F B a n k ' s information security systems and cited a press report
describing three instances of theft of computers containing information relating to customers of Wells F a r g o ' s subsidiaries. Wells Fargo
represented that it is not aware of actual identity theft or fraudulent
activity as a result of these incidents and that it provided potentially
affected customers with notice of the thefts and credit bureau monitoring and identity theft insurance services. In reviewing Wells F a r g o ' s
application, the Board has considered the e n h a n c e m e n t s Wells Fargo
is m a k i n g to its information security systems and has consulted with
the O C C , the primary federal supervisor of W F Bank.
17. 1 2 U . S . C . § 2 9 0 1 e t s e q .
18. 1 2 U S . C . § 2 9 0 3 .
19. 12 U.S.C. § 2 8 0 1 e t s e q .
20. A c o m m e n t e r included in its c o m m c n t three individual customer c o m p l a i n t s concerning mortgage loans f r o m W F Bank and
Wells Fargo H o m e Mortgage, Des Moines, Iowa ( " W F M o r t g a g e " ) ,
A. C R A P e r f o r m a n c e E v a l u a t i o n s
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the C R A performance records of the insured depository institutions of
both organizations. An institution's most recent CRA performance evaluation is a particularly important consideration in the applications proccss because it represents a
detailed, on-site evaluation of the institution's overall
record of performance under the C R A by its appropriate
federal supervisor. 21
Wells Fargo Bank, N.A. ( " W F Bank CA"), San Francisco, California, received an "outstanding" rating at its
performance evaluation from the OCC, as of October 1,
2001. 2 2 In addition, Wells Fargo's subsidiary depository
institutions that were evaluated under the CRA received
either "outstanding" or "satisfactory" ratings at their most
recent C R A performance evaluations. 2 3 F C C C ' s lead bank,
First Community Bank, N.A., received a "satisfactory"
rating at its most recent CRA performance evaluation by
the OCC, as of June 18, 2004. 2 4 Wells Fargo has represented that it will implement its program for managing
community reinvestment activities at F C C C ' s subsidiary
depository institutions on consummation of the proposal.
B. C R A P e r f o r m a n c e of Wells F a r g o
As noted above, W F Bank CA received an overall "outstanding" rating for C R A performance in the O C C ' s
most recent CRA performance evaluation. 2 5 W F Bank CA
received an "outstanding" rating under each of the lending, investment, and service tests.
Examiners commended the excellent lending performance of W F Bank CA overall and reported that the bank
had good distribution of home mortgage loans to borrowers of different income levels. They noted that W F Bank
a f o r m e r subsidiary of W F Bank that became a division of the bank
in M a y 2004. The complaints provided by the c o m m e n t e r have been
forwarded to the O C C , the primary federal supervisor of W F B a n k .
21. See Interagency Questions and Answers Regarding Community
Reinvestment,
66 Federal Register 36,620 and 36,639 (2001).
22. In 2001, W F Bank C A was the largest subsidiary depository
institution of Wells Fargo in terms of deposits and assets. In the
p e r f o r m a n c e evaluation, examiners weighted W F Bank CA's perform a n c e in California m o r e heavily than its performance in other areas
in its overall rating because more than 98 percent of its deposits and
more than 87 percent of its loans were in California during the
evaluation period. On February 20, 2004, Wells Fargo consolidated
18 of its subsidiary depository institutions, including W F Bank C A ,
with and into W F Bank. Wells Fargo currently operates ten subsidiary
depository institutions, including W F Bank.
23. Appendix C lists the most recent C R A ratings of Wells F a r g o ' s
subsidiary depository institutions that are subject to the C R A .
24. In 2004, F C C C transferred the San Antonio operations of First
C o m m u n i t y Bank, N.A., to the newly chartered First C o m m u n i t y
Bank San Antonio, N.A., which has not yet been examined under the
C R A by the O C C .
25. T h e evaluation period was April 1, 1998, through September 20, 2001. At the time of the 2001 Evaluation, W F Bank S F had
sixty assessment areas in nine states (Arizona, California, Colorado,
Legal Developments
CA had excellent geographic distribution of small loans to
small businesses. 26
Examiners reported that WF Bank CA demonstrated a
significant responsiveness overall to the needs of its assessment areas through community development lending. They
found that W F Bank CA helped address a significant need
for affordable housing in California through its community
development lending. WF Bank CA's community development loans for affordable housing in its assessment areas
subject to a full-scope review totaled $312 million during
the evaluation period.
Examiners commended WF Bank CA for its excellent
level of qualified investments and noted that the investments were highly responsive to the needs of the bank's
assessment areas. They reported that WF Bank CA's
investment and grant activities helped address essential
identified needs in the full-scope assessment areas subject
to review, particularly with respect to financing of affordable housing. Community development investments in
those assessment areas totaled $162.4 million during the
evaluation period.
Examiners reported that WF Bank CA's banking services were readily accessible to essentially all portions of
the bank's assessment areas. They noted that W F Bank
CA's alternative delivery systems included ATMs, banking
by phone or mail, and Internet banking. Examiners also
reported that Wells Fargo provided numerous community
development services such as financial educational community seminars.
435
The Board reviewed HMDA data reported by the lending subsidiaries of Wells Fargo in 2002 and 2003 in certain
areas. 28 An analysis of the HMDA data does not support
the contention that Wells Fargo disproportionately directs
African-American and Hispanic borrowers to WF Financial or that W F Prime Lenders have disproportionately
denied applications of African-American or Hispanic
individuals. 29 The 2003 HMDA data show that the
WF Prime Lenders extended more HMDA-reportable
loans to African-American and Hispanic borrowers than
WF Financial in most of the MSAs reviewed. Moreover,
the data show that the percentages of the WF Prime Lenders' total home mortgage applications that were received
from African-American and Hispanic applicants at the
WF Prime Lenders exceeded the percentages received at
WF Financial in all of the markets reviewed.
In addition, the origination rates 30 for the WF Prime
Lenders' total HMDA-reportable loans to AfricanAmerican and Hispanic borrowers was comparable to or
exceeded the rates for the aggregate of lenders ("aggregate
lenders") in most of the markets reviewed. 31 The HMDA
data indicate that the percentages of the WF Prime Lenders' total HMDA-reportable loans to African Americans
and Hispanics increased or remained constant from 2002 to
2003 in most of the markets reviewed. The percentages of
the W F Prime Lenders' total HMDA-reportable loan originations in minority census tracts also increased during this
time period in all the markets reviewed.
Moreover, a review of the 2003 HMDA data indicates
that the W F Prime Lenders' denial disparity ratios for
C. HMDA Data and Fair Lending Record
The Board has carefully considered the lending record of
Wells Fargo in light of public comments received on the
proposal. A commenter alleged, based on a review of 2003
data reported pursuant to the Home Mortgage Disclosure
Act, 12 U.S.C. 2891 et seq. ("HMDA"), that Wells Fargo
engages in discriminatory lending by directing AfricanAmerican and Hispanic applicants in certain markets
to Wells Fargo Financial, Inc. ( " W F Financial"),
Des Moines, Iowa, a subsidiary of Wells Fargo that is
engaged primarily in subprime lending, rather than to
Wells Fargo's subsidiary banks and other prime lending
channels. The commenter further alleged, based on a
review of 2003 HMDA data, that there are systemic disparities in Wells Fargo's lending because it disproportionately excludes or denies applications for HMDA-reportable
loans by African-American and Hispanic applicants. 27
Idaho, Minnesota, Nevada, Oregon, Utah, and Washington), including
sixteen that received full-scope reviews.
26. Small businesses are businesses with gross annual revenues
of $1 million or less. Small loans to businesses include loans with
original a m o u n t s of $1 million or less that are either secured by
nonfarm, nonresidential properties or classified as commercial and
industrial loans.
27. Specifically, the c o m m e n t e r ' s allegations are based on 2 0 0 3
H M D A data by W F B a n k C A and W F Financial. T h e c o m m e n t e r
cited Well F a r g o ' s H M D A data for lending to African A m e r i c a n s and
Hispanics in the L o s A n g e l e s and San Francisco Metropolitan Statisti-
cal Areas ( " M S A s " ) , in California, and the Austin, Dallas, El Paso,
San Antonio, and Houston M S A s , in Texas.
28. T h e B o a r d reviewed 2002 and 2003 H M D A data reported by
all of Wells F a r g o ' s lending subsidiaries, including W F Financial,
in California and Texas and in the M S A s that comprise the m a j o r
assessment areas of W F Bank C A and Wells F a r g o ' s depository
institutions in those states, which are noted in footnote 27. For
W F Financial in the Texas M S A s , the B o a r d ' s review included only
2 0 0 3 H M D A data. Wells F a r g o ' s lending subsidiaries that offered
p r i m e m o r t g a g e products in California and Texas in 2002 and 2003
included W F B a n k C A ; Wells Fargo B a n k Texas, N.A., San Antonio,
Texas; Wells Fargo Bank Nevada, N.A., Las Vegas, Nevada; Wells
Fargo F u n d i n g , Inc., Minneapolis, Minnesota; and W F Mortgage
( " W F P r i m e L e n d e r s " ) . Although some of these entities made some
loans that could be considered subprime, these loans represented a
small portion of their loan portfolios. In the M S A s reviewed, the
Board c o m p a r e d the H M D A data reported by the W F Prime Lenders
with the H M D A data reported by W F Financial.
29. T h e c o m m e n t e r also alleged that Wells Fargo engaged in
discriminatory lending based on a review of the prices of loans
extended to A f r i c a n - A m e r i c a n and Hispanic borrowers as compared
to white borrowers in 2004. T h e c o m m e n t e r based this allegation
on 2004 H M D A data derived f r o m loan application registers that it
obtained f r o m Wells Fargo. These data are preliminary and 2004 data
for lenders in the aggregate are not yet available. See Frequently
Asked Questions About the New HMDA Data (March 31, 2005)
available at (www.federalreserve.gov/boarddocs/press/bcreg/2005).
30. T h e origination rate equals the total n u m b e r of loans originated
to applicants of a particular racial category divided by the total
n u m b e r of applications received f r o m m e m b e r s of that racial category.
31. T h e lending data of the aggregate lenders represent the cumulative lending for all financial institutions that have reported data in a
particular area.
436
F e d e r a l R e s e r v e Bulletin • S u m m e r 2 0 0 5
African-American and Hispanic applicants for the banks'
total HMDA-reportable loans in the markets reviewed were
generally comparable with the ratios for the aggregate
lenders in those areas. 3 2 In addition, W F Prime Lenders'
denial disparity ratios for African-American and Hispanic
applicants decreased from 2002 to 2003 in most of the
markets reviewed.
Although the H M D A data may reflect certain disparities in the rates of loan applications, originations, and
denials among members of different racial groups in certain local areas, the H M D A data do not demonstrate that
the W F Prime Lenders are excluding any racial group on
a prohibited basis. The Board, nevertheless, is concerned
when the record of an institution indicates disparities in
lending and believes that all banks are obligated to ensure
that their lending practices are based on criteria that ensure
not only safe and sound lending, but also equal access
to credit by creditworthy applicants regardless of race or
income level. The Board recognizes, however, that H M D A
data alone, even with the recent addition of pricing information, provide an incomplete measure of an institution's
lending in its community because these data cover only a
few categories of housing-related lending and provide only
limited information about covered loans. 3 3 H M D A data,
therefore, have limitations that make them an inadequate
basis, absent other information, for concluding that an
institution has not assisted adequately in meeting its community credit needs or has engaged in illegal lending
discrimination. Moreover, H M D A data indicating that one
affiliate is lending to minorities or LMI individuals more
than another affiliate do not, without more information,
indicate that either affiliate has engaged in illegal discriminatory lending activities.
Because of the limitations of H M D A data, the Board
has considered these data carefully in light of other information, including examination reports that provide on-site
evaluations of compliance with fair lending laws by
the subsidiary depository and lending institutions of
Wells Fargo and FCCC. Examiners noted no substantive
violations of applicable fair lending laws in the examinations of the depository institutions controlled by Wells
Fargo or F C C C . Moreover, the Board has consulted with
the O C C about the consumer compliance records of the
W F Prime Lenders and with relevant state supervisors
about the consumer compliance records of WFFI.
The record also indicates that Wells Fargo has taken
various measures to help ensure compliance with fair lending laws and other consumer protection laws at all its
32. The denial disparity ratio equals the denial rate for a particular
racial category (e.g., A f r i c a n American) divided by the denial rate for
whites.
33. T h e data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
w h o was denied credit was, in fact, creditworthy. Credit history
problems and excessive debt levels relative to income (reasons most
frequently cited for a credit denial) are not available f r o m H M D A
data.
lending subsidiaries, including W F Financial. 3 4 Wells
Fargo represented that it has implemented corporate-wide
policies and procedures to help ensure compliance with all
fair lending and other consumer protection laws and regulations. These policies and procedures apply to all of Wells
Fargo's prime and subprime lending subsidiaries. Wells
Fargo's corporate Fair Lending Policy requires each business unit to adopt and implement fair lending policies and
procedures, including control standards related to marketing, pricing, and referrals. Wells Fargo's Compliance Risk
Management Group guides, maintains, and monitors c o m pliance of business units with fair lending and consumer
protection laws. Wells Fargo's Law Department provides
oversight and guidance on the fair lending policies and on
the business unit compliance programs. Furthermore, Wells
F a r g o ' s Corporate Fair Lending Steering Committee,
which includes senior management representatives f r o m its
bank and nonbank subsidiaries, meets regularly to identify
and provide guidance on fair lending practices throughout
the company.
Wells Fargo represented that each of its lending operations has developed, implemented, and maintained c o m pliance programs for fair lending and other consumer protection laws. These fair lending compliance programs
include components such as pricing limits, programs for
second review of initially declined applications, analysis
of decision and pricing data, and comparative file analysis.
All lending operations are required to include compliance
training in employee training programs. Wells Fargo's
internal audit unit conducts audits for compliance with fair
lending and consumer law that involve an independent
evaluation of results through data analysis or comparative
file review.
The Board also has considered the H M D A data in light
of other information, including the C R A performance
records of the subsidiary depository institutions of Wells
Fargo and FCCC. These records demonstrate that Wells
Fargo and F C C C are active in helping to meet the credit
needs of their entire communities.
Conclusion on Convenience
and Needs Considerations
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
34. A c o m m e n t e r criticized the customer service and complaint
procedures of a Wells Fargo subsidiary engaged in subprime lending
in Puerto Rico and urged the Board, without specific allegations, to
closely scrutinize the subprime lending operations of Wells Fargo in
general. Wells Fargo originates subprime mortgage loans through
W F Financial and Island Finance, and numerous joint ventures originate subprime loans that are underwritten and processed through
W F M o r t g a g e ' s unit, Wells Fargo M o r t g a g e Resource. W F Financial
and Island Finance are nonbanking subsidiaries of Wells Fargo. A s the
Board has previously noted, subprime lending is a permissible activity
that provides needed credit to consumers w h o have difficulty m e e t i n g
conventional underwriting criteria. T h e Board, however, continues to
expect all bank holding companies and their affiliates to conduct their
subprime lending operations without any abusive lending practices.
See, e.g. Royal Bank of Canada, 88 Federal Reserve Bulletin 385, 388
n. 18 (2002).
Legal Developments
institutions involved, information provided by Wells Fargo
and F C C C , comments on the proposal, 3 5 confidential
supervisory information, and Well Fargo's plans to implement its CRA-related policies, procedures, and programs at
F C C C ' s subsidiary banks. The Board notes that the proposal would expand the availability and array of banking
products and services to the customers of Wells Fargo and
FCCC, including access to expanded branch and ATM
networks and internet banking services. Based on a review
of the entire record, and for the reasons discussed above,
the Board concludes that considerations relating to the
convenience and needs factor and the CRA performance
records of the relevant depository institutions are consistent with approval.
437
order, unless such period is extended for good cause by the
Board or by the Federal Reserve Bank of San Francisco,
acting pursuant to delegated authority.
By order of the Board of Governors, effective June 23,
2005.
V o t i n g f o r this action: C h a i r m a n G r e e n s p a n , V i c e C h a i r m a n F e r g u son, and G o v e r n o r s G r a m l i c h , Bies, a n d O l s o n . A b s e n t a n d not
v o t i n g : G o v e r n o r Kolin.
JENNIFER J. J O H N S O N
Secretary of the Board
Appendix A
Conclusion
Based on the foregoing and in light of all the facts of
record, the Board has determined that the application
should be, and hereby is, approved. In reaching this conclusion, the Board has considered all the facts of record in
light of the factors it is required to consider under the BHC
Act and other applicable statutes. 3 6 The Board's approval
is specifically conditioned on compliance by Wells Fargo
with the conditions in this order and all the commitments
made to the Board in connection with this proposal. For
purposes of this action, the commitments and conditions
are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision and, as
such, may be enforced in proceedings under applicable
law.
The proposal shall not be consummated before the
fifteenth calendar day after the effective date of this order,
or later than three months after the effective date of this
Texas Banking Markets Where Wells Fargo and F C C C
Subsidiary Depository Institutions Compete Directly
Brazoria
Brazoria County, excluding the cities of Alvin and Pearland and the surrounding unincorporated area in the Houston Ranally Metropolitan Area ( " R M A " ) .
Grimes County
Grimes County.
Houston
Houston R M A , including the portion of Montgomery
County not included in the Houston R M A .
San Antonio
Bexar, Comal, Guadalupe, Kendall, and Wilson counties.
35. A c o m m e n t e r e x p r e s s e d c o n c e r n that t h e l e n g t h of the B o a r d ' s
r e v i e w of t h e p r o p o s a l n e g a t i v e l y a f f e c t e d the c u s t o m e r s , s t o c k h o l d ers, and e m p l o y e e s of F C C C .
36. A c o m m e n t e r r e q u e s t e d that the B o a r d h o l d a p u b l i c h e a r i n g or
m e e t i n g on the p r o p o s a l . S e c t i o n 3 of the B H C A c t d o e s not r e q u i r e
the Board to h o l d a p u b l i c h e a r i n g o n an a p p l i c a t i o n u n l e s s the
a p p r o p r i a t e s u p e r v i s o r y a u t h o r i t y f o r a n y of the b a n k s to be a c q u i r e d
m a k e s a t i m e l y w r i t t e n r e c o m m e n d a t i o n of denial of the a p p l i c a t i o n .
T h e B o a r d h a s n o t r e c e i v e d such a r e c o m m e n d a t i o n f r o m a n y s u p e r v i sory authority. U n d e r its rules, t h e B o a r d also m a y , in its d i s c r e t i o n ,
hold a p u b l i c m e e t i n g or heaving on an a p p l i c a t i o n to a c q u i r e a b a n k
if a m e e t i n g or h e a r i n g is n e c e s s a r y or a p p r o p r i a t e to c l a r i f y f a c t u a l
issues related to the a p p l i c a t i o n and to p r o v i d e an o p p o r t u n i t y f o r
testimony. 12 C F R 2 2 5 . 1 6 ( e ) . T h e B o a r d h a s c o n s i d e r e d c a r e f u l l y the
c o m m e n t e r ' s r e q u e s t s in light of all t h e f a c t s of r e c o t d . In t h e B o a r d ' s
v i e w , the p u b l i c h a s had a m p l e o p p o r t u n i t y to s u b m i t c o m m e n t s on
the p r o p o s a l a n d , in fact, the c o m m e n t e r has s u b m i t t e d written c o m m e n t s that t h e B o a r d h a s c o n s i d e r e d c a r e f u l l y in acting on the p r o posal. T h e c o m m e n t e r ' s r e q u e s t s fail to d e m o n s t r a t e w h y its written
c o m m e n t s d o n o t p r e s e n t its v i e w s a d e q u a t e l y or w h y a m e e t i n g or
hearing otherwise would be necessary or appropriate. T h e requests
also fail to i d e n t i f y d i s p u t e d i s s u e s of fact that are m a t e r i a l to the
B o a r d ' s d e c i s i o n that w o u l d b e clarified b y a p u b l i c h e a r i n g o r
m e e t i n g . F o r t h e s e r e a s o n s , and b a s e d o n all t h e f a c t s of r e c o r d , the
B o a r d has d e t e r m i n e d that a p u b l i c h e a r i n g or m e e t i n g is not r e q u i r e d
or w a r r a n t e d in this c a s e . A c c o r d i n g l y , the r e q u e s t s f o r a public
h e a r i n g o r m e e t i n g on the p r o p o s a l are d e n i e d .
Appendix B
Market
Data for Banking
Markets
Moderately Concentrated Banking Markets
Brazoria
Wells Fargo operates the fifth largest depository institution in the market, controlling deposits of approximately
$68.2 million, which represent approximately 8.3 percent
of market deposits. F C C C operates the 12th largest depository institution in the market, controlling deposits of
approximately $12.4 million, which represent approximately 1.5 percent of market deposits. After the proposed
merger, Wells Fargo would operate the fifth largest depository institution in the market, controlling deposits of
approximately $80.6 million, which represent approximately 9.8 percent of market deposits. Fifteen depository
institutions would remain in the banking market. The HHI
would increase 25 points, to 1,279.
438
F e d e r a l R e s e r v e Bulletin • S u m m e r 2 0 0 5
San Antonio
Wells Fargo operates the fourth largest depository institution in the market, controlling deposits of approximately
$ 1.4 billion, which represent approximately 6.8 percent of
market deposits. F C C C operates the 42nd largest depository institution in the market, controlling deposits of
approximately $13.4 million, which represent less than
1 percent of market deposits. After the proposed merger,
Wells Fargo would remain the fourth largest depository
institution in the market, controlling deposits of approximately $1.4 billion, which represent approximately 6.8 percent of market deposits. Fifty-one depository institutions
would remain in the banking market. T h e HHI would
increase 1 point, to 1,574.
Highly Concentrated Banking Markets
Grimes
Wells Fargo operates the fourth largest depository institution in the market, controlling deposits of approximately
$23.4 million, which represent approximately 10.2 percent
of market deposits. F C C C operates the sixth largest depository institution in the market, controlling deposits of
approximately $4.9 million, which represent approximately
2.1 percent of market deposits. After the proposed merger,
Wells Fargo would remain the fourth largest depository
institution in the market, controlling deposits of approximately $28.3 million, which represent approximately
12.4 percent of market deposits. Five depository institutions would remain in the banking market. The HHI would
increase 4 4 points, to 2,408.
Houston
Wells Fargo operates the third largest depository institution
in the market, controlling deposits of approximately
$6.1 billion, which represent approximately 8.1 percent of
market deposits. F C C C operates the 23rd largest depository institution in the market, controlling deposits of
approximately $415.3 million, which represent less than
1 percent of market deposits. After the proposed merger,
Wells Fargo would remain the third largest depository
institution in the market, controlling deposits of approximately $6.5 billion, which represent approximately 8.7 percent of market deposits. Ninety depository institutions
would remain in the banking market. T h e HHI would
increase 9 points, to 1,912.
Appendix C
CRA Performance Evaluations of Wells Fargo
Subsidiary Bank
C R A Rating
Date
Supervisor
1. Wells Fargo Bank, N.A.,
San Francisco, California
(now Sioux Falls, South Dakota)
2. Wells Fargo Bank Northwest, N.A.,
Ogden, Utah
3. Wells Fargo H S B C Trade Bank, N.A.,
San Francisco, California
4. Wells Fargo Financial National Bank,
Las Vegas, Nevada
5. Wells Fargo Financial Bank,
Sioux Falls, South Dakota
Outstanding
October 2001
OCC
Outstanding
May 1999
OCC
Satisfactory
August 2000
OCC
Outstanding
March 2003
OCC
Outstanding
March 2005
FDIC
The Citizens Bank ("Citizens Bank"), 1 a state member
bank, has requested the Board's approval under section
18(c) of the Federal Deposit Insurance Act (the " B a n k
Merger A c t " ) 2 to purchase the assets and assume the
liabilities of the Cave City branch ( " B r a n c h " ) of First
National Bank and Trust Company ("First National
B a n k " ) , Mountain Home, Arkansas. 3 Citizens Bank also
has requested the Board's approval to operate Branch as
a branch of Citizens Bank pursuant to section 9 of the
Federal Reserve Act ( " F R A " ) . 4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been given in accor-
1. Citizens Bank is a wholly o w n e d subsidiary of Citizens Bancshares of Batesville, Inc., also of Batesville, which is a bank holding
company within the m e a n i n g of the Bank Holding C o m p a n y Act,
12U.S.C. §1842.
2. 12 U.S.C. § 1828(c).
3. T h e b r a n c h ' s address is 201 South M a i n Street, C a v e City,
Arkansas.
4. 12 U.S.C. § 3 2 1 .
ORDERS ISSUED
UNDER BANK MERGER ACT
The Citizens Bank
Batesville, Arkansas
Order Approving the Acquisition and Establishment of a
Branch
Legal Developments
dance with the Bank Merger Act and the Board's Rules
of Procedure. 5 As required by the Bank Merger Act, reports
on the competitive effects of the merger were requested
from the United States Attorney General and relevant
banking agencies. The time for filing comments has
expired, and the Board has considered the applications and
all the facts of record in light of the factors set forth in the
Bank Merger Act and section 9 of the FRA.
Citizens Bank, with total consolidated assets of approximately $418.6 million, is the 24th largest insured depository institution in Arkansas, controlling deposits of
approximately $301.9 million. 6 Branch controls deposits
of approximately $7 million. On consummation of the
proposal, Citizens Bank would bccome the 23rd largest
insured depository institution in Arkansas, controlling
deposits of $308.9 million, which represent less than 1 percent of total deposits of insured depository institutions in
the state.
Competitive Considerations
The Bank Merger Act prohibits the Board from approving
an application if the proposal would result in a monopoly
or would be in furtherance of any attempt to monopolize
the business of banking in any relevant banking market. 7
The Bank Merger Act also prohibits the Board from
approving a proposal that would substantially lessen competition in any relevant banking market unless the anticompetitive effects of the proposal are clearly outweighed in
the public interest by the probable effect of the proposal in
meeting the convenience and needs of the community to be
served. 8
Citizens Bank and First National Bank compete directly
in the Batesvillc banking market in Arkansas. 9 The Board
has carefully reviewed the competitive effects of the proposal in this banking market in light of all the facts of
record, including the number of competitors that would
remain in the market, the relative shares of total deposits in
depository institutions in the market ("market deposits")
controlled by Citizens Bank and First National Bank, 10 the
concentration level of market deposits and the increase in
this level as measured by the Herfindahl-Hirschman Index
("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines")," and other characteristics of
the market.
5. 12 C F R 262.3(b).
6. In this context, depository institutions include commercial banks,
savings banks, and savings associations. Deposit and ranking data are
as of June 30, 2 0 0 4 . R a n k i n g data are adjusted to reflect merger and
acquisition activity through May 6, 2005.
7. 12 U.S.C. § 1828(c)(5)(A).
8. 12 U.S.C. § 1828(c)(5)(B).
9. The Batesville b a n k i n g market is defined as I n d e p e n d e n c e
C o u n t y and Sharp County south of the Strawberry River.
10. Deposit and market share data arc as of June 30, 2004.
11. Under the D O J Guidelines, a market is considered highly
concentrated if the post-merger H H I is more than 1800. T h e Department of Justice ( " D O J " ) has informed the Board that a bank merger
439
Although the Batesville banking market would remain
highly concentrated on consummation of the proposal, the
increase in the post-merger HHI would be consistent with
DOJ Guidelines and Board precedent. Citizens Bank is
the largest depository institution in the market, controlling
approximately $291.5 million in deposits, which represents approximately 45.6 percent of market deposits. 12
First National is the smallest depository institution in the
market, with deposits of approximately $7 million, which
represent approximately 1.1 percent of market deposits.
On consummation of the proposal, Citizens Bank would
remain the largest depository institution in the market,
controlling deposits of approximately $298.5 million, and
its market share would increase by a small percentage to
46.7 percent of market deposits. The HHI would increase
100 points, to 3,145, which is consistent with DOJ
Guidelines.
The Board also has considered other factors that indicate
the proposal is not likely to have a significant effect on
competition in the Batesville banking market. Six commercial banking organizations would remain in the market
after consummation, including two competitors each with
more than 10 percent of deposits in the market. In addition,
the second largest competitor increased its market share
from 14.2 percent to 27.6 percent between 1999 and 2004,
while Citizens Bank's market share decreased four percentage points during the same period.
In addition, several factors indicate that the Batesville
banking market is attractive for entry. One of the existing
competitors entered the market de novo in February 2005
and another commercial banking organization recently
received approval to open a de novo branch in the market.
Moreover, Independence County, the main county in the
market, experienced above-average population and deposit
growth rates relative to the average rates for nonmetropolitan counties in Arkansas between 1996 and 2003, and its
per capita income exceeded the averages for nonmetropolitan counties during this period.
The DOJ has reviewed the proposal and advised the
Board that consummation of the proposal is not likely to
have a significantly adverse competitive effect in the Batesville banking market. The other federal banking agencies
have been afforded an opportunity to comment and have
not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposed transaction would not likely
result in a significantly adverse effect on competition or on
the concentration of banking resources in the Batesvillc
banking market or in any other relevant banking market
and that competitive factors are consistent with approval.
or acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger
HHI is at least 1800 and the merger increases the H H I by more
than 200 points. The DOJ has stated that the higher than normal H H I
thresholds for screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limitedpurpose and other nondepository financial entities.
12. Citizens Bank increased its market share by opening seven
de novo branches over a 23-year period.
440
Federal Reserve Bulletin • S u m m e r 2005
Financial and Managerial
Considerations
In reviewing the proposal under the Bank Merger Act and
section 9 of the FRA, the Board has carefully considered
the financial and managerial resources and future prospects of the companies and depository institutions involved
in the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record including, among other things, confidential
reports of examination and other supervisory information
received from the federal and state banking supervisors of
Citizens Bank and First National Bank, publicly reported
and other financial information, and information provided
by Citizens Bank.
In evaluating financial factors in expansion proposals by
depository institutions, the Board reviews the financial
condition of the institutions involved. In this evaluation,
the Board considers a variety of areas, including capital
adequacy, asset quality, and earnings performance. In
assessing financial factors, the Board consistently has considered capital adequacy to be especially important. The
Board also evaluates the financial condition of the applicant on a pro forma basis, including its capital position,
asset quality, and earnings prospects and the impact of the
proposed funding of the transaction.
Based on its review of these factors, the Board finds that
Citizens Bank is well capitalized and would remain so on
consummation of the proposal. The Board also finds that
Citizens Bank has sufficient financial resources to effect
the proposal. The proposed transaction would be funded
with cash on hand at Citizens Bank.
The Board also has considered the managerial resources
of the institutions involved, including the resources of
Citizens Bank on a pro forma basis. The Board has
reviewed the examination records of Citizens Bank and
First National Bank, including assessments of their management, risk management systems, and operations. In
addition, the Board has considered its supervisory experience and that of the other relevant banking supervisory
agencies with the institutions and their records of compliance with applicable banking law. The Board also has
considered Citizens Bank's plans to integrate Branch and
its proposed management and to implement Citizen Bank's
risk-management systems at Branch.
Based on all the facts of record, the Board has concluded
that the financial and managerial resources and future
prospects of the institutions and the other supervisory factors involved are consistent with approval of the
proposal.
Convenience
and Needs
In acting on the proposal, the Board also must consider its
effects on the convenience and needs of the communities to
be served and take into account the records of the relevant
insured depository institutions under the Community Reinvestment Act ("CRA"). 1 3 Citizens Bank received a "satis13. 1 2 U . S . C . § 2 9 0 1 e t s e q .
factory" rating at its most recent CRA performance evaluation by the Federal Reserve Bank of St. Louis, as of
November 12, 2003. First National Bank received an "outstanding" rating at its most recent CRA performance
evaluation by the Office of the Comptroller of the Currency, as of November 4, 2002. The Board notes that the
proposal would provide Branch's customers with access to
a broader array of products and services in expanded
service areas, including access to larger branch and ATM
networks.
Based on all the facts of record, the Board concludes that
the considerations relating to the convenience and needs of
the communities to be served and the CRA performance
records of the institutions involved are consistent with
approval of this proposal.
Establishment
of a Branch
Citizens Bank also has applied under section 9 of the FRA
to establish a branch at the Cave City location of First
National Bank. The Board has assessed the factors it is
required to consider when reviewing an application under
section 9 of the FRA, including section 208.6 of the
Board's Regulation H, which implements sections 9(3) and
9(4) of the FRA, and finds those factors to be consistent
with approval. 1 4
Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the applications should be, and
hereby are, approved. In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the Bank Merger Act
and the FRA. The Board's approval is specifically conditioned on compliance by Citizens Bank with the conditions
imposed in this order, commitments made to the Board in
connection with the applications, and receipt of all other
regulatory approvals. For purposes of this action, the conditions and commitments are deemed to be conditions
imposed in writing by the Board in connection with its
findings and decision herein and, as such, may be enforced
in proceedings under applicable law. The transaction may
not be consummated before the fifteenth calendar day after
the effective date of this order, or later than three months
after the effective date of this order, unless such period is
extended for good cause by the Board or the Federal
Reserve Bank of St. Louis, acting pursuant to delegated
authority.
By order of the Board of Governors, effective June 2,
2005.
Voting for this action: C h a i r m a n Greenspan, Vice C h a i r m a n Ferguson, and G o v e r n o r s Gramlich, Bies, Olson, Bernanke, and Kohn.
R O B E R T DEV. F R I E R S O N
Deputy Secretary of the Board
14. 12 U.S.C. §§ 321 and 322; 12 C F R 208.6(b).
Legal Developments
ORDERS ISSUED
BANKING ACT
UNDER
INTERNATIONAL
Aozora Bank, Ltd.
Tokyo, Japan
Order Approving Establishment of a Representative
Office
Aozora Bank, Ltd. ("Bank"), Tokyo, Japan, a foreign bank
within the meaning of the International Banking Act
("IBA"), has applied under section 10(a) of the IBA
(12 U.S.C. § 3107(a)) to establish a representative office in
New York, New York. The Foreign Bank Supervision
Enhancement Act of 1991, which amended the IBA, provides that a foreign bank must obtain the approval of the
Board to establish a representative office in the United
States.
Notice of the application, affording interested persons an
opportunity to submit comments, has been published in a
newspaper of general circulation in New York, New York
(New York Times, September 21, 2004). The time for filing comments has expired, and all comments have been
considered.
Bank, with total consolidated assets of approximately
$44.5 billion, 1 is the 46th largest bank in Japan. Bank
provides a range of financial services to corporate and
retail clients. Outside Japan, Bank operates three representative offices in Singapore, Seoul, and Jakarta. Bank's
proposed New York office would be the first office in the
United States under its current ownership. 2 A limited partnership, Cerberus NCB Acquisition, L.P. ("Acquisition"),
Cayman Islands, holds approximately 62 percent of Bank's
shares. 3 Two other companies, Tokio Marine & Nichido
Fire Insurance Co., Ltd. and ORIX Corporation, both
in Tokyo, each hold approximately 15 percent of Bank's
shares. 4
The proposed representative office would market Bank's
services to existing and potential customers in the United
States. The proposed office would also act as a liaison with
customers of Bank and would conduct research on loan
participation opportunities for Bank.
Under the IBA and Regulation K, in acting on an application by a foreign bank to establish a representative
office, the Board must consider whether the foreign bank
1. Unless o t h e r w i s e indicated, data are as of March 31, 2005.
2. Bank was originally established in 1957 as the Nippon Fudosan
Bank, Ltd. It w a s renamed the Nippon Credit Bank, Ltd. and by the
mid-1990s operated both banking offices and nonbanking subsidiaries
in the United States. T h e bank was intervened in 1998; U.S. operations
were closed; a n d the government of Japan sold B a n k ' s shares to
private investors, w h o changed B a n k ' s n a m e to Aozora Bank, Ltd.
3. The general partner of Acquisition, Cerberus Aozora G P L L C
( " C e r b e r u s A o z o r a " ) , is a U.S. entity controlled by three other U.S.
entities, C e r b e r u s Japan Investment L L C , Cerberus Series O n e Holdings, LLC, and Richter Investment Corporation, that hold interests
of 4 9 percent, 2 6 percent, and 25 percent, respectively, in Cerberus
Aozora. These c o m p a n i e s are m e m b e r s of the Cerberus group, a
U.S.-based investment group.
4. Regional J a p a n e s e banks hold the remaining shares of Bank.
441
(1) engages directly in the business of banking outside of
the United States, (2) has furnished to the Board the
information it needs to assess the application adequately,
and (3) is subject to comprehensive supervision on a
consolidated basis by its home country supervisor
(12 U.S.C. §3107(a)(2); 12 CFR 211.24(d)(2)).s The Board
also may consider additional standards set forth in the IBA
and Regulation K (12 U.S.C. § 3105(d)(3)-(4); 12 CFR
211.24(c)(2)). The Board will consider that the supervision
standard has been met if it determines that the applicant
bank is subject to a supervisory framework that is consistent with the activities of the proposed representative office,
taking into account the nature of such activities. 6 This is
a lesser standard than the comprehensive, consolidated
supervision standard applicable to proposals to establish
branch or agency offices of a foreign bank. The Board
considers the lesser standard sufficient for approval of
representative office applications because representative
offices may not engage in banking activities (12 CFR
211.24(d)(2)). This application has been considered under
the lesser standard.
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
With respect to supervision by home country authorities,
the Board previously has determined, in connection with
applications involving other banks in Japan, that those
banks were subject to home country supervision on a
consolidated basis by their home country supervisor,
Japan's Financial Services Agency ("FSA"). 7 Bank is
5. In assessing the supervision standard, the B o a r d considers, a m o n g other factors, the extent to which the h o m e country
supervisors:
(i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide;
(ii) obtain information on the condition of the bank and its
subsidiaries and offices through regular examination reports,
audit reports, or otherwise;
(iii) obtain information on the dealings with and relationship
b e t w e e n the bank and its affiliates, both foreign and
domestic;
(iv) receive f r o m the bank financial reports that are consolidated
on a w o r l d w i d e basis or c o m p a r a b l e information that permits analysis of the b a n k ' s financial condition on a worldw i d e consolidated basis; and
(v) evaluate prudential standards, such as capital adequacy and
risk asset exposure, on a worldwide basis.
These are indicia of comprehensive, consolidated supervision. N o
single factor is essential, and other elements may inform the B o a r d ' s
determination.
6. See, e.g.,Jamuica
National Building Society, 88 Federal Reserve
Bulletin 59 (2002); RHEINHYP
Rheinische
Hypothekenbank
AG,
87 Federal Reserve Bulletin 558 (2001); see also Promstroybank
of
Russia, 82 Federal Reserve Bulletin 599 (1996); Komercni Banka,
a.s., 82 Federal Reserve Bulletin 597 (1996); Commercial Bank Ion
Tiriac, S.A., 82 Federal Reserve Bulletin 592 (1996).
7. See, e.g., Mitsubishi
Tokyo Financial Group, Inc., 87 Federal
Reserve Bulletin 349 (2001); Mizuho Holdings,
Inc., 86 Federal
Reserve Bulletin 7 7 6 (2000); The Sanwa Bank, Limited, 86 Federal
Reserve Bulletin 54 (2000); The Fuji Bank, Limited, 85 Federal
Reserve Bulletin 338 (1999).
442
Federal R e s e r v e Bulletin • S u m m e r 2 0 0 5
supervised by the FSA on substantially the same terms and
conditions as those other banks. As noted above, however,
Bank is part of a larger U.S.-based financial group with a
complex ownership structure and is controlled by entities
in the Cayman Islands and the United States. 8 Based on all
the facts of record, it has been determined that Bank is
subject to a supervisory framework that is consistent with
the activities of the proposed representative office, taking
into account the nature of such activities.
The additional standards set forth in section 7 of the IBA
and Regulation K (see 12 U.S.C. § 3105(d)(3)-(4); 12 CFR
211.24(c)(2)) have also been taken into account. The FSA
has no objection to the establishment of the proposed
representative office.
With respect to the financial and managerial resources of
Bank, taking into consideration B a n k ' s record of operations in its home country, its overall financial resources,
and its standing with its home country supervisor, financial
and managerial factors are consistent with approval of the
proposed representative office. Bank appears to have the
experience and capacity to support the proposed representative office and has established controls and procedures
for the proposed representative office to ensure compliance
with U.S. law, as well as controls and procedures for its
worldwide operations generally.
Japan is a member of the Financial Action Task Force
and subscribes to its recommendations regarding measures
to combat money laundering and international terrorism.
In accordance with these recommendations, Japan has
enacted laws and created legislative and regulatory standards to deter money laundering, terrorist financing, and
other illicit activities. Money laundering is a criminal
offense in Japan, and credit institutions are required to
establish internal policies, procedures, and systems for the
detection and prevention of money laundering throughout
their worldwide operations. Bank has policies and procedures to comply with these laws and regulations that are
monitored by governmental entities responsible for antimoney-laundering compliance.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed and relevant
government authorities have been communicated with
regarding access to information. Bank and its parent companies have committed to make available to the Board such
information on the operations of Bank and any of its
affiliates that the Board deems necessary to determine and
enforce compliance with the IBA, the Bank Holding Company Act of 1956, as amended, and other applicable federal
law. To the extent that the provision of such information
to the Board may be prohibited by law or otherwise, Bank
has committed to cooperate with the Board to obtain any
necessary consents or waivers that might be required f r o m
third parties for disclosure of such information. In addition,
8. E s t a b l i s h m e n t of a representative office will not c a u s e Bank and
its parent c o m p a n i e s to b e c o m e subject to the B a n k Holding C o m p a n y
Act.
subject to certain conditions, the F S A may share information on B a n k ' s operations with other supervisors, including
the Board. In light of these commitments and other facts of
record, and subject to the condition described below, it has
been determined that Bank has provided adequate assurances of access to any necessary information that the
Board may request.
Based on the foregoing and all the facts of record,
Bank's application to establish a representative office is
hereby approved. 9 Should any restrictions on access to
information on the operations or activities of Bank or its
affiliates subsequently interfere with the B o a r d ' s ability to
obtain information to determine and enforce compliance by
Bank or its affiliates with applicable federal statutes, the
Board may require termination of any of B a n k ' s direct or
indirect activities in the United States. Approval of this
application also is specifically conditioned on compliance
by Bank with the conditions imposed in this order and the
commitments made to the Board in connection with this
application. 1 0 For purposes of this action, these commitments and conditions are deemed to be conditions imposed
by the Board in writing in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
By order, approved pursuant to authority delegated by
the Board, effective June 29, 2005.
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
Banco del Estado
Santiago, Chile
de Chile
Order Approving Establishment of a Branch
Banco del Estado de Chile ( " B a n k " ) , Santiago, Chile, a
foreign bank within the meaning of the International Banking Act ( " I B A " ) , has applied under section 7(d) of the IBA
(12 U.S.C. §3105(d)) to establish a branch in New York,
New York. The Foreign Bank Supervision Enhancement
Act of 1991, which amended the IBA, provides that a
foreign bank must obtain the approval of the Board to
establish a branch in the United States.
Notice of the application, affording interested persons an
opportunity to comment, has been published in a newspaper of general circulation in New York, New York (The
Daily News, June 30, 2004). The time for filing comments
has expired, and all comments have been considered.
9. A p p r o v e d by the Director of the Division of B a n k i n g Supervision and Regulation, with the c o n c u r r e n c e of the General Counsel,
pursuant to authority delegated by the B o a r d .
10. T h e B o a r d ' s authority to a p p r o v e the establishment of the
proposed representative office parallels the continuing authority of the
State of N e w York to license offices of a foreign bank. T h e B o a r d ' s
approval of this application does not supplant the authority of the
State of N e w York to license the p r o p o s e d office of Bank in accord a n c e with any terms or conditions that it m a y impose.
Legal Developments
Bank, with total assets of $15.4 billion, is the third
largest commercial bank in Chile, 1 and is wholly owned by
the Chilean state. It provides a variety of banking services
to retail and corporate customers through more than 300
branches in Chile. It also provides through its subsidiaries
stock brokerage, insurance brokerage, fund management,
and financial advisory services. The proposed branch
would be its first office outside Chile. Bank is a qualifying
foreign banking organization under Regulation K (12 CFR
211.23(b)).
The proposed branch would engage in wholesale banking business focusing on trade finance and lending activities. In addition, Bank anticipates that the branch would
conduct treasury operations, participate in loan syndicates,
invest in fixed-income securities, and provide cash management services.
Under the IBA and Regulation K, in acting on an application by a foreign bank to establish a branch, the Board
must consider whether the foreign bank (1) engages
directly in the business of banking outside of the United
States; (2) has furnished to the Board the information
it needs to assess the application adequately; and (3) is
subject to comprehensive supervision on a consolidated
basis by its home country supervisor (12 U.S.C.
§3105(d)(2); 12 CFR 211.24(c)(1)). 2 The Board also may
consider additional standards set forth in the IBA and
Regulation K (12 U.S.C. §3105(d)(3)-(4); 12 CFR
211.24(c)(2)-(3)).
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
With respect to supervision by home country authorities,
the Federal Reserve previously has determined, in connection with applications involving other banks in Chile, that
those banks were subject to home country supervision on a
consolidated basis by their home country supervisor, the
Superintendencia de Bancos e Instituciones Financieras
("SBIF"). 3 Bank is supervised by the SBIF on substan1. Asset data are as of March 31, 2005.
2. In assessing this standard, the Board considers, a m o n g other
factors, the extent to which the h o m e country supervisors:
(i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide;
(ii) obtain information on the condition of the bank and its
subsidiaries and offices through regular examination reports,
audit reports, or otherwise;
(iii) obtain information on the dealings with and relationship
b e t w e e n the bank and its affiliates, both foreign and
domestic;
(iv) receive f r o m the bank financial reports that are consolidated
on a w o r l d w i d e basis or comparable information that permits analysis of the b a n k ' s financial condition on a worldw i d e consolidated basis; and
(v) evaluate prudential standards, such as capital adequacy and
risk-asset exposure, on a worldwide basis.
T h e s e are indicia of comprehensive, consolidated supervision. N o
single factor is essential, and other elements m a y i n for m the B o a r d ' s
determination.
3. See Banco de Chile, 90 Federal Reserve Bulletin 5 5 0 (2004);
Banco de Credito e lnversiones 5.-4., 85 Federal Reserve Bulletin 4 4 6
443
tially the same terms and conditions as those other banks.
Based on all the facts of record, it has been determined that
Bank is subject to comprehensive supervision on a consolidated basis by its home country supervisor.
The additional standards set forth in section 7 of the IBA
and Regulation K (see 12 U.S.C. §3105(d)(3)-(4); 12 CFR
211.24(c)(2)—(3)) have also been taken into account. The
SBIF has no objection to the establishment of the proposed
branch.
Chile's risk-based capital standards are consistent with
those established by the Basel Capital Accord ("Accord").
Bank's capital is in excess of the minimum levels that
would be required by the Accord and is considered equivalent to capital that would be required of a U.S. banking
organization. Managerial and other financial resources of
Bank also are considered consistent with approval, and
Bank appears to have the experience and capacity to support the proposed branch. Bank has established controls
and procedures for the proposed branch to ensure compliance with U.S. law and for its operations in general.
Chile is a member of GAFISUD (Financial Action Task
Force for South America), which is an observer organization to the Financial Action Task Force. Chile has enacted
laws and adopted regulations to deter money laundering.
Money laundering is a criminal offense in Chile, and
financial institutions are required to establish internal policies, procedures, and systems for the detection and prevention of money laundering throughout their worldwide
operations. Bank has policies and procedures to comply
with these laws and regulations. Bank's compliance with
applicable laws and regulations is monitored by its auditors
and the SBIF.
With respect to access to information about Bank's
operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and
relevant government authorities have been communicated
with regarding access to information. Bank has committed
to make available to the Board such information on the
operations of Bank and any of its affiliates that the Board
deems necessary to determine and enforce compliance with
the IBA, the Bank Holding Company Act, and other applicable federal law. To the extent that the provision of such
information to the Board may be prohibited by law or
otherwise, Bank has committed to cooperate with the
Board to obtain any necessary consents or waivers that
might be required from third parties for disclosure of such
information. In addition, subject to certain conditions,
SBIF may share information on Bank's operations with
other supervisors, including the Board. In light of these
commitments and other facts of record, and subject to the
condition described below, it has been determined that
Bank has provided adequate assurances of access to any
necessary information that the Board may request.
Based on the foregoing and all the facts of record,
Bank's application to establish a branch is hereby
(1999). See also. Banco
(1994).
de Chile,
80 Federal
Reserve
Bulletin
179
444
Federal Reserve Bulletin • Summer 2005
approved. 4 Should any restrictions on access to information on the operations or activities of Bank and its affiliates
subsequently interfere with the Board's ability to obtain
information to determine and enforce compliance by Bank
or its affiliates with applicable federal statutes, the Board
may require termination of any of B a n k ' s direct or indirect
activities in the United States. Approval of this application
also is specifically conditioned on compliance by Bank
with the conditions imposed in this order and the commitments m a d e to the Board in connection with this application. 5 For purposes of this action, these commitments and
conditions are deemed to be conditions imposed by the
Board in writing in connection with its findings and decision and, as such, may be enforced in proceedings under
applicable law.
By order, approved pursuant to authority delegated by
the Board, effective June 20, 2005.
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
Banco Financiera
Comercial
Tegucigalpa,
Honduras
Hondurefia,
S.A.
Order Approving Establishment of a Representative
Office
Banco Financiera Comercial Hondurena, S.A. ( " B a n k " ) ,
Tegucigalpa, Honduras, a foreign bank within the meaning
of the International Banking Act ( " I B A " ) , has applied
under section 10(a) of the IBA (12 U.S.C. § 3107(a)) to
establish a representative office in Miami, Florida. T h e
Foreign Bank Supervision Enhancement Act of 1991,
which amended the IBA, provides that a foreign bank must
obtain the approval of the Board to establish a representative office in the United States.
Notice of the application, affording interested persons an
opportunity to submit comments, has been published in a
newspaper of general circulation in Miami, Florida (Miami
Daily Business Review, March 19, 2004). The time for
filing c o m m e n t s has expired, and all comments received
have been considered.
Bank, with total consolidated assets of approximately
$612 million, 1 is the fourth largest commercial bank in
Honduras and provides wholesale and retail banking services through a network of domestic branches. 2 In the
4. A p p r o v e d by the director of the Division of B a n k i n g Supervision and R e g u l a t i o n , with the c o n c u r r e n c e of the general counsel,
pursuant to authority delegated by the Board.
5. T h e B o a r d ' s authority to a p p r o v e the establishment of the proposed b r a n c h parallels the continuing authority of the State of N e w
York to l i c e n s e offices of a foreign bank. T h e B o a r d ' s approval of this
application d o e s not supplant the authority of the State of N e w York to
license the p r o p o s e d office of Bank in a c c o r d a n c e with any terms or
c o n d i t i o n s that it m a y impose.
1. U n l e s s o t h e r w i s e indicated, data are as of D e c e m b e r 31, 2004.
2. C o r p o r a t i o n del Pacilico SA de C V ( " C O R P A S A " ) , a H o n d u r a n
holding c o m p a n y , is B a n k ' s largest shareholder with a 51.3 percent
United States, Bank has licenses to operate nonbank subsidiaries in Florida, Georgia, N e w York, North Carolina,
and Virginia that engage in money remittance services. 3
T h e proposed representative office is intended to act as a
liaison between B a n k ' s head office in Honduras and its
existing and prospective customers in Honduras and the
United States. The office would engage in representative
functions in connection with the activities of Bank, solicit
new business, provide information to customers concerning their accounts, inform U.S.- and Honduran-owned businesses of business opportunities existing in Honduras, and
receive applications for extensions of credit and other
banking services on behalf of Bank.
In acting on an application by a foreign bank to establish
a representative office under the IBA and Regulation K, the
Board must consider whether the foreign bank: (1) engages
directly in the business of banking outside of the United
States; (2) has furnished to the Board the information it
needs to assess the application adequately; and (3) is
subject to comprehensive supervision on a consolidated
basis by its home country supervisor (12 U.S.C.
§3107(a)(2); 12 CFR 211.24(d)(2)). 4 The Board also may
consider additional standards set forth in the IBA and
Regulation K (12 U.S.C. §3105(d)(3)~(4); 12 CFR
211.24(c)(2)). The Board will consider that the supervision
standard has been met where it determines that the applicant bank is subject to a supervisory framework that is
consistent with the activities of the proposed representative
office, taking into account the nature of such activities. 5
This is a lesser standard than the comprehensive, consoli-
o w n e r s h i p interest in B a n k . C O R P A S A in turn is o w n e d by m e m b e r s
of t h e Atala family.
3. B a n k o w n s its m o n e y remittance subsidiaries through F i c o h s a
E x p r e s s H o l d i n g L L C , a holding c o m p a n y organized in Florida,
which in turn is o w n e d by G r u p o Financiero F i c o h s a Ltd, a c o m p a n y
organized in the British Virgin Islands.
4. In assessing the supervision standard, the Board considers,
a m o n g other factors, the extent to w h i c h the h o m e c o u n t r y
supervisors:
(i) e n s u r e that the bank has a d e q u a t e p r o c e d u r e s for m o n i t o r i n g
and controlling its activities w o r l d w i d e ;
(ii) obtain i n f o r m a t i o n on the condition of the bank and its
subsidiaries and offices t h r o u g h regular e x a m i n a t i o n reports,
audit reports, or otherwise;
(iii) obtain information on the dealings with and relationship
b e t w e e n the b a n k and its affiliates, both f o r e i g n and
domestic;
(iv) receive f r o m the bank financial reports that are consolidated
on a w o r l d w i d e basis or c o m p a r a b l e information that permits analysis of the b a n k ' s financial condition on a worldw i d e consolidated basis; and
(v) evaluate prudential standards, such as capital a d e q u a c y and
risk asset exposure, on a w o r l d w i d e basis.
T h e s e are indicia of c o m p r e h e n s i v e , consolidated supervision. N o
single f a c t o r is essential, and other elements m a y i n f o r m the B o a r d ' s
determination.
5. See, e.g., Jamaica National Building Society, 88 Federal Reserve
Bulletin
5 9 (2002); RHEINHYP
Rheinische
Hypothekenbank
AG,
87 Federal Reserve Bulletin 558 (2001); see also Promstroybank
of
Russia, 8 2 Federal Reserve Bulletin 5 9 9 (1996); Komercni Banka,
a.s., 8 2 Federal Reserve Bulletin 5 9 7 (1996); Commercial Bank "Ion
Tiriac," S.A., 82 Federal Reserve Bulletin 592 (1996).
Legal Developments
dated supervision standard applicable to applications to
establish branch or agency offices of a foreign bank. The
Board considers the lesser standard sufficient for approval
of representative office applications because representative
offices may not engage in banking activities (12 CFR
211.24(d)(2)).
In connection with this application, Bank has provided
certain commitments that limit the activities of the representative office. It has committed that the representative
office would engage only in certain specified activities and
would not make credit decisions on behalf of Bank, solicit
deposits on behalf of Bank, or engage in activities related
to securities trading, foreign exchange, or money transmission. Bank has also committed that the representative office
would not solicit business for or promote the services of
Bank's U.S. nonbank subsidiaries and would not share
office space with those subsidiaries.
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
Bank has provided the following information regarding home country supervision. Bank is supervised by
the National Commission on Banking and Insurance
("NCBI"). The NCBI is responsible for the regulation and
supervision of financial institutions operating in Honduras.
The NCBI issues and implements regulations concerning accounting requirements, asset quality, management,
operations, capital adequacy, loan classification and loan
loss reserve requirements. In addition, the NCBI has
authority to order corrective measures, impose sanctions,
and assume management of a financial institution or liquidate it.
The NCBI supervises and regulates Bank in Honduras
through a combination of on-site examinations and off-site
monitoring. 6 On-site examinations are conducted on an
annual basis and cover capital adequacy, asset quality,
profitability, administrative efficiency, liquidity, and compliance with the law. If necessary, the NCBI can also
conduct special on-site examinations. Off-site monitoring
of Bank is conducted by the NCBI through the review of
required monthly and quarterly reports. An external audit
is also part of the supervisory process and must be conducted at least annually. 7
Based on all the facts of record, including the commitments provided by Bank limiting the activities of the
proposed office, if has been determined that Bank is subject
to a supervisory framework that is consistent with the
activities of the proposed representative office, taking into
account the nature of such activities.
6. The laws g o v e r n i n g bank supervision in Honduras are in need of
strengthening. T h e law was amended in September 2004 to require
b a n k s to obtain the prior authorization of the N C B I to establish
foreign operations and to report monthly to the N C B I on their operations. The N C B I continues to work to obtain additional legislation that
would allow it to supervise banks on a fully consolidated basis.
7. The external auditing firm must be approved by and registered
with the N C B I .
445
The additional standards set forth in section 7 of the IBA
and Regulation K (see 12 U.S.C. §3105(d)(3)-(4); 12 CFR
211.24(c)(2)) have also been taken into account. The NCBI
has no objection to the establishment of the proposed
representative office.
With respect to the financial and managerial resources of
Bank, taking into consideration its record of operations in
its home country, its overall financial resources, and its
standing with its home country supervisor, financial and
managerial factors are consistent with approval of the
proposed representative office. Bank appears to have the
experience and capacity to support the proposed representative office and has established controls and procedures
for the proposed representative office to ensure compliance
with U.S. law.
Although Honduras is not a member of the Financial
Action Task Force ("FATF"), Honduras has enacted laws
based on the general recommendations of the FATF. Additionally, Honduras is a member of the Caribbean Financial
Action Task Force and participates in other international
forums that address the prevention of money laundering. 8
Money laundering is a criminal offense in Honduras, and
banks are required to establish internal policies and procedures for the detection and prevention of money laundering. 9 Legislation and regulation require banks to adopt
know-your-customer policies, report suspicious transactions, and maintain records. Accordingly, Bank has established anti-money-laundering policies and procedures,
which include the implementation of know-your-customer
policies, suspicious activity reporting procedures, and related training programs and manuals. Bank's external auditors review compliance with requirements to prevent
money laundering.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed and relevant
government authorities have been communicated with
regarding access to information. Bank and its parent have
committed to make available to the Board such information on the operations of Bank and any of its affiliates as
the Board deems necessary to determine and enforce compliance with the IBA, the Bank Holding Company Act of
1956, as amended, and other applicable federal law. To the
extent that the provision of such information to the Board
may be prohibited by law or otherwise, Bank and Bank's
parent have committed to cooperate with the Board to
obtain any necessary consents or waivers that might be
8. H o n d u r a s is a m e m b e r of the Organization of American States
Inter-American Drug A b u s e Control C o m m i s s i o n Experts G r o u p to
Control M o n e y Laundering. H o n d u r a s is also party to the 1988 U N
C o n v e n t i o n Against the Illicit Traffic of Narcotics and Psychotropic
Substances, the U N International C o n v e n t i o n Against Transnational
Organized C r i m e and the U N International Convention for the Suppression of the Financing of Terrorism.
9. In 2002, legislation w a s enacted to strengthen the anti-money
laundering regime in Honduras. A m o n g other measures, the legislation e x p a n d e d the definition of money laundering, strengthened
e n f o r c e m e n t , and established a financial intelligence unit within the
NCBI.
446
Federal Reserve Bulletin •
Summer 2005
required f r o m third parties for disclosure of such information. In addition, subject to certain conditions, the N C B I
may share information on B a n k ' s operations with other
supervisors, including the Board. In light of these commitments and other facts of record, and subject to the condition described below, it has been determined that Bank has
provided adequate assurances of access to any necessary
information that the Board may request.
Based o n the foregoing and all the facts of record, and
subject to the c o m m i t m e n t s m a d e by Bank and its parent
and the terms and conditions set forth in this order, B a n k ' s
application to establish the representative office is hereby
approved. 1 0 Should any restrictions on access to information on the operations or activities of B a n k or any of its
affiliates subsequently interfere with the B o a r d ' s ability to
obtain information to determine and enforce compliance by
Bank or its affiliates with applicable federal statutes, the
Board m a y require or r e c o m m e n d termination of any of
B a n k ' s direct and indirect activities in the United States.
Approval of this application also is specifically conditioned
on compliance by Bank and its parent with the conditions
imposed in this order and the c o m m i t m e n t s made to the
Board in connection with this application. 1 1 For purposes
of this action, these c o m m i t m e n t s and conditions are
deemed to be conditions imposed in writing by the Board
in connection with its finding and decision and, as such,
may be e n f o r c e d in proceedings under applicable law.
By order, approved pursuant to authority delegated by
the Board, effective April 20, 2005.
Current and Former Institution Affiliated Parties
First Western Bank,
Cooper City, Florida
(State Member Bank)
Docket Nos. 99-027-B-I (20)-(41),
9 9 - 0 2 7 - C M P - I (20)-(41), 9 9 - 0 2 7 - E - I (20)
Final Decision
This is an administrative proceeding pursuant to the F e d eral Deposit Insurance Act ( " t h e FDI A c t " ) in w h i c h the
Office of the Comptroller of the Currency of the United
States of America ( " O C C " ) seeks to prohibit R e s p o n d e n t
Carl T h o m a s f r o m further participation in the affairs of any
financial institution, and to issue civil monetary penalties
as well as cease-and-desist orders against all R e s p o n d e n t s
based on their conduct as institution affiliated parties of
First Western Bank, Cooper City, Florida (the " B a n k " ) .
Upon review of the administrative record, the B o a r d
issues this Final Decision adopting the R e c o m m e n d e d
Decision ( " R e c o m m e n d e d D e c i s i o n " or " R D " ) of A d m i n istrative Law Judge Arthur L. Shipe (the " A L J " ) , except as
specifically supplemented or modified herein. The B o a r d
therefore orders that the attached Order of Prohibition
issue against Respondent Carl T h o m a s , and that the
attached Cease-and-Desist Order be issued against all
Respondents. For the reasons set forth in this Final Decision, the Board has determined to withdraw its assessment
of civil monetary penalties in this case.
R O B E R T D E V . FRIERSON
Deputy Secretary of the Board
I. P r o c e d u r a l History
FINAL ENFORCEMENT DECISIONS
BOARD OF GOVERNORS
ISSUED BY THE
In the M a t t e r of
Carl V. Thomas, Eva June Thomas,
Stephen P. Thomas, Mary Beth Thomas,
Marguerite Thomas, Charles Tomlinson,
Herbert Phillips, Lloyd Phillips, R.L. Phillips,
Stanley Phillips, Rhonda Phillips, Scott Ward,
Angela Ward, Forrest Buckley, James C. Crowe,
Johnny V. Jones, Harper Guinn, and Jeff Guinn,
10. A p p r o v e d by t h e d i r e c t o r of the D i v i s i o n of B a n k i n g S u p e r vision a n d R e g u l a t i o n , with the c o n c u r r e n c e of t h e g e n e r a l c o u n sel, p u r s u a n t to authority d e l e g a t e d by t h e B o a r d . See 12 C F R
265.7(d)(12).
11. T h e B o a r d ' s a u t h o r i t y to a p p r o v e the e s t a b l i s h m e n t of the
p r o p o s e d r e p r e s e n t a t i v e office p a r a l l e l s the c o n t i n u i n g authority of the
State of F l o r i d a to license o f f i c e s of a f o r e i g n b a n k . T h e B o a r d ' s
a p p r o v a l of t h i s a p p l i c a t i o n d o e s not s u p p l a n t t h e a u t h o r i t y of the
S t a t e of F l o r i d a or its a g e n t , the F l o r i d a D e p a r t m e n t of F i n a n c i a l
S e r v i c e s , to l i c e n s e the p r o p o s e d o f f i c e of B a n k in a c c o r d a n c e with
a n y t e r m s o r c o n d i t i o n s that it m a y i m p o s e .
On N o v e m b e r 22, 2002, the Board issued a combined
Notice of Charges and of Hearing, Notice of the Assessment of Civil Monetary Penalties and Notice of Intent to
Prohibit (the " N o t i c e " ) . T h e Notice alleged that R e s p o n dents willfully and knowingly violated the Change in B a n k
Control Act ( " C I B C " ) , 12 U.S.C. § 1817(j), its implementing regulation, and an order of the Board when they
acquired control of the Bank through a series of coordinated purchases without obtaining the B o a r d ' s prior
approval. The Notice further alleged that such actions
resulted in financial gains and other benefits to R e s p o n dents; involved personal dishonesty on the part of R e s p o n dent Carl Thomas; and were part of a pattern of misconduct with respect to Respondents Carl Thomas and Stephen
Thomas.
The Notice initially was issued against 22 individual
Respondents. Shortly after receiving the Notice, four of the
named Respondents settled with the Board by agreeing to
enter into consent orders. T h e remaining 18 Respondents,
who appeared and have participated pro se, filed answers to
the Notice but did not challenge the allegations set forth in
the Notice.
On September 25, 2003, Enforcement Counsel for the
Board filed a Motion for S u m m a r y Disposition, supplemented by evidence submitted on March 5, 2004. On
Legal
July 30, 2004, the ALJ issued a Recommended Decision,
advising that Enforcement Counsel's Motion for Summary
Disposition be granted and recommending the imposition of an order of prohibition against Respondent Carl
Thomas, as well as civil monetary penalties and a ceaseand-desist order against all Respondents. Following the
filing of a so-called "Affidavit of P r o o f " by Respondents
and a response by Board Enforcement Counsel, the matter
was referred to the Board for final decision. 12 U.S.C.
§ 1818(h)(1).
On March 29, 2005, Enforcement Counsel filed a motion
with the Board requesting that the Board withdraw its civil
monetary penalty assessment and authorize Enforcement
Counsel to arrange for the proceeds of the sale of Respondents' First Western shares, currently held in the registry of
the United States District Court for the Northern District of
Georgia, to be transferred to the registry of the United
States Bankruptcy Court for the Middle District of Florida
for ultimate distribution to the victims of fraud by Greater
Ministries International, Inc. ("Greater Ministries").
II. Statutory F r a m e w o r k
1. Statutory and Regulatory Requirements
Control of a State Member Bank
Developments
447
The C I B C Act sets forth the specific information that
must be provided in the notice to the Board. Among other
things, the notice must contain the identity, personal history, business background, and financial condition of each
person by whom or on whose behalf the acquisition is to
be made; the terms and conditions of each acquisition; and
the identity, source, and amount of funds or other consideration used or to be used in making the acquisition.
12 U.S.C. § 1817(j)(6)(A)-(H). The CIBC Act also sets
forth circumstances under which the Board may disapprove a proposed acquisition, including situations in which
an acquiring person "neglects, fails, or refuses to furnish
[the Board] all the information required by the Board."
12 U.S.C. § 1817(j)(7)(E); 12 CFR 225.43(h).
2. 18 U.S.C. §1001
Pursuant to 18 U.S.C. §1001, it is a violation of law to
knowingly and willfully make any materially false, fictitious, or fraudulent statement or representation in a matter
within the jurisdiction of a federal agency.
III. Facts
For Obtaining
The CIBC and its implementing regulation, Regulation Y,
provide that no person acting directly or indirectly or
through or in concert with one or more persons, may
acquire control of any state member bank unless the Board
has been given at least sixty days prior written notice and
has not disapproved the acquisition. 12 U.S.C. § 1817(j)(l);
12 CFR 225.41. These requirements allow the Board to
conduct an investigation of the competence, experience,
integrity, and financial ability of each controlling person by
and for w h o m shares of a state member bank are acquired.
12 U.S.C. § 1817(j)(2)(B)(i); 12 CFR 225.43(f).
Regulation Y defines "acting in concert" to include
knowing participation in a joint activity or parallel action
toward a c o m m o n goal of acquiring control of a state
member bank, whether or not pursuant to an express agreement. 12 C F R 225.41(b)(2). Regulation Y creates a rebuttable presumption that an individual and the individual's
immediate family members act in concert. 12 CFR
225.41(d)(2).
The CIBC Act defines "control" as the power, indirectly
or directly, to direct the management or policies of a state
member bank or to vote 25 percent or more of any class
of voting securities of a slate member bank. 12 U.S.C.
§ 1817(j)(8)(B). Regulation Y presumes that an acquisition
of voting securities of a state member bank constitutes an
acquisition of control if, immediately following the transaction, the acquiring person or persons will own, control,
or hold with power to vote 10 percent or more of any class
of voting securities and no other person will own, control,
or hold power to vote a greater percentage of that class of
voting securities. 12 CFR 225.41(c)(2).
Beginning in 1997, Respondent Carl Thomas, with the
primary assistance of his son, Respondent Stephen
Thomas, initiated an effort to persuade a group of approximately 4 0 individuals and business entities to join them
in acquiring shares in First Western Bank. (FF f ] [ 9 - 1 0 ;
2 1 - 2 2 ) . ' All named Respondents in this matter, including
Carl and Stephen Thomas, were members of a group that
coordinated to buy shares in First Western Bank (hereinafter referred to collectively as "Purchasing G r o u p " m e m bers). (FF 110). The acquisition of shares was undertaken
on behalf of the Greater Ministries organization, a purported religious and charitable organization with which the
Purchasing Group members were affiliated. (FF 1112; Wall
dep. at 30). Greater Ministries desired to obtain control of a
financial institution and secure favorable account relationships for itself and its members, a task it had been unable
to accomplish in the previous two years. (FF H 2 , 5, 9).
Greater Ministries appointed Respondent Carl Thomas as
one of its Elders and paid him approximately $535,000
between June 1997 and June 1998 as part of its "Gifting
Program," a program that has been found to be essentially
a Ponzi scheme. (FF'][9; Hoch. Exh. Z-37). 2
Respondents Carl and Stephen Thomas solicited members of the Purchasing Group to buy First Western shares
on various occasions, including at the conclusion of Carl
1. " F F " denotes the A L J ' s findings of fact in the R e c o m m e n d e d
Decision.
2. T h e ALJ described the " G i f t i n g P r o g r a m " as o n e in which
Greater Ministries followers w e r e persuaded to make " g i f t s " to the
organization with the expectation of receiving returns as high as
tenfold. T h e program was p r o m o t e d by Greater Ministries with the
biblical p a s s a g e " G i v e and it shall be given unto you." (Luke 6:38)
Elders such as Carl T h o m a s were awarded a portion of the " g i f t s "
associated with the m e m b e r s they brought into the organization or
w h o were otherwise assigned to them.
448
Federal Reserve Bulletin • S u m m e r 2005
Thomas's Bible study meetings. (Skrobot Decl. 19). They
advocated the opportunity to purchase shares in a
"Christian-tied bank" that would protect Greater Ministries' privacy against the government. (Skrobot Decl. (j[9).
Before solicitation by Carl and Stephen Thomas, members
of the Purchasing Group had never heard of First Western
Bank, or thought to invest in it. (Sellers depo p. 57;
Skrobot Decl. 112). At least some of the Purchasing Group
members were specifically told of Greater Ministries' ultimate goal to take control of the Bank's board of directors,
while others were simply told it was necessary that
multiple individuals purchase the stock so that it was
not all in one name. (FF 113; Sellers dep. at 58, 60). The
members of the Purchasing Group were assured that either
Greater Ministries, Carl Thomas, or Stephen Thomas
would provide the funds for the purchases of the shares
or reimburse the members for such purchases. (FF 111).
The evidence establishes that it was widely apparent to all
Purchasing Group members that they were involved in a
group effort to acquire shares in the Bank. (FF f 12).
Members of the Purchasing Group generally did not
communicate with the individuals from whom they purchased First Western shares. (FF 122). Instead, Carl and
Stephen Thomas contacted individuals who were willing
to sell their shares to negotiate and establish the amount
of shares that would be purchased as well as the price.
(FF'[[22). Subsequently, Carl or Stephen Thomas instructed
the Purchasing Group members to write checks for the
determined amount. (FF 1[22). Carl or Stephen Thomas
provided the Purchasing Group members with funds
derived f r o m Greater Ministries to pay for the acquired
shares. ( F F 1 2 2 ) . In some cases, such payments were made
to members of the Purchasing Group in cash. (Agee Decl;
Nieminen Decl. 16; Salhgreen Aff. 1[4; Skrobot Decl. 110).
Carl or Stephen Thomas instructed the Purchasing Group
members to deposit the cash in amounts under $10,000
each, so as not to raise any "red flags." 3 (Nieminen
Decl. 19; Skrobot Decl. 110).
The Purchasing Group acquired their First Western
shares between August 1997 and the end of February 1998,
with the largest concentration of shares purchased in
October 1997. ( F F H I 6 - 2 1 ; 23; 27-28; 33-34). At various
points, the Purchasing Group's accumulation of shares
triggered notification requirements pursuant to the CIBC
Act and its implementing regulation. Each time, however,
Respondents and the other members of the Purchasing
Group failed to provide proper notification and other necessary information.
The first of these required notification points came by
October 16, 1997, when members of the Purchasing Group
had acquired in excess of 10 percent of outstanding First
Western shares. (FF 123). Even after a series of correspondence from Federal Reserve staff advising of the requirements of the CIBC Act and the Board's regulations, the
3. Cash deposits of $10,000 or m o r e require a financial institution
to file a C u r r e n c y Transaction Report ( " C T R " ) with the Department
of the Treasury, thus alerting g o v e r n m e n t officials to large cash
deposits. See 31 C F R 103.22(b).
Purchasing Group members refused to supply the required
information. (FF 1 2 4 - 2 5 ) . Instead, in a group response
organized by Carl and Stephen Thomas, the Purchasing
Group members insisted that the CIBC Act and other
regulations did not apply to them. (FF 126). The evidence
reveals that the Purchasing Group members habitually
deferred to Respondents Carl and Stephen Thomas to organize responses on behalf of the group. (Agee Aff. at p. 2;
Sahlgren Aff. I l l , 12; Skrobot Decl. 116).
The second point came on or about December 2, 1997,
when Respondent Carl Thomas and his wife, Respondent
Eva Thomas, made a purchase of shares through a nominee
which brought their joint ownership from about 18,814 to
approximately 20,539 shares and elevated the Purchasing
Group's ownership to over 25 percent. ( F F H 2 8 - 2 9 ) . 4 The
Purchasing Group members failed to file prior written
notification with the Board before acquiring these shares
and continued to conceal the source of funds used to
acquire their shares. ( F F H 2 8 , 32). Further, in an apparent
attempt to conceal that the Purchasing Group owned more
than 25 percent, Carl Thomas maintained in a December 9,
1997, " D r a f t " CIBC notice, as well as in another document he submitted to the Board on December 22, 1997,
that he and his wife only owned 18,814 shares. ( F F 1 2 9 ) .
The third failure to adhere to the notification requirements took place around February 2, 1998, after additional
purchases resulted in the "immediate" Thomas family 5
owning over 10 percent of First Western shares. (FF 133).
The Thomas family failed to file prior written notice of the
acquisition and failed to submit evidence rebutting the
presumption that they were acting in concert and acquired
control of First Western. (FF 133). Finally, prior notification also was not sought before the Purchasing Group
made its last known purchase on February 26, 1998, which
brought the group's ownership to over 29 percent. ( F F 1 3 4 ;
Bd. Rec. 1-39). Instead, in documents submitted on
April 10, 1998, and August 17, 1998, Carl Thomas continued to conceal the true ownership of his family and of the
group. In both documents, he continued to claim that he
and his immediate family owned only 18,814 shares, when
they actually owned at least 33,039 by that time. 6 (FF 1135,
37). In the April 10, 1998, document, he failed to disclose
that the Purchasing Group's acquisition of shares exceeded
4. Other m e m b e r s of the Purchasing G r o u p also acquired additional shares between October 16, 1997, and D e c e m b e r 2, 1997.
(Hoch. Add. 2).
5. Pursuant to 12 C F R 225.41(c)(3), the " i m m e d i a t e " T h o m a s
family includes Carl T h o m a s ; his wife, Eva T h o m a s ; his son and
daughter-in-law, Stephen and Mary Beth T h o m a s ; his mother,
Marguerite T h o m a s ; and his brother-in-law, William Barber.
6. Contrary to representations he consistently m a d e to Federal
Reserve staff, Carl T h o m a s asserted in a February 20, 2004, letter to
the First Western Board of Directors that he held 33,039 shares of
First Western stock. (Enforcement C o u n s e l ' s March 5, 2004, M o t i o n
to File Supplemental Evidence.) Mr. T h o m a s sent the letter to First
Western in response to proxy solicitations the Bank had mailed to
Mr. T h o m a s and his family in connection with a proposed merger
between First Western and 1st United Bank. Mr. T h o m a s presumably
claimed ownership of 33,039 shares in his February 20, 2004, letter
because he stood to benefit f r o m the sale of the shares in the proposed
merger.
Legal Developments
25 percent. In the August 17,1998 submission, he admitted
that the Purchasing Group had acquired an additional
14,212 shares, but claimed the these shares were held in
"open title." (FF 135, 37). Neither the April nor August
1998 submission revealed that Greater Ministries provided
the funds used by Purchasing Group members to acquire
First Western shares. (FF ^35—38).
From August 24, 1998, to December 22, 1998, Federal
Reserve staff persisted in its attempt to obtain information
from the Respondents and other Purchasing Group members in order to achieve compliance with the CIBC and
other regulations. (FF 138). Despite numerous letters
requesting additional information, including the source of
funds used to acquire the First Western shares, the Purchasing Group failed to correct its deficiencies. (FF 138).
Ultimately, on February 10, 1999, the Board issued an
order mandating that each Respondent divest his or her
shares within ninety days of the date of the order. (FF 139).
None of the Respondents divested their respective shares
within that time. (FF 140).
In March 1999, eight Greater Ministries officials pleaded
guilty or were convicted of fraud, money laundering, and
conspiracy charges in connection with a "Gifting Program" operated by Greater Ministries, which was found
to be a Ponzi scheme through which Greater Ministries
defrauded thousands of United States residents. (FF 18). In
August 1999, a United States District Court placed Greater
Ministries into receivership after multiple states filed lawsuits against the organization for fraudulent violation of
federal and state securities laws. (FF16).
By letter dated May 18, 1999, Federal Reserve staff
advised Respondents that they would be subject to an
enforcement action for their continued violations of the
CIBC and its accompanying regulation. (FF 140; Hoch.
Dec. Ex. Z42). The letter also informed Respondents that
prompt action to terminate their voting control of First
Western shares could mitigate and possibly eliminate the
need to impose remedies, but Respondents failed to take
such action. (Hoch. Dec. Ex. Z42 and Z43; FF140).
In November 2002, Board Enforcement Counsel initiated this action against Respondents, seeking an order of
prohibition against Carl Thomas, a cease-and-desist order
against all Respondents, and civil money penalties ranging
from $10,000 to $250,000 against each Respondent.
On February 27, 2004, the Board approved an application submitted by 1st United Bank, Boca Raton, Florida, to
merge with First Western by purchasing First Western
shares for $17 per share. In March 2004, Board Enforcement Counsel filed an asset freeze action in United States
District Court for the Northern District of Georgia pursuant
to 12 U.S.C. § 1818(i)(4) in order to require the payment
into the court of the sales proceeds necessary to pay the
civil money penalty amounts assessed in the Notice in the
event the Board's final decision assessed penalties against
the Respondents. Board of Governors v, Thomas, et al.,
No. l:04-CV-0777. The District Court issued a temporary
restraining order on April 2, 2004, and a preliminary
injunction on April 28, 2004, ordering each Respondent
to direct 1st United to deposit in the court registry the
449
proceeds of the sale of Respondents' First Western shares
to the extent of the civil money penalty assessed in the
Notice, pending final resolution of this enforcement action.
Also on April 28, 2004, the United States Bankruptcy
Court for the Middle District of Florida ordered 1st United
to transfer into the registry of the bankruptcy court all
amounts due to any Respondent in excess of the civil
money penalties already ordered to be deposited in the
District Court in Georgia. 7 Thus, pursuant to these orders,
the Respondents have been divested of the proceeds of the
sale of First Western shares they acquired in the course of
the Greater Ministries scheme.
IV. Legal Conclusions
The Board has reviewed the record in this matter and finds
that the ALJ properly granted Enforcement Counsel's
Motion for Summary Disposition. The Board agrees that a
prohibition order, civil monetary penalties and cease-anddesist order should be issued, as described in detail below.
A. Respondents'
Affidavit of Truth
As noted earlier, Respondents filed a so-called "Affidavit
of Truth" at the point at which exceptions to the ALJ's
recommended decision were permitted by the Board's
regulations. 12 CFR 263.39(a). The regulation provides
that that exceptions must "set forth page or paragraph
references to the specific parts of the administrative law
judge's recommendations to which exception is taken, the
page or paragraph references to those portions of the
record relied upon to support each exception, and the legal
authority relied upon to support each exception." 12 CFR
263.39(c)(2). Failure of a party to file exceptions to a
finding, conclusion, or proposed order "is deemed a waiver
of objection." 12 CFR 263.39(b)(1).
Respondents' "Affidavit of Truth" fails to conform to
any of the requirements of a valid exception. It does not
identify the portions of the ALJ's recommendation to
which an exception was taken or cite the portions of the
record or legal authority in support of its position. Accordingly, the Respondents are deemed to have waived their
right to object to any portion of the Recommended
Decision.
Even if Respondents' filing could be considered a valid
exception, the Board finds that it raises no meritorious
claim. At best, it raises only three claims related to the
present case. The document claims that the Board "does
not have jurisdiction of state member bank stockholder"
(Aff. Truth at 16). To the contrary, such individuals qualify
as "institution-affiliated parties" under the statute if they
are controlling shareholders or are required to file a change
in control notice, and the Board is specifically granted
jurisdiction over them. 12 U.S.C. §§1813(q), (u)(l) and
(2). Second, the "Affidavit of Truth" asserts that because
7. See C a s e No. 99-13967-8B1, United States Bankruptcy Court,
Middle District of Florida.
450
Federal Reserve Bulletin • Summer 2005
Greater Ministries International was a dissolved corporation as of 1996, the present case should not have been
brought against Respondents. (Aff. Truth at 18). Greater
Ministries' corporate existence is irrelevant to the matter,
as this action is against these individual Respondents for
their role in acquiring control of First Western. Third, the
Affidavit insists that an August 24, 1998, letter from the
Federal Reserve Bank of Atlanta evidenced that Respondents complied with all of the CIBC Act requirements.
(Aff. Truth at 19). This simply misstates the content of
the letter, which in fact informed Respondents that they
needed to provide additional information concerning,
among other things, the source of funds for their purchases
of shares. Accordingly, even if Respondents' 'Affidavit of
Truth" qualified as an exception, it would be entirely
unpersuasive.
B. Prohibition
Order
Pursuant to the FDI Act, IAPs may be prohibited from the
banking industry if the appropriate federal banking
agency—here, the Board—makes three separate findings:
(1) that the IAP engaged in identified misconduct, including a violation of law or regulation, an unsafe or unsound
practice, or a breach of fiduciary duty; (2) that the conduct
had a specified effect, including financial loss to the institution or gain to the respondent; and (3) that the IAP's
conduct involved culpability of a certain degree—either
personal dishonesty or a willful or continuing disregard
for the safety or soundness of the institution. 12 U.S.C.
§ 1818(e)(l)(A)-(C).
Respondent Carl Thomas is the only individual Respondent against whom an order of prohibition was sought.
Based on the evidence in the administrative record, his
actions satisfy the misconduct, effect, and culpability element required for an order of prohibition. As mentioned
previously, Carl Thomas—either as part of his immediate
family, part of the Purchasing Group, or both—became
subject to and failed to meet the notification requirements
of the CIBC Act and its implementing Regulation Y at
various points between October 1997 and February 1998.
He also violated 18 U.S.C. §1001 by falsely understating
the amount of shares owned by both his immediate family
and the group in submissions he made to Federal Reserve
staff in December 1997, April 1998, and August 1998.
Finally, he violated the Board's February 10, 1999, order
by refusing to divest his First Western shares. Thus, the
misconduct element is more than sufficiently established.
Through his maintenance of the shares he was ordered
to divest, Carl Thomas received financial gain and other
benefits, satisfying the effect element. Finally, Carl
Thomas's actions also exhibited personal dishonesty. As
with all members of the Purchasing Group, Respondent
Carl Thomas had a legal duty to provide Federal Reserve
staff with the specific information required by the CIBC
Act. See 12 U.S.C. § 1817(j)(6)(A)-(H). He not only failed
to do so on numerous occasions, even after prompting and
several requests by Federal Reserve staff, the facts here
demonstrate that he purposefully and willfully represented
information he knew to be false. The Board agrees with the
ALJ's finding that such actions were evasive and deceptive, and evidenced personal dishonesty. In sum, all elements necessary for the issuance of a prohibition order
against Respondent Carl Thomas are present in this case.
C. Cease and Desist Order
An IAP also may be subject to a cease-and-desist order if
the Board finds that the IAP is engaging or has engaged in
an unsafe or unsound practice, or is violating or has violated a law, rule, regulation or any condition imposed in
writing by the appropriate banking agency in connection
with the granting of an application or other request by the
depository institution or any written agreement entered into
with the agency. 12 U.S.C. § 1818(b)(1). Such an order may
require the IAP to "cease and desist" from the practice or
violation and "to take affirmative action to correct the
conditions resulting from any such violation or practice."
Id.
Here, Enforcement Counsel sought a cease-and-desist
order against all Respondents based on their collaborative
actions to acquire shares in First Western. The evidence in
this matter confirms that none of the Respondents ever
complied with the CIBC Act or its implementing regulation in acquiring their First Western shares. In lieu of
providing the required information, Respondents insisted
that the CIBC Act did not apply to them, concealed that the
Greater Ministries organization funded their purchases of
First Western shares, and permitted Carl Thomas to make
false representations to Federal Reserve staff on behalf of
the group. Following the leadership of Carl Thomas, they
also failed to divest their shares when ordered to do so.
Based on these violations, the Board finds that entry of a
cease-and-desist order against each of the Respondents is
appropriate in this case. However, the Board is not adopting all terms outlined in the proposed cease-and-desist
order originally sought by Enforcement Counsel in its
Motion for Summary Disposition and adopted by the ALJ
in his Recommended Decision because the acquisition of
First Western by 1st United in 2004 has rendered many of
those terms inapplicable. As discussed above, the Respondents' shares have been acquired by 1st United, and the
proceeds from these sales have been transferred to the
United States District Court for the Northern District of
Georgia and/or the United States Bankruptcy Court for the
Middle District of Florida, as required by the orders issued
by both of those courts. As such, the terms Board Enforcement Counsel initially sought for a cease-and-desist order
relating to the transfer, sale, and voting of Respondents'
First Western shares are no longer applicable. 8 For these
8. Also, on N o v e m b e r 8, 2004, the United States Bankruptcy Court
for the Middle District of Florida issued an order that pertained to
three Respondents in this case w h o apparently refused to turn over
their First Western stock certificates to the bankruptcy trustee. The
order provided that any interest these three Respondents claimed in
First Western stock or proceeds is void. Accordingly, even if these
Legal Developments
reasons, the Board finds that the following terms for a
cease-and-desist order are appropriate at this time:
(1) Respondents shall not serve as an officer, director,
agent or employee of the Bank or its successor institution
without prior written approval of the Board of Governors;
(2) Respondents shall not knowingly acquire any additional legal, beneficial, or other interests in the Bank or its
successor institution; and
(3) Respondents shall not directly or indirectly engage
or participate in any violation of the CIBC Act.
D. Civil Monetary
Penalties
As noted above, the Notice in this matter assessed a civil
monetary penalty against each Respondent in an amount
roughly reflecting the particular respondent's level of
involvement in the illegal scheme. 9 Although the Board is
convinced that penalties could be assessed against each
Respondent on the basis of this record, it has determined to
withdraw its penalty assessment for the reasons set forth
below. 10
The Respondents' scheme to acquire First Western was
undertaken as part of a broader fraudulent scheme by
Greater Ministries. As the ALJ found, Greater Ministries
had attempted to acquire a financial institution to assist
with the influx of cash from the Gifting Program from
early 1996 on. The Purchasing Group was motivated to
take part in the acquisition scheme by their religious conviction and their desire to promote Greater Ministries'
mission. Moreover, virtually all of the funds used by Purchasing Group members to acquire First Western shares
were provided by Greater Ministries, and were presumably
derived from the victims of the Gifting Program.
Greater Ministries is now in bankruptcy proceedings,
and the court-appointed trustee has been working to marshal assets of the estate to pay the claims of those victims.
He has obtained the cooperation of several state agencies
that have pursued their own civil or criminal claims against
Greater Ministries and have agreed to subordinate their
claims to those of the estate for the benefit of the victims.
In addition, he has obtained a Final Judgment against all
of the Respondents declaring, among other things, that all
First Western stock and proceeds of such stock owned by
those individuals are "property of the estate" of Greater
Ministries. 11 Under the bankruptcy court's orders, all First
Western stock or proceeds held in the registry of the
Respondents c o n t i n u e to maintain their First Western share certificates, the d o c u m e n t s are of no value.
9. T h e a m o u n t s assessed ranged f r o m $250,000 jointly and severally against Carl T h o m a s and his wife Eva and $ 1 0 0 , 0 0 0 against their
son Stephen T h o m a s , to $10,000 against most other respondents.
10. The B o a r d has the legal authority to " c o m p r o m i s e , modify,
or r e m i t " any penalty it has previously assessed. 12 U.S.C.
§ 1818(i)(2)(F); 12 U.S.C. § 1817(j)( 16)(E); see 12 C F R 263.63(a).
11. See Final Default Judgment dated September 17, 2004; Final
Default J u d g m e n t dated N o v e m b e r 4, 2004; Final S u m m a r y Judgment
dated April 8, 2005, in O'Halloran v. 1st United Bank, et al., Adv. Pro.
No. 04-223 (Bkr. M.D. Fl.)
451
Atlanta court is "available for distribution by the trustee in
accordance with the terms of the confirmed plan of liquidation or order of this Court," subject only to the claims of
the Board.
The Trustee has requested that the Board withdraw its
civil monetary penalty against the Respondents in order to
permit the entire proceeds of the sale of their First Western
shares to be distributed to the victims of Greater Ministries' fraud. The Board has determined that the public
interest favors this outcome. The trustee has assured the
Board that none of the Respondents will receive any payment from the bankruptcy estate. It is the Board's intention
that the proceeds currently held in the registry of the
United States District Court for the Northern District of
Georgia be transferred to the registry of the United States
Bankruptcy Court for the Middle District of Florida in
accordance with that court's orders, and Board Enforcement Counsel is directed to take any appropriate measures
to ensure that result.
Conclusion
For these reasons,
attached Order of
Thomas, as well as
Respondents.
By Order of the
June 2005.
the Board orders the issuance of the
Prohibition against Respondent Carl
the Cease and Desist Order against all
Board of Governors, this 7th day of
Board of Governors of the
Federal Reserve System
JENNIFER J. JOHNSON
Secretary of the Board
Order to Cease and Desist
It is hereby ordered, pursuant to 12 U.S.C. § 1818(b), that
Carl Thomas, Stephen Thomas, Eva Thomas, Mary Beth
Thomas, Marguerite Thomas, Charles Tomlinson, Herbert
Phillips, Lloyd Phillips, R.L. Phillips, Stanley Phillips,
Rhonda Phillips, Scott Ward, Angela Ward, Forrest Buckley, James Crowe, Johnny V. Jones, Harper Guinn, and Jeff
Guinn (collectively "Respondents"):
(1) shall not serve as an officer, director, agent, or
employee of First Western Bank, Cooper City, Florida
("the Bank") or its successor institution without prior
written approval of the Board of Governors;
(2) shall not knowingly acquire any additional legal,
beneficial, or other interests in the Bank or its successor
institution; and
(3) shall not directly or indirectly engage or participate
in any violation of the Change in Bank Control Act.
Any violation of this order shall separately subject the
Respondents to appropriate civil or criminal penalties or
both under 12 U.S.C. §1818(i).
452
Federal Reserve Bulletin • S u m m e r 2005
The provisions of this order shall not bar, estop, or
otherwise prevent the Board of Governors, or any other
federal or state agency or department from taking any other
action affecting each of the Respondents named above.
By Order of the Board of Governors, this 7th day of
June 2005.
3. This order, and each and every provision hereof,
is and shall remain fully effective and enforceable until
expressly stayed, modified, terminated, or suspended in
writing by the Board.
Board of Governors of the
Federal Reserve System
This order shall become effective at the expiration of
thirty days after service is made.
By Order of the Board of Governors, this 7th day of
June 2005.
JENNIFER J. JOHNSON
Secretary of the Board
Board of Governors of the
Federal Reserve System
JENNIFER J. J O H N S O N
Secretary of the Board
Order of Prohibition
of Carl V. Thomas
WHEREAS, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the " F D I Act") (12 U.S.C.
§ 1818(e)), the Board of Governors of the Federal Reserve
System ( " t h e Board") is of the opinion, for the reasons
set forth in the accompanying Final Decision, that a
final Order of Prohibition should issue against CARL V.
THOMAS, an institution-affiliated party, as defined in section 3(u) of the FDI Act (12 U.S.C §1813(u)), of First
Western Bank, Cooper City, Florida.
NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e),
that:
1. In the absence of prior written approval by the Board,
and by any other federal financial institution regulatory
agency where necessary pursuant to section 8(e)(7)(B)
of the Act (12 U.S.C. § 1818(e)(7)(B)), Thomas is hereby
prohibited:
(a) f r o m participating in any manner in the conduct
of the affairs of any institution or agency specified
in section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)), including, but not limited to, any insured
depository institution, any insured depository institution
holding company or any U.S. branch or agency of a foreign
banking organization;
(b) from soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy,
consent or authorization with respect to any voting rights
in any institution described in subsection 8(e)(7)(A) of the
FDI Act (12 U.S.C. § 1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any Federal banking agency; or
(d) f r o m voting for a director, or from serving or
acting as an institution-affiliated party as defined in section 3(u) of the FDI Act (12 U.S.C. §1813(u)), such
as an officer, director, or employee in any institution
described in section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)).
2. Any violation of this order shall separately subject
Thomas to appropriate civil or criminal penalties or both
under section 8 of the FDI Act (12 U.S.C. § 1818).
In the Matter of a Notice to Prohibit Further Participation Against
Donald K. McKinney,
Former Vice President,
American National Bank,
Wichita Falls, Texas
Docket No. O C C - A A - E C - 0 4 - 7 0
Final Decision
This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("the FDI Act") in which the
Office of the Comptroller of the Currency of the United
States of America ( " O C C " ) seeks to prohibit the Respondent, Donald K. McKinney ("Respondent"), from further
participation in the affairs of any financial institution based
on actions he took both to obtain employment and while
employed at American National Bank, Wichita Falls, Texas
(the " B a n k " ) . Under the FDI Act, the OCC may initiate
a prohibition proceeding against a former employee of a
national bank, but the Board must make the final determination whether to issue an order of prohibition.
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended
Decision of Administrative Law Judge Arthur L. Shipe
(the "ALJ"), and orders the issuance of the attached Order
of Prohibition.
I.
Statement of the Case
A. Statutory and Regulatory
Framework
Under the FDI Act and the Board's regulations, the ALJ
is responsible for conducting proceedings on a notice of
charges. 12 U.S.C. § 1818(e)(4). The ALJ issues a recommended decision that is referred to the deciding agency
together with any exceptions to those recommendations
filed by the parties. The Board makes thefinalfindings
of fact, conclusions of law, and determination whether to
Legal Developments
issue an order of prohibition in the case of prohibition
orders sought by the OCC. Id.', 12 CFR 263.40.
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
or employee an order of prohibition f r o m further participation in banking. To issue such an order, the Board
must make each of three findings: (I) that the respondent
engaged in identified misconduct,
including a violation
of law or regulation, an unsafe or unsound practice, or a
breach of fiduciary duty; (2) that the conduct had a specified effect, including financial loss to the institution or gain
to the respondent; and (3) that the respondent's conduct
involved either personal dishonesty or a willful or continuing disregard for the safety or soundness of the institution.
12 U.S.C. § 1818(e)(l)(A)-(C).
An enforcement proceeding is initiated by filing and
serving on the respondent a notice of intent to prohibit.
Under the O C C ' s and the Board's regulations, the respondent must file an answer within twenty days of service of
the notice. 12 CFR 19.19(a) and 263.19(a). Failure to file
an answer constitutes a waiver of the respondent's right to
contest the allegations in the notice, and a final order may
be entered unless good cause is shown for failure to file a
timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).
B. Procedural
History
On September 27, 2004, the O C C served upon Respondent
a Notice of Intention to Prohibit Further Participation
and Notice of Assessment of a Civil Monetary Penalty
( " N o t i c e " ) that sought, inter alia, an order of prohibition
against Respondent based on his conduct in obtaining
employment and while employed at the Bank. The Notice
alleged that Respondent obtained his employment at the
Bank through deceitful misrepresentations. Specifically,
the Notice charged that Respondent submitted an application and resume in which he lied about his prior criminal
record and represented that he had been employed by two
companies during a period of time when he was serving a
jail sentence.
The Notice further asserted that after obtaining employment at the Bank, Respondent engaged in various other
acts of misconduct. He falsified Bank records to make it
appear that he was fulfilling an agreement to pay for the
lease of two cars that the Bank purchased for his use. He
sold a motorcycle the Bank had leased for his use but did
not forward the sale proceeds to the Bank, notwithstanding
that a balance was owed on the motorcycle. On multiple
occasions, Respondent deposited into his own personal
account checks made payable to the Bank, individuals
other than himself, and two nonprofit organizations. He
also withdrew for his own use funds f r o m the Bank and
from these two nonprofit organizations. Finally, Respondent abused the signatory power he had over the account of
one of these nonprofit organizations by forging a required
second signature for some of the withdrawals he made
from that account.
453
The B a n k ' s total loss from Respondent's misconduct
amounted to $129,046.45. The Respondent's mother m a d e
full restitution to the Bank, and accordingly, the Notice
only sought an imposition of an order of prohibition and
assessment of civil monetary penalties.
The Notice directed Respondent to file an answer within
twenty days and warned that failure to do so would constitute a waiver of his right to appear and contest the allegations. The rccord shows that the Respondent received
service of the Notice. Nonetheless, Respondent failed to
file an answer within the twenty-day period.
On or about November 16, 2004, Enforcement Counsel
filed a Motion for Entry of an Order of Default. T h e
motion was served on Respondent in accordance with the
O C C ' s rules, but he did not respond to it. Finally, on or
about December 3, 2004, the ALJ issued an Order to Show
Cause, which was mailed to the address at which Respondent had received the Notice. The Order for Show Cause
was signed for on December 6, 2004, by Respondent's
mother. The order provided Respondent 20 days from the
receipt of the order to appear and show cause why the ALJ
should not grant Enforcement Counsel's default motion.
Respondent ignored the Order to Show Cause and has
never filed an answer to the Notice.
II. Discussion
The O C C ' s Rules of Practice and Procedure set forth
the requirements of an answer and the consequences of
a failure to file an answer to a Notice. Under the Rules,
failure to file a timely answer "constitutes a waiver of
[a respondent's] right to appear and contest the allegations
in the notice." 12 CFR 19.19(c). If the ALJ finds that
no good cause has been shown for the failure to file, the
judge "shall file . . . a recommended decision containing
the findings and the relief sought in the notice." Id. An
order based on a failure to file a timely answer is deemed to
be issued by consent. Id.
In this case, Respondent failed to file an answer despite
notice to him of the consequences of such failure, and also
failed to respond to the A L J ' s Order to Show Cause.
Respondent's failure to file an answer constitutes a default.
Respondent's default requires the Board to consider the
allegations in the Notice as uncontested. The allegations in
the Notice, described above, meet all the criteria for entry
of an order of prohibition under 12 U.S.C. § 1818(e). It was
a breach of fiduciary duty for Respondent to accept
employment by the Bank and continue working for the
Bank after lying in his job application and resume and
failing to disclose his prior criminal history. Further, it was
a violation of law, breach of fiduciary duty, and an unsafe
or unsound practice for Respondent to falsify bank records,
forge a signature and steal funds f r o m the bank at which he
is employed. Respondent's actions caused gain to himself,
as well as loss to the bank. Finally, such actions also
exhibit personal dishonesty. Accordingly, the requirements
for an order of prohibition have been met and the Board
hereby issues such an order.
454
Federal Reserve Bulletin • Summer 2005
Conclusion
For these reasons, the Board orders the issuance of the
attached Order of Prohibition.
By Order of the Board of Governors, this 13th day of
May 2005.
Board of Governors of the
Federal Reserve System
JENNIFER J. JOHNSON
Secretary of the Board
Order of Prohibition
WHEREAS, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the "FDI Act") (12 U.S.C.
§ 1818(e)), the Board of Governors of the Federal Reserve
System ("the Board") is of the opinion, for the reasons
set forth in the accompanying Final Decision, that a final
Order of Prohibition should issue against DONALD K.
McKINNEY ("McKINNEY"), a former employee and
institution-affiliated party, as defined in Section 3(u) of the
FDI Act (12 U.S.C. § 1813(u)), of American National Bank,
Wichita Falls, Texas.
NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e),
that:
1. In the absence of prior written approval by the Board,
and by any other federal financial institution regulatory
agency where necessary pursuant to section 8(e)(7)(B) of
the Act (12 U.S.C. § 1818(e)(7)(B)), McKinney is hereby
prohibited:
(a) from participating in any manner in the conduct
of the affairs of any institution or agency specified
in section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)), including, but not limited to, any insured
depository institution, any insured depository institution holding company, or any U.S. branch or agency of a
foreign banking organization;
(b) from soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy,
consent, or authorization with respect to any voting rights
in any institution described in subsection 8(e)(7)(A) of the
FDI Act (12 U.S.C. § 1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any Federal banking agency; or
(d) from voting for a director, or from serving or
acting as an institution-affiliated party as defined in
section 3(u) of the FDI Act (12 U.S.C. § 1813(u)), such
as an officer, director, or employee in any institution
described in section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)).
2. Any violation of this order shall separately subject
McKinney to appropriate civil or criminal penalties or both
under section 8 of the FDI Act (12 U.S.C. § 1818).
3. This order, and each and every provision hereof, is
and shall remain fully effective and enforceable until
expressly stayed, modified, terminated, or suspended in
writing by the Board.
This order shall become effective at the expiration of
thirty days after service is made.
By Order of the Board of Governors, this 13th day of
May 2005.
Board of Governors of the
Federal Reserve System
JENNIFER J. JOHNSON
Secretary of the Board
455
Membership of the Board of Governors
of the Federal Reserve System, 1913-2005
APPOINTED
MEMBERS
Name
1
Federal Reserve
District
Date initially took
oath of office
Charles S. Hamlin
.Boston
Aug. 10, 1914
Paul M. Warburg
Frederic A. D e l a n o
W.P.G. Harding
Adolph C. Miller
New York
Chicago
Atlanta
San Francisco
Aug.
Aug.
Aug.
Aug.
Albert Strauss
Henry A. Moehlenpah
Edmund Piatt
David C. Wills
John R. Mitchell
Milo D. Campbell
Daniel R. Crissinger ...
George R. J a m e s
Edward H. C u n n i n g h a m
Roy A. Young
Eugene M e y e r
Wayland W. M a g e e
Eugene R. Black
M.S. Szymczak
New York
Chicago
New York
Cleveland
.Minneapolis
.Chicago
.Cleveland
.St. Louis
.Chicago
.Minneapolis
.New York
Kansas City
Atlanta
Chicago
Oct 26, 1918
Nov. 10, 1919
June 8, 1920
Sept. 29, 1920
May 12, 1921
Mar. 14, 1923
May 1, 1923
May 1 4 , 1 9 2 3
May 14, 1923
Oct. 4, 1927
Sept,. 16, 1930
May 1 8 , 1 9 3 1
M a y 19, 1933
June 14, 1933
J.J. Thomas
Marriner S. Eccles
Kansas City
San Francisco
June 14, 1933
Nov. 15, 1934
Joseph A. Broderick
John K. M c K e e
Ronald Ransom
Ralph W. Morrison
Chester C. Davis
Ernest G. Draper
Rudolph M. Evans
James K. Vardaman, Jr
Lawrence Clayton
Thomas B. M c C a b e
Edward L. Norton
Oliver S. Powell
W m . McC. Martin, Jr
A.L. Mills, Jr
J.L.Robertson
C. Canby Balderston
Paul E. Miller
Chas. N. Shepardson
G.H. King, Jr
George W. Mitchell
J. Dewey D a a n e
Sherman J. Maisel
Andrew F. B r i m m e r
William W. Sherrill
Arthur F. Burns
John E. Sheehan
Jeffrey M. Bucher
Robert C. Holland
Henry C. Wallich
New York
Cleveland
Atlanta
Dallas
Richmond
N e w York
Richmond
St. Louis
Boston
Philadelphia
Atlanta
Minneapolis
New York
San Francisco
Kansas City
Philadelphia
Minneapolis
Dallas
Atlanta
Chicago
Richmond
San Francisco
Philadelphia
Dallas
New York
St. Louis
San Francisco
Kansas City
Boston
Feb. 3, 1936
Feb. 3, 1936
Feb. 3, 1936
Feb. 10, 1936
June 25, 1936
Mar. 30, 1938
Mar. 14, 1942
Apr. 4, 1946
Feb. 14, 1947
Apr. 15, 1948
Sept. 1, 1950
Sept. 1, 1950
April 2, 1951
Feb. 18, 1952
Feb. 18, 1952
Aug. 12, 1954
Aug. 13, 1954
Mar. 17, 1955
Mar. 25, 1959
Aug. 31, 1961
Nov. 29, 1963
Apr. 30, 1965
Mar. 9, 1966
May 1, 1967
Jan. 31, 1970
Jan. 4, 1972
June 5, 1972
June 11, 1973
Mar. 8, 1974
10,
10,
10,
10,
1914
1914
1914
1914
Other dates and information relating
to m e m b e r s h i p 2
Reappointed in 1916 and 1926. Served until
Feb. 3, 1936. 3
Term expired Aug. 9, 1918.
Resigned July 21, 1918.
Term expired Aug. 9, 1922.
Reappointed in 1924. Reappointed in 1934 from the
Richmond District. Served until Feb. 3, 1936. 3
Resigned Mar. 15, 1920.
Term expired Aug. 9, 1920.
Reappointed in 1928. Resigned Sept. 14, 1930.
Term expired Mar. 4, 1921.
Resigned May 12, 1923.
Died Mar. 22, 1923.
Resigned Sept. 15, 1927.
Reappointed in 1931. Served until Feb. 3, 1936."
Died Nov. 28, 1930.
Resigned Aug. 31, 1930.
Resigned May 10, 1933.
Term expired Jan. 24, 1933.
Resigned Aug. 15, 1934.
Reappointed in 1936 and 1948. Resigned May 31,
Served until Feb. 10, 1936. 3
Reappointed in 1936, 1940, and 1944. Resigned
July 14, 1951.
Resigned Sept. 30, 1937.
Served until Apr. 4, 1946. 3
Reappointed in 1942. Died Dec. 2, 1947.
Resigned July 9, 1936.
Reappointed in 1940. Resigned Apr. 15, 1941.
Served until Sept. 1, 1950. 3
Served until Aug. 13, 1954. 3
Resigned Nov. 30, 1958.
Died Dec. 4, 1949.
Resigned Mar. 31, 1951.
Resigned Jan. 31, 1952.
Resigned June 30, 1952.
Reappointed in 1956. Term expired Jan. 31, 1970.
Reappointed in 1958. Resigned Feb. 28, 1965.
Reappointed in 1964. Resigned Apr. 30, 1973.
Served through Feb. 28, 1966.
Died Oct. 21, 1954.
Retired Apr. 30, 1967.
Reappointed in 1960. Resigned Sept, 18, 1963.
Reappointed in 1962. Served until Feb. 13, 1976. 3
Served until Mar. 8, 1974. 3
Served through May 31, 1972.
Resigned Aug. 31, 1974.
Reappointed in 1968. Resigned Nov. 15, 1971.
Term began Feb. 1, 1970. Resigned Mar. 31, 1978.
Resigned June 1, 1975.
Resigned Jan. 2, 1976.
Resigned May 15, 1976.
Resigned Dec. 15, 1986.
456
Federal Reserve Bulletin •
Name
Philip E. Coldwell
Philip C. Jackson, Jr
J. Charles Partee
Stephen S. Gardner
David M. Lilly
G. William Miller
Nancy H. Teeters
Emmett J. R i c e
Frederick H. Schultz
Paul A. Volcker
Lyle E. Gramley
Preston Martin
Martha R. Seger
Wayne D. Angell
Manuel H. Johnson
H. Robert Heller
Edward W. Kelley, Jr
Alan Greenspan
John P. LaWare
David W. Mullins, Jr
Lawrence B. Lindsey
Susan M. Phillips
Alan S. Blinder
Janet L. Yellen
Laurence H. Meyer
Alice M. Rivlin
Roger W. Ferguson, Jr
Edward M. Gramlich
Susan S. Bies
Mark W. Olson
Ben S. B e r n a n k e
Donald L. K o h n
Chairmen4
Charles S. Hamlin
W.P.G. Harding
Daniel R. Crissinger
Roy A. Young
Eugene M e y e r
Eugene R. Black
Marriner S. Eccles
Thomas B. M c C a b e
W m . McC. Martin, Jr
Arthur F. Burns
G. William Miller
Paul A. Volcker
Alan Greenspan
Summer 2005
Federal R e s e r v e
District
Dallas
Atlanta
Richmond
Philadelphia
Minneapolis
San Francisco
Chicago
New York
Atlanta
Philadelphia
Kansas City
San Francisco
Chicago
Kansas City
Richmond
San Francisco
Dallas
New York
Boston
St. Louis
Richmond
Chicago
Philadelphia
San Francisco
St. Louis
Philadelphia
Boston
Richmond
Chicago
Minneapolis
Atlanta
Kansas City
D a t e initially took
oath of o f f i c e
Oct. 29, 1974
July 14, 1975
Jan. 5, 1976
Feb. 13, 1976
June 1, 1976
Mar. 8, 1978
Sept. 18, 1978
June 20, 1979
July 27, 1979
Aug. 6, 1979
May 28, 1980
Mar. 31, 1982
July 2, 1984
Feb. 7, 1986
Feb. 7, 1986
Aug. 19, 1986
M a y 26, 1987
Aug. 11, 1987
Aug. 15, 1988
May 21, 1990
Nov. 26, 1991
Dec. 2, 1991
June 27, 1994
Aug. 12, 1994
June 24, 1996
June 25, 1996
Nov. 5, 1997
Nov. 5, 1997
Dec. 7, 2001
Dec. 7, 2001
Aug. 5, 2002
Aug. 5, 2002
.Aug, 10, 1914-Aug. 9, 1916
Aug 10, 1916-Aug. 9, 1922
May 1, 1923-Sept. 15, 1927
Oct. 4, 1927-Aug. 31, 1930
Sept.. 16, 1930-May 10, 1933
May 19, 1933-Aug. 15, 1934
Nov. 15, 1934-Jan. 31, 1948 s
Apr. 15, 1948-Mar. 31, 1951
Apr. 2, 1951-Jan. 31, 1970
Feb. 1, 1970-Jan. 31, 1978
Mar. 8, 1978-Aug. 6, 1979
Aug. 6, 1979-Aug. 11, 1987
Aug. 11, 1987—6
O t h e r d a t e s and i n f o r m a t i o n relating
to m e m b e r s h i p 2
Served through Feb. 29, 1980.
Resigned Nov. 17, 1978.
Served until Feb. 7, 1986. 3
Died Nov. 19, 1978.
Resigned Feb. 24, 1978.
Resigned Aug. 6, 1979.
Served through June 27, 1984.
Resigned Dec. 31, 1986.
Served through Feb. 11, 1982.
Resigned August 11, 1987.
Resigned Sept. 1, 1985.
Resigned April 30, 1986.
Resigned March 11, 1991.
Served through Feb. 9, 1994.
Resigned August 3, 1990.
Resigned July 31, 1989.
Reappointed in 1990; resigned Dec. 31, 2001.
Reappointed in 1992.
Resigned April 30, 1995.
Resigned Feb. 14, 1994.
Resigned Feb. 5, 1997.
Served through June 30, 1998.
Term expired Jan. 31, 1996.
Resigned Feb. 17, 1997.
Term expired Jan. 31, 2002.
Resigned July 16, 1999.
Reappointed in 2001.
Resigned Aug. 31, 2005.
Resigned June 21, 2005.
Vice Chairmen4
Frederic A. Delano
Paul M . Warburg
Albert Strauss
Edmund Piatt
J.J. T h o m a s
Ronald Ransom
C. Canby Balderston
J.L. Robertson
George W. Mitchell
Stephen S. Gardner
Frederick H. Schultz
Preston Martin
Manuel H. Johnson
David W. Mullins, Jr.
Alan S. Blinder
Alice M. Rivlin
Roger W. Ferguson, Jr.
Aug. 10, 1914-Aug. 9, 1916
Aug. 10, 1916-Aug. 9, 1918
Oct. 26, 1918-Mar. 15, 1920
July 23, 1920-Sept. 14, 1930
Aug. 21, 1934-Feb. 10, 1936
Aug. 6, 1936-Dec. 2, 1947
Mar. 1 1, 1955-Feb. 28, 1966
Mar. 1, 1966-Apr. 30, 1973
May 1, 1973-Feb. 13, 1976
Feb. 13, 1976-Nov. 19, 1978
July 27, 1979-Feb. 11, 1982
Mar. 31, 1982-Apr. 30, 1986
Aug. 4, 1986-Aug. 3, 1990
July 24, 1991-Feb. 14, 1994
June 27, 1994-Jan. 31, 1996
June 25, 1996—July 16, 1999
Oct. 5, 1999—
Notes and list of ex officio members appear on page 457.
Membership
Ex OFFICIO MEMBERS
Secretaries of the Treasury
W.G. McAdoo
Carter Glass
David F. Houston
Andrew W. Mellon
Ogden L. Mills
William H. Woodin
Henry Morgenthau, Jr
of the Board
of Governors
of the Federal
Reserve
System,
19]3-2005
457
1
Dec. 23, 1913-Dcc. 15, 1918
Dec. 16, 1918-Fcb. 1, 1920
Feb. 2, 1920-Mar. 3, 1921
Mar. 4, 1921-Feb. 12, 1932
Feb. 12, 1932-Mar. 4, 1933
Mar. 4, 1933-Dec. 31, 1933
Jan. 1, 1934-Feb. 1, 1936
1. U n d e r the p r o v i s i o n s of the original Federal R e s e r v e Act, the Federal
R e s e r v e B o a r d w a s c o m p o s e d of seven m e m b e r s , i n c l u d i n g five a p p o i n t e d
m e m b e r s , the S e c r e t a r y of the Treasury, w h o was e x - o f f i c i o c h a i r m a n of the
B o a r d , and t h e C o m p t r o l l e r of the C u r r e n c y . T h e original t e r m of office w a s ten
y e a r s , and the five original a p p o i n t e d m e m b e r s had t e r m s of two, four, six,
eight, and ten years respectively. In 1922 the n u m b e r of appointed m e m b e r s w a s
increased to six, a n d in 1933 the term of office w a s increased to twelve years. T h e
Banking Act of 1935, a p p r o v e d Aug. 23, 1935, changed the n a m e of the Federal
Reserve Board to the B o a r d of G o v e r n o r s of the Federal R e s e r v e System and
p r o v i d e d that the B o a r d s h o u l d be c o m p o s e d of s e v e n a p p o i n t e d m e m bers; that the S e c r e t a r y of the T r e a s u r y and the C o m p t r o l l e r of t h e C u r r e n c y
s h o u l d c o n t i n u e t o serve as m e m b e r s until Feb. I, 1936; that the a p p o i n t e d
Comptrollers of the Currency
John Skelton Williams
Feb.
Daniel R. Crissinger
Mar.
Henry M. Dawes
May
Joseph W. Mcintosh
Dec.
J.W. Pole
Nov.
J.F.T. O'Connor
May
2, 1914-Mar. 2, 1921
17, 1921-Apr. 30, 1923
1, 1923-Dec. 17, 1924
20, 1924-Nov. 20, 1928
21, 1928-Sept. 20, 1932
11, 1933-Feb. 1, 1936
m e m b e r s in office on the date of that act s h o u l d c o n t i n u e to serve until F e b . 1,
1936, o r until their s u c c e s s o r s w e r e a p p o i n t e d and had qualified; and that
t h e r e a f t e r the t e r m s of m e m b e r s should b e f o u r t e e n y e a r s and that the d e s i g n a tion of C h a i r m a n and V i c e C h a i r m a n of the B o a r d s h o u l d b e for a term of f o u r
years.
2. D a t e f o l l o w i n g Resigned and Retired d e n o t e s final clay of service.
3. S u c c e s s o r took office on this date.
4. C h a i r m a n and Vice C h a i r m a n w e r e d e s i g n a t e d G o v e r n o r and V i c e G o v e r n o r b e f o r e A u g . 23, 1935.
5. S e r v e d as C h a i r m a n Pro T e m p o r e f r o m F e b r u a r y 3, 1948, to April 15,
1948.
6. S e r v e d as C h a i r m a n Pro T e m p o r e f r o m M a r c h 3, 1996, to J u n e 20, 1996.
458
Federal Reserve Bulletin • Summer 2005
Federal Reserve Board of Governors
and Official Staff
August 16, 2005
A L A N GREENSPAN,
Chairman
Vice Chairman
SUSAN SCHMIDT BIES
ROGER W . F E R G U S O N , JR.,
MARK W . OLSON
OFFICE
DIVISION
OF BANKING SUPERVISION
AND REGULATION—CONTINUED
OF BOARD MEMBERS
M I C H E L L E A . S M I T H , Director
WINTHROP P. HAMBLF.Y, Assistant
Director for Congressional
to the Board
and
Liaison
ROSANNA PIANALTO-CAMERON, Special Assistant to the Board
DAVID W. SKIDMORE, Special Assistant to the Board
LARICKE D . BLANCH ARD, Special Assistant to the Board
for Congressional
Director
WALT H. MILES, Assistant Director
WILLIAM F. TREACY, Assistant Director
S T E P H E N M . R O B E R T S , Adviser
Liaison
ROBERT M . PRIBBI.E, Special
for Congressional
STACY COLEMAN, Assistant
JON D. GREENLEE, Assistant Director
Assistant
to the Board
Liaison
DIVISION
OF INTERNATIONAL
FINANCE
K A R E N H . J O H N S O N , Director
SCOTT G . ALVAREZ, General Counsel
RICHARD M . ASHTON, Deputy General Counsel
KATHLEEN M . O'DAY, Deputy General Counsel
STEPHANIE MARTIN, Associate General Counsel
DAVID H . HOWARD, Deputy Director
THOMAS A. CONNORS, Senior Associate Director
RICHARD T. FREEMAN, Associate
Director
STEVEN B . KAMIN, Associate Director
WILLIAM L. HELKIE, Senior Adviser
DALE W. HENDERSON, Senior Adviser
ANN E. MISBACK, Associate General Counsel
JON W. FAUST, Assistant Director
KATHERINE H . WHEATLEY, Associate General Counsel
KIERAN J. FALLON, Assistant General Counsel.
STEPHEN HORACE MEYER, Assistant
General Counsel
PATRICIA A . ROBINSON, Assistant General Counsel
CARY K. WILLIAMS, Assistant General Counsel
JOSEPH E. GAGNON, Assistant Director
MICHAEL P. LEAHY, Assistant Director
D. NATHAN SHEETS, Assistant Director
RALPH W. TRYON, Assistant Director
LEGAL
DIVISION
DIVISION
OFFICE
OF THE SECRETARY
J E N N I F E R J . J O H N S O N , Secretary
ROBERT DEV, FRIERSON, Deputy Secretary
MARGARET M . SHANKS, Associate
Secretary
DIVISION OF BANKING
AND REGULATION
SUPERVISION
R I C H A R D S P I L L E N K O T H E N , Director
STEPHEN M . HOFFMAN, JR., Deputy Director
ROGER T. COLE, Senior Associate Director
MICHAEL G . MARTINSON, Senior Adviser
DEBORAH P. BAILEY, Associate
Director
NORAH M . BARGER, Associate
Director
BETSY CROSS, Associate
Director
GERALD A. EDWARDS, JR., Associate
Director
JACK P. JENNINGS, Associate Director
ROBIN L. LUMSDAINE, Associate Director
PETER J. PURCELL, Associate Director
MOLLY S. WASSOM, Associate Director
DAVID M . WRIGHT, Associate
Director
BARBARA J. BOUCHARD, Deputy Associate Director
ANGELA DESMOND, Deputy Associate Director
JAMES A . EMBERSIT, Deputy Associate Director
CHARLES H. HOLM, Deputy Associate Director
WILLIAM C. SCHNEIDER, JR., Deputy Associate Director
WILLIAM G . SPANIEL, Deputy Associate Director
OF RESEARCH
AND STATISTICS
D A V I D J . S T O C K T O N , Director
PATRICK M . PARKINSON, Deputy Director
DAVID W. WILCOX, Deputy Director
MYRON L. KWAST, Senior Associate Director
STEPHEN D. OLINER, Associate Director
LAWRENCE SLIFMAN, Associate Director
CHARLES S. STRUCKMEYER, Associate
Director
ALICE PATRICIA WHITE, Associate
Director
JOYCE K. ZICKLER, Associate Director
S. WAYNE PASSMORE, Deputy Associate Director
DAVID L. REIFSCHNEIDER, Deputy Associate Director
JANICE SHACK-MARQUEZ, Deputy Associate Director
WILLIAM L. WASCHER III, Deputy Associate Director
MICHAEL S. CRINGOLI, Assistant Director
DOUGLAS ELMENDORF, Assistant Director
MICHAEL GIBSON, Assistant Director
DIANA HANCOCK, Assistant Director
J. NELLIE LIANG, Assistant Director
ROBIN A. PRAGER, Assistant Director
DANIEL SICHEL, Assistant Director
MARY M . WEST, Assistant Director
GLENN B. CANNER, Senior Adviser
DAVID S. JONES, Senior Adviser
THOMAS D. SIMPSON, Senior Adviser
459
DONALD L. KOHN
DIVISION OF MONETARY AFFAIRS
DIVISION
Director
B R I A N F . M A D I G A N , Deputy Director
J A M E S A . C L O U S E , Deputy Associate Director
W I L L I A M C . W H I T E S E L L , Deputy Associate Director
C H E R Y L L . E D W A R D S , Assistant Director
W I L L I A M B . E N G L I S H , Assistant Director
A T H A N A S I O S O R P H A N I D E S , Adviser
D E B O R A H J . D A N K E R , Special Assistant to the Board
Director
M A U R E E N T . H A N N A N , Deputy Director
T I L L E N A G . C L A R K , Assistant Director
G E A R Y L , C U N N I N G H A M , Assistant Director
W A Y N E A . E D M O N D S O N , Assistant Director
Po K Y U N G K I M , Assistant Director
S U S A N F . M A R Y C Z , Assistant Director
S H A R O N L . M O W R Y , Assistant Director
R A Y M O N D R O M E R O , Assistant Director
VINCENT R . REINHART,
DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS
Director
G L E N N E . L O N E Y , Deputy Director
A D R I E N N E D . H U R T , Associate Counsel and Adviser
I R E N E S H A W N M C N U L T Y , Senior Adviser
M A R Y T . J O H N S E N , Associate Director
T O N D A E . P R I C E , Associate Director
S U Z A N N E G . K I L L I A N , Assistant Director
J A M E S A . M I C H A E L S , Assistant Director
SANDRA F. B R A U N S T E I N ,
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT
Staff Director
EEO Programs Director
Senior Adviser
STEPHEN R . MALPHRUS,
SHEILA CLARK,
LYNN S. FOX,
OF INFORMATION
DIVISION OF RESERVE BANK OPERATIONS
AND PAYMENT SYSTEMS
Director
Deputy Director
P A U L W . B E T T G E , S R . , Associate Director
K E N N E T H D . B U C K L E Y , Associate Director
J A C K K . W A L T O N I I , Associate Director
D O R O T H Y L A C H A P E L L E , Deputy Associate Director
G R E G O R Y L . E V A N S , Assistant Director
J O S E P H H . H A Y E S , J R . , Assistant Director
L I S A H O S K I N S , Assistant Director
M I C H A E L J . L A M B E R T , Assistant Director
J E F F J . S T E H M , Assistant Director
LOUISE L. ROSEMAN,
JEFFREY C . MARQUARDT,
OFFICE OF THE INSPECTOR GENERAL
Inspector General
Deputy Inspector General
E L I Z A B E T H A . C O L E M A N , Assistant Inspector General
L A U R A N C E A . F R O E H L I C H , Assistant Inspector General
W I L L I A M L . M I T C H E L L , Assistant Inspector General
BARRY R . S N Y D E R ,
MANAGEMENT
DIVISION
Director
Deputy Director
S T E P H E N J . C L A R K , Senior Associate Director
C H R I S T I N E M . F I E L D S , Associate Director
M A R S H A W . R E I D H I L L , Associate Director
B I L L Y J . S A U L S , Associate Director
D O N A L D A . S P I C E R , Associate Director
C H A R L E S O ' M A L L E Y , Assistant Director
J A M E S R I E S Z , Assistant Director
H . FAY P E T E R S ,
DARRELL R . PAULEY,
TECHNOLOGY
MARIANNE M . EMERSON,
D O N A L D L . ROBINSON,
460
Federal Reserve Bulletin • Summer 2005
Federal Open Market Committee
and Advisory Councils
A u g u s t 16, 2 0 0 5
FEDERAL
OPEN
MARKET
COMMITTEE
MEMBERS
A L A N G R E E N S P A N , Chairman
T I M O T H Y F. G E I T H N E R , Vice
Chairman
SUSAN SCHMIDT BIES
DONALD L. KOHN
A N T H O N Y M . SANTOMF.RO
ROGER W . FERGUSON, JR.
MICHAEL H. MOSKOW
GARY H . STERN
RICHARD W . FISHER
MARK W . OLSON
ALTERNATE MEMBERS
CHRISTINE M . CUMMING
JEFFREY M . LACKER
JACK G U Y N N
SANDRA PIANALTO
J A N E T L . YF.LLEN
STAFF
V I N C E N T R . R E I N H A R T , Secretary
D E B O R A H J . D A N K E R , Deputy
and
Economist
Secretary
M I C H E L L E A . S M I T H , Assistant
B R I A N F . M A D I G A N , Associate
Secretary
S C O T T G . A L V A R E Z , General
General
Economist
S T E P H E N D . O L I N E R , Associate
Counsel
Economist
A R T H U R J . R O L N I C K , Associate
Economist
K A R E N H . J O H N S O N , Economist
H A R V E Y R O S E N B L U M , Associate
D A V I D J . S T O C K T O N , Economist
J O S E P H S . T R A C Y , Associate
T H O M A S A . C O N N O R S , Associate
C H A R L E S L . E V A N S , Associate
Economist
Economist
Economist
L O R E T T A M E S T E R , Associate
Counsel
T H O M A S C . B A X T E R , J R . , Deputy
R I C H A R D T . F R E E M A N , Associate
D A V I D W . W I L C O X , Associate
Economist
Economist
Economist
Economist
DINO KOS, Manager, System Open Market Account
FEDERAL
ADVISORY
COUNCIL
M A R T I N G . M C G U I N N , President
J E R R Y A . G R U N D H O F E R , Vice
President
JAMES C . S M I T H , F i r s t D i s t r i c t
DENNIS J. KUESTER, S e v e n t h District
THOMAS A . RENYI, S e c o n d D i s t r i c t
J. K E N N E T H GLASS, E i g h t h D i s t r i c t
BRUCE L. HAMMONDS, T h i r d District
JERRY A . G R U N D H O F E R , N i n t h D i s t r i c t
MARTIN G . M C G U I N N , F o u r t h District
BYRON G . THOMPSON, T e n t h D i s t r i c t
G. KENNEDY THOMPSON, F i f t h District
G A Y L E M . EARLS, E l e v e n t h D i s t r i c t
FRED L . G R E E N III, S i x t h District
R I C H A R D M . KOVACEVICH, T w e l f t h D i s t r i c t
J A M E S E . A N N A B L E , Secretary
CONSUMER
ADVISORY
COUNCIL
MARK PINSKY, Philadelphia, Pennsylvania, Chair
LORI R. SWANSON, St. Paul, Minnesota, Vice Chair
STELLA ADAMS, Durham, North Carolina
DENNIS L. ALGIERE, Westerly, R h o d e Island
FAITH L. ANDERSON, Fort Worth, Texas
SUSAN BREDEHOFT, Cherry Hill, N e w Jersey
DEBORAH HICKOK, O o l t e w a h , T e n n e s s e e
W . JAMES K I N G , C i n c i n n a t i , O h i o
ELSIE MEEKS, Rapid City, South Dakota
BRUCE B. MORGAN, Roeland Park, Kansas
S H E I L A CANAVAN, B e r k e l e y , C a l i f o r n i a
BENJAMIN ROBINSON III, C h a r l o t t e , N o r t h C a r o l i n a
CAROLYN CARTER, G e t t y s b u r g , P e n n s y l v a n i a
M A R Y JANE SEEBACH, C a l a b a s a s , C a l i f o r n i a
MICHAEL COOK, Bentonville, A r k a n s a s
LISA SODEIKA, Prospect Heights, Illinois
DONALD S. CURRIE, B r o w n s v i l l e , T e x a s
PAUL J. SPRINGMAN, A t l a n t a , G e o r g i a
A N N E DIEDRICK, N e w Y o r k , N e w Y o r k
F O R R E S T F. S T A N L E Y , C l e v e l a n d , O h i o
DAN DIXON, Washington, District of Columbia
DIANE THOMPSON, East St. Louis, Illinois
HATTIE B . DORSEY, A t l a n t a , G e o r g i a
ANSELMO VILLARREAL, W a u k e s h a , W i s c o n s i n
K U R T EGGERT, O r a n g e , C a l i f o r n i a
CLINT WALKER, W i l m i n g t o n , D e l a w a r e
JAMES G A R N E R , B a l t i m o r e , M a r y l a n d
KELLY K . WALSH, H o n o l u l u , H a w a i i
R. CHARLES GATSON, Kansas City, Missouri
MARVA E . W I L L I A M S , C h i c a g o , I l l i n o i s
THRIFT INSTITUTIONS
ADVISORY
COUNCIL
CURTIS L. HAGE, Sioux Falls, South Dakota, President
ROY M. WHITEHEAD, Seattle, Washington, Vice President
ELDON R. ARNOLD, Peoria, Illinois
JEFFREY H . FARVER, S a n A n t o n i o , T e x a s
H . BRENT BEESLEY, S t . G e o r g e , U t a h
DOUGLAS K . FREEMAN, A l p h a r e t t a , G e o r g i a
CRAIG G . B L U N D E N , R i v e r s i d e . C a l i f o r n i a
DAVID H . HANCOCK, G r a n d v i e w , M i s s o u r i
ALEXANDER R . M . BOYLE, B e t h e s d a , M a r y l a n d
GEORGE JEFFREY RECORDS, JR., O k l a h o m a C i t y , O k l a h o m a
ROBERT M . C O U C H , B i r m i n g h a m , A l a b a m a
D A V I D R U S S E L L TAYLOR, R a h w a y , N e w J e r s e y
462
Federal Reserve Bulletin • Summer 2005
Federal Reserve Board Publications
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EDUCATION
PAMPHLETS
Short pamphlets suitable for classroom
available without charge.
use. Multiple copies are
Choosing a Credit Card
Consumer Guide to Check 21 and Substitute Checks
Consumer's Guide to Mortgage Lock-Ins
Consumer's Guide to Refinancings
Consumer's Guide to Settlement Costs
Consumer Handbook on Adjustable Rate Mortgages (also available in Spanish)
Consumer Handbook to Credit Protection Laws
Guide to Business Credit for Women, Minorities, and Small
Businesses
Home Mortgages: Understanding the Process and Your Right
to Fair Lending
How to File a Consumer Complaint about a Bank (also available
in Spanish)
In Plain English: Making Sense of the Federal Reserve
Keys to Vehicle Leasing (also available in Spanish)
Looking for the Best Mortgage (also available in Spanish)
Making Sense of Savings
Privacy Choices for Your Personal Financial Information
Protecting Yourself from Overdraft and Bounced-Check Fees
Putting Your Home on the Loan Line Is Risky Business (also
available in Spanish)
Series on the Structure of the Federal Reserve System
Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Reserve Bank Board of Directors
Federal Reserve Banks
There's a Lot to Learn about Money
What You Should Know About Home Equity Lines of Credit
(also available in Spanish)
What You Should Know About Your Checks
When Is Your Check Not a Check? (also available in Spanish)
463
STAFF STUDIES: Only Summaries
Printed in the
170.
Studies and papers on economic and financial subjects that are of
general interest. Staff Studies 1-158, 161, 163, 165, 166, 168, and
169 are out of print, but photocopies of them are available. Staff
Studies 165-176 are available online at www.federalreserve.gov/
pubs/staffstudies. Requests to obtain single copies of any paper or
to be added to the mailing list for the series may be sent to
Publications Fulfillment.
SAVINGS ACT, by Gregory Elliehausen and Barbara R.
Lowrey. December 1997. 17 pp.
171.
172.
BANKING
VICES
BY
MARKETS
SMALL
AND
AND
THE
174.
USE
OF
MEDIUM-SIZED
FINANCIAL
SER-
BUSINESSES,
by
LOAN
RATES
IN
TWENTY
CITIES,
by
Stephen
A.
Rhoades. February 1992. 11 pp.
164.
1989-92
CREDIT
CRUNCH
FOR
REAL
ESTATE,
by
S U M M A R Y O F M E R G E R P E R F O R M A N C E S T U D I E S IN B A N K I N G ,
1 9 8 0 - 9 3 , AND AN ASSESSMENT OF THE " O P E R A T I N G PERFORMANCE"
AND
"EVENT
IN
BANKING,
FUTURE
OF
RETAIL
ELECTRONIC
PAYMENTS
INTERVIEWS AND ANALYSIS, F e d e r a l
STUDY"
METHODOLOGIES,
Stephen A. Rhoades. July 1994. 37 pp.
by
by
Study
SYSTEMS:
Reserve
Staff, for the Payments System Development Committee,
Federal Reserve System. December 2002. 27 pp.
176.
B A N K M E R G E R A C T I V I T Y IN T H E U N I T E D S T A T E S ,
2003, by Steven J. Pilloff. May 2004. 23 pp.
James T. Fergus and John L. Goodman, Jr. July 1993.
20 pp.
167.
DISCLOSURE
B A N K M E R G E R S A N D B A N K I N G S T R U C T U R E IN T H E U N I T E D
INDUSTRY
E V I D E N C E O N T H E S I Z E O F B A N K I N G M A R K E T S FROM M O R T GAGE
PUBLIC
STATES, 1980-98, by Stephen Rhoades. August 2000. 33 pp.
175.
Gregory E. Elliehausen and John D. Wolken. September
1990. 35 pp.
162.
IMPROVING
Group on Disclosure, Federal Reserve System. March 2000.
35 pp.
ARIES O F B A N K H O L D I N G C O M P A N I E S , b y N e l l i e L i a n g a n d
160.
U S I N G S U B O R D I N A T E D D E B T AS AN I N S T R U M E N T O F M A R -
KET DISCIPLINE, by Study Group on Subordinated Notes
and Debentures, Federal Reserve System. December 1999.
69 pp.
N E W D A T A ON T H E P E R F O R M A N C E O F N O N B A N K S U B S I D I -
Donald Savage. February 1990. 12 pp.
C O S T OF B A N K R E G U L A T I O N : A R E V I E W O F T H E E V I D E N C E ,
by Gregory Elliehausen. April 1998. 35 pp.
173.
159.
COST OF IMPLEMENTING CONSUMER FINANCIAL REGULAT I O N S : A N A N A L Y S I S O F E X P E R I E N C E W I T H T H E T R U T H IN
BULLETIN
1994-
464
Federal Reserve Bulletin • Summer 2005
ANTICIPATED
BOARD
SCHEDULE
OF GOVERNORS
OF RELEASE
DATES
OF THE FEDERAL
FOR PERIODIC
RESERVE
For ordering assistance,
write PUBLICATIONS FULFILLMENT, MS-127, Board of Governors of the Federal Reserve
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or FAX (202) 728-5886. You may also use the publications
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should accompany request and be made payable to the Board of
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residents should be drawn on a U.S. bank.
Approximate
release
days'
Period or date to
which data refer
Corresponding
Bulletin or
Statistical
Supplement
table numbers 2
Weekly Releases
H.2.
Actions of the Board:
Applications and Reports
Received
$55.00
Friday
Week ending
previous
Saturday
H.3.
Aggregate Reserves of
Depository Institutions and
the Monetary B a s e 3
$20.00
Thursday
Week ending
previous
Wednesday
1.20
$20.00
Thursday
Week ending
previous
Wednesday
1.11, 1.18
H.4.1. Factors Affecting Reserve Balances
of Depository Institutions and
Condition Statement of
Federal Reserve Banks 3
H.6.
Money Stock Measures 3
$35.00
Thursday
Week ending
Monday of
previous week
1.21
H.8.
Assets and Liabilities of
Commercial Banks in the
United States 3
$30.00
Friday
Week ending
previous
Wednesday
1.26A-F
H.10.
Foreign Exchange Rates 3
$20.00
$20.00
Monday
Week ending
previous
Friday
3.28
$20.00
$20.00
Monday
Week ending
previous
Friday
1.35
$ 5.00
First of month
Previous month
3.28
Midmonth
Previous month
2.12, 2.13
Fifth working day
of month
Second month
previous
1.55, 1.56
End of month
Second month
previous
1.51, 1.52
H. 15. Selected Interest Rates 3
Monthly
Releases
G.5.
Foreign Exchange Rates 3
$ 5.00
G.17.
Industrial Production and
Capacity Utilization 3
$15.00
G.19.
Consumer Credit 3
$ 5.00
G.20.
Finance Companies 3
$ 5.00
$ 5.00
465
Release number and title
Annual
mail
rate
Annual
fax
rate
Approximate
release
.
,
days'
. ,
,
^ ° . ?r a ef 0
which data refer
p
Corresponding
Bulletin or
Statistical
„
,
Supplement
table numbers 2
Quarterly Releases
E.2.
Survey o f Terms of Business
Lending 3
$ 5.00
Midmonth of
March, June,
September, and
December
February, May,
August, and
November
E. 11.
Geographical Distribution of
Assets and Liabilities of
Major Foreign Branches of
U.S. Banks
$ 5.00
15th of March,
June,
September, and
December
Previous quarter
E.16.
Country Exposure Lending
Survey 3
$ 5.00
January, April,
July, and
October
Previous quarter
Z. 1.
Flow of Funds Accounts
of the United States:
Flows and Outstandings 3
$25.00
Second week of
March, June,
September, and
December
Previous quarter
1. Please note that for s o m e releases, there is normally a certain variability in the release date because of reporting or processing procedures.
Moreover, for all series unusual c i r c u m s t a n c e s may, f r o m time to time,
result in a release d a t e b e i n g later t h a n anticipated.
2. Beginning w i t h the W i n t e r 2 0 0 4 issue (vol. 90, no. 1) of the Bulletin,
the c o r r e s p o n d i n g table for the statistical release no longer appears in the
4.23
1.57, 1.58,
1.59, 1.60
Bulletin. Statistical tables are n o w published in the Statistical Supplement
to the Federal Reserve Bulletin; the table numbers, however, remain the
same.
3. T h e s e releases are also available o n the B o a r d ' s w e b site,
www.federalreserve.gov/releases.
n.a. Not available.
466
F e d e r a l R e s e r v e Bulletin • S u m m e r 2 0 0 5
Maps of the Federal Reserve System
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page
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—
Branch boundary
NOTE
The Federal Reserve officially identifies Districts by number and Reserve Bank city (shown on both pages) and by
letter (shown on the facing page).
In the 12th District, the Seattle Branch serves Alaska,
and the San Francisco Bank serves Hawaii.
The System serves commonwealths and territories as
follows: the New York Bank serves the Commonwealth
of Puerto Rico and the U.S. Virgin Islands; the San Francisco Bank serves American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. The Board of
Governors revised the branch boundaries of the System
most recently in February 1996.
467
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468
Federal Reserve Bulletin • Summer 2005
Federal Reserve Banks, Branches, and Offices
August 16, 2005
FEDERAL RESERVE BANK
or B R A N C H
Zip
Chairman
Deputy Chairman
President
First V i c e P r e s i d e n t
BOSTON*
02205
Samuel O. Thier
B l e n d a J. W i l s o n
C a t h y E. M i n e h a n
Paul M . C o n n o l l y
NEW YORK*
10045
J o h n E. S e x t o n
J e r r y I. S p e y c r
M a r g u e r i t e D. H a m b l e t o n
Vice President
in c h a r g e of B r a n c h
T i m o t h y F. G c i t h n e r
Christine M. C u m m i n g
Buffalo
14202
B a r b a r a L. W a l t e r 1
PHILADELPHIA
19105
R o n a l d J. N a p l e s
Doris M. D a m m
Anthony M. Santomero
W i l l i a m H. S t o n e , Jr.
CLEVELAND*
44101
Sandra Pianalto
Robert Christy Moore
Cincinnati
Pittsburgh
45201
15230
R o b e r t W. M a h o n e y
C h a r l e s E. B u n c h
James M. Anderson
R o y W. H a l e y
RICHMOND
23261
T h o m a s J. M a c k e l l , Jr.
Theresa M. Stone
W i l l i a m C. H a n d o r f
M i c h a e l A. A l m o n d
Jeffrey M. Lacker
W a l t e r A. V a r v e l
David M. Ratcliffe
V. L a r k i n M a r t i n
J a m e s H. S a n f o r d
Fassil G a b r e m a r i a m
E d w i n A. J o n e s , Jr.
Beth Dortch Franklin
Earl L . S h i p p
Jack G u y n n
P a t r i c k K. B a r r o n
W. J a m e s Farrell
Miles D. White
Edsel B. Ford II
M i c h a e l H. M o s k o w
Gordon R.G. W e r k e m a
W a l t e r L. M e t c a l f e , Jr.
G a y l e P. W. J a c k s o n
Stephen M. Erixon
N o r m a n E. P f a u , Jr.
Russell G w a t n e y
William Poole
W. L e G r a n d e R i v e s
L i n d a Hall W h i t m a n
F r a n k L. S i m s
L a w r e n c e R. S i m k i n s
G a r y H. S t e r n
James M. Lyon
R o b e r t A. F u n k
Richard H. Bard
Thomas Williams
Tyree O. Minner
James A. T i m m e r m a n
Thomas M. Hoenig
R i c h a r d K. R a s d a l l , Jr.
R a y L. H u n t
Patricia M . Patterson
R o n C. H e l m
Lupe Fraga
Elizabeth Chu Richter
R i c h a r d W. F i s h e r
Helen E. H o l c o m b
George M. Scalise
D a v i d K.Y. T a n g
J a m e s L. S a n f o r d
James H. Rudd
H. R o g e r B o y e r
M i c R. D i n s m o r e
J a n e t L. Yellen
J o h n F. M o o r e
Baltimore
Charlotte
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
21203
28230
30309
35242
32231
33178
37203
70161
CHICAGO*
60690
Detroit
48231
ST. L O U I S
63166
Little R o c k
Louisville
Memphis
72203
40202
38101
MINNEAPOLIS
55480
Helena
KANSAS CITY
Denver
O k l a h o m a City
Omaha
DALLAS
El P a s o
Houston
San A n t o n i o
SAN FRANCISCO*
Los Angeles
Portland
Salt L a k e C i t y
Seattle
59601
64198
80217
73125
68103
75265
79901
77252
78295
94120
90051
97208
84130
98124
B a r b a r a B. H e n s h a w
R o b e r t B. S c h a u b
D a v i d E. B e c k 1
J e f f r e y S. K a n e 1
James M. McKee1
L e e C. J o n e s
C h r i s t o p h e r L. O a k l e y
Juan Del Busto
Melvyn K. Purcell1
R o b e r t J. M u s s o 1
Glenn Hansen1
Robert A. H o p k i n s 4
Maria Gerwing Hampton4
Martha Perine B e a r d 4
S a m u e l H. G a n e
P a m e l a L. W e i n s t e i n
D w a y n e E. B o g g s
Kevin A. Drusch
R o b e r t W. G i l m e r 3
Robert Smith III1
D. K a r e n D i a z 3 :5
M a r k L. M u l l i n i x 2
Mary Lee3,4
A n d r e a P. W o l c o t t
Mark Gould1
* Additional officcs of these B a n k s are located at W i n d s o r L o c k s , Connecticut 06096; East R u t h e r f o r d , N e w Jersey 07073; Utica at Oriskany, N e w York 13424;
C o l u m b u s , O h i o 4 3 2 1 6 ; Des M o i n e s , I o w a 50321; M i d w a y at B e d f o r d Park, Illinois 60638; Phoenix, Arizona 8 5 0 7 3 .
1. Senior V i c e President
2. E x e c u t i v e Vice President
3. Acting
4. Senior B r a n c h Executive
5. Assistant Vice President
469
International Journal of Central Banking
8
The International Journal of Central Banking (IJCB), a new quarterly publication
jointly sponsored by the world's major central banks (including the G-10 central
banks, the European Central Bank, and the Bank for International Settlements)
as well as many emerging-market central banks, seeks submissions for its
2006 Issues.
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The editors are soliciting manuscripts of high analytical quality on the theory
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on monetary and financial stability.
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Topic areas of published research will include but not
be limited to macroeconomics, monetary economics,
econometric modeling, finance and capital markets, banking
and financial intermediation, the analysis of payments
systems, prudential regulation and supervision, issues
relating to domestic and international financial stability, and
international finance more generally.
For complete submission guidelines, visit http://www.ijcb.org or e-mail
editor@ijcb.org for more information.
Editor: John Taylor, Stanford University
Co-editors: Hyun Shin, London School of Economics; Frank Smets, European Central Bank;
Kazou Ueda, Bank of Japan-, Michael Woodford, Columbia University
||
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470
Federal Reserve Bulletin • Summer 2005
Publications of Interest
STATISTICAL SUPPLEMENT
TO THE
FEDERAL RESERVE BULLETIN
The Statistical
Supplement
to the Federal Reserve
Bulletin is a continuation of the Financial and Business
Statistics section that appeared in each month's issue of
the Federal Reserve Bulletin.
Published monthly, the new Statistical Supplement is
designed as a compact source of economic and financial
data. All tables that appeared in the Federal Reserve
Bulletin, including the annual and quarterly special
tables, now appear in the Statistical Supplement. All
statistical series are published with the same frequency
FINANCIAL
AND
BUSINESS
DOMESTIC
FINANCIAL
that they had in the Bulletin, and the numbering system
for the tables remains the same.
Separate subscriptions for the quarterly Federal
Reserve Bulletin and the monthly Statistical
Supplement are available. For subscription information
about these publications, contact Publications Fulfillment at (202) 452-3245, or send an e-mail to
publications-bog@frbog.frb.gov.
The statistical tables included in the Statistical
Supplement are listed below.
STATISTICS
STATISTICS
Money Stock and Bank Credit
Reserves and money stock measures
Reserves of depository institutions and Reserve Bank credit
Reserves and borrowings—Depository institutions
Consumer Credit
Total outstanding
Terms
Flow of Funds
Funds raised in U.S. credit markets
Summary of financial transactions
Summary of credit market debt outstanding
Summary of financial assets and liabilities
Policy Instruments
Federal Reserve Bank interest rates
Reserve requirements of depository institutions
Federal Reserve open market transactions
DOMESTIC
Federal Reserve Banks
Condition and Federal Reserve note statements
Maturity distribution of loans and securities
Selected Measures
Output, capacity, and capacity utilization
Industrial production—Indexes and gross value
Monetary and Credit Aggregates
Aggregate reserves of depository institutions and monetary base
Money stock measures
Commercial Banking Institutions—Assets
and Liabilities
All commercial banks in the United States
Domestically chartered commercial banks
Large domestically chattered commercial banks
Small domestically chartered commercial banks
Foreign-related institutions
Financial Markets
Commercial paper outstanding
Prime rate charged by banks on short-term business loans
Interest rates—Money and capital markets
Stock market—Selected statistics
Federal Finance
Federal debt subject to statutory limitation
Gross public debt of U.S. Treasury—Types and ownership
U.S. government securities dealers—Transactions
U.S. government securities dealers—Positions and financing
Federal and federally sponsored credit agencies—Debt outstanding
Securities Markets and Corporate Finance
New security issues—Tax-exempt state and local governments and
U.S. corporations
Open-end investment companies—Net sales and assets
Domestic finance companies—Assets and liabilities
Domestic finance companies—Owned and managed receivables
Real Estate
Mortgage m a r k e t s — N e w homes
Mortgage debt outstanding
NONFINANCIAL
INTERNATIONAL
STATISTICS
STATISTICS
Summary Statistics
U.S. international transactions
U.S. reserve assets
Foreign official assets held at Federal Reserve Banks
Selected U.S. liabilities to foreign official institutions
Reported by Banks in the United States
Liabilities to, and claims on, foreigners
Liabilities to foreigners
Banks' own claims on foreigners
Banks' own and domestic customers' claims on foreigners
Reported by Nonbanking
Liabilities to foreigners
Claims on foreigners
Business Enterprises
in the United States
Securities Holdings and Transactions
Foreign transactions in securities
Marketable U.S. Treasury bonds and notes—Foreign transactions
Interest and Exchange Rates
Foreign exchange rates
SPECIAL TABLES—Data Published
Irregularly
Assets and liabilities of commercial banks
Terms of lending at commercial banks
Assets and liabilities of U.S. branches and agencies of foreign banks
Residential lending reported under the Home Mortgage Disclosure Act
Disposition of applications for private mortgage insurance
Small loans to businesses and farms
Community development lending reported under the Community
Reinvestment Act
471
Publications of Interest
FEDERAL RESERVE REGULATORY
SERVICE
To promote public understanding of its regulatory functions, the Board publishes the Federal Reserve Regulatory Service, a four-volume loose-leaf service containing all Board regulations as well as related statutes,
interpretations, policy statements, rulings, and staff
opinions. For those with a more specialized interest in
the Board's regulations, parts of this service are published separately as handbooks pertaining to monetary
policy, securities credit, consumer affairs, and the payment system.
These publications are designed to help those who
must frequently refer to the Board's regulatory materials. They are updated monthly, and each contains citation indexes and a subject index.
The Monetary
Policy and Reserve Requirements
Handbook contains Regulations A, D, and Q, plus
related materials.
The Securities Credit Transactions Handbook contains Regulations T, U, and X, which deal with extensions of credit for the purchase of securities, and related
statutes, Board interpretations, rulings, and staff opinions. Also included is the B o a r d ' s list of foreign margin
stocks.
The Consumer and Community Affairs Handbook
contains Regulations B, C, E, G, M, P, Z, AA, BB, and
DD, and associated materials.
The Payment System Handbook deals with expedited
funds availability, check collection, wire transfers, and
risk-reduction policy. It includes Regulations CC, J, and
EE, related statutes and commentaries, and policy
statements on risk reduction in the payment system.
For domestic subscribers, the annual rate is $200 for
the Federal Reserve Regulatory Service and $75 for
each handbook. For subscribers outside the United
States, the price including additional airmail costs is
$250 for the service and $90 for each handbook.
The Federal Reserve Regulatory Service is also available on C D - R O M for use on personal computers. For a
standalone PC, the annual subscription fee is $300. For
network subscriptions, the annual fee is $300 for 1 concurrent user, $750 for a maximum of 10 concurrent
users, $2,000 for a maximum of 50 concurrent users,
and $3,000 for a maximum of 100 concurrent users.
Subscribers outside the United States should add $50
to cover additional airmail costs. For further information, call (202) 452-3244.
All subscription requests must be accompanied by a
check or money order payable to the Board of Governors of the Federal Reserve System. Orders should be
addressed to Publications Fulfillment, Mail Stop 127,
Board of Governors of the Federal Reserve System,
Washington, D C 20551.
GUIDE TO THE FLOW OF FUNDS ACCOUNTS
A new edition of Guide to the Flow of Funds Accounts
is now available from the Board of Governors. The new
edition incorporates changes to the accounts since the
initial edition was published in 1993. Like the earlier
publication, it explains the principles underlying the
flow of funds accounts and describes how the accounts
are constructed. It lists each flow series in the Board's
flow of funds publication, "Flow of Funds Accounts of
the United States" (the Z . l quarterly statistical release),
and describes how the series is derived from source
data. The Guide also explains the relationship between
the flow of funds accounts and the national income and
product accounts and discusses the analytical uses of
flow of funds data. The publication can be purchased,
for $20.00, from Publications Fulfillment, Mail Stop
127, Board of Governors of the Federal Reserve System, Washington, D C 20551.
472
Federal Reserve Bulletin • Summer 2005
Federal Reserve Statistical Releases
Available on the Commerce Department's
Economic Bulletin Board
The Board of Governors of the Federal Reserve System makes some of its statistical releases available to
the public through the U.S. Department of Commerce's economic bulletin board. Computer access
to the releases can be obtained by subscription.
For further information regarding a subscription to
the economic bulletin board, please call (202) 4821986. The releases transmitted to the economic bulletin board, on a regular basis, are the following:
Reference
Number
Statistical release
Frequency of release
H.3
Aggregate Reserves
Weekly/Thursday
H.4.1
Factors Affecting Reserve Balances
Weekly/Thursday
H.6
Money Stock
Weekly/Thursday
H.8
Assets and Liabilities of Insured Domestically Chartered
and Foreign Related Banking Institutions
Weekly/Monday
H.10
Foreign Exchange Rates
Weekly/Monday
H.15
Selected Interest Rates
Weekly/Monday
G.5
Foreign Exchange Rates
Monthly/end of month
G.17
Industrial Production and Capacity Utilization
Monthly/midmonth
G.19
Consumer Credit
Monthly/fifth business day
Z.l
Flow of Funds
Quarterly
@FedFRASER