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VOL. 2 N0.1


The HMDA prescription
By George Galster

Clark Atlanta University

By Cynthia Goodwin


n December 1991, HUD
awarded $4.5 million
under a new initiative to 10
historically black colleges and
universities (HBCUs) to
stimulate economic development, promote neighborhood
revitalization, and foster antipoverty strategies within the
nation's minority communities.
"I see this $4.5 million as a
critical investment in the vast
economic and entrepreneurial
potential that we seek to unSee HBCUs, page 3
Federal Reserve Bank of St. Louis

he Federal Reserve's
release of data for 1990
collected under the auspices of
the Home Mortgage Disclosure Act (HMDA) has
created a major controversy.
What the numbers show is
clear; what the numbers mean
is not. Therefore, the stage is
set for irresponsible rhetoric,
unjustifiable complacency,
and the formulation of wrongheaded public policy.
Since the HMDA of 1975,
several categories of lenders
have been required to report
the number and dollar volume
of mortgage loans they have
made in neighborhoods of the
metropolitan areas in which
they do business. In 1989,
HMDA was modified to require that a broader variety of
lenders report not only loan
volume by neighborhood, but
also the disposition of individual loan applications and
the gender, race, and income of
each applicant. It is this first
year's expanded data that were
released recently.

The results showed
dramatic racial patterns in
mortgage activity. Disproportionately few blacks and
Hispanics applied for
mortgages relative to their
share of the population. 1
Black and Hispanic applicants
for mortgages were rejected
more frequently than white apSee HMDA, page 7

Galster is a
professor of
at The College ofWooster,
Ohio, where
he also
chairs the
Studies program. Mr.
Galster is
also a member of the
Board of




A tough time for rural housing
By Courtney Dufries


f you think it's tough to
obtain a home purchase
loan in the inner-city, you
should try to get one in a rural
area. Loan underwriting
criteria used in rural areas
present numerous barriers for
all potential home-buyers,
especially low- and moderateincome buyers. The lack of a
strong secondary market combined with higher down payments, lower loan-to-value
ratios, and traditional debt-toincome ratios pose many
obstacles for people who look
to their local lenders for these
loans. Although some government-sponsored programs
have been developed to address these problems, their effectiveness is limited.
Some of the barriers to

Rural banks frequently offer loans
with 15-year maturities, which result
in higher monthly debt payments
that disqualify many low- and
moderate-income home buyers.

these loans can be traced to the
lessons learned from
deregulating interest rates. In
1984, Congress found that
limits on rates of interest on
deposits discouraged people
from saving money in
depository institutions. In
response, Congress agreed
that all depositors should
receive a market rate of return
on their savings. Interest rates
were deregulated, and

depositors soon received
higher returns on their
However, the competition
among financial institutions
for deposits often resulted in
their paying more for shortterm deposits than they
received on long-term loans.
This mismatch was especially
evident in the savings and loan
industry. Liquidity, earnings,
and capital were strained; and
some financial institutions
eventually failed. To prevent
this problem, many banks,
notably rural banks, now require shorter terms on home
purchase loans.
Rural banks frequently
offer home purchase loans
with 15-year maximum
maturities, sometimes with
three- or five-year balloon features. Unfortunately, shorter
maturities result in higher
monthly debt payments that
disqualify many low- and
moderate-income buyers. The
added expense of refinancing
and closing another loan when
a balloon payment is due can
present a significant financial
Adjustable rate mortgage
loans (ARMs) are frequently
used by rural lenders to
prevent an interest rate mismatch between loans and
deposits. ARMs provide annual interest rate adjustments
that result in an increase or
decline in the monthly loan
payments. However, for some
homeowners an increase in the
loan payment can cause an unaffordable payment shock.
households especially,
ARMs can result in a slow
payment history on the home
loans or on other loans (credit
cards, car notes, etc.). In the
worst case, ARMs that
repriced upward over an ex-
Federal Reserve
Bank of

tended period could result in
loan defaults and foreclosures.
Most rural banks rely on
conventional (traditional) loan
underwriting criteria because
of their proven safety and
soundness. Conventional underwriting requires a minimum downpayment of 10%,
with the added expense of purchasing mortgage insurance,
or 20% without mortgage insurance. Requiring loan-tovalue ratios of 90% or less
helps ensure paying bank expenses if a foreclosure is ever
Conventional underwriting
has constraints on debt levels,
frequently called the "front"
and "back" ratios. The front
ratio is the monthly home loan
payment (principal, interest,
taxes, and hazard insurance)
divided by gross income, and
is usually set at 28%. This percentage represents the maximum debt level at which
lenders allow a borrower to
buy a home.
See Rural, page 3


HBCUs: Apossible
Continued from page 1

Dilapidated rural housing near Thompson, Georgia.

Rural: Increasing credit availability
Continued from page 2
he back ratio, normally
set at 36%, is the minimum amount paid each month
on all debt, including the home
loan, divided by gross monthly income. These debt ratios
help prevent excessive debt
burdens and help ensure that
homeowners have money for
food, clothing, savings,
repairs, and other expenses.
Conventional debt ratios
can disqualify many low-income persons because even
small amounts of debt can
result in a relatively high ratio
if the monthly gross income is
low (the denominator in the
equation). There are frequent
debates about the most appropriate debt ratios, but the
problem remains unresolved
for low- and moderate-income
Solutions Now Available

Although none are perfect,
programs are currently available lo address affordable loan
barriers such as high down
payments, conservative debt
ratios, and short maturities.
Federal Reserve Bank of St. Louis

Three potential solutions include ( 1) using government
guaranteed loans, (2) selling
loans in a secondary market,
and (3) using correspondent
bank relationships.
One of the best government
guarantees is offered through
the Farmers Home Administration
Among the several programs
FmHA offers is a new direct
guaranteed loan program (see
Partners, Vol. I, No. 2).
This program, offered to
approved lenders, provides a
90% principal guaranty for applicants who live in rural areas
and whose income does not
exceed 100% of the median
income for the county where
the home is located. Applicant
eligibility includes higher debt
ratios (29% and 41 %) and
lower down payments (up to
100% financing). However,
because fixed interest rates
and 30-year maturities are required, lenders have been
reluctant to offer these loans at
their financial institutions.
See RURAL, page 8

leash in minority neighborhoods all across the country,"
said Secretary Jack Kemp.
Under the new program,
HBCUs will work in close
cooperation with local governments to design, develop, and
implement approaches for
economic growth and community development. The
funding also encourages
HBCUs to craft strategies to
combat longstanding poverty
problems such as homelessness.
Two HBCUs in the Sixth
District received awards.
Clark Atlanta University
received an award of$497,910.
That award will be combined
with private funds and through
its community development
corporation, Clark plans to acquire and rehabilitate four
vacant homes for resale to lowand
f arnilies; spur job development
in two areas by providing technical assistance; and provide
technical assistance to various
organizations in the irnplement at ion of the West End
redevelopment plan, among
other initiatives. Dr. Edward
Davis will direct the implementation and can be
reached at (404) 880-8401 for
additional information.
Southern University at New
$500,000, which will be combined with private funding to
operate a Technology Transfer
Center for Community and
Entrepreneurial Development.
Program activities will be
designed to address local community development objectives in the area of housing and
economic development.
Project Director for this initiative is Ms. Ivory Williams. For
additional information, she can
be contacted at (504) 286-





Community Development Training
Foundation and Private
Support Increasing

The Federal Reserve Bank of Atlanta

he latest study by the
Council for Community-Based Develop-

In conjunction with
The Development Training Institute

Community Reinvestment Training Workshops for lenders, compliance officers, and senior bank management.
March 17 - Nashville, Tennessee
March 18 - Atlanta, Georgia
March 20 - New Orleans, Louisiana
Call Dianne Rawls at 404/589-7307 for registration information.

CRCs gaining popularity
ollaborating to address acute affordable
housing problems, lenders and government representatives from the Tampa-St.
Petersburg area asked The Developm~nt Fun~. a
non-profit corporation that develops mnovat1ve
financing for affordable housing and related community improvement, to prepare a plan for est~blishing a community reinvestment corporation



The concept was presented to area lenders at a
luncheon January 17 hosted by St. Petersburg
Mayor David Fischer.
Addressing the group, Ron Zunmerman, vice
president of The Federal Reserve Bank of Atlanta
commented, "To achieve the scale necessary to
fully address the housing affordabil~ty I?r_oblems,
two features-shared risk and prof1tab1hty-are
vital. This concept incorporates those attributes
and has a proven track record."
The Federal Reserve Bank of San Francisco
was instrumental in developing the first CRC, and
both Reserve Banks continue to offer support and
assistance in exposing lenders to this alternative.
George Koehn, chief executive officer of SunBank of Tampa Bay, will chair the initial task
force to assess the feasibility of forming a CRC.
CRCs offer participating institutions an opportunity
• to pool their resources to support local,
regional, or statewide affordable housing
• to share the credit risk associated with affordable housing

• to share and reduce administrative costs
• to address institutional
community reinvestment
This strategy also presents
an opportunity for small- and
medium-sized institutions to
expand their community
portfolios by reducing the
costs of obtaining the necessary expertise and maintaining
staff and resources.
Initial funding for preparing this plan was provided by
Barnett Bank of Pinellas
County, C&S National Bank
of Florida, NCNB National
Bank of Florida (C&S and
NCNB are now NationsBank,
N .A.), First Florida Bank,
N.A., First Union National
Bank of Florida, SouthTrust
Bank of Pinellas County, and
SunBank of Tampa Bay.
CRCs are currently operating in five states. The first initiative was the $100 million,
statewide California Community Reinvestment Corporation (CCRC). CCRC has
60 member banks. CCRC's
typical loan carries a fixed rate
Reserve Bank
St. Louis

ment reveals that the
private sector awarded
2,466 grants totalling $90.1
million in the community
development field in 1989.
Among the 50 leading
funders, each of which gave
over $400,000, there was a
median increase of 39 percent from 1987. A copy of
the report, Expanding
Horizons II, is available for
$18 from Council, 1070
Thomas Jefferson St.,
N.W., Washington, D.C.
20007; (202) 342-9262.

Recognizing a community need: NationsBank Corporation and the
NAACP are establishing
five Community Development Resource Centers to
development lending.
N ationsBank is committing
$1.1 million to fund the
Resource Centers for three
years. The facilities, located in Austin, TX; Atlanta, GA; Charlotte, NC;
Columbia, SC; and Richmond, VA, will be staffed
by the NAACP. The
centers will provide consumer and business education and counseling,
economic development advocacy, and technical assistance.
with a 10-, 15-, or 30-year
term, primarily for apartments
or single-room occupancies in
inner-city projects.

For additional information
aboUJ CR Cs, call John Trauth
or Kathy Kenny at The
Development Fund at (415)


SBA: More than a guarantee


he law does not require
banks to participate in
Small Business Administration (SBA) guaranteed business loan programs, but banks
may face community criticism
for not offering these loans.
Responding to criticism,
bankers sometimes point out
that SBA paperwork is a burden and that the underwriting
criteria are too strict. The fact
remains, however, that SBA
programs benefit both small
and large banks and the communities these banks serve.
(1) It offers guarantees in
the event of default.
(2) The guaranteed part of
the loan can be sold in the
secondary market (often at a
(3) The relationship between the bank and the borrower can potentially increase
bank deposits and in turn
strengthen local communities.
The SBA provides financial
assistance to small businesses
by making direct loans (resources for direct loans have been
limited in recent years), loan
guaranties, disaster loans, and
other kinds of loans. The SBA
is neither a venture capitalist
nor a commercial bank. Its
goal is to provide financial assistance until the credit becomes bankable. One of the
SBA 's most popular loan
programs, the SBA 7(a) loan
guaranty, benefits the public
and at the same time, provides
safe, sound, and profitable
bank financing.
In years past, SBA was considered the agency of last
resort. But that image has
changed. While maintaining
prudent standards, the guaranty encourages banks to be less
risk averse. 25 percent of all
SBA loans are extended to
finance start-up ventures that
are often not considered by
Federal Reserve Bank of St. Louis

many lenders. As a result, the
nonperforrning loan levels of
SBA guaranteed loans are
generally twice those of conventional portfolios-about
10 percent for defaults and 1
percent for charge-offs.
The underwriting criteria
are very similar to conventional underwriting used at commercial banks.
What the SBA does differently from commercial
banks is guarantee loans with
longer maturities that allow
small business owners to make
lower monthly loan payments.
For many borrowers, the lower
loan payments can make the
difference in qualifying or not
qualifying for a loan. Apple
Computers, Federal Express
and Nike are just three of the
successful businesses that
received SBA assistance.
Certainly no one would expect an agency like the SBA to
offer loan guarantees without a
formal process to ensure
repayment. So the SBA has
tried to ensure repayment and
at the same time, address
bankers' concerns about
paperwork. Simply understanding the process of applying for a loan may cut down
some of the paperwork.
The 7(a) guaranteed loan
application is submitted on
standardized forms and accepted for processing only
after it has been reviewed for
completeness. Any additional
information is requested on incomplete applications. If this
information is not received,
the application is returned to
the bank. The loan decline
rate is about 50 percent nationwide, but this 50 percent includes applications that were
incomplete or were ineligible.
he SBA offers two
programs that expedite
the application process. One


is the Certified Lenders Program (CLP), under which the
SBA has given about 700
lenders partial authority to approve loans. Another is the
Preferred Lenders Program
(PLP) of approximately 170
participating lenders who have
full authority to approve loans.
PLP authority includes determining eligibility and creditworthiness, structuring the

Research on
this article
provided by
Jerry Williams,
senior examiner in
the Commercial Examinations
section of
the Federal
Banko/ Atlanta.

See SBA, page 6



Continued from page 5

'The SBA

is neither a

nor a commercial
bank. The

is to provide
financial assistance
until the
credit becomes bankable."

loans, monitoring, collecting,
servicing, and deciding about
liquidation actions. This
authority does not require
prior review or consent by the
All banks, savings and
loans, and thrifts are eligible to
participate in the 7(a) program
regardless of size because they
are supervised by state or
federal regulatory agencies.
"Paperwork is a given, but
the benefit is a guaranteed portion of the loan that has the
same value as a U.S. Treasury
note. Both are backed by the
full faith of the government,"
says SBA Regional Advocate
Sam Lindsay.
"This substantially reduces
the credit risk to the bank."
Besides, the southeast regions'
SBA officers have shown a
willingness and desire to train
loan officers [at commercial
banks and for no cost]. And
the secondary market becomes
a profit center for the bank,
more than offsetting the paperwork."
In fact, a major advantage
to SBA lending is the ability to
sell the guaranteed portion in
the secondary market, similar
to selling mortgage loans. Because interest rates on these
loans can be as high as 2 3/4
percent over the prime rate, the
guaranteed portion can be sold
at a premium. In addition,
banks can negotiate loan servicing rights, that may be
profitable and contribute to the
bank's deposit base.
Not everyone can qualify
for an SBA loan. Anyone currently incarcerated, on parole
or probation, or who has
criminal actions pending is ineligible. Ineligible businesses
• Non-profit organizations

SBA 7(a) Program's Past Due Statistics
The following statistics are based on total loans outstanding as of
May 31, 1991.

Past due 30-60 days
Past due 61-179 days


Region IV*



Loans delinquent more than 180 days are usually placed in liquidation. My decision involving the liquidation of collateral is usually a
mutual decision between the participant bank and the SBA.
• Includes Kentucky, Tennessee, North Carolina, South Carolina,
Mississippi, Alabama, Georgia, and Florida.

• Media broadcasting and
• Aoor plan financing
• Gambling
• Speculation
• Real property primarily
held for investment or
• Monopolies
• Pyramid sales
• Illegal activities
Eligibility for a guaranteed
loan is usually based on size,
which varies among industries. These standards are
available from your local SBA
The SBA goes to extra
lengths to lend to handicapped
persons, veterans, and women
whom it considers acceptable
credit risks. Other minority
groups entitled to receive special considerations include
blacks, Hispanics, Asians, and
Native Americans.
The financial analysis of all
loans includes a review of: (1)
business collateral as a
primary repayment source;
and (2) additional personal
collateral and the guaranty of
the principals as secondary
repayment sources. The SBA
usually requires personal assets (i.e. equity in residences)
Federal Reserve
of St.

as protection and to ensure a
strong commitment by the
owner to the long-term
viability of the venture.
The success of small businesses affect our standard of
living and ultimately the
strength of our entire community, including the banking
community. The SBA 7(a)
loan guaranty offers safe and
sound lending opportunities
for commercial banks by
providing financing to borrowers until they become
bankable credits. By providing incentives to commercial
banks through potential increases in income and liquidity, SBA helps build communities and improve local
living standards.






HMDA: Description vs. prescription
Continued from page 1
plicants of roughly the same
income. 1
So much for the facts.
What about their interpretation? Here is where all major
parties involved-community
activists, lenders, and public
policy-makers-are tempted
to err. The common temptation is to believe that the
HMDA data prove more than
they're capable of.
My central theme is that
HMDA data are fine for
description, but lousy for
prescription. They describe
the lending patterns, but are
incapable of distinguishing
among alternative hypotheses
about why they occur.
A medical metaphor is appropriate. HMDA data are
useful like a doctor's cursory,
external physical examination
of a patient. Just as a doctor
can ascertain that a patient
looks peaked or has a fever, so
too can HMDA data reveal superficial problems. Certainly
this is not bad; but it is insufficient. Just as a doctor needs to
know the etiology of
symptoms in order to prescribe
properly, we need to see what
is occurring below the surface
of lending patterns in order to
develop appropriate responses.

The problem with the
"symptoms " of lending difficulties that HMDA data indicate is that numerous "illnesses" are capable of explaining them. Consider first the
observation of disproportionately few applications
from blacks and Hispanics.
Federal Reserve Bank of St. Louis

At least four (not mutually
exclusive) hypotheses readily
suggest themselves. First,
perhaps these applicants could
afford a mortgage for a home
but simply do not know that
they could, so they fail to
apply. This could be termed a
failure of information or
Second, they may be unsure
whether they can afford a
mortgage or not, but when they
try to obtain information from
a prospective lender, they are
misinformed or otherwise discouraged from applying. This
is lender discrimination at the
pre-application stage.
Third, they may correctly
believe that they cannot afford
the size of mortgage required
to purchase their desired
property (for one personal
financial reason or another)
and thus do not apply. This is
a problem of personal financial management, lack of personal productivity, macroeconomic conditions, or disc rim i nation in the labor
Fourth, they may correctly
believe that they can afford a
sizable mortgage but choose
not to apply for one, either because they do not see net advantages from homeownership or because they cannot
find a superior home to purchase compared to the one they
currently occupy. This could
be due to historical unfamiliarity with homeownership, relatively low property
appreciation in minority
neighborhoods, or discrimination in the housing market,
which limits housing choices.
ow consider the higher
rate of loan denials for


black and Hispanic applicants.
At least four hypotheses offer
plausible explanations. First,
applications may be treated
more harshly by lenders mere1y because they are from
minority applicants or because
the property in question is located in a minority-occupied
neighborhood. This is the
hypothesis of racial discrimination by differential
treatment of applications.
Second, applications from
minorities may be evaluated
according to similar standards
as those from whites, but the
standards are arbitrary, inflexible, and serve no sound
business interest. In this case
we would have racial discrimination through adverse
Third, applications from
minorities could be treated
evenhandedly in light of fair,
flexible standards that do have
a sound business rationale, but
they do not pass muster as
often as those from whites.
Even with identical incomes,
blacks and Hispanics on
average are less likely to have
as large a downpayment, as
long a job tenure, as good a
credit history, or as low a
debt/income ratio. This situation is due to a long, complex
legacy of interracial, economic
inequalities in America.
Fourth, minority applicants
perhaps would have been approved were it not for appraisers who discrirninatorily
undervalued the properties in
question or mortgage insurers
who discriminatorily refused
to grant insurance.

See HMDA, page 9


Mortgage Loan UndenNriting Crite ria

Rural credit

Typical Loan to Value Requirem e nt s

Continued from page 3

nother potential 90%
federal loan guarantee
on rural home mortgages is
available through the Rural
Loan Guarantee (RLG) program, created by the National
Affordable Housing Act of
1990. However, the RLG has
limited funding . If committed
funds are fully dispersed in
1992, the program will still account for less than 1% of all
rural housing loans originated.
That brings us to a second
possible solution to the loan
barriers for rural borrowers:
selling the loans to the secondary market. By selling the
loans to the secondary market,
lenders can afford to offer
longer maturities because the
sale eliminates the problem of
interest rate risk. Currently,
two major secondary markets
are actively working to purchase rural housing loans: The
Federal Agricultural Mortgage
Corporation (Farmer Mac) and
the Federal National Mortgage
Association (Fannie Mae).
Farmer Mac's underwriting
criteria are relatively strict,
and currently no loans have
been purchased from banks
under this program. Fannie
Mae has completed a pilot program to purchase rural housing
loans and has recently announced intentions to begin
purchasing loans nationwide.
Rural banks have been
reluctant to sell home
mortgages to Farmer Mac because they are required to
retain a 10% exposure on each
loan sold and because the underwriting criteria have made
it difficult for some borrowers
to qualify, especially low- and
moderate-income borrowers.
Front and back debt ratios are
set at 28% and 36%; loan to
value ratios are set at 75%, or
85% if the borrower has
private mortgage insurance;

Farmer Mac
Farmer Mac

Reserve Bank
St. Louis

( wilh m o ngagc ins uranc e )



Fannie Mae





Fannie Mae


( rural initiative)


50 __
5 5 _ 60
75_ _
80_ _
85 _ _
90 _95
L.-_ _ _
_ _65
_ _70
_ _100

Mortgage Loan UndenNritin g Crite ria
Comparative Analysis of" Loan P ro g.--..un s








maturities are set at 30 years;
and eligible areas are limited to
towns of less than 2,500
people or unincorporated communities.
Fannie Mae has an attractive program that purchases
loans with the 90% Farmers
Home Administration guarantee. Approved lenders can sell
loans one at a time, and three
options exist for the 10% loss
exposure. Lenders may assume the exposure, share the
exposure, or transfer the risk to
Fannie Mae.
Finally, a third possible
solution to overcoming barriers for rural borrowers is
looking to larger correspon-


dent banks. Many larger
financial institutions in urban
areas will purchase home
mortgage loans from rural
banks and help facilitate the
packaging and sale of loans to
the secondary market. Perhaps these relationships between rural institutions and
larger institutions will begin to
break down some of the many
barriers to affordable home
purchase loans in rural areas.



HMDA: How serious is the illness?
Continued from page 7
It is my belief that all of
these hypotheses have some
validity. The problem is that
the HMDA data tell us nothing
about the degree to which any
of them are responsible for
what we observe.
No Guidance For Private or
Publlc Polley Responses

Just as a doctor would be a
fool to prescribe solely on the
basis of an external examination, so would community
groups, lenders, or regulators
be foolish to concoct policy
responses on the bases of superficial lending patterns. No
entity in the for-profit, nonprofit, or public sectors has
enough resources to waste
them treating an illness that
isn't severe. And unfortunately, it doesn't appear that any
single policy "medicine" holds
any promise of curing several
possible lending "diseases"
Consider again the eight alternative explanations I gave
for the observed lending patterns. Each explanation holds
a radically different policy implication. If blacks and
Hispanics don't apply for
mortgages because they are
unaware of affordable
products, informational outreach programs are in order. If
applicants are illegally discouraged from applying,
lenders must modify their
management, and regulators
must modify their examination
procedures. If blacks and
Hispanics have weak personal
finances, policies ranging
from credit counseling to improved training to anti-discrimination efforts in labor
markets are appropriate. If applicants see no better housing
homeownership seminars and
anti-discrimination efforts in
housing markets are relevant.
Federal Reserve Bank of St. Louis

"In this supercharged
environment, the
lending industry
cannot afford to be
complacent... "

Similarly, if blacks and
Hispanics are more often
rejected because they are differentially treated or subjected
to lending standards having
needlessly adverse impacts,
reviews of policies and procedures by managers of lending
institutions and tighter examination procedures by
regulators are in order. If
these minorities fail to meet
fairly applied standards, new
loan products, personal financial counseling, and more systemic changes affecting their
earning potential should be
considered. Discrimination
by appraisers or mortgage insurers would indicate the need
for new anti-discrimination
The point is simple. Because HMDA data don't identify the source of the problem,
we are left with no guidance
about how to invest our scarce
resources to best improve
meeting the credit needs of
blacks and Hispanics.
A Tempting



Unfortunately, in the current politically charged atmosphere, it is tempting to place
more veracity in the HMDA
data than is warranted. Fair
housing and community reinvestment advocates may be

tempted to interpret these data
as proof of racial discrimination by lenders. The data are
consistent with this interpretation but, unfortunately, do not
offer conclusive proof. I have
already suggested several alternative, plausible explanations for the findings and have
discussed other statistical features of the HMDA data at
length in an earlier report issued by the American Bankers
Indeed, Ron Zimmerman
[Vice President and Community Affairs Officer of the
Federal Reserve Bank of Atlanta] has provided an effective
critique in the previous issue of
this publication. We have still
been bombarded in the media
with the polemics of discrimination in mortgage
markets that have originated
from community, civil rights,
and legislative leaders who
ought to know better.
Other responses are equally
inappropriate, however. The
mortgage lending industrycommercial banks, savings and
loans, mortgage companiesmay be tempted merely to find
solace in the fact that the
HMDA numbers offer no conclusive proof of discrimination. Such complacency is unwarranted for two reasons.
First, a different sort of
evidence has cast additional
shadows of potential discrimination over the performance of mortgage lenders.
Experiments were conducted
in Louisville during 1988 anq
in Chicago during 1989.
These pilot projects used
matched pairs of white and
black testers posing as
mortgage seekers to uncover
what occurred in the lending
process before loan applicaSee HMDA, page 10



Continued from page 9
lions were filed. The tests
revealed that black testers
were less likely to receive information about loan products,
less likely to be told whether
they qualified for a loan, and
less likely to be given helpful
suggestions about how to
qualify than their comparable
white teammates. Unfortunately, these pilot projects
were too experimental to be
considered definitive proof of
discrimination, yet their findings are too provocative to ignore.
Second, even if illegal discrimination were not responsible for the lending patterns
observed, the Community
Reinvestment Act of 1977 requires that lenders help meet
the credit needs of all sectors
of their communities. The
paucity of funds flowing into
many minority-occupied communities and the apparent indifference with which some
lenders treat prospective
minority loan applicants and
their neighborhoods suggests
that often this is not occurring.
n this supercharged environment, the lending industry cannot afford to be
complacent just because no
HMDA-based studies have
conclusively demonstrated
that it discriminates. Rather,
the industry must aggressively
demonstrate its commitment
to the principles of fair lending
and community reinvestment.
Lending institutions must conduct rigorous self-evaluations
to ensure that all employees,
policies, and procedures comply with the law.
In a new American Bankers
Association manual, Charles
Riesenberg and I provide suggestions for how this can be
done. 4 But beyond non-discrimination, lenders must affirmatively expand their
marketing efforts and develop

Federal Reserve
of St.

new products to suit the particular requirements and constraints of these communities.
Public policy-makers in
Congress and in the agencies
that regulate lenders may be
tempted to respond to the outcry over the HMDA statistics
with ill-conceived programs.
They might, for example,
mandate credit allocation
schemes that would dictate
that a certain share of all loans
be granted in particular neighborhoods. Such a knee-jerk
reaction could seriously distort lending patterns in ways
that make no economic or social sense. Equally inappropriate, policy-makers
might respond by arguing that
because there is no conclusive
proof of a problem, there is no
What Should be Done?

What we need now are additional facts that portray an
unambiguous picture of
what's happening behind the
scenes in mortgage markets.
In other words, we need data
that can confirm or deny the
various hypotheses offered
above . All the parties involved have a common interest in this. Activists should
want to know if their
su s picions are justified.
Lenders should want to confirm that they are being falsely
accused. Congress and the
regulators should want to ascertain whether they are fulfilling their oversight responsibilities or whether new initiatives are needed.
Congress or a regulatory
agency should commission a
comprehensive, definitive
study of mortgage markets.
This study should not only
statistically investigate data
from loan application files of a
broad sample of lenders, but
should also use testers to in-


vestigate the pre-application
stages before a "paper trail" is
created. Only then will we
know the extent to which discrimination by differential
treatment is occurring. The
highest social-scientific standards would be required. The
cost of such a study would be
trivial compared to the cost of
either ignoring a potentially
severe social problem or wasting resources in a vain attempt
to solve a minuscule one.
Interracial disparities in
mortgage loan application patterns and rejection rates
present a seductive opportunity for inappropriate
responses. Activists and
politicians must not play
demagogue. The lending industry must not be complacent. The regulatory agencies must avoid both a "knownothing" attitude and frenzied
gnorance is bad policy.
The country can best be
served by intensifying our efforts to investigate lending
practices in ways that provide
definitive answers both statistically and through the experiences of testers. Activists,
the lending industry, Congress, and regulatory agencies
have a shared interest in getting to the bottom of this matter once and for all.


I Canner, Glem (1991). '1-lome
Mortgage Disclosure Act: Expanded
Da1a on Residential Lending." Ecdg:a1
Reserve Bulletin 77, No. II (Nov.): 859881.
2 Galsttt, George (1991).

A Statistical

Perspective on IUeul Discrimination io
~ - Washington, D.C.: Amcrieat
BankeTS Association.
3 Galster, George (1991). '"The Use of
Testers in Investigating Mortgage Lending and Insurance DiscriminJJl.ion."
Paper presented at Rockefeller Foundation/Urban Institute Conference on Testing for Discrimination in America,
Washington, September 26, 1991.
4 Galsttt, George and Chwlcs Riesenberg ( 1992). Gcoanalysjs Resources.
Washington, D.C. : American Bankers






Robert Avery, Deregulation and the Location of Financial Institution Offices (Federal Reserve Bank of
Cleveland, Economic Commentary, 1991), pp. 30-42.


Glenn Canner and Charles Luckett, Consumer Debt Repayment Woes: Insights from a Household Survey,
Journal of Retail Banking, Spring 1990, pp. 55-62.


John P. Caskey, Check-Cashing Outlets in the U.S. Financial System (Federal Reserve Bank of Kansas
City, Economic Review, November/December 1991), pp. 53-63.


Arthur Kennickell and Janice Shack-Marquez, Changes in Family Finances from 1983 to 1989: Evidence
from the Survey of Consumer Finances, Federal Reserve Bulletin. January 1992, pp. 1- 18.



Constance Dunham, The Unknown Lenders: The Role of Mortgage Banks in the Chicago Metropolitan
Area (Chicago: The Woodstock Institute, 1991), I 08. The Woodstock Institute, 407 South Dearborn, Suite
550, Chicago, IL 60605, 312/427-8070.


Ronald Zimmerman, Lessons Learned from the Atlanta Mortgage Consortium. Study analyzes that
organization's loan portfolio after one year in operation. Federal Reserve Bank of Atlanta.


The Secondary Market and Community Lending Through Lenders' Eyes, prepared for Freddie Mac, this
report addresses public concern that lenders have been underserving the credit needs of certain communities (1991). Call Angie Grantman (703) 903-2363.



A Guide to Business Credit/or Women, Minorities, and Small Businesses explains the credit application
process, types of loans, and relevant regulations. Board of Governors.


Business Opportunities Casebook is an effort to assist rural communities in their economic development
efforts. For a copy, contact U.S. Small Business Administration, Rural Development, Business Development Division, 999 18th Street, Suite 701, Denver, Colorado 80202.


Community Affairs Officers at Federal Reserve Banks outlines the Community Affairs Officer's role,
duties, and responsibilities, particularly those responsibilities related to the Community Reinvestment Act.
Federal Reserve Bank of Richmond.


Home Mortgages: Understanding the Process and Your Rights details where and how to shop for a
mortgage and explains the credit analysis process. Board of Governors.


How to Establish and Use Credit discusses how to qualify for credit and use it wisely. Federal Reserve
Bank of Philadelphia.


ls My Bank Meeting Its Community Reinvestment Obligations? explains the requirements of the CRA and
the examination process. Federal Reserve Bank of Atlanta.


Mid-Atlantic Conference on the Community Reinvestment Act and Community Development Corporations
is an enlightening transcript of a conference on the subject. Federal Reserve Bank of Richmond.

Copies of

produced by
the Federal
Reserve System can be
obtained by
writing or
calling the
Affairs sec-



Public/Private Partnership Model/or Home Mortgage Lending by Ronald Zimmerman is a Lotus-based,
interactive computer model that enables the user to specify program underwriting criteria to determine a
borrower's or a program's potential. Federal Reserve Bank of Atlanta.
Federal Reserve Bank of St. Louis

tion at the
Banko/ Atlanta al
(404) 5897307.




Please notify
Partners if
your organization
would like to
publicize an
The editor
also welcomes information
about community and
efforts in
your community.

Neighborhood Reinvestment
Corporation, March 2-6, Baltimore, MD, Neighborhood
Reinvestment Training Institute,
30 courses in five areas including affordable housing, commercial and economic development,
etc. Contact (202) 376-2642.
Housing Development
Reporter & The Institute for
Professional and Executive
Development, March 12-13,
Washington, D.C., Opening
Doors to HOME. Contact (202)
National Low-Income Housing Coalition & National LowIncome Housing Information
Service, March 14-16,
Washington, D.C., Building
Housing Resources. Contact
(202) 662-1530.
Federal Reserve Bank of Atlanta, March 17, Nashville, TN;
March 18, Atlanta, GA; &
March 20, New Orleans, LA.
Community Reinvestment Training Workshops. Contact Dianne
Rawls at (404) 589-7307.
National Alliance to End
Homelessness & Single Room

Community Affairs
Department of Supervision and Regulation
Federal Reserve Bank of Atlanta
104 Marietta St., N.W.
Atlanta, Georgia 30303-2713
Federal Reserve Bank of St. Louis

Occupancy Housing Corporation, March 18-20, Anaheim,
CA, Making the Transition to
PermaMnt Housing. Contact
(202) 638-1526.

HMDA Conference. Contact
(214) 243-8844.

National Association of
Housing and Redevelopment Officials, March 23-25,
Washington, D.C., 1992
NAHRO Legislative Conference.
Contact (202) 429-29W.

National Center for
American Indian Enterprise
Development, May 10-14, Seattle, WA, 1992 Reservation
Economic Summit and National
Indian Trade Fair. Contact
(800) 423-0452.

National Peoples Action,
April 4-6, Washington, D.C.,
21st Annual Conference. Contact (312) 243-3038.
National Council for Urban
Economic Development, April
5-8, Washington, D.C., Annual
Conference: Transitions To The
Future American Economy.
Contact (202) 223-4735.
National Trust for Historic
Preservation, April 13-15,
Tulsa, OK, National Town Meeting on Main Street. Contact
(202) 673-4219.
Spectrum Services, Inc. &
The Alternatives Group, April
20-22, Dallas, TX, 1992 CRA &


National Association of
Government Guaranteed
Lenders, May 13-15,
Washington, D.C., Mid-Year
Conference on Small Business
Lending. Contact (405) 3774022.



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