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For release on delivery 9:30 a.m., E.D.T. May 16, 1990 Statement by John P. LaWare Member, Board of Governors of the Federal Reserve System before the Subcommittee on Consumer and Regulatory Affairs of the Committee on Banking, Housing, and Urban Affairs United States Senate May 16, 1990 Summary of Testimony This testimony is presented as follow-up to the mortgage lending discrimination testimony delivered last October. It describes the progress that has been made on initiatives envisioned at that time, as well as other activities developed more recently. Efforts have been completed or developed in cooperation with the other agencies or individually by Board and Reserve Bank staff. On an interagency level, efforts have been primarily focused on two areas: implementing the provisions contained in the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) requiring the agencies to prepare and to make public written evaluations of institutions' CRA performance, based on examination findings, along with the ratings assigned using a descriptive, 4-tiered rating system; and fulfilling the changes to the Home Mortgage Disclosure Act (HMDA), which expand the coverage of the Act to include mortgage lenders not affiliated with depository institutions and broaden the scope of data collected to include the race, sex and income of borrowers and loan applicants, as well as the disposition of applications. To implement the new CRA provisions uniformly, the agencies--under the umbrella of the Financial Institutions Examination Council (FFIEC)--are training over 800 of their examiners on how CRA performance should be translated into the public disclosures, 2 and emphasizing consistent application of the new rating scheme and the importance of thorough, insightful and well-supported evaluations. Other interagency initiatives that have been addressed since the October testimony include reviewing information gathered on mortgage review boards to explore whether, and how, the formation of such boards should be encouraged on a wider scale; and revising the FFIEC publication A Guide to HMDA Reporting: Getting It Right! to facilitate accurate reporting under the law's new requirements. The FFIEC has also approved plans to produce a brochure targeted to mortgage lenders, consented to developing procedures for facilitating the sharing amongst the agencies of community contact information gained during the course of CRA examinations, and accepted an initiative to make better use of HMDA data. In addition to these interagency initiatives, the Federal Reserve System has, on its own, been utilizing various avenues to strengthen enforcement efforts and to bring constructive approaches to resolve fair lending concerns to the forefront of public attention. Federal Reserve Board staff is in the process of drafting a brochure for homebuyers, has written to several hundred fair housing and civil rights-oriented groups to seek their cooperation in referring complainants to the appropriate regulatory agency, and has been participating in a series of HUD seminars dedicated to fair housing/fair lending issues at law schools. Additionally, developments in Atlanta, Detroit and 3 Boston are being monitored, and work has begun on developing computer software to generate a concise presentation of a given institution's mortgage and home improvement lending patterns in comparison with the record of lenders as a whole in the community. The Board, with the assistance of Reserve Bank staff, has begun work on a new on-line consumer complaint and inquiry tracking system to be implemented in early 1991. The resources of the Reserve Banks are being utilized in a number of other ways to promote sound and creative lending that is responsive to the special needs of low and moderate income communities. The Board has also enlisted the help of the Federal Reserve's Consumer Advisory Council and has sought to draw on the expertise of individuals and groups outside the bounds of the federal financial regulatory framework to gain a fresh perspective on our enforcement activities. Reserve Bank examination and consumer complaint experience over the past three years has been closely studied and will continue to be monitored to ensure that practices involving possible racial discrimination are addressed and that corrective action is taken as needed. This will be aided by the new data and procedures discussed in the testimony. ' k ' k ' k ’k ' k ' k ' k ' k ' k ' k ' k ' k ' k ' k ' k ' k Testimony before Subcommittee on Consumer and Regulatory Affairs Senate Committee on Banking. Housing and Urban Affairs May 16, 1990 Thank you very much for this opportunity to speak to the Subcommittee in follow-up to our testimony on mortgage lending discrimination last October. I am pleased to report to you on the progress made on initiatives envisioned at that time, as well as other activities developed more recently through the Federal Reserve System's ongoing programs to ensure equal access to housing credit and to promote private sector reinvestment in low and moderate income communities. On an interagency level, our efforts have been focused for the past several months on two major fronts, both of which have important implications for our work in enforcing fair housing and fair lending laws. The first involves changes in the Community Reinvestment Act (CRA), under which the agencies have been charged with encouraging financial institutions to help meet the credit needs of their entire communities, for example, for housing, small business, rural economic development, and with assessing their performance in doing so. Traditionally, those CRA assessments, like all other findings reached by the agencies - 2 - during the course of examinations, have been kept strictly confidential as part of the supervisory dialogue between us as regulators and the institutions we supervise. Starting with examinations conducted on or after July 1 of this year, that tradition will be broken in a dramatic way. Provisions contained in the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) require the agencies to prepare and to make public written evaluations of institutions' CRA performance, based on our examination findings, along with the ratings assigned using a descriptive, 4-tiered rating system. This mandate makes clear the need for a concerted effort by all four agencies, under the umbrella of the Federal Financial Institutions Examination Council (FFIEC), to take a uniform approach to assigning ratings, presenting the evaluations in a consistent, readily understandable manner and insuring that the public has access to these evaluations. That is precisely what we have tried to do, through the efforts of the FFIEC. The FFIEC spearheaded the development of draft guidelines for implementing the CRA changes, which were issued for public comment last December. In light of input received from community organizations, financial institutions, members of the Congress and others, the guidelines were finalized by the FFIEC last month and it is currently putting on an extensive training program and revising the interagency examination procedures for CRA. - 3 - At the same time, work proceeded on equally significant changes to the Home Mortgage Disclosure Act (HMDA), which expand the coverage of the Act to include mortgage lenders not affiliated with depository institutions or holding companies -effectively bringing all types of mortgage lenders in the U.S. under the Act. The scope of data collected has also been expanded to include the race, sex and income of borrowers and loan applicants, as well as the disposition of applications (approval, denial, or withdrawal by the applicant). These provisions should better equip us to determine whether mortgage credit standards are being fairly applied, and to judge a given lender's efforts in the context of a more complete picture of the entire mortgage market. Because the Federal Reserve Board has rulewriting responsibility for the regulation implementing HMDA, Board staff worked closely with staff members from the FFIEC agencies and HUD to draft the regulatory amendments and to develop a new loan register format designed to make the increased reporting requirements less cumbersome for lenders. After receipt of public comment, final amendments to HMDA were issued by the Board last December and became effective on January 1, 1990. Our job with respect to implementing the new HMDA provisions has yet another phase, however. For the many years since HMDA's enactment in 1975, the Board has acted as the agent for the FFIEC to compile and aggregate the data, and to produce tables which present lending patterns by factors such as the _ 4 - racial composition and income characteristics of the neighborhood as well as the age of housing stock. Anticipating a significant increase in the volume of data to be reported next year for 1990, we are working to enhance our data processing capabilities, to encourage electronic submission of data from lenders through our Federal Reserve Banks to expedite its ultimate availability to the public, and to develop new disclosure formats in order to give a concise presentation of lending patterns using the new data. These changes to both the CRA and HMDA represent a considerable challenge for us. We are very much aware that the public disclosure provisions make the CRA examination process subject to greater scrutiny than ever before. It will be incumbent on our examiners to discuss each of the assessment factors relating to the State member bank's performance -including the assessment factor relating to discrimination or other illegal credit practices -- and to show how each factor impacts overall performance. They must fully justify their conclusions and assigned rating, without divulging the institution's financial condition, information about its employees or customers, or anything else the law instructs us to keep confidential. The new HMDA data promise to be valuable in the rating process, but usefulness will largely depend on the examiners' ability to analyze it and to draw appropriate conclusions from it. - 5 - A major step toward meeting the challenge is the interagency examiner training program being carried out this month at four locations nationwide. It involves eight sessions for approximately 800 examiners from the bank regulatory agencies. The training gives examiners guidance on how the disclosures should be prepared, how the rating system should be applied, and emphasizes the importance of thorough, insightful and well-supported evaluations. While the spotlight is sure to fall on the work of our examiners after July 1, to an even greater degree the attention will fall on financial institutions themselves, and how well they are, or are not, helping to meet local credit needs. The new CRA and HMDA provisions come at a time when public concern for affordable housing, the adequacy of financial services within reach of the less affluent, the problems of economic development and growth, and the need to assure fair lending practices, runs high. Their combined impact in putting more information in the public domain will, we hope, foster a more open and productive dialogue about such concerns between financial institutions and the people they serve. We are also hopeful that the impact will bolster institutions' awareness of both their image and record as a fair lender, and will further our efforts to promote compliance with the letter and spirit of the antidiscrimination laws. Putting in place the changes mandated by FIRREA and the examiner training sessions have consumed a great deal of the agencies' staff time, especially of those having expertise in the - 6 - fair lending and fair housing arena. Nevertheless, we have moved ahead on other interagency initiatives which I outlined when I last appeared before the Subcommittee. Through the FFIEC, the agencies have begun to take a close look at the concept of mortgage review boards, which brings together lenders and community representatives to provide an appeals mechanism in cases where applicants feel they have been unfairly denied credit for purchasing a home. As a first step, inquiries were made through the agencies' field offices around the country to determine the extent to which mortgage review boards exist. Follow-up visits were then made to Massachusetts and Michigan (the two states where functioning boards were identified) to learn how they operate, the kinds of support they require and the degree of success each has achieved. The FFIEC is reviewing the information gathered to explore whether, and how, the formation of such boards should be encouraged on a wider scale. Initially a matter of concern is the very small number of appeals which have been brought forward in the experience of both states, and whether other, quite different localities around the country would be receptive to the notion. In the course of its study, the FFIEC's attention was drawn to a somewhat similar vehicle which may have favorable prospects for replication in other communities. Under the Philadelphia Mortgage Plan, a group of large commercial banks agreed to refrain from rejecting mortgage applicants until the credit committee representing all PMP lenders has an opportunity to - 7 - review the case and, if possible, place the loan with one of the other participating lenders. The lenders also offer "creative" mortgage products by providing some flexibility in underwriting criteria, such as considering rent receipts, landlord references and utility bill payments to help establish credit histories. In its 15 years of existence, the Plan has secured loans for 13,000 families totalling $180 million, and was expanded to cover the entire Delaware Valley in January of this year. The FFIEC is committed to exploring this approach, as well as others which have worked well in widening access to mortgage credit in lower income and minority neighborhoods. Another focus of our initiatives is education -- for consumers as well as for lenders -- on their rights and responsibilities under the law. Federal Reserve Board staff is in the process of drafting a brochure designed to better acquaint potential homebuyers with the mortgage origination process, the factors lenders usually consider in determining whether a person is creditworthy, and the statutory protections and agency procedures which provide recourse to those who believe they have been subjected to unlawful discrimination. The FFIEC has also approved plans to produce a brochure targeted to mortgage lenders discussing how to avoid practices that may, even unintentionally, result in unfair lending patterns, or the appearance of them. We anticipate that both brochures will be ready for distribution in the second half of this year. - 8 - The emphasis on consumer education stems, at least in part, from our concern about the very small number of complaints we and our sister agencies have received over the years alleging illegal credit discrimination. In an effort to make our work in investigating and responding to such complaints more visible, we have written to several hundred fair housing and civil rights-oriented groups to reacquaint them with our role in enforcing the legal protections afforded loan applicants, and to seek their cooperation in referring complainants to us. Our testimony last October voiced the belief that much could be gained by the agencies sharing among themselves the information obtained through interviews with community contacts -- including consumer advocacy and housing organizations, local businesspeople, trade associations, realtors, government officials and many others -- during the course of CRA examinations. Their perceptions about the state of the local economy, what types of credit would most help the community grow and prosper, the role played by financial institutions in addressing credit needs, and whether credit is available to minority and low- and moderate-income persons have proved valuable to examiners in making a balanced assessment of CRA performance. I am pleased to say that the FFIEC has approved going forward with procedures for facilitating that flow of information. We believe we should aim not only to share the information we develop among fellow regulators, but also to communicate - 9 - effectively with institution management about what we find in analyzing their lending data. This effort takes on particular importance in light of the recently expanded HMDA requirements, and the additional insight regarding lending patterns that the data should provide. With this in mind the FFIEC has approved an initiative to make better use of the HMDA data. Additionally, we are working to develop what might best be termed an "executive summary" of HMDA data -- a succinct presentation of a given institution's mortgage and home improvement lending patterns broken down by demographic factors such as race and income, and compared with the record of lenders as a whole in the community. This summary could be conveyed to institution management during a CRA examination. By providing such a profile, we hope to draw management's attention to market segments the institution may be failing to reach, and to prompt a thorough self-assessment of geographic lending patterns and the reasons for them. Because it is being developed in tandem with the computer applications to accommodate the new HMDA data, the summary probably will not be completed until 1991, although Board and Reserve Bank staff have been testing for several months the use of a very preliminary model. We have also revised the FFIEC publication A Guide to HMDA Reporting: Getting It Right! to facilitate accurate reporting under the law's new requirements. In addition to these interagency initiatives, the Federal Reserve System has, on its own, been utilizing various avenues to strengthen our enforcement efforts and to bring constructive - 10 - approaches to resolve fair lending concerns to the forefront of public attention. For example, the Federal Reserve Board has continued to monitor closely developments in Atlanta, Detroit and Boston. This effort has taken several forms. First, the Board has updated the statistical analysis presented in the Atlanta and Detroit newspapers to take account of the availability of more recent HMDA data. The 1987 and 1988 HMDA data continues to show disparities in home mortgage and home improvement lending. As before, predominately white middle-income neighborhoods received more home purchase loans per single family housing unit than did predominately minority middle-income areas, while the opposite pattern holds for home improvement loans. However, as we have indicated in prior testimony while these patterns are suggestive of lending problems in the home purchase area they do not allow one to conclude whether discrimination exists or not. The Board, with the assistance of Reserve Bank staff, has also begun work on a new on-line consumer complaint and inquiry tracking system to be implemented in early 1991. We envision that the new tracking system will enhance the Board's ability to monitor and analyze its consumer complaint and inquiry data, including data involving allegations of illegal credit discrimination. We expect that the new system's reporting capabilities will enable us to spot more easily trends that might involve such practices. We are using the resources of our Reserve Bank's in a number of ways. The Federal Reserve Bank of Atlanta has developed a - 11 - computer model that illustrates how various lending parameters effect the affordability of home loans in connection with the lending consortium established for low- and moderate-income residents of Atlanta. The Federal Reserve Bank of Boston, together with the Boston Federal Home Loan Bank, recently cohosted a symposium of the National Association of Affordable Housing Lenders attended by more than 300 lenders from New England as well as others from throughout the country. Last year the Federal Reserve Bank of San Francisco was instrumental in the creation of the California Community Reinvestment Corporation (CCRC), a lender consortium pooling more than $100 million to provide long-term loans for affordable housing development throughout the state. With the California consortium off to a successful start, Reserve Bank senior management and staff have been invited to Hawaii and Nevada to help bankers and community organizers launch similar programs in those states. Late last year, the Federal Reserve Bank of Chicago convened a seminar with some 250 area bankers to discuss specific CRA-related policies and activities which have worked well in that Federal Reserve District. In Philadelphia, the Federal Reserve Bank is planning to produce a video which will share some of the experiences and lessons learned relating to the CRA. This is but a sample of the activities of Reserve Banks undertaken in the past six months to promote sound and creative lending that is responsive to the special needs of low and moderate income communities. At the Board level, in addition to the initiatives discussed above, - 12 - Board staff has been participating in a series of HUD seminars dedicated to fair housing/fair lending issues at law schools. We have also enlisted the help of the Federal Reserve's Consumer Advisory Council. In selecting new members this year, we gave special attention to adding council members who have expertise in the civil rights area. One of the new members, Bernard Parker, testified at your hearing last October. He is executive director of Community Resource Projects, a human services organization based in Detroit that helps economically depressed individuals. Mr. Parker is also Chairman of the Ad Hoc Coalition on Fair Banking Practices in Detroit which was actively involved in a recent financial settlement with banks calling for reinvestment in low-income neighborhoods. The Board also appointed George C. Galster, Professor of Economics at the College of Wooster. Professor Galster is widely recognized as an expert in discrimination issues. He has been an expert witness and consultant in fair housing disputes and currently is a research consultant for the Metropolitan Milwaukee Fair Housing Council. He also serves on the advisory board for the HUD National Housing Discrimination Survey. A special committee of the Consumer Advisory Council is looking into various aspects of the issue including mortgage review boards, examination processes and examiner training, the use of testers, additional studies, and brochures that give guidance to lenders. Over the years we have often received - 13 - helpful input from the Council and we feel fortunate to have this resource to assist us in this difficult area. We have also sought to draw on the expertise of individuals and groups outside the bounds of the federal financial regulatory framework to gain a fresh perspective on our enforcement activities. Our staff has been in contact with representatives of the National Fair Housing Alliance to arrange for a briefing on their experience with credit discrimination cases. I have personally met with representatives from a civil rights group from Boston that was active in working with the Massachusetts Bankers Association on an ambitious housing and economic development program that is an outgrowth of the Boston Fed's mortgage discrimination study. We have consulted with the Department of Justice about its experiences in civil rights enforcement and its investigation, now in progress, of housing lending practices in Atlanta. In line with the subcommittee's questions regarding our enforcement program (our detailed responses to the committee's questions accompany our testimony) we have taken a close look at our examination and consumer complaint experience over the past three years. In particular we have completed a detailed analysis of System enforcement activity involving serious violations of the Fair Housing and Equal Credit Opportunity Acts by reviewing our examination and consumer complaint data bases. Additionally, we have asked experienced staff at the Reserve Banks for the types of problems they are seeing involving the Fair Housing and - 14 - Equal Credit Opportunity Acts and mortgage lending in particular. As we said at the October hearing, State member banks do not play a major role in the granting of mortgage credit in the United States. Examiners routinely review available mortgage lending data, including lending standards and appraisal practices. While we find violations during examinations and receive a few complaints involving the fair lending statutes, they typically involve marital status issues, such as improperly required spousal signatures. Only in very isolated cases do we find practices that involve racial discrimination in lending. From our discussions with examiners we know that they take their work and the issue of possible racial discrimination very seriously. They have been and will continue evaluating quite closely any questionable lending practices that could "effectively" result in subtle discrimination. We will continue to monitor our enforcement and complaint activities to ensure that practices involving possible racial discrimination are addressed and that corrective action is taken as needed. The new data and procedures I have mentioned above will help us in this effort. In short, we have had our hands full in the past few months completing a number of major initiatives. And although we are in the early stages of development with others, we believe they have considerable promise, and will be pleased to report to you further on their progress. Appendix to Testimony - 1. 1 - In how many instances over the past three years has your agency found substantive violations of the Fair Housing Act or Equal Credit Opportunity Act (ECOA) while conducting examinations? Provide some examples of how these substantive violations were resolved. Over the last three years 163 state member banks have been required to take corrective action for violations of the Equal Credit Opportunity or Fair Housing Acts in accordance with the interagency supervisory enforcement policy. Less than 7% of the banks were cited for violations involving mortgage lending; each of these cases involve marital status discrimination not racial discrimination, where it is easier to establish that a violation has occurred. Although examiners have not been able to establish clear cut violations involving racial discrimination, it is not uncommon for them to raise questions about transactions to help assure that bank customers are being treated fairly. When a substantive violation of the enforcement policy is found, the institution is required to correct the violation both retrospectively and prospectively. For example, if the violation involves a spousal signature on an obligation where the signature should not have been required under the bank's lending standards, the bank must identify all affected loan files and inform the individuals that the signature will be released unless that - 2 - spouse wants to remain a signatory on the debt; and if the violation involves loan denial notices that are incorrect the bank must identify all affected individuals and send corrected notices to them. In either case, the bank will be required to discontinue the illegal credit practice and train its employees regarding the provisions of the law. 2. In how many instances over the past three years has your agency referred cases of possible discrimination to the Department of Justice for prosecution? What were the results? Section 706(g) of the Equal Credit Opportunity Act states that the Board is authorized to refer matters to the Attorney General when we are unable to obtain compliance with requirements of the Act. Section 808(d) of the Fair Housing Act requires the Board to enforce the provisions of the act in an affirmative manner. Our enforcement authority and stated responsibilities under the statutes and Section 8 of the Federal Deposit Insurance Act have been sufficient to require state member banks to comply with the ECOA and FHA; consequently the Board has not referred cases to the Attorney General. 3. Has your agency found violations of the Fair Housing Act or ECOA (Regulation B) based on an "effects test" analysis? Can you provide any specific examples of how you have used this approach - 3 - to prohibit lenders from maintaining loan policies which have a discriminatory effect on minorities? System examination procedures specify that examiners must determine if women or minorities or other protected groups are treated less favorably under the bank's articulated standards for each type of credit that the bank makes available to its community. However, as indicated in our response to Question No. 1, the Board has not found violations of the Equal Credit Opportunity or Fair Housing Acts involving racial discrimination in mortgage lending over the last three years. When violations in mortgage lending are found they typically involve improperly required spousal signatures not racial discrimination. Examiners occasionally find policies that may have the "effect" of discriminating against a protected class. finding is rare, however. This As an example of such a situation examiners report a case where a comparison of the bank's accepted and rejected loan applications and its minimum lending policy showed a disparate lending pattern that appeared to disfavor women and minorities in the bank's community that were applying for consumer credit (not mortgage credit). The examiners consequently reported that the bank's policy appeared to have the effect of discriminating against women and minorities. As indicated below, occasionally questions have been raised about appraisal policies. _ 4. 4 - How many fair lending written complaints did your agency receive over the past three years? How many of these complaints led to a finding of a substantive violation. Provide some examples of how these substantive violations were resolved. From January 1, 1987 through February 28, 1990, the System received 428 complaints involving the Equal Credit Opportunity Act and the Fair Housing Act. state-chartered banks. Of these, 262 complaints involved The remainder of these complaints were referred to the appropriate regulatory agencies for response. Only 29 complaints about state member banks involved allegations about mortgage or home improvement lending. The complaints involved a wide range of fact situations and no patterns or trends were apparent. discrimination. Few of them alleged racial In no case did we find a substantive violation of the ECOA or the FHA. Although the financial institutions involved were not found to have discriminated against the complainants, in a few instances the bank granted the applicant credit after further review of the application. 5. How many fair lending telephone calls did your agency receive over the past three years? Can you characterize these inquiries? Are there any patterns among these inquiries? What are complainants told in response? In the past three years, the System received 26 complaints by telephone involving the ECOA or FHA; however, our data - 5 - collection system does not break down this figure by the type of credit involved. Therefore, we are unable to determine if any of the 26 telephone complaints involved mortgage lending, although it is possible that some did. When complaints are received by telephone that involve illegal discrimination or complex fact situations, consumers are generally encouraged to submit their complaints in writing to facilitate the Reserve Bank's investigation of the matter. When complainants follow-up their complaints in writing, they are considered for purposes of the tracing system to be written complaints and are handled as described above. 6. Do appraisers, private mortgage insurers, or the secondary market play a role in discrimination? What should Congress do about the problem of under-appraisals of properties in minority areas? Would your agency detect this problem in its normal examination or complaint-response procedures? We do not know the extent, if any, to which, appraisers, mortgage insurers, and the secondary market play a role in discrimination. Consequently, we do not have any recommendations for Congress in this area. Senior examiners surveyed in connection with this testimony report that they do not see loan denials that they believe are discriminatory involving either the inability to obtain private mortgage insurance for a loan or sell the loan in the secondary market. Examiners report that occasionally suspicious appraisal practices are detected that - 6 - necessitate an expanded review of the bank's practices, and banks have been advised to change practices that may have a discriminatory effect. The Board is in the process of developing a rule that will require that appraisals be performed in writing and in accordance with uniform standards as required by FIRREA. Title XI of the act requires the Board and the other regulators to issue regulations to protect federal financial and public policy interests in real estate transactions by requiring the services of an appraiser. Regulations were proposed by the agencies earlier this year that set minimum appraisal standards for "federally related" transactions. Pursuant to Section 1110 of Title XI, the proposed standards require conformity with the Uniform Standards of Professional Appraisal Practice, as adopted by the Appraisal Foundation. These standards state that "an appraiser must avoid stereotyped or biased assumptions relating to race, age, color, religion, gender, or national origin or an assumption that racial, ethnic, or religious homogeneity is necessary to maximize value in a neighborhood. Further, an appraiser must avoid making an assumption or unsupported premise about neighborhood decline, effective age, and remaining life." Our examiners will be alert to any suggestion that these standards are not being followed.
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