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TESTIMONY OF
FEDERAL DEPOSIT INSURANCE CORPOR
D
\
L. WILLIAM SEIDMAN
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
ON
LOAN DISCRIMINATION
BEFORE THE
SUBCOMMITTEE ON CONSUMER AND REGULATORY AFFAIRS
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
10:00 A.M.
October 24, 1989
Room SD-538, Dirksen Senate Office Building
SUMMARY OF FDIC LOAN DISCRIMINATION TESTIMONY
As required by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), the FDIC recently submitted to
the Congress a report containing findings on the extent of
discriminatory lending practices by mortgage lenders subject to
regulation or supervision by the FDIC.
Our report concludes that, fortunately, the great majority of
FDIC—supervised institutions are in satisfactory or better compliance
with the fair lending laws. Over the last three years, we have had
only five citations against FDIC—supervised institutions for illegal
discriminatory practices in mortgage lending.
The FDIC monitors possible illegal mortgage discrimination on the
part of FDIC—supervised institutions primarily through our consumer
compliance examinations.
In recent years, we have steadily increased
the number of these examinations we conduct each year. We also
monitor such activity through CRA protests by the public against
applications and through our toll-free consumer "hotline".
Institutions that do not comply with consumer protection and civil
rights laws and regulations find that violations can result in
increased regulatory oversight, administrative actions, civil money
penalties, and delays or denials of applications. No FDIC-supervised
institution with a CRA rating of less than satisfactory has had an
application approved without first agreeing to take appropriate
corrective actions.
There have been a number of recent changes to the laws, regulations
and procedures that relate to loan discrimination and fair lending
compliance and enforcement.
In FIRREA, Congress enacted several
amendments to the Community Reinvestment Act and the Home Mortgage
Disclosure Act. These changes, which become effective in 1990, will
greatly enhance the ability of the public and the regulators to
ensure compliance with and vigorous enforcement of the loan
discrimination laws. In addition, the FDIC plans to establish a new
program in the very near future in which independent community
outreach specialists will be responsible for strengthening our
efforts in the community outreach area. These individuals will
provide information to the FDIC examination staff to assist them in
evaluating the fair lending performance of FDIC-supervised
institutions.
Finally, prior to enactment of FIRREA, the Federal Financial
Institutions Examination Council Consumer Compliance Task Force had
formulated ideas and possible recommendations for strengthening
compliance with the fair lending laws. The FDIC does not want to
advocate any of these ideas until we have had a chance to further
analyze them in light of the recent changes in the fair lending
enforcement area made by FIRREA.
Good morning, Mr. Chairman and members of the Subcommittee. We
are pleased to testify today on the Federal Deposit Insurance
Corporation's report on loan discrimination. This report was
submi-tted to the Congress as required by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"). Our report contained findings, based on a review of
currently available loan acceptance and rejection statistics, on
the extent of discriminatory lending practices by mortgage
lenders subject to regulation or supervision by the FDIC.
Our report concludes that most FDIC-supervised institutions are
in satisfactory or better compliance with the fair lending
laws. However, we share the concerns of the Congress and the
public regarding recent studies which indicate possible
disparities in mortgage lending. We are committed to doing
whatever is necessary to address these concerns.
The FDIC uses a number of legal tools to monitor and oversee the
lending practices of FDIC-supervised institutions. These
include the Fair Housing Act ("FHA"), the Equal Credit
Opportunity Act ("ECOAM), the Community Reinvestment Act
("CRA"), and the Home Mortgage Disclosure Act ("HMDA").
The FDIC enforces these fair lending laws largely through its
consumer compliance examination program. Despite a dramatic
increase in the number of failed and problem institutions in
recent years, which has required the FDIC to devote
significantly more resources to problems involving safety and
soundness, we have steadily increased the number of compliance
examinations we conduct each year. In 1986, we conducted 1,228
compliance examinations; in 1987, 2,242; and in 1988, 3,066.
For 1989, we expect approximately the same number of
examinations as in 1988. More than 1,230 examinations were
conducted during the first half of 1989. Our goal is to examine
institutions rated 1, 2, or 3 for compliance once every 24
months, and institutions rated 4 and 5 at least every 12 months,
with visitations conducted as necessary.
The FDIC provides its examination staff with a Manual of
Compliance Examinations which contains explicit procedures to be
followed in examining for compliance with the consumer
protection and civil rights laws for which the FDIC has
enforcement responsibility. These procedures are currently
being revised to reflect changes in the laws made by FIRREA.
In evaluating an institution's compliance with consumer
protection and civil rights laws, the FDIC uses two rating
systems. One is the Consumer Compliance Rating System; the
other is the Interagency CRA Assessment Rating System (See
Attachment in FDIC Loan Discrimination Report). Under the
latter, the CRA assessment factors contained in Part 345 of the
-
2
-
FDIC's Rules and Regulations are grouped into five "performance
categories," including one category entitled "Discrimination or
Other Illegal Credit Practices." It is in this performance
category that we evaluate an institution's compliance with
anti-jiiscrimination and credit laws.
It is the FDIC's view that evidence of an illegal discriminatory
pattern or practice in mortgage lending is one of the most
serious compliance violations for which an institution may be
cited. Over the last three years, FDIC-supervised institutions
have been cited for only five such violations. Other fair
housing violations we have found have generally been of a
technical nature, primarily related to advertising, poster
requirements and data collection.
Institutions that do not comply with consumer protection and
civil rights laws and regulations find that violations can
result in increased regulatory oversight, administrative
actions, and civil money penalties. An institution also is
likely to be subject to CRA protests and complaints, which can
result not only in denials of applications, but in costly time
delays. However, the FDIC's overall experience, with few
exceptions, has been that once a problem is brought to an
institution's attention, steps are taken to correct it. No
FDIC-supervised institution with a CRA rating of less than
satisfactory has had an application approved without first
agreeing to take appropriate corrective actions.
The following table indicates the CRA ratings for
FDIC-supervised institutions examined during the past three
years :
CRA Ratings
Year :
1
2
3
4 and 5
1986
115
1,086
19
1
1987
221
1,965
40
8
1988
307
2,683
58
12
Our composite consumer compliance ratings are an additional
measure of possible discriminatory patterns and practices. The
-3following table indicates the composite compliance ratings
FDIC-supervised institutions during the past three years :
Composite Compliance Ratings
Year
1986
1987
1988
1
178
319
472
2
891
1,617
2,166
3
148
290
394
4 and 5
11
16
34
Based on CRA and composite compliance ratings, it can be seen
that, fortunately, the great majority of FDIC-supervised
institutions are in satisfactory or better compliance with the
fair lending laws.
CRA protests by the public against applications provide the FDIC
with an additional vehicle through which we can monitor possible
illegal mortgage lending discrimination by FDIC-supervised
institutions. The FDIC received two CRA-related application
protests in 1986 (against two institutions), nine in 1987
(against seven institutions) and five in 1988 (against five
institutions). One protest has been submitted during 1989.
The FDIC's toll-free "hotline" is another useful indicator of
possible lending discrimination practices. During 1988, the
FDIC's Office of Consumer Affairs and our Regional Offices
reported approximately 39,400 telephone calls for information
and assistance. Of this number, 331 calls involved community
reinvestment matters and 711 involved fair housing. For the
first eight months of 1989, nearly 32,200 telephone calls were
reported, with 348 relating to community reinvestment and 1,190
concerning fair housing matters. Many of these calls were from
bankers in connection with regulation revisions. In 1988, OCA
and the Regional Offices also received about 3,500 written
complaints and inquiries, twenty of which involved CRA-related
issues and three of which involved fair housing. During the
first eight months of 1989, over 2,900 written complaints and
inquiries were received. Six of these involved community
reinvestment and four involved fair housing. We made no
findings of mortgage lending discrimination in any of these
instances.
The FDIC encourages the public to advise us of possible
noncompliance by FDIC-supervised institutions with the laws the
FDIC is charged with enforcing. The FDIC reviews, responds to
and follows-up on all complaints received. If we receive a
complaint concerning mortgage redlining, we usually perform an
on-site investigation at the affected institution. All
allegations of substantive, as well as technical, violations of
law are taken seriously.
RECOMMENDATIONS
There have been a number of recent changes to the laws,
regulations and procedures that relate to loan discrimination
-4and fair lending compliance and enforcement. Some have been
statutory changes — others have been instituted by the agencies
of their own volition. For example, the federal financial
institution supervisory agencies issued a revised CRA policy
statement in March, 1989 for the specific purpose of
strengthening the agencies' oversight and enforcement of CRA.
The recent amendments to CRA and HMDA contained in FIRREA
provide for significant new authorities and data that will
enhance greatly the ability of both the public and the
regulators to monitor compliance with, and ensure the vigorous
enforcement of, the loan discrimination laws. Most importantly,
once the amendments to HMDA become effective and the information
required by those amendments becomes available, the agencies and
the public will have at their disposal more specific data to
make findings on discriminatory mortgage lending practices such
as those requested by the Loan Discrimination Report m FIRREA.
Beginning in 1990, HMDA will require disclosure by financial
institutions of both (1) data on loan applications and their
disposition and (2) the race, sex and income of borrowers and
applicants. The Federal Reserve Board, in consultation with the
other agencies, recently published proposed revisions to
Regulation C implementing these new requirements. These
revisions would require a "register” form of reporting under
which lenders would record the required data on a loan-by-loan
and application-by-application basis. These registers would be
submitted to the federal supervisory agencies and reports
reflecting individual institution and aggregate data will be
generated. Thus, the information that will be available in the
future as a result of these changes to the law should go a long
way in addressing the need for changes to assure
nondiscriminatory lending practices.
Even so, the FDIC has given significant consideration to
additional ways in which we can further enhance the monitoring
and enforcement of anti-discrimination laws. As a result, we
anticipate the establishment of a new program in the very near
future that will strengthen our efforts in the area of community
outreach. FDIC policy currently provides that examiners should
make outside contacts during regular compliance examinations
when necessary to assess an institution's performance in meeting
community credit needs. In addition, the FDIC's outreach
efforts include representation at meetings, conferences and
seminars sponsored by the FDIC and by community and industry
groups.
However, the new program we plan to establish would provide for
independent, community outreach specialists. A new position,*
Community Affairs Officer, would be established under our Office
of Consumer Affairs, which is an independent office reporting
directly to the Office of the Chairman. A similar position also
would be created for each of our eight Regional Offices,
-5reporting to the Office of Consumer Affairs. These Officers
would be primarily responsible for making contact and meeting
with consumer and community groups, government and industry
organizations, and others regarding community needs and the
lending practices of institutions within their communities.
These individuals would work independently of our compliance
examiners and thus would be supplementing their analysis.
However, they would provide information and data to the
examination staff to assist them in evaluating FDIC-supervised
institutions as to their fair lending performance. The results
of these efforts to gather and analyze pertinent information
regarding community credit needs and loan discrimination also
would be shared with other federal financial regulators.
Finally, prior to the enactment of FIRREA, the Federal Financial
Institutions Examination Council Consumer Compliance Task Force
had formulated ideas and possible recommendations for
strengthening compliance with the fair lending laws. The FDIC
does not at this time want to advocate any of these ideas until
it has had a chance to analyze the need for such measures in
view of the fair lending enforcement enhancements contained in
FIRREA. Further, at this time the concepts have not been
reviewed by the Council, but are only ideas formulated by the
Task Force.
@FedFRASER