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For release on delivery
10:00 am, EDT
October 21, 1993

Statement by
Lawrence B. Lindsey
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Credit and Insurance
of the
Committee on Banking, Finance and Urban Affairs

U.S. House of Representatives
October 21, 1993

I appreciate the opportunity to appear before this
subcommittee to discuss the Community Reinvestment Act and the
current efforts of the agencies to strengthen and improve its

This statute has become an extremely important

part of the landscape of financial institution supervision in
recent years.

Across our nation it has affected the relationship

between thousands of banks and thrift institutions and their
communities—particularly low- and moderate-income neighborhoods.
Institutions both large and small have struggled witn the law's

Local groups have aggressively used it—particularly in

the applications process—to prompt commitments for increased
lending to those who may have been overlooked before.


regulators have sought to enforce the law fairly and fully in the
face of the enormous diversity which exists among America's
communities and its financial institutions.
The results of CRA have seldom been to the full
satisfaction of either the covered institutions or community
groups, and the President has directed the agencies to conduct a
thorough reexamination of our supervisory approach.

This is a

zero based review which will take into account the views of all
affected parties.

In doing so, it is important to start from a

common understanding of the road we've traveled since the statute
was enacted in 1977.

Impact of CRA
While the total impact of the CRA is very hard to
measure, I believe a fair assessment would have to conclude that

it has generally made many depository institutions more
responsive to the needs of their communities.

Of course, the

level of effort has varied widely among institutions.


it has not cured the disinvestment that plagues many of our

But CRA has, in my view, been very instrumental in

opening channels of communication between banks and thrifts and
segments of their communities that were previously underserved.
New relationships have been established with community groups and
individuals, new products have been designed and marketed, and
many thousands of credit applications have been taken from those
who previously had no banking relationship.

Most importantly, I

am convinced that thousands of loans have been made throughout
the country that would not have been made but for the CRA.


have personally traveled to many communities and toured numerous
projects that are now helping to stabilize and revitalize
communities as a result of CRA.

In addition, numerous witnesses

from consumer and community organizations at hearings we have
htald recently have testified to the valuable contributions CRA
has made.
But exactly what is the overall level of that lending?
I do not know, and I suspect no one does.

The community groups

who track lending agreements with institutions point to over $30
billion in commitments for new credit.

Many of these commitments

cover several years and therefore extend into the future.
Moreover, I know of no overall assessment of the extent to which
the commitments have been realized.

While formal commitments to


community groups get considerable media attention, I suspect that
most CRA related activity goes on outside the high profile
negotiated agreements that receive so much attention.

My own

belief is that the true impact of CRA has far exceeded any number
derived strictly from the formal commitments.

If the figure is,

for example, double the committed amount, it is a formidable
amount indeed, and this fact should not be overlooked as we
evaluate CRA's effectiveness.
Whatever the degree of new lending attributable to CRA,
it has not been accomplished without numerous problems, which I
will refer to later.

But before doing that, there is an

important point about CRA that's often lost in the debate about
its flaws.

If this Federal statute has, in fact, had the

considerable impact I have described, it's important to note that
this has been accomplished without a huge appropriation of
government dollars, and without legions of bureaucrats to
administer the program.

These, of course, are very significant

and topical matters—as current as the recently announced
campaign to "reinvent" government in ways that emphasize these
very characteristics.
CRA established a national goal and put considerable
power in both supervisory agencies and the public to enforce it,
but left the details of how this goal would be accomplished to
local communities and depository institutions.

CRA counted on

the unique economic needs, and the give and take in the local
social and political scene, to define the specifics of the CRA

program for each community.

No one in Washington has yet been

employed to decide how much or what type of CRA lending should be
made in the individual communities you represent.

To my way of

thinking, that has been a considerable strength of the law.


any review of CRA I believe we must acknowledge the value of this
approach, at the same time that we search for improvements.

Need for Improvement
But all is not perfect as you well know.


flexibility that I've referred to has come with a price.


and many community groups alike complain that the standards are
too vague.

Our own examiners would be more comfortable as they

go about their very difficult job of assessing compliance if the
rules of the game were more precise.

Despite the ever increasing

efforts of the agencies over the years to define more
specifically the various levels of performance used in our rating
system, we are constantly faced with questions about "how much is
enough," what loans get CRA credit, and exactly what "weight"
different categories of loans will receive.

Living with the

current uncertainty makes bankers nervous, community groups
dissatisfied with their ability to hold institutions accountable,
and everyone involved concerned about assuring fair and
consistent evaluations by the agencies.

And believe me, no one

would be happier than those in my agency, who are charged with
the day-to-day enforcement of the law, if we were "going by the

There also appears to be common agreement that too much
emphasis has been placed on paperwork and process as opposed to

There is undoubtedly some truth to this despite the

agencies' efforts to assure otherwise.

But, it is important to

keep in mind that, in some sense, the focus on process is a
natural outgrowth of leaving the definition of an appropriate
level of performance up to the needs of the community and the
capacity of its institutions.

Nevertheless, the concern about

focusing on paperwork rather than results is widespread enough to
require careful evaluation.
And, of course, there are other criticisms as w e l l —
that CRA is "too much stick and too little carrot" and that we
must search for more incentives to encourage good performance,
that too many institutions receive satisfactory or better
ratings, and that either too much or too little emphasis is given
to CRA in the context of application processing.

Suffice it to

say that there are numerous areas of controversy where
improvements may be desirable.
Thus, we have what to me is a rather confusing scene.
On the one hand, we have an important national program that
appears to have stimulated considerable lending and
revitalization in low-income and minority communities.

And it

has done so in a period of great shortage of federal dollars, and
without the rules and red tape that bedevil so many government

On the other hand, I know of no other regulatory area

where there is such common agreement that all is not right and

that some "reform" is necessary.

My overall sense, however, is

that in focusing so much on the imperfections of CRA, we may have
lost sight of its considerable benefits.
Review Process
But surely we can do better.

And, it was in response

to widespread concern that the CRA can be improved that the
President issued his charge to the agencies to rethink their
administration of this law.

In the President's CRA reform

request, he asked the agencies to address several specific areas.
These include:

developing new regulations and procedures that replace
paperwork and uncertainty with greater performance,
clarity, and objectivity;


developing a core of well-trained CRA examiners;


working together to promote consistency, and evenhandedness, to improve public CRA performance
evaluations, to institute more effective sanctions
against financial institutions with consistently poor
performance, and to develop more objective,
performance-based CRA assessment standards that
minimize the compliance burden on financial
institutions, while stimulating CRA performance.
As you are aware, we are presently working with the

other agencies to carry out the President's initiative.
together is not new to us in this area.


To promote uniformity in

the approach to CRA, the Board, along with the other banking and

thrift regulatory agencies, have worked through the Federal
Financial Institutions Examination Council, or FFIEC, for some

For example, through the FFIEC the agencies developed a

common approach to the regulation, interagency CRA examination
procedures, a uniform format for CRA public disclosures, and
other regulatory material.

We have a commitment to cooperation

and uniformity, and I am confident that together we can meet the
President's goals and that any revision of CRA will be adopted on
a common basis.
Initially, our focus has been on assuring wide public

The agencies have held public CRA meetings across the

country to solicit comments on how to improve the CRA process.
We have heard the views of over 250 bankers, community groups and
small business owners, as well as members of the general public.
From these meetings, we have been told what is working with CRA,
what is not working, and what we need to consider to "fix" it.


can tell you that many of the stories I have heard—from bankers,
small business owners and community groups—have been compelling.
The stories, however, point up as many differences in perspective
between the various groups, as they do common concerns.
For example, while many may agree that it's important
to find new incentives to encourage better CRA performance, there
is great disagreement about what they might be.


understandably, banks which have sought and achieved an
"outstanding" rating would like to see this rewarded with a "safe
harbor" from protests.

Community groups, to put it mildly, do

not favor the idea.

While there is common concern about

paperwork, there is a growing recognition that any movement
toward more quantifiable standards may require more, not less,
data, and this is not a happy thought for many.


concern about the disproportionate burden on small institutions
has caused some to suggest a small institution exemption.
find this untenable.


The idea of more precision in the

requirements has widespread support, but difficult and
controversial issues arise when it comes to defining what the
specific numbers might be or even the process by which they might
be set.

Moreover, there is broadbased concern that in attempting

to be precise, we may fall into the credit allocation trap.


short, although there may be widespread agreement that CRA
requires some major repairs, there is very little agreement about
the appropriate fix.
At this point, we are still analyzing the information
we've collected and it would be premature for us to offer any

The Board along with the other agencies will continue

this process of assessing the various arguments and concerns.


expect that a proposal will be published for additional public
comment in the next few weeks.
You've asked whether the statutory language will permit
the necessary reforms.

There may or may not be a constructive

role for legislation at some point, but it seems premature to
make that judgment now.

We will be in a much better position to

provide meaningful thoughts on whether legislation is needed at a
later date.

Fair Lending Enforcement
Finally, you have asked for information on the steps we
have taken to assure compliance with fair lending laws.
Initially, let me say that no single consumer
compliance issue is of more concern to the Board, and me
personally, than assuring that the credit granting process is
absolutely free of unfair bias.
Fairness in assessing credit applications, without
regard to race, sex or other prohibited bases, is absolutely
essential in our country.
on the point.

Let no one have any misunderstanding

Racial discrimination, no matter how subtle—and

whether intended or not—cannot be tolerated.

It robs the

lending industry and our economy of growth potential, and harms
both individuals and society.
We have a coordinated approach to this issue at the
Federal Reserve which focuses both narrowly on examination for
compliance with fair lending laws, and more broadly at trying to
assure that credit is made widely available to low- and moderateincome areas of our country—including those with substantial
minority populations.

Our approach to fair lending issues is

thus a comprehensive one that goes beyond examinations. It also
involves an aggressive program to investigate consumer
complaints, provide consumer and creditor education, and gain
insight through research.

Let me describe each segment briefly.

In the research area, the Boston Federal Reserve Bank
study is well known.

In my view, despite its shortcomings, that

study has done more than any other single effort to advance our
understanding—and increase our concern—about fair lending in
the mortgage market.

Other research pieces on HMDA data,

household debt, credit shopping practices, the secondary market
and other related subjects have also added to our knowledge.
Within the next few weeks we will be releasing a comprehensive
report to Congress comparing the risks and returns of lending in
low income, minority and distressed neighborhoods compared with
those in other communities.

This too will advance our knowledge

of the problem and how to help solve it.
With regard to examinations, the Board supervises
approximately 1000 state member banks for compliance with fair
lending laws.

This involves consumer compliance examinations,

consumer complaint investigations, and community affairs efforts.
The consumer compliance examinations are conducted by examiners
at the Reserve Banks who are specially trained in consumer
affairs and civil rights examination techniques.

The Board and

each of the Reserve Banks also have staff members who deal with
consumer complaints.

In addition, the system has a substantial

Community Affairs program, many of whose activities help to
advance fair lending.

The Board provides general guidance and

oversight to Reserve Banks in these areas.
The Board first established a specialized consumer
compliance examination program in 1977.

Through it, the twelve

Reserve Banks conduct examinations of state member banks to
determine compliance with consumer protection legislation by
using a group of specially trained examiners.

The scope of these

examinations specifically include the Equal Credit Opportunity
and Fair Housing Acts.

From the beginning, the examiners were

instructed to place special emphasis on violations involving
potential discrimination of the kind prohibited by those
The Federal Reserve System's consumer compliance
examinations are scheduled at regular intervals and are

Each state member bank is examined on a regular

An average of two-thirds of state member banks are

examined each year.

In general, examinations are scheduled every

eighteen months for a bank with a satisfactory record.

A limited

number of banks with exceptional records can be examined every
two years.

Those banks with less than satisfactory records are

to be examined every six months or every year, depending on the
severity of their problems.
The examination procedures focus primarily on comparing
the treatment of members of a protected class with other loan

First, the bank's loan policies and procedures are
This is done by reviewing bank documents, as well as

interviewing loan personnel.

During this phase, the examiner

will seek to determine, among other things, the bank's credit

After the standards have been identified, the

examiner will determine whether those standards were, in fact,

applied uniformly using a sample of actual loan applicants.
Special note will be taken of applications received from
minorities, women, and others whom the laws were designed to

This means that the examiner is looking at the same

information that the bank used to make its credit decision,
including credit history, income, and total debt burden.


those standards appear not to have been used, or not used
consistently, this would be discussed with lending personnel and
a more intensive investigation would typically be undertaken.
Finally, an overall analysis of the bank's treatment of
applications from minorities, women, and others with the
characteristics described in the fair lending laws is conducted
to determine whether there are any patterns or individual
instances where such applicants were treated less favorably than
other loan applicants.
Another regular part of the examination includes
conversations with persons in the community knowledgeable about
local credit needs.

The examiners will routinely ask about

public perceptions of the availability of credit to minorities
and low- and moderate-income persons.

This information may

suggest that a particular area of the bank needs additional
scrutiny and may provide insights into how the bank is serving
the credit needs of its local community, particularly those
protected by the antidiscrimination statutes.

Violations found

through the techniques described above require correction by the

institution, notification to the applicant and referral to the
Department of Justice in appropriate cases.
As you know despite these efforts we have rarely found
evidence that we can be sure proves racial discrimination.
Consequently, we have been concerned about providing examiners
with better tools to help them get the job done.

Recently, the

Federal Reserve System developed a computerized model for using
HMDA data in connection with the fair lending portion of the

This model allows examiners to match minority and

nonminority pairs of applicants with similar credit
characteristics, but different loan outcomes, for a more
extensive fair lending review.

Once the pairs are selected,

examiners pull the credit files for the applicants to determine
if discrimination played a part in the credit granting process.
While a comparison of minority and majority applicants has always
been a part of the Federal Reserve's fair lending examination, we
believe that this computerized selection process will enable
examiners to focus their efforts and spend more time on the
actual fair lending review of loan files.
In addition to this "micro" use of the HMDA data, the
Federal Reserve has developed (on behalf of the FFIEC) a
computerized system for analyzing the expanded data collected
under the Home Mortgage Disclosure Act (HMDA).

The system is

extremely versatile and allows the data to be segmented by
demographic characteristics such as race, gender, and income
levels, or geographic boundaries.

Examiners can now sort through

vast quantities of data to focus attention on specific lending
markets and draw comparisons between an individual HMDA
reporter's performance and of all lenders in the area.


these capabilities, examiners can more readily determine whether
a bank is effectively serving all segments of its market,
including low- and moderate-income and minority neighborhoods.
We have been holding HMDA training sessions on how to use this
system around the country for our examiners, as well as those
from other agencies.
The Federal Reserve has also developed the capability
to map by computer the geographic location of a bank's lending
products, including mortgage loans.

This mapping includes

demographic information for the bank's local community.


believe that this type of analysis and presentation will enhance
our ability to assess a bank's CRA performance in meeting the
credit needs of its local community, including minority areas.
It should also be helpful in evaluating a bank's geographic
delineation of its local CRA service area to ensure that it does
not exclude low- and moderate-income neighborhoods.

Consumer Complaint Program
The Federal Reserve's consumer complaint program is an
important element in our overall effort to enforce fair lending

The investigation procedures in this regard provide

special guidance with respect to complaints involving loan

Such complaints can prompt an on-site

investigation by Reserve Bank personnel at the state member bank

accused of discrimination.

We have a referral agreement with HUD

for mortgage complaints and we have referred a number of
complaints to that agency for further investigation.

Like our

examinations area, we are devoting considerable attention to
strengthening our complaint processing system by increasing
oversight, tightening deadlines for investigation, assuring more
personal contact and making the public more aware of our
Educational Efforts
We believe that education is an important part of our
coordinated approach.

We have distributed a brochure to all the

institutions we supervise entitled "Home Mortgage Lending and
Equal Treatment."

The brochure identifies and cautions lenders

about lending standards and practices that may produce unintended
discriminatory effects.

It focuses on race and includes examples

of subtle forms of discrimination, such as unduly conservative
appraisal practices in minority areas; property standards such as
size and age which may exclude homes in minority and low income
areas; and unrealistically high minimum-loan amounts.


recently, a comprehensive booklet was published by the Federal
Reserve Bank of Boston entitled "{Closing The Gap:} A Guide To
Equal Opportunity Lending."

It too has been widely circulated.

It is another useful tool for lenders that suggests adjustments
in institutional behavior to correct racially disparate loan
practices that may be occurring in spite of bank policies to the

We have also published a brochure, entitled "Home

Mortgages! Understanding the Process and Your Right to Fair
Lending," to inform consumers about the mortgage application
process and about their rights under fair lending and consumer
protection laws.

Community Affairs Program
The Board believes that the goal of ensuring fair
access to credit can also be advanced by focussing on positive
actions that a lender may take to address such concerns.
Consequently, through its Community Affairs program, the Federal
Reserve conducts outreach, education, and technical assistance
activities to help financial institutions and the public
understand and address community development and reinvestment

We have increased resources devoted to Community Affairs

activities at the Reserve Banks—now staffed with more than 50
p e o p l e — t o enable the Federal Reserve System to respond to the
growing number of requests for information and assistance from
banks and others on the Community Reinvestment Act, fair lending,
and community development topics.

Efforts have been expanded to

work with financial institutions, banking associations,
governmental entities, businesses, and community groups to
develop community lending programs that help finance affordable
housing, small and minority business, and other revitalization

Overall the Reserve Bank's Community Affairs programs

sponsors or cosponsors about a hundred programs a year involving
thousands of participants as a way to encourage economic
development and assure fair lending.

Our commitment to fair lending has been emphasized by
Chairman Greenspan and the heads of each of the other federal
financial institutions supervisory agencies in a letter to every
bank and thrift in the country.

That letter dated May 27, 1993,

expressed the agencies' concern that some minority consumers and
small business owners may be experiencing discriminatory
treatment when trying to obtain credit.

The letter put the

institutions on notice of our very serious concern, and urged
financial institutions to aggressively undertake lending
programs. Various suggestions were provided on how institutions
could help assure fair lending.
In spite of these efforts, I am well aware of the
concern about whether our enforcement—indeed our overall
program—has been vigorous enough.

I can only assure you of our

commitment to routing out every instance of unfair treatment and
helping to assure more opportunities for all our citizens.


actions we are taking to augment our traditional examination
techniques through new computer assisted analysis should help us

Moreover, our many efforts to encourage and

instruct banks in ways to broaden their lending to low- and
moderate-income borrowers should provide more open access.


is my goal and it is the goal of the Federal Reserve System to
ensure that all our citizens are being treated fairly.