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For release on delivery
9:00 A.M. E.D.T
May 14, 1992

Testimony by
Lawrence B. Lindsey
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Housing and Community Development
and the
Subcommittee on Consumer Affairs and Coinage
of the
Committee on Banking, Finance, and Urban Affairs
U.S. House of Representatives
May 14, 1992





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I am pleased to address this Committee about the concerns raised by the 1990 Home Mortgage Disclosure Act (HMDA) data.
I would also like to describe how we, at the Federal Reserve, are
expanding our data analysis to strengthen our fair lending enforcement and Community Reinvestment Act (CRA) activities.
Last October, when Governor LaWare, as Chairman of the
Federal Financial Institutions Examination Council (FFIEC),
announced the release of the 1990 HMDA data, he indicated that he
found the data troubling.

I fully share his concern.

The prelim-

inary analysis of the nationwide data showed that three quarters
of all mortgage loan applications are approved.

But the statis-

tics on applications which were not approved showed significant
differences in loan denial rates among racial and ethnic groups.
For example, while 14% of whites applying for conventional home
purchase loans were denied, 21% of Hispanic and 34% of African
American applicants were turned down.

Disproportionately high

rejection rates for Hispanics and African Americans were evident
even when applicants with approximately the same income were
Let me be absolutely clear about the position of the
Board of Governors.

Discrimination based on race, sex, or ethnic

background is not only illegal, it is morally repugnant.


there is only one legitimate criterion on which to base loan
decisions: the expectation that repayment will be made according
to the terms stipulated in the loan agreement.

Our efforts must

be directed at assuring that only this criterion is used to make
home mortgage or other loan decisions.
The HMDA data make clear that the differences in denial
rates when applicants are grouped by race do not change notably
regardless of income.

Turndown rates for minorities substantially

exceed the rate for whites whether one looks at low income or high
income groups.

Similar patterns exist if one looks at neighbor-

hoods instead of applicants.

The proportion of home purchase loan

denials increases as the percentage of minority residents increases regardless of the income level of the neighborhood.

The fact

that denial rates differ among racial groups in spite of statistically controlling for income underscores the troubling nature of
these findings.
Many observers have pointed out that the home mortgage
picture is more complicated than the preliminary analysis of the
HMDA data indicates.

These observers are undoubtedly correct.


should be noted that income is not the primary reason for mortgage

The 1990 HMDA data make clear that credit history was

the single most commonly cited reason for credit denial for
whites, African Americans and Hispanics.

That fact should remind

us that analysis of mortgage application decisions is analytically
complicated and statistically tricky.

Indeed, when the New York

State Banking Department investigated the lending performance of
10 savings banks in that state, they found little suggestion of

As a result of the complexity of this issue, the Federal
Reserve is increasing its efforts considerably toward better
understanding the HMDA information.

In the interim, the HMDA data

will continue to provide our examiners with a basis for further
analysis of whether institutions are considering all applicants

I will turn to a discussion of these activities later in

my testimony.

Background on HMDA
The Home Mortgage Disclosure Act (HMDA) was passed in

The law is based on the concept that the public should have

access to information about the home lending activities of institutions serving their communities.

One purpose of the act is to

encourage balanced lending through the provision of data to
financial institutions, regulators, and the public at large.
To that end, the Federal Reserve Board's efforts to
collect and process the data, and make it publicly available, have
been in effect for some time.

Since 1980, the Federal Reserve, on

behalf of the federal financial regulatory agencies, has compiled
information about the home lending activities of institutions
covered by HMDA —

basically, those lending institutions with

offices in metropolitan areas.

By matching the specific loans

reported with demographic data from the census file, we produced
individual HMDA reports showing the home lending picture for each
reporting lender, as well as aggregate reports for lenders as a
whole in each metropolitan area.


For regulators, HMDA data have augmented other procedures for detecting illegal credit practices and discrimination in
consumer compliance examinations.

For example, in checking for

compliance with the Fair Housing and Equal Credit Opportunity
Acts, examiners draw samples of mortgage files to compare with the
institutions' stated underwriting policies to assure that all
applicants are treated fairly.

Similarly, in assessing Community

Reinvestment Act (CRA) performance, HMDA data have often been a
key indicator of how well banks are helping to meet the credit
needs of their entire communities, including low- and moderateincome and minority areas.
Many banks have found that HMDA data provide valuable
marketing information, enabling them to compare their performance
with that of competitors.

We have strongly encouraged banks to

study their own HMDA data as a way to spot apparent "gaps" where
credit services may not be reaching certain segments of their
Community groups have often used the data to assess the
home lending performance of institutions currently doing business
in their neighborhoods, as well as those seeking to do so by
merging with or acquiring a local institution.

Through the CRA

protest mechanism and other means, these groups and others have
the opportunity to use the HMDA data and voice their concerns
about a banking organization's CRA performance.

HMDA data have

also provided the basis for numerous studies over the years—by
community groups, academic and news organizations, the Federal

Reserve and others—of how home loans are distributed across
neighborhoods, income and racial groups.
With the statutory changes that took effect in 1990,
HMDA data now provide an even more valuable tool to all parties
concerned —

especially to us, the regulators.

For the first

time, HMDA data collected for 1990 included information about
applications that are denied or withdrawn; about the race, sex and
income of applicants; and about the secondary market purchasers of
loans sold by lending institutions.

The data also include, in

about 60% of cases, the principal reasons cited by lenders for
credit denial.
Gathering and analyzing this new data represent a
substantial commitment of resources by all the agencies.

In fact,

the new HMDA data was the most massive data collection effort ever
undertaken by us, involving nearly 9,300 reporting institutions,
representing about 24,000 reports for metropolitan areas, and more
than 1.2 million pages of data.

About $2.8 million has been spent

to develop the system to process the HMDA data, and as of September of last year, the agencies had spent an additional $2.6
million to process the 1990 HMDA data.

Last year we were able to

make the data public about six months after the reporting deadline, and we are looking at ways to speed up the processing time
starting with the 1991 data.

Caution Regarding Raw Data and The Boston Study
Although the HMDA data provide very useful information, the

data are not perfect and we urge caution in drawing too many
conclusions from a preliminary review of the data.

This problem

with drawing conclusions from the raw data is not just theoretical.

It would be a mistake to discount the effect of a variety of

factors that are at work in the loan process.

According to the

HMDA reports filed for 1990, credit history was the single most
common reason for credit denial.

However, the HMDA data do not

contain any information regarding applicants' credit histories or
a wide range of other factors that lenders consider in evaluating
loan applications such as debt to income ratio or job experience
and tenure.
We also must bear in mind the statistical ramifications
of volume.

For example, an institution which has a very aggres-

sive outreach program compared to an institution in which no such
effort is made will undoubtedly generate a higher volume of

However, the institution with the outreach program

may be statistically penalized for the effort because gathering a
greater number of applications may result in receiving a large
number from less qualified borrowers.

This, in turn, may result

in higher rejection rates in areas with high concentrations of
low- and moderate-income people.

This could be one reason why

some minority-owned institutions turned down requests for home
purchase loans relatively more frequently than other HMDA lenders.
The need for a better understanding of the data and more
careful analysis is clear.

As a result, the Board has authorized

the Federal Reserve Bank of Boston to conduct—in consultation

with other federal supervisory agencies—a detailed study that
should help answer some of the questions raised, at least in the
Boston area, in our preliminary review of the HMDA data.

In the

study, we plan to gather additional data on African American,
Hispanic and white applicants from over one hundred financial
institutions operating in the Boston area.

We believe that this

data may prove useful in designing programs to reduce racial
disparities in mortgage rejections.
The Boston study will give us an indication of which
creditworthiness criteria are used by financial institutions in
making mortgage loan decisions.

Let me stress that this does not

mean ratifying the existing set of criteria.

Some of these

criteria may have evolved through custom, and may not be statistically linked to the likelihood of timely servicing of the loan.
This information may stimulate financial institutions to reassess
their criteria for determining creditworthiness.

The incoming

information might also help us inform consumers about actions they
could take to improve their likelihood of loan approval.
The second benefit of the Boston study will be an
improved ability to determine how much of the discrepancy in
lending rates among racial groups is accounted for by key financial and employment variables that loan officers consider in their
credit evaluations.

To the extent that these financial variables

do not explain the discrepancies, we intend to use the HMDA data
to guide examiners to specific loan application files for more
extensive review.

Other Steps to Improve Enforcement
In spite of the limitations, the HMDA data are already
augmenting the work of our examiners.

For example, in CRA exami-

nations HMDA data now provide a more precise picture of lending
patterns for individual banks, and for the market as a whole.


example, examiners can now look at how application activity is
distributed among various segments of the community; whether
lending in low- and moderate-income neighborhoods is, in fact,
proportional to low- and moderate-income borrowers; to what extent
the sex of applicants seems to be related to the bank's propensity
to lend; whether approval rates are higher for different types of
loan products (such as conventional vs. government-insured mortgages) ; and how a bank which is being examined compares to its
peers in its share of lending in specific neighborhoods.


information, along with information gathered about other aspects
of CRA performance during the course of the examination, can
provide a more solid indication of areas of both strength and
weakness of institutions with respect to CRA.
At the same time, we have been working to develop
additional practical applications of the enhanced data for the
examination process.

Access has been provided to the mainframe

computer for our examiners through the use of our software capabilities.

Examiners can now readily retrieve and analyze this

wealth of new data.

We regard this type of automation capability

as essential, given that the new HMDA aggregation tables for a
single institution can be several hundred pages in length.


continue to make additional modifications to enhance the examination process for fair lending and CRA.

To accomplish this, the

Federal Reserve has made a substantial investment of resources,
and will give further advancement of this work high priority.
We are not acting alone in this process, but in concert
with the other federal financial regulatory agencies to implement
the HMDA analysis system.

Because only 7% of the HMDA lenders are

under the direct supervision of the Federal Reserve, we have been
sensitive to the need to ensure that the other agencies have
access to the HMDA data stored on the Board's mainframe, and to
coordinate with them any necessary adjustments or additions to the

An interagency working group has also been formed to work

on more advanced analytical tools and training for examiners from
all the agencies.
While we are working on the application of uses for the
HMDA data to strengthen the examination process, we have been
drawing on other methods at hand to promote compliance with fair
lending laws.

FIRREA allowed the imposition of civil money

penalties to address anv violation of law and regulation.

We have

already used this power to impose fines in the consumer area and
other such enforcement actions addressing violations of the Equal
Credit Opportunity Act and noncompliance with the CRA are in

Although the actions to date have involved fair lending

issues other than racial discrimination, we will not hesitate to
impose the stiff fines that the law now permits for all types of

During 1991, we began a series of meetings with the
Department of Justice, the Department of Housing and Urban Development, the Federal Trade Commission and the other financial
institution regulators to discuss fair lending issues and our
enforcement activities.

In particular, we have been in contact

with Department of Justice staff about an ongoing investigation of
mortgage lending practices in Atlanta, which may lead to new
techniques for determining whether a lender has illegally discriminated against creditworthy applicants.

The financial institution

regulators are in the process of retaining a consultant to review
our civil rights enforcement training and procedures.


efforts should help us design new tools for analyzing the fairness
of an institution's mortgage lending activity.
The FFIEC has just released a new brochure entitled Home
Mortgage Lending and Equal Treatment that will be useful as we
continue to emphasize the education of lenders, as well as consumers, about potential pitfalls in the mortgage lending process.
The publication alerts lenders to subtle forms of discrimination
that can occur, perhaps unknowingly, in the lending process, and
how to avoid them.

We are sending copies to all the banks we

supervise, expecting that it will prompt many of them to take a
closer look at some of the long-accepted loan origination, underwriting, appraisal and marketing practices that can have unintended discriminatory effects.

We published a similar guide for

consumers entitled Home Mortgages:

Understanding the Process and

Your Right to Fair Lending just over a year ago.

Community Economic Development
In short, we are committed to continued efforts that can
detect and prevent illegal credit discrimination—but we are not
stopping there.

The ultimate goal of these laws is to assure that

safe and sound lending takes place in every community in the
country and that it is done fairly.

We have long believed that

this goal could be achieved by other programs that serve as a
counterpoint to enforcement activities.

Consequently, for many

years the Federal Reserve, through its Community Affairs Program,
has worked with lenders around the country to refine community
development lending strategies.

In 1991, we shared this type of

experience and expertise through nine newsletters published by
Reserve Banks, 124 conferences and seminars and more than 300
speeches at the invitation of banking and community organizations.
Examples of these efforts include a new community development
finance curriculum designed to teach bankers, nonprofit organizations and others the basic skills of community development lending
using actual case studies; the development of manuals and software
by Reserve Banks that can help lenders structure sound loans where
public and private funds are involved; and our provision of
technical support to multi-bank mortgage lending pools that are
attempting to make housing credit more readily available to lower
income and minority communities in several states.

While many of

these initiatives have a broader focus than just minority housing
concerns, they all contribute to the assurance that we are making

progress in helping financial institutions serve their entire
In conclusion, I am concerned, as you are, about the
direction and use of the HMDA data.

I am also deeply concerned

about the many complex problems that seem to underlie the numbers.
Obviously, there is a great deal to be done.

The Federal Reserve

stands ready to work with you, the industry, consumers and others
in furthering this important effort.