Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Committee on Banks of the New York State Assembly, Albany, New York, January 22, 1992

Federal Reserve Bulletin, March, 1992

Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Committee on Banks of the New, York State Assembly, Albany, New York, January 22, 1992

I am pleased to have been asked to appear before the New York State Assembly's Committee on Banks to provide the Federal Reserve's perspective on issues related to mortgage lending discrimination. My remarks today will focus primarily on data recently released under the Home Mortgage Disclosure Act (HMDA).

The Federal Reserve is one of several federal agencies that monitor the compliance of financial institutions with the nation's fair lending laws, including the federal Fair Housing Act and Equal Credit Opportunity Act (ECOA). In this context, we directly supervise and evaluate the performance of roughly 1,000 state member banks (34 of them in the State of New York). The Board also has the responsibility for issuing the regulations that implement the Equal Credit and Home Mortgage statutes.

As you know, HMDA is a disclosure law that provides the public with information about the home lending activities of institutions that have offices in metropolitan areas. HMDA does not, however, require lenders to make any particular type of home loan or to make loans in any specific geographic area.

Each year, information about the persons who apply for and receive home loans is provided by the institutions covered by HMDA to the Federal Financial Institutions Examination Council (FFIEC) in Washington, D.C., through their respective supervisory agencies. The Federal Reserve compiles the data, on behalf of the FFIEC, and prepares HMDA disclosure statements for each covered institution. In addition, aggregate reports are prepared to show the overall home lending picture for each of the nation's 341 metropolitan areas.

The collection and processing of the HMDA data is a massive task. For 1990, the data processed consisted of about 6.6 million loan and application records. The FFIEC prepared disclosure statements for nearly 9,300 reporting institutions for each metropolitan area in which they had offices, totaling more than 24,000 individual reports. This disclosure effort resulted in the preparation of more than 1.2 million pages of data.

Historically, the HMDA reports have focused on the geographic distribution of home loans, both home purchase and home improvement. The 1990 HMDA data continue to provide information of this type and also disclose-for the first time-information about the disposition of applications that do not result in an origination; about the race, sex, and income of loan applicants; and about the secondary market purchasers of loans sold by covered institutions.

The 1990 HMDA information became available to the public three months ago. The data caught immediate nationwide attention because of substantial differences in the outcomes for applicants when they were categorized by their race and income and by neighborhood characteristics. In particular, the data revealed that a much larger percentage of applications for home loans filed by blacks and Hispanics were turned down than for white and Asian applicants. The data revealed that this pattern for applicant groups held true even after income was taken into account.

I like many others, find these statistics worrisome. The data raise concerns about access to home mortgage credit among minority applicants, as well as a perception of unlawful discrimination in the lending process. They also raise questions about the performance of lenders in meeting their obligations under the Community Reinvestment Act (CRA).

I can assure you of the Federal Reserve's long-standing concern about these issues and strong commitment to enforcing compliance with fair lending laws. Our efforts extend both to searching for answers to the questions raised by the HMDA data and to seeking ways to promote community development and affordable housing lending.

In regard to HMDA, however, I do want to note some important limitations in the data. In particular, the HMDA data do not include the wide range of financial factors-about the applicants and the properties they seek to purchase-that lenders consider in evaluating loan applications. For example, the HMDA data do not contain information about applicant debt and asset levels, employment experience, or credit history. Thus, it simply is not possible to determine, from the HMDA data alone, whether individual institutions or groups of lenders are discriminating unlawfully against minority applicants.

At the Federal Reserve, we rely primarily on our on-site examination process to assess lenders' compliance with the fair lending laws and the CRA. During this process, our examiners look at actual loan files, review the factors that a particular lender took into account in its credit evaluations, and then try to determine whether the lender's loan standards were applied in an evenhanded and nondiscriminatory manner.

In particular, examiners look for instances in which loan applicants met established standards but were denied credit and, conversely, for instances in which applicants failed to meet the guidelines but were nonetheless granted credit. When examiners find exceptions, they seek to determine whether similarly situated applicants were accorded like treatment by the lender, focusing particularly on members of protected groups. To date, our bank examinations have not revealed evidence that individual state member banks discriminate on the basis of race when making credit decisions.