Statement by John P. LaWare, Chairman, Federal Financial Institutions Examination Council and Member, Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 24, 1993 - Statements to Congress - Transcript

Federal Reserve Bulletin, April, 1993

I appreciate the opportunity to speak today to this committee about concerns related to credit discrimination in mortgage lending.

This hearing is very timely given the troubling questions that have been raised about the fairness of the mortgage lending process. Parity in how applications are considered, without regard to race, sex, or other prohibited bases, is absolutely essential in the United States. Let no one have any misunderstanding on the point. Racial discrimination, no matter how subtle and whether intended or not, cannot be tolerated. Simply stated, excluding any segment of our society from fundamental economic opportunities, such as home ownership and equal access to credit, is morally repugnant and illegal. Moreover, it robs the lending industry and our economy of growth potential. I can assure you that the Board is committed to vigorously enforcing fair lending laws.

As chairman of the Federal Financial Institutions Examination Council (FFIEC), I was asked to focus my testimony on current efforts to enforce fair lending laws and the steps being taken by member agencies to strengthen them. I am pleased to do so. However, as my recent letter to Chairman Riegle indicated, I will be unable to answer detailed questions about the fair lending enforcement programs of the other federal banking agencies. Each of the other FFIEC agencies (the Office of the Controller of the Currency (OCC), the Office of Thrift Supervision (OTS), the National Credit Union Administration (NCUA), and the Federal Deposit Insurance Corporation (FDIC) is represented here today, and they will respond to any questions you may have about their specific programs.

Before I move on to a discussion of the efforts of the FFIEC, let me give you a sense of some of the actions the Board has undertaken. First, in consultation with the other FFIEC agencies, we have implemented a system that increases our ability to analyze the Home Mortgage Disclosure Act (HMDA) data for use in our fair lending and Community Reinvestment Act (CRA) enforcement efforts. Second, we are working with the Department of Justice to target certain state member banks for fair lending examinations where HMDA data suggest disparate treatment of minority mortgage loan applicants. Third, we have referred several consumer complaints alleging violations of the Fair Housing Act to the Department of Housing and Urban Development (HUD) and recently referred a matter to the Department of Justice. Fourth, we have taken formal enforcement actions, including assessment of civil money penalties, to enforce compliance with consumer protection laws, including the prohibitions against credit discrimination based on marital status, age, and race found in the fair lending laws. Fifth, the Board has denied three applications in the past two years from financial institutions, primarily because of poor CRA performance. In each case, significant evidence in the record indicated that these banks were not adequately serving the credit needs of their communities. These actions demonstrate, I believe, the strong commitment the Federal Reserve has made to enforce fair lending laws.

Recent Development

Some recent developments have changed the nature of the discussion regarding the issue of credit discrimination. The debate has moved from a discussion about whether unequal treatment is occurring to how the strengthen enforcement of fair lending laws. One of these developments was a study that the Boston Reserve Bank completed. Another event was a settlement between the Department of Justice and an Atlanta savings and loan association the resulted from a fair lending investigation by the department. In each of these cases, evidence was found of disparate treatment in mortgage lending between minorities and whites. This finding has increased our understanding of this complex issue and will provide a basis from which the Federal Reserve and other agencies can better focus our efforts to strengthen the enforcement of fair lending laws.

Boston Study. As I mentioned, the Boston study furthered our understanding of issues related to credit discrimination, and I would like to share with you some of its findings. During 1992, the Boston Reserve Bank undertook a detailed study of mortgage lending in the Boston metropolitan area, in cooperation with the other federal financial supervisory agencies and HUD. The study was initiated in response to the large differences in rates of home loan denials among white, black, and Hispanic applicants in Boston as revealed by the 1990 HMDA data: a ratio of nearly three rejections for black and Hispanic applicants to one for white applicants. The study sought to analyze whether disparities in denial rates for mortgage loans among surveyed lenders reflected the equal applications of legitimate credit standards or whether race was a factor in the decisions.

Because income is the only financial attribute of loan applicants collected under HMDA, the Reserve Bank augmented the HMDA data with thirty-eight additional items of information pertaining to financial characteristics, employment experience, and credit history - data that the lenders participating in the study voluntarily provided from their files. The study revealed substantial differences in the financial and other economic circumstances of typical white applicants and those of minority applicants. Statistical analysis also revealed, however, that even after having controlled for significant economic factors, unexplained differences remained in loan approval rates for black, Hispanic, and white applicants. Specifically, the study revealed that minority applicants who had the same credit characteristics as white applicants would experience a 17 percent denial rate, compared with an 11 percent denial rate for white applicants.