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

The Board supervises approximately 1,000 state member banks for compliance with fair lending laws. This supervision has involved consumer compliance examinations, consumer complaint investigations, and community affairs efforts. Examiners at the Reserve Bank who are specially trained in consumer affairs and civil rights examination techniques conduct the consumer compliance examinations. 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.

Compliance Examinations

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 cadre of specially trained examiners. The scope of these examinations specifically includes 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 statutes.

Over the years, the Board has reassessed its enforcement responsibilities and made several changes to its consumer affairs program. This included increased training for examiner in detecting discriminatory lending practices. Changes were also made in the System's processing of consumer complaints to place increased emphasis on investigating serious complaints such as allegations of loan discrimination. We have made it clear that failure to comply with certain provisions of the fair lending laws was viewed by the Board as particularly serious and would require retroactive corrective action.

The Federal Reserve System's consumer compliance examinations are scheduled at regular intervals, are comprehensive, and are conducted by specialized examiners. Each state member bank is examined on a regular basis. An average of two-thirds of state member banks are examined each year. Examinations are scheduled every 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 applicants. First, the bank's loan policies and procedures are reviewed. Bank documents are reviewed, and loan personnel are interviewed. During this phase, the examiner will seek to determine, among other things, the bank's credit standards. After the standards have been identified, the examiners 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 protect. 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. If those standards appear not to have been used, or not to have been used consistently, the matter would be discussed with lending personnel discuss the matter, and a more intensive investigation would typically be made. Finally, an overall analysis of the bank's treatment of applications from minorities, women, and others who have the characteristics described in the laws in conducted to determine whether there are any patterns or individual instances in which such applicants were treated less favorably than other loan applicants.