Statement 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 - Statements to the Congress - Transcript

Federal Reserve Bulletin, July, 1992

Statement 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

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 preliminary analysis of the nationwide data showed that three-quarters of all mortgage loan applications are approved. But the statistics on applications that were not approved showed significant differences in loan denial rates among racial and ethnic groups. For example, although 14 percent of whites applying for conventional home purchase loans were denied, 21 percent of Hispanic and 34 percent 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 compared.

Let me be absolutely clear about the position of the Board of Governors. Discrimination based on race, gender, or ethnic background is not only illegal, it is morally repugnant. Indeed, 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 ensuring 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 neighborhoods instead of applicants. The proportion of loan denials for home purchases 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. Income is not the primary reason for mortgage denials. 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 ten savings banks in that state, they found little suggestion of bias.

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 fairly. I will turn to a discussion of these activities later in my testimony.

BACKGROUND ON HMDA

The Home Mortgage Disclosure Act was passed in 1975. The law is based on the concept that the public should have access to information about the home lending activities of institutions that serve their communities. One purpose of the act is to encourage balanced lending through the provision of data to financial institutions, regulators, and the public.

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 in each metropolitan area.

For regulators, HMDA data have augmented other procedures for detecting illegal credit practices and discrimination in examinations for consumer compliance. 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 ensure that aH 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 moderate-income and minority areas.