Fair Lending: Race and Gender Data Are Limited for Nonmortgage
Lending (17-JUL-08, GAO-08-1023T).
The Federal Reserve Board's (FRB) Regulation B, which implements
the Equal Credit Opportunity Act of 1974 (ECOA), generally
prohibits lenders from collecting certain data from loan
applicants, such as their race or gender, for nonmortgage loans
(e.g., small business loans). FRB has stated that this provision
of Regulation B minimizes the chances that lenders would use such
data in an unlawful and discriminatory manner. However, others
argue that the prohibition limits the capacity of researchers and
regulators to identify possible discrimination in nonmortgage
lending. This testimony is based on the GAO report, Fair Lending:
Race and Gender Data Are Limited for Nonmortgage Lending
(GAO-08-698, June 27, 2008). Specifically, GAO analyzes (1)
studies on possible discrimination in nonmortgage lending and the
data used in them, (2) FRB's 2003 decision to retain the
prohibition of voluntary data collection, and (3) the benefits
and costs of a data collection and reporting requirement. For
this work, GAO conducted a literature review; reviewed FRB
documents; analyzed issues involving the Home Mortgage Disclosure
Act (HMDA), which requires lenders to collect and publicly report
data on personal characteristics for mortgage loan applicants;
and interviewed FRB and others. FRB did not take a position on
this report's analysis. In addition to restating its rationale
for retaining the prohibition of voluntary data collection, FRB
summarized GAO's findings, including the potential benefits and
costs of additional data for fair lending enforcement.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-1023T
ACCNO: A82913
TITLE: Fair Lending: Race and Gender Data Are Limited for
Nonmortgage Lending
DATE: 07/17/2008
SUBJECT: Bank loans
Banking regulation
Civil rights law enforcement
Data collection
Discrimination
Federal regulations
Lending institutions
Loan interest rates
Loans
Minorities
Mortgage loans
Personal loans
Policy evaluation
Racial discrimination
Regulatory agencies
Reporting requirements
Risk assessment
Small business
Small business loans
Standards
Standards evaluation
Surveys
Policies and procedures
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GAO-08-1023T
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Testimony:
Before the Subcommittee on Oversight and Investigations, Committee on
Financial Services, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Thursday, July 17, 2008:
Fair Lending:
Race and Gender Data Are Limited for Nonmortgage Lending:
Statement of Orice M. Williams, Director Financial Markets and
Community Investment:
GAO-08-1023T:
GAO Highlights:
Highlights of GAO-08-1023T, a testimony before the Subcommittee on
Oversight and Investigations, Committee on Financial Services, House of
Representatives.
Why GAO Did This Study:
The Federal Reserve Board�s (FRB) Regulation B, which implements the
Equal Credit Opportunity Act of 1974 (ECOA), generally prohibits
lenders from collecting certain data from loan applicants, such as
their race or gender, for nonmortgage loans (e.g., small business
loans). FRB has stated that this provision of Regulation B minimizes
the chances that lenders would use such data in an unlawful and
discriminatory manner. However, others argue that the prohibition
limits the capacity of researchers and regulators to identify possible
discrimination in nonmortgage lending.
This testimony is based on the GAO report, Fair Lending: Race and
Gender Data Are Limited for Nonmortgage Lending (GAO-08-698, June 27,
2008). Specifically, GAO analyzes (1) studies on possible
discrimination in nonmortgage lending and the data used in them, (2)
FRB�s 2003 decision to retain the prohibition of voluntary data
collection, and (3) the benefits and costs of a data collection and
reporting requirement. For this work, GAO conducted a literature
review; reviewed FRB documents; analyzed issues involving the Home
Mortgage Disclosure Act (HMDA), which requires lenders to collect and
publicly report data on personal characteristics for mortgage loan
applicants; and interviewed FRB and others.
FRB did not take a position on this report�s analysis. In addition to
restating its rationale for retaining the prohibition of voluntary data
collection, FRB summarized GAO�s findings, including the potential
benefits and costs of additional data for fair lending enforcement.
What GAO Found:
GAO�s June 2008 report found that most research suggests that
discrimination may play a role in certain types of nonmortgage lending,
but data limitations complicate efforts by researchers and regulators
to better understand this issue. For example, available studies
indicate that African-American owned small businesses are denied loans
more often or pay higher interest rates than white-owned businesses
with similar risk characteristics. While the primary data source for
these studies, a periodic FRB small business survey, provides important
insights into possible discrimination, it also has limits compared to
HMDA data. For example, the FRB survey data are collected from
borrowers rather than lenders, which limit their usefulness as a means
to assess lending practices. In addition, federal bank regulators that
enforce ECOA said that HMDA data facilitates the identification of
lenders that may be engaging in discriminatory mortgage lending. In the
absence of such data for nonmortgage loans, regulators may rely on time-
consuming and less reliable approaches to identify possible
discrimination, such as assuming a loan applicant is Hispanic based on
his or her last name.
While testimony from researchers and other information GAO collected
did not fully agree with all aspects of FRB�s 2003 rationale for
retaining the prohibition of voluntary data collection, there was
general agreement that such voluntary data would have limited benefits.
FRB did not adopt a proposal that would have allowed lenders to collect
data, without any standards, because it said the proposal would have
(1) created an opportunity for lenders to use the data for
discriminatory purposes and (2) such data would not be useful since
lenders may use different collection approaches. While some researchers
and others agreed with FRB�s first rationale, others said that data
collection alone would not necessarily create the risk for
discrimination because, in some cases (e.g., small business lending),
lenders may already be aware of applicants� personal characteristics as
such lending is often done on a face-to-face basis. Even so, a range of
researchers, regulatory staff, and others agreed that voluntarily
collected data would not likely materially benefit efforts to better
understand possible discrimination because the data would be collected
on an inconsistent basis or few lenders would participate out of
concern for additional regulatory scrutiny of their nonmortgage lending
practices and the potential for litigation.
Requiring lenders to collect and publicly report data on personal
characteristics for nonmortgage loan applicants could help address
current data limitations that complicate efforts to better assess
possible discrimination. However, such a requirement would impose
additional costs on lenders that could be partially passed on to
borrowers. These potential costs include those associated with
information system integration, software development, data storage and
verification, and employee training. Limiting a requirement to certain
types of loans could help mitigate such costs but may also involve
complexities that would need to be carefully considered. For example,
to the extent that small business lending is more complicated than
other types of lending, lenders may need to collect and report
additional information on a range of underwriting standards in addition
to data on personal characteristics so that informed judgments can be
made about their lending practices.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1023T]. For more
information, contact Orice M. Williams at (202) 512-8678 or
[email protected].
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the available research on the
potential for discrimination in nonmortgage lending and the Federal
Reserve Board's (FRB) basis for largely retaining Regulation B's
prohibition against the voluntary collection of data on personal
characteristics for nonmortgage loan applicants. As you know, the Equal
Credit Opportunity Act (ECOA) of 1974 prohibits discrimination in
lending based on an applicant's personal characteristics, such as race,
gender, color, religion, national origin, marital status, or age.
[Footnote 1] A provision of Regulation B, which implements ECOA,
generally prohibits lenders from asking for, inquiring about, or
documenting such information for individuals who apply for nonmortgage
loans, such as small business, automobile, or credit card loans. In
1975, FRB established the general prohibition as a means of
discouraging discrimination in lending, based on its belief that if
lenders could not inquire about or note such information on applicants'
personal characteristics, they would be less likely to unlawfully
consider it when making lending decisions. However, some members of
Congress and consumer advocates argue that the prohibition on data
collection has limited the ability of researchers, regulators,
Congress, and the public to monitor nonmortgage lending practices and
to identify possible discrimination.
In response to such criticism, the FRB, in 1999, proposed and
considered an amendment to Regulation B that would have removed the
prohibition and permitted lenders to voluntarily collect data on
personal characteristics, without any restrictions or standards, for
nonmortgage loan applicants. However, in 2003, after reviewing more
than 600 public comment letters on the proposed amendment and taking
other steps, FRB ultimately decided to leave the basic elements of the
prohibition intact. FRB did not adopt the amendment because the agency
believed it would have (1) created an opportunity for lenders to use
the data for discriminatory purposes; and (2) generated data that would
not be useful or reliable because lenders would likely adopt
inconsistent data collection approaches. However, some members of
Congress and consumer advocates questioned FRB's decision, particularly
its conclusion that such data could be used for unlawful
discrimination. To support their position, they argued that requiring
lenders to collect and publicly report data on personal characteristics
of mortgage loan applicants under the Home Mortgage Disclosure Act of
1975 (HMDA), as amended, has made lenders less likely to engage in
discriminatory mortgage lending practices, and facilitated the ability
of regulators to monitor and enforce compliance with fair lending laws.
My comments today are based on findings from our June 2008 report
entitled Fair Lending: Race and Gender Data Are Limited for Nonmortgage
Lending.[Footnote 2] Specifically, I will discuss (1) available
research on possible discrimination in nonmortgage lending and review
the strengths and limitations of the data used in the studies, (2)
FRB's 2003 basis for largely retaining Regulation B's prohibition
against the voluntary collection of data on personal characteristic for
nonmortgage loan applicants, and (3) the potential benefits and costs
of a data collection and reporting requirement and options to mitigate
such costs.
To prepare our June 2008 report, we conducted a literature review to
identify studies that used nationwide databases and statistical
techniques to identify possible discrimination in nonmortgage lending
and assessed the strengths and weaknesses of key data used to support
the studies' findings, particularly in comparison to HMDA data.
Further, we reviewed relevant FRB documents pertaining to Regulation B
and did a content analysis of a random sample of 90 from the more than
600 comment letters that FRB received in response to the proposed 1999
amendment to the regulation. We also conducted interviews with a range
of researchers who have assessed potential discrimination in
nonmortgage lending, staff involved in fair lending law enforcement
from bank regulators, representatives from banking organizations and
consumer groups, and officials from organizations that represent
minority and women-owned businesses.
We conducted the audit work underlying the report from September 2007
to June 2008 in Washington, D.C., in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
In summary, we found that most studies suggest that discrimination may
play a role in certain types of nonmortgage lending, but data
limitations have complicated efforts by researchers and regulators to
understand the extent to which possible discrimination occurs. For
example, available research on minority business lending generally
indicates that African-American business owners are denied loans more
often or pay significantly higher interest rates than white-owned
businesses with similar risk characteristics. However, the data used in
these studies are collected from small business borrowers rather than
lenders and, therefore, cannot be used to conduct in-depth analyses of
the practices of individual lenders or the lending industry generally.
In contrast, studies on possible discrimination in mortgage lending
often use HMDA data, which are collected directly from a large
population of lenders and thus provide for more in-depth research among
other benefits.[Footnote 3] Further, we found that data limitations may
also impede the relative efficiency of the bank regulators' fair
lending examination process for the nonmortgage sector as compared with
the mortgage sector.
While testimony from researchers and other information we collected did
not reflect full agreement with all aspects of FRB's 2003 rationale for
retaining Regulation B's general prohibition on collecting data on
personal characteristics, most experts agreed with the agency's overall
conclusion that voluntarily collected data would offer limited benefits
as a means of better identifying possible discrimination in nonmortgage
lending. FRB's conclusion that voluntary data collection could create
some risk of discrimination, while supported by some interviewees, was
challenged by a range of researchers, regulatory staff, and others we
contacted. For example, several researchers said that voluntary data
collection would not necessarily increase the risk of discrimination
because, in certain cases--such as small business lending, which is
often done on a face-to-face basis--lenders could already observe an
applicant's race and gender. Even so, a range of researchers,
regulatory staff, and representatives from both consumer and banking
groups we contacted generally agreed with FRB that lenders would likely
adopt different approaches to collecting and using data on personal
characteristics, potentially limiting the reliability and usefulness of
the information. They also said that relatively few, if any, lenders
would likely choose to collect such data out of concern that their
nonmortgage lending practices would become subject to increased
regulatory oversight and potential litigation.
Finally, we found that requiring lenders to collect and publicly report
data on personal characteristics for nonmortgage loan applicants,
similar to HMDA requirements, could help address current data
limitations but would also involve costs and complexities that would
need to be considered. In concept, such a requirement could facilitate
efforts by researchers, regulators, and others to better assess
potential discrimination in nonmortgage lending. However, such a
requirement would also impose additional costs on lenders for items
such as system integration, software development, and training that
could be partially passed onto borrowers. One option to potentially
mitigate some of these costs would be limiting data collection and
reporting to specific types of lending, such as small business lending,
but this option may also involve additional complexities and costs that
must be considered. For example, to the extent that small business
lending is more complicated than other types of lending, lenders may
need to collect and report additional information on a range of
underwriting characteristics in addition to data on personal
characteristics so that informed judgments can be made about their
lending practices. Alternatively, lenders could be required to collect
data on personal characteristics and make such data available to
regulators to facilitate the fair lending examination process and
potentially decrease costs, but, in the absence of a public reporting
requirement, this option would not enhance the ability of researchers,
Congress, and others to better assess the potential for discrimination.
FRB did not take a position on this report's analysis. In addition to
restating its rationale for retaining the prohibition of voluntary data
collection, FRB summarized GAO's findings, including the potential
benefits and costs of additional data for fair lending enforcement.
Background:
Regulation B imposes a general prohibition on collecting data on
personal characteristics for nonmortgage loan applicants. But in 2003,
FRB expanded its exceptions to this prohibition to include permitting
lenders to collect data on race, gender, and other personal
characteristics in connection with a self-test for the purpose of
determining the effectiveness of the lender's compliance with ECOA and
Regulation B. A self-test is any program, practice, or study that is
designed and used by creditors to determine the effectiveness of the
creditor's compliance with ECOA and Regulation B. The results of a self-
test are privileged--that is, they cannot be obtained by any government
agency in an examination or investigation in any lawsuit alleging a
violation of ECOA.
Although Regulation B prohibits creditors, except in limited
circumstances such as conducting a self-test, from collecting data on
personal characteristics for nonmortgage loan applicants, creditors are
required to collect such data for mortgage loan applicants.
Specifically, HMDA, as amended in 1989, requires certain financial
institutions to collect and publicly report information on the racial
characteristics, gender, and income level of mortgage loan applicants.
[Footnote 4] In 2002, FRB, pursuant to its regulatory authority under
HMDA, required financial institutions to report certain mortgage loan
pricing data in response to concerns that minority and other targeted
groups were being charged excessively high interest rates for mortgage
loans.
Authority for enforcing compliance with ECOA with respect to depository
institutions, such as Federal Reserve System member banks, national
banks, state-chartered banks, saving associations, and credit unions,
lies with the five federal regulators--FRB, the Office of the
Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), the Office of Thrift Supervision (OTS), and the
National Credit Union Administration (NCUA).[Footnote 5] To carry out
their responsibilities, the agencies may conduct periodic compliance
examinations of depository institutions. These compliance exams
generally assess depository institutions' loan underwriting guidelines
and credit decisions to detect possible discrimination in both mortgage
and nonmortgage lending.
FRB's Survey of Small Business Finances (SSBF) is one of the principal
sources of information available on the factors that affect the
availability of credit for small businesses. FRB has conducted the SSBF
about every 5 years from 1987 through 2003 from a nationwide sample of
small businesses of varying sizes, locations, and ownership
characteristics. In 2007, FRB decided to discontinue the SSBF due to
its cost and other considerations. However, according to FRB officials,
FRB plans to include elements of the SSBF in another survey, the Survey
of Consumer Finances (SCF), starting in 2010.
Studies Suggest That Discrimination May Play a Role in Certain Types of
Nonmortgage Lending, but Data Limitations Complicate Efforts to Better
Understand the Issue:
The limited number of studies on nonmortgage lending that met our
criteria for selection in our June report focused primarily on the
small business sector, and suggested that certain minority-owned
businesses may be denied loans more often or be offered higher interest
rates than similar white-owned businesses. However, the key data source
for most of these studies, FRB's SSBF, has certain limitations compared
with HMDA data, and this may limit the data's usefulness as an
analytical tool. The few studies we identified that addressed possible
discrimination in automobile and credit card lending relied on SCF
data, which has certain limitations similar to those of the SSBF data.
Further, our report found that data limitations may also impede the
relative efficiency of the bank regulators' fair lending examination
process for the nonmortgage sector as compared with the mortgage
sector.
Research Suggests That Possible Discrimination Exists in Small Business
Lending, but the Data Used in Such Studies Have Limitations:
Primarily using data obtained from FRB's SSBF, all eight studies we
identified on minority business lending generally found that lenders
denied loans to minority-owned businesses (seven of the eight
specifically refer to African-American-owned businesses) or required
them to pay higher interest rates for loans significantly more often
than white-owned small businesses. This finding generally remained
consistent after considering a variety of risk factors, such as
borrower creditworthiness, industry sector, and other firm
characteristics (e.g., business location, assets, and profits). In
addition, studies have found that Hispanic-owned businesses were denied
credit or charged higher interest rates more often when compared with
white-owned businesses with similar risk characteristics. On the other
hand, some studies we reviewed did not identify evidence that women-
owned businesses face credit denials or higher rates significantly more
often than male, white-owned businesses.
While studies using SSBF data have provided important insights into
possible discrimination in small business lending, researchers and FRB
officials also pointed out a number of limitations:
* SSBF data are collected from individual small business borrowers
rather than lenders, which limit their analytical value.[Footnote 6]
For example, SSBF data do not allow researchers to assess the overall
small business lending underwriting standards or lenders' performance
by type of institution, by size, or by geographic or metropolitan
region.
* SSBF survey data are self-reported and are not verified by FRB. For
example, FRB relies upon survey respondents to accurately report their
race, gender, and other characteristics, as well as requested
information on their business and their financing. Since the survey may
be conducted long after the survey respondent applied for credit, the
timing of the SSBF increases the risk that respondents may not
accurately recall and report information from the time when the credit
decision was made.
* FRB conducts the SSBF about every 5 years rather than annually and,
therefore, the survey results may not be timely. To illustrate, most of
the studies that we reviewed were based on data that are about 10 years
old from surveys conducted in 1993 and 1998. Researchers and FRB
officials that we spoke with said it may also take FRB a significant
period of time to review and process the SSBF data prior to releasing
it to the public.
In contrast, HMDA data offer certain advantages over SSBF data as a
research tool to assess possible discrimination in mortgage lending. In
particular, HMDA data are collected directly from a large and
identified population of mortgage lenders on a consistent and annual
basis. Researchers have used HMDA data to conduct analyses of possible
discrimination by type of lending institution, size of the institution,
and geographic or metropolitan area. FRB also requires that lenders
help verify the HMDA data they report, such as applicant data on
personal characteristics and the interest rates charged on certain
types of mortgages.
Despite these advantages, we noted that analyses of HMDA data as a
basis for conducting research on possible discrimination in mortgage
lending have been criticized for not including key loan underwriting
variables, such as the borrowers' credit scores or mortgages' loan-to-
value ratios.[Footnote 7] Some argue that such underwriting variables
may account for many apparent discrepancies between minority and white
mortgage borrowers. To compensate for the lack of underwriting
variables in the HMDA data, several researchers have collected such
data from proprietary sources and matched it with HMDA data.[Footnote
8]
The Few Studies That Have Identified Possible Discrimination in
Automobile and Credit Card Lending Use Data That Have Strengths but
Also Limitations:
According to a study on auto lending, racial discrimination could play
a role in differences between the treatment of minority and white
borrowers.[Footnote 9] The study relied on data from FRB's SCF, which
asks a nationwide sample of about 4,500 U.S. consumers to provide
detailed information on the finances of their families and on their
relationships with financial institutions. Because SCF data is also
collected from borrowers rather than lenders, like SSBF data, it cannot
be used as a basis for assessing individual lenders' lending practices
or lending practices industrywide (i.e., by type of institution, size
of institution, or geographic or metropolitan area).
The two studies we identified that also relied on SCF data had mixed
results with respect to possible discrimination in credit card lending.
One study found that minorities were likely to pay higher interest
rates on credit card debt than white credit cardholders even after
considering the payment history and financial wealth of each
group.[Footnote 10] Another study did not find that minority credit
cardholders paid higher interest rates as compared with white credit
cardholders after controlling for creditworthiness factors.[Footnote
11] These studies showed the strength of the SCF as a data source
(e.g., the ability to consider data on personal characteristics and
loan underwriting factors), as well as its limitations (e.g., the data
are collected from borrowers rather than lenders).
Data Limitations May Also Impede the Efficiency of the Fair Lending
Examination Process for Nonmortgage Lending:
Representatives from the four federal bank regulatory agencies we
contacted (FRB, OCC, FDIC, and OTS) said that the availability of HMDA
data has facilitated the fair lending law examination process. In
particular, agency staff said that the analysis of HMDA data provided
insights into lenders that might be at high risk of engaging in
potentially discriminatory practices in mortgage lending. While agency
staff said that HMDA data were only a first start in the investigative
process (because they must evaluate a range of underwriting criteria
and practices that may help explain disparities in a lender's mortgage
lending patterns), HMDA data allowed them to prioritize their
examination resources.
We found that in the absence of similar race, gender, and other data on
personal characteristics for nonmortgage loan applicants, examiners may
rely on time-consuming and possibly unreliable techniques to assess
lenders' compliance with fair lending laws. Under the Interagency Fair
Lending Examination Procedures, examiners can use established
"surrogates" to make educated guesses as to the personal
characteristics, such as race or gender, of nonmortgage loan applicants
to help determine whether the lenders they regulate are complying with
established laws and regulations in extending credit to minority and
other individuals targeted for loan applicants. For example,
examination guidance allows examiners, after consulting with their
agency's supervisory staff, to assume that an applicant is Hispanic
based on the last name, female based on the first name, or likely to be
an African-American based on the census tract of the address. While
these techniques may help identify the racial or gender characteristics
of loan applicants, they have potential for error (e.g., certain first
names are gender neutral, and not all residents of a particular census
tract may actually be African-American).
As a result of the limitations of the data on personal characteristics
for nonmortgage loan applicants, as well as regulatory guidance
directing examiners to consider using surrogates, federal oversight of
lenders' fair lending law compliance in this area may be less efficient
than it is for mortgage lending. According to a comment letter
submitted by a Federal Reserve Bank to FRB as it considered amending
Regulation B in 1999, its examiners were unable to conduct thorough
fair lending examinations or review consumer complaints alleging
discrimination for nonmortgage products due to the lack of available
data. Moreover, our reviews of agency fair lending examination guidance
and discussions with some agency staff (OCC, FDIC, and OTS) suggest
that, due in part to HMDA data availability, agencies focus most of
their resources on possible discrimination in mortgage lending rather
than nonmortgage lending. We plan to further explore the issue of fair
lending enforcement in future work, including the impact of potential
data limitations on regulatory agencies' oversight and enforcement of
the fair lending laws for mortgage and nonmortgage lending.
Voluntary Lender Collection of Data on Personal Characteristics Would
Likely Offer Limited Benefits in Better Understanding Possible
Discrimination in Nonmortgage Lending:
While some individuals we contacted generally agreed with FRB's 2003
conclusion that permitting lenders to voluntarily collect data on
personal characteristics for nonmortgage loan applicants could create
some risk of discrimination, many other individuals we contacted
expressed skepticism about this argument. Even so, a range of
researchers, regulatory staff, and representatives from both consumer
and banking groups we contacted generally concurred with FRB that
voluntarily collected data might not be useful or reliable and that
very few banks would choose to collect it. Consequently, the benefits
of permitting lenders to voluntarily collect data on personal
characteristics as a means for researchers, regulators, and others to
better understand possible discrimination in nonmortgage lending would
likely be limited.
Researchers and Others Had Mixed Views on FRB's Conclusion That
Voluntary Data Collection Could Create Some Risk for Discrimination in
Nonmortgage Lending:
Some researchers, staff from a bank regulatory agency, and
representatives from banking and business trade groups we contacted
generally agreed with FRB that permitting voluntary data collection on
personal characteristics could create a risk that the information would
be used for discriminatory purposes. These officials told us that the
best way to protect borrowers against discrimination is to minimize the
availability of information to lenders about their personal
characteristics.
However, many other researchers, staff from some regulatory agencies,
and officials from consumer groups expressed skepticism on this
conclusion. First, a staff member from a regulatory agency, several
researchers, and representatives from consumer groups said that, in
certain cases, lenders were already aware of the race and gender or
other information on personal characteristics of nonmortgage loan
applicants. Therefore, simply collecting data on personal
characteristics on applicants in such cases would not necessarily
create a risk of discrimination. Other researchers and officials from
banking institutions disagreed. They noted that, in some cases, lending
decisions may be made by officials who do not interact directly with
loan applicants.
Second, lenders' voluntary collection and use of data on personal
characteristics for nonmortgage loan applicants, outside of the ECOA
self-test privilege, would also be subject to varying degrees of
regulatory scrutiny, which could serve to deter lenders from using such
data for discriminatory purposes. Similarly, all lenders that chose to
collect and use such data for discriminatory purposes would face the
risk of public disclosure of such practices through litigation.
Further, according to a variety of researchers and officials we
contacted, as well as FRB documents we reviewed, there is no evidence
that lenders have used HMDA data for discriminatory purposes. These
officials generally attributed the transparency of the HMDA program,
through regulatory reviews and public reporting requirements, as
serving to help deter lenders from using the data to discriminate in
mortgage lending.[Footnote 12]
Finally, FRB could potentially have mitigated some of its concerns that
voluntarily collected data could be used for discriminatory purposes by
including, as part of its 1999 proposal, minimum procedures for the
collection and use of such data. FRB established such procedures for
federally regulated lenders that choose to conduct a self-test. These
procedures include developing written policies describing the
methodology for data collection and keeping data on personal
characteristics separate from loan underwriting data that are used to
make credit decisions. Imposing such minimum procedures and
requirements for a voluntary program could serve to enhance regulators'
oversight of lenders' data collection, processes, practices, and uses
of the data, and further deter possibly discriminatory practices.
Many Researchers and Others Agreed That Voluntarily Collected Data May
Not Be Reliable or Useful in Helping to Better Identify Possible
Discrimination in Nonmortgage Lending:
Even so, many researchers, regulatory staff, and representatives from
consumer groups and banking trade groups agreed with FRB's conclusion
that the reliability of voluntarily collected data may be limited in
identifying possible discrimination in nonmortgage lending. In
particular, they agreed with FRB that, due to potentially inconsistent
data collection standards, it would be difficult to use voluntarily
collected data to compare fair lending performance across different
lenders. Additionally, there may be data inconsistency problems for any
given lender that chooses to collect data on personal characteristics
for nonmortgage loan applicants. For example, a lender could "cherry
pick," or collect racial, gender, and other data on personal
characteristics on applicants only for certain loan products that they
felt would reflect favorably on their fair lending practices and not
collect data for other products.
Just as FRB could potentially have mitigated some of its concerns about
the possibility that lenders would use voluntarily collected data for
discriminatory purposes by adopting minimum procedures, as mentioned
previously, it could also potentially have considered adopting data
collection standards. Such standards could have served to better ensure
the consistency of the data and enabled regulators and others to use
the data to assess individual lender performance and compare lending
practices across different financial institutions. However, according
to a senior FRB official, a researcher, and a bank industry trade
association official, the imposition of such standards would have
undermined the voluntary nature of the data collection proposal. For
example, FRB could be required to conduct examinations to help ensure
that federally regulated lenders were collecting the data in a manner
consistent with any such standards. Moreover, the establishment of such
data collection standards might also have further diminished lender
interest in a voluntary program, which researchers, FRB officials, and
others said was already limited due to the potential for increased
regulatory and public scrutiny of their lending practices. According to
bank regulators and banking trade groups, very few, if any, lenders
choose to conduct self-tests out of concern that the results of such
tests would be subject to regulatory review even though they are
privileged.
Finally, while some officials we contacted and documents we reviewed
said that any data that was collected and potentially reported by
lenders would provide important insights into nonmortgage lending
practices that are not currently available, other researchers and
researchers suggested that such data would be prone to substantial
selection bias. That is, the data would likely be skewed by the
possibility that only lenders with good fair lending compliance records
would choose to collect such data. Consequently, although voluntarily
collected data on personal characteristics could provide some benefits,
it would not likely materially assist the capacity of researchers,
regulators, and others to better understand possible discrimination in
nonmortgage lending.
A Data Collection and Reporting Requirement Could Further Efforts to
Better Understand Possible Discrimination in Nonmortgage Lending but
Would also Involve Complexities and Costs That Would Require
Consideration:
In concept, a requirement that lenders collect and publicly report data
on the personal characteristics of nonmortgage loan applicants, similar
to HMDA requirements, could help address some of the existing data
limitations that complicate efforts by researchers, federal bank
regulators, and others to identify possible discrimination. However,
mandatory data collection and reporting would impose some additional
costs on the lending industry, although opinions differed on how
burdensome these costs might be. While options exist to potentially
mitigate some of these costs, such as limiting data collection and
reporting to specific types of lending, these options also involve
additional complexities and costs that must be considered.
Researchers and Regulators Could Benefit from Mandatory Data Collection
and Reporting, but Lender Costs Would Increase:
Required data collection and reporting for nonmortgage loan applicants,
similar to HMDA's requirements, could help address some of the existing
limitations of available data and facilitate the efficiency of the fair
lending examination process for nonmortgage lending. Such data would be
more timely than SSBF data, and the implementation of data collection
standards could help ensure its reliability. For example, researchers
and financial regulators would be able to analyze the practices of
specific lenders and compare practices across lenders, assessing
lending practices by type, size, and location of the institutions,
similar to analyses done currently with HMDA data. While such analyses
would represent only the first step in determining whether or not
particular lenders were engaging in discriminatory practices, they
could potentially help regulators prioritize their examinations and
better utilize existing staff and other resources.
While it is not possible to quantify the potential costs associated
with a reporting requirement, in part because the requirements could
vary, banking organizations and banks that we contacted identified a
variety of additional costs that lenders might face. These officials
also said that they were concerned about such costs and that the
additional expenses associated with data collection and reporting
would, in part, be passed on to borrowers. According to the officials,
most of the costs associated with a reporting requirement would involve
developing the information technology necessary to capture and report
the data, including system integration, software development, and
employee training. Moreover, the officials said that, as with HMDA
data, verifying, any reported data would also entail costs, including
expenses associated with conducting internal audits. The regulatory
agency responsible for assembling, verifying, and reporting the data to
the public would also accrue costs for these activities.[Footnote 13]
Some researchers and representatives from consumer groups we contacted
said that they did not think that the costs associated with required
collection and reporting of data on personal characteristics of
nonmortgage loan applicants would be significant because many lenders
already collect and report data on personal characteristics under HMDA.
But representatives from banks and banking organizations, along with
one researcher, said that lending information systems and personnel
were not integrated in many mortgage and nonmortgage organizations. For
this reason, they reiterated that a data collection and reporting
requirement would involve additional system integration and employee
training costs, among others.
Limiting a Data Collection and Reporting Requirement to Specific Types
of Nonmortgage Loans Would Also Have Benefits and Costs:
One potential option to mitigate the costs associated with a
requirement that regulated lenders collect and report data on the
personal characteristics of those seeking nonmortgage loans would be to
limit the requirement to certain types of loans, such as small business
and/or automobile loans. Similar to mortgage loan applications, small
business and automobile loan applications are often made on a face-to-
face basis, which could enhance the ability of lenders to help verify
the race, gender, or other personal characteristics of the applicants.
In contrast, lenders' capacity to record data on personal
characteristics for other types of nonmortgage applicants, such as
applicants for credit card loans, may be limited by the fact that
credit card loan applications and credit decisions are typically done
by mail or over the Internet.
However, researchers, federal bank regulatory staff responsible for
fair lending oversight, banking officials, and representatives from
some consumer groups we contacted cautioned that there were still
significant complexities and potential costs associated with a data
collection and reporting requirement that was limited to small business
lending. Unlike mortgage and automobile lending, which have relatively
uniform underwriting criteria, these officials said that small business
loan underwriting is heterogeneous and more complex. For example, the
types of financing that small businesses typically seek can vary
widely, ranging from revolving lines of credit to term loans, and the
risk of the collateral pledged against these loans may also vary widely
(i.e., from relatively secure real estate to inventory).[Footnote 14]
As discussed previously, studies of possible discrimination in small
business lending that use SSBF data consider a variety of other
indicators of creditworthiness, such as applicants' credit scores,
personal wealth, and history of bankruptcy. Without information on key
underwriting variables, the officials said, research based on the
reported data could be subject to significant controversy and potential
misinterpretation, much like research based on HMDA data, which lacks
information on these variables. At the same time, costs for the
necessary technology, employee training, and data verification would
likely increase as the range of data that lenders were required to
collect and report increases.
One option to potentially enhance federal oversight of the fair lending
laws, while mitigating lender cost concerns, would be to require
lenders to collect data on personal characteristics for small business
loan applicants, and perhaps other types of nonmortgage lending like
automobile lending, and make the data available to regulators but not
require public reporting of such data or any other information. This
approach could facilitate federal bank regulators' ability to
prioritize fair lending examinations for regulated lenders because the
agencies currently do not have ready access to data on personal
characteristics for nonmortgage loan applicants. It could also limit
lender costs because they would not have to collect, publicly report,
and verify data on a range of underwriting variables because regulators
already have access to this information. However, due to the lack of a
public data reporting requirement, such an option would not enhance the
capacity of researchers, Congress, and the public to better understand
the possibility of discrimination in nonmortgage lending.
In closing, assessing the potential for discrimination in nonmortgage
lending is an important and complex issue. While current data sources,
primarily FRB's SSBF and SCF provide important insights into possible
discrimination in certain types of lending, they both have limitations
that may impede the ability of researchers, regulators, Congress, and
the public to further assess lender compliance with the fair lending
laws. It is also not yet clear how FRB's decision to discontinue the
SSBF and incorporate elements of the survey into an expanded SCF
beginning in 2010 will impact the already limited amount of information
about possible discrimination in nonmortgage lending. Therefore, from a
public policy perspective, now may be the time to consider whether the
benefits of additional data for research and regulatory purposes
outweigh the costs of collecting the data, as well as the trade-offs of
various options to enhance available data, from a purely voluntary
program to a data collection and reporting requirement, and decide
whether such a requirement is warranted.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to respond to any questions you or other Members of the Subcommittee
may have.
GAO Contact and Staff Acknowledgments:
For further information about this testimony, please contact Orice M.
Williams on (202) 512-8678, or at [email protected]. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this statement. Individuals making key
contributions to this testimony include Wesley M. Phillips, Assistant
Director; Benjamin Bolitzer; Emily Chalmers; Kimberly Cutright; John
Forrester; Simin Ho; Omyra Ramsingh; Robert Pollard; Carl Ramirez; and
Ethan Wozniak.
[End of section]
Footnotes:
[1] Pub. L. No. 90-321, title VII, as added by Pub. L. No. 93-495,
title V, � 503, 88 Stat. 1521 (Oct. 28, 1974) (codified, as amended, at
15 U.S.C. �� 1691 et seq.)
[2] GAO, Fair Lending: Race and Gender Data Are Limited for Nonmortgage
Lending, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-698]
(Washington, D.C.: June 27, 2008).
[3] However, as described in this testimony, studies that use HMDA data
to assess possible discrimination in mortgage lending have been
controversial because the data do not include key underwriting
variables such as a loan applicant's credit score. Some studies have
used HMDA data in conjunction with underwriting data available from
other sources to better detect potential discriminatory mortgage
lending practices.
[4] Pub. L. No. 94-200, title III, 89 Stat. 1125 (Dec. 31, 1975)
(codified, as amended, at 12 U.S.C. �� 2801 et seq.)
[5] Other agencies with enforcement authority under ECOA with respect
to certain nondepository institutions include, among others, the
Securities and Exchange Commission, the Small Business Administration,
and the Farm Credit Administration. To the extent that ECOA does not
assign to another federal agency responsibility for enforcing
compliance with respect to a particular creditor, the Federal Trade
Commission has enforcement authority for such creditors.
[6] It should be noted that data collected from borrowers can have
distinct advantages. For example, survey respondents would know better
than lenders whether they had been discouraged from applying for credit
and could more accurately describe their race or gender.
[7] Steven R. Holloway and Elvin K. Wyly, "The Color of Money Expanded:
Geographically Contingent Mortgage Lending in Atlanta," Journal of
Housing Research 12, no.1. (2001): 55-90; and Robert Avery, Kenneth P.
Brevoort, and Glenn B. Canner, "Opportunities and Issues in Using HMDA
Data," Journal of Real Estate Research 29 (2007): 351-379.
[8] Alicia H. Munnell, Geoffrey M.B. Tootell, Lynn E. Browne, and James
McEneaney, "Mortgage Lending in Boston: Interpreting HMDA Data,"
American Economic Review, 86, no. 1 (1996); Debbie Bocian, Keith S.
Ernst, and Wei Li, "Race, Ethnicity and Subprime Home Mortgage
Pricing," Journal of Economics and Business. 60, nos. 1 and no. 2
(2008); and Kenneth P. Brevoort and Glenn B. Canner, "Opportunities and
Issues in Using HMDA Data," Journal of Real Estate Research, 29 (2007):
351-379.
[9] Darryl Getter, "Consumer Credit Risk and Pricing," The Journal of
Consumer Affairs 40, no.1 (2006): 41-63. Other research has looked at
possible discrimination in the prices charged for new automobiles, as
opposed to studies that analyze interest rate pricing for automobile
loans. See: Ian Ayres and Peter Siegelman, "Race and Gender
Discrimination in Bargaining for a New Car," The American Economic
Review, 85, no. 3 (1995): 304-321; and Ian Ayres, "Fair Driving: Gender
and Race Discrimination in Retail Car Negotiations," Harvard Law
Review, 104, no. 4 (1991): 817-872.
[10] Getter, "Consumer Credit Risk and Pricing."
[11] Amberly Hazembuller, Britton Lombardi, and Jeanne Hogarth,
"Unlocking the Risk-based Pricing Puzzle: Five Keys to Cutting Credit
Card Costs," Consumer Interests Annual, 53 (2007): 73-81.
[12] We recognize that there are differences in the level of
transparency between HMDA's data collection and reporting requirements
and the voluntary data collection proposal that FRB considered in 1999
for nonmortgage loan applicants. In particular, FRB did not propose
that lenders who chose to collect such data report it to the public
whereas lenders are required to report HMDA data.
[13] According to FRB officials, it will cost the agency approximately
$3.5 million to process the 2008 HMDA data.
[14] We note, though, that small business owners may also use their
personal residences as collateral to secure business loans.
[End of section]
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