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 Boardï¿½s (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) 
FRBï¿½s 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 reportï¿½s analysis. In addition to 
restating its rationale for retaining the prohibition of voluntary data 
collection, FRB summarized GAOï¿½s findings, including the potential 
benefits and costs of additional data for fair lending enforcement. 

What GAO Found: 

GAOï¿½s 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 FRBï¿½s 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 FRBï¿½s 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 applicantsï¿½ 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, ï¿½ 503, 88 Stat. 1521 (Oct. 28, 1974) (codified, as amended, at 
15 U.S.C. ï¿½ï¿½ 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. ï¿½ï¿½ 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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