Fair Lending
Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts Gao ID: GAO-09-704 July 15, 2009The Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA)--the "fair lending laws"--prohibit discrimination in lending. Responsibility for their oversight is shared among three enforcement agencies--the Department of Housing and Urban Development (HUD), Federal Trade Commission (FTC), and Department of Justice (DOJ)--and five depository institution regulators--the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (Federal Reserve), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and Office of Thrift Supervision (OTS). This report examines (1) data used by agencies and the public to detect potential violations and options to enhance the data, (2) federal oversight of lenders that are identified as at heightened risk of violating the fair lending laws, and (3) recent cases involving fair lending laws and associated enforcement challenges. GAO analyzed fair lending laws, relevant research, and interviewed agency officials, lenders, and consumer groups. GAO also reviewed 152 depository institution fair lending examination files. Depending upon file availability by regulator, GAO reviewed all relevant files or a random sample as appropriate.
The Home Mortgage Disclosure Act (HMDA) requires certain lenders to collect and publicly report data on the race, national origin, and sex of mortgage loan borrowers. Enforcement agencies and depository institution regulators use HMDA data to identify outliers--lenders that may have violated fair lending laws--and focus their investigations and examinations accordingly. But, HMDA data also have limitations; they do not include information on the credit risks of mortgage borrowers, which may limit regulators' and the public's capacity to identify lenders most likely to be engaged in discriminatory practices without first conducting labor-intensive reviews. Another data limitation is that lenders are not required to report data on the race, ethnicity, and sex of nonmortgage loan borrowers--such as small businesses, which limits oversight of such lending. While requiring lenders to report additional data would impose costs on them, particularly smaller institutions, options exist to mitigate such costs to some degree, such as limiting the reporting requirements to larger institutions. Without additional data, agencies' and regulators' capacity to identify potential lending discrimination is limited. GAO identified the following limitations in the consistency and effectiveness of fair lending oversight that are largely attributable to the fragmented U.S. financial regulatory system: (1) Federal oversight of lenders that may represent heightened risks of fair lending law violations is limited. For example, the enforcement agencies are responsible for monitoring independent mortgage lenders' compliance with the fair lending laws. Such lenders have been large originators of subprime mortgage loans in recent years and have more frequently been identified through analysis of HMDA data as outliers than depository institutions, such as banks. Depository institution regulators are more likely to assess the activities of outliers and, unlike enforcement agencies, they routinely assess the compliance of lenders that are not outliers. As a result, many fair lending violations at independent lenders may go undetected, and efforts to deter potential violations may be ineffective. (2) Although depository institution regulators' fair lending oversight efforts may be more comprehensive, the division of responsibility among multiple agencies raises questions about the consistency and effectiveness of their efforts. For example, each regulator uses a different approach to analyze HMDA data to identify outliers and examination documentation varies. Moreover, since 2005, OTS, the Federal Reserve, and FDIC have referred more than 100 lenders to DOJ for further investigations of potential fair lending violations, as required by ECOA, while OCC made one referral and NCUA none. Enforcement agencies have settled relatively few (eight) fair lending cases since 2005. Agencies identified several enforcement challenges, including the complexity of fair lending cases, difficulties in recruiting and retaining staff, and the constraints of ECOA's 2-year statute of limitations.
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
July 2009:
Fair Lending:
Data Limitations and the Fragmented U.S. Financial Regulatory Structure
Challenge Federal Oversight and Enforcement Efforts:
GAO-09-704:
GAO Highlights:
Highlights of GAO-09-704, a report to congressional requesters.
Why GAO Did This Study:
The Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA)”
the ’fair lending laws“”prohibit discrimination in lending.
Responsibility for their oversight is shared among three enforcement
agencies”the Department of Housing and Urban Development (HUD), Federal
Trade Commission (FTC), and Department of Justice (DOJ)”and five
depository institution regulators”the Federal Deposit Insurance
Corporation (FDIC), Board of Governors of the Federal Reserve System
(Federal Reserve), National Credit Union Administration (NCUA), Office
of the Comptroller of the Currency (OCC), and Office of Thrift
Supervision (OTS). This report examines (1) data used by agencies and
the public to detect potential violations and options to enhance the
data, (2) federal oversight of lenders that are identified as at
heightened risk of violating the fair lending laws, and (3) recent
cases involving fair lending laws and associated enforcement
challenges.
GAO analyzed fair lending laws, relevant research, and interviewed
agency officials, lenders, and consumer groups. GAO also reviewed 152
depository institution fair lending examination files. Depending upon
file availability by regulator, GAO reviewed all relevant files or a
random sample as appropriate.
What GAO Found:
The Home Mortgage Disclosure Act (HMDA) requires certain lenders to
collect and publicly report data on the race, national origin, and sex
of mortgage loan borrowers. Enforcement agencies and depository
institution regulators use HMDA data to identify outliers”lenders that
may have violated fair lending laws”and focus their investigations and
examinations accordingly. But, HMDA data also have limitations; they do
not include information on the credit risks of mortgage borrowers,
which may limit regulators‘ and the public‘s capacity to identify
lenders most likely to be engaged in discriminatory practices without
first conducting labor-intensive reviews. Another data limitation is
that lenders are not required to report data on the race, ethnicity,
and sex of nonmortgage loan borrowers”such as small businesses, which
limits oversight of such lending. While requiring lenders to report
additional data would impose costs on them, particularly smaller
institutions, options exist to mitigate such costs to some degree, such
as limiting the reporting requirements to larger institutions. Without
additional data, agencies‘ and regulators‘ capacity to identify
potential lending discrimination is limited.
GAO identified the following limitations in the consistency and
effectiveness of fair lending oversight that are largely attributable
to the fragmented U.S. financial regulatory system:
* Federal oversight of lenders that may represent heightened risks of
fair lending law violations is limited. For example, the enforcement
agencies are responsible for monitoring independent mortgage lenders‘
compliance with the fair lending laws. Such lenders have been large
originators of subprime mortgage loans in recent years and have more
frequently been identified through analysis of HMDA data as outliers
than depository institutions, such as banks. Depository institution
regulators are more likely to assess the activities of outliers and,
unlike enforcement agencies, they routinely assess the compliance of
lenders that are not outliers. As a result, many fair lending
violations at independent lenders may go undetected, and efforts to
deter potential violations may be ineffective.
* Although depository institution regulators‘ fair lending oversight
efforts may be more comprehensive, the division of responsibility among
multiple agencies raises questions about the consistency and
effectiveness of their efforts. For example, each regulator uses a
different approach to analyze HMDA data to identify outliers and
examination documentation varies. Moreover, since 2005, OTS, the
Federal Reserve, and FDIC have referred more than 100 lenders to DOJ
for further investigations of potential fair lending violations, as
required by ECOA, while OCC made one referral and NCUA none.
Enforcement agencies have settled relatively few (eight) fair lending
cases since 2005. Agencies identified several enforcement challenges,
including the complexity of fair lending cases, difficulties in
recruiting and retaining staff, and the constraints of ECOA‘s 2-year
statute of limitations.
What GAO Recommends:
Congress should consider options, such as requiring larger lenders to
report additional data, to enhance the data available to detect
potential fair lending violations. Further, as part of ongoing
discussions on revising the regulatory structure, Congress should
consider how to best ensure consistent and effective federal oversight
of the fair lending laws. In comments, agencies and regulators
generally agreed with the report‘s analysis.
View [hyperlink, http://www.gao.gov/products/GAO-09-704] or key
components. For more information, contact Orice Williams Brown at (202)
512-8678 or williamso@gao.gov.
Contents:
Letter:
Background:
Data Available to Detect Potentially Heightened Risk for Fair Lending
Violations Have Limitations, and Options to Enhance the Data Involve
Trade-offs:
Lenders That May Pose Relatively Greater Risks of Violating Fair
Lending Laws Generally Are Subject to Less Comprehensive Federal
Oversight Due to the Fragmented Regulatory Structure and Other Factors:
Differences in the Depository Institution Regulators' Fair Lending
Oversight Programs Also Highlight Challenges Associated with a
Fragmented Regulatory System:
Enforcement Agencies Have Filed and Settled a Limited Number of Fair
Lending Cases in Recent Years; Certain Challenges May Affect
Enforcement Efforts:
Conclusions:
Matters for Congressional Consideration:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Federal Oversight Authority for FHA and ECOA:
Appendix III: Comments from the Federal Trade Commission:
Appendix IV: Comments from the Federal Deposit Insurance Corporation:
Appendix V: Comments from the Board of Governors of the Federal Reserve
System:
Appendix VI: Comments from the National Credit Union Administration:
Appendix VII: Comments from the Office of the Comptroller of the
Currency:
Appendix VIII: Comments from the Office of Thrift Supervision:
Appendix IX: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Federal Depository Institution Regulators of Federally Insured
Depository Institutions:
Table 2: Number of Outliers on Federal Reserve Screening List Based on
HMDA Year 2006 Data, by Type of Federal Agency That Oversees Them:
Table 3: Number of All Outliers Identified by Depository Institution
Regulators, Based on HMDA Year 2006 Data:
Table 4: Annual Numbers of HMDA Filers Identified by the Federal
Reserve Screens as a Percentage of Total HMDA-filing Lenders, by Lender
Type, 2004-2007:
Table 5: Number and Percentage of Pattern or Practice Referrals to DOJ
Related to Mortgage Pricing Disparities Identified by Selected
depository institution Regulators in the Outlier Examinations GAO
Reviewed, Based on HDMA Years 2005 and 2006 Data:
Table 6: DOJ Settled Enforcement Cases Involving Fair Lending
Violations, from 2005 through May 2009:
Figures:
Figure 1: HMDA-Filing Institutions by Type, 2004-2007:
Figure 2: Fair Lending Referrals to DOJ, by Depository Institution
Regulator, 2005-2008:
Figure 3: Percentage of Referrals to DOJ for Marital Status
Discrimination in Violation of ECOA versus Other Fair Lending
Referrals, 2005-2008:
Abbreviations:
APR: annual percentage rate:
CRA: Community Reinvestment Act:
DFP: Division of Financial Practices:
DOJ: Department of Justice:
DTI: debt-to-income:
ECOA: Equal Credit Opportunity Act:
FDIC: Federal Deposit Insurance Corporation:
FHA: Fair Housing Act:
FHEO: Office of Fair Housing and Equal Opportunity:
FTC: Federal Trade Commission:
HMDA: Home Mortgage Disclosure Act of 1975:
HUD: Department of Housing and Urban Development:
LTV: loan-to-value:
MSA: metropolitan statistical area:
NCUA: National Credit Union Administration:
OCC: Office of the Comptroller of the Currency:
OSI: Office of Systemic Investigations:
OTS: Office of Thrift Supervision:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 15, 2009:
Congressional Requesters:
The Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA)
(collectively, fair lending laws) prohibit discrimination in making
credit decisions.[Footnote 1] Specifically, ECOA prohibits creditors
from discriminating against credit applicants on the basis of race,
color, religion, national origin, sex, marital status, age, because an
applicant receives income from a public assistance program, or because
an applicant has in good faith exercised any right under the Consumer
Credit Protection Act.[Footnote 2] FHA prohibits discrimination by
direct providers of housing, as well as other entities whose
discriminatory practices, among other things, make housing unavailable
to persons because of race or color, religion, sex, national origin,
familial status, or disability. Under one or both of the fair lending
laws, a lender may not, because of a prohibited basis:
* fail to provide information or services or provide different
information or services regarding any aspect of the lending process,
including credit availability, application procedures, or lending
standards;
* discourage or selectively encourage applicants with respect to
inquiries about or applications for credit;
* refuse to extend credit or use different standards in determining
whether to extend credit;
* vary the terms of credit offered, including the amount, interest
rate, duration, or type of loan;
* use different standards to evaluate collateral;
* treat a borrower differently in servicing a loan or invoking default
remedies; or:
* use different standards for pooling or packaging a loan in the
secondary market or for purchasing loans.
Eight federal agencies--the Department of Housing and Urban Development
(HUD); the Federal Trade Commission (FTC); the Department of Justice
(DOJ)--and the regulators of insured depository institutions--the
Federal Deposit Insurance Corporation (FDIC), the Board of Governors of
the Federal Reserve System (Federal Reserve), the National Credit Union
Administration (NCUA), the Office of the Comptroller of the Currency
(OCC), and the Office of Thrift Supervision (OTS)--principally share
oversight and enforcement responsibility for the fair lending laws. The
enforcement agencies, HUD, FTC, and DOJ, generally have jurisdiction
over nondepository mortgage lenders, including independent mortgage
lenders that are not affiliated with federally insured depository
institutions or owned by federally regulated lenders.[Footnote 3] The
depository institution regulators oversee federally insured banks,
thrifts, and credit unions and, as appropriate, certain subsidiaries,
affiliates, and service providers of these institutions. While the
enforcement agencies can pursue investigations, file complaints, and
participate in litigation against lenders in administrative or federal
district courts for potential fair lending violations under their
independent investigative and enforcement authorities, depository
institution regulators are required to refer lenders under their
supervision to DOJ for further investigation whenever one has reason to
believe a lender has engaged in a pattern or practice of discouraging
or denying applications for credit in violations of ECOA.[Footnote 4]
Furthermore, the depository institution regulators must provide notice
to HUD and the alleged injured parties whenever they have reason to
believe that an FHA violation occurred that did not also constitute a
pattern or practice violation of ECOA and thus did not trigger a
referral to DOJ. The depository institution regulators also have
authority to enforce the FHA and ECOA through administrative
proceedings.
Over the years, some members of Congress, researchers, consumer groups,
and others have raised questions about lenders' compliance with fair
lending laws and the depository institution regulators' and agencies'
enforcement of these laws. These concerns have been heightened in
recent years because of the availability of mortgage pricing data
published by the Federal Reserve, which many lenders are required to
submit under the Home Mortgage Disclosure Act of 1975, as amended
(HMDA).[Footnote 5] According to the Federal Reserve, researchers, and
others, their analyses of HMDA data indicate that on average, African-
American and Hispanic mortgage borrowers may pay substantially higher
interest rates and fees than similarly situated non-Hispanic white
borrowers. Since 2005, the Federal Reserve annually has used HMDA data
to identify approximately 200 lenders with statistically significant
pricing disparities based on ethnicity or race and distributed this
screening or outlier list to other enforcement agencies, depository
institution regulators, and state regulators for their review and
potential follow-up.[Footnote 6] Many of these entities were
independent lenders that specialized in subprime loans, which appear to
have been disproportionately offered to minority borrowers. Critics
argue that enforcement agencies and depository institution regulators
have not adequately pursued potential fair lending violations; for
example, in recent years few enforcement actions have been brought
against lenders alleging discrimination.
Federal enforcement agencies and depository institution regulators have
stated that they have processes to ensure effective oversight and
enforcement of the fair lending laws. In particular, enforcement
agencies and depository institution regulators said that they use the
lists of institutions that have statistically significant pricing
disparities provided by the Federal Reserve and/or develop their own
screening or outlier lists through independent analysis of HMDA data or
consumer complaints and focus investigative and examination resources
on those institutions.[Footnote 7] Federal agency and depository
institution regulatory officials also stated that limitations in HMDA
data, particularly the lack of underwriting information such as
borrowers' credit scores, explain why many investigations and
examinations are a result of false positives and thus do not result in
enforcement actions.[Footnote 8] In addition, as discussed in this
report, FTC officials said that HMDA data do not allow for assessing
mortgage pricing discrimination at all lenders. However, federal
officials also stated that they vigorously pursue cases where the
inclusion of underwriting data does not explain differences in denials
and mortgage interest rates between borrowers who fall into different
protected groups based on national origin, race, or sex and initiate
enforcement actions where appropriate.[Footnote 9]
This report responds to your request that we provide an overview of
federal oversight and enforcement of the fair lending laws and
addresses a range of relevant issues. Specifically, this report (1)
assesses the strengths and limitations of data sources that enforcement
agencies and depository institution regulators use to screen for
lenders that have potentially heightened risk for fair lending law
violations and discusses options for enhancing the data, (2) assesses
federal oversight of lenders that may represent relatively high risks
of fair lending violations as evidenced by analysis of HMDA data and
other information, (3) examines differences in depository institution
regulators' fair lending oversight programs, and (4) discusses
enforcement agencies' recent litigation involving potential fair
lending law violations and challenges that federal officials have
identified in fulfilling their enforcement responsibilities.
To meet our objectives, we reviewed and analyzed fair lending
examination and investigation guidance, policies, and procedures,
agencies' Inspectors General reports, testimonies, agency documents,
academic studies, and past GAO work, in particular our 1996 report on
federal oversight of fair lending laws.[Footnote 10] In addition, we
assessed agencies' compliance with fair lending examination procedures
by selecting a sample of 152 fair lending examination files and
summaries derived from each depository institution regulator's annual
list of lenders at potentially heightened risk for fair lending
violations (that is, outlier lists).[Footnote 11] For the Federal
Reserve, FDIC, and OTS, we reviewed summary documentation of completed
examinations for each lender based on their 2005 and 2006 HMDA data
outlier lists. For OCC and NCUA, we reviewed randomly selected samples
of their outlier examination reports, largely due to the time that it
took these agencies to provide requested documentation.[Footnote 12] We
generally limited the scope of our examination file review to
compliance (that is, if such examinations were initiated on schedule
and if they contained key elements for which the depository institution
regulators' Interagency Fair Lending Examination Procedures call for,
such as a review of HMDA and underwriting and pricing data, reviews of
loan policies and files, and interviews with lending officials).
[Footnote 13] Making judgments on how well the depository institution
regulators conducted examinations (for example, if they selected a
sufficient sample of loan files to review or if they used an
appropriate examination methodology) was beyond the scope of this
review. However, we did compare the depository institution regulators'
overall outlier examination findings and assessed the extent to which
the interagency examination procedures allowed for assessments of all
phases of the mortgage loan application process. We also reviewed
agency referrals to DOJ since 2005, reviewed DOJ's investigative
activities and settlements, and consulted with all agencies on some of
the challenges they encountered in enforcing fair lending laws.
Finally, we interviewed officials from each federal enforcement and
depository institution regulator--including senior officials, policy
analysts, economists, statisticians, attorneys, examiners, and
compliance specialists--state financial regulatory entities, lenders,
and researchers.[Footnote 14] We asked these officials to describe and
comment on regulatory efforts to enforce fair lending laws, which
included screening lenders for potentially heightened risk of
violations, conducting examinations, and enforcing the laws through
referrals, investigations and examinations, or other means. (See
appendix I for more information on our objectives, scope, and
methodology).
We conducted this performance audit from October 2008 to July 2009, 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.
Background:
During the late 1960s and 1970s, Congress enacted several laws that
were intended to help ensure fair and equitable access to credit for
both individuals and communities. These laws included FHA in 1968, ECOA
in 1974, and HMDA in 1975.[Footnote 15] ECOA and FHA constitute the
federal antidiscrimination statutes applicable to lending practices and
commonly are referred to as the "fair lending laws." Although both
statutes prohibit discrimination in lending, FHA antidiscrimination
provisions also apply more generally to housing, such as prohibiting
discrimination in the sale or rental of housing. Unlike ECOA and FHA,
HMDA does not prohibit any specific activity of lenders, but it
establishes data collection, reporting, and disclosure obligations for
particular institutions, which are discussed below. The Federal Reserve
has general rulemaking authority for ECOA and HMDA, and HUD has similar
rulemaking authority for FHA.
Federal Oversight and Enforcement of Fair Lending Laws Are Shared among
Multiple Agencies and Depository Institution Regulators:
Responsibility for federal oversight and enforcement of the fair
lending laws is principally shared among three enforcement agencies and
five depository institution regulators (see appendix II for more
details). In general, with respect to the relevant fair lending law,
HUD and DOJ have jurisdiction over all depository institutions and
nondepository lenders, including "independent" mortgage lenders, such
as mortgage finance companies, which are not affiliated with, or owned
by, federally insured depository institutions such as banks, thrifts,
or credit unions or owned by a federally regulated bank or savings and
loan holding company.[Footnote 16] FTC has jurisdiction pursuant to
ECOA over all nondepository lenders, including independent mortgage
lenders, subsidiaries and affiliates of depository institutions, and
nondepository subsidiaries of bank holding companies. Unlike HUD and
DOJ, FTC does not have enforcement authority over federally regulated
depository institutions.[Footnote 17]
The following describes the fair lending enforcement responsibilities
of HUD, FTC, and DOJ in more detail:
* Under FHA, HUD investigates all complaints filed with it alleging
violations of FHA and may initiate investigations and file its own
complaints, referred to as Secretary-initiated complaints, against
independent mortgage lenders, or any other lender, including depository
institutions that HUD believes may have violated the act. FHA requires
HUD to seek conciliation between the parties to any complaint. If
conciliation discussions are unsuccessful, and HUD determines after an
investigation that reasonable cause exists to believe that a
discriminatory housing practice has occurred, or is about to occur, HUD
must issue a Charge of Discrimination against those responsible for the
violation and prosecute the claim before an administrative law judge.
However, after a charge has been issued, any party may elect to
litigate the case instead in federal district court, in which case DOJ
assumes responsibility from HUD for pursuing litigation. A HUD
administrative law judge or federal judge may order lenders to change
their policies, compensate borrowers affected by the violation, and
take steps to prevent future violations, in addition to imposing civil
penalties.[Footnote 18]
* FTC also may conduct investigations and file ECOA complaints against
nonbank mortgage lenders or brokers--including but not limited to
nonbank subsidiaries of banks and bank holding companies--that may be
violating ECOA. If FTC concludes that it has reason to believe ECOA is
being violated, the agency may file a lawsuit against the lender in
federal court to obtain an injunction and consumer redress. If FTC
deems civil penalties are appropriate, the agency may refer the case to
DOJ. Alternatively, FTC may bring an administrative proceeding against
the lender before the agency's administrative law judges to obtain an
order similar in effect to an injunction.
* DOJ, which has both ECOA and FHA authority, may initiate its own
investigations of any creditor--whether a depository or nondepository
lender--under its independent authority or based on referrals from
other agencies as described below. DOJ may file pattern or practice and
other fair lending complaints in federal courts.
The types of remedies that may be obtained in fair lending litigation
include monetary settlements for consumer redress or civil fines,
agreements by lenders to change or revise policies, and the
establishment of lender fair lending training programs, and other
injunctive relief.
The five depository institution regulators generally have fair lending
oversight responsibilities for the insured depository institutions that
they directly regulate, as well as certain subsidiaries and affiliates
(see table 1). Along with the enforcement agencies, the Federal Reserve
and OTS also have general authority over lenders that may be owned by
federally regulated holding companies but are not federally insured
depository institutions. Many federally regulated bank holding
companies that have insured depository subsidiaries, such as national
or state-chartered banks, also may have nonbank subsidiaries, such as
mortgage finance companies. Under the Bank Holding Company Act of 1956,
as amended, the Federal Reserve has jurisdiction over such bank holding
companies and their nonbank subsidiaries.[Footnote 19] OTS has
jurisdiction over the subsidiaries of savings and loan-holding
companies, which can include federally insured thrifts as well as
noninsured lenders.
Table 1: Federal Depository Institution Regulators of Federally Insured
Depository Institutions:
Type of depository institution: Commercial banks: National banks;
Federal depository institution regulator: OCC.
Type of depository institution: Commercial banks: State banks - Federal
Reserve System members;
Federal depository institution regulator: Federal Reserve.
Type of depository institution: Commercial banks: State banks - Federal
Reserve System nonmembers;
Federal depository institution regulator: FDIC.
Type of depository institution: Savings associations;
Federal depository institution regulator: OTS.
Type of depository institution: Credit unions;
Federal depository institution regulator: NCUA.
Source: GAO.
[End of table]
Depository institution regulators conduct examinations of institutions
they oversee to assess their fair lending compliance, including
determining whether there is evidence that lenders have violated ECOA
or the FHA. Under ECOA, depository institution regulators are required
to refer lenders that may have violated the fair lending laws to DOJ if
there is reason to believe that a lender has engaged in a pattern or
practice of discouraging or denying applications for credit in
violation of ECOA.[Footnote 20] The depository institution regulators
are required to notify HUD of any instance where there is reason to
believe that a FHA and ECOA violation has occurred which has not been
referred to DOJ as a potential ECOA pattern and practice
violation.[Footnote 21] Under the FHA, HUD must provide information to
DOJ regarding any complaint in which there is reason to believe that a
pattern or practice of violations occurred or that a group of persons
has been denied rights under FHA and the matter raises an issue of
general public importance.[Footnote 22]
In addition, ECOA granted the depository institution regulators
enforcement authority to seek compliance under section 8 of the Federal
Deposit Insurance Act and the Federal Credit Union Act.[Footnote 23]
Depository institution regulators have parallel jurisdiction over such
matters, even when the matter is referred to the DOJ, because there is
a reason to believe that a pattern or practice violation has occurred
and DOJ does not defer for administrative enforcement.[Footnote 24] The
agencies must work together to assure there is no duplication of their
efforts. The Federal Reserve, OCC, FDIC, and OTS generally may take an
administrative enforcement action against an insured depository
institution or an institution-affiliated party that is violating, or
has violated a law, rule, or regulation.[Footnote 25] NCUA may take
administrative enforcement action against an insured credit union or
its affiliated party that is violating or has violated a law, rule or
regulation.[Footnote 26] Depository institution regulators also have
cease and desist authority, can order restitution for the victims of
discrimination, and issue orders to change or revise lending policies
or institute a compliance program or require external audits and
compliance with these orders can be enforced in federal court.[Footnote
27] Moreover, they can impose civil money penalties for each day that a
violation continues.[Footnote 28]
HMDA Data Provide Information on the Race, Sex, and Other Personal
Characteristics of Mortgage Loan Borrowers and Applicants:
HMDA, as amended, requires certain lenders to collect, disclose, and
report data on the personal characteristics of mortgage borrowers and
loan applicants (for example, their ethnicity, race, and sex), the type
of loan or application (for example, if the loan is insured or
guaranteed by a federal agency such as the Federal Housing
Administration), and certain financial data such as the loan amount and
borrowers' incomes.[Footnote 29] HMDA's purposes are to provide the
public with loan data that can assist in identifying potential risks
for discriminatory patterns and enforcing antidiscrimination laws, help
the public determine if lending institutions are meeting the housing
credit needs of their communities, and help public officials target
community development investment. In 2002, the Federal Reserve,
pursuant to its regulatory authority under HMDA, required financial
institutions to collect certain mortgage loan pricing data for higher
priced loans in response to the growth of subprime lending and to
address concerns that minority and other targeted groups were being
charged excessively high interest rates for mortgage loans. This
requirement was effective on January 1, 2004.[Footnote 30]
Specifically, lenders were required to collect and publicly disclose
information about mortgages with annual percentage rates above certain
designated thresholds. This 2004 revision to HMDA also was intended to
provide depository institution regulators and the public with more
information about mortgage lending practices and the potentially
heightened risk for discrimination. The data were first reported and
publicly disclosed in 2005.
HMDA's data collection and reporting requirements generally apply to
certain independent mortgage lenders and federally insured depository
institutions as set forth in Regulation C. As shown in figure 1, many
more depository institutions than independent mortgage lenders are
required to collect and report HMDA data (nearly 80 percent are
depository institutions, and 20 percent are independent lenders).
Lenders subject to HMDA's requirements must submit the data by March 1
for the previous calendar year. For example, lenders submitted calendar
year 2004 data--the first year in which lenders were required to
collect and report mortgage pricing data--to the Federal Reserve by
March 1, 2005. Through individual contracts with the other depository
institution regulators and HUD, the Federal Reserve collects the HMDA
data from all filers, performs limited data validity and quality
reviews, checks with lenders as appropriate to clear up discrepancies,
and publishes the data in September of each year.
Figure 1: HMDA-Filing Institutions by Type, 2004-2007:
[Refer to PDF for image: vertical bar graph]
Year: 2004;
Commercial banks: 3,946;
Credit unions: 2,030;
Savings institutions: 1,017;
Total, Depositories: 6,993;
Independent mortgage company: 1,464;
Subsidiary mortgage company: 396;
Total, mortgage companies: 1,860;
Overall total: 8,853.
Year: 2005;
Commercial banks: 3,904;
Credit unions: 2,047;
Savings institutions: 974;
Total, Depositories: 6,925;
Independent mortgage company: 1,347;
Subsidiary mortgage company: 576;
Total, mortgage companies: 1,923;
Overall total: 8,848.
Year: 2006;
Commercial banks: 3,900;
Credit unions: 2,036;
Savings institutions: 946;
Total, Depositories: 6,882;
Independent mortgage company: 1,328;
Subsidiary mortgage company: 676;
Total, mortgage companies: 2,004;
Overall total: 8,886.
Year: 2007;
Commercial banks: 3,910;
Credit unions: 2,048;
Savings institutions: 929;
Total, Depositories: 6,858;
Independent mortgage company: 1,124;
Subsidiary mortgage company: 628;
Total, mortgage companies: 1,752;
Overall total: 8,610.
Source: GAO analysis of Federal Reserve data.
Note: All federally insured or regulated banks, credit unions, and
savings associations with total assets exceeding $39 million (in 2009)
with a home or branch office in an MSA and that originated, during the
preceding calendar year, at least one home purchase loan or refinancing
secured by a first lien on a one-to four-family dwelling are required
to file HMDA data.
The threshold for 2004 is $33 million; 2005 is $34 million; 2006 is $35
million; 2007 is 26 million; 2008 is 38 million, and 2009 is $39
million.
[End of figure]
Data Available to Detect Potentially Heightened Risk for Fair Lending
Violations Have Limitations, and Options to Enhance the Data Involve
Trade-offs:
Federal enforcement agencies and depository institution regulators use
analysis of HMDA data and other information to identify lenders that
potentially are at heightened risk of having violated the fair lending
laws and target their investigations and examinations accordingly.
However, there are several critical limitations in available HMDA data
and other data that limit federal fair lending oversight and
enforcement efforts. First, HMDA data lack key underwriting data or
information, such as borrowers' credit scores or loan-to-value ratios,
which may help explain why lenders may charge relatively higher
interest rates or higher fees to some borrowers compared with others.
Second, limited data are available on the premortgage loan application
process to help determine if loan officers engage in discriminatory
practices, such as steering minority applicants to high-cost loans,
before a loan application is filed. Third, Regulation B, the regulation
that implements the ECOA, generally prohibits lenders from collecting
personal characteristic data, such as applicants' race, ethnicity and
sex, for nonmortgage loans, such as small business and credit card
loans, which also impedes federal oversight efforts. Requiring lenders
to collect and publicly report additional data could benefit federal
oversight efforts as well as independent research into potential
discrimination in lending, but also would impose additional costs,
particularly on smaller institutions with limited recordkeeping
systems. Several options, such as limiting additional data collection
and reporting requirements to larger lenders, could help mitigate such
costs while better ensuring that enforcement agencies and depository
institution regulators have critical data necessary to help carry out
their fair lending responsibilities.
Federal Enforcement Agencies and Depository Institution Regulators Use
HMDA Data to Detect Lenders at Potentially Heightened Risk of Having
Violated the Fair Lending Laws:
Since 2005, when HMDA mortgage pricing data became available, the
Federal Reserve annually has screened the data to identify lenders with
statistically significant pricing disparities, based on ethnicity or
race, and voluntarily has shared the screening results with other
federal and state agencies.[Footnote 31] First, the Federal Reserve
systematically checks the data for errors (such as values that are
outside the allowable ranges) or omissions, which may include
contacting individual institutions for verification purposes. Second,
using statistical analysis, the Federal Reserve matches loans made to
minorities with loans made to non-Hispanic whites for each HMDA
reporting lender, based on the limited information available in HMDA
(such as property type, loan purpose, loan amount, location, date, and
borrower income). Third, the Federal Reserve calculates disparities by
race and ethnicity for rate spreads (among those loans for which rate
spreads were reported) and the proportion of loans that are higher
priced (the incidence of higher priced lending). Finally, it identifies
those lenders with statistically significant disparities in either the
amount of rate spread or the incidence of higher priced lending and
develops a list it shares with the other agencies.[Footnote 32]
As shown in table 2, which breaks out the Federal Reserve screening
list for 2006 HMDA data, independent lenders that are under the
jurisdiction of enforcement agencies accounted for almost half of
lenders on the list, although they account for only about 20 percent of
all HMDA data reporters. Federally insured and regulated depository
institutions such as banks, thrifts, and credit unions, which comprise
nearly 80 percent of all HMDA data reporters, accounted for the other
half of the outlier list.
Table 2: Number of Outliers on Federal Reserve Screening List Based on
HMDA Year 2006 Data, by Type of Federal Agency That Oversees Them:
Type of federal agency: Enforcement agencies;
Number of HMDA outliers: 128;
Percentage of total outlier list: 49;
Number of regulated institutions that are HMDA filers: 2,004.
Type of federal agency: Depository institution regulators;
Number of HMDA outliers: 132;
Percentage of total outlier list: 51;
Number of regulated institutions that are HMDA filers: 6,882.
Type of federal agency: Total;
Number of HMDA outliers: 260;
Percentage of total outlier list: 100;
Number of regulated institutions that are HMDA filers: 8,886.
Source: GAO.
Note: All federally insured or regulated banks, credit unions, and
savings associations with total assets exceeding $39 million (in 2009)
with a home or branch office in an MSA and that originated, during the
preceding calendar year, at least one home purchase loan or refinancing
secured by a first lien on a one-to four-family dwelling are required
to file HMDA data.
[End of table]
Federal enforcement agencies generally use the Federal Reserve's annual
screening list, but also conduct independent analyses of HMDA data and
other information to develop their own list of outliers, according to
agency officials. For example, all of the enforcement agencies said
that they incorporate the Federal Reserve's annual screening list into
their own ongoing screening process to identify targets for fair
lending investigations. In addition, HUD and FTC officials said they
also use other information to identify outliers, including consumer
complaint data.
Like enforcement agencies, depository institution regulators generally
use the Federal Reserve screening list, independent analysis of HMDA
data, and other information sources to identify potential outliers and
other risk factors. The approaches that the depository institution
regulators use may vary significantly. For example, OCC and OTS
consider a range of potential risk factors in developing its annual
outlier list including, the Federal Reserve's annual pricing outlier
list, independent analysis of mortgage pricing disparities, approval
and denial rate disparities, and indications of potential redlining and
marketing issues, among others.[Footnote 33] Other depository
regulators, such as the FDIC and the Federal Reserve generally focus on
independent analysis of HMDA data and other information to develop
outlier lists that are based on statistically significant pricing
disparities, although they also may assess other risk factors,
including approval and denial decisions and redlining, in assessing
fair lending compliance at other lenders under their jurisdiction. FDIC
and the Federal Reserve use this analysis to plan and scope their
routine fair lending compliance examinations.[Footnote 34] As shown in
table 3, OCC, due to the range of risks that it assesses, identified
the largest number of outliers on the basis of its analysis of 2006
HMDA data. We discuss the agencies' differing approaches in more detail
and the potential implications of such differences later in this
report.
Table 3: Number of All Outliers Identified by Depository Institution
Regulators, Based on HMDA Year 2006 Data:
Depository institution regulator: OCC;
Number of outliers identified by depository institution regulators
based on HMDA year 2006 data: 113;
Number of HMDA filers: 1,169;
Percentage of outliers to HMDA filers: 10.
Depository institution regulator: FDIC;
Number of outliers identified by depository institution regulators
based on HMDA year 2006 data: 47;
Number of HMDA filers: 2,854;
Percentage of outliers to HMDA filers: 2.
Depository institution regulator: OTS;
Number of outliers identified by depository institution regulators
based on HMDA year 2006 data: 26;
Number of HMDA filers: 588;
Percentage of outliers to HMDA filers: 4.
Depository institution regulator: Federal Reserve;
Number of outliers identified by depository institution regulators
based on HMDA year 2006 data: 47;
Number of HMDA filers: 680;
Percentage of outliers to HMDA filers: 7.
Depository institution regulator: NCUA;
Number of outliers identified by depository institution regulators
based on HMDA year 2006 data: 24;
Number of HMDA filers: 2,048;
Percentage of outliers to HMDA filers: 1.
Depository institution regulator: Total;
Number of outliers identified by depository institution regulators
based on HMDA year 2006 data: 257;
Number of HMDA filers: 7,339;
Percentage of outliers to HMDA filers: 4.
Sources: GAO analysis of data from FDIC, Federal Reserve, NCUA, OCC,
and OTS.
Notes: All federally insured or regulated banks, credit unions, and
savings associations with total assets exceeding $39 million (in 2009)
with a home or branch office in an MSA and that originated, during the
preceding calendar year, at least one home purchase loan or refinancing
secured by a first lien on a one-to four-family dwelling are required
to file HMDA data.
The number of filers is as of 2007 for the Federal Reserve and NCUA and
as of 2008 for FDIC, OCC, and OTS.
[End of table]
Without HMDA data, enforcement agencies' and depository institution
regulators' ability to identify outliers and target their
investigations and examinations would be limited. According to the
depository institution regulators, analysis of HMDA data allows them to
focus examination resources on lenders that may have potentially
heightened risk of violating fair lending laws. In the absence of HMDA
data, enforcement agencies and depository institution regulators would
have to cull through loan files or request electronic data to assess a
lender's relative risk of having violated the fair lending laws, which
could be a complex and time-consuming process.
Lack of Key Underwriting Information Can Limit Regulatory Screening and
Independent Research on Discrimination in Mortgage Lending; Collecting
That Information Entails Additional Costs, Which May Be Outweighed by
the Benefits under Certain Options:
Although the development of outlier lists on the basis of HMDA data may
allow enforcement agencies and depository institution regulators to
prioritize fair lending law investigations and examinations, the lack
of key information necessary to gauge a borrower's credit risk, such as
underwriting variables, limits the data's effectiveness. Agency and
depository institution regulatory officials have told us that the lack
of key mortgage loan underwriting variables, such as borrowers' credit
scores, borrowers' debt-to-income, or the loan-to-value ratios of the
mortgages, is a critical limitation of HMDA data.[Footnote 35]
Underwriting variables are important because they may help explain
mortgage lending disparities among what otherwise appear to be
similarly situated loan applicants and borrowers of different
ethnicity, race, or sex and may help to uncover additional disparities
that may not be evident without the underwriting variables. The lack of
underwriting data may result in enforcement agencies and depository
institution regulators initiating investigations or examinations of
lenders that may charge relatively higher interest rates to certain
borrowers due to business necessities, such as risk-based pricing that
reflects borrower's creditworthiness.
FTC officials also said that the information HMDA data has provided on
potential mortgage pricing disparities limits its usefulness for the
agency's enforcement activities. In particular, FTC officials said that
reported HMDA data are geared toward assessing mortgage pricing
disparities among subprime lenders rather than lenders that may offer
prime, conventional mortgages or government-guaranteed (or -insured)
mortgages. The FTC officials said that lenders that originate such
mortgages generally do so at levels below the thresholds established in
HMDA data reporting requirements.[Footnote 36] Thus, the FTC officials
said that Federal Reserve's annual outlier list is disproportionately
represented by independent and other lenders that have specialized in
subprime mortgage loans and that the agency's capacity to assess the
potential for discrimination in the prime and government-guaranteed and
-insured mortgage markets is limited.
Agencies, Regulators, and Researchers Typically Supplement HMDA Data
with Underwriting Information to Help Assess Potentially Risk for Fair
Lending Law Violations:
To compensate for the lack of key underwriting information included in
HMDA data, officials from enforcement agencies and depository
institution regulators said that they typically request additional data
once an outlier investigation or examination has been initiated. Some
officials said that while it generally is easier for larger lenders to
provide the data on a timely basis because most of them store it
electronically, smaller lenders with paper-based loan documentation may
face greater challenges in doing so or may not maintain requested data.
When the underwriting data are received, enforcement agency and
depository institution regulatory officials said that they use them to
determine if statistically significant pricing and denial disparities
between mortgage loan applicants and borrowers of different ethnicity,
race, or sex still exist. Officials we contacted generally agreed that
the annual screening process would be more efficient if they had access
to additional underwriting data at the time they screened the HMDA data
to identify potential outliers. To try to address the timing issue, in
2009, OCC began a pilot program to obtain this information earlier in
the screening process. Specifically, OCC has requested that six large
national banks separately provide certain specified underwriting
information to the agency at the same time they report HMDA data.
The lack of key underwriting information in HMDA data also limits
independent research, advocacy, and private plaintiff case development
regarding potential discrimination in mortgage lending.[Footnote 37]
Because HMDA data are publicly available, researchers, community
groups, and others use them to assess the potential risk for
discrimination in the mortgage lending industry and at particular
lenders. However, researchers, community groups, and others have stated
that the absence of sufficient underwriting data makes determining if
lenders had a reasonable basis for mortgage pricing and other
disparities--as identified through analysis of HMDA data alone--
difficult. As a result, researchers have obtained aggregated mortgage
underwriting data from other sources and matched them with HMDA data to
assess potential risk for discrimination in mortgage lending. While
this approach may help identify the potential risk for discrimination,
the underwriting data obtained may not be as accurate as if reported
directly by the lenders as part of HMDA. Additionally, FDIC noted that
although the data from other sources may reflect commonly accepted
standards for underwriting, they may or may not reflect a particular
lender's actual policy.[Footnote 38]
Additional Costs to Lenders from Making Underwriting Data Available to
Federal Agencies and Researchers Could Be Offset to Some Degree:
Requiring lenders to collect and publicly report key underwriting data
as part of their annual HMDA data submissions would benefit regulatory
and independent research efforts to identify discrimination in mortgage
lending.[Footnote 39] With underwriting data included in HMDA data,
enforcement agencies and depository institution regulators may be
better able to identify lenders that may have disparities in mortgage
lending, enabling them to better target investigations and examinations
toward the lenders most at risk of having violated the fair lending
laws. Moreover, this could help minimize burdens on lenders that do not
represent significant risks but are flagged as outliers without the
additional data. Similarly, such data might help researchers and others
better assess the risk for potential risk for discrimination and
independently assess the enforcement of fair lending laws and enhance
transparency. For example, researchers, advocacy groups, and potential
plaintiffs could use independent analysis of the data to more
efficiently monitor discrimination by particular lenders and in the
mortgage lending industry generally, which could help inform Congress
and the public about compliance with the fair lending laws.
Although expanding HMDA data to include certain underwriting data could
facilitate regulatory and independent research efforts to assess the
potential risk for mortgage discrimination, it would result in
additional costs to lenders. As we have reported previously,
quantifying such costs in a meaningful way can be difficult for a
variety of reasons, such as challenges associated with obtaining
reliable data from potentially thousands of lenders that have different
cost accounting systems and underwriting policies.[Footnote 40]
According to representatives from a banking trade group and a large
lender, the additional costs likely would include expenses associated
with (1) establishing information systems or upgrades to collect the
data in the proper format, (2) training costs for staff who would be
responsible for collecting and reporting the data, and (3) legal and
auditing costs to help ensure that the data were accurate and in
compliance with established standards. The representative from the
large lender said that costs also would be associated with
electronically storing and securing additional types of sensitive data
that eventually would be made public. Additionally, the official said
thousands of employees, who currently look at underwriting, but are not
associated with reporting HMDA data, would have to receive fair lending
compliance training. Additionally, the official said ensuring
compliance with additional public reporting requirements would require
additional legal support to certify the accuracy of the additional
data. Finally, the costs may be relatively higher for smaller
institutions because they may be less likely than larger lenders to
collect and store underwriting and pricing data electronically or may
not currently retain any pricing data.
While certain key underwriting data, such as borrower credit scores,
DTI ratios, and LTV ratios, generally would benefit regulatory
screening efforts and independent research, advocacy, and private
enforcement, they may not be sufficient to resolve questions about
potential heightened risk for discrimination by individual lenders or
in the industry generally. As part of fair lending investigations and
examinations, enforcement agencies and depository institution
regulators may request a range of additional underwriting data from
lenders, such as detailed product information, mortgage-rate lock
dates, overages, additional fees paid, and counteroffer information to
help assess the basis for mortgage rate disparities identified through
initial analysis of HMDA data.[Footnote 41] However, according to
representatives from a banking trade group and a large lender,
requiring them to collect and publicly report such additional
underwriting data as part of their annual HMDA data submissions likely
would involve additional training, software, compliance, and other
associated costs. In addition, according to FTC, overage data may be
closely guarded proprietary information, which lenders likely would
object to reporting publicly on the grounds that they would represent
disclosures to their competitors.
Several options could reduce the potential costs associated with
requiring lenders to collect and report certain underwriting variables
as part of their HMDA data submissions. For example, these options
include:
* Large lender requirement--requiring only the largest lenders to
provide expanded reporting. According to officials, many of these
lenders already collect and store such information electronically.
According to published reports, the top 25 mortgage originators
accounted for 92 percent of total mortgage loan volume in 2008. Thus,
such a requirement would focus on lenders that constitute the vast
majority of mortgage lending and minimize costs on smaller lenders,
which may not record underwriting in electronic form as most larger
lenders reportedly do;[Footnote 42]
* Regulatory (nonpublic) reporting of expanded data--requiring all HMDA
filers to routinely report underwriting data only to the depository
institution regulators in conjunction with HMDA data (as OCC is
requiring six large lenders in its pilot study). In so doing, lenders
may facilitate depository institution regulators' efforts to identify
potential outliers while minimizing concerns about potential public
reporting and compliance costs; and:
* Nonpublic reporting limited to large lenders--requiring only the
largest lenders to report expanded data to the depository institution
regulators in conjunction with their HMDA data filings.
While all of these options would help mitigate additional costs to some
degree compared with a general requirement that lenders collect and
report publicly underwriting data, each would result in limited or no
additional information available to researchers and the public--one of
the purposes of the act. In addition, according to DOJ, it is not clear
whether the enforcement agencies would have access to the expanded data
under the second or third options described above. Nevertheless, any of
these options could help enhance depository institution regulators'
ability to oversee and enforce fair lending laws. Without additional
routinely provided underwriting data, agencies and depository
institution regulators will continue to expend limited resources
collecting such information on a per institution basis as they initiate
investigations and examinations.
Lack of Data during the Preapplication Phase of Mortgage Lending May
Result in a Gap in Fair Lending Oversight, and Addressing This Gap Has
Been Challenging:
Another data limitation that might affect federal efforts to enforce
the fair lending laws is the lack of information about the
preapplication process for mortgage loans. HMDA data only capture
information after a mortgage loan application has been filed and a loan
approved or denied. However, fair lending laws apply to the entire loan
process. The preapplication process involves lenders' treatment of
potential borrowers before an application is filed, which could affect
whether the potential borrower applies for a loan and the type of loan.
[Footnote 43] In a 1996 report on federal enforcement of fair lending
laws, we reported that discrimination could occur in the treatment of
customers before they actually applied for a mortgage loan.[Footnote
44] This type of discrimination, which also would be a violation under
ECOA, could include spending less time with minority customers when
explaining the application process, giving them different information
on the variety of products available, or quoting different rates.
Subsequent studies by researchers and fair housing organizations have
continued to raise concerns about the potential risk for discrimination
in mortgage lending during the preapplication phase.[Footnote 45] The
methodology used in these studies often included a technique known as
matched pair testing. In matched pair testing, individuals or couples
of different ethnicity, race, or sex pose as mortgage loan applicants,
visit lenders at different times, and meet with loan officers. The
testers, or mystery shoppers, usually present comparable financial
backgrounds in terms of assets, income, debt, and credit history, and
are asked to request information about similar loan products. For
example, in a 2006 study that utilized testers who posed as low-income,
first-time home buyers in approximately 250 matched pair tests,
researchers found evidence of adverse treatment during the
preapplication phase of African-Americans and Hispanics in the Chicago
metropolitan area.[Footnote 46] Specifically, the study found that
African-American and Hispanic testers were less likely than their white
counterparts to be given detailed information about requested or
additional loan products and received less coaching and follow-up
communication. However, the authors of the study found that in Los
Angeles the treatment of white, African-American, and Hispanic testers
generally was similar.
Agency officials we contacted said that the use of testers may have
certain advantages in terms of identifying potential risks for
discrimination by loan officers and other lending officials, but it
also has a number of challenges and limitations. For example, officials
from FTC, NCUA, and OTS said that testers require specialized skills
and training, which results in additional costs. In the early 1990s,
FTC officials said that they used testers as a part of their fair
lending oversight activities and found the effort not only to be costly
but also inconclusive because matching similarly situated borrowers and
training the testers was difficult. OCC indicated that it conducted a
pilot testing program from 1994 through 1995 and found that indications
of differing treatment were weak and involved primarily unverifiable
subjective perceptions, such as how friendly the loan officer was to
the tester.[Footnote 47] FTC officials said that current technological
advances have made the use of testers even more difficult because loan
officers can check a potential loan applicant's credit scores during
the initial meeting. Therefore, these officials said that loan officers
may suspect testers are not who they claim to be, thereby raising
questions about potential fraud that could affect the loan officer's
interactions with the testers and make any results unreliable. FTC
officials also noted that it also was difficult to script identical
scenarios because testers often would ask questions, react, and respond
differently, which can make test results unreliable. DOJ officials said
that they only occasionally used testers in the context of fair lending
enforcement due to the difficulties described above and the
complexities involved in analyzing lender treatment of testers during
the mortgage preapplication process. However, FDIC officials said they
were in the early stages of analyzing the costs of using testers and
considering whether it would be beneficial to use them in conjunction
with their fair lending reviews.
While the agencies and depository institution regulators' generally do
not use testers to assess the potential risk for discrimination during
the preapplication phase, the alternative strategies that are used have
limitations. In general, officials said that they encourage lenders to
voluntarily test for fair lending compliance, which may include the use
of testers. Officials said that they would review any available
analysis when conducting fair lending examinations. However, according
to Federal Reserve and OCC officials, this information provided by the
use of in-house testers may be protected by the ECOA self-testing
privilege, which limits their ability to use it for examination
purposes.[Footnote 48] Federal Reserve officials also noted that few
lenders conduct such testing. Depository institution regulators also
said that they review customer complaint data; compare the number of
applications filed by mortgage loan applicants of different ethnicity,
race, or sex and investigate any potential disparities; and review HMDA
and additional data to help determine the extent to which minority
mortgage loan applicants may have been steered into relatively high-
cost loans although they might have qualified for less-expensive
alternatives. However, these alternative sources share the same
limitations as the use of testers, including the information may
provide only an inferential basis for determining if discrimination
occurred during the preapplication process and may not be reliable. The
depository institution regulators have yet to identify robust data or
means of assessing potential discrimination during this critical phase
of the mortgage lending process. In a recent report on the financial
regulatory system, the Department of the Treasury suggested that
surveys of borrowers and loan applicants may be an alternative means of
assessing compliance with consumer protection laws, such as the fair
lending laws.[Footnote 49] Without adequate data from the
preapplication phase such as through the use of testers, surveys, or
alternative means, any fair lending oversight and enforcement will be
incomplete because it will include only information on the borrowers
that apply for credit and not the larger universe of potential
borrowers who sought it.
Lack of Personal Characteristic Data for Nonmortgage Lending Limits
Effectiveness of Efforts to Detect Potential Risk for Fair Lending Law
Violations:
A final data limitation is that depository institution regulators
generally do not have access to personal characteristic data (for
example, race, ethnicity, and sex) for nonmortgage loans, such as
business, credit card, and automobile loans. In a 2008 report, we
reported that Federal Reserve Regulation B generally prohibits lenders
from requesting and collecting such personal characteristic data from
applicants for nonmortgage loans.[Footnote 50] The Federal Reserve
concluded in 2003 that lifting Regulation B's general prohibition and
permitting voluntary collection of data on personal characteristic data
for nonmortgage loan applicants, without any limitations or standards,
could create some risk that the information would be used for
discriminatory purposes. The Federal Reserve also argued that amending
Regulation B and permitting lenders to collect such data on a voluntary
basis would result in inconsistent and noncomparable data. In the
absence of personal characteristic data for nonmortgage loans, we found
that agencies tended to focus their oversight activities more on
mortgage lending rather than on areas such as automobile, credit card,
and business lending that are also subject to fair lending laws.
[Footnote 51]
While the interagency procedures that depository institution regulators
use to conduct fair lending examinations provide for assessing the
potential risk for discrimination in nonmortgage lending, our 2008
report concluded that such procedures had a high potential for error
and were time-consuming and costly. Under the interagency procedures,
examiners may make use of established "surrogates" to deduce
nonmortgage loan applicants' race, ethnicity, or sex. For example,
after consulting with their agency's supervisory staff, the procedures
allow examiners 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. However, there is
the potential for error in the use of such surrogates (for example,
certain first names are gender neutral, and not all residents of
particular census tract may be African-American). Furthermore, using
such surrogates may require examiners to cull through individual
nonmortgage loan files. In contrast, HMDA data allow enforcement
agencies and depository institution regulators to identify potential
outliers through statistical analysis.
As we reported, requiring lenders to collect personal characteristic
data for nonmortgage loans to facilitate the regulatory supervision and
independent research into the potential risk for discrimination would
involve additional costs for lenders.[Footnote 52] These potential
costs included information system integration, employee training, and
compliance costs. A requirement that lenders collect and publicly
report such personal characteristic data likely would need to be
accompanied by a requirement that they provide underwriting data to
better inform assessments of their lending practices. However, because
certain types of nonmortgage lending, such as small business lending,
generally are more complicated than mortgage lending, the amount of
underwriting data that would need to be reported to allow for informed
assessments likely would be comparatively higher as would the
associated reporting costs. Similar to the options for expanding HMDA
data, several options could facilitate depository institution
regulators' efforts to assess the potential risk for discrimination in
nonmortgage lending while mitigating potential lender costs. In
particular, lenders could be required to collect such data for certain
types of loans, such as small business loans, and make the data
available to depository institution regulators rather than publicly
report it.
Lenders That May Pose Relatively Greater Risks of Violating Fair
Lending Laws Generally Are Subject to Less Comprehensive Federal
Oversight Due to the Fragmented Regulatory Structure and Other Factors:
Lenders that may represent heightened risks of fair lending violations
are subject to relatively less comprehensive federal review of their
activities than other lenders. Specifically, the Federal Reserve's
annual analysis of HMDA pricing data and other information suggest that
independent lenders and nonbank subsidiaries of holding companies are
more likely than depository institutions to engage in mortgage pricing
discrimination. While depository institutions may represent relatively
less risk of fair lending violations, they generally are subject to a
comprehensive oversight program. Specifically, depository institution
regulators conduct oversight examinations of most depository
institutions that are identified as outliers (more than an estimated
400 such examinations were initiated and largely completed based on the
2005 and 2006 HMDA data analysis) and have established varying policies
to conduct routine fair lending compliance oversight of many other
depository institutions as well. In contrast, enforcement agencies,
which have jurisdiction over independent lenders have conducted
relatively few investigations of such lenders that have been identified
as outliers over the past several years (for example, HUD and FTC have
initiated 22 such investigations since 2005). HUD and FTC also
generally do not conduct fair lending investigations of independent
lenders that are not viewed as outliers. While the Federal Reserve can
conduct outlier examinations of nonbank subsidiaries as it does for
state-chartered depository institutions under its jurisdiction, it
lacks clear authority to conduct routine consumer compliance, including
fair lending, examinations of such nonbank lenders as it does for state
member banks. To some degree, these differences reflect differences
between the missions of enforcement agencies and depository institution
regulators, as well as resource considerations. They also illustrate
critical deficiencies in the fragmented U.S. financial regulatory
structure, which is divided among multiple federal and state
agencies.[Footnote 53] In particular, the current regulatory structure
does not ensure that independent lenders and nonbank subsidiaries
receive the same level of oversight as other financial institutions. As
we have stated previously, congressional action to reform the financial
regulatory system is needed and could, among a range of benefits, help
to ensure more comprehensive and consistent fair lending oversight.
Federal Reserve's Annual HMDA Analysis and Other Information Suggest
That Independent Mortgage Lenders and Nonbank Subsidiaries of Holding
Companies Pose Relatively Heightened Risks of Potential Fair Lending
Law Violations:
Based on the Federal Reserve's annual screening lists, independent
mortgage lenders represent relatively heightened risks of fair lending
law violations than federally insured depository institutions (see
table 4). On the basis of 2004-2007 HMDA data, the Federal Reserve
annually identified on average 116 independent mortgage lenders through
its pricing screens, which represent about 6 percent of all independent
mortgage lenders that file HMDA data. In contrast, the Federal Reserve
identified on average 118 depository institutions as outliers during
the same period, which represented less than 2 percent of depository
institutions that file HMDA data.
Table 4: Annual Numbers of HMDA Filers Identified by the Federal
Reserve Screens as a Percentage of Total HMDA-filing Lenders, by Lender
Type, 2004-2007:
Independent mortgage lenders (HUD, FTC, and DOJ):
Number of HMDA-filing lenders;
2004: 1,860;
2005: 1,923;
2006: 2,004;
2007: 1,752.
Number of filers identified by Federal Reserve screens (outliers);
2004: 104;
2005: 138;
2006: 128;
2007: 94.
Percentage of lenders identified as outliers;
2004: 5.6;
2005: 7.2;
2006: 6.4;
2007: 5.4.
Depository lenders (FDIC, Federal Reserve, NCUA, OCC, and OTS):
Number of HMDA-filing lenders;
2004: 6,993;
2005: 6,925;
2006: 6,882;
2007: 6,858.
Number of filers identified by Federal Reserve screens (outliers);
2004: 90;
2005: 130;
2006: 132;
2007: 121.
Percentage of lenders identified as outliers;
2004: 1.3;
2005: 1.9;
2006: 1.9;
2007: 1.8.
Source: Federal Reserve Bulletin.
Notes: All federally insured or regulated banks, credit unions, and
savings associations with total assets exceeding $39 million (in 2009)
with a home or branch office in an MSA and that originated, during the
preceding calendar year, at least one home purchase loan or refinancing
secured by a first lien on a one-to four-family dwelling are required
to file HMDA data.
The number of lenders represents only those institutions that were
required to file HMDA reports. The number of lenders identified through
the Federal Reserve screens is not totaled for 2004-2007, as some
lenders may appear on multiple lists and summing outliers would involve
double counting. In addition, the Federal Reserve sends the same list
of independent mortgage lenders to HUD, FTC, and DOJ because they are
the agencies with jurisdiction over these lenders.
[End of table]
Independent mortgage lenders and nonbank subsidiaries of holding
companies have been a source of significant concern and controversy for
fair lending advocates in recent years. As we reported in 2007, 14 of
the top 25 originators of subprime and Alt-A mortgages were independent
mortgage lenders, and they accounted for 44 percent of such
originations.[Footnote 54] Similarly, we found that 7 of the 25 largest
originators of subprime and Alt-A mortgages in 2007 (accounting for 37
percent of originations) were nonbank subsidiaries of bank and savings
and loan holding companies. The remaining four originators were
depository institution lenders. We also reported that many such high-
cost, and potentially heightened-risk mortgages, appear to have been
made to borrowers with limited or poor credit histories and
subsequently resulted in significant foreclosure rates for such
borrowers. In a 2007 report, we found that the market share of subprime
lending had grown dramatically among minority and other borrowers and
at the expense of the market for mortgage loans insured by the Federal
Housing Administration.[Footnote 55]
Depository Institution Regulators Conduct Targeted Fair Lending
Examinations of Most Institutions Identified as Outliers as Well as
Other Lenders through the Routine Examination Process:
Depository institution regulators oversee fair lending compliance
through targeted examinations of institutions that are identified as
outliers through screening HMDA data or routine examinations of the
institutions under compliance or safety and soundness examination
programs. A key objective of the depository institution regulators'
fair lending outlier examinations, which generally are to take place
within 12-18 months of a lender being placed on such a list, is to
determine if initial indications of heightened fair lending risk
warrant further review and potential administrative or enforcement
action, which can serve to punish violators and deter violations by
other lenders. To assess lender compliance, each of the depository
institution regulators is to follow the Interagency Fair Lending
Examination Procedures, which were established jointly by the
depository institution regulators in 1999.[Footnote 56] While the
interagency fair lending procedures are intended to be flexible to meet
the specific requirements of each depository institution regulator,
they contain general procedures to be included in examinations,
according to officials.[Footnote 57] Specifically, under the
guidelines, examiners are to request information from each lender about
its underwriting and pricing policies and procedures, the types of loan
products offered, and the degree of loan officer discretion in making
underwriting and pricing decisions. The depository institution
regulators also assess the accuracy of the lender's HMDA data and
request loan underwriting and pricing data. The depository institution
regulators also interview lending officials to ensure they properly
understand the policies and procedures and discuss any remaining
discrepancies that have been identified between mortgage applicants and
borrowers of different ethnicity, race, or sex. The examiners also
generally review lender files to assess potential discrepancies,
particularly when disparities in the data persist after accounting for
underwriting variables. Finally, examiners may review the lender's
marketing efforts to check for fair lending violations and assess the
lender's fair lending compliance monitoring procedures and training
programs to ensure that efforts are sufficient for ensuring compliance
with fair lending laws.
Our reviews of completed fair lending outlier examinations indicated
general agency compliance with established policies and procedures.
Based on our file review, we estimate that the depository institution
regulators initiated and largely completed more than 400 examinations
of lenders that were identified as outliers on the basis of their
analysis of 2005 and 2006 HMDA data. The combined outlier lists for
each HMDA data year contained more than 200 lenders.[Footnote 58]
Furthermore, our analysis of examination files generally identified
documentation that showed that depository institution regulators
followed key procedures in the interagency fair lending guidance,
including reviewing underwriting policies, incorporating underwriting
data into analysis, and conducting interviews with the lending
institution officials. While we identified documentation of these key
elements, our review did not include an analysis of the depository
institution regulators' effectiveness in identifying potentially
heightened risks for fair lending law violations. However, our review
identified certain differences and, in some cases, limitations in the
depository institution regulators' fair lending examination programs,
which are discussed in the next section.
Depository institution regulators also have established varying
policies to help ensure that many lenders not identified through HMDA
screening routinely undergo compliance examinations, which may include
fair lending components. Such routine examinations may be critical
because HMDA data analysis may not detect all potentially heightened
risks for violations, and many smaller lenders are not required to file
HMDA data. For example, FDIC, Federal Reserve, and OTS officials said
they have policies to conduct on-site examinations of lenders for
consumer compliance, including fair lending examinations, generally
every 12-36 months, primarily depending on the size of the lender and
the lender's previous examination results. Moreover, FDIC, Federal
Reserve, and OTS officials said they conduct a fair lending examination
in conjunction with every scheduled compliance examination. OCC selects
a sample of all lenders--including those that are not required to file
HMDA data--for targeted fair lending examinations. OCC officials said
its examiners then conduct a more in-depth fair lending examination on
these randomly selected institutions, which averages about 30
institutions per year. NCUA generally conducts fair lending
examinations on a risk basis, as described later in this report, and
generally does not conduct routine fair lending examinations of credit
unions that are not viewed as representing potentially heightened
risks.
Limited Mission Focus and Resource Levels May Help Explain Breadth of
Depository Institution Regulators Fair Lending Oversight Programs:
While depository institution regulators may identify potentially
heightened risks for fair lending violations through their outlier and
routine examinations, ECOA requires that they refer all cases for which
they have a reason to believe that a pattern or practice of
discrimination has occurred to DOJ for further investigation and
potential enforcement. Moreover, depository institution regulators must
provide notice to HUD whenever they have a reason to believe that a FHA
and ECOA violation has occurred and the matter has not been referred to
DOJ as a potential pattern or practice violation of ECOA.[Footnote 59]
Therefore, depository institution regulators generally do not have to
devote the time and resources necessary to determine whether the
federal government should pursue litigation against depository
institutions and, if so, conduct such litigation as this is the
responsibility of the enforcement agencies. However, depository
institution regulators may pursue other actions against lenders for
fair lending violations through their administrative authorities
including monetary penalties, cease and desist orders to remedy the
institution's systems, policies and procedures, restitution to obtain
reimbursement and remedies for harmed consumers and order additional
ameliorative measures including creating community or financial
literacy programs to assist consumers.
Depository institution regulators also may have large examination
staffs and other personnel to carry out fair lending oversight. At the
depository institution regulators, fair lending oversight generally is
housed in offices that are responsible for oversight of a variety of
consumer compliance laws and regulations, and the CRA, in addition to
the fair lending laws. While ensuring compliance with these laws is
challenging as there may be thousands of depository institutions under
the jurisdiction of each depository institution regulator, regulators
typically have hundreds of examiners to carry out these
responsibilities. Moreover, the Federal Reserve, FDIC, OCC, and OTS
also employ economists and statisticians to assist in fair lending
oversight. NCUA officials said that the agency does not employ
statisticians. However, all of the depository institution regulators
have attorneys who are involved in supporting fair lending oversight
and other consumer law compliance activities.
Federal Reviews of Independent Lenders and Nonbank Subsidiaries of
Holding Companies Are Limited:
While independent lenders and nonbank subsidiaries of holding companies
may represent higher fair lending risks than depository institutions,
federal reviews of their activities are limited. According to HUD and
FTC officials, since 2005, the agencies have initiated a combined 22
investigations of independent mortgage lenders for potentially
heightened risks for fair lending violations.[Footnote 60] FTC opened
more than half, 13, of these investigations in 2009, and these
investigations currently are in the initial stages. DOJ has also opened
several such investigations, as well as conducting investigations of
nonbank subsidiaries of bank holding companies and savings and loan
holding companies based on referrals from the depository regulators.
Therefore, the enforcement agencies have not conducted investigations,
in many cases, where the Federal Reserve's initial analysis of HMDA
data suggests statistically significant mortgage pricing disparities
between minority and nonminority borrowers. As discussed previously,
the Federal Reserve has identified on average 116 independent lenders
annually for mortgage pricing disparities based on its analysis of HMDA
data since 2005. While DOJ, HUD and FTC may independently analyze HMDA
data to identify lenders that they view as representing the highest
risks, and targeting their investigations accordingly, as discussed
previously, in the absence of underwriting data the agencies cannot be
assured that other lenders with statistically significant differences
in mortgage pricing for minority and nonminority borrowers are in
compliance with the fair lending laws. HUD and FTC also generally do
not initiate investigations of independent lenders that are not viewed
as outliers. According to FTC officials, such investigations are not
initiated largely due to resource limitations, which are discussed
below. Therefore, unlike most depository institution regulators,
enforcement agencies do not assess the fair lending compliance of
independent lenders through routine oversight.
Once DOJ, HUD or FTC identify a particular lender as potentially having
violated fair lending laws, their initial investigative efforts
generally resemble those of depository institution regulators' outlier
examinations. For example, DOJ, HUD and FTC officials said they request
that such lenders provide loan underwriting policies and procedures,
information on the types of loan products offered, and information on
the extent to which loan officers have discretion over loan approvals
and denials or the pricing terms (interest rates or fees) at which an
approved loan will be offered.[Footnote 61] According to agency
officials, if loan officers have substantial discretion under lender
policies, the risk of discriminatory lending decisions is higher.
[Footnote 62] DOJ, HUD and FTC officials also may request raw HMDA data
from lenders and test their accuracy and request loan underwriting or
overage data. With this information, DOJ, HUD and FTC officials said
they conduct additional statistical analysis to help determine if
initial disparities based on ethnicity, race, or sex can be explained
by underwriting information. DOJ, HUD and FTC officials also may
determine if the lender internally monitors fair lending compliance and
interview representatives of the lending institution.[Footnote 63]
Finally, DOJ, HUD and FTC may review loan files. In such reviews,
investigators generally try to identify, frequently through statistical
analysis, similarly situated applicants and borrowers of different
ethnicity, race, or sex to determine if there was any discrimination in
the lending process. On the basis of their investigations, HUD DOJ, and
FTC determine if sufficient evidence exists to file complaints against
the lenders, subject to such investigations, and pursue such litigation
where deemed appropriate.
Enforcement agencies also have established efforts to coordinate their
activities and prioritize investigations of independent lenders and
other institutions, as necessary. For example, enforcement agency
officials said that they meet periodically to discuss investigations
and have shared information derived from investigations. According to
DOJ, the agency, FTC and HUD also have a working group that meets on a
bimonthly basis to discuss HMDA pricing investigations on nonbank
lenders and to discuss issues common to the three enforcement agencies
in their shared oversight of nonbank lenders.
Resource Considerations May Limit Enforcement Agencies Fair Lending
Oversight Activities:
The differences in the enforcement agencies' capacity to pursue
potential risks for violating the fair lending laws, relative to the
depository institution regulators, results in part from resource
considerations. For example, in a 2004 report, we assessed federal and
state efforts to combat predatory lending (practices including
deception, fraud, or manipulation that a mortgage broker or lender may
use to make a loan with terms that are disadvantageous to the
borrower), which can have negative effects similar to fair lending
violations.[Footnote 64] We questioned the extent to which FTC, as a
federal enforcer of consumer protection laws for nonbank subsidiaries,
had the capacity to do so. We stated that FTC's mission and resource
allocations were focused on conducting investigations in response to
consumer complaints and other information rather than on routine
monitoring and examination responsibilities.
Our current work also indicates that resource considerations may affect
the relative capacity of enforcement agencies to conduct fair lending
oversight. For example, at HUD, responsibility for conducting such
investigations lies with the Fair Lending Division in the Office of
Systemic Investigations (OSI) in its Office of Fair Housing and Equal
Opportunity that was established in 2007. OSI currently has eight
staff--including four equal opportunity specialists and two economists.
At FTC and DOJ, the units responsible for fair lending oversight each
have fewer than 50 staff, and have a range of additional consumer
protection law responsibilities. FTC's Division of Financial Practices
(DFP) has 39 staff, including 27 line attorneys, and is responsible for
fair lending enforcement as well as the many other consumer protection
laws in the financial services arena, such as the Fair Debt Collection
Practices Act and Section 5 of the FTC Act, which generally prohibits
unfair or deceptive acts or practices.[Footnote 65] In addition,
economists and research analysts from FTC's Bureau of Economics assist
in DFP investigations, particularly with data analysis. At DOJ, the
unit responsible for fair lending investigations, the Housing and Civil
Enforcement Section, includes 38 staff attorneys with a range of
enforcement responsibilities, including enforcing laws against
discrimination in rental housing, insurance, land use, and zoning, as
well as two economists and one mathematical statistician.
In the President's proposed budget for fiscal year 2010, he requested
additional resources for fair lending oversight. For example, HUD's
proposed budget includes $4 million for additional staff to address
abusive and fraudulent mortgage practices and increase enforcement of
mortgage and home purchase settlement requirements. This budget request
would increase staffing for HUD's Office of Fair Housing and Equal
Opportunity to expand fair lending efforts and for the Office of
General Counsel to handle increased fair lending and mortgage fraud
enforcement among other initiatives. Further, the budget request
includes an additional $1.3 million to fund increases for DOJ's Housing
and Civil Enforcement Section's fair housing and fair lending
enforcement, including five additional attorney positions. In its
fiscal year 2010 budget request, FTC requested nine additional full-
time equivalent staff for financial services consumer protection law
enforcement, which officials noted include fair lending.
The Federal Reserve's Oversight Authority for the Nonbank Subsidiaries
of Bank Holding Companies is Limited:
While the nonbank subsidiaries of bank holding companies also may pose
heightened risks of fair lending violations, the Federal Reserve has
interpreted its authority under the Bank Holding Company Act, as
amended by the Gramm-Leach Bliley Act, as limiting its examination
authority of such entities compared with the examination authority that
it and other depository institution regulators conduct oversight of
depository institutions.[Footnote 66] The Federal Reserve interprets
its authority as permitting it to conduct consumer compliance oversight
of nonbank subsidiaries when there is evidence of potentially
heightened risks for violations, such as through annual analysis of
HMDA data or other sources of information such as previous examinations
or consumer complaints. However, pursuant to a 1998 policy, Federal
Reserve examiners are prohibited from conducting routine consumer
compliance examinations of nonbank subsidiaries. According to FTC,
while the agency also has authority over nonbank subsidiaries, its
capacity to oversee them is limited due to resource limitations as
discussed earlier. Due to the risks associated with nonbank
subsidiaries, in 2004, we suggested that Congress consider (1)
providing the Federal Reserve with the authority to routinely monitor
and, as necessary, examine nonbank subsidiaries of bank holding
companies to ensure compliance with federal consumer protection laws
and (2) giving the Federal Reserve specific authority to initiate
enforcement actions under those laws against these nonbank
subsidiaries.[Footnote 67]
While Congress has not yet acted on our 2004 suggestion, Federal
Reserve officials said that they have implemented a variety of steps
within their authority to strengthen consumer compliance supervision,
including fair lending supervision of nonbank subsidiaries since our
2004 report. In particular, they said the Federal Reserve created a
unit in 2006 dedicated to consumer compliance issues associated with
large, complex banking organizations, including their nonbank
subsidiaries. In addition, Federal Reserve officials said examiners are
to conduct consumer compliance risk assessments of nonbank subsidiaries
in addition to their supervisory responsibilities for bank holding
companies. Based on these risk assessments, the officials said
examiners may conduct a targeted examination on a case-by-case basis.
Furthermore, when a nonbank subsidiary has been identified as a
potential outlier, Federal Reserve officials said similar to oversight
practices for state member banks, they assess the entity for risk of
pricing discrimination and may conduct additional statistical pricing
reviews through the use of HMDA data and other information to better
understand its potential risks. During such reviews, Federal Reserve
officials said that examiners closely review the lender's policies and
procedures and with the approval of the Director of Consumer Compliance
also may conduct loan file reviews if there is potential evidence of a
fair lending violation. Federal Reserve officials said that they have
referred one nonbank subsidiary for pricing discrimination to DOJ in
recent years.
We also note that in 2007 the Federal Reserve began a pilot program
with OTS, FTC, and state banking agencies to monitor the activities of
nonbank subsidiaries of bank and savings and loan holding companies.
OTS has jurisdiction over savings and loan holding companies and any of
their nonbank subsidiaries.[Footnote 68] During the pilot program,
agency officials said that they conducted coordinated consumer
compliance reviews of several nonbank subsidiaries and related
entities, such as mortgage brokers that may be regulated at the state
level, to assess their compliance with various federal and state
consumer protection laws, including fair lending laws. According to the
Federal Reserve, OTS, and FTC officials, they recently completed their
reviews of the pilot study and are evaluating how the results might be
used to better ensure consumer compliance, including fair lending
oversight, of nonbank subsidiaries.
While the Federal Reserve's process for reviewing nonbank subsidiaries
identified as potentially posing fair lending risks and the pilot study
are important steps, its lack of clear authority to conduct routine
examinations of nonbank subsidiaries for compliance with all consumer
protection laws appears to be significant. Given the limitations in
HMDA data described in this report, agency screening programs may have
limited success in detecting fair lending violations. According to a
Federal Reserve official, many potential violations of the fair lending
laws and subsequent referrals of state-chartered banks are identified
through routine examinations rather than the outlier examination
process. Without clear authority to conduct similar routine
examinations of nonbank subsidiaries for their fair lending compliance,
the Federal Reserve may not be in a position to identify as many
potential risks for fair lending violations at such entities as it does
through the routine examinations of state member banks.
Limitations in Fair Lending Oversight of Independent Lenders and
Nonbank Subsidiaries Also Reflect the Fragmented Regulatory Structure:
The relatively limited fair lending oversight of independent lenders
and nonbank subsidiaries reflect the fragmented and outdated U.S.
financial regulatory system.[Footnote 69] As described in our previous
work, the U.S. financial regulatory structure, which is divided among
multiple federal and state agencies, evolved over 150 years largely in
response to crises, rather than through deliberative legislative
decision-making processes. The resulting fragmented financial
regulatory system has resulted in significant gaps in federal oversight
of financial institutions that represent significant risks. In
particular and consistent with our discussion about fair lending
oversight, federal depository institution regulators lacked clear and
sufficient authority to oversee independent and nonbank lenders.
Congress and the administration currently are considering a range of
proposals to revise the current fragmented financial regulatory system.
In our January 2009 report, we stated that reforms urgently were needed
and identified a framework for crafting and evaluating regulatory
reform proposals that consisted of characteristics that should be
reflected in any new regulatory system.[Footnote 70] These
characteristics include:
* clearly defined and relevant regulatory goals--to ensure that
depository institution regulators effectively can carry out their
missions and be held accountable;
* a systemwide focus--for identifying, monitoring, and managing risks
to the financial system regardless of the source of the risk;
* consistent consumer and investor protection--to ensure that market
participants receive consistent, useful information, as well as legal
protections; and:
* consistent financial oversight--so that similar institutions,
products, risks, and services are subject to consistent regulation,
oversight, and enforcement.
Any regulatory reform efforts, consistent with these characteristics,
should include an evaluation of ways in which to ensure that all
lenders, including independent lenders and nonbank subsidiaries, will
be subject to similar regulatory and oversight treatment for safety and
soundness and consumer protection, including fair lending laws. In the
absence of such reforms, oversight and enforcement of fair lending laws
will continue to be inconsistent.
Differences in the Depository Institution Regulators' Fair Lending
Oversight Programs Also Highlight Challenges Associated with a
Fragmented Regulatory System:
Although depository institution regulators' initial activities to
assess evidence of potentially heightened risks for fair lending
violations generally have been more comprehensive than those of
enforcement agencies, their oversight programs also face challenges
that are in part linked to the fragmented regulatory structure. While
depository institution regulators have taken several steps to
coordinate their fair lending oversight activities where appropriate,
the effects of these efforts have been unclear. Each depository
institution regulator uses a different approach to screen HMDA data and
other information to identify outliers, and the management of their
outlier examination programs and the documentation of such examinations
varied. For example, FDIC, Federal Reserve, and OTS described
centralized approaches to managing their outlier programs while NCUA's
and OCC's management approaches were more decentralized. In contrast to
other depository institution regulators, OCC's outlier examination
documentation standards and practices were limited, although the agency
recently has taken steps to improve such documentation. Finally,
depository institutions under the jurisdiction of FDIC, Federal
Reserve, and OTS were far more likely to be subject to referrals to DOJ
for potentially being at heightened risk for fair lending violations
than those under the jurisdiction of NCUA and OCC. These differing
approaches raise questions about the consistency and effectiveness of
the depository institution regulators' collective fair lending
oversight efforts, which are likely to persist so long as the
fragmented regulatory structure remains in place.
Depository Institution Regulators Have Coordinated Fair Lending
Examination Procedures and Used an Interagency Task Force and Other
Forums to Discuss Oversight Programs:
Given the current fragmented structure of the federal regulatory
system, we have stated that collaboration among agencies that share
common responsibilities is essential to ensuring consistent and
effective supervisory practices.[Footnote 71] Such collaboration can
take place through various means including developing clear and common
outcomes for relevant programs, establishing common policies and
procedures, and developing mechanisms to monitor and evaluate
collaborative efforts. In keeping with the need for effective
collaboration, depository institution regulators as well as enforcement
agencies have taken several steps to establish common policies and
procedures and share information about their fair lending oversight
programs. These steps include the following:
* Since 1994, depository institution regulators and enforcement agency
officials have participated in an Interagency Fair Lending Task Force.
The task force was established to develop a coordinated approach to
address discrimination in lending and adopted a policy statement in
1994 on how federal regulatory and enforcement agencies were to conduct
oversight and enforce the fair lending laws. Federal officials said
that the task force, which currently meets on a bimonthly basis,
continues to allow depository institution regulators and enforcement
agencies to exchange information on a range of common issues,
informally discuss fair lending policy, and confer about current trends
or challenges in fair lending oversight and enforcement. For example,
officials said that depository institution regulators and enforcement
agencies may discuss how they generally approach fair lending issues,
such as outlier screening processes. According to depository
institution regulators, because the task force is viewed as an informal
information-sharing body, it has not produced any reports on federal
fair lending oversight and no meeting minutes are kept. Moreover,
officials said that economists from the depository institution
regulators contact each other separately from the task force to discuss
issues including their screening processes for high-risk lenders and
emerging risks. According to FDIC, attorneys from different agencies
also contact each other about specific legal issues and share relevant
research. DOJ officials indicated that they regularly discuss with
attorneys from the depository institution regulators, HUD and FTC
specific legal issues.
* As discussed previously, in 1999, the depository institution
regulators jointly developed interagency fair lending procedures.
According to depository institution regulatory officials, they are in
the process of revising and updating the procedures through the Federal
Financial Institutions Examination Council Consumer Compliance Task
Force.[Footnote 72] They expect the updated examination guidelines to
be finalized and adopted in 2009 with potential enhancements to
pricing, applicant steering, mortgage broker, and redlining sections of
the guidance.
Differences in Depository Institution Regulators' Fair Lending
Oversight Programs include Screening Approaches, Examination Management
and Documentation, and Referral Practices:
While depository institution regulators have taken a number of actions
to collaborate on their fair lending oversight efforts, challenges
remain in ensuring consistent application of oversight and treatment of
lenders. In the Department of the Treasury's recent report on the
financial regulatory structure, it stated that the fragmented
regulatory structure for fair lending oversight and other consumer
protection laws creates several critical challenges.[Footnote 73] In
particular, the report stated that the fragmented structure makes
coordination of supervisory policies difficult and slows responses to
emerging consumer protection threats. In our work, we also identified
key differences in the depository institution regulators' fair lending
oversight approaches, which indicate that the division of
responsibility among multiple depository institution regulators results
in inconsistent oversight processes as described below:
Approaches to Screening HMDA Data and Other Information to Identify
Fair Lending Outliers Varied among the Depository Institution
Regulators:
While the Federal Reserve annually reviews HMDA data to identify
lenders at potentially heightened risk for fair lending violations
related to mortgage pricing disparities, each depository institution
regulator uses its own approach to identify potential outliers.
Specifically,
* FDIC and Federal Reserve examination officials generally develop
their own outlier lists on the basis of statistically significant
pricing disparities. FDIC and the Federal Reserve's approaches differ
from one another and from the Federal Reserve's annual mortgage pricing
outlier list that is distributed to all agencies. FDIC officials said
that the agency's approach to developing its pricing outlier list is
geared toward the smaller state-chartered banks that primarily are
under its jurisdiction. Federal Reserve officials said they supplement
the annual mortgage pricing outlier list for lenders under their
jurisdiction with additional information. For example, the officials
said this information includes assessments of the discretion and
financial incentives that loan officers have to make mortgage pricing
decisions, the lenders' business models, and past supervisory findings.
As we discussed earlier, both FDIC and the Federal Reserve noted that
they also screen HMDA data and other information to assess other risk
factors, such as redlining. However, such screening is done in
conjunction with their routine examination processes rather than their
outlier examination processes.
* In contrast, OCC and OTS generally consider a broader range of
potential risk factors beyond pricing disparities in developing their
annual outlier lists. According to OCC officials, in addition to the
Federal Reserve's outlier list and OCC's independent analysis of
mortgage pricing disparities, it also conducts screening relating to
approval and denial decisions, terms and conditions, redlining and
marketing. Similarly, OTS officials said they use other risk factors,
such as mortgage loan approval and denial decisions, redlining and
steering, beyond mortgage pricing disparities, in developing their
outlier lists.
* NCUA does not currently conduct independent assessments of HMDA data
as it does not have any statisticians to do so, according to an agency
official. Instead, NCUA officials said that the agency prioritizes fair
lending examinations based on several factors, which include the
Federal Reserve's annual pricing screening list, complaint data, safety
and soundness examination findings, discussion with regional officials,
and budget factors. Over the past several years, NCUA has conducted
approximately 25 fair lending examinations each year, and these
examinations are generally divided equally among its five regional
offices. NCUA's Inspector General reported in 2008 that analytical
efforts for identifying discrimination in lending were limited, but the
agency was developing analyses to screen for potential discriminatory
lending patterns, which were expected to be operational in 2009.
[Footnote 74]
There may be a basis for depository institution regulators to develop
fair lending outlier screening processes that are suited towards the
specific types of lenders under their jurisdiction. Nevertheless, the
use of six different approaches among the five depository institution
regulators (the Federal Reserve's annual analysis plus the unique
approach at each regulator) to assess the same basic data source raises
questions about duplication of effort and the inefficient use of
limited oversight resources. In this regard, we note that OCC's
independent analysis of HMDA data in 2007 identified twice as many
national banks and other lenders under its jurisdiction with mortgage
pricing disparities as the Federal Reserve did in its mortgage pricing
analysis of lenders under OCC's jurisdiction. With a continued division
of fair lending oversight responsibility among multiple depository
institution regulators, opportunities to develop a coordinated approach
to defining and identifying outliers and better prioritize oversight
resources may not be realized.
Management of the Fair Lending Examination Processes and Documentation
Quality Varied:
The depository institution regulators differed in the extent to which
they centrally manage examination processes, documentation, and
reporting. FDIC, the Federal Reserve, and OTS officials described a
more centralized (headquarters-driven) approach to ensuring that
outlier examinations are initiated and necessary activities carried
out. Headquarters officials from these agencies described approaches
they used to ensure that fair lending examiners and other staff in
regional and district offices conduct outlier examinations, document
examination findings and recommendations, and follow up on
recommendations. In addition to running the HMDA data outlier screening
programs, FDIC, the Federal Reserve and OTS officials said that they
held ongoing meetings with headquarters and district staff to discuss
outlier examinations and their findings. FDIC officials said that the
agency has developed a process for conducting reviews of completed
outlier and routine examinations to assess if the agency is
consistently complying with the interagency fair lending examination
procedures. Officials from FDIC, the Federal Reserve, and OTS also said
that headquarters staffs were involved in conducting legal and other
analyses needed to determine if a referral should be made to DOJ for a
potential pattern or practice violation.
FDIC, OTS, and the Federal Reserve have developed fair lending
examination documentation and reporting standards and practices
designed to facilitate the centralized management of their outlier
programs. Such examination documentation and reporting standards
generally are consistent with federal internal control policies that
require that agencies ensure that relevant, reliable, and timely
information be readily available for management decision-making and
external reporting purposes.[Footnote 75] For example,
* FDIC staff generally prepare summary memorandums that describe
critical aspects of outlier examinations. These memorandums discuss
when examinations were initiated and conducted; the initial focal point
(such as mortgage interest rate disparities in conventional loans
between African-American and non-Hispanic white borrowers) identified
through HMDA data analysis; the methodologies used to assess if
additional evidence of potential lending discrimination existed for
each focal point(s); and any findings or recommendations. According to
an FDIC headquarters official, FDIC headquarters manage the outlier
reviews in collaboration with regional and field office staff. In
addition to the outlier reviews, summary documents are reviewed on an
ongoing basis to monitor the nationwide implementation of the fair
lending examination program and allow the agency to assess the extent
to which lenders are implementing examination recommendations.
Additionally, in 2007, FDIC required that examiners complete a
standardized fair lending scope and summary memorandum to help ensure
implementation of a consistent approach to documenting fair lending
reviews.
* OTS also generally requires its examiners to prepare similar summary
documentation of outlier examinations, which agency officials said are
used to help manage the nationwide implementation of their outlier
examination programs.
* The Federal Reserve has developed management reports, which track
major findings of outlier examinations and potentially heightened risks
for violations of the fair lending laws and referrals to DOJ, to ensure
that fair lending laws are consistently enforced and examiners receive
appropriate legal and statistical guidance.[Footnote 76] Federal
Reserve officials said that the Reserve Banks generally maintain
documentation of the outlier examinations in paper or electronic form;
however, electronic versions of examination reports generally are
available at the headquarters level.
While NCUA and OCC officials also indicated that headquarters staff
performed critical functions, such as HMDA data screening or developing
policies for conducting fair lending examinations, they generally
described more decentralized approaches to managing their outlier
examination programs. For example, OCC officials said that the agency's
supervisory offices are responsible for ensuring that examinations are
initiated on time, key findings are documented, and recommendations are
implemented.[Footnote 77] Among other responsibilities, OCC
headquarters staff provide overall policy and supervisory direction,
develop appropriate responses to emerging fair lending issues, and
provide ongoing assistance to field examiners as needed, and assist in
determining whether referrals or notifications to other agencies are
necessary or appropriate. OCC also conducts quality assurance reviews,
which included an audit of fair lending examinations at large banks,
which was completed in 2007. NCUA officials said that headquarters
staff are involved in managing the selection of the approximately 25
fair lending examinations that are conducted each year, but regional
staff play a significant role in selecting credit unions for
examination on a risk basis. NCUA officials said that they do not
routinely monitor regional compliance with the interagency fair lending
examination procedures as this is largely the responsibility of
regional officials. However, NCUA's staff at their central office would
randomly review a select number of the fair lending examinations that
are sent from the regional offices to ensure compliance with
established procedures. NCUA's examination files generally included a
single summary document that described scope, key findings, and
recommendations made, if any, which facilitated our review.
However, due to OCC's approach to documenting outlier examinations, we
faced certain challenges in assessing the agency's compliance with its
examination schedules and procedures for the period we reviewed. For
example, OCC was unable to verify when outlier examinations were
started for most of their large banks.[Footnote 78] OCC officials told
us that part of the reason for this was because OCC conducts continuous
supervision of large banks, and the database for large banks does not
contain a field for examination start and end dates. Also, the
documentation of outlier examination methodologies and findings and
recommendations was not readily available or necessarily summarized in
memorandums for management's review. Rather, a variety of examination
materials contained critical items and retrieving such documentation
from relevant information systems was time consuming. In 8 of the 27
OCC outlier examinations we reviewed, the documentation did not
identify examination activities undertaken to assess lenders' fair
lending compliance as being part of the outlier examination program.
In 2007, an OCC internal evaluation of its large bank fair lending
program found that key aspects of the agency's risk-assessment process,
such as its methodology, data analysis, and meetings with bank
management were not well documented. However, the report also found
that OCC fair lending examinations of large banks generally followed
key interagency examination procedures and that adequate documentation
supported the conclusions reached. The evaluation recommended that OCC
develop a common methodology to assess fair lending risk and better
documentation standards, which the agency is in the process of
implemeting. In May 2009, OCC officials told us that they recently had
taken steps to improve the ability to retrieve data from their
documentation system. For example, for their database for midsize and
community banks, OCC added a keyword search function to identify key
information, such as the HMDA outlier year on which the examination was
based. However, it is too soon to tell what effects these changes will
have on OCC's fair lending examination documentation standards and
practices. Unless these changes begin to address documentation
limitations that we and OCC's internal evaluation identified, OCC
management's capacity to monitor the implementation, consistency and
reporting of the agency's fair lending examination program will be
limited.
Depository Institution Regulators Referral Practices Vary:
There are significant differences in the practices that the depository
institution regulators employ to make referrals to DOJ and in the
number of referrals they made. In response to a previous GAO
recommendation, DOJ provided guidance to the federal depository
institution regulators on pattern or practice referrals in 1996.
[Footnote 79] The DOJ memorandum identified criteria for determining if
an ECOA violation identified in a depository institution regulatory
referral is appropriate for DOJ's further investigation for potential
legal action or returned to the referring agency for administrative
resolution. These criteria include the potential for harm to members of
a protected class, the likelihood that the practice will continue, if
the practice identified was a technical violation, if the harmed
members can be fully compensated without court action, and the
potential impact of federal court action, including the payment of
damages to deter other lenders engaged in similar practices. Moreover,
DOJ officials told us that they encourage depository institution
regulators to consult with them on potential referrals.
While DOJ has issued long-standing guidance on referrals, depository
institution regulatory officials indicated that different approaches
may be used to determine if initial indications of potential risks for
fair lending violations identified through HMDA screening warranted
further investigation or referral to DOJ. For example, OCC and OTS
officials said that they considered a range of data and information and
conducted analyses before making a referral to DOJ. According to agency
officials, this information might include statistical analysis of HMDA
and loan underwriting data, reviews of policies and procedures, and on-
site loan file reviews. OCC and OTS officials said that staff routinely
conduct such file reviews as one of several approaches to assessing a
lender's fair lending compliance and likely would not refer a case
without conducting such reviews. In contrast, while FDIC and the
Federal Reserve may also conduct file reviews to extract data and/or
confirm an institution's electronic data, officials said that
statistical analyses of HMDA and underwriting and pricing data could
and have served as the primary basis for concluding that lenders may
have engaged in a pattern or practice violation of ECOA and as the
basis for making referrals to DOJ. NCUA generally relies on on-site
examinations and loan file reviews to reach conclusions about lender
compliance with the fair lending laws and, as mentioned earlier, does
not conduct independent statistical reviews of credit unions' HMDA
data. OCC officials said referrals for potential fair lending
violations are not insignificant matters, either for the lender or DOJ,
and they have established processes to ensure that any such referrals
are warranted.
As shown in figure 2, the number of referrals varied by depository
institution regulator. FDIC accounted for 91 of the 118 referrals (77
percent) that depository institution regulators made to DOJ from 2005
through 2008. In contrast, OCC made one referral during this period and
NCUA none. OCC officials said that since 2005 their examiners have
identified technical violations of the fair lending laws and weaknesses
in controls that warranted attention of bank management, but that the
identification of potential pattern or practice violations was
"infrequent." NCUA officials said their examiners had reported
technical violations but had not identified any pattern or practice
violations, and thus made no referrals to DOJ.
Figure 2: Fair Lending Referrals to DOJ, by Depository Institution
Regulator, 2005-2008:
[Refer to PDF for image: illustrated table]
Referrals by agency:
Year: 2005;
FDIC: 35;
Federal Reserve: 2;
NCUA: 0;
OCC: 0;
OTS: 0;
All regulators: 37.
Year: 2006;
FDIC: 29;
Federal Reserve: 5;
NCUA: 0;
OCC: 0;
OTS: 0;
All regulators: 34.
Year: 2007;
FDIC: 15;
Federal Reserve: 9;
NCUA: 0;
OCC: 0;
OTS: 3;
All regulators: 27.
Year: 2008;
FDIC: 12;
Federal Reserve: 3;
NCUA: 0;
OCC: 1;
OTS: 4;
All regulators: 20.
Year: Total;
FDIC: 91;
Federal Reserve: 19;
NCUA: 0;
OCC: 1;
OTS: 7;
All regulators: 118.
Number of regulated entities (as of date):
5,068 (12/31/08);
878 (12/31/07);
7,809 (12/31/08);
1,641 (3/31/09);
1,308 (6/30/08).
Source: GAO analysis of DOJ data.
Note: The numbers of referrals in the table include not only those
based on outlier examinations but also those based on deficiencies that
depository institution regulators identified through routine consumer
compliance examinations during calendar years 2005-2008.
[End of figure]
From 2005 to 2008, we found that about half of the referrals that the
depository institution regulators made resulted from marital status-
related violations of ECOA--such violations can include lender policies
that require spousal guarantees on loan applications. FDIC accounted
for about 82 percent of such referrals (see figure 3). DOJ officials
said they generally returned such referrals to the depository
institution regulators for administrative or other resolution.[Footnote
80] The one institution that OCC referred to DOJ in 2008 involved a
marital status violation, which DOJ subsequently returned to OCC for
administrative resolution.
Figure 3: Percentage of Referrals to DOJ for Marital Status
Discrimination in Violation of ECOA versus Other Fair Lending
Referrals, 2005-2008:
[Refer to PDF for image: stacked vertical bar graph]
Year (total referrals): 2005 (37);
Marital status discrimination referrals: 56.8% (21);
FDIC portion of marital discrimination referrals: 90.5% (19);
All other referrals: 43.2% (16).
Year (total referrals): 2006 (34);
Marital status discrimination referrals: 41.2% (14);
FDIC portion of marital discrimination referrals: 85.7% (12);
All other referrals: 58.8% (20).
Year (total referrals): 2007 (27);
Marital status discrimination referrals: 55.6% (15);
FDIC portion of marital discrimination referrals: 73.3% (11);
All other referrals: 44.4% (12).
Year (total referrals): 2008 (20);
Marital status discrimination referrals: 55.0% (11);
FDIC portion of marital discrimination referrals: 72.7% (8);
All other referrals: 45.0% (9).
Total:
Marital status discrimination referrals (61; 51.7%);
FDIC portion of marital discrimination referrals (50; 82.0%);
All other referrals (57; 48.3%).
Source: GAO analysis of DOJ data.
Note: Referrals to DOJ for marital discrimination in violation of ECOA
includes all referrals that relate to marital status concerns, such as
spousal guarantee, and all violations pertaining to marital status.
[End of figure]
While marital status referrals accounted for a significant percentage
of all referrals, FDIC, OTS, and the Federal Reserve, through outlier
and routine examinations, have identified potential pattern or practice
violations in other key areas (see table 5). Specifically, in the 110
outlier examinations that we reviewed that were conducted by these
three depository institution regulators, the regulators identified
potential pattern or practice violations based on statistically
significant pricing disparities in 11 cases, or 10 percent of the
examinations, and referred the cases to DOJ.[Footnote 81] DOJ indicated
that several of these referrals had been returned to the depository
institution regulators for administrative enforcement, while the
remaining referrals are still in DOJ's investigative process.
Table 5: Number and Percentage of Pattern or Practice Referrals to DOJ
Related to Mortgage Pricing Disparities Identified by Selected
depository institution Regulators in the Outlier Examinations GAO
Reviewed, Based on HDMA Years 2005 and 2006 Data:
FDIC;
Number of outlier examinations reviewed: 38;
Number of examinations reviewed in which potential pattern or practice
violations related to mortgage pricing were identified and referred to
DOJ[A]: 4;
Percentage of reviewed examinations in which potential pattern or
practice violation related to mortgage pricing were identified and
referred to DOJ: 11.
Federal Reserve;
Number of outlier examinations reviewed: 32;
Number of examinations reviewed in which potential pattern or practice
violations related to mortgage pricing were identified and referred to
DOJ[A]: 3[B];
Percentage of reviewed examinations in which potential pattern or
practice violation related to mortgage pricing were identified and
referred to DOJ: 9.
OTS;
Number of outlier examinations reviewed: 40;
Number of examinations reviewed in which potential pattern or practice
violations related to mortgage pricing were identified and referred to
DOJ[A]: 4[C];
Percentage of reviewed examinations in which potential pattern or
practice violation related to mortgage pricing were identified and
referred to DOJ: 10.
Total;
Number of outlier examinations reviewed: 110;
Number of examinations reviewed in which potential pattern or practice
violations related to mortgage pricing were identified and referred to
DOJ[A]: 11;
Percentage of reviewed examinations in which potential pattern or
practice violation related to mortgage pricing were identified and
referred to DOJ: 10.
Source: GAO.
Note: The numbers in this table are based on HMDA year, not calendar
year.
[A] The number of pattern or practice referrals related to mortgage
pricing disparities in this table is solely based on the number of fair
lending outlier examinations and associated documentation that GAO
reviewed. These numbers reflect referrals that GAO identified as of
June 2009. The actual number of referrals to DOJ may be higher since
some fair lending examinations are ongoing and may result in more
referrals.
[B] DOJ considered two of the Federal Reserve referrals as one because
the two referrals were sent to DOJ in one referral document.
[C] In addition, OTS referred one lender to HUD, and not to DOJ because
a pattern or practice of discriminatory lending could not be
established. As the institution's lending practices violated OTS
nondiscrimination regulations and FHA as well as ECOA, OTS referred the
institution to HUD.
[End of table]
While it is difficult to fully assess the reasons for the differences
in referrals and outlier examination findings across the depository
institution regulators without additional analysis, they raise
important questions about the consistency of fair lending oversight. In
particular, depository institutions under the jurisdiction of OTS,
FDIC, and the Federal Reserve appear to be far more likely to be the
subject of fair lending referrals to DOJ and potential investigations
and litigation than those under the jurisdiction of OCC and NCUA. Under
the fragmented regulatory structure, differences across the depository
institution regulators in terms of their determination of what
constitutes an appropriate referral as well as fair lending examination
findings are likely to persist.
Enforcement Agencies Have Filed and Settled a Limited Number of Fair
Lending Cases in Recent Years; Certain Challenges May Affect
Enforcement Efforts:
Enforcement agency litigation involving the fair lending laws has been
limited in comparison with the number of lenders identified through
analyses of HMDA data and other information. For example, since 2005,
DOJ and FTC have reached settlements in eight cases involving alleged
fair lending violations while HUD has not yet reached any settlements.
Among other factors, resource considerations may account for the
limited amount of litigation involving potential fair lending
violations. Federal officials also identified other challenges to fair
lending oversight and enforcement, including a complex and time-
consuming investigative process, difficulties in recruiting legal and
economic staff with fair lending expertise, and ECOA's 2-year statute
of limitations for civil actions initiated by DOJ under its own
authority or on the basis of referrals from depository institution
regulators.
Overview of HUD and FTC Fair Lending Law Enforcement Activities:
According to HUD officials, the department has filed two Secretary-
initiated complaints against lenders alleging discrimination in their
lending practices. The officials said that HUD is currently considering
whether, pursuant to FHA, to issue Charges of Discrimination in
administrative court in these two matters. If HUD decides to issue such
charges in administrative court, any party may elect to litigate the
case instead in federal district court, in which case DOJ assumes
responsibility from HUD for pursuing litigation.
Since 2005, FTC under its statutory authority has filed complaints
against two mortgage lenders in federal district court for potential
discriminatory practices and has settled one of these complaints while
the other one is pending.[Footnote 82] FTC's settlement dated December
17, 2008, with Gateway Funding Diversified Mortgage Services, L.P.
(Gateway) and related entities provides an example of potential fair
lending law violations and insights into federal enforcement
activities. FTC filed a complaint against Gateway on the basis of an
alleged ECOA pricing violation that originated in prime, subprime, and
government loans such as FHA-insured mortgage loans. According to FTC,
Gateway's policy and practice of allowing loan officers to charge
discretionary overages that included higher interest rates and higher
up-front charges resulted in African-Americans and Hispanics being
charged higher prices because of their race or ethnicity. FTC alleged
that the price disparities were substantial, statistically significant,
and could not be explained by factors related to underwriting risk or
credit characteristics of the mortgage applicants. Under the terms of
the settlement, Gateway agreed to pay $2.9 million in equitable
monetary relief for consumer redress ($2.7 million of which was
suspended due to the company's inability to pay); establish a fair
lending monitoring program specifically designed to detect and remedy
fair lending issues; and establish, implement, operate, and maintain a
fair lending training program for employees.[Footnote 83]
The limited litigation involving potential fair lending violations
reflects the limited number of investigations these agencies have
initiated since 2005. From 2005 through 2009, HUD and FTC, as discussed
previously, initiated 22 investigations of independent lenders at
potentially heightened risk for fair lending law violations. Resource
constraints may affect their capacity to file and settle fair lending
related complaints. For example, FTC officials said that most of their
staff who work on fair lending issues were dedicated to pursing the
litigation associated with the three investigations that the agency
opened from 2005 through 2008.[Footnote 84]As two of these three
investigations have now been settled or concluded, additional staff
resources are available to pursue evidence of potential violations at
other lenders under the agency's jurisdiction.
Overview of DOJ Fair Lending Enforcement Activities:
Since 2005, DOJ has filed complaints and settled complaints in seven
cases involving potential violations of the fair lending laws (see
table 6). These cases involved allegations of racial and national
origin discrimination, sexual harassment against female borrowers, and
discrimination based on marital status in the areas of loan pricing and
underwriting, and redlining. One of these settlements--United States.
v. First Lowndes Bank, Inc--involved an allegation that a lender had
engaged in mortgage pricing discrimination, which has been the basis of
several depository institution regulators' referrals in recent years.
[Footnote 85]
Table 6: DOJ Settled Enforcement Cases Involving Fair Lending
Violations, from 2005 through May 2009:
Year settled: 2008;
Name of case: United States v. First Lowndes Bank, Inc., No. 2:08-cv-
798-WKW-CSC (M.D. Al., 2008); (residential lending);
Basis of complaint: Race and pricing: The complaint alleged that the
bank engaged in a pattern or practice of discriminating against African-
American customers by charging them higher interest rates on
manufactured housing loans than similarly situated white customers, in
violation of FHA and ECOA;
Source of case: Referral from FDIC based on 2004 HMDA pricing data;
Outcome: Settlement reached. The defendant agreed to pay up to
$185,000, plus interest, to compensate African-American borrowers who
may have been charged higher interest rates. The bank denied the
allegations in the settlement documents and there was no factual
finding or adjudication for any matter alleged.
Year settled: 2008;
Name of case: United States v. Nationwide Nevada, LLC, No. 2:08-cv-
01309 (D. Nev., 2008); (automobile lending);
Basis of complaint: Redlining: The complaint alleged that Nationwide
Nevada and its general partner NAC Management, Inc., engaged in a
pattern or practice of discrimination by refusing to purchase contracts
from automobile dealers when they believed that the applicant or co-
applicant lived on an Indian reservation, in violation of ECOA;
Source of case: Independent authority;
Outcome: Settlement reached. The defendant agreed to pay $170,000 plus
interest to compensate loan applicants who may have suffered as a
result of the defendants alleged failure to comply with the ECOA. The
defendants denied that they engaged in any discrimination and
specifically denied that they violated ECOA or Regulation B.
Year settled: 2007;
Name of case: United States v. First Nat'l Bank of Pontotoc, No.
3:06cv061-M-D (N.D. Miss., 2007); (residential and consumer
lending)[A];
Basis of complaint: Sexual harassment: The lawsuit alleged that a
former bank vice president engaged in a pattern or practice of sexual
harassment against female borrowers and applicants for credit in
violation (consumer or residential lending) of FHA and ECOA;
Source of case: Independent authority;
Outcome: Settlement reached. The defendants agreed to pay $250,000 to
15 identified victims, and $50,000 to the United States as a civil
penalty. The defendants also agreed to pay up to $50,000 to any
additional victims. Bank employees are required to receive training on
the prohibition of sexual harassment under federal fair lending laws.
The agreement also requires the bank to implement both a sexual
harassment policy and a procedure by which an individual may file a
sexual harassment complaint against any employee or agent of the First
National Bank of Pontotoc. Defendants denied that they violated FHA or
ECOA.
Year settled: 2007;
Name of case: United States v. Pacifico Ford, Inc., (E.D. Pa. 2007);
(automobile lending);
Basis of complaint: Race and pricing: Alleges that the car dealership
violated ECOA by engaging in a pattern or practice of discriminating
against African-American customers by charging them higher dealer
markups on car loan interest rates than similarly situated non-African-
American customers;
Source of case: Independent authority/initiated jointly with
Pennsylvania Attorney General;
Outcome: Settlement reached. Defendant agreed to pay up to $363,166,
plus interest, to African-American customers who were charged higher
interest rates. In addition, the dealership will implement changes in
the way it sets markups, including guidelines to ensure that the
dealership follows the same procedures for setting markups for all
customers, and that only good faith, competitive factors consistent
with ECOA influence that process. The dealership also will provide
enhanced equal credit opportunity training to officers and employees
who set rates for automobile loans. Defendants denied violating the
ECOA or engaging in any discriminatory practices against African-
Americans or any other consumers.
Year settled: 2007;
Name of case: United States v. Springfield Ford, Inc., (E.D. Pa. 2007);
(automobile lending);
Basis of complaint: Race and pricing: Complaint alleges that the car
dealership violated ECOA by engaging in a pattern or practice of
discriminating against African-American customers by charging them
higher dealer markups on car loan interest rates than similarly
situated non-African-American customers;
Source of case: Independent authority/initiated jointly with
Pennsylvania Attorney General;
Outcome: Settlement reached. Defendant agreed to pay up to $94,564,
plus interest, to African American customers who were charged higher
interest rates. In addition, the dealership will implement changes in
the way it sets markups, including guidelines to ensure that the
dealership follows the same procedures for setting markups for all
customers, and that only good faith, competitive factors consistent
with ECOA influence that process. The dealership also will provide
enhanced equal credit opportunity training to officers and employees
who set rates for automobile loans. Defendants denied violating the
ECOA or engaging in any discriminatory practices against African-
Americans or any other consumers.
Year settled: 2007;
Name of case: United States v. Compass Bank, No. 07-H-0102-S (N.D. Al.,
2007); (automobile lending);
Basis of complaint: Marital status: Complaint alleges that Compass Bank
violated ECOA by engaging in a pattern or practice of discrimination on
the basis of marital status in thousands of automobile loans that it
made through hundreds of different car dealerships in the South and
Southwest between May 2001 and May 2003;
Source of case: Referral from the Federal Reserve;
Outcome: Settlement reached. Defendant agreed to pay up to $75 million
to persons who may have suffered as a result of the alleged violations.
The consent order also requires the bank to ensure that its
underwriting guidelines and procedures do not discriminate on the basis
of marital status and to implement fair lending training programs for
its employees. The defendant denied the allegations.
Year settled: 2006;
Name of case: United States v. Centier Bank, No. 2:06-CV-344 (N.D. Ind.
2006); (business and residential lending);
Basis of complaint: Redlining: Complaint alleges that Centier Bank
violated FHA and ECOA by unlawfully avoiding and refusing to provide
its business and residential lending products and services to
predominately African-American and Hispanic neighborhoods while making
services available to white areas;
Source of case: Independent authority;
Outcome: Settlement reached. Defendant agreed to open two new full-
service branch offices in majority-minority census tracts; expand an
existing supermarket office in a majority Hispanic census tract into a
full-service branch; invest $3.5 million in a special financing program
for residents and small businesses in the minority communities of the
Gary, Indiana, area; invest at least $500,000 for consumer education
and credit counseling programs; and spend at least $375,000 to
advertise its products in media targeted to minority communities. The
bank denied it engaged in discrimination or that it violated FHA or
ECOA.
Source: GAO summary of DOJ data.
Note: This list includes only cases that were settled by DOJ from
January 2005 through May 2009. It does not include cases referred by
depository institution regulators during their reviews based on 2005
and 2006 HMDA data that remain open or were returned to the depository
institution regulators for administrative action.
[A] See also In the Matter of William W. Anderson, Jr., OCC No. AA-EC-
09-22 (2009).
[End of table]
According to DOJ officials, the enforcement actions for mortgage
lending result both from investigations that were initiated under the
department's independent authority and from referrals from depository
institution regulators. As shown in table 6, five of the seven fair
lending cases settled were initiated under DOJ's independent
investigative authority; one was based on a referral from FDIC, and one
from the Federal Reserve. However, DOJ officials said that there are
investigations based on other referrals from depository institution
regulators that are ongoing, including one case in pre-suit
negotiations based on a referral from the Federal Reserve and another
case that arose from a FDIC referral.
Officials Cited Several Challenges in Conducting Fair Lending
Investigations and Initiating Enforcement Actions:
According to officials from federal enforcement agencies,
investigations involving allegations of fair lending violations can be
complex and time-consuming. For example, DOJ officials said that if the
department decided to pursue an investigation based on a referral from
a depository institution regulator, such an investigation may be
broader than the information contained in a typical referral. DOJ
officials said that referrals typically were based on a single
examination, which may cover a limited period (such as potential
discrimination based on an analysis of HMDA data for a particular
year). They also pointed out that the standard for referral to DOJ for
the depository institution regulators is "reason to believe" that a
discriminatory practice is occurring.[Footnote 86] DOJ officials said
that to determine if a referred pattern or practice of discrimination
warrants federal court litigation, they may request additional HMDA and
underwriting data for additional years and analyze them. Furthermore,
they said that lenders often hire law firms that specialize in fair
lending to assist the lender in its response to the department's
investigation. DOJ officials said that these firms may conduct their
own analysis of the HMDA and underwriting and pricing data and, as part
of the investigation process, offer their views about why any apparent
disparities may be explained. Depending on the circumstances, this
process can be lengthy. According to a 2008 report by FDIC's Inspector
General, fair lending referrals that are not sent back to the referring
agency for further review may be at DOJ for years before they are
resolved.[Footnote 87] Additionally, HUD officials said that their
initial investigations into evidence of potential fair lending
violations may detect additional evidence of discrimination that also
must be collected and reviewed.
According to officials from an enforcement agency and available
research, another challenge that complicates fair lending
investigations involves lending discrimination based on disparate
impact, which we also raised as an enforcement challenge in our 1996
report.[Footnote 88] As discussed in the Interagency Policy Statement
on Discrimination in Lending, issued in 1994, fair lending violations
may include allegations of disparate treatment or disparate impact.
[Footnote 89] It is illegal for a lender to treat borrowers from
protected classes differently, such as intentionally charging
disproportionately higher interest rates based on race, sex, or
national origin that are not related to creditworthiness or other
legitimate considerations. It also is illegal for a lender to maintain
a facially neutral policy or practice that has a disproportionately
adverse effect on members of a protected group for which there is no
business necessity that could not be met by a less discriminatory
alternative. For example, a lender might have a blanket prohibition on
originating loans below a certain dollar threshold because smaller
loans might be more appealing to borrowers with limited financial
resources and therefore represent higher default risks. While such a
policy might help protect a lender against credit losses, it also could
affect minority borrowers disproportionately. Furthermore, alternatives
other than a blanket prohibition might mitigate potential losses, such
as reviewing applicant credit data. It may be difficult for enforcement
agencies or depository institution regulators to evaluate lender claims
that they have a business necessity for particular policies and
identify viable alternatives that would not have a disparate impact on
targeted groups. However, an official from the Federal Reserve told us
that the potential for disparate impact can be assessed through its
examination and other oversight processes. The official said the
Federal Reserve has evaluated lenders' policies to assess the potential
disparate impact and has referred at least one lender to DOJ based on
the disparate impact theory.
DOJ and FTC officials also said that recruiting and retaining staff
with specialized expertise in fair lending laws can be challenging.
Both DOJ and FTC officials said that recruiting attorneys with
expertise in fair lending investigations and litigation was difficult,
and employees who develop such expertise may leave for other positions,
including at other federal depository institution regulators or quasi-
governmental agencies that offer higher compensation. Additionally, DOJ
and FTC officials said that recruiting and retaining economists who
have expertise in analyzing HMDA data and underwriting data to detect
potential disparities in mortgage lending can be difficult. FTC
officials said that due to the recent departure of economists to
depository institution regulators, the agency increasingly relies on
outside vendors to provide such economic and statistical expertise.
ECOA's Statute of Limitations May Limit Enforcement Activities:
Finally, some federal enforcement agency and depository institution
regulators cited ECOA's statute of limitations as potentially
challenging for enforcement activities. Currently, ECOA's statute of
limitations for referrals to DOJ from the depository institution
regulators and for actions brought on DOJ's own authority requires that
no legal actions in federal court be initiated more than 2 years after
the alleged violation occurred.[Footnote 90] According to federal
officials, the ECOA statute of limitations may limit their activities
because HMDA data generally are not available for a year or more after
a potential lending violation has occurred. Consequently, federal
agencies and regulators may have less than a year to schedule an
investigation or examination, collect and review additional HMDA and
underwriting and pricing data, and pursue other approaches to determine
if a referral to DOJ would be warranted. According to OTS officials, an
extension of the statue of limitations beyond its current 2-year period
would provide valuable additional time to conduct the detailed analyses
that is necessary in fair lending cases. Accordingly, FDIC has
recommended that Congress extend ECOA's statute of limitations to 5
years. DOJ officials noted that they would not be averse to the statute
of limitations being extended.
While federal officials said that there are options to manage the
challenges associated with the ECOA statutes of limitations, these
options have limitations. For example, some enforcement officials said
that ECOA violations may also be investigated under FHA, which has
longer statutes of limitations. Specifically, under FHA, DOJ may bring
an FHA action based on a pattern or practice or for general public
importance within 5 years for civil penalties and within 3 years for
damages; there is no limitation period for injunctive relief. However,
not all ECOA violations necessarily constitute FHA violations as well.
Enforcement agency officials also said that in some cases they may be
able to obtain tolling agreements as a means to manage the ECOA and FHA
statutes of limitations. Tolling agreements are written agreements
between enforcement agencies, or private litigants, and potential
respondents, such as lenders subject to investigations or examinations
for potential fair lending violations, in which the respondent agrees
to extend the relevant statute of limitations so that investigations
and examinations may continue. Enforcement agency officials said that
lenders often agree to tolling agreements and work with the agencies to
explain potential fair lending law violations, such as disparities in
mortgage pricing. The officials said that the lenders have an incentive
to agree to tolling agreements because the enforcement agencies
otherwise may file wide-ranging complaints against them on the basis of
available information shortly before the relevant statute of
limitations expires. However, enforcement officials said it is not
always possible to obtain lenders' consent to enter into tolling
agreements, and our review of fair lending examination files confirmed
this assessment. We found several instances in which depository
institution regulators had difficulty obtaining tolling agreements.
Because federal enforcement efforts to manage ECOA's 2-year statute of
limitations may not always be successful, the agencies' capacity to
thoroughly investigate potential fair lending violations and take
appropriate corrective action in certain cases may be compromised.
Conclusions:
Federal enforcement agencies and depository institution regulators face
challenges in consistently, efficiently, and effectively overseeing and
enforcing fair lending laws due in part to data limitations and the
fragmented U.S. financial regulatory structure. HMDA data, while useful
in screening for potentially heightened risks of fair lending
violations in mortgage lending, are limited because they currently lack
the underwriting data needed to perform a robust analysis. While
requiring lenders to collect and report such data would impose
additional costs on them, particularly for smaller institutions, the
lack of this information compromises the depository institution
regulators' ability to effectively and efficiently oversee and enforce
fair lending laws. Such data also could facilitate independent research
into the potential risk for discrimination in mortgage lending as well
as better inform Congress and the public about this critical issue. A
variety of options could mitigate costs associated with additional HMDA
reporting, including limiting the reporting to larger lenders or
restricting its use for regulatory purposes. While these alternatives
would limit or restrict additional publicly available information on
the potential risk for mortgage discrimination compared to a general
data collection and reporting requirement, these are tradeoffs that
merit consideration because additional data would facilitate the
consistent, efficient, and effective oversight and enforcement of fair
lending laws.
The limited data available about potentially heightened risks for
discrimination during the preapplication process also affects federal
oversight of the fair lending laws for mortgage lending. Currently,
enforcement agencies and depository institution regulators lack a
direct and reliable source of data to help determine if lending
officials may have engaged in discriminatory practices in their initial
interactions with mortgage loan applicants. While researchers and
consumer groups have conducted studies using testers that suggest that
discrimination does take place during the preapplication process and
federal officials generally agree that testers offer certain benefits,
federal officials also have raised several concerns about their use.
For example, they have questioned the costs of using testers and the
reliability of data obtained in using them. Nevertheless, the lack of a
reliable means to assess the potential risk for discrimination during
the preapplication phase compromises depository institution regulators'
capacity to ensure lender compliance with the fair lending law in all
phases of the mortgage lending process. In this regard, FDIC's possible
incorporation of testers into its examination process, depository
institution regulators' ongoing efforts to update the interagency fair
lending examination guidance, or the Interagency Task Force on Fair
Lending may offer opportunities to identify improved means of assessing
discrimination in the preapplication phase. Moreover, the potential use
of consumer surveys as suggested by the Department of the Treasury in
its recent report on regulatory restructuring may represent another
approach to assessing the potential risk for discrimination during the
preapplication phase.
Data limitations may have even more significant impacts on depository
institution regulators' and enforcement agencies' capacity to assess
fair lending risk in nonmortgage lending (such as small business,
credit card, and automobile lending). Because Federal Reserve
Regulation B generally prohibits lenders from collecting personal
characteristic data for nonmortgage loans, agencies generally cannot
target lenders for investigations or examinations as they can for
mortgage loans. Consequently, federal agencies have limited tools to
investigate potentially heightened risks of violations in types of
lending that affect most U.S. consumers. While depository institution
regulators and enforcement agencies have tried to develop ways to
provide oversight in this area, the existing data limitations have
affected the focus of oversight and enforcement efforts. While
requiring lenders to collect and report personal characteristic data
for nonmortgage loans as well as associated underwriting data as may be
appropriate raises important cost and complexity concerns, the absence
of such data represents a critical limitation in federal fair lending
oversight efforts.
There also are a number of larger challenges to fair lending oversight
and enforcement stemming from the fragmented U.S. regulatory structure
and other factors such as mission focus and resource constraints.
Specifically,
* Independent lenders, which were the predominant originators of
subprime and other questionable mortgages that often were made to
minority borrowers in recent years, generally are subject to less
comprehensive oversight than federally insured depository institutions
and represent significant fair lending risks. In particular,
enforcement agencies do not conduct investigations of many independent
lenders that are identified as outliers through the Federal Reserve's
annual analysis of HMDA data to determine if these disparities
represent fair lending law violations. The potential exists that
additional instances of discrimination against borrowers could be
taking place at such firms without being detected. Such limited
oversight could undermine enforcement agencies' efforts to deter
violations. While depository institution regulators' outlier
examinations differ in important respects from enforcement agency
investigations, depository institution regulators generally conduct
examinations of all lenders identified as outliers to assess the
potential risk for discrimination, which likely contributes to efforts
at deterrence. Moreover, enforcement agencies, unlike most depository
institution regulators, generally do not initiate fair lending
investigations of independent lenders on a routine basis that are not
viewed as outliers, which represents an important gap in fair lending
oversight.
* The Federal Reserve lacks clear authority to assess fair lending
compliance by nonbank subsidiaries of bank holding companies, which
also have originated large numbers of subprime mortgages, in the same
way that it oversees the activities of state-chartered depository
institutions under its jurisdiction. The lack of clear authority to
conduct routine consumer compliance examinations of nonbank
subsidiaries is important because the Federal Reserve identifies many
potential fair lending violations at state-chartered banks through such
routine examinations. Without similar authority for nonbank
subsidiaries, the Federal Reserve's capacity to identify potential
risks for fair lending violations is limited.
* Despite the joint interagency fair lending examination guidance and
various coordination efforts, we also found that having multiple
depository institution regulators resulted in variations in screening
techniques, the management of the outlier examination process,
examination documentation standards, and the number of referrals and
types of examination findings. While differences in these areas may not
be unexpected given the varied types of lenders under each depository
institution regulator's jurisdiction, these differences raise questions
about the consistency and effectiveness of regulatory oversight. For
example, the evidence suggests that lenders regulated by FDIC, the
Federal Reserve, and OTS are more likely than lenders regulated by OCC
and NCUA to be the subject of referrals to DOJ for being at potentially
heightened risk of fair lending violations. Our current work did not
fully evaluate the reasons and effects of identified differences and
additional work in this area could help provide additional clarity.
Finally, federal depository institution regulators and enforcement
agencies also face some challenges associated with the 2-year statute
of limitations under ECOA applicable to federal district court actions
brought by DOJ. Because it takes about 6 months for the Federal Reserve
to reconcile and review HMDA data, depository institution regulators
and enforcement agencies typically review the HMDA data almost one year
after the underlying loan decisions occurred, and may have a limited
opportunity to conduct thorough examinations and investigations in some
cases. While strategies may be available to manage the ECOA 2-year
statute of limitations, such as obtaining tolling agreements, they are
not always effective. Therefore, ECOA's statute of limitations may work
against the act's general objective, which is to penalize and deter
lending discrimination.
Matters for Congressional Consideration:
To facilitate the capacity of federal enforcement agencies and
depository institution regulators as well as independent researchers to
identify lenders that may be engaged in discriminatory practices in
violation of the fair lending laws, Congress should consider the merits
of additional data collection and reporting options. These varying
options pertain to obtaining key underwriting data for mortgage loans,
such as credit scores as well as LTV and DTI ratios, and personal
characteristic (such as race, ethnicity and sex) and relevant
underwriting data for nonmortgage loans.
To help ensure that all potential risks for fair lending violations are
thoroughly investigated and sufficient time is available to do so,
Congress should consider extending the statute of limitations on ECOA
violations.
As Congress debates the reform of the financial regulatory system, it
also should take steps to help ensure that consumers are adequately
protected, that laws such as the fair lending laws are comprehensive
and consistently applied, and that oversight is efficient and
effective. Any new structure should address gaps and inconsistencies in
the oversight of independent mortgage brokers and nonbank subsidiaries,
as well as address the potentially inconsistent oversight provided by
depository institution regulators.
Recommendation for Executive Action:
To help strengthen fair lending oversight and enforcement, we recommend
that DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS work
collaboratively to identify approaches to better assess the potential
risk for discrimination during the preapplication phase of mortgage
lending. For example, the agencies and depository institution
regulators could further consider the use of testers, perhaps on a
pilot basis, as well as surveys of mortgage loan borrowers and
applicants or alternative means to better assess the potential risk for
discrimination during this critical phase of the mortgage lending
process.
Agency Comments and Our Evaluation:
We provided a draft of this report to the heads of HUD, FTC, DOJ, FDIC,
the Federal Reserve, NCUA, OCC, and OTS. We received written comments
from FTC, FDIC, NCUA, the Federal Reserve, OCC, and OTS, which are
summarized below and reprinted in appendixes III through VIII. HUD
provided its comments in an e-mail which is summarized below. DOJ did
not provide written comments. All of the agencies and regulators,
including DOJ, also provided technical comments, which we incorporated
into the report where appropriate. We also provided excerpts of the
draft report to two researchers whose studies we cited to help ensure
the accuracy of our analysis. One of the researchers responded and said
that the draft report accurately described his research, while the
other did not respond.
In the written comments provided by FDIC, the Federal Reserve, NCUA,
OCC, and OTS, they agreed with our recommendation to work
collaboratively regarding the potential use of testers or other means
to better assess the risk of discriminatory practices during the
premortgage loan application process, and generally described their
fair lending oversight programs and, in some cases, planned
enhancements to these programs. In particular, the Federal Reserve
stated that it would be pleased to provide technical assistance to
Congress regarding potential enhancements to HMDA data to better
identify lenders at heightened risk of potential fair lending
violations and described its existing approaches to fair lending
oversight, including for the nonbank subsidiaries of bank holding
companies. Further, the Federal Reserve stated that it is developing a
framework for increased risk-based supervision for these entities.
While such enhancements could strengthen the Federal Reserve's
oversight of nonbank subsidiaries, the lack of clear authority for it
to conduct routine examinations continues to be an important limitation
in fair lending oversight and enforcement.
OCC also described its fair lending oversight program and planned
revisions. First, OCC stated that it planned to enhance its procedures
by formalizing headquarters involvement in the oversight process. For
example, senior OCC headquarters officials will receive reports on at
least a quarterly basis on scheduled, pending, and completed fair
lending examinations to facilitate oversight of the examination
process. Second, OCC plans to strengthen its fair lending examination
documentation through, for example, changes in its centralized data
systems so that the systems contain, in standardized form: relevant
examination dates, the risk factors that were identified through the
screening and other processes for each lender, the focal points of the
examination, the reasons for any differences between the focal points
and the areas identified through the risk screening processes, and the
key findings of the examinations. OCC also noted that it (1) plans to
expand its "HMDA-plus" pilot program to collect underwriting data from
large banks at an earlier stage to facilitate screening efforts, (2)
views working with other regulators to enhance the effectiveness and
consistency of screening efforts as appropriate, and (3) will undertake
work with other regulators and DOJ to address variations in referral
practices.
NCUA's Chairman generally concurred with the draft report's analysis
and recommendations and offered additional information. First, the
Chairman stated that additional study is needed to assess the
depository institution regulators' varying referral practices, but that
such study should be conducted before drawing any conclusions about the
effectiveness of NCUA's fair lending oversight. The Chairman stated
that NCUA has not made any referrals to DOJ because the agency did not
identify any potential violations during the period covered by the
report. Further, the Chairman stated NCUA uses the same examination
procedures as the other depository institution regulators and offered
reasons as to why violations may not exist at credit unions. For
example, the Chairman said that credit unions have a specified mission
of meeting the credit and savings needs of their members, especially
persons of modest means (who typically are the target of discriminatory
actions). We have not evaluated the Chairman's analysis as to why fair
lending violations may not exist at credit unions, but note that there
is a potential for discrimination in any credit decision and that all
federal agencies and regulators have a responsibility to identify and
punish such violations as well as deter similar activity. The Chairman
also (1) concurred that additional data collection under HMDA could
enhance efforts to detect lenders at heightened risk of violations, but
believes that such requirements should pertain to all lenders rather
than a subset; (2) agreed that ECOA's statute of limitations should be
extended; and (3) concurred with the recommendation that NCUA work
collaboratively with other regulators and agencies to better assess the
potential for discrimination during the preapplication phase of
mortgage lending.
In an e-mail, HUD said that improved communication and cooperation
among the federal agencies responsible for overseeing federal fair
lending laws could improve federal compliance and enforcement efforts.
HUD also concurred with the draft report's analysis that expanding the
range of data reported, by mortgage lenders pursuant to HMDA would
significantly expand the department's ability to identify new cases of
potential lending discrimination. In particular, HUD stated that
requiring lenders to report underwriting data, such as borrowers'
credit scores, would allow the department to more accurately assess
lenders' compliance with the Fair Housing Act. However, HUD urged
careful consideration be paid to any proposal to limit the range of
lenders subject to new reporting requirements under HMDA. HUD stated
that, in its experience, smaller lenders, no less than larger lenders,
may exhibit disparities in lending that warrant investigation for
compliance with federal law. In addition, HUD stated that many smaller
lenders may already collect and maintain for other business purposes
the same data, which may be sought through expanded HMDA reporting
requirements.
FTC's Director, Bureau of Consumer Protection, stated that the draft
report appropriately drew attention to limitations in HMDA data as a
means to identify lenders at heightened risk of fair lending
violations. The Director also highlighted two conclusions in the draft
report and noted that limitations of the data warranted collecting
additional data before any conclusions about discrimination could be
drawn. First, the Director stated that the report concluded that
independent lenders have a heightened risk of potential violations
compared to depository institutions. The Director said that many
lenders make very few or no high-priced loans and thus cannot be
evaluated by an analysis of HMDA pricing data whereas independent
lenders disproportionately make such loans. Therefore, the Director
said it is not possible to draw conclusions as to which types of
lenders are more likely to have committed violations solely on the
basis of HMDA data or the outlier lists and that such a conclusion
about independent lenders is especially tenuous. The Director also
stated that the report recommends that additional underwriting data be
collected to supplement current mortgage data but does not address the
importance of discretionary pricing data. The Director stated that
lender discretion in granting or pricing credit represents a
significant fair lending risk, and that the agency collects such
information, in addition to underwriting information, as part of its
investigations. In sum, the Director stated that while HMDA data is
useful, additional data must be collected from lenders before any
conclusions about discrimination can meaningfully be drawn.
We have revised the draft to more fully reflect the Director's views
regarding limitations in HMDA data and its capacity to identify lenders
at heightened risk of fair lending violations and draw conclusions
about potential discrimination in mortgage lending. However, HMDA data
may have limitations with respect to identifying mortgage pricing
disparities as the Director noted. We do not concur that statements in
the draft report suggesting that independent lenders may represent
relatively heightened risks of fair lending violations are especially
tenuous. As stated in the draft report, subprime loans and similar high
cost mortgages, which are largely originated by independent lenders and
nonbank subsidiaries of holding companies, appear to have been made to
borrowers with limited or poor credit histories and subsequently
resulted in significant foreclosure rates for such borrowers. Further,
our 2007 report noted that subprime lending grew rapidly in areas with
higher concentrations of minorities. While the scope or our work did
not involve an analysis of the feasibility and costs of incorporating
discretionary pricing data into HMDA data collection and reporting
requirements, we acknowledge that the lack of such information may
challenge oversight and enforcement efforts.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from report date. At that time, we will send copies of this report to
other interested congressional committees, and to the Chairman, Board
of Governors of the Federal Reserve System; Chairman, Federal Deposit
Insurance Corporation; Comptroller of the Currency, Office of the
Comptroller of the Currency; Acting Director, Office of Thrift
Supervision; Inspector General, the National Credit Union
Administration; the Chairman of the Federal Trade Commission; the
Secretary of the Department of Housing and Urban Development; the
Attorney General; and other interested parties. In addition, the report
will be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions regarding this report, please
contact me at (202) 512-8678 or williamso@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix IX.
Signed by:
Orice Williams Brown:
Director, Financial Markets and Community Investment:
List of Congressional Requesters:
The Honorable Barney Frank:
Chairman:
Committee on Financial Services:
House of Representatives:
The Honorable Melvin L. Watt:
Chairman:
Subcommittee on Domestic Monetary Policy and Technology:
Committee on Financial Services:
House of Representatives:
The Honorable Luis V. Gutierrez:
Chairman:
Subcommittee on Financial Institutions and Consumer Credit:
Committee on Financial Services:
House of Representatives:
The Honorable Maxine Waters:
Chairwoman:
Subcommittee on Housing and Community Opportunity:
Committee on Financial Services:
House of Representatives:
The Honorable Gregory W. Meeks:
Chairman:
Subcommittee on International Monetary Policy and Trade:
Committee on Financial Services:
House of Representatives:
The Honorable Dennis Moore:
Chairman:
Subcommittee on Oversight and Investigations:
Committee on Financial Services:
House of Representatives:
The Honorable Joe Baca:
The Honorable Michael E. Capuano:
The Honorable André Carson:
The Honorable Emanuel Cleaver:
The Honorable Keith Ellison:
The Honorable Al Green:
The Honorable Rubén Hinojosa:
The Honorable Paul W. Hodes:
The Honorable Carolyn B. Maloney:
The Honorable Carolyn McCarthy:
The Honorable Gwen Moore:
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of our report were to (1) assess the strengths and
limitations of data sources that enforcement agencies and depository
institution regulators use to screen for lenders that have potentially
heightened risk for fair lending law violations and discusses options
for enhancing the data; (2) assess federal oversight of lenders that
may represent relatively high risks of fair lending violations as
evidenced by analysis of Home Mortgage Disclosure Act (HMDA) data and
other information; (3) examine differences in depository institution
regulators' fair lending oversight programs; and (4) discuss
enforcement agencies' recent litigation involving potential fair
lending law violations and challenges that federal officials have
identified in fulfilling their enforcement responsibilities.
To address the first objective for assessing the strengths and
limitations of data to screen for lenders that appear to be at a
heightened risk for potentially violating fair lending laws, we
reviewed and analyzed fair lending examination and investigation
guidance, policies, and procedures, and other agency documents. We
gathered information on how enforcement agencies--the Department of
Housing and Urban Development (HUD), the Federal Trade Commission
(FTC), and the Department of Justice (DOJ)--and depository institution
regulators--the Board of Governors of the Federal Reserve System
(Federal Reserve), the Office of the Comptroller of the Currency (OCC),
the Federal Deposit Insurance Corporation (FDIC), the National Credit
Union Administration (NCUA), and the Office of Thrift Supervision
(OTS)--use data sources such as HMDA data to screen for high-risk
lenders. HMDA requires many mortgage lenders to collect and report data
on mortgage applicants and borrowers. In 2004, HMDA was amended to
require lenders to report certain mortgage loan pricing data. To assess
the strengths and limitations of these data, we reviewed academic
research, studies from consumer advocacy groups, Inspectors General
reports, Congressional testimonies, and prior GAO work on the strengths
and limitations of HMDA data and the limited availability of data for
nonmortgage lending. We also reviewed available information on current
initiatives to gather enhanced HMDA data (adding underwriting
information such as loan-to-value ratios and credit scores) earlier in
the screening and examination process, such as OCC's pilot project. In
addition, we interviewed officials from the enforcement agencies and
depository institution regulators listed above--including senior
officials, examiners, policy analysts, economists, statisticians,
attorneys, and compliance specialists--to discuss how they use various
data sources to screen for high-risk lenders, gather their perspectives
on the strengths and limitations of available data sources, and obtain
information on the costs of reporting HMDA data. We did not interview
NCUA economists or attorneys and NCUA does not have statisticians. We
did interview senior officials, examiners, policy analysts and
compliance specialists. We also discussed current initiatives to
address screening during the preapplication phase of lending, and the
potential benefits and limitations of using testers during this phase.
We evaluated the depository institution regulators' examination
guidance and approaches for the preapplication phase. We interviewed
researchers, lenders, representatives from community and fair housing
groups, and independent software vendors to gather perspectives on the
strengths and limitations of HMDA data in the fair lending screening
process and the benefits and costs of requiring the collection of
additional or enhanced HMDA data.
To address the second objective, we reviewed and analyzed enforcement
agency and depository institution regulator documents. More
specifically, we reviewed and analyzed internal fair lending
examination and investigation guidance, policies, and procedures;
federal statutes and information provided by the agencies on their
authority, mission and jurisdiction; the Federal Reserve's annual HMDA
outlier lists; information on staffing resources; documentation on the
number of fair lending enforcement actions initiated and settled; and
other agency documents to compare and contrast the agencies' and
depository institution regulators' authority and efforts to oversee the
fair lending laws, including enforcement and investigative practices.
We also obtained information on depository institution regulators'
outlier examination programs from internal agency documents and our
file review of examinations of outlier institutions, as discussed
below. Furthermore, we interviewed key agency officials from the eight
enforcement agencies and depository institution regulators that oversee
the fair lending laws to gather information on their regulatory and
enforcement activities and compare their approaches. To gather
information on state coordination of fair lending oversight with
federal agencies, as well as to compare and contrast fair lending
examination policies and practices, we also interviewed state banking
regulatory officials and community groups.
We also evaluated certain aspects of depository institution regulators'
compliance with fair lending outlier examination schedules and
procedures. Specifically, we conducted a systematic review of 152 fair
lending examination summary files derived from each depository
institution regulator's annual list of institutions identified to be at
higher risk for fair lending violations (that is, their outlier lists).
We examined outlier lists based on 2005 and 2006 HMDA data because they
fully incorporated pricing data (first introduced in 2004 HMDA data),
and because the examinations based on these lists had a higher
likelihood of being completed. We systematically collected information
and evaluated each examination's compliance with key agency regulations
and interagency and internal fair lending guidance. For instance, we
reviewed the files to determine if outlier examinations had been
initiated in a timely fashion; if examination scoping, focal points,
and findings had been documented; and if recommendations were made to
correct any deficiencies. We limited our focus to assessing regulatory
compliance with applicable laws, regulations, and internal guidance and
did not make judgments on how well agencies conducted the examinations.
For three of the depository institution regulators--the Federal
Reserve, FDIC, and OTS--we reviewed summary documentation (such as
reports of examination, scope and methodology memorandums, exit and
closing memorandums, and referral documentation to DOJ) of completed
examinations for every institution on their 2005 and 2006 HMDA data
outlier lists when relevant. This amounted to 32 examinations for the
Federal Reserve, 38 for FDIC, and 40 for OTS. Because NCUA (1) does not
have a centralized process for identifying outliers, (2) was unable to
respond to our document request in a timely manner, and (3) had a
relatively low number of credit unions identified as outliers by the
Federal Reserve, we randomly selected and reviewed summary
documentation for a sample of 10 examinations conducted in 2007 to
capture examinations that analyzed loans made in 2005 and 2006 (out of
25 examinations).
We also reviewed a random sample of national banks due to limitations
in OCC's fair lending examination documentation and the need to conduct
our analysis in a timely manner. We randomly selected a simple sample
of 27 examinations of institutions from a population of 231 institution
examinations derived from OCC's annual outlier lists for 2005 and 2006
HMDA data. Because OCC also randomly selects a sample of banks (both
HMDA and non-HMDA filing) to receive comprehensive fair lending
examinations, we also reviewed examination files from 2005 for five of
these institutions (out of a population of 31). Thus, our sample
totaled 32 lender examinations and we requested that OCC provide all
fair lending oversight materials for each of these lenders from 2005
through 2008 so that we could discern the extent to which OCC was
complying with regulations and guidance for its outlier examination
program. We collected the same information for these examinations as
from the other depository institution regulators.
In addition, we reviewed guidance, policies, procedures, relevant
statutes, and other documents from the Federal Reserve to assess the
extent of fair lending oversight conducted for nonbank subsidiaries of
bank holding companies. We also reviewed past GAO reports on the
history of oversight of nonbank subsidiaries of bank and thrift holding
companies. We interviewed agency officials and consumer advocacy groups
to gather their perspectives on the extent of current oversight for
nonbank subsidiaries of bank holding companies. We also spoke with
agency officials to gather information on a current interagency pilot
program between the Federal Reserve, OTS, FTC, and the Conference of
State Bank Supervisors to monitor the activities of nonbank
subsidiaries of holding companies.
For the third objective, in addition to reviewing our analysis of
depository institution regulators' compliance with fair lending
examination policies as described above, we (1) conducted further
comparisons of their outlier examination screening processes, (2)
reviewed documentation and reports related to their management of the
outlier examination process and documentation and reporting of
examination findings; and (3) reviewed documentation related to their
referral practices and outlier examination findings. We also reviewed
relevant federal internal control standards for documentation and
reporting and compared them to the depository institution regulators'
practices as appropriate. We also discussed these issues with senior
officials from the depository institution regulators and state
financial regulatory officials from New York, Washington, and
Massachusetts.[Footnote 91] In addition, we discussed their efforts to
coordinate fair lending oversight programs through the development of
interagency examination guidance and participation in meetings of the
Interagency Task Force on Fair Lending and related forums.
To address the fourth objective, we reviewed agencies' internal
policies, procedures, and guidance as well as federal statutory
requirements that depository institution regulators use when making
referrals or notifications to HUD or DOJ for potential violations of
the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. We
also analyzed information on enforcement agencies' and depository
institution regulators' staff resources and any time constraints they
might face related to ECOA's 2-year statute of limitations for making
referrals to DOJ for follow-up investigations and potential enforcement
actions. To obtain information on the enforcement activities of federal
agencies, we conducted an analysis of the number of fair lending
investigations initiated, complaints filed, and settlements reached by
each enforcement agency. We also interviewed officials from each
depository institution regulator and enforcement agency to gather
information on investigative practices that enforcement agencies use
when deciding whether to pursue a fair lending investigation or
complaint against an institution and possible challenges that
enforcement agencies and depository institution regulators face in
enforcing the fair lending laws, specifically ECOA's 2-year statute of
limitations.
For all the objectives, we interviewed representatives from financial
institutions and several consumer advocacy groups and trade
associations such as the Center for Responsible Lending, the National
Community Reinvestment Coalition, and the National Fair Housing
Alliance, Leadership Conference on Civil Rights, a large commercial
bank, and Consumer Bankers' Association. We obtained their perspectives
on regulatory efforts to enforce fair lending laws, which include
screening lenders for potential violations, conducting examinations,
and enforcing the laws through referrals, investigations, or other
means, and any collaborative activities between depository institution
regulators and state entities.
We conducted this performance audit from September 2008 to July 2009 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.
[End of section]
Appendix II: Federal Oversight Authority for FHA and ECOA:
The table below lists the federal regulatory and enforcement agencies
that examine and enforce compliance with the fair lending laws Fair
Housing Act (FHA),[Footnote 92] and Equal Credit Opportunity Act
(ECOA)[Footnote 93] at depository institutions and their affiliate and
subsidiaries, independent lenders, servicers, holding companies, and
nonfunctionally regulated subsidiaries of their holding companies. See
the table notes for statutory cites and brief explanations of the
statutory authorities.
Table 7: Federal Agencies That Have Examination and Enforcement
Authorities for Fair Lending Laws, by Type of Entity (Depository
Institutions, Independent Lenders, Servicers):
Type of Entity: Bank holding companies;
Examination Authority: Board of Governors of the Federal Reserve System
(Federal Reserve)[C];
FHA Enforcement Authority[A]: Federal Reserve,[D] Department of Housing
and Urban Development (HUD), Department of Justice (DOJ)
ECOA Enforcement Authority[B]: Federal Reserve[D], DOJ
Type of Entity: Nonfunctionally regulated subsidiaries of bank holding
companies;
Examination Authority: Federal Reserve[C];
FHA Enforcement Authority[A]: Federal Reserve,[D] HUD, DOJ;
ECOA Enforcement Authority[B]: Federal Reserve,[D] DOJ, Federal Trade
Commission (FTC).
Type of Entity: National banks;
Examination Authority: Office of the Comptroller of the Currency
(OCC)[E];
FHA Enforcement Authority[A]: OCC,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: OCC,[B] DOJ.
Type of Entity: Operating subsidiaries of national banks;
Examination Authority: OCC[E];
FHA Enforcement Authority[A]: OCC,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: OCC,[B] FTC, DOJ.
Type of Entity: Affiliates of national banks (not regulated by another
functional regulator);
Examination Authority: OCC[F];
FHA Enforcement Authority[A]: OCC,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: OCC,[B] FTC, DOJ.
Type of Entity: State banks, members of the federal reserve system;
Examination Authority: Federal Reserve[G];
FHA Enforcement Authority[A]: Federal Reserve,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: Federal Reserve,[B] DOJ.
Type of Entity: Subsidiaries of state banks that are members of the
Federal Reserve System;
Examination Authority: Federal Reserve[G];
FHA Enforcement Authority[A]: Federal Reserve,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: Federal Reserve,[B] FTC, DOJ.
Type of Entity: Affiliates of state banks that are members of the
Federal Reserve System (not regulated by another functional regulator);
Examination Authority: Federal Reserve[H];
FHA Enforcement Authority[A]: Federal Reserve,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: Federal Reserve,[B] FTC, DOJ.
Type of Entity: State banks, not a member of the Federal Reserve
System;
Examination Authority: Federal Deposit Insurance Corporation (FDIC)[I];
FHA Enforcement Authority[A]: FDIC,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: FDIC,[B] DOJ.
Type of Entity: Subsidiaries of state banks, not a member of the
Federal Reserve System;
Examination Authority: FDIC[I];
FHA Enforcement Authority[A]: FDIC,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: FDIC,[B] FTC, DOJ.
Type of Entity: Affiliates of state banks, not a member of the Federal
Reserve System (not regulated by another functional regulator);
Examination Authority: FDIC[J];
FHA Enforcement Authority[A]: FDIC,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: FDIC,[B] FTC, DOJ.
Type of Entity: Savings and loan holding companies;
Examination Authority: Office of Thrift Supervision (OTS)[K];
FHA Enforcement Authority[A]: OTS,[L] HUD, DOJ;
ECOA Enforcement Authority[B]: OTS,[L] DOJ.
Type of Entity: Subsidiaries of savings and loan holding companies;
Examination Authority: OTS[K];
FHA Enforcement Authority[A]: OTS,[L] HUD, DOJ;
ECOA Enforcement Authority[B]: OTS,[L] FTC, DOJ.
Type of Entity: Savings associations
Examination Authority: OTS[M];
FHA Enforcement Authority[A]: OTS,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: OTS,[B] DOJ.
Type of Entity: Subsidiaries of savings associations;
Examination Authority: OTS[M];
FHA Enforcement Authority[A]: OTS,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: OTS,[B] FTC, DOJ.
Type of Entity: Affiliates of savings associations;
Examination Authority: OTS[N];
FHA Enforcement Authority[A]: OTS,[A] HUD, DOJ;
ECOA Enforcement Authority[B]: OTS,[B] FTC, DOJ.
Type of Entity: Bank service company or independent servicer providing
mortgage or lending-related services to a bank or savings association;
Examination Authority: Federal Reserve, OCC, FDIC, or OTS as
appropriate[O];
FHA Enforcement Authority[A]: HUD, DOJ, Federal Reserve, OCC, FDIC, or
OTS as appropriate[O];
ECOA Enforcement Authority[B]: FTC, DOJ, Federal Reserve, OCC, FDIC, or
OTS as appropriate[O].
Type of Entity: Federal credit unions;
Examination Authority: National Credit Union Administration (NCUA);
FHA Enforcement Authority[A]: NCUA,[P] HUD, DOJ;
ECOA Enforcement Authority[B]: NCUA,[P] DOJ.
Type of Entity: Federally insured state-chartered credit unions;
Examination Authority: NCUA[Q];
FHA Enforcement Authority[A]: HUD, DOJ;
ECOA Enforcement Authority[B]: FTC, DOJ.
Type of Entity: Credit Union Service Organizations;
Examination Authority: NCUA[R];
FHA Enforcement Authority[A]: HUD, DOJ;
ECOA Enforcement Authority[B]: FTC, DOJ.
Type of Entity: Independent nonbank lender;
Examination Authority: No regulatory agency has this authority;
FHA Enforcement Authority[A]: HUD, DOJ;
ECOA Enforcement Authority[B]: FTC, DOJ.
Sources: GAO analysis of statutes and agency information.
[A] The Federal Reserve, OCC, FDIC, and the OTS (federal banking
agencies) generally may take an administrative enforcement action
against an insured depository institution or an institution-affiliated
party that is violating or has violated a law, rule, or regulation. 12
U.S.C. § 1818(b). The appropriate federal banking agency will have
enforcement authority over an institution-affiliated party that is not
itself an insured depository institution with a different appropriate
federal banking agency or a holding company, provided that the
affiliate otherwise meets the definition of an institution-affiliated
party. 12 U.S.C. §§ 1813(q), (u) and 1818. An institution-affiliated
party means:
(1) any director, officer, employee, or controlling stockholder (other
than a bank holding company) of, or agent for, an insured depository
institution;
(2) any other person who has filed or is required to file a change-in-
control notice with the appropriate Federal banking agency under [12
U.S.C. § 1817(j)];
(3) any shareholder (other than a bank holding company), consultant,
joint venture partner, and any other person as determined by the
appropriate Federal banking agency (by regulation or case-by-case) who
participates in the conduct of the affairs of an insured depository
institution; and;
(4) any independent contractor (including any attorney, appraiser, or
accountant) who knowingly or recklessly participates in”
(A) any violation of any law or regulation;
(B) any breach of fiduciary duty; or
(C) any unsafe or unsound practice, which caused or is likely to cause
more than a minimal financial loss to, or a significant adverse effect
on, the insured depository institution,
which caused or is likely to cause more than a minimal financial loss
to, or a significant adverse effect on, the insured depository
institution.
12 U.S.C. § 1813(u). For example, the term ’institution-affiliated
party“ is defined to include OTS-regulated institution‘s employees,
directors and officers, controlling shareholders, agents, consultants
and other ’persons participating in the conduct of the affairs“ of an
institution, and under certain circumstances independent contractors.
When an institution-affiliated party engages in a direct or indirect
violation of any law or regulation the appropriate regulatory agency is
authorized to remove such party from office or prohibit such party from
any further participation in the conduct of the affairs of any insured
depository institution in certain circumstances. 12 U.S.C. §
1818(e)(1). This is in addition to cease and desist authority. 12
U.S.C. § 1818(b). Moreover, civil money penalties may be imposed for
each day that a violation continues. 12 U.S.C. § 1818(i)(2).
[B] See note.[A] FTC has authority to enforce ECOA except to the extent
that enforcement is specifically committed to another government
agency, and is authorized to use ’all of the functions and powers of
the [FTC] under the Federal Trade Commission Act“ to do so. 15 U.S.C. §
1691c(c). Under the FTC Act, FTC may sue in federal court for an
injunction and other equitable relief, 15 U.S.C. § 53(b), for civil
penalties, 15 U.S.C. § 45(m)(1)(A), and in some circumstances for
damages, 15 U.S.C. § 57b(b); or FTC may institute administrative
proceedings under 15 U.S.C. § 45(b). Under pertinent parts of 15 U.S.C.
§ 1691c(a), OCC, the Federal Reserve, FDIC, and OTS are each charged
with enforcing ECOA under 12 U.S.C. § 1818 regarding the depository
institutions they supervise, and NCUA is charged with enforcing ECOA
under 12 U.S.C. § 1751 et seq. regarding federal credit unions. See
also 12 C.F.R. pt. 202, app. A. DOJ has authority to bring civil
actions regarding pattern or practice violations of ECOA against any
lender, regardless of regulator, and to bring civil actions to redress
FHA violations against any lender so long as the claim is based on a
real estate-based transaction.
[C] Under 12 U.S.C. § 1844(c)(2)(A)(i)-(ii), the Federal Reserve may
examine bank holding companies and nonfunctionally regulated
subsidiaries (including nonbank subsidiaries) of bank holding companies
to determine the nature of their operations, their financial condition,
risks that may pose a threat to the safety and soundness of a
depository institution subsidiary and the systems of monitoring and
controlling such risks. In addition, the Federal Reserve may examine a
bank holding company or nonfunctionally regulated subsidiary (including
a nonbank subsidiary) to monitor compliance with certain laws,
including any federal law that the Federal Reserve has specific
jurisdiction to enforce against the bank holding company or
nonfunctionally regulated subsidiary and those laws governing
transactions and relationships between any depository institution
subsidiary and its affiliates. See 12 U.S.C. § 1844(c)(2)(A)(iii). ECOA
explicitly addresses enforcement by the federal banking agencies. In
particular, 15 U.S.C. § 1691c(b) provides authority for among others
the federal banking agencies to exercise any other authority conferred
by law. ECOA provides the Federal Reserve with enforcement authority
against bank holding companies and their nonbank subsidiaries. See 15
U.S.C. § 1691c(b). FHA has no similar enforcement provisions.
[D] The Federal Reserve has general authority to enforce any law or
regulation with respect to a bank holding company and subsidiary (other
than a bank). 12 U.S.C. § 1818(b)(3). In addition, the Federal Reserve
has specific jurisdiction to enforce ECOA violations against a bank
holding company and nonbank subsidiary pursuant to the enforcement
authority conferred by 12 U.S.C. § 1818. 15 U.S.C. § 1691c(b).
[E] OCC‘s authority to examine national banks and national bank
operating subsidiaries derives from 12 U.S.C. § 481. See also, 12
C.F.R. § 5.34(e)(3) (regarding examination and supervision of national
bank operating subsidiaries).
[F] OCC may conduct such examinations of certain affiliates of national
banks as shall be necessary to disclose fully the relations between the
bank and such affiliates and the effect of these relations on the
affairs of the bank. 12 U.S.C. § 481.
[G] The Federal Reserve examines state member banks and their
subsidiaries under 12 U.S.C. § 325.
[H] 12 U.S.C. § 338 provides authority for the Federal Reserve to
examine the affairs of affiliates of a state member bank as necessary
to determine the relations between a bank and its affiliates and the
effect of those relations on the affairs of the bank.
[I] 12 U.S.C. §§ 1819(a) Eighth and 1820(b)(2).
[J] 12 U.S.C. § 1820(b)(4) provides authority for FDIC to examine any
affiliate of any depository institution as may be necessary to disclose
the relationship between the depository institution and an affiliate;
and the effect of such relationship on the depository institution.
[K] 12 U.S.C. § 1467a(b)(4).
[L] 12 U.S.C. § 1818(b)(9).
[M] 12 U.S.C. §§ 1463 and 1464.
[N] OTS, in making an examination of a savings association may make
examinations of the affairs of all affiliates of the savings
association as shall be necessary to disclose fully the relations
between the savings association and such affiliates and the effect of
these relations on the affairs of the savings association. 12 U.S.C. §
1464(d)(1)(B)(i).
[O] 12 U.S.C. § 1867 permits examination and regulation of bank service
companies or independent servicers performing under a contract or
otherwise any service for a federally regulated depository institution
by the appropriate Federal banking agency of the depository institution
acquiring the service, which includes OCC, the Federal Reserve, FDIC,
and OTS.
[P] 12 U.S.C. § 1786 generally provides NCUA authority to take
enforcement action against an insured credit union or an institution-
affiliated party that is violating or has violated a law, rule or
regulation, which is somewhat comparable to 12 U.S.C. § 1818(b)
authority. See note.a NCUA has the authority to enforce ECOA against
federal credit unions as the other regulatory agencies have for the
institutions they supervise. See note [B].
[Q] The state supervisory authority (SSA) has primary examination
authority for federally insured state-chartered credit unions (FISCU);
however, NCUA may examine in this area if it believes there is a safety
and soundness concern.
[R] For credit union service organizations (CUSO) providing services
only to federal credit unions (FCU), NCUA has review authority. For
CUSOs that provide services to both FCUs and FISCUs, NCUA and the
appropriate SSA have review authority. Effective June 29, 2009, NCUA
regulation provide NCUA the authority to review any CUSO that provides
service to a FISCU. However, the NCUA Board may exempt FISCUs in a
given state from compliance with section 712.3(d)(3) if the NCUA Board
determines the laws and procedures available to the SSA in that state
are sufficient to provide NCUA with the degree of access to CUSO books
and records it believes is necessary to evaluate the safety and
soundness of credit unions having business relationships with CUSOs
owned by credit union(s) chartered in that state.
[End of table]
[End of section]
Appendix III: Comments from the Federal Trade Commission:
United States Of America:
Federal Trade Commission:
Office of the Director:
Bureau of Consumer Protection:
Washington, D.C. 20580:
July 10, 2009:
Ms. Orice M. Brown:
Director, Financial Markets and Community Investment:
United States Government Accountability Office:
Washington, D.C. 20548:
Dear Ms. Brown:
Thank you for the opportunity to comment on the draft report on Fair
Lending: Data Limitations and the Fragmented U.S. Financial Regulatory
Structure Challenge Federal Oversight and Enforcement Efforts (GAO-09-
704).[Footnote 94] The Report appropriately brings attention to the
limitations of the data that mortgage lenders are required to report
under the Home Mortgage Disclosure Act (HMDA) and the consequences of
those limitations for the ability of the agencies responsible for
enforcing the Equal Credit Opportunity Act (ECOA) and Fair Housing Act
to do so effectively.[Footnote 95] This letter offers additional
important information as to the implications of the data limitations
under HMDA.
The Report acknowledges that HMDA data, by itself, are insufficient to
fully assess the likelihood of ECOA violations and that more
information is needed from lenders in order to do so. However, the
Report appears to rely on the Federal Reserve Board's analysis of HMDA
data (known as the "outlier list") to draw two conclusions. First, the
Report concludes that independent mortgage lenders are more likely than
depository institutions to engage in discrimination when originating
home loans. Second, the Report recommends that additional data as to
applicants' underwriting characteristics be reported by lenders under
HMDA but does not address the importance of discretionary pricing data.
As to the first conclusion, the Federal Reserve's outlier list is based
on a review of HMDA pricing data which, under Regulation C, lenders
only report for higher-priced loans. Many lenders, however, make very
few or no higher-priced loans and thus cannot be evaluated by an
analysis of HMDA pricing data. The lenders who do report large numbers
of higher priced loans under HMDA are disproportionately independent
mortgage lenders. Therefore, it is impossible to reach any conclusion
about which entities are more or less likely to engage in
discrimination based solely on HMDA data or the outlier list; the
conclusion that independent mortgage lenders present a higher risk of
discrimination than do depository lenders is especially tenuous.
Second, the Federal Reserve's outlier list is the result of an analysis
of HMDA pricing data that does not include discretionary pricing data.
As a result, the outlier list is only of limited utility in detecting
lenders with illegal pricing disparities. As demonstrated by both our
recent investigations and our cases over the last three decades,
discretion in granting or pricing credit presents a significant fair
lending risk. Thus, in our investigations, we seek information
concerning whether lenders' business practices allow for discretion,
along with data reflecting both applicants' underwriting
characteristics and the discretionary prices charged to borrowers. Both
types of data, along with information about lenders' business
practices, are needed to identify true instances of discriminatory
conduct.
In sum, although HMDA data have provided a useful tool in identifying
lenders that may merit further scrutiny, the data have limitations that
necessitate gathering more information about the prices of all loans,
including specifically discretionary prices, and about lenders'
business practices before any conclusions about discrimination can
meaningfully be drawn.
[End of section]
Appendix IV: Comments from the Federal Deposit Insurance Corporation:
FDIC:
Federal Deposit Insurance Corporation:
Division of Supervision and Consumer Protection:
550 17th Street NW:
Washington, D.C. 20429-9990:
July 10, 2009:
Mr. Richard J. Hillman, Managing Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Mr. Hillman:
Thank you for the opportunity to review and comment on the Government
Accountability Office's (GAO) report entitled, FAIR LENDING: Data
Limitations and the Fragmented US. Financial Regulatory Structure
Challenge Federal Oversight and Enforcement Efforts (GAO-09704). In
this report, you examined, 1) data used by agencies and the public to
detect potential violations and options to enhance the data, 2) federal
oversight of lenders that are identified as at heightened risk of
violating the fair lending laws, and 3) recent cases involving fair
lending laws and associated enforcement challenges. You recommend that
the FDIC and other federal regulatory and enforcement agencies work
collaboratively to identify approaches to better assess the potential
for discrimination during the preapplication phase of mortgage lending.
For example, you suggest we could further consider the use of testers,
perhaps on a pilot basis, as well as surveys of mortgage loan borrowers
and applicants or alternative means to better assess the potential for
discrimination during the preapplication phase of the mortgage lending
process. The FDIC agrees with this recommendation.
The FDIC has long had a robust fair lending examination and enforcement
program. As you note in your report, we require a thoroughly documented
fair lending review at every consumer compliance examination. All
consumer compliance examiners receive fair lending training. Further,
Fair Lending Examination Specialists in our regional and Washington
offices assist with the most complex examinations, including the Home
Mortgage Disclosure Act (HMDA) pricing "outlier" cases. This process is
supported by economists and statisticians in our Division of Insurance
and Research who perform detailed reviews of HMDA data, and attorneys
in the FDIC's Legal Division.
The FDIC fully investigates all the institutions that appear on its
outlier lists to determine the source of the disparities reflected in
the HMDA data. For most of the outlier reviews to date, the FDIC found
that non-discriminatory reasons explain the disparities. However, where
the FDIC determined that the disparities resulted from discrimination
in violation of the Equal Credit Opportunity Act (ECOA) or the Fair
Housing Act (Fl IA), it utilized its full array of enforcement
authorities to remedy the situation.
Under Section 8 of the Federal Deposit Insurance Act, the FDIC may
pursue enforcement actions to remedy any unsafe or unsound practice or
a violation of any law, including fair lending laws.
The FDIC utilizes both informal and formal enforcement actions to
remedy this misconduct. Informal enforcement actions may include a
resolution issued by the institution's board of directors or a
Memorandum of Understanding (i.e., a written agreement with the FDIC),
documenting the actions the institution commits to take to remedy the
situation. In more serious situations, the FDIC takes formal
enforcement actions against financial institutions and individuals. In
addition to ordering compliance with consumer protection laws, these
actions may seek restitution on behalf of consumers and assess civil
money penalties. Moreover, even where no statistically significant
lending disparities have been found, the FDIC has utilized its informal
enforcement authority to require banks to improve weak internal
monitoring and audit systems, to eliminate or modify programs that have
the potential to result in discrimination, and to ensure that HMDA
reporting is accurate.
Under ECOA, the FDIC may take its own actions even in cases where it
refers matters to the DOJ because of a reason to believe there is
evidence of a pattern or practice of discrimination. However, to avoid
duplication, the FDIC and the DOJ consult about which agency is better
situated to remedy the violation.[Footnote 96] In most mandatory
referral cases the DOJ defers to the FDIC's administrative enforcement
process.
The FDIC continues to seek additional means of finding and remedying
illegal discrimination. We believe that a variety of approaches are
necessary in light of the myriad operational models presented by
institutions of different sizes and business strategies. Ensuring
effective compliance involves a thorough understanding of supervised
institutions and their operations. Bank examinations play an essential
role in discovering and remedying specific violations as well as
requiring actions by institutions to prevent future violations. We
support your recommendation that the agencies collaborate to consider
undertaking mystery shopping activities, perhaps as a pilot, and that
we also consider the potential use of consumer surveys as an
alternative means to detect potential discrimination. During the coming
year we will work with the other agencies, through the established
Joint Agency Task Force on Fair Lending, to carefully review these
possible actions and determine whether and to what extent they could
provide useful information about potential discrimination.
Sincerely,
Signed by:
Sandra L. Thompson:
Director:
[End of section]
Appendix V: Comments from the Board of Governors of the Federal Reserve
System:
Board Of Governors Of The Federal Reserve System:
WASHINGTON, D.C. 20551:
July 9, 2009:
Ms. Once Williams Brown:
Director, Financial Markets and Community Investment:
Government Accountability Office:
Washington, DC 20548:
Dear Ms. Brown:
Thank you for the opportunity to comment on the draft report entitled
"Fair Lending: Data Limitations and the Fragmented U.S. Financial
Regulatory Structure Challenge Federal Oversight and Enforcement
Efforts," GAO-09-704. The draft report recommends that federal agencies
work collaboratively to identify approaches to better assess the
potential for discrimination during the pre-application phase of
mortgage lending. The report cites testers and surveys of borrowers as
examples of techniques that may warrant further consideration.
Currently, the Federal Reserve uses the Interagency Fair Lending
Examination Procedures, as well as statistical analysis, to identify
pre-application discrimination. Pursuant to the Interagency Fair
Lending Examination Procedures, examiners analyze the potential for
steering at institutions that engage in both prime and subprime
lending, or have both prime and subprime affiliates. For example,
examiners consider whether the institution has clear, objective
standards for referring applicants to subsidiaries or affiliates,
classifying applicants as "prime" or "subprime," or deciding what kinds
of alternative loan products should be offered to applicants. In our
statistical analysis of mortgage pricing, we look for evidence that
minorities are targeted for more expensive loans or loans with
potentially onerous terms, such as prepayment penalties. We would be
pleased to work with the other agencies to share what we have learned
and to explore other techniques to identify illegal discrimination at
the pre-application phase.
We note that the draft report raises other matters for Congressional
consideration, including expanding the Home Mortgage Disclosure Act
(HMDA) data set, collecting application information on non-mortgage
loans, extending the statute of limitations for the Equal Credit
Opportunity Act, and taking steps to ensure that fair lending laws are
comprehensively and consistently enforced. The Board would be pleased
to provide technical assistance to Congress on any of these proposals.
The draft report analyzes federal fair lending enforcement efforts,
including each regulatory agency's fair lending examination process.
The Federal Reserve is committed to ensuring that every institution it
supervises complies fully with the fair lending laws. As noted in the
draft report, Federal Reserve Board staff provide significant oversight
of the fair lending examination process. The Federal Reserve Board has
a dedicated Fair Lending Enforcement Section to ensure that the fair
lending laws are enforced rigorously throughout the Federal Reserve
System. The section centrally manages the HMDA screening process
discussed in the draft report and described more fully below. The
section also tracks potential fair lending violations across the system
and provides legal and statistical guidance to examiners to ensure that
each potential fair lending violation is fully evaluated and that
appropriate enforcement action is taken.
The draft report also describes the efforts of the federal agencies to
use HMDA data to facilitate fair lending enforcement As the draft
report notes, the Federal Reserve Board has developed statistical
screens of the HMDA data to identify institutions with statistically
significant pricing disparities by race and ethnicity. The Federal
Reserve follows a highly rigorous process to ensure that we effectively
use these screens to identify institutions under our supervision at
risk for pricing discrimination. Federal Reserve examiners prepare a
comprehensive pricing discrimination risk assessment for each
institution supervised by the Federal Reserve that is identified
through our HMDA pricing screens. These risk assessments consider the
institution's fair lending compliance program, our past supervisory
experience with the institution, consumer complaints, and the presence
of fair lending risk factors, such as discretionary pricing and
incentives to charge borrowers higher prices. We place particular
emphasis on the presence of discretionary pricing, such as allowing
overages, and financial incentives that reward loan officers for
charging higher prices to borrowers. Based on these comprehensive
assessments, we determine which institutions should receive a targeted
pricing review.
Our rigorous fair lending enforcement process extends to nonbank
subsidiaries of bank holding companies. As noted in the draft report,
the Federal Reserve has taken significant steps in recent years to
increase its consumer compliance supervision of nonbank subsidiaries.
In 2006, we established a specific unit at the Federal Reserve Board
dedicated to large and complex banking organizations, including nonbank
subsidiaries of bank holding companies. While nonbank subsidiaries are
not subject to routine consumer compliance examinations, they are
subject to risk-based supervisory reviews, such as in depth risk
assessments. These supervisory reviews have resulted in the
identification of several fair lending issues, which are then subject
to a full evaluation, including the analysis of loan files when
appropriate. In 2008, for example, a nonbank subsidiary was referred to
the Department of Justice after a supervisory review identified a
discriminatory lending policy.
Additionally, nonbank subsidiaries of bank holding companies are
subject to the same rigorous HMDA screening process described above. We
have performed robust pricing reviews of several nonbank subsidiaries
and referred one to the Department of Justice for pricing
discrimination. As a result of our supervisory experience with nonbank
subsidiaries, including the subprime pilot discussed in the draft
report, the Federal Reserve Board is developing a framework for
increased risk-based supervision of nonbank subsidiaries to further
strengthen the review of these entities.
We appreciate the professionalism of the GAO's review team in
conducting this study.
Sincerely,
Signed by:
Sandra Braunstein:
Director:
Division of Consumer and Community Affairs:
[End of section]
Appendix VI: Comments from the National Credit Union Administration:
National Credit Union Administration:
Office of the Chairman:
1775 Duke Street:
Alexandria, VA 22314-3428:
703-518-6300; 703-518-6319: Fax:
July 13, 2009:
Encrypted Electronic Mail Delivery: PhillipsW@.gao.gov:
Mr. Wesley Phillips, Assistant Director:
Financial Markets and Community Investment:
United States Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Phillips:
Thank you for the opportunity to review and comment on GAO's draft
report, dated June 26, 2009, entitled Fair Lending: Data Limitations
and the Fragmented U.S. Financial Regulatory Structure Challenge
Federal Oversight and Enforcement Efforts (GAO-09-704). The discussion
below responds specifically to your report's comments, conclusions, and
recommendations.
Regulator Referral Practices Vary:
The report states "While it is difficult to fully assess the reasons
for the differences in referrals and outlier examination findings
across the depository regulators without additional analysis, they
raise important questions about the consistency of fair lending
oversight. In particular, depository institutions under the
jurisdiction of OTS, FDIC, and the Federal Reserve appear to be far
more likely to be the subject of fair lending referrals to DOJ." GAO
concludes that "Under the fragmented regulatory structure, differences
across the depository regulators in terms of their determination of
what constitutes an appropriate referral as well as fair lending
examination findings are likely to persist."
Furthermore, the Conclusion section states: "Despite the joint
interagency fair lending examination guidance and various coordination
efforts, we also found that having multiple depository institution
regulators resulted in variations in screening techniques, the
management of the outlier examination process, examination
documentation standards, and the number of referrals and types of
examination findings. While differences in these areas may not be
unexpected given the varied types of lenders under each regulator's
jurisdiction, these differences raise questions about the consistency
and effectiveness of regulatory oversight. For example, the evidence
suggests that lenders regulated by FDIC, the Federal Reserve, and OTS
are more likely than lenders regulated by OCC and NCUA to be the
subject of referrals to DOJ for potential fair lending violations. Our
current work did not fully evaluate the reasons and effects of
identified differences and additional work in this area could help
provide additional clarity."
NCUA concurs that additional study is needed relative to DOJ referrals;
however, it should be done prior to reaching the conclusion about the
consistency and effectiveness of NCUA's regulatory oversight. As the
report points out, NCUA has not referred any fair lending violations to
the Department of Justice (DOJ). Such referrals should only be done
where there is a clear pattern or practice of discriminatory actions.
NCUA did not identify any such actions during the time period covered
by the report. NCUA uses the same fair lending examination procedures
as the other banking regulators thereby providing a consistent approach
to identifying potential DOJ referrals.
Violations may not exist in credit unions because credit unions: (1)
are member owned and member managed; (2) have a defined field of
membership which enables them to have a better understanding of their
members' financial needs, (3) are nonprofit entities; and (4) have
specified mission of meeting the credit and savings needs of members,
especially persons of modest means (who typically are the target of
discriminatory actions).
Matters for Congressional Consideration:
Additional data collection and reporting options. NCUA concurs
obtaining key underwriting data for mortgage loans would assist in
analyzing the HMDA data and enhance the ability of identifying
potential fair lending concerns in an efficient manner. NCUA does not
concur with applying that strategy to a subset of institutions who
report HMDA data and recommends that all institutional reporters report
the same information.
ECOA statute of limitations. NCUA concurs with extending the ECOA
statute of limitations to 5 years.
Recommendation for Executive Action:
Interagency collaboration. NCUA concurs with the recommendation for the
DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS to work
collaboratively to identify approaches to better assess the potential
for discrimination during the preapplication phase of mortgage lending.
Thank you again for the opportunity to comment on the draft report.
NCUA trusts the requested report changes submitted to the GAO on July
10, 2009 will be incorporated into the final report. If you have any
questions or need further information, please feel free to contact NCUA
Executive Director David M. Marquis at (703) 518-6320.
Sincerely,
Signed by:
Michael E. Fryzel:
Chairman:
[End of section]
Appendix VII: Comments from the Office of the Comptroller of the
Currency:
Comptroller of the Currency:
Administrator of National Banks:
Washington, DC 20219:
July 10, 2009:
Ms. Once Williams Brown:
Director:
Financial Markets and Community Investment:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Brown:
We have received and reviewed your draft report, "Fair Lending: Data
Limitations and the Fragmented U.S. Financial Regulatory Structure
Challenge Federal Oversight and Enforcement Efforts." I offer the
following comments on behalf of the Office of the Comptroller of the
Currency (OCC).
I. Background on the OCC's Fair Lending Supervisory Process:
It is helpful at the outset to briefly describe the OCC's fair lending
compliance program in order to give context to our comments. Assuring
fair access to credit and fair treatment of national bank customers are
fundamental responsibilities of the OCC as administrator of the
national banking system. The OCC's fair lending supervisory and
enforcement process is designed to monitor the level of fair lending
risk in every national bank; assess compliance with fair lending laws
and regulations; obtain corrective action when significant weaknesses
or deficiencies are found in a bank's policies, procedures, and
controls; and ensure that enforcement action is taken when warranted,
including referrals to the Department of Justice (DOJ) and
notifications to the Department of Housing and Urban Development (HUD).
The foundation of the OCC's integrated safety and soundness and
compliance supervisory process is the detailed, core knowledge that
examiners develop and maintain about each bank's organizational
structure, culture, business lines, products, services, customer base,
and level of risk. With that as a starting point, the OCC's fair
lending supervisory and enforcement process. uses a combination of
analytical tools, bank-specific lending reviews, and risk-based
targeted fair lending examinations to evaluate credit decisions made by
a bank and to help us determine whether different outcomes are the
result of unlawful discrimination.
For banks that have a large volume of applications, as well as a
variety of loan product types, the OCC often uses statistical models to
compare information from large numbers of files and to test for high
risks of potential unlawful discrimination. Examiners first review the
bank's underwriting and pricing policies, and then work with
quantitative experts to construct a statistical model to test for
potential discrimination. As part of this process, the OCC receives a
large amount of information from the bank that is not contained in the
Home Mortgage Disclosure Act (HMDA) data and that may explain
variations in underwriting and pricing decisions by race, ethnicity, or
sex. For example, underwriting policy information can include cutoffs
or threshold values for certain key variables, like debt-to-income
ratios. In pricing examinations, examiners will request rate sheets,
policies on "overages" and "underages," and exceptions to pricing
policies. Because underwriting and pricing decisions can vary by bank,
channel, and product, the exact model specifications also can vary bank
to bank, and exam to exam. Once a model is developed, we focus on the
magnitude and significance of the estimated disparities between
prohibited basis groups and a control group, using standard statistical
tests. These techniques help to identify particular applications or
originations that appear to be outliers or to identify applicants who
appear to be similarly situated, but who experienced different
outcomes. This process helps to identify the corresponding loan files
to be reviewed.
Midsize and community banks have smaller loan volumes and less
diversity in loan types than the larger institutions we supervise.
While we use statistical techniques to assist in fair lending
examinations at a number of midsize institutions, for other midsize
institutions and for community banks, statistical analysis is not
appropriate or feasible. For these reasons, after setting the
examination focus and scope, the next stage of a fair lending
examination for midsize and community banks is typically a comparative
file review, rather than the use of statistical analysis.
For all banks, when potential unlawful discriminatory results are
found, examiners present their findings to bank management for an
explanation. If the bank's explanation is inadequate to rebut
preliminary examination findings, the findings are documented, and
decisions are made on what OCC supervisory or enforcement action should
be taken and on whether the matter must be referred to the DOJ or HUD.
II. Discussion of Draft Report Findings and Recommendations, and OCC
Responses:
The following describes several issues and recommendations raised in
the GAO's draft report and the actions that the OCC will be taking with
respect to those issues.
Centralized oversight of fair lending functions. While the report does
not take issue with the OCC's substantive oversight of its fair lending
functions, it notes that our approach to managing and documenting the
examination programs for institutions that have been identified as
"outliers" in our fair lending screening processes is not centralized
in the OCC headquarters office. This is only partially correct. The
OCC's fair lending risk screening process and policy development is
managed in headquarters; however, the conduct and oversight of fair
lending examinations themselves rests primarily with senior supervisory
managers in our four district offices (for our midsize and community
banks), and with the examiners-in-charge (for our large banks). We have
found this approach to be effective and efficient, and information
about the status of our examination activities is available to
headquarters managers through databases that centralize this
information. And as the report recognizes, we have made a number of
enhancements to our systems in order to facilitate retrieval of
information of key exam status information. Nevertheless, based on
conversations with my staff about these issues after reading the draft
report, I have determined that there are additional steps we could take
to enhance our procedures by formalizing aspects of headquarters
involvement in our oversight process. First, as described in more
detail below, we are implementing additional enhancements to our data
systems to facilitate ready retrieval of key examination status
information. Second, going forward, I have directed that senior level
officials in our headquarters offices-the Senior Deputy Comptroller for
Large Bank Supervision and the Senior Deputy Comptroller for
Midsize/Community Bank Supervision, as applicable - receive reports on
at least a quarterly basis of scheduled, pending, and completed fair
lending examinations, to enable these senior managers to have readily
available and uniform information that will facilitate their oversight
of the types, timeliness, and findings of these examinations on an
ongoing basis.
Documentation of fair lending examinations. As noted in the report, the
OCC already has taken a number of steps to improve fair lending
compliance documentation practices. I have directed my staff to further
refine these documentation procedures so that our centralized databases
contain information in a standardized form for: the relevant dates the
examination was conducted (for our largest banks, this generally would
be the calendar year); the risk factors that were identified in the
screening or risk assessment process applicable to the bank; the time
frame of the HMDA data that were used in the screening process; the
focal points of the examination; reasons for any difference between
those focal points and the areas identified through the risk. screening
process; and the key findings of the examination. In addition,
specified types of significant back up documents relating to a fair
lending examination, such as statistical analyses and conclusion
memoranda, will be included in these records in a uniform way for easy
"onestop" access by OCC supervisory staff and senior management.
Limitations on HMDA data. The report discusses the limitations on the
data that are collected and reported under HMDA. Key underwriting
information is not contained in the publicly reported HMDA data, and
the report suggests that annual screening processes at the banking
agencies could be made more efficient if each agency had access to
additional underwriting data when screening for outliers. As the report
notes, however, the OCC already has undertaken to collect and use such
additional information in our fair lending supervision of large banks.
This year, we began a pilot program at six of the largest national
banks to collect "HMDA-plus" information - expanded data on all
relevant underwriting factors - at the earliest possible stage in the
examination cycle, and we use this information as part of a
comprehensive screen for fair lending risks at these banks. We have
found that the approach we followed in our pilot program has the
potential to significantly improve the efficiency and quality of our
fair lending screening process at these banks. Therefore, I have
directed my staff to expand the "HMDA-plus" screening process to
additional banks in our large bank supervision program.
Need for information about potential preapplication discrimination. The
report also discusses other data limitations, such as information about
potential discrimination during the preapplication process, and it
concludes that the lack of such information may limit the federal
banking agencies' fair lending enforcement efforts. The report
specifically recommends that the federal banking and enforcement
agencies "work collaboratively to identify approaches to better assess
the potential for discrimination during the preapplication phase of
mortgage lending." In particular, it suggests that the agencies further
evaluate the use of testers and also explore other means of obtaining
information about potential preapplication discrimination such as
conducting surveys of applicants. We agree that enhanced tools to
combat potential preapplication discrimination are desirable; the key
question is whether and how the use of testers can reliably accomplish
that goal. We welcome discussions with the other banking agencies, DOJ,
and HUD about how to improve our joint procedures in this regard.
Interagency coordination on fair lending activities. As noted in the
report, coordination by the federal banking agencies, DOJ, and HUD on
fair lending issues is an important, and ongoing, process given our
respective responsibilities. We also agree that more effective
coordination and information sharing would be appropriate to ensure
consistency in our fair lending oversight. Another issue raised in your
report that bears particular interagency scrutiny is why the
overwhelming majority of referrals to DOJ are marital status violations
and why relatively very few referrals are race and ethnicity matters.
This fact is true for all of the federal banking agencies - even though
each agency conducts some form of analysis of HMDA data in order to
identify the institutions that appear to have significant disparities
in denial rates and loan prices along race and ethnicity lines.
Improving the effectiveness and consistency of the banking agencies'
screening processes and standards for referrals is also very
appropriate to take up on an interagency basis.
Variations in referral practices. With respect to referral practices in
particular, the report noted that there were significant differences in
the practices the regulators employed to make referrals to DOJ and the
number of referrals made. For example, as the report describes, the OCC
conducts a variety of in-depth analyses, which may include statistical
analysis and loan file reviews, before making a decision to make a
referral to DOJ. We also discuss issues with DOJ on an ongoing basis to
assist in the determination of whether a referral is warranted. Based
on the information contained in the report, it appears that our pre-
referral decision activities may be more extensive than other agencies.
This weeding out process may account for the low number of referrals to
DOJ by the OCC. Nevertheless, it does illustrate the differences that
exist among the agencies' processes and our respective interpretations
of DOJ's guidance on referrals by the federal banking agencies. We
agree that more consistency in the standards and processes employed in
the area is very desirable, and we will undertake to work with the
other federal banking agencies and DOJ to further that objective.
Need for oversight of non federally supervised lenders. Finally, the
report notes the significant gaps in oversight between institutions
supervised by the federal banking agencies compared to independent
lenders who were the "predominant originators of subprime and other
questionable mortgages that often were made to minority borrowers." As
the report points out, these lenders accounted for almost half of
lenders on the Federal Reserve Board's outlier list despite the fact
that they account for only 20% of all HMDA reporters. This is a
troubling statistic, and it underscores the need for action to address
the "gaps and inconsistencies in the oversight of independent mortgage
brokers and nonbank subsidiaries" cited in the report.
We appreciate the opportunity to comment on the draft report.
Sincerely,
Signed by:
John C. Dugan:
Comptroller of the Currency:
[End of section]
Appendix VIII: Comments from the Office of Thrift Supervision:
Office of Thrift Supervision:
Department of the Treasury:
John E. Bowman:
Acting Director:
1700 G Street, NW:
Washington, DC 20552:
202-906-6372:
July 10, 2009:
Orice M. Brown:
Director, Financial Markets and Community Investment:
United States Government Accountability Office:
441 G Street NW:
Washington, DC 20548:
Dear Ms. Brown:
Thank you for the opportunity to review and comment on the Government
Accountability Office (GAO)'s draft report entitled, Fair Lending: Data
Limitations and the Fragmented U.S. Financial Regulatory Structure
Challenge Federal Oversight and Enforcement Efforts (GAO-09-704).
Various agencies share responsibility for oversight of the federal fair
lending laws, including the Office of Thrift Supervision (OTS). The
report examines data used by agencies and the public to detect
potential violations and options to enhance the data: federal oversight
of lenders that are identified as at heightened risk of violating the
fair lending laws: and recent cases involving fair lending laws and
associated enforcement challenges.
GAO outlines matters for Congressional consideration as well as a
recommendation directed to the agencies. To help strengthen fair
lending oversight and enforcement, GAO recommends that DOJ, FDIC,
Federal Reserve, FTC, HUD, NCUA, OCC and OTS work collaboratively to
identify approaches to better assess the potential for discrimination
during the preapplication phase of mortgage lending. While OTS
currently works closely with the OCC, FDIC, Federal Reserve and NCUA
(collectively the federal banking agencies) on common supervisory and
examination programs and issues, OTS concurs with the report's
executive recommendation and will collaborate with the federal banking
agencies, FTC. HUD, and DOJ to review, identify, and evaluate
approaches to better assess the potential for discrimination during the
preapplication phase of mortgage lending.
Thank you again for the opportunity to review and respond to your draft
report.
Sincerely,
Signed by:
John E. Bowman:
[End of section]
Appendix IX GAO Contact and Staff Acknowledgments:
GAO Contact:
Orice Williams Brown, (202) 512-8678, or williamso@gao.gov:
Staff Acknowledgments:
In addition to the individual name above, Wesley M. Phillips, Assistant
Director; Benjamin Bolitzer; Angela Burriesci; Kimberly Cutright; Chris
Forys; Simin Ho; Marc Molino, Carl Ramirez; Linda Rego; Barbara
Roesmann; Jim Vitarello; and Denise Ziobro made major contributions to
this report. Technical assistance was provided by Joyce Evans and
Cynthia Taylor.
[End of section]
Footnotes:
[1] Respectively, Pub. L. No. 90-321, title VII, as added Pub. L. No.
93-495, title V, 88 Stat. 1521 (1974), codified at 15 U.S.C. §§ 1691-
1691f; and Pub. L. No. 90-284, title VIII, 82 Stat. 81 (1968), codified
at 42 U.S.C. §§ 3601-3619.
[2] Pub. L. No. 90-321, 82 Stat. 146 (1968), codified at 15 U.S.C. §§
1601-1667e, 1671-1693r; 18 U.S.C. §§ 891-896.
[3] DOJ has enforcement authority over all lenders under both the FHA
and ECOA.
[4] 15 U.S.C. § 1691e(g). According to DOJ, the courts have found a
"pattern or practice" when the evidence establishes that the
discriminatory actions were the defendant's regular practice, rather
than an isolated instance. A "pattern or practice" also exists when the
defendant has a policy of discriminating, even if the policy is not
always followed.
[5] Pub. L. No. 94-200, title III, 89 Stat. 1125, codified at 12 U.S.C.
§§ 2801-2810. HMDA requires lending institutions to collect and
publicly disclose information about housing loans and applications for
such loans, including the loan type and amount, property type, income
level and borrower characteristics (such as ethnicity, race, and sex).
All federally insured or regulated banks, credit unions, and savings
associations with total assets exceeding $39 million, as of December
31, 2008, with a home or branch office in a metropolitan statistical
area (MSA) that originated any secured home purchase loans or
refinancing are required to file HMDA data. Regulation C, 12 C.F.R. §§
203.3(e)(1), 203.4 (2009); see also Home Mortgage Disclosure, 73 Fed.
Reg. 78616 (Dec. 23, 2008) (establishing an adjustment from $37 million
to $39 million). Further, most mortgage lending institutions located in
a MSA must file HMDA data. 12 C.F.R. §§ 203.3(e)(2), 204.4.
[6] Not all depository institution regulators may use the term
"outlier" to describe lenders that are identified as potentially having
heightened risk for fair lending law violations through their annual
analysis of HMDA data and other information. However, we use the term
"outlier" to describe such lenders for purposes of consistency in this
report.
[7] For the purposes of this report, we refer to enforcement agencies'
(HUD, FTC, and DOJ) assessments of individual lender's compliance with
the fair lending laws (including analysis of HMDA data and other
information, on-site interviews, and file reviews) as "investigations"
and depository institution regulators' (FDIC, Federal Reserve, NCUA,
OCC, and OTS) assessments as "examinations."
[8] We use the term "underwriting" in this report to describe data or
information that lenders may use to make credit decisions, such as
whether to approve or deny a loan application or the terms of approved
loans, such as their interest rates or fees. These underwriting data or
variables include borrower credit scores, debt-to-income (DTI) ratios,
or loan-to-value (LTV) ratios.
[9] See 12 C.F.R. pt. 203, app. B.
[10] See GAO, Fair Lending: Federal Oversight and Enforcement Improved
but Some Challenges Remain [hyperlink,
http://www.gao.gov/products/GAO/GGD-96-145] (Washington, D.C.: Aug. 13,
1996).
[11] Depository institution regulators may use the Federal Reserve's
annual HMDA screening list to target examinations or they may develop
their own outlier lists through independent reviews of HMDA data and
other sources, such as complaints. Our reviews were based on outlier
lists that the depository institution regulators developed from 2005
and 2006 HMDA data.
[12] Our review consisted of a random sample of 20 outlier examinations
that OCC conducted based on 2005 HMDA data and seven based on 2006 HMDA
data. We also reviewed a random sample of 10 of the 25 fair lending
examinations that NCUA conducted in calendar year 2007.
[13] Federal Financial Institutions Examination Council(FFIEC),
"Interagency Fair Lending Procedures," [hyperlink,
http://www.ffiec.gov/PDF/FairLend.pdf].
[14] We did not interview NCUA economists or attorneys, and NCUA does
not have statisticians.
[15] This also includes the Community Reinvestment Act (CRA) of 1977,
Pub. L. No. 95-128, title VIII, 91 Stat. 1147. CRA seeks to
affirmatively encourage institutions to help meet the credit needs of
the entire community served by each institution, and CRA ratings take
into account lending discrimination by those lenders. For example, see
12 C.F.R. §§ 25.28(c), 228.28(c) (2009). This report focused solely on
enforcement of ECOA and FHA.
[16] See 42 U.S.C. §§ 3610, 3612, 3614; 15 U.S.C. § 1691e(g), (h).
According to HUD, a memorandum of understanding between HUD and the
federal depository institution regulators provides for intra-
governmental cooperation in the investigation of fair housing
complaints against depository institutions. DOJ indicated that DOJ, but
not HUD, has authority to enforce ECOA as well as the FHA with respect
to all lenders.
[17] 15 U.S.C. § 1691c(a)(c).
[18] HUD also refers fair lending complaints filed by aggrieved persons
to state and local government agencies that enforce fair housing laws
that are substantially equivalent to FHA. See 42 U.S.C. § 3610(f).
However, such complaints are then processed under the state or
locality's substantially equivalent law, not FHA.
[19] Ch. 240, 70 Stat. 133, codified at 12 U.S.C. 1841-1850.
[20] A depository institution regulator also may refer an ECOA case to
DOJ when it has reason to believe that one or more creditors has
violated the nondiscrimination provisions of ECOA. 15 U.S.C. §
1691e(g).
[21] 15 U.S.C. § 1691e(k). FDIC also noted that, as a practical matter
in mortgage lending, most ECOA violations also will constitute
violations of FHA. DOJ noted that this is the case if they involve one
or more factors prohibited by both statutes, such as race, color,
national origin, sex or religion. Marital status is not a prohibited
basis under FHA.
[22] 42 U.S.C. §§ 3610(e)(2) 3614(a).
[23] Ch. 967, §§ 1,2, 64 Stat. 873 (1950) codified at 12 U.S.C. § 1818;
ch. 750, 48 Stat. 1216 (1934), codified at 12 U.S.C. §§ 1751 et. seq.
[24] See 15 U.S.C. §§ 1691c(a) and 1691e(g).
[25] 12 U.S.C. § 1818(b). An institution-affiliated party is (1) any
director, officer, employee, or controlling stockholder (other than a
bank holding company) of, or agent for, an insured depository
institution; (2) any other person who has filed or is required to file
a change-in-control notice with the appropriate federal banking agency
under [12 U.S.C. § 1817(j)]; (3) any shareholder (other than a bank
holding company), consultant, joint venture partner, and any other
person as determined by the appropriate federal banking agency (by
regulation or case-by-case) who participates in the conduct of the
affairs of an insured depository institution; and (4) any independent
contractor (including any attorney, appraiser, or accountant) who
knowingly or recklessly participates in any violation of any law or
regulation; any breach of fiduciary duty; or any unsafe or unsound
practice, which caused or is likely to cause more than a minimal
financial loss to, or a significant adverse effect on, the insured
depository institution, which caused or is likely to cause more than a
minimal financial loss to, or a significant adverse effect on, the
insured depository institution. 12 U.S.C. § 1813(u).
[26] 12 U.S.C. § 1786(e)(1). ("If, in the opinion of the Board, any
insured credit union, credit union which has insured accounts, or any
institution-affiliated party is engaging or has engaged, or the Board
has reasonable cause to believe that the credit union or any
institution-affiliated party is about to engage, in an unsafe or
unsound practice in conducting the business of such credit union, or is
violating or has violated, or the Board has reasonable cause to believe
that the credit union or any institution-affiliated party is about to
violate, a law, rule, or regulation, or any condition imposed in
writing by the Board in connection with the granting of any application
or other request by the credit union or any written agreement entered
into with the Board, the Board may issue and serve upon the credit
union or such party notice of charges in respect thereof.")
[27] 12 U.S.C. § 1818.
[28] 12 U.S.C. § 1818(i)(2); 12 U.S.C. § 1786(k)(2) for NCUA. In
addition, while DOJ has 2 years to file a civil action for an ECOA
violation, depository institution regulators have 5 years to take
enforcement action to impose civil money penalties for violations of
the fair lending statutes.
[29] Regulation C, 12 C.F.R § 203.2(e) (2009) addresses which financial
institutions must submit HMDA data.
[30] According to the Federal Reserve, one of the purposes of
Regulation C is to require reporting of price data for subprime loans.
Originally, a "higher price" loan under Regulation C was defined as a
loan with an annual percentage rate (APR) of 3 or more percentage
points (5 or more percentage points for subordinate-lien loans) higher
than the yield for a comparable term Department of the Treasury
security as of a date within approximately 1 month before the date the
interest rate for the loan was set. On October 24, 2008, the Federal
Reserve announced the adoption of a final rule amending Regulation C,
effective October 1, 2009, that changes the definition of a "higher
price" mortgage loan under Regulation C to correspond to the definition
of a "higher price" loan under Regulation Z. Under the new rule, a
"higher price" loan is one with an APR that is 1.5 or more percentage
points (3.5 or more percentage points for subordinate-lien loans)
higher than a rate published by the Federal Reserve Board (based on the
Freddie Mac Primary Mortgage Market Survey average rate) as of a date
within approximately 1 week before the date the interest rate for the
loan was set. The new rule is intended to more effectively and
consistently capture the subprime market and is not intended to lower
the threshold and capture more loans overall. See Home Mortgage
Disclosure, 73 Fed. Reg. 63329 (Oct. 24, 2008) (to be codified at 12
C.F.R. pt. 203).
[31] The Federal Reserve begins this process in March when HMDA data is
filed for the preceding calendar year and the lists are generally
shared with the other depository institution regulators by September.
[32] Currently, the rate spread is the difference between the annual
percentage rate on the loan and the yield on Department of the Treasury
securities with a comparable maturity.
[33] Redlining is the practice by which lenders may not make loans in
areas that have large minority populations.
[34] As described in this report, depository institution regulators
conduct routine fair lending and other consumer compliance examinations
in addition to the targeted examinations associated with their outlier
programs.
[35] The credit score indicates the applicants' past credit history and
potential default risk, the DTI indicates the potential financial
burden of a mortgage on a borrower, and the LTV indicates the amount of
borrower equity in a property.
[36] A loan's rate spread--the difference between the annual percentage
rate on a loan and the rate on the Department of the Treasury
securities of comparable maturity--determines whether pricing data are
required for HMDA reporting. Only loans with spreads above designated
thresholds set by Regulation C must be reported. For example, for first-
lien loans, the threshold is 3 percentage points above the Department
of the Treasury security of comparable maturity. 12 C.F.R.
§203.4(a)(12). The Federal Reserve chose the thresholds in the belief
that they would exclude the vast majority of prime-rate loans and
include the vast majority of subprime-rate loans. See 67 Fed. Reg.
7222, 7229 (Feb. 15, 2002).
[37] See GAO, Fair Lending: Race and Gender Data Are Limited for
Nonmortgage Lending, [hyperlink,
http://www.gao.gov/products/GAO-08-698] (Washington, D.C.: June 27,
2008).
[38] FDIC also indicated that when conducting pricing analyses, they
aim to understand and analyze the pricing factors actually used by the
particular lender being reviewed.
[39] Under HMDA, the Federal Reserve has broad authority to carry out
the purposes of the act, including requiring lenders to collect and
report data as deemed necessary. Our work did not involve a review of
the Federal Reserve's basis for not requiring lenders to report certain
underwriting data. Congress also has the option of amending HMDA, as it
has in the past to require additional data collection and reporting.
[40] [hyperlink, http://www.gao.gov/products/GAO-08-698].
[41] Overages occur when lenders allow loan originators to exercise
discretion when determining the fees and interest rates charged to
borrowers over and above the risk-based price of the loan. This overage
is not related to the default risk of a particular borrower. Therefore,
two borrowers with similar underwriting characteristics may pay
different prices for the same loan product due to the added
discretionary price. According to FTC, although many lenders collect
overage data to determine loan officer compensation, not all lenders
maintain this information so that it can be readily provided in
response to requests from enforcement agencies and depository
institution regulators.
[42] Inside Mortgage Finance Publications, The 2009 Mortgage Market
Statistical Annual (Bethesda, Md.: 2009).
[43] Some information is collected concerning preapproval requests made
by loan applicants. See Regulation C, 12 C.F.R. pt. 203, app. A (2009).
[44] See [hyperlink, http://www.gao.gov/products/GAO/GGD-96-145].
[45] Stephen Ross, et. al. "Mortgage Lending in Chicago and Los
Angeles: A Paired Testing Study of the Preapplication Process," Journal
of Urban Economics 63, no. 3 (Aug. 3, 2006). Margery Austin Turner and
Felicity Skidmore, eds., The Urban Institute, "Mortgage Lending
Discrimination: A Review of Existing Evidence" (Washington, D.C.: June
1999).
[46] Ross, et al.
[47] The results of OCC's pilot testing program were summarized in
Advisory Letter 96-3 (Apr. 18, 1996).
[48] See 15 U.S.C. § 1691c-1, which provides that the results of a self-
test conducted by a lender of a credit transaction to determine the
lender's compliance with ECOA, when corrective action is taken for any
possible violation identified in the self-test is privileged and may
not be obtained or used in a court action, examination, or
investigation related to the lender's compliance with ECOA. See also 42
U.S.C. § 3614-1 (FHA self-testing privilege).
[49] See Department of the Treasury, Financial Regulatory Reform: A New
Foundation: Rebuilding Financial Supervision and Regulation (June
2009).
[50] See [hyperlink, http://www.gao.gov/products/GAO-08-698].
[51] Regulation B also establishes procedures that lenders are to
follow in providing notice to loan applicants that their applications
for credit have been denied. See 12 C.F.R. § 202.9 (2009).
[52] A Federal Reserve official said that it has the authority under
ECOA to require lenders to collect personal characteristic data for
nonmortgage loans but may not have the authority to require the public
reporting of such information.
[53] The U.S. Supreme Court recently upheld the states' right to
enforce state fair-lending laws against National Banks, which are under
the supervision of the OCC. Cuomo v. Clearing House Ass'n, L.L.C., 557
U.S.___, No. 08-453, 2009 WL 1835148 (June 29, 2009).
[54] [hyperlink, http://www.gao.gov/products/GAO-08-78R]. Alt-A
mortgages generally serve borrowers whose credit histories are close to
prime, but the loans often have one or more higher-risk features such
as limited documentation of income or assets.
[55] See GAO, Federal Housing Administration: Decline in the Agency's
Market Share Was Associated with Product and Process Developments of
Other Market Participants, [hyperlink,
http://www.gao.gov/products/GAO-07-645] (Washington, D.C.: June 29,
2007).
[56] The Interagency Fair Lending Examination Procedures are currently
being updated.
[57] The examination procedures generally include guidelines to set the
scope and intensity of an examination by identifying all potential
focal points or risk factors that appear worthwhile to examine.
Activities include understanding credit operations and evaluating the
potential for discriminatory conduct, and examination procedures, which
assess the institution's fair lending performance by applying the
appropriate procedures that follow each of the examination focal points
already selected during scoping. The appropriate procedures include (1)
documenting overt evidence of disparate treatment, such as written
policy, oral statements, or unwritten practice; (2) analyzing
transactional underwriting for residential, consumer, and commercial
loans to test for disparities in loan approvals and denials; (3)
analyzing potential disparities in terms and conditions, such as rates,
fees, maturity variations, LTVs, and collateral requirements to test
for pricing disparities; (4) analyzing the potential for steering,
redlining, and discriminatory marketing practices; (5) analyzing the
lender's credit scoring model, if used; (6) and analyzing the potential
for disparate impact, which is the potential that a seemingly neutral
business or lending policy has a disproportionate and adverse effect on
targeted groups.
[58] This estimation of more than 400 outlier examinations is based on
the fact that FDIC, OTS, and the Federal Reserve generally were able to
provide the requested documentation for all institutions identified on
their 2005 and 2006 outlier lists. As previously mentioned, we reviewed
a sample of examinations from OCC and NCUA. Both OCC and NCUA generally
were able to provide documentation of examinations for institutions
selected in our sample; however, we faced certain challenges in
assessing OCC's documentation, which are explained in the following
section.
[59] The depository institution regulator also must inform the loan
applicant of its notice to HUD and of the remedies available under FHA.
In addition, pursuant to a memorandum of understanding between HUD and
the depository institution regulators, the regulators provide HUD a
copy of any complaint they receive that appears to allege a violation
of FHA against an institution within their respective jurisdictions.
[60] For HUD, this number includes six investigations opened since
2005. HUD also initiated a fair lending investigation of a regulated
depository institution, but this is not included in the group of 22
because the case did not involve an independent mortgage lender. For
FTC, this number includes 16 investigations, 3 of which were closed,
settled, or had a complaint filed since December 2008, and 13 of which
were opened in 2009.
[61] As discussed later, many lenders may allow their loan originators
discretion in setting the price of a mortgage, which has been the basis
of nearly all DOJ, HUD, and FTC fair lending enforcement actions
relating to the pricing of mortgages.
[62] According to FTC, there are two ways to separate the discretionary
price of a mortgage from the risk-based price of a mortgage: (1) by
obtaining underwriting data and then using statistical or analytic
techniques to compare the total price of the loan (such as the annual
percentage rate data reported under HMDA) across borrowers with similar
underwriting characteristics or (2) by directly evaluating the
discretionary price of the loan--a data point that, as discussed later,
agency officials report that many but not all lenders maintain.
[63] See prepared statement of FTC, Home Mortgage Disclosure Act Data
and FTC Lending Enforcement, before the House Committee on Financial
Services Subcommittee on Oversight and Investigations (Washington,
D.C.: Jul. 25, 2007). See also, prepared statement of DOJ, Rooting Out
Discrimination in Mortgage Lending: Using HMDA as a Tool for Fair
Lending Enforcement, before the House Committee on Financial Services,
Subcommittee on Oversight and Investigations, (Washington, D.C.: Jul.
25, 2007).
[64] GAO, Consumer Protection: Federal and State Agencies Face
Challenges in Combating Predatory Lending, [hyperlink,
http://www.gao.gov/products/GAO-04-280] (Washington, D.C., Jan. 30,
2004).
[65] Pub. L. No. 90-321, title VIII, as added Pub. L. No. 95-109, 91
Stat. 874 (1977), codified at 15 U.S.C. §§ 1692-1692p; Pub. L. No. 63-
203, ch. 311, 38 Stat. 717(1914), codified at 15 U.S.C. §§ 41-58.
[66] Ch. 240, 70 Stat. 133, as amended by Pub.L. No. 106-102 Stat.1338
(1999), codified at 12 U.S.C. §§ 1841-1850. Under 12 U.S.C. §
1844(c)(2)(A)(i)-(ii), the Federal Reserve may examine bank holding
companies and subsidiaries (including nonbank subsidiaries) to
determine the nature of their operations, their financial condition,
risks that may pose a threat to the safety and soundness of a
depository institution subsidiary and the systems of monitoring and
controlling such risks. In addition, the Federal Reserve may examine a
bank holding company or subsidiary (including a nonbank subsidiary) to
monitor compliance with any federal law that the Federal Reserve has
specific jurisdiction to enforce against the bank holding company or
subsidiary and those laws governing transactions and relationships
between any depository institution subsidiary and its affiliates. See
12 U.S.C. § 1844(c)(2)(A)(iii). ECOA provides the Federal Reserve with
specific enforcement authority against bank holding companies and their
nonbank subsidiaries. See 15 U.S.C. § 1691c(b). However, FHA does not
have a similar enforcement provision. The Federal Reserve interprets
the language in section 1844 about monitoring compliance with federal
law as providing it with limited examination authority of nonbank
subsidiaries because it generally must have specific authority to
enforce a consumer protection law in order to examine a nonbank
subsidiary for compliance with the law.
[67] [hyperlink, http://www.gao.gov/products/GAO-04-280].
[68] OTS conducts routine risk-focused examinations on each
consolidated holding company structure. 12 U.S.C. § 1467a(b)(4) states
in pertinent part that "each savings and loan holding company and each
subsidiary thereof (other than a bank) shall be subject to such
examinations as the Director [of OTS] may prescribe." This appears to
be broad examination authority as compared with the Federal Reserve's
limited authority to examine bank holding company subsidiaries.
According to OTS, the level of review of a nonthrift subsidiary is
determined on a case-by-case basis depending on a variety of factors,
including the type of activities, the size or materiality of the
subsidiary in relation to the consolidated structure, the role of
functional depository institution regulators, and financial
performance. OTS does not routinely conduct stand-alone examinations of
nonthrift subsidiaries as it does of thrift institutions, which are
examined every 12-18 months.
[69] GAO, Financial Regulation: A Framework for Crafting and Assessing
Proposals to Modernize the Outdated U.S. Financial Regulatory System,
[hyperlink, http://www.gao.gov/products/GAO-09-216] (Washington, D.C.:
Jan. 8, 2009) and GAO, Large Bank Mergers: Fair Lending Review Could be
Enhanced with Better Coordination, [hyperlink,
http://www.gao.gov/products/GAO/GGD-00-16] (Washington, D.C.: Nov. 3,
1999).
[70] [hyperlink, http://www.gao.gov/products/GAO-09-216].
[71] GAO, Financial Market Regulation: Agencies Engaged in Consolidated
Supervision Can Strengthen Performance Measurement and Collaboration,
[hyperlink, http://www.gao.gov/products/GAO-07-154] (Washington, D.C.:
Mar. 15, 2007).
[72] The council is an interagency body charged with promoting
uniformity in examination procedures and processes in the supervision
of financial institutions. See 12 U.S.C. §§ 3301 to 3311.
[73] See Department of the Treasury, Financial Regulatory Reform: A New
Foundation: Rebuilding Financial Supervision and Regulation (June
2009).
[74] See National Credit Union Administration, Office of the Inspector
General, Home Mortgage Disclosure Act Data Analysis Review, OIG-08-09
(Washington, D.C.: Nov. 7, 2008).
[75] In November 1999, we issued an overall framework for establishing
and maintaining internal control in the federal government, and
identifying and addressing major performance and management challenges
and areas at greatest risk of fraud, waste, abuse, and mismanagement.
See GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[76] The Federal Reserve System consists of the Board of Governors and
12 districts, each with a Federal Reserve Bank that is responsible for
day-to-day examination activities of banks and bank holding companies.
[77] Starting with the screening lists for the 2006 HMDA data, mid-size
community bank examiners have been advised that they should complete
fair lending examinations within approximately 1 year of receiving the
screening lists from headquarters, although OCC acknowledges that some
examinations presenting complex issues may not be completed within this
time frame. For large banks, the screening lists are incorporated into
ongoing fair lending supervision activities. Because of the continuous
nature of supervisory activities for large banks, examinations may be
completed even before the screening lists are issued by headquarters
staff. In some instances involving highly complex examinations, the
examination may take more than a year to complete.
[78] OCC took approximately 10 weeks to provide us examination start
dates for its midsize and community banks before they implemented the
keyword search function for its database at the time of our request.
[79] [hyperlink, http://www.gao.gov/products/GAO/GGD-96-145].
[80] FDIC noted that DOJ does not opine on a matter when a matter is
deferred to the depository institution regulator for administrative
enforcement. Specifically, DOJ does not make its own determination of
whether there was discrimination or whether there was a pattern or
practice warranting the referral. The deferral of a matter is simply an
agreement that the depository institution regulator is in a better
position to resolve the violation through administrative measures.
[81] In our review of fair lending outlier examination files, we also
identified cases in which depository institution regulators referred
institutions to DOJ on the basis of other factors not related to
mortgage pricing disparities, such as steering or policies of
discrimination in automobile lending.
[82] FTC Press Release, "Mortgage Lender Agrees to Settle FTC Charges
That It Charged African-Americans and Hispanics Higher Prices for
Loans" (December 16, 2008). [hyperlink,
http://www.ftc.gov/opa/2008/12/gateway.shtm]. FTC Press Release, "FTC
Alleges That Mortgage Lender Charged Hispanics Higher Prices for Loans"
(May 11, 2009). [hyperlink, http://www.ftc.gov/opa/2009/05/gem.shtm].
[83] FTC v. Gateway Funding Diversified Mortgage Services, L.P., No. 08-
5805 (E.D. Pa., 2008). The defendants in this case did not admit
liability for any of the matters alleged in the complaint.
[84] As discussed previously, FTC reached a settlement in one of these
investigations and filed a suit in federal court against another lender
in May 2009. According to FTC, it concluded an investigation against
another lender due to its deteriorated financial condition.
[85] No. 2:08-cv-798-WKW-CSC (M.D. Al., 2008).
[86] As previously stated, ECOA requires these agencies to refer
matters to DOJ when there is "reason to believe that 1 or more
creditors has engaged in a pattern or practice of discouraging or
denying applications for credit in violation of ECOA" 15 U.S.C. §
1691e(g).
[87] Federal Deposit Insurance Corporation, Office of the Inspector
General, Enforcement Actions for Compliance Violations at FDIC-
Supervised Institutions (Washington, D.C.: December 2008).
[88] [hyperlink, http://www.gao.gov/products/GAO/GGD-96-145]. See
Stephen Ross and John Yinger, "Uncovering Discrimination: A Comparison
of the Methods Used by Scholars and Civil Rights Enforcement
Officials," American Law and Economics Review 8, no. 3 (Fall 2006).
[89] Policy Statement on Discrimination in Lending, 59 Fed. Reg.
18,266, 18,268 (Apr. 15, 1994).
[90] According to FTC, its investigations and enforcement actions are
not subject to a statue of limitations when enforcing ECOA for
equitable injunctive and monetary relief. When seeking civil penalties
for ECOA violations, FTC is subject to a 5-year statute of limitations
for those penalties. 28 U.S.C. § 2462.
[91] We chose these three states based on a recommendation from
officials of the Conference of State Bank Supervisors, who noted that
the three are among the more active states as relates to fair lending
supervision and enforcement activities.
[92] Under 42 U.S.C. § 3608(a), HUD has authority and responsibility
for administering FHA. All executive departments and agencies must
administer their programs and activities relating to housing and urban
development to affirmatively further the purposes of FHA and to
cooperate with HUD, including the agencies having regulatory or
supervisory authority over financial institutions. 42 U.S.C. § 3608(d).
HUD has authority to issue rules to carry out FHA under 42 U.S.C. §
3601 note. Furthermore, the financial regulatory agencies must provide
notice to HUD and the alleged injured party when they have reason to
believe that an FHA and ECOA violation has occurred but such violation
has not been referred to DOJ. 15 U.S.C. § 1691e(k).
HUD has administrative enforcement authority under FHA. 42 U.S.C. §§
3610-3612. Complaints of FHA violations may be filed with HUD, or HUD
may file a complaint on its own initiative, which HUD investigates and
upon determining that reasonable cause exists to believe that a
discriminatory housing practice has occurred, or is about to occur, HUD
must file a Charge of Discrimination on behalf of the aggrieved person.
42 U.S.C. § 3610. If the aggrieved person or the respondent elects to
have the case decided in a civil court action, DOJ is charged with
bringing the case in federal court. If no party elects to go to federal
court, under 42 U.S.C. § 3612, HUD must provide an opportunity for a
hearing before an administrative law judge and issue a final decision.
Relief may include actual damages suffered by the aggrieved person and
injunctive or other equitable relief, as well as a civil penalty in an
amount up to $65,000, depending on the circumstances. 42 U.S.C. §
3612(g)(3); 24 C.F.R. § 180.671.
In addition to election cases under 42 U.S.C. § 3612, DOJ also has
enforcement authority under FHA to bring civil actions in U.S. district
court for cases involving a pattern or practice of discrimination or
the denial of rights to a group of persons. See 42 U.S.C. § 3614.
Relief may include preventive relief, injunction, restraining order, or
other relief as is necessary to assure the full enjoyment of the rights
granted by the FHA, and other relief as the court deems appropriate,
including actual and punitive damages to the aggrieved persons; and
civil penalties of up to $55,000 for a first violation; and up to
$110,000 for any subsequent violation. 42 U.S.C. § 3614(d); 28 C.F.R. §
85.3(b)(3).
[93] The Federal Reserve has authority to issue regulations to carry
out the purposes of ECOA. 15 U.S.C. § 1691b; 12 C.F.R. § 202.1(a).
Except for certain entities (see note iv below), FTC has enforcement
authority for ECOA and a violation of ECOA is deemed to be a violation
of a requirement imposed under the Federal Trade Commission Act. 15
U.S.C. § 1691c(c). Moreover, DOJ has authority under 15 U.S.C. §
1691e(h) to bring civil action in any appropriate U.S. district court
against any lender for such relief as may be appropriate, including
actual and punitive damages and injunctive relief. Cases must be
referred to DOJ whenever the supervising agency has a reason to believe
that a creditor engaged in a pattern or practice of denying or
discouraging applications for credit in violation of ECOA. 15 U.S.C. §
1691e(g).
[94] The views expressed in this letter are my own and do not
necessarily represent the views of the Commission.
[95] The Federal Trade Commission does not enforce the Fair Housing
Act.
[96] See "Policy Statement on Discrimination in Lending" 59 Fed. Reg.
18267, April 15, 1994 at Q. 13, for a discussion of coordination.
[End of section]
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