Expanded HMDA data on residential lending: one year later.

Questions about the access of minorities and lower-income households to home mortgage loans continued to draw considerable attention in the past year. Indeed, the release of new data in October 1991 documenting the credit experiences of various groups during 1990 intensified the discussion and stimulated initiatives in the private and public sectors to address perceived inequities. The data on home lending, which cover metropolitan areas throughout the United States, are available as a consequence of the 1989 amendments to the Home Mortgage Disclosure Act (HMDA), which greatly expanded the scope of the act.

Since 1976, when the original act went into effect, most depository institutions--commercial banks, savings banks, savings and loan associations, and credit unions--with offices in metropolitan areas (and their mortgage-lending subsidiaries) have made public information about the geographic distribution of the home mortgage and home improvement loans they originate and purchase. Beginning with lending activity for 1990, reflected in the numbers released in October 1991, covered institutions have also disclosed--in reports prepared by the Federal Financial Institutions Examination Council (FFIEC)--information on the disposition of loan applications and on the race or national origin, gender, and annual income of loan applicants and borrowers.(1)

A first study of the expanded HMDA data, reported in the November 1991 Federal Reserve Bulletin, depicted certain statistical relationships that the data revealed about lending activity nationwide.(2) Among the findings, the one that attracted the most attention was that black and Hispanic loan applicants were denied credit in greater proportions than white applicants, even within the same income groupings. The data showed similar variations in rates of loan disposition among neighborhoods classified by their racial composition and income characteristics. The HMDA data have clear limitations. Foremost among them is the general lack of information about factors important in assessing the creditworthiness of applicants and the adequacy of collateral offered as security on loans. Without such information, determining whether individual applicants have been treated fairly is not possible. Nonetheless, the lending patterns depicted by the data have led many persons to conclude that widespread racial discrimination characterizes the home-lending process.

The HMDA data now available for 1991 present a nationwide picture that is little changed from that in 1990: They continue to reflect wide differences in approval and rejection rates for minorities and whites. Thus, the debate about what the data signify can be expected to persist.

After presenting national aggregates from the 1991 reports, this article describes some of the responses within the public and private sectors to the data released a year ago. These responses include research projects that seek objective explanations of the statistical patterns, investigative and enforcement efforts by federal regulators to ensure compliance with fair-lending and community reinvestment laws, educational measures to increase awareness of lenders' responsibilities and to inform consumers better about the mortgage loan process, and practical ideas for identifying and eliminating lending practices that may discriminate against minority applicants, including a careful examination of any unintended adverse effects of underwriting standards.(3) The article discusses as well the special role that entities in the secondary mortgage market play in the home-lending process and steps such institutions have taken to promote affordable housing.

SUMMARY RESULTS FOR 1991 HMDA DATA

For lending activity in 1991, the FFIEC prepared disclosure statements for 9,358 reporting institutions--5,551 commercial banks, 1,536 savings and loan associations, 1,436 credit unions, and 835 mortgage companies, of which 528 were unaffiliated with a depository institution (table 1).(4) These disclosure statements consisted of 25,934 individual reports, each covering the lending activity of a particular institution in a specific metropolitan statistical area (MSA). Although the number of reporting institutions in 1991 remained about the same as in 1990, the volume of reported applications and loans increased substantially.

1. Residential lending activity reported by financial
   institutions covered by HMDA, 1981-91
                   Number      Number of       Number of
    Year             of        reporting      metropolitan
                   loans(1)    institutions   statistical
                  (millions)                  area reports
   1981              1.28       8,094           10,945
   1982              1.13       8,258           11,357
   1983              1.71       8,050           10,970
   1984              1.86       8,491           11,799
   1985              1.98       9,072           12,567
   1986              2.83       8,898           12,329
   1987              3.42       9,431           13,033
   1988              3.39       9,319           13,919
   1989              3.13       9,203           14,154
   1990(2)           6.59       9,332           24,041
   1991              7.89       9,358           25,934

At the time this article was written, a few revisions were being made to the data base. Consequently, statistics presented here may differ slightly from those that may be derived from the final 1991 public data set.

Volume of Applications and Loans

In 1991, lenders covered by HMDA acted on roughly 6.56 million home loan applications--3.26 million for purchasing, 2.09 million for refinancing, and 1.18 million for improving dwellings for one to four families, and the balance for loans on multifamily dwellings for five or more families (table 2). As in 1990, nearly three-quarters of the reported applications for home purchase loans were for conventional mortgage loans; the remainder were for government-backed forms of credit--loans insured or guaranteed by the Federal Housing Administration (FHA), the Veterans Administration (VA), or the Farmers Home Administration (FmHA). [TABULAR DATA 2 OMITTED]

Among the various types of loans used to purchase homes, those backed by VA guarantees changed the most from 1990 to 1991, increasing 27 percent. The total number of conventional loans was virtually unchanged, while the number of FHA-insured loans fell about 1.5 percent.

The 1991 volume of loans for the purpose of refinancing more than doubled the 1990 total, reflecting the decline in mortgage interest rates. The level of refinancing activity can be expected to be even greater for 1992, as interest rates have continued to fall.

Use of Various Loan Products for Home Purchase

Like the 1990 data, the 1991 HMDA data reveal large differences in the types of home purchase loans that applicants, grouped by their income and racial characteristics, sought during the year (table 3). In general, government-backed home purchase loans are more likely to be requested by households with relatively low incomes than they are by borrowers with higher incomes. In 1991, 38.8 percent of applicants with low incomes (income less than 80 percent of the median family income for their MSA) applied for government-backed loans, compared with 15.4 percent of applicants with high incomes (income more than 120 percent of the median family income for their MSA). The heavy reliance of lower-income applicants on government-backed loans reflects two principal factors. First, such households are much more likely to buy homes that are within the maximum limits of FHA loan insurance (between $67,500 and $124,875, the latter amount for localities with relatively high prices for homes). Second, households with lower incomes, which on average have substantially fewer liquid and other financial assets than do higher-income households, are much more likely than households with high incomes to face significant liquid-asset constraints.(5) Because government-backed loans allow very low down payments and the financing of a portion of closing costs, they are particularly appealing to prospective borrowers who have limited financial resources. [TABULAR DATA 3 OMITTED]

Among racial groups, blacks were much more likely than whites, and Asians much less likely than whites, to seek FHA and VA loans. In 1991, 47.6 percent of blacks who applied for home purchase loans sought government-backed forms of credit; the comparable proportions for Hispanics, whites, and Asians were 33.9 percent, 24.8 percent, and 11.7 percent respectively.(6)

The overall proportions of the different racial groups seeking government-backed loans reflect differences in their underlying financial circumstances. The only financial characteristic of applicants reported in the HMDA data, however, is income. After controlling for applicant income, the 1991 HMDA data still indicate that blacks, in particular, are much more likely than whites to seek FHA and VA loans. For instance, 56.0 percent of the low-income black applicants applied for government-backed home purchase loans in 1991, compared with 36.4 percent of the low-income white applicants.

Disposition of Loan Applications

HMDA data for 1991, like the data for 1990, indicate that lenders approve most applications they receive for home purchase loans. In 1991, lenders approved roughly 71.2 percent of applications for conventional home purchase loans and 71.7 percent of applications for government-backed loans (table 2). Among the applications for conventional loans, 18.9 percent were denied by lenders; for the balance, either the consumers withdrew their applications or the lender closed the application file after the prospective borrower was asked for, but failed to submit, information required for the credit decision.

One reason that rates of approval for home purchase loans are relatively high is that prospective homebuyers, before filing an application, frequently obtain information about the price of home they can afford and the size of loan for which they can likely qualify. Results of a recent consumer survey sponsored by the Federal Reserve Board indicate that nearly 70 percent of the families that purchased a home within the past three years, and that financed the purchase with either a mortgage or a land contract, received information from real estate agents or loan officers about whether they were likely to qualify for a loan.(7) Also receiving prequalification information were consumers who had actively been looking for a home to buy but did not complete a purchase. Overall, 78 percent of the consumers who said they were active house hunters in the past three years had worked with real estate agents or had approached lending institutions for some type of credit information. Of these, 61 percent reported receiving prequalification advice.

Loan officers or real estate agents are likely to base prequalification advice on limited information such as the prospective borrower's income, debts, and assets, together with the price of the home. Generally, however, they do not obtain credit history information available from credit bureau reports. Thus, because many of the other factors that underwriters consider in evaluating loan applications are considered at this prequalification stage, if most prospective applicants are prescreened one would expect to see credit history as the predominant reason for credit denial. The regulations that implement HMDA provide lenders with an opportunity to report the reasons for credit denial, and an assessment of these data confirms that by far the most frequently cited reason for credit denial is credit history.

Nationally, the proportion of applications for conventional home loans denied by lenders was somewhat higher for 1991 than for 1990 (18.9 percent compared with 16.1 percent). Several factors may account for this change. First, in light of increasing delinquencies on mortgage loans associated with the recession and weak housing markets in many areas of the country, lenders may have tightened their standards for loan underwriting or applied standards more conservatively in 1991.(8) Some evidence for such tightening can be found from the "Senior Loan Officer Opinion Survey on Banks' Lending Practices" conducted by the Federal Reserve. These quarterly surveys indicate that much larger proportions of mortgage lenders were tightening credit standards in late 1990 through the middle of 1991 than were easing them. Most frequently these lenders reported requiring a higher percentage of down payment; the next most frequently used methods for tightening that they mentioned were higher requirements for income and more stringent requirements for mortgage insurance.

Second, the higher loan denial rate shown for 1991 may reflect an increased tendency of loan originators to sell mortgages into the secondary market. To do so, lenders must adhere to the underwriting guidelines of the various secondary market institutions and thus frequently follow these guidelines in assessing loan applicants. Lenders may also approve nonconforming loans for their own portfolios, however. Sometimes they originate these loans under special lending programs that apply highly flexible underwriting standards; at other times, the lender's familiarity with the prospective borrower allows an extension of credit when a strict application of the underwriting guidelines might suggest otherwise. Some evidence that lenders are selling more loans to the secondary market comes from the HMDA data. In 1990, lenders covered by HMDA reported selling 46 percent of the conventional home purchase loans they originated; in 1991, they reported selling 51 percent. The proportion of loans for refinancing that were sold to the secondary market increased even more significantly, from 39 percent in 1990 to 51 percent in 1991.

Third, the increase in the loan denial rate from 1990 to 1991 may have resulted from a deterioration in the financial circumstances of loan applicants. With the recession, a larger portion of applicants in 1991 than in 1990 may have had less stable incomes or weaker credit histories. Also, weak housing markets may have led to more instances in which property appraisals that did not support contract sales prices resulted in loan denials.

Comparisons between the 1990 and the 1991 HMDA data suggest that, nationwide, the pool of applicants for conventional home loans in 1991 may have been somewhat less qualified (based on differences in income, at least) than the pool in 1990. Whereas high-income applicants accounted for 61.2 percent of all applicants for conventional home loans in 1990, they accounted for 53.6 percent in 1991. (For purposes of comparison, applicants in both 1990 and 1991 were categorized using the median family income figures for each MSA as estimated by HUD.) This change results from both a decline in the number of high-income applicants and an increase in the number of low-income applicants. The larger number of low-income applicants may be due to enhanced marketing and outreach efforts by lending institutions and the implementation of innovative lending programs by the secondary market (see the discussion on the secondary market below). The growth at the lower-income end of the market is consistent with data from other sources that indicate a greater proportion of first-time homebuyers in 1991 than in 1990. Such homebuyers likely have lower incomes than current owners buying new homes. Finally, the growth at the lower-income end of the conventional market may reflect a shift in preferences among some home purchasers away from FHA-insured loans toward conventional loans. In July 1991, the FHA loan program was modified in several ways that made these loans relatively less desirable to prospective mortgage borrowers (for instance, only 57 percent of closing costs instead of 100 percent could be financed).

Disposition Rates for Different Groups of Applicants

Although most applications for home loans are approved. the rates of approval and denial vary considerably among applicants grouped by their income and racial characteristics (table 4). Nationwide in 1991, 79.1 percent of the applicants for conventional home purchase loans whose incomes placed them in the highest income grouping were approved for loans, compared with 59.8 percent for the lowest income grouping. Similar relationships between approval rates and applicant income are evident for other types of loans, including those for refinancing and for home improvement. [TABULAR DATA 4 OMITTED]

The high rates of loan approval for higher-income applicants are not surprising. Of course, a household with relatively low income may qualify for a particular loan (of a given size and set of terms) when a higher-income household cannot because of differences in other factors pertinent to credit evaluations (for instance, debt payment records or levels of nonhousing debt); however, lower-income households on average have fewer assets available to meet down payment requirements and closing costs, have lower net worth, and experience more frequent periods of unemployment.

Like the data for 1990, the HMDA data for 1991 indicate that greater proportions of black and Hispanic loan applicants than of Asian and white applicants are turned down for credit (table 4). Consistent with these findings are indications from the 1991 data that the rate of loan denial generally increases as the proportion of minority residents in a neighborhood increases (table 5). [TABULAR DATA 5 OMITTED]

Nationwide for conventional home purchase loans, 37.6 percent of black applicants, 26.6 percent of Hispanic applicants, 15.0 percent of Asian applicants, and 17.3 percent of white applicants were denied credit in 1991 (table 4); by comparison, the denial rates nationwide in 1990 for this type of loan were 33.6 percent for blacks, 21.4 percent for Hispanics, 12.8 percent for Asians, and 14.2 percent for whites. Similar rates of loan denial across racial lines are found for other types of home loans as well.

The differences in denial rates for applicants categorized by their race or national origin partly reflect differences in the proportion of each group with relatively low incomes. In 1991, for instance, 22.9 percent of white applicants who applied for conventional home purchase loans had incomes that were less than 80 percent of the median family income for their MSA. The comparable percentages for blacks, Hispanics, and Asians were 39.8 percent, 26.2 percent, and 12.1 percent respectively. Although income levels may account for some of the variation in loan disposition rates among racial groups, other factors account for most of the differences. This conclusion is evident because, after controlling for income, white applicants for conventional home loans in all income groupings have lower rates of denial than black and Hispanic applicants (table 6). [TABULAR DATA 6 OMITTED]

EVALUATING THE DATA

The HMDA data provide little insight into the financial circumstances of loan applicants or the characteristics of the properties that applicants seek to purchase, refinance, or improve. The data reveal that credit history problems and excessive debt levels relative to income are the reasons that lenders most frequently give for credit denial; but specific information for applicants--on their level of debt, debt repayment record, employment experience, and other factors pertinent to an assessment of credit risk--is not available. Moreover, the HMDA data include no information about the specific underwriting standards used to assess each prospective borrower's application. Thus, the data, by themselves, provide little basis to assess the fairness of the loan process.

Three major investigative efforts that were recently completed assessed how factors not contained in the HMDA reports--such as financial assets, level of debt, employment experience, and record of payments on debt--influence credit decisions. The first, by the Department of Justice, focused on a single lender in Atlanta. Based on its investigation, the Department of Justice filed a complaint in September 1992 alleging that the institution had engaged in discrimination against prospective black homebuyers when marketing home loan products and granting mortgage loans.(9)

The second effort was a study of lending in the Boston metropolitan area, conducted by the Federal Reserve Bank of Boston in cooperation with the other federal banking agencies and HUD.(10) It was initiated in response to the large differences in rates of home loan approval among white, black, and Hispanic home loan applicants in Boston that were revealed by the 1990 HMDA data.

The third effort, a study by the New York Banking Department completed in March 1992, examined files of home loan applications submitted in 1989 at ten savings banks in metropolitan New York. Its primary focus was the assessment of loan approvals and rejections to determine whether these banks were unlawfully discriminating in their credit decisions.

Department of Justice Investigation in Atlanta

For the past several years, the Department of Justice has been investigating home-lending practices in Atlanta and, in particular, the practices of Decatur Federal Savings and Loan Association, one of the largest home lenders in the city. The Department of Justice launched its investigation after a series of articles, published in 1988 in the Atlanta Journal Constitution, documented wide differences in the number of home mortgage loans extended in Atlanta neighborhoods grouped by their racial composition.(11) The investigation has been wide-ranging but has focused on a detailed review of the files of more than 4,000 applicants for mortgage loans, using statistical techniques to control for differences in the financial and economic circumstances of these prospective borrowers. Based on its investigation, the Department of Justice concluded that Decatur Federal had violated the Fair Housing Act and the Equal Credit Opportunity Act (ECOA) by treating black applicants less favorably than white applicants.(12)

The complaint against Decatur Federal alleged that black applicants who sought mortgage loans were subjected to stricter underwriting standards than were white applicants. According to the Department of Justice, white applicants who failed to meet the underwriting standards of the institution in some instances were extended special consideration, and their applications were approved, whereas black applicants did not receive this treatment. In other cases, black applicants who met the institution's underwriting standards were nonetheless denied credit. One consequence of these practices was that black applicants for home loans had a significantly higher rejection rate than white applicants had. The government's investigation also concluded that Decatur Federal purposely excluded large portions of the black community from its defined lending market and that the institution "rarely or never" advertised its home loan products in media oriented to the black community.

The case against Decatur Federal was resolved in a consent decree without any admission of wrongdoing by the institution. The decree requires Decatur Federal to take remedial actions that include providing $1 million to forty-eight black applicants whose loan requests were turned down, advertising extensively through black-oriented newspapers and radio stations, implementing a pay structure that increases incentives for lending in predominantly minority neighborhoods, appointing a review underwriter to reexamine every application that is initially rejected, and instituting a retraining program for all home-lending personnel. The Department of Justice believes that the investigation, which was the first to rely on a detailed statistical analysis of credit files, will serve as a model for future investigations.

Federal Reserve Bank Study of Institutions in Boston

Racial disparities in patterns of mortgage lending have long been a concern in Boston. A 1989 study by the Federal Reserve Bank of Boston documented differences in lending patterns across neighborhoods grouped by their racial composition.(13) That study was based primarily on information from records of property transfers and on data about neighborhood characteristics from the 1980 U.S. census of population and housing. Information about individual borrowers or loan applicants was unavailable to the researchers. The study found that, after controlling for a wide variety of factors related to the economic characteristics of neighborhoods, the number of mortgage originations relative to the number of owner-occupied housing units was 24 percent lower in predominantly black neighborhoods in Boston than in predominantly white areas. The researchers could not, however, conclude with certainty the causes of the observed differences in lending.

With the release last year of the expanded HMDA data, some limited information about loan applicants became available. For 1990, the HMDA data for the metropolitan Boston area revealed a ratio of nearly three rejections for blacks and Hispanics to one for white applicants. To understand the significance of these numbers better, the Federal Reserve Bank of Boston augmented the HMDA data with information for about 1,000 black and Hispanic applicants who had applied for conventional home purchase loans in the Boston area in 1990 and for a control sample of roughly 3,100 white applicants. The additional data were requested from the 131 financial institutions that had received twenty-five or more mortgage applications, from among 352 lenders that had filed 1990 HMDA data for the Boston metropolitan area. Lenders assembled data for applicants identified by the Federal Reserve Bank and reported thirty-eight additional pieces of information about each one pertaining to financial characteristics, employment experience, and credit history. The data were items available to the lender on residential loan application forms. credit bureau reports, and loan-underwriting worksheets.

The study revealed substantial differences in the financial and other economic circumstances of typical white applicants and those of minority applicants, and in the types of properties and characteristics of the loans they sought. For instance, minority applicants on average had weaker credit histories, fewer liquid assets, and lower net worths and incomes than white applicants. Minority households were also typically seeking to purchase properties with lower assessed values; as a consequence, their ratio of monthly housing expense to monthly income (one key qualifying ratio) was quite similar to that of white applicants. Other substantial differences between the two groups were that minority applicants were much more likely to be seeking to buy two- to four-family properties than single-family properties and were more often applying for loans with high loan-to-value ratios, most of which required private mortgage insurance for approval. Black and Hispanic applicants were also more likely than whites to be seeking a loan under special lending programs offered in the Boston market in 1990.

One of the more revealing findings of the study was that most applicants--both minority and white--had some flaw in their credit histories (such as a record of late payment on debts) or exceeded the basic debt burden guidelines for acceptable qualifying ratios (such as total obligations to income). Nonetheless, roughly 85 percent of all applicants in the study had been approved for loans, indicating that underwriters routinely considered compensatory factors.

Statistical analysis of the data revealed that, after controlling for significant economic factors affecting mortgage-lending decisions, there were unexplained differences in loan approval rates for blacks, Hispanics, and whites among the surveyed mortgage lenders as a group. Economic differences accounted for much of the disparity that was apparent in the HMDA data, but they do not appear to explain it entirely. Specifically, the study found that if minority applicants had the same economic and property characteristics as white applicants (thereby differing only by race), they would have experienced a denial rate of 17 percent, compared with 11 percent for whites. Stated another way, the analysis indicates that the denial rate for minority applicants would have been 20 percent if the race of the applicant had not been a factor--compared with the actual denial rate of 28 percent revealed by the HMDA data.

The findings of the study suggest that greater attention is needed to ensure the fairness of the mortgage-granting process. The degree to which the findings reflect outright discrimination by individual loan officers and financial institutions in the market remains unclear. The regulatory agencies will follow up with on-site examinations in Boston to assess further the fairness of mortgage lending.

New York State's Review of 1989 Data

In March 1992, the New York State Banking Department released the findings of a study of the mortgage-lending practices of ten savings banks in metropolitan New York.(14) The department examined the banks' mortgage loan files in detail, focusing on the treatment of minority and female applicants and of applicants seeking to buy homes in areas of low income and in those with high percentages of minorities. It first reviewed the underwriting criteria that the lending institutions used, to determine whether they were in keeping with or more restrictive than industry and secondary market standards. It then considered the actual application of the criteria, to determine whether they were consistently applied or whether exceptions had been made--or not made--in a way that indicated discriminatory treatment.

Based on its evaluation of approved and rejected applications, the banking department concluded that banks had applied their underwriting standards with consistency and in a nondiscriminatory manner. Exceptions were supported by evidence of significant differences in creditworthiness between minority applicants who were denied and white applicants who were approved although they did not meet the banks' underwriting standards.

The banking department also determined that, for six of the ten institutions, the underwriting criteria were generally in line with industry and secondary market standards. In some of the other institutions, the standards were more stringent than the industry norm and hence could disadvantage minorities, women, and lower-income applicants. Specific policies in question included a maximum fifteen-year maturity on mortgages (which could require higher monthly payments than a person with low income could afford), the requirement of a 20 percent down payment, and the charging of nonrefundable fees to applicants who could have been turned away after a preliminary review.

The department's report noted ways in which the banks could better serve the credit needs of minorities, women, and areas heavily populated by minorities. Suggestions included a review to ensure that underwriting standards are not overly restrictive and a second review for denied applications to determine whether, like those that are approved despite falling short of the stated criteria, they might have other favorable characteristics warranting loan approval. The department also identified the need for banks to consider modifying loan-qualifying ratios and maximums for low-income households, which typically spend a significantly greater proportion of their income on housing costs. Banks were urged also to reevaluate their community outreach programs and to consider offering FHA loans to applicants who might not qualify for conventional loans.

REGULATORY EFFORTS: ENFORCEMENT OF FAIR LENDING AND CRA

Federal regulators are expanding data analyses to strengthen enforcement of fair lending and of compliance with the Community Reinvestment Act (CRA).(15) Acting in concert, the agencies are developing techniques using automated access to the data in looking for evidence of differential treatment. Through these efforts they are also seeking to identify the factors that underlie disparate lending patterns. In October, they issued a joint statement that addressed the issue of disparate treatment, attempting to shift the focus from a debate about whether unequal treatment is occurring to initiatives that will ensure fair lending practices.

Interagency Statement on Disparate Treatment in Mortgage Lending

In a joint statement dated October 9, 1992, the regulatory agencies outlined initiatives for ensuring that minorities have equal access to home lending and reemphasized concerns about fair treatment of applicants for mortgage loans. The statement pointed to increased evidence that the differences in loan approval rates between white and minority home mortgage applicants that characterize some lending may be unwarranted by economic factors.

The agencies believe it is time to move beyond debating about whether unequal treatment may be taking place to discussing efforts to ensure that minorities have equal access to credit. Achieving this objective, they noted, will require action by the supervisory agencies and by financial institutions and their trade associations--to refine and strengthen enforcement of fair-lending laws, to provide needed education and training, and to identify and promote successful techniques that ensure equal treatment of loan applicants. For lenders, initiatives might include the use of internal systems to conduct independent second reviews of denied applications from minorities to ensure fair treatment; development of training programs to ensure fair treatment of prospective borrowers; credit counseling for groups of prospective loan applicants'. participation on mortgage review boards; and use of "shoppers" hired by an institution to test its personnel's adherence to its own procedures.(16)

Fair-Lending and CRA Compliance

In evaluating compliance with the fair-lending laws, bank examiners assess mortgage decisions in the context of the lending institution's underwriting standards. They look at a sample of approved and denied applications and check whether an institution, in applying its lending criteria, has implemented standards consistently and fairly, particularly in its treatment of minority applicants. When examiners find exceptions, they seek to determine whether differences in the decision to grant or deny credit have a legitimate basis or whether they suggest discriminatory treatment that warrants further investigation. Because they have access to all of a lender's files on loan applications and to related information, agency staff overcome most of the limitations of the HMDA data regarding applicant creditworthiness and property characteristics.

The new HMDA data enable the banking regulators to augment the procedures already in place for identifying loan application samples for review, to target lending institutions for more intensive examination of lending policies and practices, and to make peer comparisons of lending patterns. The data provide the basis for the use of more heavily computerized and sophisticated statistical tools. Through sorting capabilities in the analytical software they use, for instance, the regulators can readily determine the race or ethnic origin of borrowers and applicants for purposes of comparison.

The FFIEC has retained an outside consultant to review the agencies' programs of civil rights enforcement. The consultant will look at current training and examination procedures and will suggest improvements. In the meantime, the FFIEC's task force on consumer compliance is revising the policy statement that sets some common guidelines for the agencies' enforcement of ECOA and the Fair Housing Act. The task force is also working on the supervisory enforcement policy for these two statutes; this statement spells out the types of corrective action required to prevent violations from recurring and to correct conditions that result from violations.

Historically, examiners have also used the HMDA data to help assess lenders' compliance according to twelve criteria established by the regulations that implement the CRA. The criteria include the following:

* The geographic distribution of the institution's credit applications, extensions, and denials

* The institution's record of originating or purchasing residential mortgage loans, housing rehabilitation credit, home improvement loans, and loans to small businesses and farms within its community

* Evidence of prohibited, discriminatory, or other illegal credit practices.

Community activists, who frequently use the protest mechanism offered by the CRA to voice publicly their concerns about an organization's performance, often rely on HMDA data in assessing the lending performance of banks doing business in their neighborhoods or seeking to merge with or acquire a local institution. The HMDA data can help the agencies assess the merits of specific protests about an institution's performance regarding applications for charters, deposit insurance, branch or other deposit facilities, office relocations, mergers, and acquisitions. In the past year, the agencies denied three applications because of the institutions' CRA performance. In numerous other cases, they approved applications with conditions and commitments made by the applicants relating to their CRA performance.

In related areas, the agencies have taken the following actions in the past year:

* In March 1992, the agencies amended the CRA guidelines to make clear that examiners should view favorably an institution's working through minority financial institutions to help serve the credit needs of lower-income and minority households.

* The FFIEC issued a policy statement in December 1991 encouraging financial institutions to analyze the geographic distribution of their products as part of their CRA process, to help ensure that residents of minority and low-income areas are adequately served.

* The agencies distributed to the institutions that they supervise a brochure prepared by the FFIEC, "Home Mortgage Lending and Equal Treatment," to caution lenders about practices that may result in discrimination (see box on lender education.). In 1991, the Federal Reserve published a companion brochure entitled "Home Mortgages: Understanding the Process and Your Right to Fair Lending" to inform consumers about the mortgage application process and about their rights under fair-lending and consumer protection laws.

* The Federal Reserve and the FDIC have initiatives under way to develop a computer-based mapping technology that will assist examiners in matching a bank's lending activity with the boundaries of its delineated community.

* The agencies are publishing, for public comment, proposed policy statements on branch closings to guide depository institutions in complying with section 228 of FDICIA. This new law requires each covered institution to adopt a branch-closing policy and to provide ninety days' notice of any proposed branch closing to its customers and to the appropriate federal regulator. The notice to the regulator must include a detailed statement of the reasons for the decision to close the branch and statistical information to support the decision. A notice of the decision must be posted at the branch thirty days before its closing.

* The Federal Reserve Board will consider the implementation later this year of an amendment to the ECOA--also contained in FDICIA--that gives mortgage applicants the right to a copy of appraisal reports used in evaluating their applications for home purchase and home improvement loans.

* In June 1992, the Federal Reserve's Consumer Advisory Council urged the lending industry and the regulatory community to close the deliberations on whether discrimination exists in mortgage lending and to begin discussing how best to detect and remedy the problem.

The HMDA data have also focused attention on the enforcement of civil rights laws by other regulatory agencies. During 1991, the banking agencies began meetings with the Department of Justice, HUD, and the Federal Trade Commission. These meetings have provided an opportunity to coordinate enforcement of the fair-lending laws and may lead to the adoption of new techniques for determining whether illegal discrimination against creditworthy applicants is occurring.

Amendments to the Fair Housing Act in 1990 strengthened HUD's enforcement authority, and HUD and the regulatory agencies have agreed (in a memorandum of understanding) to refer to each other and to coordinate investigation of complaints alleging fair-housing violations. The banking agencies also are exploring ways to cooperate with the Department of Justice in detecting possible patterns of discrimination against minority applicants.

Community Affairs Programs

The banking agencies conduct educational and informational programs to promote fair lending and to foster affordable housing and small-business lending, frequently on an interagency basis. The Federal Reserve System, the FDIC, and the OCC conduct--primarily through community affairs programs--ongoing outreach and educational activities to help banks and the public better understand and deal with community credit issues, including discrimination. These activities fall primarily into four categories:

* Sponsoring conferences and workshops for and with bankers and community and business representatives. These programs focus on issues and opportunities concerning community reinvestment, community-development lending, and related credit issues, and are often developed in conjunction with state bankers' associations.

* Giving presentations at meetings of banking associations and of housing, community, and economic-development groups. During 1991, for example, the community affairs staff of the Federal Reserve System made more than 315 presentations on topics related to community-development finance, community reinvestment, home mortgage and small-business lending, and discrimination issues.

* Producing newsletters and other publications. Agency publications feature information on banks' community-development lending programs and on public--private partnerships of community development in which banks can participate.

* Undertaking special projects and providing technical assistance. Community affairs programs develop projects that provide information and technical assistance to banks and others. The Federal Reserve System, for example, has undertaken several programs to assist banks in developing mortgage and small-business lending consortiums that help increase credit availability in lower-income and minority areas. Several Federal Reserve Banks also publish "community profiles" that provide information on local economies, demographics, and key programs and groups active in affordable-housing development, small-business development, neighborhood revitalization, and related issues.

EXPANDING OPPORTUNITIES: PRACTICAL RESPONSES FROM LENDERS AND OTHERS

The financial services industry continues to address the questions of how and to what extent unlawful discrimination takes place in mortgage lending. Industry trade associations and individual lenders are also focusing on ways to improve access to home mortgages for minorities and lower-income applicants.

Trade Association Task Forces

Several of the national trade associations have formed HMDA task forces to evaluate the issues of accessibility raised by the HMDA data and have sought to identify areas that members could address. For example, the American Bankers Association (ABA) has created a center for community development to provide member banks with a clearinghouse of information and products that could help increase the availability of mortgage loans to creditworthy minority and low- and moderate-income applicants. Key components of the association's plan for the center include the following:

* Lender training. The center will develop resources to help bankers conduct community-development lending and will work with government agencies, nonprofit organizations, and other development groups; it will provide training in preventing subtle, unintended forms of discrimination. The ABA currently makes available a video, "Fair Lending Compliance: Understanding Equal Treatment," developed to help lenders avoid discriminatory treatment of applicants.

* Borrower education. To better inform mortgage applicants about the lending process, the center will prepare educational materials, including brochures for borrowers and a guidebook showing bankers how to develop mortgage and credit education programs for current and prospective customers.

* Information exchange. The center is compiling detailed information about successful community lending efforts and will coordinate an information exchange, with a toll-free telephone number, to facilitate referrals.

* Interindustry coordination. The center will coordinate efforts with secondary market agencies, private mortgage insurers, appraisers, and others to increase the flexibility of the mortgage process.

In September 1992, the Mortgage Bankers Association of America (MBA) issued the "HMDA Task Force Report" to heighten awareness of issues of mortgage availability, encourage lender self-analysis, and provide guidance on ways in which members could increase their loan approval rates, particularly for black and Hispanic applicants. Three of the task force's findings were that (1) many mortgage companies are conservative in applying the underwriting guidelines of the secondary market and of the FHA and VA because of concerns about forced repurchase and indemnification of loans approved under nontraditional guidelines; (2) underwriting guidelines, together with interpretations and applications. are based on historical data that reflect primarily nonminority participants in mortgage loans, and thus they may unintentionally reflect racial bias; and (3) members of minority groups may receive unequal treatment in the prequalification and loan application stages of the lending process.

According to the report, third parties may contribute to the lender's loan decisions; therefore. lenders should take steps to show their commitment to nondiscriminatory practices, such as emphasizing to real estate brokers their desire to meet the credit needs of all applicants; becoming aware of the fair-lending policies of mortgage brokers with whom they do business: and monitoring appraisal reports carefully to ensure that they contain no overt or veiled adverse references to minority neighborhoods. The task force also strongly recommended that lenders develop an internal program to test for discrimination at both the preapplication and the application stages of the loan process and that all applications resulting in a denial of credit receive an additional review before a final decision is reached.

The MBA plans a nationwide series of one-day seminars at which members can discuss the recent updates to underwriting guidelines used by the secondary market agencies, including the clarification of eligibility, appraisal, and underwriting requirements. The MBA will also disseminate information about innovative mortgage loan products that are designed to improve financing opportunities for qualified low- and moderate-income homebuyers.

Initiatives to Promote Affordable Housing

Financial institutions across the country have developed many creative activities in partnership with each other and in conjunction with local community organizations. These efforts are assisting banks in making credit available to their entire communities. The following programs are representative of numerous efforts by financial institutions, individually and jointly, to address the need for affordable housing:

* Statewide lending consortiums developed in California. Washington, Nevada, and Hawaii create a pool of fixed-rate, long-term mortgage funds for low- and moderate-income housing.

* A large multiregional institution has developed community partnerships in each of its markets with nonprofit organizations that provide home-buyer education and training for first-time home-buyers. The nonprofit organizations are paid by the bank for each participant who completes the training program, and program graduates receive cards that entitle them to apply for a specific, affordable mortgage product from the bank.

* In Houston, financial institutions have created a partnership with the Consumer Credit Counseling Service and two credit-reporting services to offer a course on the fundamentals of good credit. Completion of the course is noted on participants' credit reports for the benefit of any institutions to which they may apply. Participants are helped to develop a plan for correcting credit problems and for keeping their credit clean.

* In Burton, Michigan, a neighborhood housing service in conjunction with local lenders has developed a "homebuyers club" that offers counseling and training for potential homebuyers on the borrowing process, underwriting criteria, and new homeowners' responsibilities.

* In Washington, D.C.. a local bank in partnership with a community organization offers "community loan days" in low- and moderate-income neighborhoods. The event offers seminars on how to obtain credit, and a major credit-reporting service offers advice on how to read credit reports and how to correct erroneous entries. Loan officers representing the bank's major product lines take applications for loans, and bank employees in minority procurement explain the way to bid on bank contracts. City government representatives provide information on city programs and loans.

TESTING INITIATIVES

Among mechanisms for ensuring fair lending, the use of testing continues to be suggested as a way of identifying the presence of unequal treatment based on race or national origin or any other characteristic protected under the ECOA or the Fair Housing Act. Historically, testing efforts have included both research testing, designed to assess the incidence of possible differential treatment, and enforcement testing. designed to establish proof of possible discrimination in individual cases. The results of testing programs in housing (and more recently in employment) have identified patterns in the United States of unequal treatment of blacks and Hispanics compared with that of whites.(17) In the sale and rental of homes, the testing technique has long been used to provide proof of discriminatory treatment against individuals and to detect patterns of differential treatment based on race or ethnic origin.

The traditional testing method is to use pairs of individuals matched in all relevant respects except for the particular characteristic under investigation, such as race. These testers, whose constructed identities (including financial, housing, and family characteristics) help ensure as much comparability as possible, successively approach lenders to simulate the search (or to "shop") for mortgage credit. A comparison of the treatment that the testers encounter serves as one basis for detecting differences in treatment that may be systematically related to the characteristic under study and that may violate the Fair Housing Act or the ECOA.

In mortgage lending, preapplication testing has been carried out under several HUD-financed pilot projects to address the concern that unlawful practices may occur that are otherwise impossible to discern because no paper trail exists. The pilot tests carried out to date suggest there may be some degree of racially differential treatment at the preapplication stage.

HUD's Fair-Housing and Mortgage-Testing Program

Several initiatives have taken place in rental and sales testing through HUD's funding of the Fair Housing Initiatives Program. In 1993, HUD will competitively award $1 million to fund a testing project on mortgage-lending practices. Nonprofit organizations and other private entities were invited in August 1992 to submit proposals to identify specific unlawful discriminatory acts or practices that prevent or impede minorities from obtaining financing for the purchase of homes.(18) The project, which will support testing in three metropolitan areas, is expected to produce a method for testing mortgage-lending practices and for providing evidence of the existence or nonexistence of discriminatory lending based on race and national origin. HUD also continues to issue contracts to state and local agencies and fair-housing groups to conduct testing for the detection of discrimination in the sale and rental of homes.

HUD's objective is to examine whether and to what extent testing techniques provide credible evidence of differential treatment of mortgage lending at the preapplication stage of the loan process. The information will form one component in more comprehensive investigations of fair-lending discrimination conducted by HUD's Office of Fair Housing and Equal Opportunity.

Self-Testing by Lenders

Some banking institutions are undertaking programs for self-testing, a concept that received endorsements in 1992 from the lending industry and from two members of the Federal Reserve Board.(19) The MBA's HMDA task force strongly recommended, in its September 1992 report, that lenders develop an internal program to test for discrimination in mortgage lending at both the prequalification and the application stages.

A report early in 1992 publicized a survey by a market research firm that had been hired by a banking institution. Interviewers, posing as potential mortgage customers, visited fifty branches of the institution located in nonminority, middle-income neighborhoods. Each bank branch was visited separately by a white and a minority shopper. The research firm characterized the survey results as revealing subtle forms of discrimination on the part of bank representatives. Differences were noted, for example, in the amount of information given to minority shoppers, in the time spent with minority shoppers, and in the effort to inform minorities about alternative mortgage products.

RECENT ACTIVITIES INVOLVING THE SECONDARY MORTGAGE MARKET

Institutions in the secondary mortgage market play a prominent role in the U.S. housing market by promoting the standardization of the home-lending process and ensuring a reliable supply of credit to loan originators. They provide a means by which the originators of home loans can sell assets that are otherwise relatively illiquid and obtain funds to provide new credit to homebuyers. An active secondary market also stimulates competition among loan originators by encouraging new firms to enter the home-lending market.

Three government-sponsored mortgage enterprises (GSEs) dominate secondary market activities--the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Government National Mortgage Association (GNMA). FNMA and FHLMC are publicly chartered private entities, whereas GNMA is a government-owned agency. In 1991, the three accounted for 71 percent of the roughly 3 million loans sold into the secondary market by lenders covered by HMDA; in 1990, they accounted for 70 percent (table 7). Other types of institutions--such as pension funds, insurance companies, mortgage companies, and depository institutions--are also active secondary market participants; they provide an outlet for so-called "jumbo loans" (those exceeding the loan-size limits used by the GSEs) and other loans that may not conform to the underwriting standards set by the GSEs. [TABULAR DATA 7 OMITTED]

Basic underwriting guidelines (those, for instance, applying to acceptable monthly debt-to-income and maximum loan-to-value ratios) differ among the secondary market participants, although FNMA and FHLMC follow essentially the same guidelines, which they themselves set for the conventional loans they purchase. For GNMA, underwriting standards are established by HUD for FHA-insured loans and the VA for VA-guaranteed loans. Given that HUD and the VA impose less stringent loan standards than do originators of conventional loans, and that they have different rules about the maximum size of loans they will back. one can expect that, overall, FHA and VA borrowers will differ markedly from users of conventional loans. Consequently, borrowers whose loans are securitized by GNMA are also likely to differ from those whose loans are sold to or securitized by FNMA or FHLMC.

Considerable information about the purchase and securitization activities of secondary market institutions (particularly the GSEs) has long been publicly available, but before 1990 it was mostly of an aggregate nature. The 1989 amendments to HMDA fundamentally expanded the information available about secondary market activities by requiring lenders covered by HMDA to report, for loans originated or purchased during a year, the loans that they sold, classified by the type of secondary market purchaser. The release of the 1990 HMDA data provided the first opportunity to examine the secondary market's patterns of loan purchase and securitization by the characteristics of mortgage borrowers and neighborhoods in which their homes are located. It also allowed comparisons between the activities of the primary market institutions and those of the secondary market institutions along these dimensions.

The first comprehensive evaluation of the HMDA data, as it pertains to secondary market institutions, was completed in May 1992.(20) The patterns of home loan purchase by the major entities in the secondary market appear, in general, to mirror loan origination activity in the primary market. In particular, the distribution of loan purchases arrayed by borrower and neighborhood characteristics among the secondary market agencies reflects closely the distribution of loan originations by applicant and neighborhood characteristics. More specifically, the borrower and location characteristics of home purchase loans backed by GNMA guarantees directly reflect that agency's legislated specialization in government-backed loans. Similarly, the characteristics of loans acquired by FNMA and FHLMC derive, for the most part, from the borrower and geographic composition of conventional home-purchase loan originations.

For both FNMA and FHLMC, the 1991 HMDA data indicate that about 26 percent of the loans they purchase involve borrowers whose income is equal to or less than the median family income of the MSAs in which they reside.(21) By comparison, about 52 percent of the loans backed by GNMA guarantees were made to this income class. The HMDA data also reveal that, compared with other secondary market purchasers, GNMA guaranteed relatively more loans to borrowers purchasing homes in low- or moderate-income and middle-income neighborhoods.

One objective in the charters of FNMA and FHLMC is to promote the availability of mortgage credit to low- and moderate-income households. Recently, both houses of the Congress passed a bill that would establish specific goals for this availability--requiring, for example, that 30 percent of the dwelling units financed be for families whose income is at or below the median family income of the area where they reside and that 30 percent of the dwelling units financed be located in central city neighborhoods.(22)

While it is true that the secondary market institutions can purchase home loans only from the pool of loans that the primary market originates, the underwriting guidelines established by these entities, as well as those used by private mortgage insurance companies, significantly affect the nature of the home purchase loans originated. Many mortgage lenders closely follow the secondary market guidelines in their own underwriting so that they can subsequently sell the loans they originate.

FNMA and FHLMC have established guidelines that they believe are prudent for the originating of home loans. The guidelines deal with factors basic to loan credit quality, including the ability of the borrower to repay the loan and the soundness of the property that serves as collateral for the loan. Over the years, questions have been raised about the effect of the underwriting guidelines on the ability of loan originators to extend credit to the full range of creditworthy borrowers. Some have argued that the guidelines are too rigid. Others believe that loan originators, perhaps in fear of being forced to repurchase loans that go into default, are unduly conservative in applying the guidelines. Questions have also arisen about the potential for misinterpretation of the guidelines by loan originators.(13)

FNMA and FHLMC have responded to these concerns by continually revising their guidelines and by emphasizing to lenders and others that the rules are not absolute. Over the past five years, the agencies have significantly changed the guidelines to help ensure their flexibility in reflecting the special circumstances of lower-income borrowers and properties in older, urban areas. In the past year, for example, guideline changes have dealt with the treatment of credit history (such as a record of slow or late payments on debts) and the acceptability of certain types of short-term income (such as seasonal employment and child support payments) as compensating factors to justify the use of higher qualifying ratios for debt-to-income. The use of information in appraisal reports has been clarified. For instance, the guidelines now clearly indicate that a loan on property receiving a "less than average" rating is not automatically ineligible for sale to the secondary market.

To expand homeownership, property rehabilitation, and rental opportunities for low- and moderate-income households, both FNMA and FHLMC have undertaken major initiatives concerning affordable housing, often in partnership with institutions such as private mortgage insurance companies, state and local governments, and various groups in the private sector. These initiatives involve loan products with special features, including low down payments and relaxed qualifying ratios. For instance, FNMA has a "Community Home Buyer's Program" with a 3-2 option, and FHLMC has developed customized homeownership initiatives, including an "Affordable Gold Program." These two programs allow borrowers to meet the minimum 5 percent down payment by providing 3 percent from their personal resources and up to 2 percent in the form of a gift from a family member or a grant or unsecured loan from a nonprofit organization or public entity. An important component of many of the affordable housing initiatives are counseling seminars and educational materials on homeownership (such as FNMA's "Guide to Home Ownership") to enhance consumers' understanding of the mortgage loan process and to apprise them of the housing opportunities that are available.

The secondary market institutions have also started providing information to primary market institutions about the sociodemographic characteristics of their communities. A FNMA product called FannieMaps allows loan originators to use a computer-accessible pictorial representation of the income and racial characteristics of a designated area, such as the city in which they have offices or groups of selected neighborhoods, on which to overlay their lending activity. Such tools help depository institutions to expand their knowledge of their local communities and encourage them to seek business where the need for affordable housing may be great and where the institutions may not currently be very active.

FNMA and FHLMC recently announced that, to improve their evaluation of their efforts in promoting affordable housing, they will ask loan originators for more information about loan recipients and the properties they purchase.(24) Data to be collected include the borrower's gender, monthly income, monthly housing expenses, and total debt; the appraisal amount and purchase price of the home; and an indication of whether the borrower is a first-time homebuyer. Collection of these data will allow the agencies not only to measure their progress in meeting the goals established in the GSE legislation, but also to understand better the relation between indicators of creditworthiness and those of loan performance. In turn, a better understanding of the relationship among borrower, property characteristics, and ultimate loan performance may indicate ways in which underwriting guidelines can be revised to increase lending opportunities.

APPENDIX: DATA QUALITY AND AVAILABILITY

To maximize the usefulness of the HMDA data, the information must be accurate, available to the public in a timely manner, and formatted so that it is easily used and understood. The achievement of these objectives requires a substantial commitment of resources by the covered institutions and their supervisory agencies. Because of the importance of accurate and timely submissions of HMDA data, a violation of HMDA is subject to administrative sanctions, including the imposition of civil money penalties where applicable.

Data Quality

The banking agencies and HUD seek to ensure that the lenders they supervise provide complete and accurate HMDA information. To facilitate accurate reporting, the FFIEC distributes a booklet to financial institutions entitled "A Guide to HMDA Reporting: Getting it Right!" Most supervisory agencies make available, without charge, computer software packages for financial institutions to use in preparing their Loan/Application Register (LAR) submissions. The agencies also have a program for the identification and resolution of errors. This program identifies invalid, as well as possibly correct but questionable, submissions. Each of the agencies makes available to the public specific criteria used in the "data cleaning" process. These criteria are evolving as more experience with the expanded HMDA is gained. For instance, to ensure improved quality in the multifamily lending category, the agencies are working with the Government Accounting Office to expand the criteria for these types of loans.(25) For 1991, the proportion of LAR records of all types containing validity errors was 4.4 percent. The error rate varied some among different types of institutions, with independent mortgage companies (the most recently added category of lenders to be covered by HMDA) having the highest rate of error.

Disclosure statements portraying the 1991 HMDA data, like those portraying the 1990 information, are based on the 1980 census tract boundaries and population characteristics (neighborhood income level and racial composition). The usefulness of these data is consequently somewhat limited by the age of the census information. Beginning with lending data collected from January 1992 onward, covered institutions are required to use 1990 census tract boundaries for identifying the location of properties underlying their loans. Disclosure statements displaying the 1992 HMDA data will use the 1990 census information.

Because the census is conducted only once each decade, the disclosure statements use estimates for MSA median family income that are updated annually. Estimates calculated by HUD for purposes of program eligibility are now used to categorize applicants into one of four income groupings. For the 1990 disclosure reports, the FFIEC had used median family income estimates based on changes in the Consumer Price Index.

Data Availability

The FFIEC makes the HMDA data available in various forms and formats. These include disclosure statements for individual institutions and aggregate reports (in paper copy, microfiche, and computer tape) for each MSA; a set of tables showing nationwide aggregates; and a series of tables highlighting key information for each MSA. An edited version of the LAR records for the nation as a whole is available on data tape and will be made available in early 1993 on PC diskette for each MSA separately.

Besides the HMDA data, the FFIEC makes available to the public associated data files, including information about annual estimates of median family income for each MSA produced by HUD and sociodemographic information for each census tract produced by the Census Bureau.

The FFIEC also will make available a new series of reports drawn from the "HMDA Data Analysis System" developed by the regulatory agencies to enhance their fair-lending and CRA enforcement efforts. Four new reports will provide information about the lending activity of individual institutions in forms different from the standard tables used for the disclosure statements. For instance, one report provides information about the number and dollar amount of loan applications and their disposition by census tract; it also displays a variety of socioeconomic data tor each census tract.

For information about data availability, contact the FFIEC at 2100 Pennsylvania Avenue, N.W., Suite 200, Washington, DC 20037.

Lender Education

The FFIEC's brochure "Home Mortgage Lending and Equal Treatment," published in March 1992, alerts lenders to subtle forms of discrimination that may occur despite an institution's stated policy of fair lending. It suggests that lenders take a closer look at long-accepted practices in loan origination, underwriting, appraisal, and marketing that can have discriminatory effects, such as the following:

* Property standards and minimum loan amounts. Setting limits on the maximum age or nimimum size of the property may exclude homes in minority and low-income areas, especially in urban centers characterized by older and smaller dwellings. So may minimum loan amounts that are unrealistically high for these areas. Sometimes lenders believe loans must be of a certain size to qualify for purchase on the secondary market. Neither FNMA nor FHLMC has a standard for minimum loan amount that prevents their purchasing small mortgage loans.

* Subjective criteria. Standards that are not stated objectively may produce varying interpretations among lending personnel and allow them to reach different conclusions based on personal perceptions. Such standards may include calling for property that is in a "stable" area or a "desirable neighborhood" or for applicants who have an "excellent" credit history. The use of such terms may also discourage some consumers from applying for loans.

* Differential credit terms. Different length of loans, different fees on various sizes of loans, or different required down payments--when applied to specific neighborhoods--may be discriminatory.

* Employment stability. Standards that require a fixed number of years on the same job may exclude individuals who have consistent employment but not necessarily with one employer.

* Credit record. For some consumers, particularly those with low income, credit performance may not appear on the standard credit reports. But financial responsibility may be adequately reflected in years of timely payments on nondebt obligations, such as rent and utilities.

* Origination practices. Certain practices may affect the treatment of minority applicants in the loan origination process. For example, because of preconceptions or a perceived corporate bias, a loan officer may steer prospective applicants for conventional loans to other sources of financing such as FHA loans or to other lenders when such actions may not be in the consumers' best interest.

* Appraisal practices. Appraisal practices may have a discriminatory effect if they are unduly conservative in some neighborhoods and may result in rejections or in the granting of reduced loan amounts for properties in minority areas.

* Marketing strategies. The absence of contact with realtors who serve minority communities or borrowers may be perceived as reluctance on the part of the lender to serve minorities.

* Private mortgage insurance. If private mortgage insurance companies apply underwriting standards that are excessively conservative or rigid, the effect may be discriminatory. (1.) The 1989 changes to the act also extended coverage to some independent mortgage companies--those unaffiliated with a depository institution. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) extends coverage to even more independent mortgage companies, To implement the provisions of FDICIA, the Federal Reserve Board is adopting amendments to Regulation C (12 C.F.R. 203). These amendments will establish a new set of criteria as of January 1, 1993, for determining coverage for independent mortgage companies. The new rules are expected to bring the total of independent mortgage companies covered by HMDA to more than 1,000 institutions. (2.) See Glenn B. Canner and Dolores S. Smith, "Home Mortgage Disclosure Act: Expanded Data on Residential Lending," Federal Reserve Bulletin, vol. 77 (November 1991), pp. 859-81. Statistics presented in the Bulletin article were based on preliminary data. The final HMDA data for 1990 were made available to the public in January 1992. Overall, differences between the preliminary and final data were slight. For some individual lenders and some metropolitan areas, however, the differences were more substantial. (3.) The federal banking agencies include the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA). The other enforcement agencies are the Department of Justice, the Department of Housing and Urban Development (HUD), and the Federal Trade Commission. (4.) Each financial institution covered by HMDA submits a Loan/ Application Register (LAR) to its supervisory agency. The LAR is a report form used to record data for each loan application acted on and for each loan purchased. It includes information on the race or national origin, gender, and annual income of the applicants or borrowers; the size of the loan; the geographic location of the property; and the identity of the secondary market purchaser if the loan was sold. Based on the submission of these raw data, the FFIEC prepares HMDA disclosure statements consisting of a set of tables for each metropolitan area in which institutions have offices. The disclosure statements are made available to the public by the covered institutions and by central data depositories in each metropolitan area. See Appendix. (5.) See Arthur Kennickell and Janice Shack-Marquez, "Changes in Family Finances from 1983 to 1989: Evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, vol. 78 (January 1992), pp. 1-18. (6.) The HMDA data include Hispanics of all races in the Hispanic category, in contrast to data compiled by the U.S. Census Bureau, which differentiate between white Hispanics and nonwhite Hispanics. (7.) Board of Governors of the Federal Reserve System, "Survey of Consumer Credit Shopping Activities" (forthcoming). (8.) Data from the Mortgage Bankers Association show that, after reaching a ten-year low in the first quarter of 1990, delinquency rates on conventional mortgages rose sharply through the second quarter of 1991. Delinquency rates have moderated some since then. (9.) U.S. Department of Justice, press release, "Department of Justice Settles First Race Discrimination Lawsuit Against Major Home Mortgage Lender," September 17, 1992. (10.) Alicia H. Munnell, Lynn E. Browne, James McEneaney, and Geoffrey M.B. Tootell, "Mortgage Lending in Boston: Interpreting HMDA Data," Federal Reserve Bank of Boston (October 8, 1992). Copies of the report are available from the Research Library--D, P.O. Box 2076, Federal Reserve Bank of Boston, 60 Atlantic Avenue, Boston, MA 02106. (11.) "The Color of Money," Atlanta Journal Constitution (May 1-16, 1988). (12.) Both the ECOA and the Fair Housing Act prohibit discrimination on the basis of race or ethnic origin, gender, and religion. In addition, the Fair Housing Act prohibits discrimination on the basis of handicap or familial status; and the ECOA prohibits discrimination on the basis of age and marital status, because income is derived from public assistance. or because a right under the Consumer Credit Protection Act is exercised. The civil rights acts of 1866 and 1870, too, have been interpreted to bar racial discrimination in lending. (13.) Katherine L. Bradbury, Karl E. Case. and Constance R. Dunham, "Geographic Patterns of Mortgage Lending in Boston, 1981-1987." Federal Reserve Bank of Boston, New England Economic Review (September/October 1989), pp. 3-30. (14.) Ernest Kohn, Cyril E. Foster, Bernard Kaye, and Nancy J. Terris, "Are Mortgage Lending Policies Discriminating?--A Study of 10 Savings Banks," New York State Banking Department (March 1992). (15.) The CRA requires federal agencies to encourage depository institutions to help meet the credit needs of their communities, including low- and moderate-income neighborhoods, in a manner conistent with safe and sound lending practices. (16.) Mortgage review boards are organizations in which participating lenders review the underwriting decisions on loan applications. The objective of a mortgage review board is to help ensure nondiscriminatory treatment of loan applicants and to encourage additional lending. For example, in the Delaware Valley Mortgage Plan implemented by lenders in the Philadelphia area, reviews are automatically obtained before the lender denies an application. (For an evaluation of this plan, see Paul S. Calem, "The Delaware Valley Mortgage Plan: An Analysis Using HMDA Data." Federal Reserve Bank of Philadelphia, Working Paper No. 92-3, February 1992.) In Boston and Detroit, loan applicants can appeal decisions to the review boards after being turned down, (17.) For the results of housing testing programs, see Ronald E. Wienk, Clifford E. Reid, John C. Simonson, and Frederick J. Eggers, Measuring Racial Discrimination in American Housing Markets, (U.S. Department of Housing and Urban Development, Office of Policy Development and Research, April 1979); and John Yinger. Housing Discrimination Study: Incidence and Severity of Unfavorable Treatment (HUD, Office of Policy Development and Research, November 1991). For the results of employment testing programs, see H. Cross, G. Kenney, J. Mell, and W. Zimmerman, Employer Hiring Practices: Differential Treatment of Hispanic and Anglo Job Seekers, Report 9-4 (Urban Institute, 1990); U.S. General Accounting Office, Immigration Reform: Employer Sanctions and the Question of Discrimination (GAO. 1992); and Margery A. Turner, Michael Fix, and Raymond J. Struyk. Opportunities Denied, Opportunities Diminished: Discrimination in Hiring, Report 91-9 (Urban Institute, 1991). (18.) Notice of funding availability for "Major Testing Project on Mortgage Lending Practices," Federal Register, vol. 57 (May 18, 1992), pp.21127-32. (19.) Lawrence B. Lindsey, "The Future of Banking: Choosing the Right Model" (speech at the California Bankers Association, May 11, 1992); and John P. LaWare, "Giving Due Credit Where Credit Is Due" (speech at the Conference on Credit and the Economically Disadvantaged, Federal Reserve Bank of Kansas City, October 8, 1992). (20.) Results were presented at the Annual Housing Conference sponsored by FNMA in May 1992 and subsequently published. See Glenn B. Canner and Stuart A. Gabriel. "Market Segmentation and Lender Specialization in the Primary and Secondary Mortgage Markets," Housing Policy E. Debate. vol. 3 (September 1992). pp. 241-329; and Frank E. Nothaft and Vanessa Perry, "Home Mortgage Disclosure Act Data," Secondary Mortgage Markets, vol. 8 (Winter 1991-92). pp. 2-6. (21.) The HMDA data do not reflect all the loans purchased or backed by secondary market entities in a given year--only those that were originated or purchased by a covered lender and that were sold in the same year. The characteristics of borrowers whose loans are not included may differ from those reported by institutions covered by HMDA. (22.) Conference report on H.R. 5334, Housing and Community Development Act of 1992, sections 1332 and 1333, Congressional Record (daily edition), October 5, 1992, part 5, p. H12019. (23.) In 1990, FHLMC undertook an assessment of these issues by sponsoring focus group interviews with more than 130 mortgage lenders nationwide. See "The Secondary Market and Community Lending through Lenders' Eyes," prepared by ICF, Inc., Fairfax, Virginia (February 28, 1991). (24.) See FNMA, "Announcement on Reporting Additional Information for Mortgage Deliveries" (July 21, 1992); and FHLMC, "Revised Home Mortgage Delivery Data Requirements" (July 21, 1992). (25.) Of the data reported in 1990, the type of lending that appears to have the greatest problems of data quality is the multifamily category. Among the problems identified is the incorrect reporting of some loans for one- to four-family properties as multifamily. As in 1990, the most common error in the 1991 HMDA data is the incorrect reporting of census tract numbers for the identification of the location of properties underlying loans and applications.