Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, September 24, 1993.

Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, September 24, 1993

I appreciate the opportunity to speak to you today about the challenges that face banks in meeting the service and credit needs of low-income and minority communities. I commend the committee for holding this hearing in a local community in Prince George's County where questions pertaining to these factors have been raised.

It is our understanding that the committee is interested in developing a profile of current lending activity in a specific neighborhood in Prince George's County and then periodically reviewing the record for changes in bank credit and service delivery. As a starting point for analysis, we were furnished a list of thirty-nine census tracts and a list of banks and thrift institutions that were identified by the committee as having a branch or office located in these specific census tracts, or, as I will refer to it in the testimony, the "target area."

I toured the target area with the Director of Housing and Community Development for Prince George's County. During that visit we discussed demographics, housing, and other conditions in the county as a whole, and in the target area specifically. I saw many encouraging developments in some areas--and opportunities in others--which I will address later in this statement.

First, I would like to comment on some of the specific characteristics of the neighborhood. I will make some general observations about the overall Home Mortgage Disclosure Act (HMDA) data for the area. Then I will briefly discuss the banks for which the Federal Reserve is the primary regulator and that are located in the target area. Finally, I would like to acquaint the committee with some of the initiatives being undertaken by the financial institution regulators, and by the Federal Reserve specifically, to address credit availability for underserved areas.

CHARACTERISTICS OF PRINCE GEORGE'S COUNTY

Prince George's County is an interesting area for this type of study because it has undergone some massive changes in population and demographics during the past ten years. The county estimates the 1992 population at roughly 750,000 people. This is an increase of 20,000 people just since the 1990 census and an increase of 85,000 in population since the 1980 census.

The county's population is 58 percent minority, including 50 percent black and 8 percent Hispanic, Asian, and other minorities. This represents a shift since 1980, when the majority of the county's population was white. The shift is a result of the out-migration of whites coupled with the in-migration of blacks, many of whom came from Washington, D.C., in search of better housing values and public school systems. Many of the blacks who have moved into the county represent middle- and upper-income families. Prince George's County has both the highest median income for a black population and the largest number of black-owned businesses of any county in the United States.

The thirty-nine census tracts that make up the target area of interest to the committee differ from the county over all in some demographic characteristics. The population of the target area is 159,000 and consists of 82 percent blacks and 3 percent Hispanic, Asian, and other minorities. Even though this area has a greater percentage black population than the county as a whole, the median income for the target area of $46,476 is very close to the county median of $49,031. However, the median home value for the target area of $111,779 is lower than the county median of $123,995. The percentage of owner-occupied units in the thirty-nine tracts (56.9 percent) is roughly equivalent to that in the county as a whole (56.2 percent).

During my tour of the target area, I observed that, as was expected, most of the older, lower-income housing is closest to the District line. Some of the residences in these areas are currently undergoing rehabilitation, and some of those rehabs are being financed by the county government. Others are being financed privately. Many other homes in the general area apparently could benefit from repair or improvement. The commercial areas in those neighborhoods are small retail strips. We did see several bank branches in certain commercial areas near the District line; however, there were also quite a few check-cashing operations and liquor stores that also frequently cash checks.

As you travel farther out Central Avenue toward Enterprise Road, there is a lot of new housing and commercial development. The housing stock reflects an upward shift in income, with recently built larger, more expensive homes. I was struck by the apparent diversity of income within the relatively small area of the thirty-nine targeted census tracts.

As indicated by the attached maps, we have plotted the locations of all the depository institutions with offices in the target area.(1) Six of these institutions have branches or offices along the narrow Central Avenue corridor. The largest number of branches (twelve) are clustered in the southwest area of the designated community. That southwest corner of the target area includes census tracts with a population that is 60 percent to 80 percent minority, and with median family incomes that fall in the range of 80 percent to 120 percent of the Metropolitan Statistical Area (MSA) median income ($54,173 in 1990). The remainder of the branches are scattered throughout the neighborhoods. The areas with the lowest income do not have many branches of banks or savings and loans.

HOME MORTGAGE LENDING

The best information available about the types and volume of credit extended in the neighborhoods that are the focus of these hearings is for residential lending. As a product of the data collected under the authority of the Home Mortgage Disclosure Act, we know both the types and volume of home loans applied for and granted in selected census tracts. We also know the race and income of the applicants and borrowers.

For this hearing, on behalf of all the agencies here today, we examined the 1992 HMDA data, which are still being processed by the Federal Reserve Board. The HMDA reports are quite revealing, although I must caution that revisions to the data are still possible because we are just completing the final editing of the 1992 data. We will be happy to provide the committee with revised information if corrections are made.

The Federal Reserve used the preliminary 1992 HMDA data to prepare special reports showing the home lending activity of the depository institutions that have branches in the target neighborhoods besides a report showing the lending activity of all lenders covered by HMDA for these neighborhoods, including lenders, such as mortgage companies, that have no deposit-taking function.

The 1992 HMDA data show that the depository institutions with branches in the target neighborhoods received relatively few applications for credit to purchase or improve homes or refinance existing mortgages in these neighborhoods. When comparing the HMDA data and the maps showing the location of institution branches, it is somewhat surprising that, at least in the target area, branch location seems to have no relation to the number of housing-related loan applications.

According to the 1992 HMDA data, the depository institutions that have branches in the target area received fifteen applications for home purchase loans, nine of which were approved; ninety-eight applications for refinancing, fifty-six of which were approved; and 150 applications for home improvement loans, fifty-nine of which were approved. However, the HMDA data also reveal that approximately 190 lenders covered by HMDA with locations outside the target area--both depositories and mortgage companies--received loan applications pertaining to properties in the target area. These lenders with office locations outside the target area include eighty banks and thrift institutions, sixty-three mortgage company subsidiaries of banks and thrift institutions, and fifty independent mortgage companies. I should note that the HMDA data probably understate the total number of residential lenders active in these areas because some of the lenders extending credit in these neighborhoods either are exempt from HMDA because of the institution's size (less than $10 million in assets) or location (not in an MSA), or, because of a low volume of loans, are not required to report their lending in the Washington MSA by census tract.

In 1992, the roughly 190 other lenders active in the target neighborhoods received approximately 2,900 applications for home purchase loans, 1,900 of which were approved; 2,850 applications for refinancing, approximately 2,150 of which were approved; and roughly 700 applications for home improvement loans, 400 of which were approved.

One thing that is shown by the HMDA data is the disposition of housing-related applications. On a national basis, the denial rate for black applicants for conventional home purchase loans is about twice the rate for white applicants. However, in the target area, the black denial rate of 18.8 percent is actually lower than the white denial rate of 20.8 percent.

We also looked at the denial rates for other types of housing products extended by all lenders in the target area. Historically, the denial rates nationally for FHA and VA home purchase loans have been 26.4 percent for black and 16.3 percent for white applicants. In the target area, for 1992, these rates also reflect roughly an 8 percentage point difference and are 18.3 percent for black and 10.2 percent for white applicants. Refinancing and home improvement applications in the target area show denial rates very different from the national norms. Mortgage refinancing applications nationally have resulted in denial rates of 29.5 percent for black and 13.7 percent for white applicants. The target area, in 1992, experienced a 12.2 percent denial rate for black applicants and a 10.5 percent denial rate for white applicants, a significantly lower disparity than the national figures. Home improvement applications demonstrated a similar pattern. Whereas nationally the denial rates were 44.2 percent for black applicants and 21.1 percent for white applicants, in the target area the denial rates were 39.5 percent for black applicants and 38.7 percent for white applicants.

It is worth noting that although the local depository institutions accounted for a very small proportion of all the home purchase and home refinancing applications in the target neighborhoods, they were major players in home improvement loans, accounting for about 20 percent of total applications.

By examining the 1992 HMDA data we can learn something about the types of loans used by homebuyers in the targeted area for this review. In 1992, of the roughly 2,900 applications for home purchase loans, 61 percent were either for FHA-insured or VA-guaranteed loans; the remainder were for conventional loans. Among low- and moderate-income black applicants for home purchase loans, 75 percent applied for government-backed loans, while only 49 percent of white applicants with similar incomes sought government-backed credit. The reasons for these differences are not known.

STATE MEMBER BANKS IN THE TARGET AREA

The Federal Reserve has primary regulatory responsibility for only two of the banks that appeared on the list supplied by the committee. These two banks together have a total of four branches or offices in the designated area. One of the banks became a member of the Federal Reserve just within the past year. That bank was last examined, for compliance with the Community Reinvestment Act (CRA), by its previous regulator, in 1989, before public disclosure of CRA ratings. Consequently, we do not have a public rating at this time. That bank is scheduled for a compliance examination, which will include a review of performance under the Community Reinvestment Act, by the Federal Reserve Bank of Richmond in November. Upon completion of that examination, we will be glad to send the committee a copy of the publicly disclosed CRA Evaluation Report.

The other state-member institution in the neighborhood was rated "satisfactory" in April 1993. The committee has already been sent a copy of that report. It is important to keep in mind that the evaluation of that bank is based on its entire delineated community, which encompasses a large area including, but not limited to, parts of Prince George's County.

Both state member banks offer a broad range of credit services, including loans for home im

(1.) The attachments to this statement are available from Publications Services, Board of Governors of the Federal Reserve System, Washington, DC 20551. refinancing, and purchase (including FHA and VA loans); loans for residential and commercial construction; loans for small business start-up, expansion, and operation; and general consumer loans.

One of the state member banks will cash government checks for noncustomers with proper identification. The other bank provides that service for customers only. Both banks have low-cost basic checking accounts with no minimum balance, one at a monthly cost of $3.000 and the other with a $4.00 monthly fee. These fees include six checks per month, with a $0.50 per check fee for any checks beyond the six.

The two state member banks located in the neighborhoods had no mortgage loan purchase applications, four applications for refinancing, of which one was approved and three denied, and twenty-five home improvement loan applications (nine approved, fourteen denied, and two withdrawn). However, these statistics do not tell the entire lending story for these institutions.

Both state member banks have mortgage company subsidiaries. In examining the HMDA data, we also looked at the target area lending activity by these subsidiaries. The mortgage company subsidiaries received a total of forty-five mortgage home purchase loan applications, of which forty were approved, three were denied, and two were withdrawn. There were ninety-nine applications for mortgage loan refinancing in the target area, of which seventy-three were approved, eight were denied, and eighteen were withdrawn.

FEDERAL RESERVE INITIATIVES

I would now like to discuss some of the initiatives in which the Federal Reserve Board is participating or initiating to increase credit availability in low-income and minority neighborhoods.

In response to concerns in the banking industry and among potential borrowers, in March the federal banking agencies issued a joint statement on credit availability that created a special category for small and medium-sized business and farm loans that could be made with less documentation that is normally required. The amount of such loans may not exceed 20 percent of a bank's capital. It was our hope at the time that banks would take advantage of this opportunity to increase the number of small business loans in communities such as the target area. However, it seems that only a few institutions are utilizing this basket, possibly because of slack demand.

On June 10, the agencies announced additional credit availability initiatives that included lessening paperwork and regulatory burdens for financial institutions to encourage them to make additional credit available. These initiatives included revised valuations of collateral, better coordination of bank examinations among the agencies, and guidance on use of classification categories in commercial examinations.

These initiatives also included guidance on fair lending and referred to an interagency letter issued in May. This interagency letter on lending discrimination was signed by the principals of all the federal banking regulatory agencies and was sent to the chief executive officers of all banks, savings and loan associations, and bank holding companies in the United States. It stressed the serious nature of violations of antidiscrimination laws and the importance of these issues to the regulatory agencies. The letter also included guidance to the financial institutions on steps that can be taken to ensure that they are complying with the relevant fair lending statutes and regulations. The recommendations included the use of second reviews for denied applications, mortgage review boards, and compensation programs in financial institutions that provide incentives to loan officers for loans made to low- and moderate-income minority applicants.

Further guidance to banks on discrimination issues is included in the Federal Reserve Bank of Boston's brochure "Closing the Gap." This creative pamphlet discusses discrimination and provides advice to banks on ways to have an effective program that serves the minority communities in a bank's delineated area. "Closing the Gap" is now in its third printing, and thousands of copies have been distributed to financial institutions and others throughout the United States.

The Federal Reserve is also emphasizing compliance with fair lending statutes by improving examiner training and examination techniques for these requirements. We have developed a special "HMDA data analysis system," which allows computer analysis of the raw information to facilitate a better understanding of the HMDA data. This enables our examiners to go beyond the normal HMDA tasks as they review lending activity in cases where the analysis indicates a possible evidence of discrimination, they may indicate areas that need further explanation or investigation by the examiners.

The HMDA data are also being used in a recently developed computer model that allows examiners to match minority and nonminority applicants with similar credit characteristics but different loan outcomes. Once the pairs are selected, the examiners will pull the identified files and determine the factors used in the credit process. This model is still being tested in several Reserve Bank Districts, but initial feedback shows great promise for use in fair lending examinations.

Besides the HMDA data, we now have a mapping program that allows us to analyze several variables and present them in an easy-to-read display. Some of the capabilities of this system are evident in the maps I have submitted that show the race, income, and housing loans in the target area.

Another major initiative currently being undertaken by the agencies is the Community Reinvestment Act reform project. The administration has requested that the regulatory agencies review CRA and revise it to base it less on process and paperwork and more on actual credit extended or performance. The agencies are working together on this project and are currently engaged in gathering wide public input from bankers and community groups. Two meeting have been held, one with industry trade associations and one with representatives of national community advocacy organizations. Additionally, principals of the agencies have held seven public hearings on CRA in locations throughout the country and gathered testimony from a wide variety of large and small banks and thrift institutions, community and other grass-roots organizations, and public officials.

In response to the recent series of articles on lending and banking services in the Washington Post, the Federal Reserve Board and the Federal Reserve Bank of Richmond invited the chief executives of the major financial institutions in the Washington metropolitan area to an information session at the Board. More than sixty local bankers attended this program.

The session featured a presentation on the Delaware Valley Mortgage Plan, an innovative bank consortium in Philadelphia that offers single-family housing loans to low- and moderate-income individuals and families. The plan has eleven bank and thrift participants that have committed to offer creative mortgage products to lower-income persons. They also commit to not reject applications until after a credit committee for the plan has an opportunity to explore other methods of approving the loan. The plan has made more than $270 million in mortgages to roughly 16,500 families since 1975. The President of the Federal Reserve Bank of Richmond has confirmed the support of Reserve Bank and Board staff for similar initiatives the local lenders may wish to pursue.

Among the goals established for the Community Affairs program at the Federal Reserve Bank of Richmond is the preparation of community profiles of all the metropolitan and major rural areas in the District. The first profile, currently being prepared, is for all of Prince George's County, including the target area that is the focus of these hearings. The profiles will describe the general credit needs of each area, with specific focus on low- and moderate-income neighborhoods and small businesses. The profiles will also identify various opportunities for financial institution investment. By providing demographic analysis and information on groups active in community development, the profiles should help financial institutions respond positively to community reinvestment challenges.

After completion of the Prince George's County profile, the Community Affairs office will sponsor a training seminar in community development finance for financial institutions, community groups, and public officials is the area. This seminar will promote public and private initiatives and opportunities in the county and be a prototype for action as additional profiles are completed.

In conclusion, I thank you for the opportunity to testify today on this particular neighborhood in Prince George's County as well as methods for addressing credit availability issues in other neighborhoods that include minority residents and small businesses. We recognize the importance of these issues and look forward to working with you to address them.