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Statement by Richard F. Syron, President, Federal Reserve Bank of Boston, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 24, 1993.

Thank you for this opportunity to discuss the Federal Reserve Bank of Boston's recent study of mortgage lending patterns and the report's implications for combatting discrimination in mortgage lending.

As the committee knows, the Home Mortgage Disclosure Act (HMDA HMDA Hexamethylene Diamine (chemistry)
HMDA Hitchhiker Motorized Door Assembly
HMDA High Mobility DGM Assemblage
HMDA Home Mortgage Disclosure Act of 1974
) data for 1990 showed substantially higher denial rates for black and Hispanic Hispanic Multiculture A person of Mexican, Puerto Rican, Cuban, Central or South American, or other Spanish culture or origin, regardless of race Social medicine Any of 17 major Latino subcultures, concentrated in California, Texas, Chicago, Miam, NY, and elsewhere  applicants than for white applicants. This was true in all the major metropolitan statistical areas, and it was certainly true in Boston Boston, town, England
Boston, town (1991 pop. 26,495), E central England, on the Witham River. Boston's fame as a port dates from the 13th cent., when it was a Hanseatic port trading wool and wine. Having recovered from a decline in the 18th and 19th cent.
. Approximately 30 percent of black and Hispanic mortgage applicants were denied loans in the Boston metropolitan statistical area in 1990, compared with only 11 percent of white applicants. The 1991 data for Boston, which became available in fall 1992, show a narrower but still sizable siz·a·ble also size·a·ble  
Of considerable size; fairly large.

siza·ble·ness n.
 gap, with 24 percent of black and Hispanic applicants denied loans, compared with 11 percent of white applicants.

When the 1990 HMDA were released, the implications of the racial disparities in denial in denial Psychiatry To be in a state of denying the existence or effects of an ego defense mechanism. See Denial.  rates were unclear. Although the HMDA date included information on applicant income, no information was collected on applicants' credit histories, loan-to-value ratios Loan-to-value ratio (LTV)

The ratio of money borrowed on a property to the property's fair market value.
, debt-to-income or so called obligation ratios, and other factors that lenders commonly consider when they make mortgage loan decisions. Some felt that this missing information could explain the high denial rates experienced by minorities. Others argued that even if all relevant information were included, substantial bias in mortgage lending still existed. This disagreement has made it difficult to formulate formulate /for·mu·late/ (for´mu-lat)
1. to state in the form of a formula.

2. to prepare in accordance with a prescribed or specified method.
 solutions to improve credit flows to poor and minority neighborhoods.

The Federal Reserve Bank of Boston The Federal Reserve Bank of Boston is responsible for the First District of the Federal Reserve, which covers Connecticut (excluding Fairfield County), Massachusetts, Maine, New Hampshire, Rhode Island and Vermont. It is headquartered in Boston, Massachusetts. , with the support of the Federal Reserve Board and other supervisory agencies and the cooperation of mortgage lenders in the Boston area, undertook a major study of mortgage lending in an effort to clarify this issue. Racial disparities in mortgage lending patterns have been a concern in Boston for some years, and in 1989 the Boston Fed had undertaken a study of mortgage lending within the city of Boston. Although that study had found that housing and mortgage markets were functioning in a way that hurt black neighborhoods, the data available at that time could not distinguish the role played by lenders form the actions of buyers, sellers, realtors, and other market participants The term market participant is used in United States constitutional law to describe a U.S. State which is acting as a producer or supplier of a marketable good or service. When a state is acting in such a role, it may permissibly discriminate against non-residents. , After the 1990 HMDA data on applications were released, the Boston Fed was able to improve upon its earlier research and focus on the activities of the mortgage lending industry. I would like to submit for the record a copy of the Boston Fed's study, "Mortgage Lending in Boston: Interpreting HMDA Data."

The 131 financial institutions that had been the most active mortgage lenders in the Boston metropolitan area were asked to provide additional information on thirty-eight financial, credit history, and employment variables for all 1,143 of their black and Hispanic mortgage applicants and for a random sample of 3,300 white applicants. To protect the confidentiality of borrowers, we assured the lenders that all information collected would remain with the Federal Reserve and other bank regulatory agencies regulatory agency

Independent government commission charged by the legislature with setting and enforcing standards for specific industries in the private sector. The concept was invented by the U.S.
. The response from lenders was excellent, although missing information, errors in recording the original data, and withdrawn applications resulted in a final sample of 722 black and Hispanic applicants and 2,340 white applicants.

The additional variables collected were chosen after numerous conversations with underwriters, examiners, and others familiar with the mortgage lending process. We attempted to include all the variables that lenders view as relevant to their mortgage decisions. The information collected from the financial institutions was then combined with information on neighborhood characteristics from the 1990 Census and used to develop a model of mortgage lending decisions in the Boston area. Using this model, it was possible to test whether race was a significant factor in the lending decision once financial, credit history, employment, and neighborhood characteristics were taken into account.

The analysis revealed that the additional information about each applicant substantially reduced the disparity dis·par·i·ty  
n. pl. dis·par·i·ties
1. The condition or fact of being unequal, as in age, rank, or degree; difference: "narrow the economic disparities among regions and industries" 
 in denial rates but did not eliminate the gap. Black and Hispanic mortgage applicants in Boston, on average, had larger debt burdens, higher loan-to-value ratios, and weaker credit histories, and in other respects did not fare as well according to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 the evaluation criteria used by mortgage lenders. But after having taken all these factors into account, black and Hispanic mortgage applicants were still more likely to be turned down than white applicants. Minority applicants with the same financial, credit history, employment, and neighborhood characteristics as the white applicants in Boston would have experienced a denial rate of 17 percent rather than the actual white denial of 11 percent.

The information gathered in this study provides some insight into how this outcome occurs. Many observers have difficulty accepting that discrimination exists because they do not believe that rational lenders would turn down a perfectly good application simply because the applicant was black or Hispanic. The problem is that few applications fit a narrow definition of perfect. Most applicants, white as well as minority, exceed some guideline guideline Medtalk A series of recommendations by a body of experts in a particular discipline. See Cancer screening guidelines, Cardiac profile guidelines, Gatekeeper guidelines, Harvard guidelines, Transfusion guidelines.  for obligation or loan-to-value ratios or credit history; or some possess a characteristic that requires additional documentation, such as self-employment The perspective and/or examples in this article do not represent a world-wide view. Please [ edit] this page to improve its geographical balance.  or the fact that they are purchasing a two- to four-family home. As a consequence, the mortgage decision is not a purely mechanical process. Loan originators must exercise judgment, and they have considerable discretion in the way they evaluate these deviations from perfection Perfection
Giotto’s O

perfect circle drawn effortlessly by Giotto. [Ital. Hist.: Brewer Dictionary, 463]

golden mean

or section
 and in the degree to which they take compensating factors into consideration.

On balance, this discretion is both necessary and desirable. Historically, residential mortgages have been very safe investments. And applicants need not be perfect to be creditworthy cred·it·wor·thy  
Having an acceptable credit rating.

. However, discrimination may enter into the decision-making decision-making,
n the process of coming to a conclusion or making a judgment.

decision-making, evidence-based,
n a type of informal decision-making that combines clinical expertise, patient concerns, and evidence gathered from
 process. Precisely how this happens is not something that can be answered by this study. It could be as simple as loan officers being more willing to exercise discretion and put their own reputations at risk for people who look or talk like themselves than for others. However the discrimination occurs, black and Hispanic applicants are more likely to be turned down for mortgages than white applicants who have the same economic and other characteristics.

What can be done to address the problem of discrimination in mortgage lending?

In my judgment, the most critical step is for mortgage lenders to acknowledge at least the possibility that the results of their lending process are discriminatory dis·crim·i·na·to·ry  
1. Marked by or showing prejudice; biased.

2. Making distinctions.

. As long as lenders sincerely believe that their procedures are beyond reproach re·proach  
tr.v. re·proached, re·proach·ing, re·proach·es
1. To express disapproval of, criticism of, or disappointment in (someone). See Synonyms at admonish.

2. To bring shame upon; disgrace.

, efforts to get them to change will have limited success. This area is one in which we hope that we have made a contribution. At least in Boston, our study seems to have ended the debate over how to interpret the HMDA data. Economic factors do explain some of the disparity in denial rates, but race also plays a role. Lenders' reactions to the study suggest that they are now questioning what they have always taken for granted Adj. 1. taken for granted - evident without proof or argument; "an axiomatic truth"; "we hold these truths to be self-evident"
axiomatic, self-evident

obvious - easily perceived by the senses or grasped by the mind; "obvious errors"
. They are starting to recognize that simply having a policy that prohibits discrimination does not prevent discrimination.

Consumer advocates, government agencies, and lending institutions Noun 1. lending institution - a financial institution that makes loans
financial institution, financial organisation, financial organization - an institution (public or private) that collects funds (from the public or other institutions) and invests them in
 have developed several strategies to help lenders ensure that they are treating all prospective borrowers fairly. The Federal Reserve Bank of Boston is in the process of compiling com·pile  
tr.v. com·piled, com·pil·ing, com·piles
1. To gather into a single book.

2. To put together or compose from materials gathered from several sources:
 these strategies in a guide that will soon be available for distribution to lenders. I suspect that the members of this committee have heard many of these ideas. They include the following: (1) ensuring that all employees involved with the loan process are thoroughly familiar with laws related to fair lending, (2) having a staff that reflects the racial and ethnic composition of the communities served by the lending institutions, (3) ensuring that compensation structures for employees do not deter them from serving low-income and minority markets, (4) using carefully designed second review processes for denied applications, and (5) taking several other approaches.

Although the guide does not present something totally new, it makes a contribution by tailoring each recommendation to the lender's board of directors and senior management as well as to loan originators. The commitment to eliminating discrimination must start at the top and continue right through the organization to those who meet the public face to face.

The efforts of financial institutions will have to be reinforced by enhanced regulatory methods. Because so many mortgage applications violate some guideline or in some way require that the lender exercise judgment, most denials can appear appropriate by objective standards. Thus, discrimination can be difficult to prove when one looks case by case. It is also necessary to examine broad patterns and an institution's entire loan-making process. The Federal Financial Institutions Examination Council The Federal Financial Institutions Examination Council, or FFIEC, is a formal interagency body of the United States government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of  is aware of this problem and is working on improving its examination procedures.

Finally, I would like to emphasize that although lending discretion may permit discrimination to occur, removing the discretionary element would be a major mistake. If current guidelines guidelines, a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks.
 were to become rules to be applied with no exceptions, then even if these rules were not as tight as the guidelines are today, many creditworthy applicants would be denied loans and, thus, the opportunity to own a home. And if the Boston experience is representative of that nationally, black and Hispanic applicants would fare worse than white applicants because they have higher obligation and loan-to-value ratios and weaker credit histories.

In conclusion, the Federal Reserve Bank of Boston's study of mortgage lending patterns in the Boston metropolitan statistical area shows that the large disparities in denial rates revealed by the HMDA date are partially attributable have the fact that black and Hispanic applicants have greater debt burdens, higher loan-too-value ratios, weaker credit histories, and other economic characteristics that lenders view with disfavor. However, even after having taken account of all these factors, a statistically significant and economically important gap remains in denial rates for white and minority applicants. Eliminating this gap requires that regulators, lenders, and community groups understand the nature and likely causes of that gap, stop arguing about whether a problem exists, and work more effectively together for the future.
COPYRIGHT 1993 Board of Governors of the Federal Reserve System
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Statements to Congress
Publication:Federal Reserve Bulletin
Article Type:Transcript
Date:Apr 1, 1993
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