Fair Lending:

Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts

GAO-09-704: Published: Jul 15, 2009. Publicly Released: Jul 15, 2009.

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The Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA)--the "fair lending laws"--prohibit discrimination in lending. Responsibility for their oversight is shared among three enforcement agencies--the Department of Housing and Urban Development (HUD), Federal Trade Commission (FTC), and Department of Justice (DOJ)--and five depository institution regulators--the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (Federal Reserve), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and Office of Thrift Supervision (OTS). This report examines (1) data used by agencies and the public to detect potential violations and options to enhance the data, (2) federal oversight of lenders that are identified as at heightened risk of violating the fair lending laws, and (3) recent cases involving fair lending laws and associated enforcement challenges. GAO analyzed fair lending laws, relevant research, and interviewed agency officials, lenders, and consumer groups. GAO also reviewed 152 depository institution fair lending examination files. Depending upon file availability by regulator, GAO reviewed all relevant files or a random sample as appropriate.

The Home Mortgage Disclosure Act (HMDA) requires certain lenders to collect and publicly report data on the race, national origin, and sex of mortgage loan borrowers. Enforcement agencies and depository institution regulators use HMDA data to identify outliers--lenders that may have violated fair lending laws--and focus their investigations and examinations accordingly. But, HMDA data also have limitations; they do not include information on the credit risks of mortgage borrowers, which may limit regulators' and the public's capacity to identify lenders most likely to be engaged in discriminatory practices without first conducting labor-intensive reviews. Another data limitation is that lenders are not required to report data on the race, ethnicity, and sex of nonmortgage loan borrowers--such as small businesses, which limits oversight of such lending. While requiring lenders to report additional data would impose costs on them, particularly smaller institutions, options exist to mitigate such costs to some degree, such as limiting the reporting requirements to larger institutions. Without additional data, agencies' and regulators' capacity to identify potential lending discrimination is limited. GAO identified the following limitations in the consistency and effectiveness of fair lending oversight that are largely attributable to the fragmented U.S. financial regulatory system: (1) Federal oversight of lenders that may represent heightened risks of fair lending law violations is limited. For example, the enforcement agencies are responsible for monitoring independent mortgage lenders' compliance with the fair lending laws. Such lenders have been large originators of subprime mortgage loans in recent years and have more frequently been identified through analysis of HMDA data as outliers than depository institutions, such as banks. Depository institution regulators are more likely to assess the activities of outliers and, unlike enforcement agencies, they routinely assess the compliance of lenders that are not outliers. As a result, many fair lending violations at independent lenders may go undetected, and efforts to deter potential violations may be ineffective. (2) Although depository institution regulators' fair lending oversight efforts may be more comprehensive, the division of responsibility among multiple agencies raises questions about the consistency and effectiveness of their efforts. For example, each regulator uses a different approach to analyze HMDA data to identify outliers and examination documentation varies. Moreover, since 2005, OTS, the Federal Reserve, and FDIC have referred more than 100 lenders to DOJ for further investigations of potential fair lending violations, as required by ECOA, while OCC made one referral and NCUA none. Enforcement agencies have settled relatively few (eight) fair lending cases since 2005. Agencies identified several enforcement challenges, including the complexity of fair lending cases, difficulties in recruiting and retaining staff, and the constraints of ECOA's 2-year statute of limitations.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: To facilitate the capacity of federal enforcement agencies and depository institution regulators as well as independent researchers to identify lenders that may be engaged in discriminatory practices in violation of the fair lending laws, Congress may wish to consider the merits of additional data collection and reporting options. These varying options pertain to obtaining key underwriting data for mortgage loans, such as credit scores as well as LTV and DTI ratios, and personal characteristic (such as race, ethnicity and sex) and relevant underwriting data for nonmortgage loans.

    Status: Closed - Implemented

    Comments: Consistent with GAO's suggestions, Congress amended the Home Mortgage Disclosure Act (HMDA) in its Dodd-Frank Wall Street Reform and Consumer Protection Act, which became public law in July, 2010. Among other things the amendments require lenders to gather data on the credit score of mortgage loan applicants. As a result, the potential exists that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination for mortgage lending.

    Matter: To help ensure that all potential risks for fair lending violations are thoroughly investigated and sufficient time is available to do so, Congress may wish to consider extending the statute of limitations on ECOA violations.

    Status: Closed - Implemented

    Comments: Consistent with GAO's recommendation, Congress extended the statute of limitations for Equal Credit Opportunity Act actions from two to five years pursuant to section 1085(7) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act became public law in July 2010.

    Matter: As Congress debates the reform of the financial regulatory system, it may wish to take steps to help ensure that consumers are adequately protected, that laws such as the fair lending laws are comprehensive and consistently applied, and that oversight is efficient and effective. Any new structure should address gaps and inconsistencies in the oversight of independent mortgage brokers and nonbank subsidiaries, as well as address the potentially inconsistent oversight provided by depository institution regulators.

    Status: Closed - Implemented

    Comments: Consistent with GAO's suggestions, Congress included improvements in its supervision of holding company subsidiaries and examination and enforcement of mortgage brokers in its Dodd-Frank Wall Street Reform and Consumer Protection Act, which became public law in July 2010. Specifically, the Act requires the Federal Reserve to examine non-bank subsidiaries that are engaged in activities that the subsidiary bank can do (e.g. mortgage lending) on the same schedule and in the same manner as bank exams, and gives regulators the authority to examine and enforce regulators for all mortgage-related businesses, such as mortgage brokers and other non-bank financial companies. As a result, the potential exist that the enforcement agencies and banking regulators will be better equipped to comprehensively and consistently apply the fair lending laws.

    Recommendations for Executive Action

    Recommendation: To help strengthen fair lending oversight and enforcement, DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS should work collaboratively to identify approaches to better assess the potential risk for discrimination during the preapplication phase of mortgage lending. For example, the agencies and depository institution regulators could further consider the use of testers, perhaps on a pilot basis, as well as surveys of mortgage loan borrowers and applicants or alternative means to better assess the potential risk for discrimination during this critical phase of the mortgage lending process.

    Agency Affected: Department of Justice

    Status: Closed - Implemented

    Comments: In September 2009, the Joint Agency Task Force on Discrimination in Lending established a working group with representatives from each of the enforcement agencies and depository institution regulators to respond to our recommendation. The working group is to discuss the use of testers and surveys as a means to assess discrimination in the preapplication phase and share information on how each agency currently identifies potential preapplication discrimination. In addition, the working group has expanded its efforts to seek input from non-governmental agencies regarding additional information and suggestions on potential methods for identifying preapplication discrimination. As a result, the potential exist that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination during the preapplication phase of mortgage lending.

    Recommendation: To help strengthen fair lending oversight and enforcement, DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS should work collaboratively to identify approaches to better assess the potential risk for discrimination during the preapplication phase of mortgage lending. For example, the agencies and depository institution regulators could further consider the use of testers, perhaps on a pilot basis, as well as surveys of mortgage loan borrowers and applicants or alternative means to better assess the potential risk for discrimination during this critical phase of the mortgage lending process.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

    Status: Closed - Implemented

    Comments: In September 2009, the Joint Agency Task Force on Discrimination in Lending established a working group with representatives from each of the enforcement agencies and depository institution regulators to respond to our recommendation. The working group is to discuss the use of testers and surveys as a means to assess discrimination in the preapplication phase and share information on how each agency currently identifies potential preapplication discrimination. In addition, the working group has expanded its efforts to seek input from non-governmental agencies regarding additional information and suggestions on potential methods for identifying preapplication discrimination. As a result, the potential exist that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination during the preapplication phase of mortgage lending.

    Recommendation: To help strengthen fair lending oversight and enforcement, DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS should work collaboratively to identify approaches to better assess the potential risk for discrimination during the preapplication phase of mortgage lending. For example, the agencies and depository institution regulators could further consider the use of testers, perhaps on a pilot basis, as well as surveys of mortgage loan borrowers and applicants or alternative means to better assess the potential risk for discrimination during this critical phase of the mortgage lending process.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: In September 2009, the Joint Agency Task Force on Discrimination in Lending established a working group with representatives from each of the enforcement agencies and depository institution regulators to respond to our recommendation. The working group is to discuss the use of testers and surveys as a means to assess discrimination in the preapplication phase and share information on how each agency currently identifies potential preapplication discrimination. In addition, the working group has expanded its efforts to seek input from non-governmental agencies regarding additional information and suggestions on potential methods for identifying preapplication discrimination. As a result, the potential exist that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination during the preapplication phase of mortgage lending.

    Recommendation: To help strengthen fair lending oversight and enforcement, DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS should work collaboratively to identify approaches to better assess the potential risk for discrimination during the preapplication phase of mortgage lending. For example, the agencies and depository institution regulators could further consider the use of testers, perhaps on a pilot basis, as well as surveys of mortgage loan borrowers and applicants or alternative means to better assess the potential risk for discrimination during this critical phase of the mortgage lending process.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Closed - Implemented

    Comments: In September 2009, the Joint Agency Task Force on Discrimination in Lending established a working group with representatives from each of the enforcement agencies and depository institution regulators to respond to our recommendation. The working group is to discuss the use of testers and surveys as a means to assess discrimination in the preapplication phase and share information on how each agency currently identifies potential preapplication discrimination. In addition, the working group has expanded its efforts to seek input from non-governmental agencies regarding additional information and suggestions on potential methods for identifying preapplication discrimination. As a result, the potential exist that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination during the preapplication phase of mortgage lending.

    Recommendation: To help strengthen fair lending oversight and enforcement, DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS should work collaboratively to identify approaches to better assess the potential risk for discrimination during the preapplication phase of mortgage lending. For example, the agencies and depository institution regulators could further consider the use of testers, perhaps on a pilot basis, as well as surveys of mortgage loan borrowers and applicants or alternative means to better assess the potential risk for discrimination during this critical phase of the mortgage lending process.

    Agency Affected: Federal Trade Commission

    Status: Closed - Implemented

    Comments: In September 2009, the Joint Agency Task Force on Discrimination in Lending established a working group with representatives from each of the enforcement agencies and depository institution regulators to respond to our recommendation. The working group is to discuss the use of testers and surveys as a means to assess discrimination in the preapplication phase and share information on how each agency currently identifies potential preapplication discrimination. In addition, the working group has expanded its efforts to seek input from non-governmental agencies regarding additional information and suggestions on potential methods for identifying preapplication discrimination. As a result, the potential exist that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination during the preapplication phase of mortgage lending.

    Recommendation: To help strengthen fair lending oversight and enforcement, DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS should work collaboratively to identify approaches to better assess the potential risk for discrimination during the preapplication phase of mortgage lending. For example, the agencies and depository institution regulators could further consider the use of testers, perhaps on a pilot basis, as well as surveys of mortgage loan borrowers and applicants or alternative means to better assess the potential risk for discrimination during this critical phase of the mortgage lending process.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: In September 2009, the Joint Agency Task Force on Discrimination in Lending established a working group with representatives from each of the enforcement agencies and depository institution regulators to respond to our recommendation. The working group is to discuss the use of testers and surveys as a means to assess discrimination in the preapplication phase and share information on how each agency currently identifies potential reapplication discrimination. In addition, the working group has expanded its efforts to seek input from non-governmental agencies regarding additional information and suggestions on potential methods for identifying preapplication discrimination. As a result, the potential exist that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination during the preapplication phase of mortgage lending.

    Recommendation: To help strengthen fair lending oversight and enforcement, DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS should work collaboratively to identify approaches to better assess the potential risk for discrimination during the preapplication phase of mortgage lending. For example, the agencies and depository institution regulators could further consider the use of testers, perhaps on a pilot basis, as well as surveys of mortgage loan borrowers and applicants or alternative means to better assess the potential risk for discrimination during this critical phase of the mortgage lending process.

    Agency Affected: National Credit Union Administration

    Status: Closed - Implemented

    Comments: In September 2009, the Joint Agency Task Force on Discrimination in Lending established a working group with representatives from each of the enforcement agencies and depository institution regulators to respond to our recommendation. The working group is to discuss the use of testers and surveys as a means to assess discrimination in the preapplication phase and share information on how each agency currently identifies potential preapplication discrimination. In addition, the working group has expanded its efforts to seek input from non-governmental agencies regarding additional information and suggestions on potential methods for identifying preapplication discrimination. As a result, the potential exist that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination during the preapplication phase of mortgage lending.

    Recommendation: To help strengthen fair lending oversight and enforcement, DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS should work collaboratively to identify approaches to better assess the potential risk for discrimination during the preapplication phase of mortgage lending. For example, the agencies and depository institution regulators could further consider the use of testers, perhaps on a pilot basis, as well as surveys of mortgage loan borrowers and applicants or alternative means to better assess the potential risk for discrimination during this critical phase of the mortgage lending process.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Closed - Implemented

    Comments: In September 2009, the Joint Agency Task Force on Discrimination in Lending established a working group with representatives from each of the enforcement agencies and depository institution regulators to respond to our recommendation. The working group is to discuss the use of testers and surveys as a means to assess discrimination in the preapplication phase and share information on how each agency currently identifies potential preapplication discrimination. In addition, the working group has expanded its efforts to seek input from non-governmental agencies regarding additional information and suggestions on potential methods for identifying preapplication discrimination. As a result, the potential exist that the enforcement agencies and depository institution regulators will be better equipped to identify potential lending discrimination during the preapplication phase of mortgage lending.

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