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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
June 2008:
Fair Lending:
Race and Gender Data Are Limited for Nonmortgage Lending:
Fair Lending:
GAO-08-698:
GAO Highlights:
Highlights of GAO-08-698, a report to congressional requesters.
Why GAO Did This Study:
The Federal Reserve Board’s (FRB) Regulation B, which implements the
Equal Credit Opportunity Act of 1974 (ECOA), generally prohibits
lenders from collecting certain data from loan applicants, such as
their race or gender, for nonmortgage loans (e.g., small business
loans). FRB has stated that this provision of Regulation B minimizes
the chances that lenders would use such data in an unlawful and
discriminatory manner. However, others argue that the prohibition
limits the capacity of researchers and regulators to identify possible
discrimination in nonmortgage lending. This report analyzes (1) studies
on possible discrimination in nonmortgage lending and the data used in
them, (2) FRB’s 2003 decision to retain the prohibition of voluntary
data collection, and (3) the benefits and costs of a data collection
and reporting requirement. GAO conducted a literature review; reviewed
FRB documents; analyzed issues involving the Home Mortgage Disclosure
Act (HMDA), which requires lenders to collect and publicly report data
on personal characteristics for mortgage loan applicants; and
interviewed FRB and other regulatory officials, researchers, banks, and
consumer groups. FRB did not take a position on this report's analysis.
In addition to restating its rationale for retaining the prohibition of
voluntary data collection, FRB summarized GAO’s findings, including the
potential benefits and costs of additional data for fair lending
enforcement.
What GAO Found:
Most studies suggest that discrimination may play a role in certain
types of nonmortgage lending, but data limitations complicate efforts
by researchers and regulators to better understand this issue. For
example, available studies indicate that African-American-owned small
businesses are denied loans more often or pay higher interest rates
than white-owned businesses with similar risk characteristics. While
the primary data source for these studies, a periodic FRB small
business survey, provides important insights into possible
discrimination, it also has limits compared with HMDA data. For
example, the FRB survey data are collected from borrowers rather than
lenders, which limit their usefulness as a means to assess lending
practices. In addition, federal bank regulators that enforce ECOA said
that HMDA data facilitates the identification of lenders that may be
engaging in discriminatory mortgage lending. In the absence of such
data for nonmortgage loans, regulators may rely on time-consuming and
less reliable approaches to identify possible discrimination, such as
assuming a loan applicant is Hispanic based on his or her last name.
While testimony from researchers and other information GAO collected
did not fully agree with all aspects of FRB’s 2003 rationale for
retaining the prohibition of voluntary data collection, there was
general agreement that such voluntary data would have limited benefits.
FRB did not adopt a proposal that would have allowed lenders to collect
data, without any standards, because it said the proposal would have
(1) created an opportunity for lenders to use the data for
discriminatory purposes and (2) such data would not be useful because
lenders may use different collection approaches. While some researchers
and others agreed with FRB’s first rationale, others said that data
collection alone would not necessarily create the risk for
discrimination because, in some cases (e.g., small business lending),
lenders may already be aware of applicants’ personal characteristics as
such lending is often done on a face-to-face basis. Even so, a range of
researchers, staff from regulatory agencies, and others agreed that
voluntarily collected data would not likely materially benefit efforts
by researchers, regulators, and others to better understand possible
discrimination in nonmortgage lending because it would be collected on
an inconsistent basis or few lenders would participate out of concern
for additional regulatory scrutiny of their nonmortgage lending
practices and the potential for litigation.
Requiring lenders to collect and publicly report data on personal
characteristics for nonmortgage loan applicants could help address
current data limitations that complicate efforts to better assess
possible discrimination (e.g., the data may enhance regulators’ ability
to detect discriminatory practices). However, such a requirement would
impose additional costs on lenders that could be partially passed on to
borrowers. These potential costs include those associated with
information system integration, software development, data storage and
verification, and employee training. Limiting a requirement to certain
types of loans could help mitigate such costs but may also involve
complexities that would need to be considered. For example, to the
extent that small business lending is more complicated than other types
of lending, lenders may need to collect and report additional
information on a range of underwriting standards in addition to data on
personal characteristics so that informed judgments can be made about
their lending practices.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-698]. For more
information, contact Orice M. Williams at (202) 512-8678 or
williamso@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Studies Suggest That Discrimination May Play a Role in Certain Types of
Nonmortgage Lending, but Data Limitations Complicate Efforts to Better
Understand the Issue:
Voluntary Lender Collection of Data on Personal Characteristics Would
Likely Offer Limited Benefits in Better Understanding Possible
Discrimination in Nonmortgage Lending:
A Data Collection and Reporting Requirement Could Further Efforts to
Better Understand Possible Discrimination in Nonmortgage Lending but
Would also Involve Complexities and Costs That Would Require
Consideration:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Board of Governors of the Federal
Reserve System:
Appendix III: GAO Contact and Staff Acknowledgments:
Bibliography:
Abbreviations:
DOJ: Department of Justice:
ECOA: Equal Credit Opportunity Act of 1974:
FDIC: Federal Deposit Insurance Corporation:
FHAct: Fair Housing Act:
FRB: Federal Reserve Bank:
FTC: Federal Trade Commission:
HMDA: Home Mortgage Disclosure Act:
NCUA: National Credit Union Administration:
OCC: Office of the Comptroller of the Currency:
OTS: Office of Thrift Supervision:
SBA: Small Business Administration:
SCF: Survey of Consumer Finances:
SSBF: Survey of Small Business Finances:
United States Government Accountability Office:
Washington, DC 20548:
June 27, 2008:
The Honorable Barney Frank:
Chairman:
Committee on Financial Services:
United States House of Representatives:
The Honorable Carolyn B. Maloney:
Chair:
Subcommittee on Financial Institutions and Consumer Credit:
Committee on Financial Services:
United States House of Representatives:
The Honorable Melvin L. Watt:
Chairman:
Subcommittee on Oversight and Investigations:
Committee on Financial Services:
United States House of Representatives:
The Equal Credit Opportunity Act (ECOA) of 1974, one of the federal
fair lending laws, prohibits discrimination in lending based on an
applicant's personal characteristics, such as race, gender, color,
religion, national origin, marital status, or age.[Footnote 1] A
provision of the Federal Reserve Board's (FRB) Regulation B, which
implements ECOA, generally prohibits lenders from asking for, inquiring
about, or documenting such information for individuals who apply for
nonmortgage loans, such as small business, automobile, or credit card
loans.[Footnote 2] FRB established the general prohibition as a means
of discouraging discrimination in lending, based on its belief that if
lenders could not inquire about or note such information on applicants'
personal characteristics, they would be less likely to unlawfully
consider it when making lending decisions. However, some members of
Congress and consumer advocates argue that the prohibition on data
collection has limited the ability of researchers, regulators,
Congress, and the public to monitor nonmortgage lending practices and
to identify possible discrimination.
In response to such criticism and in conjunction with an overall review
of Regulation B, the FRB in 1999 proposed and considered an amendment
to the regulation that would have permitted lenders to voluntarily
inquire about and collect, without any restrictions or standards, data
on the personal characteristics of nonmortgage loan
applicants.[Footnote 3] However, in 2003, after reviewing more than 600
public comments on the proposed amendment and taking other steps, FRB
ultimately decided to leave the basic elements of the prohibition
intact. In so doing, FRB largely reaffirmed the basis underlying its
initial decision to impose the prohibition--that allowing lenders to
voluntarily collect and use such information without restrictions or
standards could create some risk that it would be used for
discriminatory purposes. In 2003, FRB also concluded that data
collected voluntarily and without standards would not be
reliable.[Footnote 4] However, FRB did revise Regulation B to permit
lenders to collect data on race, gender, and other personal
characteristics of all credit applicants (including applicants for
nonmortgage credit) for the specific purpose of conducting a "self-
test" to allow lenders to assess their compliance with ECOA.[Footnote
5] But such data may be privileged--that is, if the requirements of a
self-test are satisfied, the lender is generally not required to
disclose the results of these tests to regulators in connection with a
fair lending investigation or enforcement action involving the
lender.[Footnote 6]
Some members of Congress, consumer advocates, and others have
questioned FRB's 2003 rationale for leaving Regulation B's general
prohibition on the collection of data on personal characteristics on
nonmortgage credit applicants largely intact. In particular, these
critics have questioned the conclusion that such data could be used for
unlawful discrimination. For example, they argue that the Home Mortgage
Disclosure Act of 1975 (HMDA), as amended, which requires many lenders
to collect and publicly report data on racial, gender, and other
personal characteristics for mortgage loan applicants, has facilitated
the ability of minorities and other targeted groups to obtain
mortgages.[Footnote 7] The critics of FRB's rationale for Regulation B
also contend that requiring lenders to collect and publicly report HMDA
data has made lenders less likely to engage in discriminatory mortgage
lending practices and facilitated the ability of regulators to monitor
and enforce compliance with fair lending laws.
This report responds to your request that we conduct a review of the
issues surrounding Regulation B. Specifically, we agreed to (1) discuss
available research on possible discrimination in nonmortgage lending
and review the strengths and limitations of the data that researchers
and regulators use to detect possible discrimination, (2) analyze FRB's
basis for largely retaining Regulation B's prohibition against the
voluntary collection of data on personal characteristic for nonmortgage
loan applicants in 2003, and (3) assess the potential benefits and
costs of requiring lenders to collect and publicly report data on the
personal characteristics of nonmortgage loan applicants and options to
mitigate such costs.
To meet our objectives, we conducted a literature review to identify
studies that used nationwide databases and statistical techniques to
identify possible discrimination in nonmortgage lending, identified the
reports' key findings, and assessed the strengths and weaknesses of key
data used to support the studies' findings, particularly in comparison
to HMDA data. In addition, we reviewed relevant FRB documents
pertaining to Regulation B, did a content analysis of a random sample
of 90 from the more than 600 comment letters that FRB received in
response to its 1999 Regulation B proposed rule, and analyzed existing
standards on data quality, as appropriate. We also conducted interviews
with a range of researchers, officials, and others who were
knowledgeable about issues surrounding Regulation B. We interviewed
senior officials from FRB regarding Regulation B and the agency's
documentary and analytical basis for the 2003 regulatory ruling.
Additionally, we interviewed researchers and other experts on
discrimination in nonmortgage and mortgage lending, as well as staff
from federal bank regulatory agencies responsible for enforcing fair
lending laws. We asked these officials to comment on Regulation B,
FRB's analytical basis for largely retaining the data collection
prohibition, related HMDA issues, and the benefits and costs of a data
collection and reporting requirement. We also interviewed
representatives from banking and business trade groups, banks, consumer
and community groups, and groups that represent minority-and women-
owned businesses.
We conducted this performance audit from September 2007 to June 2008 in
Washington, D.C., in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
Appendix I describes the objectives, scope, and methodology of our
review in more detail.
Results in Brief:
Most studies suggest that discrimination may play a role in certain
types of nonmortgage lending, but data limitations have complicated
efforts by researchers and regulators to understand the extent to which
possible discrimination occurs. For example, available research on
minority business lending generally indicates that African-American
business owners are denied loans more often or pay significantly higher
interest rates than white-owned businesses with similar risk
characteristics. While the primary data source for these studies, FRB's
Survey of Small Business Finances (SSBF), provides important insights
into possible discrimination in small business lending, the data have
limitations.[Footnote 8] For example, SSBF data are collected from
small business loan borrowers rather than their lenders and, therefore,
cannot be used to conduct in-depth analyses of the practices of
individual lenders or the lending industry generally. The studies we
identified that addressed the possibility of discrimination in
automobile and credit card lending also relied on a data source that
has limitations similar to those of the SSBF. In contrast, studies on
possible discrimination in mortgage lending often use HMDA data, which
are collected directly from a large population of lenders and thus
provide for more in-depth analyses among other research
benefits.[Footnote 9] Further, federal bank regulators said that HMDA
data were used to facilitate the fair lending examination process for
mortgage lending by helping examiners more quickly identify lenders
that might be engaged in discriminatory lending practices and thus
merit further investigation. In the absence of such lender-specific
data for nonmortgage lending, written examination guidance directs
examiners to consider other approaches that are time-consuming and may
be less reliable, such as assuming that a loan applicant is Hispanic or
female based on last or first names, to help determine whether a lender
may be engaging in discriminatory practices. According to regulatory
documents, examination data, and agency staff, the lack of data on
applicants' personal characteristics for nonmortgage loans may limit
the relative efficiency of regulatory oversight of fair lending
practices in this sector.
While testimony from researchers and other information we collected did
not reflect full agreement with all aspects of FRB's 2003 rationale for
retaining Regulation B's general prohibition on collecting data on
personal characteristics, most experts agreed with the agency's overall
conclusion that voluntarily collected data would offer limited benefits
as a means of better understanding possible discrimination in
nonmortgage lending. As discussed previously, FRB viewed such a
voluntary program, without any restrictions or standards, as (1)
creating the potential for lenders to collect and use data on personal
characteristics for discriminatory purposes and (2) likely resulting in
data that would not be useful or reliable, because the lenders would
adopt inconsistent data collection approaches. Some researchers, staff
from a bank regulator, and representatives from banking organizations
agreed with FRB's general view that restricting lender access to data
on applicants' personal characteristics minimized the risk of
discrimination in nonmortgage lending. However, many other researchers,
staff from bank regulators, and representatives from consumer groups
disagreed with FRB's analysis. For example, several researchers said
that in certain cases--such as small business lending, which is often
done on a face-to-face basis--lenders could already observe an
applicant's race and gender. In these cases, they said data collection
by itself would not necessarily create a risk for discrimination. Even
so, a range of researchers, regulatory staff, and representatives from
both consumer and banking groups we contacted generally agreed with FRB
that lenders would likely adopt different approaches to collecting and
using data on personal characteristics, potentially limiting the
reliability and usefulness of the information. They also said that
relatively few, if any, lenders would likely choose to collect and use
such data out of concern that their nonmortgage lending practices would
become subject to increased regulatory oversight and potential
litigation. While a staff member from a regulatory agency, a
researcher, and representatives from some consumer groups said that any
data that was collected and potentially reported would provide
important insights into possible discrimination in nonmortgage lending
than is currently available, other researchers and officials said that
such data would be prone to significant selection bias that would
compromise its usefulness. That is, they said that only lenders with
good fair lending law compliance programs would choose to collect such
data, while lenders with weak compliance programs would lack the
incentive to do so.
Requiring lenders to collect and publicly report data on personal
characteristics for nonmortgage loan applicants could help address some
of the current data limitations that complicate efforts to better
understand the potential for discrimination but would also involve
additional costs and complexities that would need to be
considered.[Footnote 10] In concept, such a requirement would provide
researchers with more consistent, timely, and reliable data to help
detect possible discrimination. It could also allow regulators to more
easily detect lenders that might be engaging in discrimination and thus
warranted further review during fair lending examinations or
investigations. However, a data collection and reporting requirement
would also impose additional costs on lenders that could be partially
passed onto borrowers. These potential costs include expenses
associated with information system integration and software
development, data storage and verification, and employee training. One
option to mitigate such costs might be to limit a lender data
collection and reporting requirement to certain types of lending such
as small business or automobile lending. Like mortgage lending,
applications for these types of loans are often made in person,
allowing lenders to observe and document applicants' racial and gender
information. While limiting a requirement to certain types of loans
could be less costly to lenders than some alternatives, it could still
involve complexities and costs. In particular, researchers, regulatory
staff, and others said that because small business lending was more
complicated than other types of lending, lenders might need to collect
and report significant additional information on a range of
underwriting standards and data for small business lending, in addition
to applicants' data on personal characteristics so that informed
judgments could be made about their lending practices. Alternatively,
lenders could be required to collect and report data on personal
characteristics for use only by regulators, possibly facilitating fair
lending examinations and decreasing costs. However, such a proposal
would not enhance the information available to researchers, Congress,
and others to assess the possibility of discrimination in nonmortgage
lending. We make no recommendations in this report, but note that, from
a public policy perspective, considering the trade-offs of various
options to enhance available data to assess potential discrimination in
nonmortgage lending may be warranted.
We provided a copy of a draft of this report to the Chairman of FRB,
and the Director of the Division of Consumer and Community Affairs
provided written comments that are reprinted in appendix II. In its
written comments, FRB did not take a position on the draft report's
analyses but restated a rationale for its 2003 decision for retaining
Regulation B's general prohibition on collecting data on personal
characteristics for nonmortgage loan applicants. That is, FRB concluded
that, permitting voluntary data collection would not produce reliable
or useful market-wide data. Moreover, FRB summarized other key aspects
of the draft report's analyses. For example, FRB noted that the draft
report found that a data collection and reporting requirement could
help address current data limitations that complicate efforts to better
understand the potential for discrimination in nonmortgage lending, but
such a requirement would also impose additional costs on lenders that
could be partially passed on to borrowers. Finally, FRB provided
technical comments on a draft of the report, which we incorporated into
this report as appropriate. We also provided a draft of this report to
FDIC, OCC, and OTS, which provided technical comments that we have
incorporated in this report as appropriate. In addition, we requested
comments on selected excerpts of a draft of this report from 12
researchers whose studies we cited. We received technical comments from
5 of the 12 researchers and incorporated their comments into this
report as appropriate. The remaining 7 did not respond to our request.
Background:
ECOA prohibits discrimination in any type of credit decision based on
an applicant's race, color, gender, national origin, religion, marital
status, or age. Through Regulation B, FRB has established various
requirements to ensure and monitor lender compliance with ECOA,
including the general prohibition against collecting or noting data on
the personal characteristics of applicants for most nonmortgage loans.
Additionally, Regulation B establishes procedures for lenders'
evaluations of credit applications to ensure that such evaluations are
not done in an unlawfully discriminatory manner.[Footnote 11]
While Regulation B imposes a general prohibition on collecting data on
personal characteristics for nonmortgage loan applicants, FRB, in 2003,
expanded its exceptions to this prohibition by permitting the
collection of data on race, color, gender, national origin, religion,
marital status, and age in connection with a self-test.[Footnote 12] A
self-test is any program, practice, or study that is designed and used
by creditors to determine the effectiveness of the creditor's
compliance with ECOA and Regulation B and that creates data or factual
information that is not available and cannot be derived from loan or
application files or other records related to credit
transactions.[Footnote 13] The results of a self-test are privileged--
that is, they cannot be obtained by any government agency in an
examination or investigation in any lawsuit alleging a violation of
ECOA. However, the methodology used or the scope of the test and the
time period covered by the test are not privileged.
Although Regulation B prohibits creditors, except in limited
circumstances such as conducting a self-test, from collecting data on
personal characteristics with respect to nonmortgage loan applicants,
creditors are required to collect such data for mortgage loan
applicants. In 1976, FRB amended Regulation B to implement a compliance
monitoring program that required lenders to request that applicants for
residential mortgages provide information on their national origin or
race, marital status, sex, and age.[Footnote 14] The amendment was
adopted because, at the time, there were specific concerns about
unlawful discrimination with respect to mortgage lending. In 1989, HMDA
was amended to require certain financial institutions to collect and
publicly report information on the racial characteristics, gender, and
income level of mortgage loan applicants.[Footnote 15] In 2002, FRB,
pursuant to its regulatory authority under HMDA, required financial
institutions to report certain mortgage loan pricing data in response
to concerns that minority and other targeted groups were being charged
excessively high interest rates for mortgage loans. Specifically,
lenders were required to collect and disclose information about
mortgages with annual percentage rates above certain designated
thresholds.
Federal Oversight of ECOA:
Authority for enforcing compliance with ECOA with respect to depository
institutions, such as Federal Reserve System member banks, national
banks, state-chartered banks, saving associations, and credit unions,
lies with the five federal banking regulators--FRB, the Office of the
Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), Office of Thrift Supervision (OTS), and the
National Credit Union Administration (NCUA). Other agencies with
enforcement authority under ECOA with respect to certain nondepository
institutions include, among others, the Securities and Exchange
Commission (for broker dealers), the Small Business Administration (for
small business investment companies), and the Farm Credit
Administration (for federal land banks, federal land bank associations,
federal intermediate credit banks, and production credit associations).
To the extent that ECOA does not assign to another federal agency
responsibility for enforcing compliance with respect to a particular
creditor, the Federal Trade Commission (FTC) has enforcement authority
for such creditors. For example, FTC generally is responsible for
ensuring compliance with ECOA by retailers, finance companies, and
mortgage companies. ECOA requires federal regulators to refer matters
to the Department of Justice (DOJ) when there is reason to believe that
a lender is engaging in a pattern or practice of discouraging or
denying applications for credit in violation of the act.
The five banking regulators may carry out their ECOA and other fair
lending enforcement responsibilities with respect to depository
institutions through periodic examinations to assess their loan
underwriting guidelines and credit decisions to detect possible
discrimination in both mortgage and nonmortgage lending. Following the
Interagency Fair Lending Examination Procedures, examiners from the
five federal banking regulators are to (1) evaluate the institution's
overall fair lending compliance program, including management
commitment and resources devoted to preventing violations, and (2)
determine if the institution has, in fact, violated the fair lending
laws by, among other tasks, reviewing lending policies and practices
and testing the institution's actual lending record for specific types
of discrimination, such as underwriting discrimination in consumer and
business loans or pricing discrimination in mortgage or automobile
lending.
FRB's Survey of Small Business Finances:
FRB's SSBF is one of the principal sources of information available on
the factors that affect the availability of credit for small
businesses. FRB has conducted the SSBF about every 5 years from 1987
through 2003 from a nationwide sample of small businesses of varying
sizes, locations, and ownership characteristics. The most recent survey
(2003) gathered data from 4,240 firms that were selected to be
representative of small businesses in the United States. (i.e., firms
with fewer than 500 employees). Through interviews, the firms answered
questions about how they applied for and obtained credit, and
characteristics of their businesses in addition to the race and gender
of their owners. In 2007, FRB decided to discontinue the SSBF due to
its cost and other considerations. However, FRB plans to include
elements of the SSBF in another survey, the Survey of Consumer Finances
(SCF), starting in 2010.
Studies Suggest That Discrimination May Play a Role in Certain Types of
Nonmortgage Lending, but Data Limitations Complicate Efforts to Better
Understand the Issue:
The limited number of studies on nonmortgage lending that met our
criteria for selection focused primarily on the small business sector,
largely because there is data available on this type of lending from
FRB's SSBF. While these studies suggest that discrimination may play a
role in small business lending, SSBF data also have certain limitations
as a research tool. For example, SSBF data are collected from small
business borrowers rather than lenders, which means that SSBF data
cannot be used to assess the small business lending practices of
individual lenders or the lending industry. The few studies we
identified that addressed possible discrimination in automobile and
credit card lending relied on a data source that had certain
limitations similar to those of the SSBF data. In contrast, studies on
possible discrimination in mortgage lending often use HMDA data, which
among their research advantages, are collected directly from a large
population of lenders that make mortgage loans. Staff from federal bank
regulatory agencies also said that HMDA data allowed them to identify
regulated lenders that might be at high risk of engaging in possible
mortgage lending discrimination and thereby to better prioritize fair
lending law examination and investigative processes. In the absence of
similar data on personal characteristics for nonmortgage loans,
regulators may rely on more time-consuming and possibly unreliable
techniques to conduct oversight, potentially impeding the relative
efficiency of the fair lending examination process for nonmortgage
loans.
Research Suggests That Possible Discrimination Exists in Small Business
Lending, but the Data Used in Such Studies Have Limitations:
In a previous report, we summarized available studies and research that
address the challenges that minority-and women-owned businesses might
face in raising debt and equity capital.[Footnote 16] This research
suggests that a variety of business characteristics may make lenders
reluctant to provide credit to such businesses due to the perceived
risks involved in doing so. In summary, this research concluded that
minority-and women-owned businesses could face challenges in raising
debt and other financing because they were (1) primarily concentrated
in the service and retail sectors rather than capital intensive sectors
(i.e., manufacturing) and, thus, might have difficulties pledging
collateral; (2) frequently new businesses with limited credit
histories; and (3) on average, relatively small and often lack
managerial and technical expertise.[Footnote 17]
Nevertheless, a majority of available research we reviewed on minority
business lending also suggested that discrimination might play a role
in lending patterns when comparing certain minority-owned businesses
with white-owned businesses. Primarily using data obtained from FRB's
SSBF, all eight studies we identified on minority business lending
generally found that lenders denied loans to minority-owned businesses
(seven of the eight specifically refer to African-American-owned
businesses) or required them to pay higher interest rates for loans
significantly more often than white-owned small businesses. These
findings remained generally consistent after considering a variety of
risk factors, such as borrower creditworthiness, industry sector, and
firm size. In addition, studies have also found that Hispanic-owned
businesses were denied credit or charged higher interest rates more
often when compared with white-owned businesses with similar risk
characteristics. On the other hand, some studies we reviewed did not
identify evidence that women-owned businesses face credit denials or
higher rates significantly more often than male, white-owned
businesses.
Two of the studies that we reviewed illustrate researchers' analysis
with respect to possible discrimination in small business
lending.[Footnote 18] Using 1998 SSBF data, the two studies found that
African-American-owned businesses were about twice as likely to be
denied credit as white-owned businesses. The studies analyzed a variety
of factors that might help explain such differences, such as the
applicants' credit scores, personal wealth (such wealth can serve as
collateral for business loans), history of bankruptcy, and the
timeliness of business obligations payments over several years. In
addition, the studies controlled for firm characteristics such as
business location, industry, assets, and profits. Even after
controlling for these factors, the studies could not rule out
discrimination as a possible explanation for differences in loan denial
rates.
While studies using SSBF data have provided important insights into
possible discrimination in small business lending, researchers and FRB
officials also said the data had the following certain limitations as a
research tool:
* SSBF data are collected from individual small business borrowers
rather than lenders, which limit their analytical value.[Footnote 19]
For example, SSBF data do not allow researchers to assess the overall
small business lending underwriting standards and practices of the
particular lenders with whom individual survey respondents may be doing
business. Further, the SSBF data do not allow researchers to assess
lenders' performance by type of institution, by size, or by geographic
or metropolitan region.
* SSBF survey data are self-reported and are not verified by FRB. For
example, FRB relies upon survey respondents to accurately report their
race, gender, and other characteristics, as well as requested
information on their business and their financing. The timing of the
SSBF survey may also call into question the reliability of reported
data. For example, the survey may be conducted long after the survey
respondent applied for credit, increasing the risk that respondents may
not accurately recall and report information from the time when the
credit decision was made.
* FRB conducts the SSBF about every 5 years rather than annually and,
therefore, the survey results may not be timely. To illustrate, most of
the studies that we reviewed were based on surveys conducted in 1993
and 1998. As a result, the majority of available research on possible
discrimination in nonmortgage lending is based on data that are about
10 years old. Researchers and FRB officials that we spoke with said it
may also take FRB a significant period of time to review and process
the SSBF data prior to releasing it to the public. For example, FRB did
not release the 2003 survey data until November 2006, and we identified
and reviewed only one study that was based on a preliminary analysis of
the 2003 data.
In contrast, HMDA data offer certain advantages over SSBF data as a
research tool to assess possible discrimination in lending. In
particular, HMDA data are collected directly from a large and
identified population of mortgage lenders on a consistent and annual
basis. Researchers have used HMDA data to conduct analyses of possible
discrimination by type of lending institution, size of the institution,
and geographic or metropolitan area. FRB also requires that lenders
help verify the HMDA data they report, such as applicant data on
personal characteristics and the interest rates charged on certain
types of mortgages. In addition, under HMDA regulations, lenders must
note a mortgage applicant's personal characteristics such as race and
gender if the borrower refuses to voluntarily provide this information.
Despite these advantages, we note that analyses of HMDA data as a basis
for conducting research on possible discrimination in mortgage lending
have been subject to criticism. In particular, HMDA data have been
criticized for not including key loan underwriting variables, such as
the borrowers' credit scores or mortgages' loan-to-value
ratios.[Footnote 20] Some critics of HMDA studies argue that many
apparent discrepancies between minority and white mortgage borrowers
can be accounted for by including other underwriting variables in the
analysis. While FRB required lenders to include in reported HMDA data
information for certain high-interest rate mortgages starting in 2004,
the data have still been criticized for not providing a comprehensive
basis for understanding mortgage lending practices.[Footnote 21] To
compensate for the lack of underwriting variables in the HMDA data,
several researchers have collected such data from proprietary sources
and match it with HMDA data.[Footnote 22]
The Few Studies That Have Identified Possible Discrimination in
Automobile and Credit Card Lending Use Data That Have Strengths but
Also Limitations:
We identified only one study meeting our criteria for selection that
specifically addressed possible discrimination in automobile
lending.[Footnote 23] According to this study, approximately 40 percent
of minority households with high credit ratings paid relatively high
interest rates for new car loans as compared with nonminority
households with similar credit scores and financial wealth. The study
concluded that racial discrimination could play a role in these
differences between minority and white automobile loan borrowers.
This study relied on data from FRB's SCF, which has some limitations
that are similar to those of the SSBF. The SCF asks a nationwide sample
of about 4,500 U.S. consumers to provide detailed information on
finances of their families, and on their relationships with financial
institutions. While the SCF is conducted every 3 years and allows
researchers to consider a range of variables on personal
characteristics and loan underwriting factors in conducting their
analysis, it is also collected from borrowers rather than lenders.
Therefore, SCF data, like SSBF data, cannot be used as a basis for
assessing individual lenders' lending practices or lending practices
industrywide (i.e., by type of institution, size of institution, or
geographic or metropolitan area). FRB also relies on SCF respondents to
provide accurate information about their personal characteristics and
finances.
We note that a number of lawsuits involving allegations of
discrimination in automobile lending have been settled in recent years.
According to a 2006 study there had been a series of class action
lawsuits filed against several large automobile dealers and lenders
alleging that minority consumers--African Americans and Hispanics in
particular--had systematically been charged a higher markup, or
interest rate, on auto loans than white borrowers.[Footnote 24]
According to the study, all of the cases were eventually settled by the
litigants, with one automobile lender agreeing to pay individual cash
amounts to the plaintiffs and make changes in its business practices.
Further, in 2007, DOJ announced the filing of complaints and consent
orders against two automobile dealerships and one bank, in each case
alleging that the lenders engaged in a practice of discriminating on
the basis of race (in the case of the automobile dealers) or marital
status (in the case of the bank) in violation of ECOA, by charging them
higher interest rates than other similarly situated
applicants.[Footnote 25] In all three consent orders, the defendants
agreed to pay monetary damages to remedy the allegations of
discrimination.
The two studies we identified that also relied on SCF data had mixed
results with respect to possible discrimination in credit card lending.
One study found that minorities were likely to pay higher interest
rates on credit card debt than white credit card holders even after
considering the payment history and financial wealth of each
group.[Footnote 26] Another study did not find that minority credit
card holders paid higher interest rates as compared with white credit
card holders after controlling for creditworthiness factors.[Footnote
27] These studies showed the strength of the SCF as a data source
(e.g., the ability to consider data on personal characteristics and
loan underwriting factors), as well as its limitations (e.g., the data
are collected from borrowers rather than lenders).
Data Limitations May Also Impede the Efficiency of the Fair Lending
Examination Process for Nonmortgage Lending:
Representatives from the four federal bank regulatory agencies we
contacted (FRB, OCC, FDIC, and OTS) said that the availability of HMDA
data had facilitated the fair lending law examination process. In
particular, agency staff said that the analysis of HMDA data provided
insights into lenders that might be at high risk of engaging in
potentially discriminatory practices in mortgage lending. For example,
the consistency of HMDA data allows examiners to investigate whether a
particular lender denies a relatively high number of mortgage loan
applications from minority borrowers or may be charging relatively
higher interest rates compared with similarly sized lenders in the same
geographic or metropolitan area. While agency staff said that HMDA data
were only a first start in the investigative process (because they must
evaluate a range of underwriting criteria and practices that may help
explain disparities in a lender's mortgage lending patterns), HMDA data
allowed them to prioritize their examination resources.
In the absence of similar race, gender, and other data on personal
characteristics for nonmortgage loan applicants, regulators may rely on
time-consuming and possibly unreliable techniques to assess lenders'
compliance with fair lending laws. Under the Interagency Fair Lending
Examination Procedures, examiners can use established "surrogates" to
make educated guesses as to the personal characteristics, such as race
or gender of nonmortgage loan applicants to help determine whether the
lenders they regulate are complying with established laws and
regulations in extending credit to minority and other individuals
targeted for loan applicants. For example, examination guidance allows
examiners, after consulting with their agency's supervisory staff, to
assume that an applicant is Hispanic based on the last name, female
based on the first name, or likely to be an African American based on
the census tract of the address. While these techniques may help
identify the racial or gender characteristics of loan applicants, they
have potential for error (e.g., certain first names are gender neutral,
and not all residents of particular census tract may actually be
African-American).
As a result of the limitations of the data on personal characteristics
for nonmortgage loan applicants, as well as regulatory guidance
directing examiners to consider using surrogates, federal oversight of
lenders' fair lending law compliance in this area may be less efficient
than it is for mortgage lending. According to a comment letter
submitted by a Federal Reserve Bank to FRB as it considered amending
Regulation B from 1999 to 2003, its examiners were unable to conduct
thorough fair lending examinations or review consumer complaints
alleging discrimination for nonmortgage products due to the lack of
available data. Moreover, our reviews of agency fair lending
examination guidance and discussions with some agency staff suggest
that, due in part to HMDA data availability, agencies focus most of
their resources on possible discrimination in mortgage lending rather
than nonmortgage lending. We plan to further explore the issue of fair
lending enforcement in future work, including the impact of potential
data limitations on regulatory agencies' oversight and enforcement of
the fair lending laws for mortgage and nonmortgage lending.
Voluntary Lender Collection of Data on Personal Characteristics Would
Likely Offer Limited Benefits in Better Understanding Possible
Discrimination in Nonmortgage Lending:
FRB concluded in 2003 that lifting Regulation B's general prohibition
and permitting voluntary collection of data on personal characteristic
data for nonmortgage loan applicants, without any limitations or
standards, could create some risk of discrimination and that such data
would not be reliable. While some researchers, regulatory agency staff,
and banking officials agreed with FRB that the voluntarily collected
data could create the potential that it would be used for
discriminatory purposes, many other researchers, regulatory staff, and
representatives from consumer groups expressed skepticism about this
argument. For example, some researchers said that data collection by
itself would not necessarily mean the information would be used to
discriminate because in many cases--such as small business lending--
lenders may already be aware of an applicant's personal characteristics
because such lending is often done on a face-to-face basis. Even so, a
range of researchers, regulatory staff, and representatives from both
consumer and banking groups we contacted generally concurred with FRB
that voluntarily collected data might not be useful or reliable and
that very few banks would choose to collect it. Consequently, the
benefits of permitting lenders to voluntarily collect data on personal
characteristics as a means for researchers, regulators, and others to
better understand possible discrimination in nonmortgage lending would
likely be limited.
FRB Concluded That Permitting Data Collection without Standards Could
Create Some Risk That the Data Would Be Used for Discriminatory
Purposes and Result in Data of Questionable Reliability:
The FRB concluded in its 2003 final rule that the general prohibition
under Regulation B's long-standing prohibition should largely be
retained after considering a proposal that would have permitted lenders
to voluntarily collect data on personal characteristics, such as race
and gender, for nonmortgage loan applicants without restrictions or
uniform standards. FRB's conclusion largely relied on staff analysis,
including a review of more than 600 public comment letters. Moreover,
FRB held periodic meetings (in 1999 and 2002) with its Consumer
Advisory Council--a group of representatives from consumer groups and
banking institutions--to discuss the benefits and costs of amending
Regulation B.[Footnote 28] An FRB official also said that the staff
consulted FRB board members and fair lending examiners to gather their
views on permitting lenders to voluntarily collect data on personal
characteristics for nonmortgage loan applicants.
Upon completing this analysis, FRB concluded that amending Regulation B
to permit voluntary data collection, without restrictions or standards,
could create some risk that the information would be used for
discriminatory purposes. For example, under such permissive
circumstances, FRB concluded that a lender might selectively note
nonmortgage loan applicants' personal characteristics, including their
race or gender, and use such data as a basis for unlawful lending
discrimination. By retaining Regulation B's data collection
prohibition, FRB essentially reaffirmed its original view of the
prohibition when it was adopted in 1976. That is, possible
discrimination is mitigated if lenders are not permitted to collect
data on personal characteristics.
FRB also concluded that voluntarily collected data on personal
characteristics for nonmortgage loan applicants would be of
questionable reliability. According to an FRB official, in the absence
of data collection standards, lenders could use different approaches to
collecting data. For example, they could collect the data within
different time frames, for different loan products and, in the case of
business lending, using their own definitions of what constitutes a
minority business versus nonminority business. Lenders would also have
the opportunity to stop collecting data whenever they decided that it
was not advantageous to do so. Consequently, regulators would not be in
a position to use such voluntarily collected data, as is currently
possible with HMDA data for mortgage lending, to compare a lender's
nonmortgage lending practices with those of its peers or to conduct
further analysis as appropriate to follow up on evidence of possible
discriminatory practices.
Researchers and Others Had Mixed Views on FRB's Conclusion That
Voluntary Data Collection Could Create Some Risk for Discrimination in
Nonmortgage Lending:
Some researchers, staff from a bank regulatory agency, and
representatives from banking and business trade groups we contacted
generally agreed with FRB that permitting voluntary data collection on
personal characteristics, such as race and gender, could create a risk
that the information would be used for discriminatory purposes relative
to prohibiting data collection. Because ECOA prohibits the use of
personal characteristics, such as race and gender, as criteria to make
lending decisions, these officials told us that the best way to protect
borrowers against discrimination is to minimize the availability of
information about their personal characteristics. In addition,
according to FRB's analysis, as well as our own analyses of the comment
letters that FRB received in 1999 for the proposed rule, some
commenters, mostly from the banking industry, shared this view.
However, many other researchers, staff from some regulatory agencies,
and officials from consumer groups expressed skepticism that
voluntarily collected data on personal characteristics would create a
risk of discrimination. First, a staff member from a regulatory agency,
several researchers, and representatives from consumer groups said that
in certain cases lenders were already aware of the race and gender or
other information on personal characteristics of nonmortgage loan
applicants. For example, three researchers said that, in the case of
small business lending, lending officials already were aware of the
race and gender of loan applicants because such lending was typically
done on a face-to-face basis. Therefore, simply collecting data on
personal characteristics on applicants in such cases would not
necessarily create a risk of discrimination. Other researchers and
officials from banking institutions disagreed. They noted that in some
cases lending decisions may be made by officials who do not interact
directly with loan applicants. Further, for other types of lending,
such as credit card lending, the data collection prohibition may
mitigate the risk of possible discrimination. An FRB official said that
lenders largely offer credit cards through the mail and thus do not
have specific access to the race and gender of their customers and
potential customers.
Second, lenders' voluntary collection and use of data on personal
characteristics for nonmortgage loan applicants outside of the ECOA
self-test privilege, would also be subject to varying degrees of
regulatory scrutiny and potentially litigation, which could serve to
deter lenders from using such data for discriminatory purposes. For
example, according to an FRB representative, federal bank regulators
would be in a position to evaluate federally regulated lenders'
collection and use of data on personal characteristics through the fair
lending law examination and oversight process. Further, all lenders
that chose to collect and use such data for discriminatory purposes,
would face the risk of public disclosure of such practices through
litigation. While FRB's 2003 final rule is silent on the potential
deterrent effect of regulatory and public scrutiny in deterring lenders
from using data on personal characteristics for discriminatory
purposes, available evidence regarding HMDA suggests that it may be
significant. According to a variety of regulatory staff, researchers,
and other officials we contacted, as well as FRB documents we reviewed,
there is no evidence that lenders have used HMDA data for
discriminatory purposes.[Footnote 29] These officials generally
attributed the transparency of the HMDA program, through regulatory
reviews and public reporting requirements, as serving to help deter
lenders from using the data to discriminate in mortgage lending.
Finally, FRB could potentially have mitigated some of its concerns that
voluntarily collected data could be used for discriminatory purposes by
including as part of its 1999 proposal minimum procedures for the
collection and use of such data. FRB established such minimum
procedures for federally regulated lenders that choose to conduct a
self-test and avail themselves of the nondisclosure privilege. These
procedures include developing written policies describing the
methodology for data collection and keeping data on personal
characteristics separate from loan underwriting data (e.g., credit
scores) that are used to make credit decisions. Imposing such minimum
procedures and requirements for a voluntary program could serve to
enhance regulators' oversight of lenders' data collection, processes,
practices, and uses of the data, and further deter possibly
discriminatory practices.
Many Researchers and Others Agreed That Voluntarily Collected Data May
Not Be Reliable or Useful in Helping to Better Identify Possible
Discrimination in Nonmortgage Lending:
Even so, many researchers, regulatory staff, and representatives from
consumer groups and banking trade groups agreed with FRB's conclusion
that the reliability of voluntarily collected data may be limited in
identifying possible discrimination in nonmortgage lending. In
particular, they agreed with FRB that, due to potentially inconsistent
data collection standards, it would be difficult to use voluntarily
collected data to compare fair lending performance across different
lenders. Additionally, there may also be data inconsistency problems
for any given lender that chooses to collect data on personal
characteristics for nonmortgage loan applicants. For example, a lender
could "cherry-pick", or collect racial, gender, and other data on
personal characteristics on applicants only for certain loan products
that they felt would reflect favorably on their fair lending practices
and not collect data for other products. Thus lenders would create
their own standards that could be designed to systematically enhance
their reputations and business prospects.
Just as FRB could potentially have mitigated some if its concerns about
the possibility that lenders would use voluntarily collected data for
discriminatory purposes by adopting minimum procedures, as mentioned
previously, we note that it could also potentially have considered
adopting data collection standards. Such standards could have served to
better ensure the consistency of the data and enabled regulators and
others to use the data to assess individual lender performance and
compare lending practices across different financial institutions.
However, according to a senior FRB official, a researcher, and a bank
industry trade association official, the imposition of such standards
would have undermined the voluntary nature of the data collection
proposal. For example, FRB would be required to conduct examinations to
help ensure that federally regulated lenders were collecting the data
in a manner consistent with any such standards.
Moreover, the establishment of such data collection standards might
also have further diminished lender interest in a voluntary program,
which researchers, FRB officials, and others said was likely limited
due to the potential for increased regulatory and public scrutiny of
their lending practices. An apparent lack of interest by lenders in
conducting ECOA compliance tests under the self-test privilege of
Regulation B provides support for the contention that few lenders would
choose to collect data on personal characteristics on a voluntary basis
even if permitted to do so. Federal bank regulators generally said that
very few, if any, lenders used the self-test to assess their compliance
with ECOA; nor were any of the banking trade associations aware of any
such institutions. Bank representatives we contacted, as well as some
of the comment letters submitted by banking institutions, indicated
that they still believed there was a potential for regulators and the
public to gain access to self-test results, even with the self-test
privilege. Lenders' apparent reluctance to collect data under the self-
test privilege--which affords lenders protection from being compelled
to disclose such data to regulators--suggests that they would be even
less likely to collect such data under a general voluntary data
collection program, such as the one that FRB considered in 1999, given
that such data would be subject to regulatory scrutiny and potential
litigation.
While a staff member from a regulatory agency, a researcher, and
representatives from some consumer groups we spoke with, as well as our
analysis of the comment letters, indicated that any data that were
collected and potentially reported would provide insights into
nonmortgage lending practices that were not currently available,
researchers and other comment letters we reviewed indicated that such
data would be prone to substantial selection bias. That is, the data
would likely be skewed by the possibility that only lenders with good
fair lending compliance records would choose to collect such
data.[Footnote 30] Conversely, it is unlikely that lenders with weak
fair lending compliance programs would voluntarily collect data that
might confirm fair lending violations. Consequently, although
voluntarily collected data on personal characteristics could provide
some additional insights into lending practices than currently
available data provide, it would not likely materially assist the
capacity of researchers, regulators, and others to better understand
possible discrimination in nonmortgage lending.
A Data Collection and Reporting Requirement Could Further Efforts to
Better Understand Possible Discrimination in Nonmortgage Lending but
Would also Involve Complexities and Costs That Would Require
Consideration:
In concept, a requirement that lenders collect and publicly report data
on the personal characteristics of nonmortgage loan applicants, similar
to HMDA requirements, could help address some of the existing data
limitations that complicate efforts by researchers, federal bank
regulators, and others to identify possible discrimination. However,
mandatory data collection and reporting would impose some additional
costs on the lending industry, although opinions differed on how
burdensome these costs might be. While options exist to potentially
mitigate some of these costs, such as limiting data collection and
reporting to specific business types, these options also involve
additional complexities and costs that must be considered.
Researchers and Regulators Could Benefit from Mandatory Data Collection
and Reporting, but Lender Costs Would Increase:
Required data collection and reporting for nonmortgage loan applicants,
similar to HMDA's requirements, could help address some of the existing
limitations of available data. For example, researchers would be able
to analyze the practices of specific lenders and compare practices
across lenders, assessing lending practices by type, size, and location
of the institutions, similar to analyses done currently with HMDA data.
Such data would also be more timely than SSBF data, and the
implementation of data collection standards could help ensure its
reliability. As a result, the availability of such data could also
better inform Congress, regulators, and the public about possible
discrimination in nonmortgage lending.
Such a requirement on personal characteristics collection and reporting
could also facilitate the efficiency of the fair lending examination
process for nonmortgage lending. As is currently the case with fair
lending examinations for mortgage lending due to the availability of
HMDA data, bank examiners could potentially use data on personal
characteristics that were collected from lenders to focus the
examination process on those lenders they regulate that appeared to
show the highest risk of engaging in potentially discriminatory
practices. Further, examiners could use such data to compare practices
across lenders to identify possibly discriminatory practices. While
such analyses would represent only the first step in determining
whether or not particular lenders were engaging in discriminatory
practices, they could potentially help regulators prioritize their
examinations and better utilize existing staff and other resources.
While it is not possible to quantify the potential costs associated
with a reporting requirement, in part because the requirements could
vary, banking organizations and banks that we contacted identified a
variety of additional costs that lenders might face. These officials
also said that they were concerned about such costs and that the
additional expenses associated with data collection and reporting
would, in part, be passed on to borrowers. According to the officials,
most of the costs associated with a reporting requirement would involve
developing the information technology necessary to capture and report
the data, including system integration, software development, and
employee training. Moreover, the officials said that, as with HMDA
data, verifying any reported data would also entail costs, including
expenses associated with conducting internal audits. The regulatory
agency responsible for assembling, verifying, and reporting the data to
the public would also accrue costs for these activities.[Footnote 31]
Some researchers and representatives from consumer groups we contacted
said that they did not think that the costs associated with required
collection and reporting of data on personal characteristics of
nonmortgage loan applicants would be significant. They pointed out that
because many lenders already collect and report data on personal
characteristics under HMDA, it should not be prohibitively expensive
for them to collect similar data for nonmortgage applicants. But other
representatives from banks and banking organizations along with one
researcher said that in many cases mortgage and nonmortgage lending
information systems and personnel were not integrated. For example,
mortgage and nonmortgage lending might be conducted within different
subsidiaries of a single financial conglomerate. For this reason, they
reiterated that a new data collection and reporting requirement for
nonmortgage lending would involve additional system integration and
employee training costs, among other things.
Limiting a Data Collection and Reporting Requirement to Specific Types
of Nonmortgage Loans Would Also Have Benefits and Costs:
One potential option to mitigate the costs associated with a
requirement that regulated lenders collect and report data on the
personal characteristics of those seeking nonmortgage loans would be to
limit the requirement to certain types of loans, such as small business
and/or automobile loans. As discussed previously, available research
suggests that the potential for discrimination exists in both types of
lending, and a data collection and reporting requirement would help in
better understanding this issue than is possible with current data.
Similar to mortgage loan applications, moreover, small business and
automobile loan applications are often made on a face-to-face basis.
Therefore, lenders would be in a position to record such information
themselves based on visual observation, if applicants choose not to
provide such data, as is currently required under the regulations
implementing HMDA for loan applications made in-person.[Footnote 32] In
contrast, lenders' capacity to record data on personal characteristics
for other types of nonmortgage applicants, such as applicants for
credit card loans, may be limited by the fact that credit card loan
applications and credit decisions are typically done by mail or over
the Internet. As a result, limiting a data collection and reporting
requirement to either small business or automobile lending, or both
could focus attention on areas that appear to be at risk of
discriminatory practices and potentially offset some of the costs to
lenders associated with a broader requirement.
However, researchers, federal bank regulatory staff responsible for
fair lending oversight, banking officials, and representatives from
some consumer groups we contacted cautioned that there were still
significant complexities and potential costs associated with a data
collection and reporting requirement that was limited to small business
lending. Unlike mortgage and automobile lending, which have relatively
uniform underwriting criteria, these officials said that small business
loan underwriting is heterogeneous and more complex. For example, while
mortgage lending has become more complicated in recent years, the type
of financing that applicants seek in order to buy homes is often more
standardized (e.g., 30-year fixed rate loans or variable rate products)
and the collateral securing mortgages, generally single-family
residences, is well understood and generally more marketable. In
contrast, the types of financing that small business typically seek can
vary widely, ranging from revolving lines of credit to term loans, and
the risk of the collateral pledged against loans may vary widely (i.e.,
from relatively secure real estate to less secure inventory).[Footnote
33] As discussed previously, moreover, studies on possible
discrimination in small business lending that use SSBF data, consider a
variety of other indicators of creditworthiness, such as applicants'
credit scores, personal wealth, and history of bankruptcy.
Consequently, the officials said that lenders would have to collect and
report significant additional information on a range of underwriting
standards and data for small business lending in order to make the data
on personal characteristics useful so that examiners, researchers,
Congress, and others are in a better position to determine whether a
particular lender's practices may involve discrimination or not.
Without the key underwriting variables, the officials said, research
based on the reported data could be subject to significant controversy
and potential misinterpretation, much like research based on HMDA data,
which lack information on these variables. At the same time, costs for
the necessary technology, employee training, and data verification
would likely increase as the range of data that lenders were required
to collect and report increases.
One option to potentially enhance federal oversight of the fair lending
laws, while mitigating lender cost concerns, would be to require
lenders to collect data on personal characteristics for small business
loan applicants, and perhaps other types of nonmortgage lending like
automobile lending, and make the data available to regulators but not
require public reporting of such data or any other information. This
approach could facilitate federal bank regulators' ability to
prioritize fair lending examinations for regulated lenders because the
agencies currently do not have ready access to data on personal
characteristics for nonmortgage loan applicants. It could also limit
lender costs because they would not have to collect, publicly report,
and verify data on a range of underwriting variables because regulators
already have access to this information. However, due to the lack of a
public data reporting requirement, such an option would not enhance the
capacity of researchers, Congress, and the public to better understand
the possibility of discrimination in nonmortgage lending.
Assessing the potential for discrimination in nonmortgage lending is an
important and complex issue. While current data sources, primarily
FRB's SSBF and SCF provide important insights into possible
discrimination in certain types of lending, they both have limitations
that may impede the ability of researchers, regulators, Congress, and
the public to further assess lender compliance with the fair lending
laws. It is also not yet clear how FRB's decision to discontinue the
SSBF and incorporate elements of the survey into an expanded SCF
beginning in 2010 will impact the already limited state of information
about possible discrimination in nonmortgage lending. Therefore, from a
public policy perspective, considering the trade-offs of various
options to enhance available data, from a purely voluntary program to a
data collection and reporting requirement, may be warranted.
Agency Comments and Our Evaluation:
We provided a copy of a draft of this report to the Chairman of FRB,
and the Director of the Division of Consumer and Community Affairs
provided written comments that are reprinted in appendix II. In its
written comments, FRB did not take a position on our analyses but
restated one of its 2003 rationales for retaining Regulation B's
general prohibition on collecting data on personal characteristics for
nonmortgage loan applicants. That is, FRB concluded that permitting
voluntary data collection would not produce reliable or useful market-
wide data. Moreover, FRB also summarized the draft report's analysis
that, while there was not full agreement among those that we contacted
with all aspects of the FRB's rationale for retaining the prohibition,
there was widespread agreement that such voluntary data would have
limited benefits. FRB also restated the draft report's analysis that a
data collection and reporting requirement could help address current
data limitations and might enhance regulators' ability to detect
discriminatory practices. However, such a requirement would impose
additional costs on lenders that could be partially passed along to
borrowers. We note in the report that, from a public policy
perspective, considering the trade-offs associated with various options
to enhance available data on potential discrimination may be warranted.
Finally, FRB provided technical comments on a draft of the report,
which we incorporated as appropriate. We also sent a draft of this
report to FDIC, OCC, and OTS, which provided technical comments that we
incorporated into this report as appropriate. In addition, we requested
comments on selected excerpts of a draft of this report from 12
researchers whose studies we cited. We received technical comments from
5 of the 12 researchers and incorporated their comments into this
report as appropriate. The remaining 7 did not respond to our request.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to the Ranking Member of the Committee on Financial Services, House of
Representatives; Chairman and Ranking Member of the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate; and other interested
congressional committees. We are also sending copies to the Chairman,
Board of Governors of the Federal Reserve System; Chairman, Federal
Deposit Insurance Corporation; Comptroller of the Currency, Office of
the Comptroller of the Currency; Director, Office of Thrift
Supervision; and other interested parties. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions regarding this report, please
contact me at (202) 512-8678 or williamso@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix III.
Signed by:
Orice M. Williams:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of our report were to discuss (1) available research on
possible discrimination in nonmortgage lending and review the strengths
and limitations of the data that researchers and regulators use to
detect possible discrimination; (2) analyze the Federal Reserve Board's
(FRB) basis for largely retaining Regulation B's prohibition against
the voluntary collection of racial and gender data in 2003; and (3)
assess the potential benefits and costs of requiring lenders to both
collect and publicly report racial and gender data for nonmortgage loan
applicants, as well as options to mitigate such costs.
To address objective one, we conducted a literature review to identify
articles and studies using nationally recognized surveys or
quantitative data, which examine the possibility of discrimination in
nonmortgage lending (i.e., business loans, automobile loans, and credit
card loans). We identified and selected a population of literature by
searching electronic databases, using research from our past reports,
and referrals from interviews with published researchers, federal
government officials, and representatives from business and consumer,
trade, industry and advocacy associations. We also performed a more
limited review of literature on the possibility of discrimination in
mortgage lending and assessed the strengths and weaknesses of data on
personal characteristics that lenders are required to collect and
report under the Home Mortgage Disclosure Act (HMDA) of 1975, as
amended.
The majority of studies we reviewed focused on small businesses lending
and used data from FRB's Survey of Small Business Finances (SSBF). We
conducted analysis to assess the strengths and weaknesses of SSBF as a
data source by reviewing documents on the survey's purpose, use, and
limitations, and discussing the survey with researchers including FRB
officials and compared SSBF data with HMDA data. We also (1) conducted
a similar analysis regarding FRB's Survey of Consumer Finances (SCF),
which has been used to conduct studies on the potential for
discrimination in automobile and credit card lending, and (2) reviewed
publicly available information on litigation involving possible
discrimination in automobile lending.
We also conducted interviews with a range of researchers, federal
financial regulators and agencies, as well as consumer, business and
banking trade groups, and lenders. We interviewed seven researchers who
have published relevant works using statistical techniques to
understand the extent to which possible discrimination may occur in
nonmortgage lending. We selected researchers to interview based on the
relevance of their published studies, widespread recognition in their
professional community, related experience, recommendations from peers,
and their ability to represent a broad range of available perspectives.
We also interviewed fair lending examiners, specialists, supervisors,
directors, researchers, and counsel from four federal bank regulatory
agencies, which are FRB, the Office of the Comptroller of the Currency,
the Federal Deposit Insurance Corporation, and the Office of Thrift
Supervision. In addition, we met with officials from the Small Business
Administration (SBA), SBA's independent Office of Advocacy, and the
Department of Commerce's Minority Business Development Agency to gather
information regarding Objectives 1 and 3 for business lending.[Footnote
34] We conducted interviews with officials from nine lenders across the
nation --both large and small-- and banking industry representative
organizations, including the American Bankers Association, Consumers
Bankers Association, and Independent Community Bankers of America. We
also interviewed officials from consumer, trade, industry and advocacy
organizations including those that represent minority-owned and women-
owned businesses such as the National Black Chamber of Commerce, Pan
Asian American Chamber of Commerce, U.S. Hispanic Chamber of Commerce,
Women's Chamber of Commerce, National Association of Women's Business
Owners, and the Center for Women's Business Research.
Further, we reviewed federal financial regulators' examination
procedures from the Interagency Fair Lending Examination Procedures,
data from some of the regulators regarding complaints alleging possible
discrimination by type of nonmortgage lending (e.g., small business or
credit card), and the U.S. Department of Justice Annual Report to
Congress Pursuant to the Equal Opportunity Credit Act Amendments of
1976 (April 2008) for the number of fair lending referrals from
regulators regarding potential ECOA claims that DOJ had received in
2007.
To address Objective 2, we reviewed relevant FRB studies, proposed
rulings, final rulings, meeting notes from its Consumer Advisory
Council, congressional testimony, correspondence, a sample from the 600
plus comment letters that FRB received in 1999, and other internal
documents assessing the 1999 proposal to amend Regulation B and permit
lenders to collect data on personal characteristics for nonmortgage
loan applicants on a voluntary basis. Additionally, we interviewed
researchers who have assessed the potential for discrimination in
nonmortgage lending and banking and representatives from business trade
groups, banks, consumer groups, and groups that represent minority-and
women-owned businesses representatives. We asked these researchers and
officials to provide their views on FRB's 2003 rationale for largely
retaining Regulation B's prohibition against collecting data on
personal characteristics for nonmortgage lending except, as is
discussed in the report, for the purposes of conducting a self-test for
compliance with the Equal Credit Opportunity Act. We also asked
researchers and officials their views on the extent to which, if at
all, HMDA may have created a risk for discrimination in mortgage
lending. We compared the reliability of voluntary data collection to
the general data reliability standards that we and others have
established.
To supplement our analysis of FRB's 1999 proposed amendment to
Regulation B, we conducted an independent review of the 600 public plus
comment letters. To do so, we conducted an independent content analysis
of a statistically valid random sample of these letters. To conduct our
content analysis, we removed a total of 194 duplicates and ineligible
comment letters from the original population of 608 and ultimately
selected a sample of 90 letters to review. We summarized the key
comments of each of these letters from our sample by categorizing the
letters by: (1) type of respondent; (2) their position of support,
opposition, or no opinion on voluntary and mandatory collection of
data; and (3) reasoning offered for support or opposition of voluntary
collection and mandatory data collection and reporting. We helped
confirm that our categorizations were reliable by having two analysts
independently categorize a small number of letters to determine if they
were in agreement.
For Objective 3, we found that researchers had not produced studies or
articles on the benefits and costs of requiring lenders to collect and
report data on personal characteristics, such as race and gender, for
nonmortgage loan applicants. Therefore, we spoke with a variety of
researchers, government officials, and representatives from lending and
business trade groups, including women-and minority-owned businesses,
to offer perspectives and analysis on the benefits and costs of
requiring the collection of racial and gender data for nonmortgage loan
applicants. We asked these officials to compare and contrast the
benefits and costs of collecting nonmortgage data with the benefits and
costs of collecting HMDA data, as appropriate. We also reviewed and
analyzed options to mitigate costs of a data collection and reporting
requirement, as appropriate, for regulators, researchers, lenders,
businesses, and consumers, such as limiting a possible collection and
reporting requirement to apply to only small business and automobile
lenders. We reviewed the Interagency Fair Lending Examination
Procedures for mortgage and nonmortgage loans and interviewed
regulators on the difference in which they perform fair lending
examinations on mortgage and nonmortgage lending, such as business
lending. We also examined available cost estimates for lenders and
regulators to collect and process data for nonmortgage loan applicants
from FRB, researchers, and lenders and compared and contrasted such
estimates with HMDA cost estimates for collecting and processing
additional data as appropriate.
We conducted this performance audit from September 2007 to June 2008 in
Washington, D.C., in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Board of Governors of the Federal
Reserve System:
Board Of Governors Of The Federal Reserve System:
Sandra F. Braunstein:
Director:
Division Of Consumer And Community Affairs:
June 12, 2008:
Ms. Orice M. Williams:
Director:
Financial Markets and Community Investment:
Government Accountability Office:
Washington, DC 20548:
Dear Ms. Williams:
Thank you for the opportunity to comment on the draft report entitled
"Fair Lending: Race and Gender Data Are Limited for Nonmortgage
Lending," GAO-08-698. The draft report analyzes studies on possible
discrimination in nonmortgage lending and the data used in them, the
benefits and costs of a mandatory data collection and reporting
requirement, and the Board's decision to retain the regulatory
prohibition on voluntary applicant data collection for nonmortgage loan
applications.
As the report notes, the Federal Reserve Board's ("Board") Regulation
B, which implements the Equal Credit Opportunity Act, generally
prohibits lenders from collecting data on the personal characteristics
of loan applicants, such as their race and gender, for nonmortgage
loans. In 1999, the Board proposed to amend Regulation B to remove the
general prohibition and to allow creditors to voluntarily collect these
data. After thoroughly considering the issue, the Board in 2003 decided
to retain the general prohibition, except if the creditor collects the
data for the purpose of conducting a self-test. The Board concluded
that lifting the prohibition and permitting voluntary data collection
would not produce reliable or useful market-wide data.
The GAO's draft report examines the rationale for the Board's decision
to retain the prohibition and not permit voluntary collection. The
draft report finds that while there was not full agreement among those
interviewed with all aspects of the Board's rationale for retaining the
prohibition, there was widespread agreement that such voluntary data
would have limited benefits. The draft report also concludes that a
mandatory data collection and public reporting requirement could help
address current data limitations and might enhance regulators' ability
to detect discriminatory practices. However, such a requirement would
impose additional costs on lenders that could be partially passed on to
borrowers.
We are committed to ensuring that credit is made available to all
qualified applicants for any kind of credit, including small business
credit, in a fair and non-discriminatory manner. We appreciate the
professionalism of the GAO's review team in conducting this study.
Sincerely,
Signed by:
Saundra F. Braunstein:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Orice Williams, (202) 512-8678, or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Wesley M. Phillips, Assistant
Director; Benjamin Bolitzer; Emily Chalmers; Kimberly Cutright; John
Forrester; Simin Ho; Omyra Ramsingh; Robert Pollard; Carl Ramirez; and
Ethan Wozniak made major contributions to this report.
[End of section]
Bibliography:
Research on Discrimination in Nonmortgage Lending:
Blanchflower, David G. "Minority Self-employment in the United States
and the Impact of Affirmative Action Programs." NBER Working Paper No.
13972. Cambridge, Mass.: National Bureau of Economic Research, 2008.
Blanchflower, David G., Phillip B. Levine, and David J. Zimmerman.
"Discrimination In The Small-Business Credit Market." The Review of
Economics and Statistics 85, no. 4 (November 2003): 930-943.
Bostic, Raphael W. and K. Patrick Lampani. Racial Differences In
Patterns Of Small Business Finance: The Importance Of Local Geography.
Proceedings, Federal Reserve Bank of Chicago. (March 1999):149-179.
Cavalluzzo, Ken, and John Wolken. "Small Business Loan Turndowns,
Personal Wealth and Discrimination." Journal of Business 78, no. 6
(2005): 2,153-2177.
Cavalluzzo, Ken, and Linda Cavalluzzo. "Market Structure and
Discrimination: The Case of Small Businesses." Journal of Money,
Credit, and Banking 30, no. 4 (November 1998): 1-15.
Cavalluzzo, Ken, Linda Cavalluzzo, and John Wolken. "Competition, Small
Business Financing, and Discrimination: Evidence From A New Survey."
Journal of Business 75, no. 4 (2002): 641-679.
Cole, Rebel A. "Availability of Credit to Small and Minority-owned
Businesses." MPRA Paper No. 4715. Munich, Germany: Munich Personal
RePEc Archive (2007). [hyperlink, http://mpra.ub.uni-muenchen.de/4715/
(accessed 05/16/2008)].
Coleman, Susan. "Constraints Faced by Women Small Business Owners:
Evidence from the Data." Journal of Developmental Entrepreneurship 7,
no. 2 (August 2002): 151-174.
Coleman, Susan. "Is There a Liquidity Crisis for Small Black-Owned
Firms?" Journal of Developmental Entrepreneurship 10, no. 1 (April
2005): 29-47.
Getter, Daryl E. "Consumer Credit Risk and Pricing." The Journal of
Consumer Affairs 40, no. 1 (2006): 41-63.
Hazembuller, Amberly, Britton J. Lombardi, and Jeanne M. Hogarth.
"Unlocking the Risk-based Pricing Puzzle: Five Keys to Cutting Credit
Card Costs." Consumer Interests Annual 53 (2007): 73-84.
[End of section]
Footnotes:
[1] Pub. L. No. 90-321, title VII, as added by Pub. L. No. 93-495,
title V, § 503, 88 Stat. 1521 (Oct. 28, 1974) (codified, as amended, at
15 U.S.C. §§ 1691 et seq.) For purposes of this report, the term "fair
lending laws" refers to two federal statutes and their related
regulations: ECOA and the Fair Housing Act (FHAct) of 1968, Pub. L. No.
90-321, title VIII, 82 Stat. 83 (Apr. 11, 1968 (codified as amended at
42 U.S.C. §§ 801 et seq.) ECOA and FHAct specifically prohibit
discrimination in lending---ECOA with respect to the extension of
credit in general and FHAct with respect to mortgage lending.
[2] Regulation B allows lenders to collect data on personal
characteristics if required or permitted by another regulation, order
or agreement of a court or enforcement agency to monitor or enforce
compliance with the ECOA, Regulation B, or any other federal or state
statue or regulation. This exception was included in the regulation so
that lenders would not have to choose between competing regulations or
statutes. For example, the Small Business Administration (SBA) requires
lenders participating in its 7(a), or SBA guaranteed loan program to
collect race and gender information from applicants. Under the
regulatory exception, lenders can comply with the SBA requirements
without violating Regulation B. SBA uses these data for purposes of
assessing the performance of the 7(a) program. Based on our literature
review, the data do not appear to be widely used as a tool for
conducting research on potential discrimination in small business
lending. In addition, as described in this report, many lenders are
required to collect data on personal characteristics for residential
mortgage loan applicants.
[3] FRB's analysis of the proposed amendment was done in conjunction
with its policy of periodically reviewing existing regulations, such as
Regulation B, to determine whether they continue to meet their stated
purposes.
[4] FRB began its most recent comprehensive review of Regulation B, in
March 1998, by publishing an Advanced Notice of Proposed Rulemaking.
See 63 Fed. Reg. 12326. Based on its review of the comments it received
on the Advanced Notice, FRB published its proposed revisions to
Regulation B and the official commentary in 1999. See generally, Equal
Credit Opportunity, 64 Fed. Reg. 44582 (Aug. 16, 1999) (proposed rule).
[5] A self-test is a program, practice, or study that is used to
determine a lender's compliance with ECOA and Regulation B and that
creates unique data or factual information--i.e., data that are not
available from loan or application files or other records.
[6] The federal banking regulators--FRB, the Office of the Comptroller
of the Currency, the Federal Deposit Insurance Corporation, the Office
of Thrift Supervision, and the National Credit Union Administration--as
well as the Department of Housing and Urban Development and the
Department of Justice, have responsibility for monitoring lender
compliance with the fair lending laws and taking civil or criminal
enforcement actions as may be deemed appropriate. Regulators may carry
out their responsibilities through, for example, periodic examinations
of lenders to assess their loan underwriting guidelines and credit
decisions to detect possible discrimination in both mortgage and
nonmortgage lending.
[7] Pub. L. No. 94-200, title III, 89 Stat. 1125 (Dec. 31, 1975)
(codified, as amended, at 12 U.S.C. §§ 2801 et seq.)
[8] Conducted about once every 5 years (i.e., 1987, 1993, 1998, and
2003), the SSBF asks a sample of small business owners to provide
detailed information on their financing and credit history in addition
to the race and gender of the owner(s).
[9] However, as described in this report, studies that use HMDA data to
assess possible discrimination in mortgage lending have been
controversial because the data do not include key underwriting
variables such as a loan applicant's credit score. Some studies have
used HMDA data in conjunction with underwriting data available from
other sources to better detect potential discriminatory mortgage
lending practices.
[10] An FRB legal official said that the agency likely has the
authority under ECOA to require lenders to collect data on personal
characteristics for nonmortgage loan applicants. In 1976, FRB required
lenders to collect such data for mortgage loan applicants. However, FRB
officials said that it was not clear that the agency had the authority
to require lenders to report such data publicly. HMDA, as amended in
1989, required many lenders to report data on mortgage applicants'
personal characteristics.
[11] Regulation B also establishes procedures that lenders are to
follow in providing notice to loan applicants that their applications
for credit have been denied. See 12 C.F.R. § 202.9 (2008).
[12] Other exceptions to the general prohibition on personal
characteristic inquiries include inquiries about the marital status and
gender of an applicant for securities credit or incidental credit. See
12 C.F.R. § 202.5 (2008).
[13] See 15 U.S.C.§ 1691c-1(a); 12 C.F.R. § 202.15 (2008).
[14] Creditors were not required to note such information if the
applicant declined to provide it. The amendment followed 1976 statutory
amendments to expand ECOA to prohibit discrimination based on race,
color, religion, national origin, age, gender, marital status, the
receipt of public assistance, and the exercise of rights under the
Consumer Credit Protection Credit Act. See Pub. L. No. 94-239, 90 Stat.
251 (Mar. 23, 1976).
[15] The data collection and reporting requirements apply to depository
lending institutions and nondepository mortgage lending institutions
that satisfy specific asset thresholds and meet other criteria set
forth in 12 C.F.R. § 203.2(e) (2008).
[16] See GAO, Financial Services Industry: Overall Trends in
Management- Level Diversity and Diversity Initiatives, 1993-2004, GAO-
06-617 (Washington, D.C.: June 1, 2006). This report also discussed
research on possible discrimination in small business lending.
[17] See GAO-06-617.
[18] Ken Cavalluzzo and John Wolken, "Small Business Loan Turndowns,
Personal Wealth, and Discrimination," Journal of Business, 78, no. 6
(2005): 2,153-77; and David Blanchflower, Phillip B. Levine, and David
J. Zimmerman, "Discrimination in the Small Business Credit Market," The
Review of Economics and Statistics, 85, no. 4 (2003): 930-43.
[19] It should be noted that data collected from borrowers can have
distinct advantages. For example, survey respondents would know better
than lenders whether they had been discouraged from applying for credit
and could more accurately describe their race or gender.
[20] Steven R. Holloway and Elvin K. Wyly, "The Color of Money
Expanded: Geographically Contingent Mortgage Lending in Atlanta,"
Journal of Housing Research 12, no.1. (2001): 55-90; and Robert Avery,
Kenneth P. Brevoort, and Glenn B. Canner, "Opportunities and Issues in
Using HMDA Data," Journal of Real Estate Research 29 ( 2007): 351-79.
[21] In February 2002, FRB adopted amendments to HMDA Regulation C to
require lenders to include in HMDA reports data regarding loan pricing
(the rate spread annual percentage rate on a loan and the yield
comparable Department of the Treasury securities) for loan originations
in which the annual percentage rate exceeded the Treasury yield by a
threshold amount set by FRB. See Home Mortgage Disclosure, 67 Fed. Reg.
7222 (Feb. 15, 2002) (final rule). The proposed thresholds set by FRB
in February 2002--a spread of 3 percentage points for first-lien loans
and 5 percentage points for subordinate-lien loans--were adopted in
June of that year. See 67 Fed. Reg. 43218 (June 27, 2002). At that same
time, FRB also amended Regulation C to require lenders to report the
lien status of applications and originated loans.
[22] Alicia H. Munnell, Geoffrey M.B. Tootell, Lynn E. Browne, and
James McEneaney, "Mortgage Lending in Boston: Interpreting HMDA Data,"
American Economic Review, 86, no. 1 (1996); Debbie Bocian, Keith S.
Ernst, and Wei Li, "Race, Ethnicity and Subprime Home Mortgage
Pricing," Journal of Economics and Business. 60, nos. 1 and no. 2
(2008); and Kenneth P. Brevoort and Glenn B. Canner, "Opportunities and
Issues in Using HMDA Data," Journal of Real Estate Research, 29 (
2007): 351-79.
[23] Darryl Getter, "Consumer Credit Risk and Pricing," The Journal of
Consumer Affairs 40, no.1 (2006): 41-63. Other research has looked at
possible discrimination in the prices charged for new automobiles, as
opposed to studies that analyze interest rate pricing for automobile
loans. See: Ian Ayres and Peter Siegelman, "Race and Gender
Discrimination in Bargaining for a New Car," The American Economic
Review, 85, no. 3 (1995): 304-321; and Ayres, Ian, "Fair Driving:
Gender and Race Discrimination in Retail Car Negotiations," Harvard Law
Review, 104, no. 4 (1991): 817-872.
[24] Mark Cohen, "Imperfect Competition in Auto Lending: Subjective
Markup, Racial Disparity and Class Action Litigation," Vanderbilt
University Law School Law and Economics Working Paper, No. 07-01
(2006). Typically, automobile dealers act as intermediaries between car
buyers and lending institutions in the application process for
automobile purchase loans.
[25] A consent order is the resolution of a civil action in the form of
a contractual agreement between the parties to the litigation that is
sanctioned by the court and in which the opposing party (in this case
the defendant named in DOJ's civil enforcement action) agrees to
undertake certain remedial actions without admitting any liability with
respect to the allegations in the complaint filed against it.
[26] Getter, "Consumer Credit Risk and Pricing."
[27] Amberly Hazembuller, Britton J. Lombardi, and Jeanne M. Hogarth,
"Unlocking the Risk-based Pricing Puzzle: Five Keys to Cutting Credit
Card Costs," Consumer Interests Annual, 53 (2007): 73-81.
[28] The Consumer Advisory Council, established in 1976, advises the
FRB on the exercise of its responsibilities under the Consumer Credit
Protection Act and on other matters in the area of consumer financial
services. 15 U.S.C. § 1691b(b). The council membership represents
interests of consumers, communities, and the finance services industry.
Members are appointed by the Board of Governors and serve staggered 3-
year terms. The council meets three times a year in Washington, D.C.,
and the meetings are open to the public.
[29] We recognize that there are differences between the level of
transparency between HMDA's data collection and reporting requirements
and the voluntary data collection proposal that FRB considered in 1999
for nonmortgage loan applicants. In particular, FRB did not propose
that lenders who chose to collect such data report it to the public
whereas lenders are required to report HMDA data.
[30] Our review of research standards confirms that selection bias can
be a limitation for voluntarily collected data and may affect the
reliability and usefulness of such data. Specifically, estimates made
from data collection based on a self-selected sample may be at risk of
significant bias because those who choose to participate may differ
from those who do not.
[31] According to FRB officials, it will cost the agency approximately
$3.5 million to process the 2008 HMDA data.
[32] See 12 C.F.R. Part 203 (2008).
[33] We note, though, that small business owners may also use their
personal residences as collateral to secure business loans.
[34] The SBA's Office of Advocacy works independently within the agency
to advance the interests of small businesses within the federal
government.
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