TO: Chief Executive Officers and Directors of National Banks and All
Examining Personnel

PURPOSE

This issuance is intended to strongly encourage national banks to
continue exploring ways to ensure that all mortgage loan applicants
receive fair and equal treatment in the lending decision process. It
provides encouragement and suggestions that may help bank management and
boards of directors fulfill their responsibility to comply with fair
lending laws and regulations. It is not intended to provide a blueprint
for compliance.

BACKGROUND

The 1991 Home Mortgage Disclosure (HMDA) data released in October
continue to reveal considerable racial and ethnic disparities in
mortgage loan denial rates. Although the OCC recognizes that those
disparities are caused in part by differences in applicant credit
qualifications, two recently completed studies conclude that illegal
lending discrimination does occur. Those studies, one by the Department
of Justice and the other by the Federal Reserve Bank of Boston, found
that nonminority applicants for home mortgage loans receive preferential
treatment not always given to minority applicants.

After a three-year investigation of an Atlanta mortgage lender, the
Department of Justice alleged that \"white applicants who failed to meet
certain underwriting standards have been extended special
considerations\" not extended to black applicants. It also alleged that
\"the lender counseled white applicants about their deficiencies and
reworked their applications in order to help them qualify with
underwriting guidelines, but did not consistently supply comparable
assistance to black applicants.\" In a settlement of the suit in
September 1992, the lender agreed to certain corrective actions,
including the creation of a \$1 million fund to provide relief to 48
black creditseekers.

In October 1992, the Federal Reserve Bank of Boston published the
results of a detailed review of about 130 Boston lenders, which found
that some lending showed differences in approval rates that were
unwarranted by economic factors. Since the Boston study found that 80
percent of applicants had some flaw in their credit qualifications but
only 15 percent of applications were denied, it is clear that most
applicants benefit from some judgment or initiative that neutralizes the
flaws. The study found, however, that minority applicants benefitted
less frequently than nonminority applicants.

The study suggested that differential treatment may begin with the
presumption that nonminority applicants are creditworthy, but that
minority applicants need to prove their creditworthiness to the lender.
The positive presumption about nonminority applicants leads lenders to
justify many kinds of judgments, accommodations, and efforts to help
them qualify for loans in spite of shortcomings. However, when one group
of customers benefit from considerations not given to another group, or
benefit to a different degree, antidiscrimination laws are violated.

SUGGESTED ACTIONS FOR LENDERS

Management and boards of directors of national banks should take steps
to eliminate any illegal discrimination from their lending practices. In
that effort, they need to determine the reasons for any disparities in
the way their institutions review and decide home mortgage applications.
The thorough analysis of the bank\'s HMDA data outlined in the OCC\'s
December 11, 1991, Advisory Letter (attached) is a valuable start in
making that determination. Further, we suggest you:

[Ensure Equality in Customer Service]{.underline} \-- All applicants
should receive the same beneficial presumptions and equal measures of
assistance, diligence, patience, and flexibility. Similarly qualified
applicants should benefit equally from those discretionary and dynamic
aspects of bank lending processes.

This effort should begin in training programs for lending officers.
Training should anticipate and address participants\' stereotyped
assumptions, and describe options that should be offered equally to
borrowers who do not meet conventional lending standards. Internal bank
compliance programs should be designed to monitor these elements of
customer service.

An application checklist can help banks ensure that compensating
factors, unconventional documentation of creditworthiness, and
explanations of negative information are considered equally for every
applicant. The checklist the Department of Justice required in its
Atlanta settlement is a good example of a tool that can make sure that
information that might overcome apparent deficiencies in an applicant\'s
credit qualifications is not solicited selectively. The settlement
documents filed in the Atlanta case are highly detailed and can provide
valuable guidance to lenders.

[Record and Evaluate the Reasons for Denials]{.underline} \-- National
banks should record the \"reasons for denial\" on their HMDA loan
application registers. Many financial institutions already maintain this
voluntary information, which allows them to determine whether reasons
for denial are equally distributed among applicants. For example, a
pattern of higher rejections for \"lack of verification\" or
\"incomplete information\" for a minority group might indicate that
lending personnel are not working as diligently to qualify those
applicants.

A complete tabulation of reasons for denial can show if an overall
disparity in denial rates reflects a disproportionate use of one or two
reasons with respect to minority applicants. That information allows the
lender to focus on minority denials for those reasons to identify the
flaws they contain. If the bank then performs a parallel review of
nonminority approvals, it can determine if those approvals included
deficiencies comparable to those in the denied minority applications.
When a bank finds such a pattern, it should determine why similar flaws
were treated differently.

[Establish Review Systems]{.underline} \-- A system of review
underwriters and a mortgage review board can help banks make sure that
applicants receive equal treatment. The Atlanta settlement included a
requirement for a review underwriter, but often lenders voluntarily
establish reviews that provide a second consideration of denied minority
applications. Other lenders have review systems that also consider a
sample of nonminority applications, both approved and rejected, to
ensure that their lending standards are being applied consistently. In
some cities, financial institutions have established joint mortgage
review boards. Such boards are composed of lending personnel from the
participating financial institutions who reviewed rejected applications
from all members.

To be valuable, second reviews must provide the reviewer with a sense of
how frequently and why nonminority applicants with deficiencies are
granted loans. A review that only verifies that denied applicants have
deficiencies in their credit qualifications does not answer the crucial
question of equality of treatment. A good review must discover whether
rejected minority applicants\' deficiencies were worse than those of
successful nonminority applicants and whether the lender made equal
efforts to help all customers qualify.

Well designed and operated review systems help banks comply with
nondiscrimination laws, provide them with valuable information, and can
result in the banks making more loans. One lender recently reported that
on second review it approved 35 percent of initially rejected
applications.

[Initiate Testing Programs]{.underline} \-- When a bank\'s best efforts
to prevent discrimination with training, procedures, and accountability
are not fully successful, it should consider the use of \"shoppers.\"
The additional documentation and information from self-testing can help
identify and dislodge subtle and even unintentional discriminatory
attitudes and practices.

Professional testers can conduct paired tests to determine if treatment
of equally qualified loan applicants with different racial, ethnic, or
other characteristics is substantially the same. In addition to
identifying situations in which treatment is not equal, self-testing can
find situations in which established lending practices are not followed,
and can provide management with valuable customer service data.

SUMMARY

Eliminating discrimination in mortgage lending depends on the commitment
of bank management and boards of directors. It is their responsibility
to establish the systems and procedures necessary to comply with fair
lending laws and regulations and to monitor those systems. Examiners
will evaluate banks\' efforts to comply and to review and monitor their
compliance.

The approaches in this issuance are suggestions that may be useful
additions to measures already in place. They do not constitute a
checklist of required activities or steps that guarantee compliance.

RESPONSIBLE OFFICE

If you have any questions concerning this issuance or fair lending, you
should contact your supervisory office or the Compliance Management
Department in Washington, D.C.

Stephen M. Cross

Deputy Comptroller for Compliance Management