NR 96-45
April 19, 1996

       OCC Summarizes Results of Fair Lending Pilot Testing

WASHINGTON, D.C. -- The Office of the Comptroller of the
Currency (OCC) today issued a report summarizing the results of
its pilot program to assess the use of "testers" to identify
fair lending violations at national banks.  

"Matched pair tests were conducted at eight national banks and
no violations of fair lending laws were detected," said Bert
Otto, Acting Deputy Comptroller for Compliance Management. 
"Based on the pilot experience, we've concluded that matched-pair testing can be a valuable tool to use in certain situations
in the agency's overall fair lending program." 

The OCC launched its pilot testing program in July 1994 to
assess whether national banks and their mortgage subsidiaries
treated consumers of different races and nationalities similarly
during the pre-application phase of the mortgage process.  In
addition to actual testing, the OCC examined and evaluated
testing processes currently in use by other regulatory agencies,
fair housing organizations, mystery shopping vendors and others
who had experience with matched-pair testing.

Going forward, the OCC will consider further use of testing on a
case-by-case basis when an evaluation of information from
examiners, consumers or the media indicates that a bank may be
engaging in illegal discrimination in the pre-application stage. 
The agency also has encouraged national banks to conduct fair
lending self-assessments.  Self-assessments include both self-evaluations of information contained in loan files and self-tests at the pre-application stage of the loan process.  Interim
guidelines on self-assessments were sent to national banks in
OCC Bulletin 95-51, dated September 15, 1995. 
 
"A significant benefit of our fair lending pilot testing program
is that the agency now can assist national banks in developing
their own self-testing programs," Otto said.

The report summarizing the OCC's fair lending pilot testing
program accompanies this news release.  The document is also
available on the agency's Internet web site, found at
http:\\www.occ.treas.gov, or it may be obtained by fax from the
OCC Information Line at (202) 479-0141 document number 79645. 

                              # # #

The OCC charters, regulates and examines approximately 2,800
national banks and 70 federal branches and agencies of foreign
banks in the U.S., accounting for more than half the nation's
banking assets.  Its mission is to ensure the safety and
soundness of the national banking system.

         The Office of the Comptroller of the Currency
                                
               Fair Lending Pilot Testing Program
                                
                         Summary Report
                                
                           April 1996
      OCC's Pilot of Fair Lending Testing at National Banks

Background

In 1993, the OCC assembled an interdepartmental team, under the
direction of the Compliance Management Department, to develop
and implement an OCC mortgage loan testing program. A pilot
program to test whether national banks and their mortgage
subsidiaries treated mortgage loan applicants of different races
and national origin similarly during the pre-application phase
was launched during 1994, and all tests were completed by
January 1995. Those tests did not disclose any violations of
fair lending laws.

In addition to actual testing, the team examined and evaluated
testing processes currently in use by other regulators, fair
housing organizations, mystery shopper vendors, and others who
had experience with testing.

To prepare for testing and to set the parameters for this pilot,
the team reviewed testing materials from the Urban Institute,
the Federal Reserve Board, the Department of Housing and Urban
Development (HUD), the University of Wisconsin, the University
of Michigan, the Department of Justice (DOJ), and others. In
addition, the team received a large amount of information in
response to a "Request for Information" that the OCC published
in the Commerce Business Daily. The team also interviewed staffs
of other regulators including HUD, the Federal Trade Commission
(FTC), and DOJ; a nonprofit fair housing group; a nonprofit
research group; and a for-profit firm.

Major Objectives

After gathering information and becoming more experienced with
the testing process, the team identified the following as its
major objectives:

-    To plan, develop, and implement a pilot testing program.
-    To select national banks or their wholly owned mortgage
     subsidiaries to be tested on a pilot basis to determine if
     they were prescreening applicants on a prohibited basis.
-    To gain experience in testing and to evaluate the
     effectiveness of different testing methods used by
     organizations offering testing services.
-    To draw conclusions about whether, how and when the OCC
     could use testing in the future.

Planning the Pilot Program

Based on the information gathered, the team determined that the
OCC should hire outside testing organizations to conduct tests.
Since outside organizations already had hired, trained, and
debriefed testers, the team believed that using those existing
structures, reviewed and modified by OCC, could save time in
implementing a pilot program.

The team determined that the pilot program should:

-    Test for pre-application discrimination based on the
     race/national origin of the applicant.   Although other
     prohibited bases could have been used, the team believed
     that statistical analyses and public attention in the last
     few years have focused on the race and national origin of
     applicants as the major cause for possible discrimination
     in mortgage lending.

-    Select blacks and Hispanics as the target racial/ethnic
     groups.   Blacks and Hispanics are major minority groups in
     the United States and have been the target of recent
     statistical analyses and public concern regarding
     discriminatory treatment.

-    Focus on home purchase loans, using in-person, paired
     testers.   Paired testing sends people who have comparable
     application characteristics into each institution to
     inquire about obtaining credit. In these tests, one person
     in each pair was white, and the other was either black or
     Hispanic.

          Focusing on home purchase loans allowed the pilot
          program to use Home Mortgage Disclosure Act (HMDA)
          data to select institutions to be tested and readily
          available mortgage underwriting ratios to construct
          tester profiles.

          Using in-person interviews avoided the ambiguities
          associated with telephone contacts.

-    Construct fictional qualifications that show testers to be
     marginally qualified for credit, with minority testers
     slightly more creditworthy than non-minority ones.

-    Audiotape tests, where permitted by law.

-    Select target lenders on the basis of potential
     discrimination based on characteristics of the applicant,
     rather than characteristics of the neighborhood.

-    Identify a variety of geographic areas in which illegal
     discrimination could exist.

-    Use different professional testing organizations, including
     both fair housing organizations and marketing research
     firms (sometimes called "mystery shopper" firms) to perform
     pilot testing for the OCC.

          Four organizations   one fair housing organization and
          three market research firms   conducted tests.

          Fair housing organizations and market research
          organizations have fundamentally different approaches
          to testing. Fair housing organizations  generally
          recruit testers from local, nonprofit organizations,
          such as universities and the League of  Women Voters.
          They generally conduct fewer tests and the testers are
          aware that they are testing for illegal
          discrimination. They also train their testers more
          extensively in bank lending processes. Market research
          organizations, on the other hand, recruit testers from
          local marketing research firms. They conduct numerous
          tests as bases for statistical analysis and use
          testers that are generally unaware of the purpose of
          the test.

          The organizations were located in different portions
          of the United States, which allowed the OCC to achieve
          wide geographic coverage while keeping costs low by
          selecting a testing organization located near the
          lender to be tested.

-    Use no testing company that had a business relationship
     with an institution selected for testing.

Selecting Institutions for Testing

Institutions were selected for inclusion in the pilot program
primarily based on HMDA and census data and supervisory
information. The team began by identifying metropolitan
statistical areas (MSAs) that had sufficiently large minority
populations that a low number of minority applications would
raise the possibility of unequal treatment. It then identified
HMDA reporters who received more than a certain minimum number
of home purchase loan applications and eliminated any MSA that
did not have any such institutions. The team then further
reduced the potential MSAs by eliminating census tracts in which
the minority population was so small that the testers might be
exposed, i.e., that the lender might be suspicious that they
were not part of the local community.

For national banks (or wholly owned mortgage subsidiaries of
national banks) in the remaining MSAs, the team determined the
percentage of minority applications each received and compared
their performance to that of other HMDA reporters. The goal was
to identify any bank that received significantly lower
percentages of minority applications than other institutions in
the same market.

Once the team identified the national banks (and subsidiaries)
with the lowest percentages, it reviewed other information about
the bank; specifically, the OCC's internal Supervisory
Monitoring System (SMS), Community Reinvestment Act (CRA)
reports, and consumer complaints. Then the team looked at the
geographic distribution of the offices of the potential
candidates for testing and eliminated any banks that did not
have offices located near minority populated census tracts. The
team made final selections to avoid concentrating resources in
just one part of the country. The result was a group of eight
institutions   seven national banks and one wholly owned
mortgage company subsidiary of a national bank   that were
tested. Five institutions were tested for pre-application
discrimination against Hispanics and three were tested for pre-application discrimination against African Americans.

Lessons Learned from the Pilot Program

-    Agency involvement in the testing process is critical
     because different test structures, testing companies,
     testers, and local conditions can affect what testers find.

     One testing company in the pilot devised virtually
     identical fictional qualifications for all testers. Without
     agency involvement to amend those qualifications, the
     institution would quickly have detected that it was being
     tested.

     In one test, there were significant differences in the way
     individual loan officers dealt with the testers, including
     the amount of time they spent with the testers, the amount
     of information they shared with the testers, and in the
     criteria for obtaining a loan that they explained to the
     testers. However, each loan officer treated all testers he
     or she dealt with similarly. The differences in treatment,
     therefore, were attributable to the loan officers
     themselves   not the race of the testers.

     In another test, few testers, either minority or non-minority, encountered loan officers that addressed the
     testers' creditworthiness. Only one of 26 testers was asked
     about savings, investments, or credit history. In contrast,
     85 percent of testers said the loan officer described the
     next step to take. The loan officers evidently viewed these
     interviews as very preliminary.

     One testing company went beyond the parameters of the test
     and attempted to ascertain "whether effort was made to make
     a loan to an applicant who presents that opportunity." In
     doing so the company found significant differences in
     treatment, although not necessarily related to access to
     credit. Follow-up review by the agency found no evidence of
     different and less favorable treatment of minorities.  OCC
     staff determined that indications of disparate treatment
     were weak and primarily involved unverifiable testers'
     subjective perceptions, such as how "friendly" the loan
     officer was to the tester.

-    The OCC needs to impose high standards concerning the
     quality of information produced by testing because of its
     enforcement responsibilities.

     To ensure that testing produced information that was
     sufficiently clear, reliable, and precise to determine
     whether violations had occurred and to support an
     enforcement proceeding, the OCC insisted on data standards
     more rigorous than a research or customer service project
     would need. Some standards that arose from the pilot test
     are:

          Testing companies must focus on and document lender
          conduct that facilitates or limits access to credit.

          In debriefing testers, questions should not call for
          interpretation or subjective responses. Although in
          other testing situations such observations are valued
          for the information they provide on customer service,
          from an enforcement perspective, they are not
          sufficiently clear, reliable, or comparable to serve
          as a basis for determining whether discrimination
          occurred.

          Tester debriefing questions cannot rely on simple
          yes/no answers. They must seek more of the facts
          presented by the lender ("What, if any, fees must be
          paid?") and ask about substantive differences in
          treatment related to access to credit.

          The debriefing questions cannot assume that every
          tester followed the prescribed scenario. They must ask
          the tester to report the facts he or she described to
          the lender. This allows the OCC to be more confident
          that the testers present themselves to the bank as
          similarly qualified.

          Testing companies must understand the importance of
          the documentation of the test. In one case a testing
          company official's notations on questionnaires filled
          out by testers might have compromised the value of the
          test report as evidence.

-    Using testers presents a variety of difficulties.

          The possibility that they might be asked to testify
          made some potential testers reluctant to participate.

          Testers sometimes find the fictional scenarios
          complicated and confusing, and therefore, have a hard
          time staying with the "script."

          Testers and testing companies do not always understand
          the OCC's concept of "marginal" qualifications.

-    Testing companies must understand what they are testing.

     Even when it was delivering the final report, one testing
     company had basic misconceptions about the activity it had
     just completed. Such misconceptions may not compromise the
     test; however, they present the disturbing possibility that
     a testing company may misinterpret results, and reinforce
     the importance of agency oversight.

Conclusions and Recommendations for Future OCC Testing

Matched-pair testing can be a valuable tool in the OCC's overall
fair lending program.

Examples of situations in which the OCC might consider
conducting pre-application testing are:

-    In a compliance examination, examiners discover that the
     institution reports receiving virtually no mortgage loan
     applications from a geographic area of the city that is
     predominantly minority.  Other lenders report receiving
     significant numbers of applications to purchase property
     located in this geographic area.

-    Examiners are approached during an examination and told
     that one of the loan officers quotes significantly higher
     interest rates to minorities inquiring about consumer
     credit than are quoted to whites making similar inquiries.

-    The OCC receives several unrelated complaints from members
     of the same minority group against the same bank alleging
     that they were discouraged from applying for no apparent
     reason or were met with such resistance when they inquired
     about consumer loans that they decided to apply elsewhere.

-    During a CRA examination, minority community contacts
     report that it is difficult to obtain mortgage loans from a
     bank because the bank requires a 30 percent down payment. 
     Yet, examiners conducting a concurrent fair lending
     examination report few mortgage loans to minorities and
     numerous loans to whites with less than 30 percent down
     payments.

These examples are not inclusive.  The OCC will consider testing
at an institution when information from examiners, consumers, or
the news media indicates the institution may be engaging in
illegal discrimination in the pre-application stage. The OCC
will not target institutions solely on the basis of HMDA and
census data and will not seek to conduct any  specific number of
tests each year.  When the OCC does identify an institution for
testing: 

-    An OCC fair lending specialist will manage all testing,
     including on-site coordination with the vendor before,
     during, and after each test. That coordinator will observe
     or review each step of the process, including identifying
     and contacting the vendor, estimating the number of tests
     to be conducted, developing the applicant profiles and
     scenarios, training and debriefing the testers, analyzing
     the test reports, monitoring for indications that the bank
     has detected the testing, and reaching any conclusion about
     whether discrimination occurred.

-    Tests will be refined, particularly with respect to
     applicant profiles and the identification of lender loan
     terms and policies.

-    More tests will be completed at a decision center (e.g.,
     bank, branch, mortgage company), even if it means testing
     fewer decision centers of the same institution. To avoid
     uncertainties in evaluating the testing data, at least four
     pairs of testers will be sent into a single office of an
     institution. This approach will also increase the
     likelihood that some minority and non-minority testers will
     speak to the same individuals.

-    OCC testing will be conducted by private fair housing
     organizations when possible. In the pilot program, testers
     from fair housing organizations were more professional and
     thorough and, typically, had participated in a number of
     tests previously. Testers from fair housing organizations
     offer the additional advantage of knowing they are testing
     for discrimination, though not the specific prohibited
     basis being targeted, and generally are willing to provide
     testimony, if necessary.

-    Tests will be audiotaped where permitted by state law for
     better documentation and to help deflect any allegations of
     tester bias.