The Office of the Comptroller of the Currency
               Fair Lending Pilot Testing Program
                         Summary Report
                           April 1996
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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:

o  To plan, develop, and implement a pilot testing program.

o  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.

o  To gain experience in testing and to evaluate the
effectiveness of different testing methods used by organizations
offering testing services.

o  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:

o  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.

o  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.

o  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.

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

o  Audiotape tests, where permitted by law.

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

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

o  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.

o  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

o  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.

o  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:

o  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.

o  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.

o  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:

o  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.

o  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.

o  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.

o  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: 

o  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.

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

o  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.

o  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.

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