HOME MORTGAGE DISCLOSURE ACT: NEWLY

COLLECTED DATA AND WHAT IT MEANS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 13, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–99

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HOME MORTGAGE DISCLOSURE ACT: NEWLY COLLECTED DATA AND WHAT IT MEANS

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HOME MORTGAGE DISCLOSURE ACT: NEWLY

COLLECTED DATA AND WHAT IT MEANS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 13, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–99

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

CAMPBELL, JOHN, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, JR., North Carolina, 

Vice Chairman 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

JUDY BIGGERT, Illinois 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

WM. LACY CLAY, Missouri 

JIM MATHESON, Utah 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 13, 2006 .................................................................................................... 1

Appendix: 

June 13, 2006 .................................................................................................... 61

WITNESSES 

TUESDAY, JUNE 13, 2006

Bowdler, Janis, Housing Policy Analyst, National Council of La Raza .............. 39

Bradford, Calvin, President, Calvin Bradford Associates, Ltd., on behalf of 

the National Fair Housing Alliance .................................................................... 45

Duncan, Douglas G., Senior Vice President and Chief Economist, Research 

and Business Development, Mortgage Bankers Association ............................ 38

Ernst, Keith, Senior Policy Counsel, Center for Responsible Lending ................ 43

Himpler, Bill, Executive Vice President, Federal Affairs, American Financial 

Services Association ............................................................................................. 41

Olson, Hon. Mark W., Board of Governors, Federal Reserve System ................. 13

Staten, Prof. Michael E., Director, Credit Research Center, McDonough 

School of Business, Georgetown University ....................................................... 47

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 62

Clay, Hon. Wm. Lacy ....................................................................................... 65

Bowdler, Janis .................................................................................................. 90

Bradford, Calvin ............................................................................................... 110

Duncan, Douglas G. .......................................................................................... 78

Ernst, Keith ...................................................................................................... 101

Himpler, Bill ..................................................................................................... 96

Olson, Hon. Mark W. ........................................................................................ 66

Staten, Prof. Michael E. ................................................................................... 128

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Written statement submitted by Consumer Mortgage Coalition ................. 228

Watt, Hon. Melvin L.: 

Written statement submitted by ACORN ...................................................... 139

Written statement submitted by Center for Responsible Lending ............... 143

Written statement submitted by Consumer Federation of America (CFA) . 193

Written statement submitted by Fair Housing Center of Greater Boston .. 262

Letter and 3 studies submitted by National Community Reinvestment 

Coalition (NCRC) .......................................................................................... 279

Written statement submitted by National Training and Information Center (NTIC) ...................................................................................................... 445

Frank, Hon. Barney: 

Letter from U.S. Department of Housing and Urban Development (HUD) 449

Letter from U.S. Department of Justice ......................................................... 450

Letter from Comptroller of the Currency ....................................................... 452

Letter from Office of Thrift Supervision, U.S. Department of the Treasury .................................................................................................................. 455

Page

VI

Frank, Hon. Barney—Continued

Letter from Federal Deposit Insurance Corporation ..................................... 457

Letter from National Credit Union Administration ...................................... 458

Letter from Federal Deposit Insurance Corporation ..................................... 457

Moore, Hon. Gwen: 

Viewpoints article by Gregory D. Squires ...................................................... 459

(1)

HOME MORTGAGE DISCLOSURE ACT: 

NEWLY COLLECTED DATA AND 

WHAT IT MEANS 

Tuesday, June 13, 2006

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding. 

Present: Representatives Bachus, Baker, Garrett of New Jersey, 

Pearce, Neugebauer, Price, McHenry, Maloney, Watt, Meeks, Waters, Ford, Baca, Green, Clay, Matheson, and Frank (Ex Officio). 

Also present: Representatives Davis of Alabama, and Lee. 

Chairman BACHUS. Good morning. The committee will come to 

order. Today’s hearing, which was requested by Ranking Members 

Frank and Sanders, Congresswomen Waters and Lee, and Congressman Watt, will focus on the recently implemented Federal Reserve Board regulation under the Home Mortgage Disclosure Act 

that requires mortgage lenders to collect, report, and make public 

new mortgage pricing data and what that data means for consumers and lenders. 

The possibility of racial discrimination is a serious issue that deserves our attention. I am hopeful that today’s hearing will shed 

some light on this issue. Owning a home is part of the American 

dream, and all Americans should be treated fairly when they try 

to make that dream a reality. 

The Home Mortgage Disclosure Act was enacted by Congress in 

1975 to provide the public with information to determine whether 

lenders are serving their communities to enhance enforcement of 

laws prohibiting discrimination in lending, and to provide private 

investors and public agencies with information to guide investments in housing. The Act, which was implemented by the Federal 

Reserve Board, requires most mortgage lenders located in metropolitan areas to collect data about their housing-related lending activity, report that data annually to the government, and make the 

data publicly available. 

In 2002, the Federal Reserve Board required additional information to be reported for its 2004 data collection in order to improve 

the quality, consistency, and utility of the data reported. Most importantly, lenders must now disclose pricing, which includes interVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
2

est rates and fees for higher-priced loans. Other newly required information now being reported includes whether the loan is a first 

lien, a junior lien or unsecured, and whether it is secured by a 

manufactured home and if it is subject to the protections of 

HOEPA. 

However, it should be pointed out that the data does not include 

or take into consideration certain risk evaluation factors used by 

lenders in determining whether to make a loan and at what price. 

Specifically, the data does not include the borrower’s asset level or 

credit score, the loan-to-value ratio of the property, the borrower’s 

debt to income ratio, or the level of documentation submitted. 

Because of the limitations of the data, I, along with many members of the subcommittee, signed a letter requesting that the Federal Reserve examine more comprehensive data to assess the extent to which loan pricing is correlated with risk. With this enhanced information, the Federal Reserve and the Departments of 

Justice and HUD should be able to make a determination as to 

whether any disparity in loan pricing is based on discrimination or 

risk-based pricing. 

Today’s hearing will consist of two panels. First, we will hear 

from Federal Reserve Board Governor Mark W. Olson. On the second panel, we will hear from Dr. Douglas G. Duncan, senior vice 

president and chief economist, research and business development 

for the Mortgage Bankers Association; Ms. Janis Bowdler, housing 

policy analyst, National Council of La Raza; Mr. Bill Himpler, executive vice president, federal affairs, American Financial Services 

Association; Mr. Keith Ernest, senior policy counsel, Center for Responsible Lending; Mr. Calvin Bradford, president, Calvin Bradford 

& Associates on behalf of the National Fair Housing Alliance; and 

Dr. Michael E. Staten, director, Credit Research Center, 

McDonough School of Business, Georgetown University. 

The reason for the second panel with six witnesses was to accommodate several members who had specific requests. 

I look forward to hearing from today’s witnesses and thank them 

for taking time from their busy schedules to join us. 

In closing, I would like to thank Ranking Members Frank and 

Sanders and their staffs for working with us on this hearing. They 

are strongly committed to these issues, and I commend them for 

their efforts to ensure that lenders comply with fair lending laws 

and that discrimination does not occur in the marketplace. Violations of our fair lending laws should not be tolerated, and I look 

forward to working with them, with Congresswomen Waters and 

Lee, and Congressman Watt, in assuring that violations of our fair 

lending laws are exposed and violators brought to responsibility. I 

look forward to working with them and members of this subcommittee as we continue to examine predatory lending practices. 

The Chair now recognizes Mr. Watt for any opening statement 

he would like to make. 

Mr. WATT. Thank you, Mr. Chairman. Last week Representative 

Kanjorski asked me to substitute for him as the ranking member 

of the hearing because he was out of town, and today Representative Sanders asked me to substitute for him as the ranking member because he couldn’t be here. 

3

I think that there is a concerted effort to bring up the minor 

league on our side, those of us who are in training either for ranking member positions or chairmanships, we hope. So here I am 

again substituting, and I appreciate the chairman convening the 

hearing at our request. 

I thank Ranking Member Frank and Representatives Sanders, 

Waters, and Lee for joining in the request, along with myself, that 

we have this hearing today. 

The Equal Credit Opportunity Act prohibits, ‘‘any creditor to discriminate against any applicant with respect to any aspect of a 

credit transaction on the basis of race, color, religion, national origin, sex, or marital status or age.’’ Title 8 of the Civil Rights Act, 

Fair Housing Act, as amended, prohibits discrimination in the sale, 

rental, and financing of dwellings and in other housing-related 

transactions based on race, color, national origin, religion, sex, familial status, including children under the age of 18 living with 

parents of legal custodians, pregnant women, and people securing 

custody of children under the age of 18, and handicap disability. 

The Federal Reserve uses HMDA data as a screening tool to 

identify disparities in mortgage lending that warrant closer scrutiny. Based on a review of 2004 HMDA data, the Federal Reserve 

reportedly identified about 200 lenders that demonstrated statistically significant disparities in mortgage lending. The Federal Reserve shared, on a confidential basis, the results of this analysis of 

lenders’ 2004 HMDA data with other agencies that have supervisory or enforcement authority over these lenders for use in those 

agencies’ supervisory or enforcement programs. 

On March 17, 2006, in addition to requesting this hearing, Mr. 

Chairman, Representative Frank wrote to HUD, DOJ, OCC, FDIC, 

OTS, and NCUA requesting information about these agencies’ processes for assessing the lenders under their authority that the Federal Reserve had flagged as having demonstrated significantly significant disparities for compliance with fair housing laws. 

Let me just be clear, having given that framework. Ladies and 

gentlemen, this issue is not going to go away. Discrimination in 

lending has to stop. It has to stop for several reasons. Number one, 

because it is against the law. Number two, you can’t look at us and 

say get equal education, get equal loan scores, credit scores, get 

equal in every aspect of your life, and then at the end of the day, 

make statistically disparate impact loans that are explainable only 

in racial terms. You factor out everything else. This has to stop. 

It has to stop because more than 70 percent of the assets in the 

African American community are tied up in residences, in equity 

in homes, and if we don’t have that, we don’t have anything. You 

can’t point to stocks and bonds and mutual funds and retirement 

accounts; our equity is in our homes, and that is the only source 

of wealth in our communities. 

This has to stop, and we will continue to pursue it until it does 

stop. You can’t look at us and say well, it is a burden to keep 

HMDA data when the data suggests that discrimination is continuing. You get your house in order on that front, then you can 

talk to us about stopping the burdensome aspects of these regulations. 

4

So there is a quid pro quo here. It has to stop. One-tenth of a 

point, a quarter point, a half a point means thousands and thousands of dollars over the life of a loan. And these disparities have 

to stop. 

I am talking to everybody in the audience, Mr. Chairman. They 

know who I am talking to. We have to stop this practice. 

Mr. Chairman, I would ask unanimous consent that since they 

are not represented here today, although they are represented indirectly, I suppose through other people, that the statements of 

Acorn, NCRC, and the National Training and Information Center, 

all be submitted for the record, and that we submit the statements 

that we have gotten so far in response from HUD, DOJ, OCC, 

FDIC, OTS, and NCUA because we will be pursuing those inquiries 

until this stops. 

I yield back. 

Chairman BACHUS. Without objection, and hearing none, those 

statements will be in the record and become part of the hearing 

record. Ranking Member Frank, would you like to train for the 

chairman’s job? 

Mr. FRANK. Yes, I would. 

I want to begin by expressing the strongest possible support for 

what my colleague from North Carolina has just said. I am very 

proud of the good working relationships that we on the Democratic 

side have had with our friends in the financial services industry. 

We have had good relations with the regulators, but I am very disappointed with the response that we have seen to this HMDA data. 

I do recall, since I was here at the time, that the legislation that 

resulted in this data being made available was adopted over the 

strong objections of many in the industry. Our former colleague, 

Joe Kennedy, took the lead. Tough vote. It was actually defeated 

in this committee and then won on the Floor. 

We have a record that shows that African Americans and Hispanic people are less likely to get loans and will have to pay more 

for the loans that they do get. All I read from the regulators, frankly, and the financial services industry is well, there are good reasons for it. It is not racism; it can be explained here. 

I understand that there are qualifications and explanations that 

ought to be introduced in reacting to the data. The problem is what 

I read gives us the explanations without the reactions. 

I would have hoped that people would have said that this is a 

very bad situation, and we have to change it, as my friend from 

North Carolina said. Instead, the overwhelming tone that is it is 

not my fault, and that there is nothing you can do about it, and 

that none of my institutions are doing it. 

Race continues to be the most serious problem in America. We 

have just gotten an indication here that when it comes to a basic 

tenet of American capitalism, there is nothing remotely radical 

about this, when it comes to a basic tenet of American capitalism, 

there is significant discrimination, in fact, according to racial and 

ethnic lines. 

Now I don’t believe that it is all racism, and I don’t believe that 

none of it is. Anybody who tells me in America today, with our history, that racism and racial prejudice isn’t a part of it is kidding 

herself, but not me. That just can’t be the case. 

5

But I also acknowledge that there are factors other than simple 

racism or even sophisticated racism. But having denied that it is 

racism doesn’t mean that we don’t have a problem. Much of what 

I see here says look, it is not just racism, there are all these other 

problems. If there are, let’s talk about how to solve them. Let’s talk 

about what we do. 

It is unacceptable, frankly, the tone of the responses and testimony we have here. This kind of collective, ‘‘Well, that is the way 

the world works,’’ isn’t acceptable. I will continue to work closely 

with people on the Financial Services Committee. I think the function that banks and lenders play is a critical one, but we cannot 

continue to ignore this racially disparate impact, and people need 

to do a much better job than they have in the testimony I have 

seen, even from the regulators. So this one is not going away. 

Now most of the regulators, we are told, are still studying this, 

because the Federal Reserve itself said that in some cases it would 

appear to be race. Most of the regulators say that they are still 

working on it. I would like to see what is happening. This has been 

out for a while now. We are not going to be out-waited on this. We 

will continue to return to this. 

So I really strongly urge my friends in the industry, please, take 

this more seriously as a problem that has to be alleviated than you 

have. We cannot continue in this country to pretend that race is 

not still a problem in many ways. When African Americans are significantly worse off when it comes to getting a loan to buy a home, 

we need to figure out exactly why that is and then try to deal with 

it. Simply saying, ‘‘Well, it is not a racial problem, and that is the 

end of it,’’ is, one, I think somewhat inaccurate, but, two, totally 

unacceptable. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Frank. 

Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. I certainly appreciate 

you holding this hearing and look forward to the testimony from 

our wonderful panel we have coming before us, two separate panels. The Home Mortgage Disclosure Act information that we are 

going to be discussing today is a very important finding by the Federal Reserve, and it is important that we, as a committee, consider 

all the factors related to the cost of a mortgage on individual borrowers—their credit rating, net worth, their personal debts, and 

the whole variety of issues that are associated with it. 

For a first-time home buyer, it is a daunting task to get lending. 

I think it is important for us to have a fair and balanced way of 

disclosure to individual borrowers but beyond that, to make sure 

that the lending industry is competitive, that free market principles reign, and that as a result of that, individual borrowers will 

benefit. 

The individuality of the borrower demands a wide array of 

choices in the mortgage lending marketplace. For the home mortgage lending market to evolve further, it must be free of over burdensome regulation. 

In the early 1990’s, subprime mortgage lenders emerged because 

market demand was not being met by prime mortgage lenders. According to a study by a former member of the Federal Reserve 

6

Board of Governors, from 1994 to 2003, subprime lending went 

from $45 billion a year to over $330 billion a year, now making up 

one in 10 mortgages. In that period, almost 9 million Americans, 

more than half minorities, became first time home buyers, pushing 

the homeownership rate to an all time high of 69 percent across 

America. 

I think that is something we should be proud of as policymakers 

and something we should be proud of as Americans. It is clear that 

subprime lending has increased credit to individuals who previously hadn’t been afforded the opportunity, given their credit rating, savings, or personal income. 

I look forward to the testimony from this panel and the questions 

from fellow committee members about the HMDA data and, as we 

review the findings, it is important that we acknowledge that the 

nonprime lending marketplace has given countless underserved 

Americans access to the dream of homeownership. As public policymakers, we have to be sure this is done free of discrimination in 

any way, shape, or form, and that it is justified based on all the 

factors that the borrower brings forward to the lender, including 

their credit rating, their personal wealth, their personal ownership 

of assets and their personal debt, and to ensure that the future 

competitiveness of loans, we must allow the open competitive market to thrive. 

As policymakers, I think it should be our intent to make sure 

that the free market system works, especially when it comes to 

homeownership. We want to make sure that first time home buyers 

are able to access the resources that they need to actually purchase 

a home. 

Thank you, Mr. Chairman, for hosting this hearing and I look 

forward to the testimony. 

Chairman BACHUS. Thank you. 

The gentleman from New York is recognized. 

Mr. MEEKS. Thank you, Mr. Chairman. 

I think what we just heard is part of what the problem is because this is not really a hearing on what the disinformation of 

what the HMDA data shows, not talking about subprime lending 

versus prime lending, it is not talking about the homeownership. 

African Americans definitely, like anyone else, want to own a 

home. They get it and they understand generally that it is the best 

and most important investment they can make in their lives and 

indeed as Mr. Watt indicated, it is their biggest investment. Probably one of the largest investments that most people, not only African Americans, but most people make in their lives would be in 

their home. 

And we preach and teach talking about the fact that we want 

them to buy a home because it is an appreciating asset, as opposed 

to a car. However, there still should be some equity in getting a 

loan. So if you happen to go to a subprime and you don’t belong 

in a subprime, you should be told to go to a prime and/or if you 

are two individuals that have the exact same credit scores, have 

the exact same income, have the exact same background, and the 

only difference is the color of your skin, and so therefore, you pay 

more money than the other, there is something wrong with that 

and that cannot be tolerated. 

7

And this regulation with reference to HMDA, whatever it is that 

say that is burdensome, well, until it is burdensome on a whole 

group of people who have to pay thousands of extra dollars over the 

course of the mortgage simply based upon the color of their skin, 

it must change, as Mr. Watt said. It is not acceptable. 

You want to relieve the burden of having to go through the paperwork with reference to HMDA data? The best way to relieve the 

burden is to change and fix the problem so that individuals who 

have the same scores can get the same rate, and it is not, as reflected in here, based upon the color of your skin. 

Now I know some argue that maybe it is a financial literacy 

piece. Well, if that is what you are saying, then I would urge you 

to get more involved in educating individuals in regard to financial 

literacy. That helps relieve the burden. Then if we can show that 

we have things on a level playing field now, then we can talk about 

something else. 

But until we can show that the playing field is level for everybody, the burdens in the requirements of supplying the HMDA 

data, I know, for my part, will never, ever change. It is something 

that must happen, and simply to say I don’t know how it happened, 

or I don’t know why the data is what it is, is not acceptable. 

So those who may be in institutions who say look at our individual data, I would say, look at and talk to the others in the same 

association as you are, and say we are in this thing together and 

we have to figure out a fix if you don’t want collectively to have 

the requirements of coming up with HMDA data. 

So this has to stop. This is, after all, 2006, and we would like 

to think that we have made, and we have made a lot of progress, 

but obviously, from the data that we have seen here, a lot has 

changed but there are a lot of other things that have not changed, 

have yet to change, and we have to be sure that it does begin to, 

otherwise we have to continue to stress this, and I think there will 

be other consequences down the road. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Meeks. 

Mr. Baca. 

Mr. BACA. Thank you very much for having this hearing today, 

and I also want to thank Representative Mel Watt. 

Last week, I attended a hearing along with Representative Clay 

and others to discuss concerns regarding mortgage discriminations 

finding in a new report released by the Center for Responsible 

Lending. 

The report indicates that after controlling for risk factors, minorities were more than 30 percent likely to receive a higher rate 

than White borrowers. We have to ask ourselves why there is a disparity. That is a question we have to ask ourselves. The report has 

come out. Why is there a disparity? 

It appears that the Federal Reserve found that Latinos are 2.3 

times more likely to receive higher cost loans than Whites. Why? 

We have to ask ourselves why. Blacks are 3.7 times more likely. 

Why? Is there a disparity in how those loans are distributed? 

These price disparities should concern everyone in this room because basically, what we all want, Black, White, Indian, American 

8

Indian, all of us, all we want is respect, equal treatment, and 

equality. 

We don’t want to go back to say that there are violations of civil 

rights or discrimination. But we have to stop this disparity that exists today. The data shows that minorities are not getting equal 

treatment and are deliberately being steered into high cost 

subprime loans. Why? Because they are vulnerable, and don’t have 

the education, they are easy prey. We have the marketers that are 

out there. 

It is like all of us, capital gives us asset. I know because I remember the very first time that my parents bought a home—we 

came from a large family of 15—having that home and having 

roots. But you also know that you have to provide for a family and 

so someone is preying and someone calls them and they say all 

right, here is an easy fix. You need a loan, you need capital, you 

have a mortgage, you have payments, you have other responsibilities, here is an opportunity to prey into a high subprime loan, an 

adjustable loan or whatever the case may be. 

These loans should be the last resort for all of us. While 

subprime loans have helped many families get into their first 

home, they are risky and high-priced and have foreclosure rates 

twice that of prime loans. 

Too many mortgage loans and brokers are taking advantage of 

the low income minority borrowers by placing them in high-risk 

mortgages which they cannot afford, and they know they can’t afford them, but they put them right into it. It is like the old way 

that we used to have when this country was first founded, many 

of us minorities owned land, we didn’t have stakes, and the White 

man came and all of a sudden developed new laws and said these 

are the laws in place right now so if you don’t have papers we are 

taking over. 

It is just a different form right now. It being done. Some of the 

brokers are taking back their homes when individuals can’t afford 

these homes. We are seeing many minority families being steered 

into nontraditional loans such as adjustable rate mortgages and interest only loans that carry risky terms, and that is what I was describing in terms of land claimers that we used to have. Well, it 

is a different form of land claimer that we have now. 

As interest rates are rising, their monthly payments are becoming too high and becoming vulnerable for foreclosure. We see the 

cost of living going up but the adjustable costs in terms of wages 

are not increasing. Many individuals can’t afford a home. 

We have the largest growth, both minorities and others moving 

from L.A., Orange County, who are buying homes, and then all of 

a sudden, they are getting into these adjustable loans or high-risk 

loans that they are giving them and then they are foreclosing. 

Some reports indicate that as many as 1.2 million families may 

lose their homes to foreclose this year. That is frightening when 

someone is going to lose their roots, their homes that they have established. 1.2 million families may lose their homes this year, nearly 3 times the amount in 2005. 

These new products may be appropriate for some families, but 

for others the abuse has become a very serious problem. Hispanic 

families rely heavily on mortgage brokers, that is why it is imporVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
9

tant to have education literacy both in Spanish and English in the 

centers. 

The industry lacks the accountability to consumers and too many 

Latino families are falling through the cracks. Bad actors must be 

held accountable, and I say bad actors, and there are good actors 

out there. I want to state that, too, for the record. There are good 

actors, but there are a lot of bad actors as well. There should be 

a list of those bad actors to ensure that home buyers have equal 

access to fairly priced homes. 

I look forward to continuing to work with this committee and to 

look at developing legislation to address this issue. As Representative Mel Watt indicated, we have to stop this type of discrimination. All we want is equal respect, and equality for all of us. 

Thank you. 

Chairman BACHUS. Thank you, Mr. Baca. 

Mr. Neugebauer. 

Mr. NEUGEBAUER. Mr. Chairman, I yield my time to the distinguished chairman. 

Chairman BACHUS. I thank you. 

Governor Olson, you have heard several opening statements, and 

normally we have limited them to 5 minutes but some have been 

longer than that. I think the reason for that is the importance of 

this subject. 

You are going to hear more opening statements before we start, 

because members feel very strongly about this issue. I think if 

there is anything that a member serving on the Financial Services 

Committee comes to realize, it is the value of homeownership. It 

is really economically and socially the pathway to wealth accumulation, to a store of wealth. It is a source of stability, not only for 

families, but also communities. You can look at a community, look 

at the percentage of homeownership, and you can—that is a predictor of crime rates, educational progress, and advancement. 

I said in my opening statement that homeownership is part of 

the American dream. It is the greatest investment that most families make, so it is absolutely important that we ensure and that we 

take steps to stop discrimination in mortgage lending. There will 

always be different treatment because there are different incomes, 

and different documentation on loans. There are always reasons for 

people to get different interest rates and to be charged different 

fees, but one of the reasons can never be racially motivated. 

We talk about fair play, Mr. Meeks talked about a level playing 

field. It is absolutely essential to our democracy if it is to function 

well and accord equal opportunity that we do not have racial discrimination in our mortgage lending. So this is, in fact, a very important hearing. 

I can’t understate the effects that discrimination, the consequences of discrimination in mortgage lending. If there is significant racial discrimination, then it is of great significance and importance to all of us. 

With that said, our next speaker—I would like to ask unanimous 

consent that the gentleman from Alabama, Mr. Davis, who is not 

on this subcommittee, be allowed to make an opening statement. 

Hearing no objection, Mr. Davis. 

10

Mr. DAVIS. Thank you, Mr. Chairman, for welcoming me back to 

the subcommittee and giving me leave to make an opening statement and to ask questions. 

Mr. Baca asked the question, and a number of people have asked 

the question, of why these disparities exist and why they go on, 

and I agree with my good friend from New York, Mr. Meeks, and 

I agree with my friend from Massachusetts, Mr. Frank, that it is 

not just enough to throw up our hands and say, ‘‘Oh, these things 

happen, but I didn’t do it.’’ It is off in the air somewhere. 

Let me take a stab at why I think part of this happens. What 

the mortgage industry does is fundamentally and qualitatively different from what the legal profession does and from what the medical profession does. I will tell you what I mean when I say that. 

I am a lawyer. I have had that license for 13 years now. When 

I was practicing law and a client came to see me I had an obligation to give that client the best representation I could provide. I 

didn’t get to say if you pay me ‘‘X’’ amount of money, I will give 

you this amount of representation, but if you pay me ‘‘X’’ amount 

of money, I will give you this amount of representation. Once you 

sign the contract, you better give that person the best of your intelligence about his or her case. 

Those of us who have been to see doctors, we understand that 

once you walk in and the doctor takes on that case, you don’t get 

certain treatment based on whether you are a Medicare patient or 

Medicaid patient. You get the best treatment that can be provided 

by that doctor. 

I would submit that is not the case when it comes to someone 

who is engaging in a mortgage transaction. You don’t get the best 

service you can possibly get, you get the service that is in the interest of the broker, you get the service that is in the interest of the 

bank making the loan. 

And think of what that would mean if a lawyer, Mr. Olson, provided advice to clients based on what was in his or her best interest financially. Think of what it would mean if the doctor said I 

will encourage you to do whatever would get my Medicare billing 

rates to the highest level. We call that fraud. 

That is the root of the problem, in my opinion. There has to be 

an ethic in this industry that is frankly as good as what doctors 

and lawyers give out. We are not the most noble people in the 

world and we still manage it. 

There has to be an ethic that says that when you come in here 

for a transaction, we are going to give you the best information we 

can and the best advice that we can. We owe that to you as part 

of our fiduciary relationship. That ought to be the written ethic in 

the profession, that ought to be something that we try to see if we 

can write into law, but more than writing in law, it has to be written into practice. 

Then I want to make this other point. What is amazing to me, 

I remember when had a hearing in this very room, Mr. Olson, and 

there was testimony from, I think, someone who was president of 

the Mortgage Bankers or one of the groups and I asked the question, do we think that this disparity in subprime lending, do we 

think it is based purely on market-based factors, and the chairman 

11

of the Mortgage Bankers said no, it is not. Then other people from 

the industry and other various lobbyists said no, it is not. 

Can you imagine, Mr. Chairman, if the Speaker of the House 

were to make a statement tomorrow that yes, some hiring in the 

House of Representatives is based on race, or if the Chairman of 

the Joint Chiefs were to say some promotions in the military are 

based on race, I think we would worry about that. 

We haven’t had that kind of outcry over those kinds of concessions from the industry, and it ought to move us. We have a large 

number of people here today, and that is great to have that many 

people, but I am reminded as I conclude today that when Senator 

Robert Kennedy was being laid to rest, Larry O’Brien, who became 

NBA Commissioner, has been Postmaster General, run Bobby Kennedy’s political operation, and he made the comment what wonderful crowds. And then someone on the train said yes, but what are 

they good for. 

I close by saying, I see all these people from all sectors of this 

argument who are here today and a higher than average number 

of members here, but what good is it if we don’t get as worried and 

concerned about the industry coming into this room and admitting 

part of the problem is race and not coming forward with steps to 

deal with it, solutions. 

This has to move us to action. If it doesn’t, those of you in the 

industry, I make this point to you, and I make it as a friendly 

statement, the distrust you breed will cost you money. The distrust 

you breed will cost you customers. 

So we all have a stake in more transparency and accountability 

here, and this ought to be the beginning of a process and it ought 

to produce results before we leave here for recess in August. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Davis. 

Ms. Lee. Ms. Lee was one of the members who actually requested 

this hearing. We welcome your opening statement. 

Ms. LEE. Thank you, Mr. Chairman, I will try to be very brief, 

but I want to thank you and our ranking member for this hearing, 

and also just associate myself with probably all of the remarks that 

have been made already, but add to that that it is very clear to me 

that the American dream is becoming a nightmare for so many 

Americans and in California, for example, and I need to ask this 

question in advance of the testimony, because I had been working 

with Mr. Greenspan on the CRA ratings. 

For example, the financial institutions, the majority of them in 

California, the majority receive outstanding ‘‘A’’ grading scores as 

it relates to CRA ratings, when I looked at the mortgage lending 

data as it relates to African Americans and Latinos, they were, 

like, between 1 and 4 percent of mortgage lending. 

For the life of me, I never could, and Mr. Greenspan could never 

explain why an institution could get an outstanding rating, and yet 

be so dismal in their mortgage lending to African Americans and 

Latinos. So I hope that will be addressed at some point in this 

hearing. 

Finally, let me just say, oftentimes, we are accused of playing the 

race card. Well, I think this data, this information really is an example though of when some of us talk about institutional racism, 

12

how it has been institutionalized and how, of course, people of 

color, communities of color end up on the losing end. 

I think when you look at the subprime lending, and I am looking 

at Mr. Olson’s—a couple of statements that you made on page 9 

of your testimony, indicating that some of the segmentation of the 

market by race and ethnicity may reflect objective differences in 

borrowers’ preferences or differences from credit risk indicators. I 

think the majority of borrowers in our country, regardless of their 

race or ethnicity, want to be treated fairly; do not want to be victim 

to predatory lending; want to know what they are getting into; and 

want to make sure that their loans are going to be loans that allow 

them to realize the American dream in terms of acquiring the equity that they need or they want, or that they deserve so they can 

send their kids to college, start a small business or whatever. But 

when we have such a large percentage of minorities in the 

subprime market, it begs the question in terms of just the advances 

we have made in racial discrimination and institutional racism in 

our country. 

So thank you, Mr. Chairman, for this hearing. I look forward to 

the testimony. 

Chairman BACHUS. I thank the gentlelady from California. 

The gentleman from Missouri, Mr. Clay, I recognize you for your 

opening statement. 

Mr. CLAY. The statement is very brief. Good morning to all and 

thank you for holding this hearing, Mr. Chairman. The Home 

Mortgage Disclosure Act is an important tool for my district and 

for most districts that are in metropolitan areas. The data reported 

under HMDA includes information about denied home loan application, race, sex, and income of the borrower. Additionally, lenders 

have to report all first mortgages priced 3 percentage points above 

Treasury yield and all secondary mortgages 5 percentage points 

over Treasury yield. 

We need this tool in my district to combat predatory lending, discrimination in lending, and many other ills associated with obtaining affordable housing. I was disturbed when proposals were made 

to eliminate the requirement that intermediate small banks collect 

and disseminate CRA data on small business, small firms, and 

community development lending. 

The elimination of this data will eliminate the ability by which 

communities themselves measure whether the bank is meeting the 

small business needs of the community. There are no adequate substitutes for this data. I understand that financial institutions have 

concerns about the cost and efforts required to produce and disseminate the data, however, the value of the data to our districts 

far outweigh the cost associated with this collection. 

I am eager to hear what our panelists have to say on this issue, 

and I yield back the balance of my time, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Clay. 

That concludes the opening statements from the committee members and at this time, we will recognize the Honorable Mark Olson, 

Board of Governors, Federal Reserve System. Governor Olson, welcome to the committee. 

13

STATEMENT OF HON. MARK W. OLSON, BOARD OF 

GOVERNORS, FEDERAL RESERVE SYSTEM 

Mr. OLSON. Thank you very much, Chairman Bachus, and members of the committee. I have an opening statement, which I would 

ask to be submitted for the record but, Mr. Chairman, you and others have hit the highlights of what I have to say regarding the intent of HMDA, the concern about racial discrimination, and the 

evolution, if you will, of some of HMDA, so I will just make a couple of points that were brought up in the questions. 

In your opening statement, you talked about the importance of 

eliminating racial discrimination. What I heard from so many of 

the members was the degree of frustration that we are finding because of the persistence that we find in the studies. It is a concern 

that we share. 

Congressman Watt, in your testimony or your discussion, you 

identified the laws, such as the Fair Housing Act, that really are 

the core of fair lending, and I would remind the committee that 

those laws have been on the books in some cases for 40 years, and 

in some cases for 30 years. We have been asking banks to be in 

compliance with those laws for all those periods of time. 

When the HMDA information was first disclosed, and Congressman Frank pointed out, initially it was by an amendment to allow 

for that information to be made public. If we would have had the 

discussion 15 years ago, not quite 15, 13 years ago after the first 

reports had come out, I suspect that your concern would have been 

about the approval-denial ratio because that was our understanding of the racial component in lending a number of years ago. 

The dynamic changes that have taken place in the mortgage 

market over that period of time have shifted our concern. We still 

are concerned about approval-denial. But to a greater extent, we 

are focused on the difference in pricing and to the extent that those 

difference in prices are, in fact, race-based, and that is, of course, 

disparate treatment and is the violation of fair lending standards. 

We continue to examine institutions for that purpose. 

Now we are in the process of also holding hearings around the 

country on the HOEPA legislation which is also focusing in a significant way on the changes that we are seeing in the marketplace. 

Several of you have alluded to the fact that in the marketplace 

there is a tremendous amount of marketing activity and a certain 

amount, perhaps, of steering activity that is going on and the great 

concern is that equally situated borrowers are not receiving equal 

treatment, which is the essence of fair lending. 

When we, as the Federal Reserve, look at the HMDA data, that 

is not our first look at the lending activity of these institutions. We 

examine all of these institutions on a routine basis. In some of 

those institutions, we are physically in the institution continuously, 

and have an opportunity to continuously evaluate their compliance 

with fair lending laws. 

Let me move forward to 2004. It was an initiation of the Federal 

Reserve that we asked for pricing data, that is the pricing data to 

be publicly released because the pricing data is the point now 

where we are most likely to find the opportunities for disparate 

treatment. But that is not the first look that we, the Federal Reserve or the other regulators, have had with respect to that issue. 

14

We have been aware of that shift in the marketplace or that growing change in the marketplace. As Congressman McHenry suggested, the subprime markets has grown rapidly over the last number of years, and the good part of that is there is enormous societal 

value in providing additional mortgage activity to a wider range of 

borrowers. The downside of that is that there are more opportunities for mischief. 

So when we go in and look at an institution and we have been 

examining for those factors for many years, we start by looking at 

the extent to which their policies and procedures and their risk 

management tools examine for possible disparate treatment or fair 

lending compliance. We then look at, for example, the manner in 

which they monitor those who are buying loans on behalf of the institution from brokers, the extent to which they are evaluating 

these brokers, we look at the extent to which individual borrowers 

with individual characteristics are given the same treatment. 

We have had a chance to look at the initial HMDA data in the 

aggregate, and we are in the process of now looking at it on an institution-by-institution basis. 

Of the 200 institutions, as we have pointed out, that were identified where there was some statistical disparity, somewhere between 30 and 40, perhaps 35 of them are Federal Reserve regulated institutions. In each of those instances, we have initiated discussions, and in some cases, have been deep into looking at and 

evaluating the extent to which that additional information gives us 

a different prism to look at the manner in which they are in compliance. 

Mr. Chairman, we support the efforts of this committee, we support certainly the efforts of Congress to address this important subject, and I would be happy to answer any questions. 

[The prepared statement of Governor Olson can be found on page 

66 of the appendix.] 

Chairman BACHUS. Governor Olson, I very much appreciate your 

testimony. I thought it was very to the point and valuable to our 

committee as we explore this. 

Let me ask you this, the Congress is presently considering the 

Voting Rights Act. The 15th amendment was passed in 1870, giving all of our citizens the right to vote, at least all except women, 

who obtained that right later. But it wasn’t until the Voting Rights 

Act that really most of our citizens, they had the constitutional 

right to vote, many of them were denied that right, many votes 

weren’t counted until we had a Voting Rights Act some hundred 

years later. 

We have all sorts of laws on the books which prohibit racial discrimination in lending practices, and yet, in your knowledge at 

least, there is an appearance that discrimination may go on. Is 

there something else we need? I mean, do we need further legislation; do we need to gather more data? 

I said in my opening statement that at least with high cost loans, 

since 2002, when the Federal Reserve started, I think it was gathered in 2004 under HMDA the lenders had to first disclose. But are 

there other things that we—do we need to gather other information, do we need to gather what the borrowers’ asset level was and 

their credit scores, the loan-to-bank ratio of the property, the borVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
15

rowers’ debt to income ratio or the level of documentation submitted. Is there something else we need to do, or the Federal Reserve needs to do? 

Mr. OLSON. Let me separate the issue, because there are two 

components to it. 

The pricing data is not difficult for the regulators to get at the 

pricing data, because we go in and examine an institution’s entire 

portfolio, and examiners, all of the bank examiners from all agencies and all of the examiners of mortgage lenders, have had the 

ability to look at that data and examine that data very carefully. 

We have always had that ability. Only recently, though, has that 

been included, as you pointed out, in the public release of HMDA 

data. 

Now that helps identify another issue that perhaps—but not 

fully—HMDA data alone does not give you a complete picture of 

the extent to which there might be discrimination in the lending 

process. 

Incrementally, if you were to add to that, it probably would not 

also lead you to that final fundamental determination of discrimination because discrimination now is usually not overt, to the extent that it exists and it clearly does still exist, it is very subtle. 

So you have to look very carefully at all the data that you have 

available. 

Also across institutions it is very difficult to make comparisons. 

For example, if you were to add a credit score, different organizations use different kinds of scores and, increasingly, especially the 

largest institutions are now building their own scoring models. So 

if you were to compare across institutions, it is very difficult to 

make that determination. 

I would say, however, that we are in the process now in the hearings that are going on, the HOEPA hearings—we have had two. We 

have two more scheduled, one at the end of this week, and one 

later on. We are discovering a great deal more about the changing 

marketplace. Incidentally, the second panel that you have coming 

on next, many of those people have been part of the hearings that 

we have had. They have provided excellent additional information 

as to the changes that have taken places. 

My suggestion would be, respectfully, that before Congress would 

consider additional legislation, we understand fully the extent to 

which we know the changes that are taking place in the market 

and how best to address them. 

Chairman BACHUS. Thank you. 

Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. Thank you, Mr. Olson. 

Chairman BACHUS. Actually—I’m sorry. It should be Mr. Frank. 

I apologize. 

Mr. FRANK. I thank the gentleman, because we do have the HUD 

Transportation Appropriations, so I am going to have to leave. 

Mr. Olson, you say we should not legislate until we get all that 

done. When do you expect we will have it? 

Mr. OLSON. Well, there are no destinations, there are only journeys. 

Mr. FRANK. Then that is the problem. 

16

Mr. OLSON. Our hearings will be complete by July. We will have 

a chance to look at this initial round of disclosures. This will be ongoing. 

Mr. FRANK. But if it is ongoing—excuse me. No, I’m sorry—do 

not legislate until we have the information. But if there is no destination, it is ongoing, and we will never get there. You heard this 

from my colleagues. There is a crisis here. We do very well in a 

lot of areas, but there is a crisis. You have significant numbers of 

Americans who think they are getting frozen out of the system. So 

we cannot wait that long. 

I will be honest with you. I do not see, on the part of the financial services industry or the regulators, the kind of urgency that 

many of us think that this situation requires. If the HMDA data 

alone isn’t enough, then tell me what we need to do to expand the 

data and collect it and analyze it. The Federal Reserve is very good 

at all kinds of very sophisticated analysis. Too much of this testimony is, we do not have enough, we need more. This is an urgent 

issue. We can have— 

Go ahead. 

Mr. OLSON. No, go ahead. 

Mr. FRANK. I do have to address—several of us talked about it. 

I was struck by it. I know Ms. Lee mentioned it. On page 9, you 

say, ‘‘Black and Hispanic borrowers are more likely to obtain mortgage loans from institutions that tend to specialize in subprime 

lending. Now, at least part of this segmentation by race and ethnicity may reflect objective differences in borrowers’ preferences.’’ 

Would you tell me what it is of the psyche of Black and Hispanic 

people that they would prefer to go to a subprime lender rather 

than someone else? I know you say there are other factors, but 

what are the factors? 

Mr. OLSON. I suspect it reflects what we see in the marketplace 

now, which is push marketing. 

Mr. FRANK. Excuse me. You do talk about—you say steering, etc. 

There are other factors. You did not say this is the only factor; I 

acknowledge that. But you said part of it is that the Blacks and 

Hispanics prefer to go to subprime lenders. Do you really want to 

stick with that? I mean, you did say it may go from being steered 

and there are different levels of literacy, but you said a preference 

for subprime lenders. What kind of people would prefer a subprime 

lender to a prime lender? 

Mr. OLSON. It may not have been as artfully worded as it might 

have been, but the point that we are making is what we do see is 

that there do seem to be a larger number of African Americans in 

that community going to the subprime lenders. 

Mr. FRANK. I understand that. That is not the problem. Do not 

blame the victim. That is exactly the problem. I know, let’s go to 

the subprime lender. To impute that as a preference to the victims, 

frankly, makes people—the insensitivity sign goes up. Please, do 

not say that again. 

Mr. OLSON. If I were wearing my sociological hat, I probably 

would have worded it differently. I apologize. But what we are 

doing is we are reflecting and describing the preferences that are 

demonstrated not simply because they like them better but the 

preferences that are demonstrated by the number of applications. 

17

Mr. FRANK. But there are many reasons why, if you are an African American, you would wind up there. Why dig up their own 

preferences? 

Mr. OLSON. That is a better way to say it. 

Mr. FRANK. But, to be honest, that is what makes people nervous. This is victim blaming and stereotyping, to be honest. I know 

you do not believe this, but the fact that this gets into the testimony—you know, you guys are pretty good at vetting over there. 

When this slips through, that is what makes us nervous. 

Let me say finally this—yes, help us with the data, but I do want 

to say to yourself and to all the other regulators, we have data that 

shows significant disparities. We have the Feds saying that while 

there are non-subjectively racist reasons for many—not most—of 

the disparities, there is some prima facie reason to believe that 

there is racism. 

We live in America, where racism has been the curse of this 

country, and while we are making progress we have not totally 

eradicated it. If at the end of the analysis of this factual data which 

shows a substantial disparity nobody is penalized for engaging in 

racially discriminatory behavior, then the loss of confidence on the 

part of many of us is going to be overpowering. 

Mr. OLSON. Congressman, we did not expand the data collection 

to pricing data to cover up the issue or to any way diminish the 

issue. We expanded the collection of data and the public distribution, or the public release of that information in order to shed 

greater light because we agree with you. 

Now we knew that that would invite analysis, and we knew that 

it would perhaps invite criticism. Now even your discussion that 

you just gave, you were giving the data in the aggregate. You did 

not go—as did our initial report, which discussed the differences 

when you get down to an institution-by-institution basis which significantly eliminates or accounts— 

Mr. FRANK. I appreciate that, and I acknowledge that many of 

the disparities can be explained in other ways. But by the Federal 

Reserve’s own analysis of a number of institutions, it is hard to 

think of an explanation other than race. And I am saying this: If 

after we get this, in the end of the process, nobody found anybody 

guilty of anything, I am going to be very skeptical. 

Mr. OLSON. So will I, frankly. And I think as we have a number 

of groups, we have a number of interested parties all looking at the 

same data. We have the lenders. We have the regulators. We have 

a number of community groups. Independently, we have some law 

enforcement agencies. I would agree with your conclusion. 

Mr. FRANK. Thank you. 

Thank you for the courtesy, Mr. Chairman. 

Chairman BACHUS. Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. I certainly appreciate 

it. 

To the ranking Democrat’s question, who would have a preference for a subprime loan in the marketplace, there are no-doc 

loans—no-documentation loans that you can get quickly. And being 

involved in real estate investment, it is a good tool to have so you 

can close quickly on a property and not have to get a stack of paperwork to get the loan. Now you will be charged a higher rate and 

18

additional fees to get it, but it is a wonderful thing to access that 

capital so you can purchase a property for investment purpose, and 

that is something that I have seen utilized a number of times. 

But, thank you, Mr. Olson, for being here today. You said in your 

testimony that certainly the HMDA data, as it is presented, the 

HMDA data tells a great deal about lending patterns, but they do 

not tell the entire story. What would you have say could be the rest 

of the story? 

Mr. OLSON. Well, there are a number of factors. The HMDA 

data—the publicly released HMDA data tells part of the story. If 

you are looking at all of the factors that go into the mortgage decision, either the approval or the pricing, you take into consideration 

a number of factors. 

You just hit on a major one, which is the choice of products. 

There is a wider range on the choice of products depending whether somebody wants a low-doc or a no-doc or, for example, if the 

product is what we have always called a conforming product, which 

I am sure you are aware of which is a Fannie Mae- and Freddie 

Mac-approved product. Each of those contain different levels of documentation, different levels of cost, and, therefore, there are different levels of pricing involved. Also, the credit risks or the loanto-value ratio of an institution. Those are some of the notable characteristics impacting pricing. 

However, the people who are involved in fair lending or in the 

fair lending area tell me you need to look at roughly 30 different 

data points in order to really determine if there is, in fact, a disparity in treatment among borrowers. 

Mr. MCHENRY. How many data points have you collected in this 

HMDA data? 

Mr. OLSON. I think eight or nine. It is a relatively small number, 

and they are not necessarily the key ones. But the key ones are 

very sensitive—there are some privacy implications for having any 

of those data released to the public. 

Mr. MCHENRY. But perhaps you have 25 percent of the data, 

maybe, for us to get a fair read on. 

Mr. OLSON. Yes, but that is done on a weighted basis. But, yes, 

roughly. 

Mr. MCHENRY. So it would be perhaps unfair for us to jump to 

conclusions or to draw significant conclusions from the HMDA 

data? 

Mr. OLSON. HMDA data are very valuable, but, as we have stated, they are not definitive. 

Mr. MCHENRY. So what would be one of the definitive ways to 

determine whether there is discrimination? Would it be the credit 

risk associated in matching that with sex, age, or race? 

Mr. OLSON. As you look at an institution—as you look at an institution and within that institution, if you look within the institution either at the various channels or at the product mix, the question would be are equally situated borrowers treated equally? What 

we have described and some of what we have done, even with 

HMDA data, is to develop a systematic method of comparing borrowers called matched pair analysis. They might take an African 

American borrower, for example, vis-a-vis a White borrower or an 

Hispanic borrower versus a White borrower and find borrowers 

19

with identical characteristics and then determine the extent to 

which they are treated similarly. 

You need to get down to that sort of a fine comparative evaluation before you can make a determination as to whether or not 

there is disparate treatment. 

Mr. MCHENRY. As policymakers on this committee, what conclusions can we draw from the HMDA data as presented? 

Mr. OLSON. It is fair to draw a conclusion that there are differences among the treatment of minority borrowers and White 

borrowers that need explanation and that we ought to continually 

look at trying to determine why those differences exist. 

Mr. MCHENRY. Thank you. 

Chairman BACHUS. Thank you, Mr. McHenry. 

Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. Olson, let me start by thanking you for some stuff. We do 

not want to kill the messenger, and I think it is significant and 

something that the Federal Reserve is to be commended for, that 

you have expanded the information from just an approve-deny decision to pricing data, analysis, collecting information that allows us 

to analyze pricing data, not just a decision about whether somebody gets a loan or does not get a loan. Because if there is disparity 

in treatment, if there is discrimination—and I distinguish between 

those two—it is getting more sophisticated. We know that. 

I applaud the distribution of the HMDA data privately to the 

other regulators so that they can get right to work on doing what 

their authority gives them the right to do as regulators. 

So nothing we say here should ignore those two applauses that 

I am giving you. You say there are 30 data points or somewhere 

in that range for determining disparate treatment. I do not think 

you mean that disparate treatment, you have already found anything. There may be 30 data points for determining whether it is 

discrimination or whether there is discrimination, but I think we 

already have the gross information about disparate treatment. Am 

I wrong about that? I do not want to get into a semantic session 

here. 

Mr. OLSON. You are on a very important point. And I think that 

in the evolution of our understanding of what constitutes discrimination. Early on in the process thought of discrimination as being 

overt discrimination. We lend to Whites. We do not lend to Blacks. 

That was what discrimination was described as years ago. I think 

over the course of a number of years, we have learned that discrimination can also include either disparate impact or disparate 

treatment— 

Mr. WATT. Disparate impact. 

Mr. OLSON. —and the differences are significant. Because disparate impact and disparate treatment, especially disparate treatment, takes into consideration a whole wide range of factors, and 

you cannot have evaluated the entire impact—the entire universe 

without looking at that impact. 

Mr. WATT. But let me be clear, Mr. Olson—and I hope I am trying to be fair and clear here—that race is not one of those 30 data 

points. 

20

Mr. OLSON. It absolutely is. Especially if you are using regression, for example, you control for all of the factors and you determine what is left that is unexplainable, and if race is one of the 

factors that is unexplainable, then you have a real problem. So indeed it is, if you are looking at it, because in the context that we 

were talking about of disparate treatment— 

Mr. WATT. Maybe I should ask the question in a slightly different 

way. Surely race—if race is the only data point standing at the end 

of the day, you have eliminated all of the other data points as explanations, then we have a problem. 

Mr. OLSON. Exactly. And where institutions have historically run 

into difficulty in the past— 

Mr. WATT. I am going to run out of time here. 

Mr. OLSON. I will not take your time. I would be happy to come 

back, if you would like, and we can talk about this. 

Mr. WATT. I want to go beyond the HMDA data, which you said 

touches on eight or nine of those data points, and ask you if you 

have had an opportunity to review the report of the Center for Responsible Lending? Have you had that opportunity? 

Mr. OLSON. I have looked at it briefly, yes. 

Mr. WATT. How many more of those 30 data points did they pick 

up in their analysis? 

Mr. OLSON. That I don’t remember right off the top of my head. 

Mr. WATT. But significantly more, wouldn’t you say, than the 

eight or nine that the Federal Reserve picked up, isn’t that right? 

Mr. OLSON. Not that the Federal Reserve picked up, that is released in the HMDA data. 

Mr. WATT. In the HMDA data that the Federal Reserve released, 

right. 

Mr. OLSON. I believe you are correct. 

Mr. WATT. So if there are up to 20 out of those 29 maybe and 

race—they factored out, for a certain population, credit scores and 

geographic factors and other factors that are data points, and race 

still is standing as a significant factor, or appears to be, I take it 

that is troubling to you. 

Mr. OLSON. Congressman, I believe that I am correct and—I am 

not sure I am correct—they looked at aggregate data. 

Mr. WATT. No, as I understand what they did was they took the 

actual data based on actual loans and got down to that level and 

analyzed those loans, that you analyzed on an aggregate basis, on 

a specific basis and still found that race was a factor. 

Mr. OLSON. You hit on the real key fact. You need to look at it 

on an institution-by-institution basis. In the initial look that we 

did, even of the HMDA data, when you look at it on an institutionby-institution basis, that explains a lot of that differential but not 

all of it. There still is a persistent difference that remains. But as 

we look at institutions, as we go in and examine those institutions, 

we can examine them very carefully on all of those bases. 

Mr. WATT. And you are going to do that under the 30 to 40 that 

is under the Fed’s jurisdiction? 

Mr. OLSON. We will continue to do it. 

Mr. WATT. Okay, and other regulators will do it, you hope? 

Mr. OLSON. They do, trust me. They do the examinations as well. 

Mr. WATT. Thank you, Mr. Chairman. 

21

Chairman BACHUS. Thank you, Mr. Watt. 

At this time, we are going to recess. There are votes on the Floor. 

Governor Olson, there are other members who do want the opportunity to ask you questions. 

Mr. OLSON. Then I will stay. 

Chairman BACHUS. We appreciate it. I commend you for your 

testimony thus far. 

The hearing is recessed subject to votes on the Floor of the 

House. At the end of the last vote in this series, we will reconvene 

here. 

[Recess] 

Chairman BACHUS. The Subcommittee on Financial Institutions 

and Consumer Credit will come to order. 

At this time, Governor Olson, we are going to allow additional 

time for members to ask questions. At this time, I will recognize 

Mr. Pearce for any questions he may have. 

Mr. PEARCE. Thank you, Mr. Chairman, and thank you, Mr. 

Olson. 

I was a little surprised to see you walk away from your comments that some borrowers might prefer. We find examples of that 

every day. My mom bought a higher-priced car for her whole life. 

She chose a higher price because she was more comfortable at the 

dealership. People choose higher-priced TV’s. 

The truth is that many lenders, many subprime lenders hire people who will talk the language, that will make them feel more comfortable, compared to going in a bank and seeing the rigors there. 

So I think you had it adequately stated, and I saw you lose your 

nerve. I do not really need a comment. I am just making an observation that I think, in truth, there are times when people have 

preferences even to the point of damage. People willingly purchase 

narcotics knowing that it is not the best thing for them. So I think 

there is an element of personal responsibility. I do not say that 

there are not problems and even deep problems. 

How long have you been with the Federal Reserve, Mr. Olson? 

Mr. OLSON. I have been a Governor for four-and-a-half years. 

Mr. PEARCE. Four-and-a-half years. And how long have you been 

with the Reserve overall? 

Mr. OLSON. That is my entire experience with the Fed. I have 

been in banking and the banking consulting business for 35 years. 

Mr. PEARCE. Where I am headed is I see that on page 7 you conclude that the HMDA data lacks information and that you cannot 

use that to observe racial or ethic differences in the price of loans 

as being the result of unlawful discrimination. If you cannot determine that from HMDA loans, have you submitted a request for the 

measurement parameters that would allow you to ascertain that? 

Just, yes, you have submitted the request or, no, you have not. 

Mr. OLSON. The distinction—the point we are making is that you 

do not make that determination based on the information that is— 

Mr. PEARCE. I understand that. Have you asked for the full and 

complete information that will allow you to get to the point that 

we have been discussing? 

Mr. OLSON. We get the full and complete information when we 

go into the institution. 

22

Mr. PEARCE. Your statement says HMDA does not allow you to 

arrive at the conclusion of whether or not it is unlawful discrimination. Is that not the statement on page 7? 

Mr. OLSON. That is the statement. 

Mr. PEARCE. Is that how you then asked for enough additional 

data that would allow you to ascertain that? 

Mr. OLSON. I am trying to answer the question. The answer is 

we have all the access we need to that information, but it is not 

information that is in the public domain. HMDA data gives us one 

prism with which we look at that organization, but on a constant 

basis, on a consistent regular basis, we go into an institution; we 

look at their entire loan portfolio. 

Mr. PEARCE. So the fact that it is not made available to the public domain does not stop you from regulating it, does it? 

Mr. OLSON. That is correct. 

Mr. PEARCE. How many instances of enforcement have you had 

in the last four-and-a-half years that you know of where you have 

actually gone in and given somebody a whack for discriminating racially? 

Mr. OLSON. In terms of the referrals to the Justice Department, 

we have had 35 over the last decade. Now how many of those have 

been in the last four-and-a-half years I could not tell you. 

Mr. PEARCE. Thirty-five in the last decade of approximately how 

many investigations? How many banks have you looked at in 10 

years? 

Mr. OLSON. Nine hundred banks that we regulate, so that we 

would have reason to examine on a frequent basis. 

Mr. PEARCE. Now then when I listen to your testimony, not your 

written testimony but your spoken testimony, I hear that you share 

the concerns that we share, that there are laws on the books for 

30 years, that the HMDA was an amendment that Mr. Meeks described, additional thousands paid by minorities. Yet if the solution 

is within your reach, if you have all the data you need to determine 

if people are discriminating and steering towards, I just do not understand why that—your presentation—your verbal presentation 

gave the appearance that you are kind of in concert with us, that 

you agreed with us but you are unable to do anything about it. But 

yet I feel through your discussion you have the capability to do 

something about it, and it is confusing. 

I will let you answer that. I see my time has expired. 

It is disorienting to hear you agreeing with all the testimony, 

which is fine, but then the role of the governors is regulatory and 

you have the capability to do something, but that is not in the tone 

and tenor that came across in your verbal presentation. 

Thank you, Mr. Chairman. 

Mr. OLSON. Then let me try once more. 

Of the roughly 9,000 institutions that provide HMDA data—

9,000 institutions have provided HMDA data after we have started 

asking for public disclosure of the pricing data. Of those 9,000, in 

roughly 200 we found statistical disparity, and this statistical disparity could be in one of two forms, either in the numbers of borrowers—the relative numbers of borrowers who have received high 

price loans or in the interest disparity on the APR. So that is 200 

out of 9,000. 

23

Of those 200, somewhere between 30 and 40 are institutions that 

we regulate. And of those 30 to 40, some of them may be multiple 

HMDA providers within the same organizations. Those are institutions that we have examined for many, many years for fair lending, 

and that we have required to disclose to us how they manage their 

fair lending responsibilities. 

Now in addition to all of the examination procedures that we 

have done in the past, we then look at them again in light of the 

new HMDA data. 

Now what I have not said yet but is important to say is that, of 

those 200, probably 100 of them, probably half of them, are mortgage lenders that are outside of the banking industry in terms of 

the regulatory oversight. They are national bank or bank holding 

companies or bank subsidiaries. And I suspect that a good deal of 

the instances of questionable behavior that we find are in those institutions because they do not receive regulation with the same 

rigor as do the banks or the bank subsidiaries. 

Chairman BACHUS. Thank you, Mr. Pearce. 

Mr. Meeks, do you have questions? 

Mr. MEEKS. Thank you, Mr. Chairman. 

Mr. Olson, let me first thank you for your testimony. 

Let me make sure that I am clear, also, because I think it is important. I agree with you that maybe 20 years ago or less than that 

we were concerned, very definitely, about approval or denial, but 

I do not believe that we intended that to mean that individuals can 

be approved but get ripped off. At the same token, I want to be 

clear that I am not against subprime lending. I am against predatory lending, and I see that as two different things. 

But what I am against is and what I think that I know some of 

the studies have shown, where both a minority individual and a 

nonminority can go to a subprime lender with the same credit 

scores. It shows that, basically everything else being equal, the 

nonminority would be given advice or direction or something of 

that nature to how they can get a cheaper rate. But the minority 

is just given the most expensive rate. That kind of disparity is 

what I am focused on and I think should not be happening. 

And the same goes whether you are a subprime lender or prime 

lender. If you have the same background, everything being equal, 

you should have the same rights, and if there is a practice to steer 

one to a better rate, then both should be steered to a better rate. 

Historically, because of what you talked about and because of the 

way the marketing is done, because Blacks for too long had been 

denied by prime banks and so, therefore, they got tired of being denied and denied and denied, and then there are advertisements 

that are projected to the minority community in particular saying 

that no credit, any credit, we always say yes, just come and get 

your mortgage, and individuals want to get a home because we 

have preached the value of home ownership and they want to be 

said yes to. And they are steered to the subprime lenders. 

Once they got to the subprime lender, the guy looks and says 

they have A–1 credit, then the ethics, I think, that Mr. Davis was 

talking about should dictate that they should say, look, you do not 

need this. You can qualify for a better loan than this, and you 

should go someplace else. 

24

We do not see that kind of policing, that kind of ethics, if you 

will, in the industry. 

So I guess I led up to my question. One of my questions is this. 

Because then I also understand, as a result—and I do not know, 

maybe we need to increase the assessment area—that in those 

areas that have been classified as a CRA assessment area, in those 

areas we have found a much smaller disparity in lending rates 

then in those areas that have not been. So is it possible—because 

I am also trying to find out some solutions here. Is it a possible 

solution somehow that if we expand those assessment areas we can 

begin to again do something affirmatively to start eliminating the 

disparity that we see in these rates? 

So that is my first question to you. 

Mr. OLSON. The CRA philosophy is essentially that an institution 

that collects deposits in a certain area is required to meet the financial needs of that community as well. So that in every bank we 

essentially we ask them to define their CRA area footprint. In 

other words, the areas where they have branches, the area where 

they are in the deposit-gathering process, and then have them assess the needs of that community and then meet the financial 

needs of that community consistent with their financial product offerings. 

Many of those institutions may have mortgage lending affiliates 

that have offices scattered throughout the country, and in those offices, they do not have the physical infrastructure, it is likely that 

in a lot of those institutions, the mortgage gathering process is 

done by mortgage brokers. 

So one of the questions that we raised rhetorically in our evaluation is perhaps it is the additional use of mortgage brokers that has 

resulted in product differences that carry with them higher rates, 

and that is one of the issues that we want to look at. As we examine the banks and the bank holding companies, including their subsidiaries, that we regulate, that is one of the questions we ask 

them, what standards that they have in place to either police brokers or to provide the borrowers with a range of products that best 

fit their credit profile. So that is one of the criteria that we use. 

Mr. MEEKS. I will just ask this real quickly, Mr. Chairman, because I go back and forth in my own mind. 

One of the debates that we have here to combat steering and others is whether or not it would be better to have individual States 

address this behavior—we have strong anti-predatory lending statutes in New York, as opposed to having a national anti-predatory 

lending law—and whether or not that would help prevent this kind 

of steering. I just wondered whether you had an opinion on that. 

Mr. OLSON. Congressman, we have not taken a position on that. 

As I indicated earlier, we are in the process right now of going 

around the country and having hearings, what we call the HOEPA 

hearings. More broadly, we are looking at the changes that are taking place in the mortgage industry and in the mortgage market, 

and to the extent that there would be a legislative initiative that 

came from that, we would then look at it at that time. At the moment, we do not have a position on that bill. 

Mr. MEEKS. Thank you. 

Chairman BACHUS. Thank you, Mr. Meeks. 

25

Mr. Baker. 

Mr. BAKER. Thank you, Mr. Chairman. I appreciate your leadership on this issue and your bringing this matter to the attention 

of the committee. 

I have several questions that I just want to try to get into the 

record, perhaps a slightly different understanding of the purpose 

and complexity of HMDA data. 

Mr. Olson, my understanding is that HMDA data is a very broad 

brush regulatory tool that can open a window for the regulator to 

make further examination. But upon looking at the elements that 

are reported, I understand the data does not include, for example, 

the borrower’s individual credit score, so that it would be difficult 

to know from HMDA data whether the person was a 550 or 750. 

I understand that HMDA data would not disclose, for example, at 

the time of closure whether it was a 100 percent loan or an 80 percent conforming loan. My opinion is there is a relevance between 

whether a person has significant equity in a home or whether they 

do not and the likelihood of not making their financial obligations. 

It does not disclose, for example, whether there is cash-out at 

closing which falls into the range of those mystery objects, 125 percent of home equity loans. I am still trying to understand how we 

allow that to happen. 

It does not disclose, for example, the borrower’s debt-to-income 

ratio. So if the person were making $50,000 a year and had 

$200,000 in obligations in addition to a prospective $100,000 mortgage obligation, that might color the lending institutions about risk 

and rates. 

It does not include, for example, the loan-to-value ratio. It does 

not include a consideration of the individual’s other assets owned. 

For example, if they were invested in the markets, they had a relatively modest job but had $2- or $300,000 in a bank account somewhere, that might incent that lender to give a lower credit cost to 

the borrower because of a low-risk likelihood demonstrated by that 

person’s past savings history. 

It does not include an analysis of the person’s employment 

record. They could be 20 years of age, right out of college, and employed 6 months. There is a high degree of risk associated with 

that person’s earning capacity. 

It does not include an analysis of the person’s academic record, 

which in many cases leads to a determination of a person’s future 

earnings capacity and stability of holding a job. 

It does not include, for example, the variances in the lending institution’s cost of funds, or a smaller institution in a rural market 

as competitive with a larger institution in an urban market might 

be at a market disadvantage in the cost of its own funding which 

then goes through to the ultimate borrower. 

It does not include consideration that the three credit rating 

agencies, which all have their own proprietary method of rating 

me, for example, would be extraordinarily unlikely, almost impossible, for me to call the three rating agencies today and get all 

three of them to give me the same identical numerical score. I cannot believe all three national credit rating agencies are doing racial 

profiling. I think it has something to do with the proprietary methVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
26

odology with which they put in the financial indicators for that particular borrower. 

Also, it does not take into consideration that if I go to lending 

institution ‘‘A’’ with the same credit score and the same profile and 

go to credit extender ‘‘B’’, that there might be two variant screens 

through which my credit application flows; and the same person 

going to two institutions will get a different credible evidence rating risk assessment with the same person—not similar, the same 

person. That is called competition. That is why when you go out 

and you are looking for a home loan you very rarely find 20 people 

all willing to extend the same credit on the same terms on the 

same day. There is variance because all of them have slightly different proprietary methodologies on how they come to these conclusions. 

The reason why I bring these points up, it would appear to me 

to allege that there is racial profiling in the issuance of credit on 

the provision that HMDA data is the Bible and clear-cut philosophic statement on market activity, well, it seems to be a reach. 

I would hope that if a regulator, based on their discovery of the 

facts at a relevant institution, would find clear, convincing evidence 

that the same person who came in with the same score was treated 

differently from any other person with the same set of facts at the 

same institution for the same type of borrowing, we would find 

those people being treated equitably. And if they were not, wouldn’t 

that be the regulator’s responsibility to make further examination, 

call those executives in and say, let’s get our business straight? Or 

am I wrong? 

Mr. OLSON. I would go one step further. What you have described 

is a referral to the Justice Department. If you went through that 

entire analysis and found a pattern of discrimination, that is not 

what constitutes a referral to Justice. You said it exactly right. It 

is on an institution-by-institution basis. Because there are different 

risks. There are different risk appetites. There is a wider range of 

products. There is a wider range. 

Mr. BAKER. I could apply at 10 o’clock in the morning, go back 

to the same institution at 2 o’clock and say, I’ve changed my mind; 

what’s your rate now? 

Mr. OLSON. The rate could have changed. 

Mr. BAKER. And nothing has changed about me. It is all changed 

about the institution because their cost to funds is different. 

So all of the variances that people make reference to need to be 

backed up by specific case representations that Mr. Jones went in 

and had the exact same profile as Mr. Smith. Mr. Jones was denied, and that becomes an actionable case by the Department of 

Justice. 

Mr. OLSON. That is correct. 

Mr. BAKER. Thank you, very much. 

Chairman BACHUS. Thank you, Mr. Baker. 

Ms. Waters. 

Ms. WATERS. Thank you very much, Mr. Chairman, for not only 

holding this hearing and working with Mr. Watt and others to hold 

it, but thank you for redirecting me to the hearing when I was 

headed in another direction; I appreciate that. 

27

I have been trying to learn more about the role of brokers and 

loan officers, and the initiation of loan packages by people who are 

associated either with financial institutions or with other brokers, 

etc. Would you explain to me—and perhaps I should know this—

what kind of latitude does an institution have in paying those who 

initiate loans for them—the yield spread, the difference in what the 

institution requests and the interest rates charged to the homebuyer, or other kind of pricing and what the broker can ask for—

how does this impact the consumer? 

Mr. OLSON. The yield spread premium I think is what you are 

referring to. 

Ms. WATERS. Yes, that is what it is. 

Mr. OLSON. As far as I know, there are no legal parameters 

around what a yield spread premium would require, but there are 

disclosure requirements for the yield spread premium. In the regulated financial institutions, we require the lenders to purchase brokered mortgage products, to have parameters around what the 

yield spread premiums can be and what would be acceptable yield 

spread premiums. In the less regulated environment, I should say 

that same discipline may or may not happen. 

Ms. WATERS. I need a little bit more explanation. You said that 

it is disclosed. 

Mr. OLSON. Yes. 

Ms. WATERS. And what have you learned about—that is okay, go 

ahead. 

Mr. OLSON. This is a very important question. 

Ms. WATERS. Yes. 

Mr. OLSON. It is disclosed on the HUD one, HUD disclosure 

statement; there is some controversy about how consistently or how 

well it is disclosed. 

Ms. WATERS. What do you know about it? Based on the disclosure or lack thereof, what can you tell us about how this is impacting the consumer? What percentage of the subprime mortgages 

have yield spread premiums? How much are they? What is the average rate? How does that add to the mortgage costs? What is it 

all about? And can one of these persons, who may or may not be 

trained or—I don’t know what this relationship is. I see people on 

the street offering mortgages, and telling people all kind of things 

and trying to get them into all kinds of risky mortgages. What do 

you know about this? 

Mr. OLSON. Congresswoman, let us get back to—I do not have at 

my disposal today a significant amount of informational analysis of 

the yield spread premium or the impact it has on the market, but 

we do have that information, and I would be happy to come back 

and provide that for you. Or, Mr. Chairman, I would be very happy 

to submit that for the record as well. 

Chairman BACHUS. Thank you. Without objection. 

Ms. WATERS. Yes, I suppose so. 

But, Mr. Chairman, I would like for this issue to be the focus of 

our work as we look at the issue of predatory lending because I am 

finding that this yield spread premium is much larger than most 

of us understand. We need to know who gets to initiate these loans, 

not only much how much the spread is. I want to know what the 

various institutions are doing and how this works. So I would apVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
28

preciate him not just getting back to me but getting back to you 

and this committee. 

Chairman BACHUS. Congresswoman Waters, as you know, in 

your discussions on predatory lending or subprime lending bill, we 

have discussed the yield spread premium, and it is part of our discussions going forward. 

Ms. WATERS. Do you have any data that has been collected on 

it? 

Chairman BACHUS. We do have data as to what different States 

and the Federal Government—the parameters they have set on 

yield spread premium and what different States—the approaches 

they have taken. 

We probably are going to meet this Thursday, and I have been 

meeting with Mr. Frank, Mr. Watt, and I think your staff and others in these ongoing discussions. I think this is very important, 

about your line of questioning, that we do get some uniform bill to 

regulate subprime lending in this country of nonfederally regulated 

institutions. 

Ms. WATERS. I appreciate it. I would like to see the information, 

and they should have it. Because if we have financial institutions 

who have a 6.5 interest rate and we have someone out there initiating a loan at 8 points or 7 points, I want to know how it all 

works, and is passed on to the consumer. 

Chairman BACHUS. We have Secretary Jackson from HUD. We 

have had discussions with him. We have information from the Federal Reserve. We have a lot of HMDA data, and, in looking at the 

cost of these loans, of subprime loans, the yield spread premium is 

something that we have focused on. 

Ms. WATERS. We have to do something about it. 

Thank you. 

Mr. OLSON. Congresswoman, we are involved in some hearings 

around the country at the moment. We will be in California on Friday, as a matter of fact. And during these the whole issue of the 

role of brokers has been an important part of those discussions, 

and the yield spread premium is a component of the broker relationship with the borrower. That has come up. I am disappointed, 

also, that I am not better informed about that and cannot add more 

to it. 

Chairman BACHUS. Actually, you have informed us about the 

hearings on financial literacy and steering. 

Mr. WATT. Mr. Chairman, I would like to make it clear that Ms. 

Waters was not walking out on you. She has a bill on the Floor, 

and I think she got focused on that. 

Mr. OLSON. I promise you, I spent five-and-a-half years working 

for Members of the House and Senate, so I know the multiple types 

of responsibilities that you all have to balance. 

Chairman BACHUS. I will say the Federal Reserve, as my understanding is, you all have been having hearings on the segmentation 

about race and ethnicity of the housing market— 

Mr. OLSON. That is correct. 

Chairman BACHUS. —and will continue to have those. 

Mr. OLSON. That is correct. 

Chairman BACHUS. At this time, in the order—the order of witnesses by seniority, which is what the minority side has asked me 

29

to go by, Mr. Ford, Mr. Green, Mr. Clay, Ms. Lee, unanimously consent that you be allowed to have questions, because you are a 

member of the full committee and are one of the members who requested this specific hearing. So I would ask without objection that 

she also be allowed to ask questions. 

Unless there is some direction as far as seniority, I will take my 

direction. 

Mr. Clay. 

Mr. CLAY. Thank you, and thank my colleague for yielding. 

Mr. Olson, let me ask you about your comment on your testimony on page 9 where you say, ‘‘Yet the segmentation may have 

more troubling causes, at least in part. Segmentation may steer 

borrowers to lenders that charge higher prices.’’ 

Who does the steering? Which part of the industry does the 

steering? 

Mr. OLSON. We have heard the range of responses to that question. I will tell you that some of the people who have addressed this 

issue in great detail are the people on the next panel. So that is 

an important question you ask, but let me give you some of what 

we have learned. 

Number one, what we have learned is that people do in fact go 

to brokers or to lenders with whom they are comfortable or with 

whom they have repeat experiences. They also go to lenders that 

their principal advisor for financial products directs them to. There 

is a wide variation among how people determine who their primary 

advisors are. 

There is also in the mortgage business among all segments of the 

business a great deal of marketing and we have uncovered—not 

uncovered but we are aware of what is called push marketing, 

where there is a very substantial—very aggressive marketing taking place, not all of which necessarily will lead a prospective borrower to the most advantageous product based on their needs and 

on their credit backgrounds. 

Mr. CLAY. I don’t want to cut you off, because I have a limited 

amount of time, but don’t you think if borrowers don’t know there 

is a better product out there that prevents them from getting— 

Mr. OLSON. Indeed it does. That educational component is maybe 

one of the most important elements that we need to deal with; 

there is a knowledge asymmetry that is critical and growing. 

Mr. CLAY. You also said that you are looking at 35 Federal Reserve regulated institutions that the 2004 HMDA data showed significant disparity based on race or ethnicity. How many of these institutions have outstanding CRA ratings, do you know? 

Mr. OLSON. I don’t have that information. 

Mr. CLAY. Would you get us some data on that? 

Mr. OLSON. With this caveat. We are very careful not to disclose 

the identity of an institution that we are examining, but I will try 

to correlate those two factors, the fair lending and CRA, to the best 

I can. 

Mr. CLAY. My final question. Despite the value of the HMDA 

data for elimination of lending discrimination, there is no enforcement of the mortgage lending industry, the nondepository institution. This is a failure of the regulatory system. Why doesn’t any 

other agency such as the FTC or the Justice Department aggresVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
30

sively pursue supervision and enforcement of the fair lending laws 

with nondepository institutions? Is this a protected group? If not, 

why no aggressive enforcement? 

Mr. OLSON. In our case, I say that, broadly, in the case of the 

financial institution regulator with prudential supervision, it is our 

role to go into those institutions on a regular basis, and in those 

institutions we are both examining for and expecting that they will 

have processes in place, and we will examine them for their compliance with the whole body of fair lending law. 

By contrast, Justice and FTC, for example, are enforcers, as opposed to supervisors. It is a completely different paradigm. They 

are not funded or staffed to evaluate in the way we are. It is a different philosophy, a different approach to law enforcement. 

Mr. CLAY. When you find practices of discrimination or something that is really overt, do you report them, too? 

Mr. OLSON. To either HUD or Justice. It is almost always Justice. 

Chairman BACHUS. Would the gentleman yield? 

Mr. CLAY. I yield. 

Chairman BACHUS. It is a referral? 

Mr. OLSON. To the Justice Department. We have the authority 

to refer to HUD. For reasons that I can’t tell you in great detail, 

they are almost always to Justice. Where we find evidence, significant evidence of discrimination that we would think perhaps is actionable, those are referrals to Justice. 

Chairman BACHUS. From your fair lending reviews. 

Mr. OLSON. That is right. There are enforcement actions that we 

can take independently, but where we see that level of evidence, 

it is a referral to Justice. 

Chairman BACHUS. Congresswoman Lee. 

Ms. LEE. Let me thank my colleagues for yielding and allowing 

me to ask my questions. 

Let me go back to my point I made in my opening statement, Mr. 

Olson, with regard to CRA ratings. Of course, Congress created the 

Community Investment Act to make sure that banks are vested in 

strengthening communities in which they served and which they 

were collecting fees and in which they were doing business. 

Now I can understand your response to Mr. Clay not wanting to 

give the exact names of the 35 institutions that you are reviewing 

at this point, but I also know it is a matter of public information, 

especially in California, that the top five, ten banks, their percentage of mortgage lending to African Americans and to Latinos 

amount to, from what I remember, between 1 and 3, 4 percent, yet 

these banks—again, it is public information—their CRA ratings 

were outstanding. 

Now I have been trying for years to reconcile this, and Mr. 

Greenspan had indicated it was difficult to reconcile because the 

CRA statute did not focus on lending to minorities. But I guess 

what I would want to ask you is how do you think we can strengthen the statute so that we can at least have that information so we 

know whether or not the CRA ratings are really warranted? Because, quite frankly, an outstanding rating under CRA and mortgage lending to African Americans at 1 percent, something is not 

in sync, and I would like to get your ideas on how we can fix that. 

31

Then, secondly, I would just like to ask you about the FICA scoring process, credit scoring. What do you think we can do to make 

that a bit more reasonable so that it works better for potential 

homeowners, regardless of their race or ethnicity? 

Mr. OLSON. When CRA was originally passed, there was a concern that financial institutions were taking deposits out of a community—and however you define community, could be a neighborhood—but out of an area but not looking at meeting the financial 

needs of that community. And boiled down to its essence what the 

CRA requirements are intended to do was to have an institution 

evaluate the extent to which in its marketplace, however it defines 

its marketplace, and certainly one of the key determinants of the 

marketplace is where it has its deposit base and the extent to 

which it evaluates the needs of that community and then meets the 

financial needs of that community consistent with the product line 

that that institution offers. That is the criteria. 

We take that very seriously in our evaluation and on an institution by institution basis, and I am sure that the banks have recognized this is a discussion that has gone on for some time, the extent to which that is really a serious process. 

Ms. LEE. Let me comment here. The needs in many of these communities are varied, but home ownership is certainly one need, and 

the product line of many of these institutions are mortgages. 

Mr. OLSON. That is correct. 

Now those institutions have varying risk appetites. They might 

include a subprime lender or they might not. Some are very aggressive mortgage lenders. Some are very aggressive installment lenders. We don’t ask all institutions to be all things to all people. 

What we ask them to do is evaluate how they are meeting the financial needs of their community as defined with the products that 

they have, and that is the criteria. 

Now I can’t answer on a specific institution by institution basis, 

but that is one of the reasons that CRA ratings are disclosed and 

one of the reasons that HMDA information is disclosed, to have the 

institution in the public arena defend how they juxtaposed the two. 

Ms. LEE. I understand that, Mr. Olson. I am saying what resource is there, from a regulatory standpoint, for these institutions 

getting the outstanding ratings and yet they are flunking, on the 

most part, on mortgage lending to minorities? 

Mr. OLSON. If in fact an institution is flunking, that would be a 

very difficult question to answer without looking at the specifics. 

Because it seems to me that what you have described is fundamentally inconsistent. 

Ms. Lee. But it is a fact and we have been trying to get some 

answers to this for years. I am trying to, like many, find a solution. 

We haven’t been able to get any response from the Federal Reserve 

with regard to how we can begin to fix this. So I would like to work 

with you. 

Mr. OLSON. Very good. We will continue to—we will make a 

point of following up and give you more specifics. 

Ms. LEE. Thank you, Mr. Chairman. 

Chairman BACHUS. Mr. Ford. 

Mr. FORD. I will be very brief. 

32

Good to see you, Governor. You are a bright guy and brighter because you have a good guy from Memphis to work for you. 

Mr. OLSON. Memphis is well-represented in the Federal Reserve, 

and we are the beneficiary of it. 

Mr. FORD. You tell the other Governor that I like him, but I like 

her even more, so I am glad to see you. 

Mr. OLSON. You like her more so? 

Mr. FORD. She is a voter. I thank you. 

Just a quick question. I won’t take much time. 

I have looked—what do you think the answer to this is? Because, 

obviously, that is what everybody is struggling to get at here. And 

Ms. Lee’s frustration was not directed at you but years before she 

got here and the California gentleman’s work on this and some of 

the others. 

How do we get at this? Because we all see this data, it inflames 

emotions and provokes some policy reactions, and then we seem to 

be back here every year. The credit agencies claim they have nothing to do with it, the banks say they really have nothing to do with 

it, and it just kind of happens. Then you have people we represent 

stuck with the bill. 

Normally, when rich people have a problem, they get a lobbyist 

and spend a lot of money and we get them moving up here. These 

folks can’t do that. I don’t mean to put it all on your shoulders, but 

how do we proceed from here? That is what we are trying to get 

at, and I know you are, too. 

Mr. OLSON. If I can, Congressman, let me put that in a little bit 

broader context and describe what we see. What we have seen over 

the years and even incrementally from year to year, we see a significant increase in the number of mortgage applications, in excess 

of the population growth or even the adult population growth in 

this country. 

So what we are seeing is significant increases in the mortgage 

market, providing mortgage financing to an increasing number of 

people. We also see efficiencies in the marketplace so that the products are available at a lower price than ever before, and the entire 

growth of the market has meant that more people, minority and 

nonminority, have access to more credit than ever in the past. That 

process, as best I can tell, is accelerating because of the numbers 

of lenders in the marketplace and the explosion in the secondary 

market particularly and the secondary market appetite for the conforming and nonconforming product. 

The real difficulty that we see is that the increasing sophistication in that product means that the options available exceed the 

ability of even a fairly well-informed borrower to sort through all 

of the options available to them, and there are some—I don’t remember who first said it, but there are some bad actors in the 

mortgage business. It is a small number, but there are some. 

And what we are trying to do, what we have done through the 

regs and in the hearings, is to isolate those practices and those 

lenders. So what we can do is to preserve the advantages that 

mortgage financing has provided to allow more people to achieve 

home ownership but, at the same time, identify both the practices 

and the lenders that are abusive. And it is a combination. It is on 

33

the one hand an educational process by the consumer. Certainly 

there is a responsibility that we ought to expect of the lenders. 

Thirdly, I think that one of the greatest support mechanisms 

that we have out there are the community groups. They have been 

tremendous both in disseminating information, helping pinpoint 

the lenders that probably are abusive and then call those to our attention. 

We have many banks in many markets partnering with community groups, and that is a process that we have strongly encouraged 

and certainly that is the regulators’ responsibility on the oversight 

function. So it is a shared responsibility. 

Mr. FORD. Do you think that the punishment should be greater? 

Mr. OLSON. That is a legal question, Congressman, and I am not 

sure that— 

Mr. FORD. Do you think if there were sterner penalties that it 

might deter some of this behavior? 

Mr. OLSON. I think the penalties—it seems to me that the most 

significant penalty that you could provide to a lender, a responsible 

lender, would be just the reputational risk exposure. For a lender 

to be branded as discriminatory in their lending practices, for a responsible lender that is the worst thing you could say about them. 

I think, to me, that is the most significant deterrent. 

Mr. FORD. I think you are right. That is a big part of it in some 

communities. But in some areas where people have limited options—that is the only concern I have. If you can only buy from one 

or two guys or women and they both have awful reputations but 

you have limited options, you don’t have a real choice. 

Mr. OLSON. You are hitting on an important point. Because one 

of the dangers that we see is that we are eliminating the numbers 

of people providing mortgage financing and to particular the minority communities. We have seen an increase in the numbers of lenders willing to aggressively lend. There is a downside to that. But 

I think it is important that we continue to remind lenders that we 

are encouraging additional lending into all communities, including 

the minority communities. 

Mr. FORD. I have gone way over my time, but if this committee 

considers anti-predatory lending legislation, the Governor of my 

State is about to sign a law in the next few weeks probably. Your 

thoughts, do we need a national law on this? 

Mr. OLSON. We have not taken a position, Congressman, on this. 

Mr. FORD. I was hoping you were having such a good time you 

might break that rule. I appreciate your candor. 

I am of the opinion that the States probably should act if we are 

not going to act this point and hopefully come up with a good plan. 

So you all have not— 

Mr. OLSON. We have not taken a position. 

Mr. FORD. Thank you for taking your time and forgive me for 

abusing mine, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Ford. 

Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman and Mr. Watt, for hosting 

this hearing, and thank you, Mr. Olson, for your testimony. 

Let’s start, if we may, please, with a sentence on page 7 of your 

testimony. Midway down the first paragraph it reads, ‘‘Some of the 

34

typical credit-risk factors not included in the HMDA data are credit 

scores and loan-to-value ratios.’’ 

If we had that information, would that alter your testimony 

greatly, sir? 

Mr. OLSON. First of all, let me go back and make an important 

distinction. Those are factors that are not publicly available 

through the HMDA disclosures, but those are the factors that we 

look at very carefully and we do have access to when we examine 

those institutions. 

So it lends itself to the question, can you make a decision, can 

you arrive at a conclusion from HMDA data? And even that additional incremental data would not allow you to arrive at a conclusion. However, our responsibility as regulators is to get into those 

institutions and look at their entire lending methodology, and those 

two factors become important in our analysis. 

Mr. GREEN. In fact, in that same paragraph you go on to indicate 

that additional information about the lender, including loan products, lending practices, and borrower’s credit worthiness; these are 

other factors that ought to be considered, and that would be important. 

Mr. OLSON. That is correct. 

Mr. GREEN. Is it possible, Mr. Olson, to construct an acid test, 

if you will, such that we can ascertain whether or not invidious discrimination exists with reference to lending practices? Is it possible? 

Mr. OLSON. It is possible—well, that is exactly what our role is, 

and that is exactly what the Congress has asked us to do in the 

enforcement of ECOA and the Fair Housing Act, the body of law 

that constitutes fair lending. That is our responsibility and—as is 

with the other regulators. 

If you were to have in the public domain enough information to 

definitively draw that conclusion, you would have had to lay bare 

the credit history and a lot of other personal data and a lot of other 

information of individuals that I think would be a fundamental 

breach of their right to privacy. 

Mr. GREEN. You have indicated that this is a part of your function, to come to conclusions about price discrimination, invidious 

price discrimination, is that correct? 

Mr. OLSON. That is correct. 

Mr. GREEN. As a part of your function, given that you have access to information that is crucial in making such a decision about 

invidious discrimination, how many referrals have you made to the 

Justice Department? Assuming that you have found some cases of 

invidious price discrimination, how many referrals have you made 

to the Justice Department within the last 2 years? Let’s start with 

2 years. 

Mr. OLSON. The pricing data—only recently has the pricing data 

been included in the HMDA disclosures. 

Mr. GREEN. I don’t mean to be rude, crude and unrefined, but I 

do need to intercede. Because I have to ask this. Has this been the 

charge of your institution for the last 10 years? 

Mr. OLSON. That is correct. For the last—since fair lending—

since ECOA and since the Fair Housing Act have been on the 

books. 

35

Mr. GREEN. Approximately how many years? 

Mr. OLSON. Twenty-five to thirty. 

Mr. GREEN. In that 25- to 30-year period, could you give me just 

a rough guesstimate as to the number of referrals you have, given 

that this is one of the charges of your institution? 

Mr. OLSON. Let me—I would be happy to follow up and give it 

to you more broadly, but let me give you the figures that I have 

today. In the last decade, we have made 33 referrals to Justice. 

Mr. GREEN. In the last 10 years. 

Mr. OLSON. Of those, I believe that the Justice Department has—

3 of those 33 have actually resulted in action taken by the Justice 

Department. 

Mr. GREEN. Thirty-three referred and 3 of 33— 

Mr. OLSON. I have an update. In 2004 and 2005, we have made 

five referrals to Justice. 

Mr. GREEN. 2004 through 2005, five referrals. 

Mr. OLSON. Correct. 

Mr. WATT. Could the gentleman yield? 

For clarification, are you saying that 3 out of 33 in which legal 

action was taken, or any action was taken? 

Mr. OLSON. In which the Justice Department took an enforcement action. 

Mr. WATT. That is, filed a lawsuit. 

Mr. OLSON. I have to get that. Including settlements. 

Mr. WATT. So just 3 out of the 33. 

Mr. OLSON. That is correct. 

Chairman BACHUS. Would the gentleman further yield? 

I think, as Governor Olson has said, this is only the second year 

that the pricing data has been available, and the Federal Reserve, 

to their credit, in 2002 started requesting this for 2004. So at least 

progress, I think, has been made. 

Before, you said, actually, this data would be helpful. Have you 

found it to be helpful? 

Mr. OLSON. Mr. Chairman, I suspect that those five referrals 

probably are information that predate our receipt of the 2004 information that we finally got in 2005. 

Chairman BACHUS. What about the benefits as opposed to the 

cost of the data that you are now collecting? Could you give us an 

assessment of that? 

Mr. OLSON. The Congress has mandated that we will collect the 

data, and so we do. 

Chairman BACHUS. Have you found it valuable? 

Mr. OLSON. There is no question but what the release—that 

HMDA and the public release of that information has caused lending institutions to very significantly focus on the issue of disparate 

treatment. 

The additional information, the incremental information in pricing, that should not be new to any lender. Because we have been 

examining for compliance with that responsibility for at least a decade, also should not be new. But, even so, I suspect that lenders 

are much more attentive to that issue now that that information 

is in the public domain. 

So I don’t know that I can quantify an answer, but it certainly 

has had an impact. 

36

Chairman BACHUS. That included census tracking information. 

Mr. OLSON. Geocode information, yes. 

Chairman BACHUS. Thank you. 

Mr. Green, I yield back 2 seconds, if you have additional followup. 

Mr. GREEN. Thank you, Mr. Chairman. 

Permit me to ask about a term that I think I may have coined, 

and I simply called it O–U–T–I–N–G, outing. Did you out—3 of the 

33, were they outed? Did we publish that they were engaged in invidious discrimination? 

Mr. OLSON. The actions taken by the Justice Department were 

very public. 

Mr. GREEN. The others, the 30, what was said or done with reference to their actions? 

Mr. OLSON. I would have to guess how Justice handled them, 

and I would prefer not to do that. But I suspect that, for whatever 

reason, they decided that there was not sufficient information in 

order for them to bring action. That is strictly a presumption on 

my part. 

Mr. GREEN. If I may, Mr. Chairman, may I ask one additional 

question? The Ohio law that has been referenced, I believe, earlier, 

if not, I am referencing it presently, it gives consumers the right 

to uncapped damages. We were talking about penalties earlier, and 

we talked about exposure as a penalty, and you gave your opinion 

about exposure as a penalty. What would be your opinion with reference to uncapped damages as a penalty? 

Mr. OLSON. That is way out of my area of expertise, Congressman. The relationship between the penalties and the extent to 

which penalties may in fact deter behavior is way out of my range. 

Mr. GREEN. Just a final comment, and I appreciate it very much, 

if exposure is within your range, it would seem to me that, as a 

penalty, that uncapped damages might be something that we ought 

to give some thought to. Ohio seems to be a part of the avant 

garde, and maybe this is where we are headed. I am not sure. But 

I do look forward to visiting with you more. 

Thank you. I yield back. 

Chairman BACHUS. Thank you. 

Governor Olson, you have testified before the committee now for 

3 hours with a small break, and I want to commend you for your 

testimony and your openness with this committee. I think that 

Government works best in this environment, and I think it is a 

wonderful opportunity to display a beneficial interaction between 

an independent agency of our Government and the Congress elected by the people. So I very much appreciate it. 

We are going to have one follow-up question, unanimous consent 

request. 

Mr. WATT. In this segment of the hearing. 

Chairman BACHUS. Governor Olson, let me simply say that this 

committee has found on many occasions that home ownership is a 

key to financial independence, that affordable rental housing and 

home ownership are basically for most people the choice of where 

they will call home, and we have programs to promote both of 

them. Home ownership, as you know, builds strong communities, 

37

and it offers children a safe and stable environment in which to 

grow and flourish. 

Having said that, there is a concern that this committee has—

members on both sides of the aisle—on what appears to be an opportunity gap between our White citizens, non-Hispanic White citizens, who have home ownership rates of about 76 percent, and our 

Hispanic and Black populations or citizens, who have home ownership between 40 and 50 percent. So a gap of about 25, 26 percent, 

which is a concern to all of us, and we would ask your commitment 

and we know that we have the Federal Reserve’s attention and 

commitment to seeing that we mirror this opportunity gap. 

Mr. OLSON. You indeed have our commitment on that, Mr. Chairman. 

Chairman BACHUS. Thank you. 

At this time, I will recognize Mr. Watt for unanimous consent. 

Mr. WATT. Mr. Chairman, I ask unanimous consent to be allowed 

to submit for the record a report of the Consumer Federation of 

America entitled: New Analysis of Nontraditional Mortgage Borrowers Shows Less Wealthy, Weaker Credit Than Industry Suggests; second, a report of the Fair Housing Center of Greater Boston entitled: The Gap Persists, in which the Boston Center used 

testers to call and visit 10 banks and 10 mortgage lending companies in the Greater Boston area and found differences in treatment 

that disadvantaged minority home buyers in 9 of the 20 matched 

pair tests. That was 45 percent. Seven of these tests, the difference 

in treatment were large enough to form the basis for legal action. 

So I am just submitting those for the record. 

Chairman BACHUS. Without objection. 

I would also like to submit for the record testimony submitted by 

the Consumer Mortgage Coalition entitled: Home Mortgage Disclosure Act, Newly Collected Data and What it Means, dated June 

13th. 

At this time, Governor Olson, you are free to leave. 

We will start our second panel. Mr. Tom Price, a Member from 

Georgia, will preside for at least the first hour of the second panel. 

Thank you very much. 

Mr. OLSON. Thank you, Mr. Chairman, and members of the subcommittee. 

Chairman BACHUS. If our second panel will come forward at this 

time. 

Mr. PRICE. [presiding] I want to welcome each member of the 

second panel, and I appreciate your patience as well. I know this 

has gone on a little longer that you have anticipated, but we thank 

you for coming and providing your testimony on this important 

issue. 

Joining us on the second panel are Dr. Douglas Duncan, who is 

a senior vice president and chief economist, research and business 

development at Mortgage Bankers Association; Ms. Janis Bowdler, 

housing policy analyst, National Council of La Raza; Mr. Bill 

Himpler, executive vice president, federal affairs, American Financial Services Administration; Mr. Keith Ernst, senior policy counsel, Center for Responsible Lending; Mr. Calvin Bradford, president, Calvin Bradford & Associates Limited, on behalf of the National Fair Housing Alliance; and Professor Michael E. Staten, diVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
38

rector, Credit Research Center, McDonough School of Business at 

Georgetown University. 

We welcome each and every one of you. Please try to keep your 

opening statements to 5 minutes. The lights in front of you will 

show green until a minute is remaining; and then yellow will come 

on; and if you slow down enough, you won’t get to the red, which 

comes on at 5 minutes to stop your testimony. If you can stay within these guidelines, it is appreciated. 

We will have members come in and out and hopefully have a 

good round of Q and A, and we thank you once again for coming 

today. 

Mr. PRICE. Dr. Duncan, if you would please begin. 

STATEMENT OF DOUGLAS G. DUNCAN, SENIOR VICE PRESIDENT AND CHIEF ECONOMIST, RESEARCH AND BUSINESS 

DEVELOPMENT, MORTGAGE BANKERS ASSOCIATION 

Mr. DUNCAN. Mr. Chairman, members of the committee, thank 

you. One brief change. Good afternoon. 

I have been analyzing HMDA data for 14 years and believe that 

HMDA is an invaluable tool to understand how the mortgage market works in practice. Our HMDA work at MBA helps our members 

reach new customers and develop products and underwriting tools 

to better serve new and established portions of the market. 

The most recent HMDA data on loans made in 2004 and 2005 

demonstrate the greatest and widest availability of mortgage credit 

in our Nation’s history, which in turn has made possible record 

home ownership rates. The data show that borrowers in virtually 

every area of the Nation of every race and ethnicity and every income level receive a wide array of credit opportunities. 

HMDA is fulfilling its intended legislative and regulatory purposes of providing data concerning the availability of credit in order 

to help lenders, regulators and the public spotlight where additional lending may be needed. It reflects activity in the marketplace, provides usable information to facilitate public and private 

investment, and provides signals to regulators where further review is warranted. 

The mortgage market is working. Statistical analysis of the data 

suggests that denial rates and differences in the incidence of minority and nonminority higher cost loans are explained by objective 

risk-related factors that are being applied in a nondiscriminatory 

manner. Absent overregulation and the imposition of unworkable 

solutions, the range of mortgage products and the risk-based pricing prevalent in the mortgage lending industry will continue to expand access to credit and record levels of home ownership. At the 

same time, competition will continue to compress rate spreads. 

The market is working, but we recognize that it is not perfect. 

While risk generally determines rates, the effectiveness of borrower 

understanding and shopping cannot be discounted. Borrowers still 

find it challenging to understand the mortgage process. 

Making financial literacy a reality is a good long-term goal, but 

we believe that there are steps we can take in the short term. 

First, borrowers need tools to educate themselves about the mortgage process; second, consumers need simpler, more user-friendly 

disclosures about mortgages in order to shop and compare; and, 

39

third, consumers need to be urged to shop more intensively, comparing mortgage offerings from lender to lender. 

Let me expand on that last point. Our research has shown that 

home buyers, particularly first-time home buyers, rely on a trusted 

advisor who may have an adverse incentive to help them through 

the complex process of buying a home and getting a mortgage. Too 

often, these new buyers, and particularly minority first-time home 

buyers, either contact only one lender or mortgage broker or are referred by a real estate agent to only one lender or broker while 

shopping for a mortgage. Borrowers more experienced in the process are generally more likely to seek additional rate quotes and are 

therefore more likely to receive a lower rate. 

MBA opposes efforts to chill the innovation in our Nation’s mortgage markets or in any way weaken competition. Some solutions 

that would actually harm borrowers include unnecessarily burdening lenders with additional data requirements and continuing 

to expand the patchwork of laws at the State and local level aimed 

at predatory lending. 

Additional restrictions impose a cost, whether in increased compliance costs that are passed on to the borrower or through reduced 

competition as lenders make the rational decision that lending in 

certain markets is too risky. 

Here is the conundrum facing lenders today. If they deny a loan, 

particularly if it is a request from a lower income or minority borrower, they risk being charged with red-lining or falling short on 

CRA requirements. If they approve a request, they risk charges of 

unsuitability or an unsafe or unsound credit decision. If they 

charge too much, they are accused of predatory lending. If they 

charge too little, they could be out of the business. 

At this point, attorneys are telling businessmen what their business practices should be, but, despite the number of attorneys on 

this committee, that is not a good thing. 

Those promoting unwise solutions to abuses in the market have 

misused the HMDA data to push their agenda. Press releases and 

inaccurate reports state that the differences in denials in higher 

rate lending among the minorities are unfair and discriminatory. 

More worrying, however, appears to be the wide-scale use of these 

reports to make public policy decisions where more scientific research reaching the opposite conclusion is available to legislators. 

The mortgage market is working, and the innovation in this industry has benefited borrowers and increased the supply of credit, 

ultimately resulting in a higher level of home ownership than otherwise would have been the case. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Duncan can be found on page 78 

of the appendix.] 

Mr. PRICE. Thank you, Dr. Duncan. I appreciate your testimony. 

Next is Ms. Janis Bowdler, the housing policy analyst for the National Council of La Raza. We welcome you. 

STATEMENT OF JANIS BOWDLER, HOUSING POLICY ANALYST, 

NATIONAL COUNCIL OF LA RAZA 

Ms. BOWDLER. Thank you. 

40

Good afternoon. My name is Janis Bowdler, and I am a housing 

policy analyst for the National Council of La Raza. I would like to 

begin by thanking the chairman, the ranking member, and other 

members of this committee for hosting this important dialogue. 

Though I don’t have as much experience as my fellow panelists, 

I bring NCLR’s expertise and perspective on this important issue. 

As a funder of housing counseling, NCLR has been working with 

the mortgage industry for nearly 10 years to increase Latino home 

ownership. To better serve our clients, we have sophisticated partnerships with several of the Nation’s top mortgage lenders. This allows us to understand the dynamics between lenders and the 

Latino community. 

HMDA data is critical in this respect. It is the only publicly 

available data that gives insight into how lenders perform in certain neighborhoods among low income and minority individuals. 

This morning, I would like to briefly describe what HMDA data 

tells us about Latino home borrowers and home owners, what is 

driving market disparities, and what more is needed from HMDA 

to complete the picture. Let me begin with what the 2004 HMDA 

reveals about Latinos. 

In many ways, the story is not new. Latino families are twice as 

likely to be in the subprime market as Whites, 18 percent of Latino 

applicants are denied financing, and this is compared to 12 percent 

of Whites. 

However, the release of the 2004 HMDA data gave us a look at 

disparities in product pricing. As you will hear later, Latinos are 

30 percent more likely than Whites to be in the most expensive 

subprime products. Other minority communities have similar experiences. 

In addition, NCLR’s review of proprietary HMDA data from various lenders has revealed similar results. Latinos and other minorities are underserved by the prime market and overrepresented in 

the subprime market. These disparities are a clear indicator of 

market failure. Such market segmentation results in families wasting hard-earned income on access fees and interest, rather than on 

building wealth. 

Moreover, these market disparities are not an accident,and centers built into the structure of the market drive segmentation. 

Allow me to explain. 

A variety of underwriting variables common among Latino borrowers often require manual underwriting. For example, 22 percent 

of Latinos do not have credit scores. In a world of automated underwriting, manually underwritten loans are an unwelcome increase in time and resources. Not wanting the added expense, lenders process few loans of this kind. The excess demand is then 

forced to turn to the subprime market. Subprime lenders use a discretionary and proprietary pricing known as risk-based pricing. It 

focuses on placing clients in products that are profitable for the 

lender rather than suitable for the borrower. 

In an effort to further cut costs and boost profits, lenders also 

rely on mortgage brokers. They help reach deeper into certain markets and cut branch expenses. Consumers rely on broker services, 

too, especially Latinos. Bilingual and bicultural brokers promote 

themselves as advisors Latinos can trust to find them the best 

41

deal. However, lender-offered incentives known as yield spread premiums entice brokers to push the cost of the borrower’s loan higher. YSP’s add another layer of subjective pricing to already expensive and risky products. 

NCLR’s experience with the market busts the myth that such 

products are the only ones available to meet the needs of these 

hard-to-serve borrower profiles. Eighty-eight percent of NCLR’s 

housing counseling clients are below 80 percent of area median income and many require manual underwriting, but all receive prime 

products. Instead, lenders are looking to cut costs, please their investors, and increase profits. 

Still, more information is needed to accurately gauge the quality 

of services that lenders provide to minority and underserved communities. For example, loan-to-value ratios and credit scores are 

often considered the driver of mortgage prices. Those needed fields 

are not collected by HMDA. Moreover, HMDA is not as user friendly as it could be. The Internet offers the easiest access point for 

most, but not all, publicly available data is on the Web site. 

To summarize, HMDA data provides the only publicly available 

picture of how minorities are faring in the marketplace. It reveals 

that Latinos and other minorities are not being served well by the 

mortgage market. They are forced to rely on subjective pricing 

models because of inadequate service by the prime market, and 

more information must collected under HMDA to allow for more indepth analysis. 

In closing, NCLR would like to make the following three recommendations: First, hold lenders and brokers accountable; create 

suitability in anti-steering standards for lenders and mortgage brokers; remove the barriers to HMDA analysis by adding additional 

data field so more robust analysis can be completed; and invest in 

housing counseling as a meaningful way to bridge the gap between 

underserved borrowers and their home ownership opportunities. 

Thank you, and I look forward to your questions. 

[The prepared statement of Ms. Bowdler can be found on page 

90 of the appendix.] 

Mr. PRICE. Thank you very much. 

Next, Mr. Bill Himpler, executive vice president of federal affairs, 

American Financial Services Association. We welcome you. 

STATEMENT OF BILL HIMPLER, EXECUTIVE VICE PRESIDENT, 

FEDERAL AFFAIRS, AMERICAN FINANCIAL SERVICES ASSOCIATION 

Mr. HIMPLER. Thank you, Congressman Price. Good afternoon, 

Congressman Green and Congressman Watt. 

I represent the American Financial Services Association and its 

300 member companies, which include consumer and commercial 

finance companies, ‘‘captive’’ auto finance companies, credit card 

issuers, mortgage lenders, and other financial service firms that 

lend to consumers and small businesses across the country. This 

year, AFSA is celebrating its 90th birthday as the Nation’s premier 

consumer and commercial credit association. 

I am pleased to be here today to provide an industry perspective 

on the Home Mortgage Disclosure Act, also known as HMDA. Specifically, my comments will focus on the value and limitations of 

42

the data collected under HMDA and why we think that the 2004 

data demonstrates that risk-based pricing works. 

First, let me provide some quick background on this law. 

As has been stated, HMDA was first enacted in 1975 to identify 

and prevent red-lining. Therefore, lenders were required to provide 

data on the location of loans financed by property location by State, 

county, and census tract. 

In 1989, HMDA was amended to require lenders to collect and 

report the race, sex, and income of every applicant and borrower, 

and, in 2002, HMDA was again amended to include rate information on higher rate loans. And, in 2004, lenders began reporting on 

this new data set, including the spread or the difference between 

the borrowers’ APR and comparable Treasury notes. 

While HMDA data can assist regulators in several ways, they do 

not present a complete picture of the mortgage lending process. 

That is because the data do not contain relevant risk-related and 

price-related information including the borrower’s credit score, 

property type, down payment, any cash-out information, property 

value, the borrower’s debt-to-income ratio, the loan-to-value ratio, 

and any assets held by the borrower. 

Marketplace competition and the degree of borrower research 

and comparison shopping also are among the factors that typically 

determine the rate received by a borrower. 

Without the information I just listed, HMDA cannot be used to 

draw accurate conclusions about why a loan was refused or made 

at a particular rate. Throughout 2005, the Federal Reserve explicitly cautioned that using raw data from HMDA alone could lead to 

faulty conclusions about lending practices. 

The obvious question is: Why not require lenders to collect and 

report borrowers’ credit and risk-related information that is used to 

price a loan and determine the rate that is charged; there are several reasons. 

First, the release of credit scores and certain other data would 

undermine the privacy interests of borrowers. Second, the data elements utilized by lenders are numerous and weighted differently 

by different lenders and such weighting cannot be disclosed without undermining market competition and reducing invasion. Third, 

regulators already have the ability to review the individual loan 

files—let me say that again—individual loan files, which is really 

the only way to determine whether or not lending discrimination 

has occurred. 

Even if all the data points that I mentioned earlier were collected 

and reported, HMDA data would still be incomplete. That is because some of the credit and risk-related factors that lenders rely 

upon are not captured electronically. For example: the data set 

does not capture the borrower’s payment history related to past 

rent and mortgage payments; does not capture information related 

to the borrower’s employment stability, such as whether or not the 

borrower has seasonal work or is an independent contractor; and 

it does not give an assessment of the surrounding neighborhood 

and value of nearby homes. 

In its analysis of the 2004 HMDA data, the Federal Reserve reported that the risk-based pricing now used is working effectively. 

It has expanded access to credit and significantly contributed to the 

43

highest levels of home ownership in our Nation’s history. A record 

of nearly 70 percent of Americans now own their own home. Consumers are benefiting tremendously because mortgage lending is 

far more competitive than it was just 10 or 15 years ago. Today’s 

unprecedented competition between lenders is keeping prices low 

and allowing consumers to shop around for a better-priced loan. 

Finally, there is one point that I can’t stress enough: Pricing disparities between borrowers who have different racial or ethnic 

background but identical personal and property risk profiles are 

unacceptable. The mortgage lending industry is committed to nondiscriminatory lending practices, and we continue to work with others who share our commitment to affordable lending to determine 

why any disparities exist so that we can take the necessary steps 

to eliminate them. 

I appreciate the opportunity to be here today and would be 

happy to answer any of your questions. 

[The prepared statement of Mr. Himpler can be found on page 

96 of the appendix.] 

Mr. PRICE. We thank you for your testimony. 

Next is Mr. Keith Ernst, senior policy counsel for the Center for 

Responsible Lending. Mr. Ernst. 

STATEMENT OF KEITH ERNST, SENIOR POLICY COUNSEL, 

CENTER FOR RESPONSIBLE LENDING 

Mr. ERNST. Thank you. 

I would like to thank Chairman Bachus, Ranking Member Sanders, and members of the committee for the opportunity to testify on 

recent developments related to the Home Mortgage Disclosure Act. 

Also, I would like to take this opportunity to specifically thank 

Chairman Bachus and Congressman Watt for their thoughtful 

leadership in addressing predatory lending and other interests 

vital to American homeowners. 

In these brief remarks, I will discuss a recent study from my organization. In it we find that African American and Latino borrowers in the subprime market are commonly 30 percent more likely to receive a higher rate mortgage than similarly situated White 

borrowers. Before turning to the study, however, I wish to provide 

some context. 

There have been longstanding concerns about potentially unfair 

pricing in the mortgage market. In 2000, a joint report by HUD 

and the Treasury Department noted that in predominantly Black 

neighborhoods, subprime lending accounted for 51 percent of refinanced loans in 1998, compared to only 9 percent in predominantly 

White neighborhoods. 

Federal Reserve researchers recently noted in 2004 African 

American and Latino home buyers remained respectively 3.1 and 

1.9 times more likely to receive a higher rate home loan, even after 

controlling for differences in income, gender, property location, and 

loan amount. 

To help advance understanding, my organization brought together detailed information on loan prices, loan terms, and borrower risk profiles in a single database of 177,000 subprime loans 

made in 2004. As a result, we were able to ask squarely if race and 

44

ethnicity were significant predictors of whether a borrower received 

a higher rate loan. As I mentioned, the findings were striking. 

Even after accounting for objective factors that lenders used to 

set prices, including borrowers’ credit scores, including loan-tovalue ratios and borrowers’ ability to document income, we report 

that African American and Latino borrowers in the subprime market remain commonly 30 percent more likely to receive a higher 

rate home loan. 

When considering these results, it is important to understand 

that our analysis focused exclusively on subprime mortgages, those 

intended for borrowers with blemished credit. Also, our study did 

not evaluate patterns of loan approvals or denials. Rather, we illuminate troubling disparities in pricing. These disparities represent 

real barriers to economic progress at a time when the median nonWhite or Latino family continues to have just one-sixth the net 

worth of the median White family and substantial gaps in home 

ownership remain. 

Even as I note the importance of these findings for specific communities, I stress that they have implications for all families. 

There is simply no reason to believe that the issues underlying 

these disparities stop at the color line. With this in mind, I offer 

several recommendations: 

First, address industry practices that deviate from risk-based 

pricing and encourage inflated charges. The clearest example lies 

with yield-spread premiums. These cash payments give brokers a 

direct incentive to place borrowers in loans with higher rates. Including these charges in a revised definition under HOEPA would 

provide an important check against predatory lending and unfair 

pricing. 

Second, holds lenders and brokers responsible for providing loans 

that are suitable for a given borrower. Investment counselors have 

long had such an affirmative obligation, yet while buying or refinancing a home is the biggest and increasingly most complex investment most American families will ever make, lenders and brokers frequently have no such obligation. 

Third, require lenders under HMDA to disclose more detailed 

pricing information, indicate whether a loan was brokered, and provide information on key underwriting variables. 

Fourth, encourage regulators to focus and make more transparent fair lending enforcement activities. 

Finally, I recommend supporting a policy framework that promotes responsible lending. Especially critical to this objective are 

policies to end abusive lending so responsible lenders can successfully compete to meet all families’ credit needs. Along these lines, 

State predatory lending laws provide a useful model as they work 

to filter abusive loans while allowing credit to flow. 

In closing, I recognize that every member of this committee 

shares the ultimate goal of fairly priced credit and the resulting opportunities to build wealth for all families. The 2004 HMDA data 

shows that we have substantial work ahead to realize this goal. 

Thank you for your consideration. 

[The prepared statement of Mr. Ernst can be found on page 101 

of the appendix.] 

Mr. PRICE. Thank you very much for your testimony. 

45

We now have Mr. Calvin Bradford, president of Calvin Bradford 

& Associates, on behalf of the National Fair Housing Alliance. Mr. 

Bradford. 

STATEMENT OF CALVIN BRADFORD, PRESIDENT, CALVIN 

BRADFORD ASSOCIATES, LTD., ON BEHALF OF THE NATIONAL FAIR HOUSING ALLIANCE 

Mr. BRADFORD. Thank you. 

I am speaking here today on behalf of the National Fair Housing 

Alliance, or NFHA. I want to thank Chairman Bachus and the 

members of this committee for inviting us to these important hearings. 

Professionally, I have worked in the field of fair housing, fair 

lending, and community reinvestment for 35 years. NFHA was 

founded in 1988. I have worked with this organization on many of 

its extensive educational training and enforcement programs in fair 

lending. 

Today, I want to make five key points: 

First, the Home Mortgage Disclosure Act data are widely used 

and extensively valuable in fair lending and community reinvestment activities. Since these data were first released, HMDA has 

become the pre-eminent source of comprehensive data to track patterns and trends in mortgage markets. Community groups, civil 

rights attorneys, governments at all levels, financial regulatory 

agencies, and lenders have used the data literally thousands of 

times each year to address fair lending. These uses range from 

identifying lenders for testing to developing programs that have 

created literally billions of dollars in private reinvestment programs. 

However, improvements can be made. For example, the HMDA 

data software programs could be more user friendly for community 

based organizations and others with limited resources. We also recommend that HMDA be enhanced to include the identification of 

loans processed through mortgage brokers, that interest rates and 

fees be reported separately, and that the FFIEC consider whether 

a single pricing index really is appropriate for all HMDA loans. 

Second, fair lending enforcement by the Federal enforcement 

agencies is critical to eliminating housing discrimination. 

Private lawsuits have historically been the mainstay in efforts to 

combat lending discrimination. While these private efforts are important, the full engagement of Federal enforcement agencies is essential for any serious effort to combat lending discrimination in its 

many forms. Typically, in order to show that a member of a protected class was treated illegally, one needs to know how other applicants were treated. This requires access to proprietary information that is not in the public domain. Most victims of discrimination are unlikely to know that they have been discriminated 

against, especially where deception is involved and misleading or 

fraudulent practices. 

Private organizations simply do not have the resources to undertake this type of investigation and litigation on a routine basis. 

Lack of aggressive Federal enforcement actually provides a form of 

safe harbor for those engaged in discriminatory activity. 

46

Third, the Federal regulatory agencies must improve the quality 

and the scope of their fair lending enforcement activities. 

The Federal agencies that regulate depository institutions have 

the authority to conduct effective fair lending exams. However, in 

the experience of many of us directly involved in training, education, and litigation, the record of enforcement falls short of the 

mark. 

For example, in the case of Flagstar Bank, the OTS raised its 

CRA rating from satisfactory to outstanding after it was found liable for overtly discriminating against an entire national class on 

the basis of race in a Federal court. Moreover, the discriminatory 

policy was implemented while the bank was being examined. 

Fair credit lending exam procedures themselves sometimes reflect the fundamental lack of understanding of fair lending. For example, find the examination procedures actually instructing examiners that it is an indicator of potential discrimination if the same 

loan officer is allowed to provide an applicant with applications, or 

options, for the prime and subprime loan product of that lender’s 

mortgage companies. 

On the other hand, this practice was seen by fair housing groups 

and many of us in the field as essential to fair lending. 

We recommend that Congress should exercise its continued oversight authority to determine why discrimination that is so often 

identified by private enforcement efforts is so seldom uncovered by 

fair lending exams. 

HUD, Justice, and the FTC must increase their fair lending enforcement efforts. HUD is the main enforcement agency under the 

Fair Housing Act. However, it has undertaken very little fair lending enforcement activity. The Department of Justice was the lead 

agency in establishing some landmark cases in the 1990’s, but its 

enforcement activity has declined since then. The Federal Trade 

Commission has the authority over nonregulated lenders under the 

Equal Credit Opportunity Act, but it has pursued almost no lending discrimination cases. 

In this environment, Congress needs to allocate additional resources to HUD’s Office of Equal Opportunity and to the Fair 

Housing Initiative Programs in order to support increased educational enforcement efforts on the part of private fair housing organizations. 

Finally, but not least at all, no agency regulates independent 

mortgage companies for fair lending compliance. There is a vacuum 

of Federal enforcement of nondepository institutions which account 

for the majority of loans in the market today. This is an especially 

severe problem in the subprime market and in the wholesale market, where most lending is done through unregulated brokers. 

In addition to HUD, Justice, and the FTC, we believe that the 

Federal Reserve should take more aggressive action to ensure that 

bank holding companies and all of their affiliates are in compliance 

with fair lending laws. 

This conclude our comments. 

[The prepared statement of Mr. Bradford can be found on page 

110 of the appendix.] 

Mr. PRICE. Thank you, Mr. Bradford. 

47

Finally, we have joining us today Professor Michael Staten, who 

is the director of the Credit Research Center at the McDonough 

School of Business at Georgetown. 

STATEMENT OF PROFESSOR MICHAEL E. STATEN, DIRECTOR, 

CREDIT RESEARCH CENTER, MCDONOUGH SCHOOL OF 

BUSINESS, GEORGETOWN UNIVERSITY 

Mr. STATEN. Thank you, Congressman Price, and members of the 

committee. 

As the last of six panelists, and after extensive Q and A with 

Governor Olson, I run the risk of sounding like a broken record. 

Nevertheless, I will plow forward and get right to the point. 

HMDA is designed to provide information about the extent to 

which mortgage loans are available to borrowers across neighborhoods and across income and racial groups. The data are very good 

at that original purpose. 

With the addition of pricing data for some loans, the HMDA data 

more accurately identifies the location of subprime lending activity, 

as well as higher-cost loans under HOEPA coverage. As such, the 

database is a gold mine for researchers and also for marketers 

seeking to identify certain neighborhoods that may be ripe for competition. However, the HMDA reporting process was never designed to replicate the data collection that mortgage collectors undertake during the underwriting process. 

It can jump-start for the regulators a fair lending analysis because it indicates the price of the loan that is actually charged. But 

far more characteristics about the borrower and the property and 

the loan itself are omitted from HMDA than are included. So the 

HMDA data by itself cannot be used to draw any conclusions about 

the appropriateness of pricing. 

That should not come as a surprise to anybody, because the Federal Reserve has repeatedly noted for the last several years that it 

is going to use this new pricing data purely as a screening device 

to identify institutions for closer scrutiny and inspection of the loan 

files. It looks for pricing disparities that can be accounted for with 

the HMDA data itself and then flags institutions and loan products 

for a closer look at the actual files. The HMDA data help it to focus 

that resource-intensive process. 

One of the lessons that was pretty effectively demonstrated in 

the Fed’s bulletin article last fall was that differences we observe 

across racial groups in the likelihood of receiving a high-price loan 

narrow as more information about risk-related factors is added to 

the analysis. Characteristics of the loan, such as the size of the borrower’s down payment and whether the interest rate is fixed or adjustable, account for some adjustments in loan price, but they are 

not reported under HMDA. Characteristics of the borrower, like 

credit score and total debt relative to income, and delinquency history, also affect the price, but they are not reported under the 

HMDA. 

You are undoubtedly aware that different research groups, including my own, have used different loan bases with different variables, and we have all found that when information is added to the 

HMDA-reported data, pricing disparities shrink. We all acknowlVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
48

edge that the databases we use do not contain all of the risk factors 

that lenders consider when pricing a loan. 

I picked up from comments made earlier in the hearing that 

there is this illusion that some of these studies actually control for 

everything, but they do not. All of them are short some of the information that is present in the loan files but not present in the electronic databases that are utilized. 

So there are really two messages here. The first is that analysis 

of pricing fairness is greatly affected by the amount of information 

about both the borrower and loan characteristics. The second message is that when available data are known to be incomplete, analysis must be preliminary and no conclusions from that analysis are 

possible. 

The Federal Reserve has been saying this repeatedly for more 

than a year. Call it, ‘‘the inconvenient truth’’ of the HMDA data. 

The fact is that no study based on HMDA data alone can generate 

a conclusion that any lending institution has violated fair lending 

laws, nor can studies like our own or the recent study by my colleagues at the Center for Responsible Lending that utilize an expanded but still incomplete set of loan level characteristics. Good 

intentions notwithstanding, this sort of statistical effort is destined 

to fail. The data just are not up to it. 

The only way to reach defensible conclusions about fair lending 

practices is through a combination of statistical analysis and loan 

file review through the examination process. That is exactly the approach, apparently, that the Federal Reserve is using. 

In my written testimony I refer readers to two papers by agency 

economists that present results from actual fair lending exams. 

Both papers demonstrate rather convincingly how inspection of 

loan files can significantly alter conclusions reached through portfolio-wide statistical analysis alone. 

It is certainly reasonable to ask, and it has been asked several 

times already this morning, if more statistical information would 

be helpful. Wouldn’t it be a good idea to require more detail as part 

of the HMDA reporting requirements? I think the answer to that 

depends on the extent to which reported items would be publicly 

disclosed. 

The requirement that lenders provide more detail to the Federal 

Reserve for its internal use only might help to focus their pricing 

disparity analysis and focus those resource-intensive efforts by telling them which loan files to look at. 

Now suppose that the expanded reporting requirement would 

also include public disclosure of the data elements, just as current 

HMDA data are disclosed. It seems to me that this is a very bad 

idea, because the process would quickly compromise the privacy of 

borrowers. 

The Federal Reserve staff have already demonstrated that it is 

possible to match publicly available HMDA data with publicly 

available information on property transfers to identify the race and 

income of owners reported under HMDA right now with a high degree of accuracy. Federal Reserve staff indicate that for more than 

90 percent of loan records in a given year’s HMDA data, that the 

lender reports only one loan in a given census tract for a specific 

amount. If you know the lender, the census tract and the loan 

49

amount, you can match it with publicly available property records 

and determine the identities of borrowers. With that match, any 

item in the HMDA database is publicly known. 

Public release of data on credit scores and other borrower attributes is virtually unthinkable, given today’s regulatory commitment to privacy protections, and it still would not give the public 

all the information necessary to draw fair lending conclusions. 

Thank you very much, and I would be happy to answer questions. 

[The prepared statement of Professor Staten can be found on 

page 128 of the appendix.] 

Mr. PRICE. Thank you, Professor Staten. We appreciate it. We 

thank you very much for your testimony, and we thank you for 

your participation. It is very valuable information you brought to 

us today. 

I should have mentioned before you began that, without objection, your complete written statements will be made a part of the 

record. 

We have scheduled some votes within a relatively short period of 

time, but I think we can probably get through questions. We will 

begin with Mr. Watt, and I recognize Mr. Watt for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. 

Let me first commend all of the witnesses and reassure particularly Professor Staten that we have no illusions that HMDA data 

is the end-all to all the questions that are out there. If we did, I 

suspect a number of people would be running out the door to file 

lawsuits based on discrimination. 

I think all of you have demonstrated that there are a number of 

factors that go into determining what lender rates will be and conditions and terms of a loan will be, and for that reason borrowers 

are having trouble sifting through all of these factors. I think it 

was said there were about 30 of them. Representative Baker 

named a bunch of them, including the time of day. 

We know that loan decisions are complex, but we still get back 

to the end of the day—a recognition that I think Mr. Himpler 

made, if I can find his testimony, that at the end of the day pricing 

disparities between borrowers who have different racial or ethic 

backgrounds but identical personal and property risk profiles are 

unacceptable, and I do not think any of us, industry, Members of 

Congress, anybody thinks that some of that is not going on. So we 

get back to Representative Ford’s question, and probably the fairest 

thing to do is to ask Mr. Duncan and Mr. Himpler to address this. 

It is implicit in Mr. Himpler’s statement where he says, ‘‘We continue to work with others who share our commitment to affordable 

lending to determine why any disparities exist so we can take the 

necessary steps to eliminate them.’’ It raises the question, how do 

we get there from here? In a market that is very viably complex, 

where everybody’s intentions are good, rate differentials, loan differentials are still taking place, how do you suggest we do that? 

We do not want to increase the burden of paperwork. We do not 

want to make life more miserable for lenders. We simply want to 

eliminate any unacceptable factors from being considered. How do 

we do it? 

50

Mr. HIMPLER. Well, since you are referencing my testimony, I 

will take the first shot at it, and I have a feeling that my colleague, 

Dr. Duncan, will elaborate more fully than I can. 

Mr. WATT. If I referred to him as Mr. Duncan, I’m sorry. Dr. 

Duncan. 

Mr. HIMPLER. I think at this point we do not want to get the cart 

before the horse. It is probably imprudent for me, Congressman, to 

ask the members of this committee to please be patient, but, essentially, that is what I am asking as a representative of the mortgage 

industry. 

A number of our members have just reported HMDA data for the 

first time in 2004, which is why the Federal Reserve worked so 

hard to crunch the numbers. They have now made referrals from 

the 8,500 plus lenders from whom they reviewed data. They made 

referrals for further investigation to the regulatory bodies that 

Governor Olson mentioned, including the Federal Reserve. 

My hope is that at the end of the day, as those investigations 

come to a conclusion, that—and I would encourage members of this 

committee to request that of the regulators—to report to this committee and to Congress what findings they had. Let’s let the process work itself out. They have the ability. They are looking at individual loan files, and only by looking at individual loan files can 

you determine whether or not discrimination is taking place. But 

it is going to take a little bit more time. 

Mr. PRICE. Dr. Duncan, if you would like to. 

Mr. DUNCAN. Certainly, Congressman. Not to worry about the 

title. Only my mother has permission to call me doctor, typically. 

I think the best way both to reveal any inequities and to ensure 

that they do not emerge has two parts. One is on the lender side 

and the other is on the consumer side. On the lender side, what 

you need is vigorous competition so that someone who is discriminatory is revealed to have pricing, whether in dollars or quality, 

that is outside the market and the market bids the business away 

from them by doing a better job. 

Oversight over that lender requires vigorous regulatory oversight 

and well-funded support for that oversight for existing laws prohibiting fraud and discrimination. That is something that we have argued for for some time and is still not fully there. 

On the borrowers’ side, what borrowers need are three things. 

First, they need good information that is understandable, to understand the mortgage process from beginning to end, and that has become ever more important as some lenders now have 200 to 300 

loan products that they offer. Second, they need clear, understandable disclosures of the loan terms so they can understand how the 

product works so that they can shop it from lender to lender. And 

third, they need all the encouragement that they can get to shop 

from lender to lender and make the market forces work for them. 

We have done some survey work that showed—and this was 

about 4 years ago—of the thousand people who bought a home, not 

refinanced but bought a home, one-third never talked to more than 

one party in the entire transaction. Well, if you happen to get one 

of those bad actors you are leaving yourself open to abuse because 

you did not activate the power of the marketplace. 

Mr. WATT. I plead guilty to that. Most borrowers will. 

51

Mr. PRICE. The gentleman’s time has expired. 

Mr. ERNST. If I may add one note to that. I disagree that consumers need more information and encouragement to shop around. 

I think one of the things that has become very clear to ask, working with the data being involved in this to date, is that consumers 

also need confidence that there are a set of policies in place that 

protect them and promote their best interest. 

If we talk about 200 or 300 mortgage products out there in the 

marketplace, that really is a bewildering array. I think that is why 

one of our strong recommendations at this point in the debate is 

the focus and the protections, including suitability requirements, 

and ensure that some of that high-quality information for a while 

may come from the mortgage broker, the person sitting across from 

the table, who is really in many ways in the best position to provide that information. 

Mr. PRICE. Thank you. 

The Chair recognizes himself for 5 minutes. I just want to thank 

you all very much for coming. Your testimony and this information 

has been very helpful, at least in my education process on this. 

I am also struck by the number of outliers that you note, Mr. 

Himpler, and I note that we look forward to that report and see 

what information they glean. 

I was also struck by the time of day being part of how a mortgage turns out in terms of offer. I have noted that is true for purchase of cars as well, time of day, and day of the month. So it is 

indeed an education process. 

I have just two kind of overarching questions for anybody who 

wants to take a stab at them. 

One is, is there any role at all for subjectivity in the granting of 

a mortgage? And anybody is certainly welcome to take a stab at 

that. 

The second one, in view of Mr. Himpler’s and other’s testimony, 

I wonder if it is possible—Professor Staten touched on this as 

well—to collect adequate data that can either confirm or disprove 

that discrimination is in place. 

So kind of those overarching questions, if anybody wants to take 

a stab at them. Mr. Bradford. 

Mr. BRADFORD. I would like to start with the second one. 

I think the real purpose of the Home Mortgage Disclosure Act 

has been to try to respond to the market as it has—over the years, 

it has changed and added information in order to be able to highlight the areas, to sort of focus light on the areas where disparities 

exist so that the real, substantive, detailed analysis investigation 

can take place. 

I do not think it is reasonable to assume that you are going to 

be able to re-underwrite every single loan by some set of public 

data, because of the vast number of loan products and flexibilities 

and guidelines that exist. That I think brings us back to the importance of there being a Federal enforcement effort, because those 

agencies have the authority to go and investigate those cases. It 

looks like half of these 200 lenders that I find in the Federal Reserve’s analysis are essentially unregulated lenders, and we do not 

know what is going to happen with looking intensively at their patVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
52

terns. We have the regulatory agencies responding to the ones covered by them. 

Just in passing, I would just comment, sometimes all of us who 

have degrees in statistical analysis have done a terrible disservice 

to everyone, because there seems to be an impression that statistical significance is sort of the end-all to defining these issues, and 

I think it relates to a subjective question. Statistical analysis is not 

going to help you with the marketing programs where lenders 

serve different channels and different groups and populations for 

different channels. It is not going to resolve internal decisions people make about whether to grant exceptions and make subjective 

decisions that are informed and that should be guided by policies 

of the lender but nonetheless they are not. They are not something 

that you can incorporate in the underwriting system. They still are 

subjective. 

I work with the Fair Housing Act, and the Fair Housing Act does 

not say you can discriminate until you pass some threshold of statistical significance. If you violate anyone’s rights, you have violated the law. 

Also, in the Federal Reserve analysis, statistical significance is 

driven literally by the size of your groups. Therefore, you can see 

statistical significance in a whole market, but when you pick a particular lender and then a particular set of loan products and then 

a particular set of characteristics to match on, you are likely to end 

up with a group that is so small that it really is mathematically 

impossible if there aren’t statistical differences, even if people were 

treated totally differently. 

So we have to be careful, that you might have sensed that somehow the statistical difference is important and the examination 

procedures literally allow the examiners under conditions to use 

the statistical significance difference and statistical measures instead of their full exam procedures. So I think we need to focus on 

those subjective ways in which they examined the way the decision 

actually got made. 

Mr. PRICE. My former statistics professor appreciates your disclaimer. 

Mr. Himpler. 

Mr. HIMPLER. Yes, a couple of comments, Congressman. You 

made mention to my reference to the 200 outliers. I do not want 

anyone to take away from my commentary this afternoon that I 

would characterize those either finance companies or financial institutions as outliers. They are going through the process. The 

HMDA data pointed to the possibility or the need for further investigation, and until they are investigated fully then they are not 

really outliers. 

But I did want to make one other comment, because it has come 

up a number of times. We are talking about federally regulated financial institutions and nonfederally regulated either financial institutions or finance companies, a number of which I represent. I 

think it is important for the members of this committee to remember that a number of the finance companies that are not federally 

regulated are very well-regulated at the State level. A number of 

members have even commented that the States should be taking 

a lead in that. As a corollary to that—and I appreciate CongressVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
53

man Meek’s comments earlier—making a distinction between 

subprime lenders and those that abuse the process. 

It is important to remember that the progress that we have made 

over the last 10 or 15 years in the mortgage lending arena has 

largely come through subprime lending and digging deeper and 

deeper into the consumer market. So that we are not talking about 

pass, fail, approval, denial. We are talking about rates. That is 

where the debate should be. 

Mr. PRICE. My time has expired, but Ms. Bowdler if you want to 

comment. 

Ms. BOWDLER. Thank you. 

I just want to pick up on the idea of subjectivity. 

There is an earlier comment—there has been a lot of talk about 

the number of products that are out there for people. Say there are 

200 products. It is quite conceivable that I am going to qualify for 

10 or 20 of those products. So, when sitting down in front of a lender, how our families end up in one product over another when they 

could qualify for, say, any fraction of those 200 really has to do 

with what are the motivations of industry. And I am just going to 

go that, hands down, they are always going to put them in the loan 

that is most profitable for them. That is just the nature of the 

beast. The business want to turn a profit, and it needs to do so in 

order to continue to serve consumers. 

But what we need is something to offset those motivations, some 

incentives to make sure that the concerns of the borrower are represented. So there are a couple of things that have been talked 

about. 

If you would indulge me for just one moment, I have brought an 

example, this question of subjectivity, of how people end up in the 

various loans that they do and is there room for subjectivity. 

I have with me the Casa section from the Washington Hispanic 

and the Real Estate section from the Washington Post, both from 

this month. I went through the Casa section, and there is not one 

advertisement in here for a standard prime product. They are all 

100 percent financing, payment option, adjustable rate mortgages 

with a teaser rate, and that includes both mainstream institutions 

and mortgage finance institutions. If you look at the English language newspaper in the Washington Post, I did not find any payment option mortgage advertisements. I see lists and lists of standard 5/1 ARM’s, standard amortizing product. 

So when we are talking about room for subjectivity, I think there 

is, but what we need to talk about is also how to offset the profit 

motivations of industry to make sure that consumers are treated 

fairly. 

Mr. PRICE. Thank you. My time has expired. 

Mr. Green, you are recognized for 5 minutes. 

Mr. GREEN. Thank you very much. 

I am concerned about the impact of the newly passed Ohio predatory lending law, and my assumption is that some of you will be 

familiar with it. It imposes a good-faith standard for brokers and 

lenders. It gives consumers a right to sue for uncapped damages, 

and it creates a database of loan officers who violate the law and 

make available that database on a Web site. Now the question is, 

54

what impact do you think this newly passed law will have on lending practices? And I welcome all of you to give your opinions. 

Mr. ERNST. It seems we may not have any Ohio law experts on 

the panel, but I will say, in terms of the broker obligations that you 

discuss in the Ohio bill, that North Carolina and several other 

States have had obligations that they have placed on brokers, and 

I know that our banking commissioner, Joseph Smith, has talked 

about the importance of those standards in terms of making sure 

that borrowers are finding their way to good products. 

I think the other thing that I am aware of in the Ohio law that 

is an interesting lesson perhaps for this committee is that yield 

spread premiums themselves are subject to scrutiny. So, in other 

words, when the loan is evaluated, to determine whether or not the 

incentives in place at time of origination to the mortgage brokers—

in other words, how much was the mortgage broker walking away 

from the table with, that measurement is comprehensive. So yield 

spread premiums, up-front payments to the mortgage broker are 

all measured to determine whether additional protections are put 

in place. 

I will say that that kind of provision in other States has proven 

workable. So I think, while it is probably too early to judge a law 

that I do not think has actually been signed by the Governor yet, 

I think there are some good, optimistic provisions in there that 

could serve borrowers well. 

Mr. DUNCAN. Likewise, our organization, being a national organization, not experts in the State law, but as an economist just listening to your comments on some of the provisions, they will impose costs on the businesses within that marketplace and they 

could be observed in one of two ways. Either they can be observed 

in a shrinkage of lenders serving that market and then the overall 

pricing structure in the market rising for consumers and pricing 

some people out of the marketplace, or they could simply be passed 

through to consumers in the form of higher costs. But I am not 

sure if the law has been signed into law by the Governor yet, but 

we will certainly take a look at it when it takes place. 

Mr. HIMPLER. Until then, Dr. Duncan, my fear is that at the end 

of the day it may drive lenders out of the community that are serving the community in the State of Ohio and doing a good job there. 

But because of the risk of exposure they cannot afford to stay in 

the various communities that they are currently working in. The 

result from that is the possibility that folks who may have been 

right on the fringe, if you will, of being able to afford their first 

home may not be able to go to those lenders because they are no 

longer there, and they are forced to go to the nefarious folks that 

we are all concerned about, driving them directly into the hands of 

the people that this hearing is trying to address. 

Mr. ERNST. I guess the thing that I would put on the table for 

consideration is that there is another possibility to have allowable, 

will be able to be implemented, and that is that consumers will 

find themselves having the luxury of additional consumer protections that will make a real difference in the quality of the loans 

they receive. It will eventually cut down on foreclosures and help 

borrowers in preserving their wealth. 

55

That has been the intention of State predatory lending laws, and 

research from my organization, from most senior economists at the 

Federal Reserve Bank of St. Louis, shows that, by and large, the 

predatory lending laws are now leading to large decreases in access 

to subprime creditor to credit overall. 

I think we should keep in mind squarely one of the benefits that 

come with these laws, which are considerable—and we should, of 

course, take every law on its own merit—but I do not want to lose 

sight of the fact that these laws are, in fact, providing enormous 

benefits to borrowers in the States that have them. 

Mr. BRADFORD. I think you have an example of a lot of States 

trying to come to grips with the process of dealing with the brokers. Because even the lenders cannot control the brokers. Because 

if you decided not to do business with a broker because you do not 

like their behavior, they just go and do business with someone else. 

So they are not an employee. 

So it is one of those difficult situations where we see the key 

actor in the market that is often the focus point, particularly of 

some of the fraud and abuse, is an actor that is very hard to control. So what you really have are people exploring ways in which 

they can try and deal with that without shutting down the market, 

I think, in response to those issues. The market has become so 

competitive among lenders. I think legitimate lenders with good resources and decent products are going to be so competitive that if 

a particular broker leaves the market, other people are going to 

deal with that pretty rapidly. 

Mr. DUNCAN. Just to pick up on the research, I think there is 

also a compelling body of research that will show that, in fact, access to credit has declined in some of the States that have passed 

fairly punitive laws with regard to predatory lending. 

With regard to the flow-through, of how lenders deal with brokers, there is a market mechanism which picks that up. The secondary market today prices mortgage-backed securities and mortgage-related assets quite competitively, in fact, globally. Perhaps 

15 percent of U.S. real estate assets are funded with global capital 

inflows to the United States. That flows through to the borrower 

level very quickly in this very efficient market that we have, and 

lenders keep a scorecard on their brokers where they evaluate the 

quality of the loans that come through and into the secondary market. If quality suffers, then the lender suffers with disadvantageous 

pricing, and they therefore maintain the scorecard to cut off brokers and push them out of the system. 

So there are some structures that help protect consumers that 

are inherent in the marketplace. 

Mr. PRICE. The gentleman’s time has expired. 

Mr. GREEN. Thank you, Mr. Chairman. 

Mr. PRICE. Thank you. 

I want to recognize Mr. Davis for 5 minutes. But, before I do, I 

will have to leave, and I thank the Chair for allowing me to preside. 

Mr. DAVIS. Thank you, Mr. Price. 

Let me, if I can, take the panel back to the observations that I 

made during the opening statement, and the question was the 

standard that, frankly, is owed someone who comes into an office 

56

for a mortgage transaction. Let me just ask the question fairly directly, and I want to hear from people from the industry. I guess 

that is Dr. Duncan and Mr. Himpler. Briefly, what do you all consider the standard or the duty of care to be at present between consumer and mortgage broker or mortgage banker? 

Mr. DUNCAN. We believe that every credit-worthy borrower 

should get the credit in the form that they seek it and that they 

are qualified for. 

Mr. DAVIS. And obviously we have an issue as to whether that 

happens or not. 

Do we believe that the mortgage broker, the mortgage banker, 

whoever is involved on the business side of the transaction has a 

duty to notify the consumer of the best and optimal credit to which 

he or she is entitled? 

Mr. DUNCAN. Let me give you a recent anecdote as an introductory, and then I will close it. 

I was speaking with a reporter who reports on the housing markets, and in particular the subject was the different loan types that 

are available. So I asked her, do you have a mortgage? And as it 

turn out she had recently—this was in January of this year—she 

and her husband had recently purchased a home. 

So I asked what kind of a loan that they used. They used a 5-

year, fixed-rate, interest-only loan. And I said, well, that is interesting. You are reporting on that. What are you telling people 

about the dangers of those loans? Because she was asking questions about their dangers. 

She said, well, in our case, my husband is on a low monthly base 

salary and receives commission and at the end of the year a bonus. 

So we simply pay the principal when he receives this bonus, and 

the loan amortizes as fast or faster than if we had taken, say, a 

30-year, fixed-rate, level-payment, self-amortizing mortgage. 

So the question really revolves around whether it is the lender 

that has better insight into how the household intends to manage 

their finances or the household. Because the household qualified for 

a fixed interest rate, 5-year, interest-only loan, they could probably 

also get a 30-year, fixed-rate, level-payment loan. But they made 

a decision because of the structure of the household finances that 

worked better for them at that time. 

Mr. DAVIS. Mr. Ernst, Ms. Bowdler, let me pose the same question to you all. Do you believe that the standard mortgage industry 

is what has been described by Dr. Duncan? 

Ms. BOWDLER. Let me start by saying that, when it comes to all 

of these products, subprime products, the alternative mortgage 

products that we have been hearing so much about, like the interest-only product that was just described, are certainly legal products that are suitable for some people, but they are not suitable for 

all people. And we have talked a little bit about various—subjectivity about who gets these loans and how to make all of these decisions, which I think was inherent in Dr. Duncan’s anecdote. 

But what we do not see in the industry right now is any obligation on behalf of mortgage brokers specifically, but also on behalf 

of lenders, to ensure that the borrower is in fact getting a loan that 

they have the ability to repay that is suitable for their cirVerDate 0ct 09 2002 13:26 Jan 10, 2007 Jkt 031528 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 F:\DOCS\HBA164.150 HFIN PsN: TERRIE
57

cumstances, or that they are not steering to a loan that is more 

profitable for themselves. 

Given the structure of the marketplace which has built-in profit 

incentives, I think there is definitely a need for a suitability standard that will offset that structure. 

Mr. DAVIS. Let me pose the questions—because my time is running. I want to pose a question on the industry. 

Dr. Duncan or Mr. Himpler, either one of you, what happens 

right now to a mortgage broker, for example, who falls short of 

what you describe as best practices in the industry? What is the 

punishment in effect for a broker who does not follow best practices? Is there one? 

Mr. DUNCAN. If the broker commits fraud— 

Mr. DAVIS. Not fraud. There is a difference between fraud and 

best practices. It is kind of like for us. There is a difference between good practices and what will send you to jail. 

Mr. HIMPLER. I do know that a number of lenders have certain 

standards that they apply to brokers, and if they fall below those 

standards they do not use those brokers anymore. But, as was stated earlier, those brokers may go and do business with some other 

lender. 

But if I could take just a moment, Congressman, to get back to 

your initial question as to how the standard—I think you used the 

legal profession, which I am also part of, or the medical profession. 

I think it is important when you are talking about mortgage products, because what you are talking about is a consumer product, 

not a professional service. And you can tell whether or not you as 

a lawyer are providing the best service to your client. I am not 

going to be so presumptuous to determine what is the best product 

for a given consumer. 

We have heard of a couple of examples already. I am glad Ms. 

Bowdler mentioned the ability to repay. AFSA has that as one of 

its voluntary standards that all of our members have to agree to, 

to be a member of AFSA, is to abide by an ability to repay standard. I think that is an equitable way of going about it. 

But when we get into the area of suitability, we run into dangerous ground. Because whereas it might be suitable for customer 

‘‘A’’, it may not be suitable for customer ‘‘A’’ who is trying to buy 

down in order to be able to afford more house than they might otherwise do. 

Mr. DAVIS. Let me make one observation, since my time is up. 

Mr. Ernst, I know you are dying to say something. Let me make 

my closing comment on this. 

What is different, though, Dr. Duncan, Mr. Himpler, all of you 

on the panel, by definition when these transactions happen, the 

prospective buyer, if you will, is obviously at an informational disadvantage, typically at a sophistication level disadvantage, at the 

ultimate disadvantage that he or she really wants to buy the home 

and does not want to really know a lot beyond that at the moment, 

and the person in the superior position when it comes to information, when it comes to detachment, if you will, is the person who 

is on the seller side or on the lender side. Given that disparity, it 

seems to me that if we are serious about transparency, if we are 

58

serious about accountability, you have to put a little bit more of a 

burden upon the lender. 

Mr. Himpler, I would make the point that you made about the 

legal profession but turn it in a slightly different direction. I agree 

when a client would come to me when I was practicing law they 

don’t know much about the Federal criminal statutes or title 7 or 

any of those things. It is my duty to give them my best and most 

searching judgment, and to provide good representation, I had a 

duty to ask them a lot of questions. I had to be intrusive. I had 

to ask them more than they told me. 

Those who are in the realm of practicing law, if you are bound 

by what your clients tell you, you will commit malpractice a lot of 

times. You have to step beyond that. You have to know what questions to ask. You have to know how to drive your point home. 

That is my concern, that there is a little bit of a sense of, well, 

if I am a lender, I am not going to cheat anybody, but nor am I 

going to ask them a whole lot of questions. I will let them tell me, 

and I will take what they tell me and structure my advice around 

it. 

I submit to you if doctors followed that standard and lawyers followed that standard, the quality of care in both of those professions 

would dramatically erode. 

Mr. Ernst, I will let you get the last word. 

Mr. ERNST. I think—Congressman Davis, I think you are right, 

that this is an area where the suitability standard makes sense. 

There are direct parallels between the legal and medical profession. 

Moreover, I think this is an area where it is actually unfair to 

expect the market to unilaterally take steps without leadership 

from policymakers. If a given lender tries to rein in broker behavior 

on their own, this broker would simply take their business elsewhere. 

That is why it is important as we consider—I know it is under 

consideration—what Federal predatory lending standards can be, 

that those standards really help consumers, help lenders rein in instances where discretionary pricing—and this gets back to a question that was asked by Congressman Price—where discretionary 

pricing is leading to bad outcomes of the sort we have documented 

in our study where we find that there are still significant differences with African American or Latino borrowers being 30 percent more likely to be in a higher rate loan, even after we control 

objective risk factors like loan evaluation. 

There has to be assistance from policymakers working in partnership with consumer groups, with housing counselors, and with 

lenders to solve these problems, that is something that is before 

you now. 

Mr. DAVIS. Mr. Ernst, have we adequately publicized offending 

companies or offending brokers? Do we do a good enough job as an 

economy of publicizing bad actors? 

Mr. ERNST. I think it may be possible that more could be done 

there, but I would say that there are simply so many lenders and 

so many mortgage brokers in the marketplace today that even providing that information is a real challenge. 

I know in North Carolina our banking commissioner has talked 

about how in the past brokers have been able to set up shop under 

59

a different name, and it is very difficult for consumers to weed 

their way through all of that information to find that sort of best 

seal of approval that I think you are suggesting. 

Mr. DUNCAN. If I could, before we have leave the subject, since 

this very recent CRL study is coming up repeatedly, I want to refer 

back to the professor’s statement about the ultimate efficacy about 

some of these pieces of research without full information. A couple 

of things to make note about that study is, for example, if you intend for the model in the study to replicate the lender’s behavior, 

then you have to replicate what it is lenders look at in terms of 

the data to reach their decision. 

One of the things that is in the study is the use of income. In 

fact, lenders do not use income. Lenders use the debt-to-income 

ratio both in the sense of the size of the potential mortgage payment to the other credit service payments and the size of the overall debt relative to overall income. Because what the lender is really interested is in the credit capacity of that borrower, as opposed 

to the specific income. 

For example, you could have a very high-income household who 

also has very high levels of debt and is therefore a bad credit risk. 

You could have a very low-income household who has very low levels of debt and therefore could be a good credit risk. 

Mr. DAVIS. Dr. Duncan, let me ask you this fairly pointed question. How much actual discrimination—how much actual race discrimination do you think goes on in the industry today? 

Mr. DUNCAN. I think we would be naive to say zero. I think you 

are hard pressed to find expansive data of systematic discrimination. In between the two of those, I do not know what the number 

is. 

Mr. DAVIS. Ms. Bowdler, do you want to answer the same question? 

Ms. BOWDLER. I think I would echo that we would be hard 

pressed to come up with an exact percentage, but saying that there 

is not systemic discrimination is not right. We know that the structure of the mortgage market does channel harder-to-serve borrowers, which usually includes Latinos, African Americans, low income, other minority communities, and the elderly, and I think 

that is discrimination, and we should be concerned about that. 

Mr. ERNST. If I might, since our study has been brought up—

and, Doug, I appreciate you giving me the opportunity to clarify 

this here. 

In our model, we control for the objective determinants of loan 

pricing. We did this by going out and looking, taking a survey of 

lenders’ rates and saying what factors determine how your price is 

set in the market. What we saw in those sheets is that debt-to-income was the criteria for qualifying for a mortgage and, in fact, did 

not affect how mortgages are placed in the subprime markets. In 

other words, you can make the decision whether or not the borrower can pay back a loan overall, but we did not see this factor 

being used as a pricing factor, and that, quite simply, is why it is 

not included in our model. 

I think the second point you raised is an interesting one. To look 

at lenders’ behavior, we need to replicate exactly what they do in 

the underwriting process, and we have had a number of comments 

60

here today about how no data source can allow you to do that. I 

think that is a fair remark, but I would say that what we sought 

to do was not to replicate lender behavior, but to understand what 

borrowers’ experiences were in the marketplace. 

So the strength of our study is that we are able to say, after we 

account for businesses between credit scores, between down payment sizes, we are able to talk about how borrowers’ experiences 

differ based on their race and ethnicity. 

So this is very different from the study that sets out to ask if 

lender ‘‘X’’, lender ‘‘Y’’ or lender ‘‘Z’’ is committing discrimination. 

That is not something that we set out to do. We set out to ask what 

borrowers’ experiences are at the end of the day. Are borrowers 

more likely to receive a higher rate loan even after we are able to 

control for the differences in their credit score and the other factors 

that are used to set prices? And, unfortunately, the answer is that 

race and ethnicity still continue to have an effect. 

Mr. WATT. Mr. Chairman, since we were getting into a debate 

about the Center for Responsible Lending’s study, let me make a 

unanimous consent request that the study itself be submitted for 

the record, and everybody will be able to evaluate it on its merits 

or lack thereof, depending on their perspectives. 

Chairman BACHUS. [presiding] Without objection. 

I think at this point we have finalized the questioning, and the 

Chair notes that some members may have additional questions for 

this panel, which may be submitted in writing. 

Without objection, the hearing record will remain open for 30 

days for members to submit written questions to these witnesses, 

and to place their responses in the record. 

Thank you for your attendance. 

This hearing is adjourned. 

[Whereupon, at 2:17 p.m., the subcommittee was adjourned.] 

(61)

A P P E N D I X

June 13, 2006

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