For release on delivery
10:00 a.m. EDT
July 18, 2023
Furthering the Vision of the Fair Housing Act
Remarks by
Michael S. Barr
Vice Chair for Supervision
Board of Governors of the Federal Reserve System
at
"Fair Housing at 55-Advancing a Blueprint for Equity"
National Fair Housing Alliance 2023 National Conference
Washington, D.C.
July 18, 2023
Thank you for the invitation to join you in commemorating 55 years since the Fair
Housing Act became law.1 Along with the Voting Rights Act, the Fair Housing Act was
an essential step in making good on the promise of the Civil Rights Act, and of the vision
of Dr. Martin Luther King, to build a fair and equal society. Let me also acknowledge
the work of the National Fair Housing Alliance (NFHA), its members, and their partner
organizations in pursuit of this goal.
As with other aspects of America's journey toward equality, today we can
recognize the progress made in fair housing while also acknowledging how much farther
we have to go and recommitting ourselves to reaching that destination. We need to do
that because everyone deserves a fair and equal opportunity. And as we saw in the global
financial crisis, failure to pay attention to discriminatory and predatory practices can have
a devastating effect on our economy.
Fair Lending Supervision and Enforcement
I'll start with a few words on the Federal Reserve's role in eradicating
discrimination in lending. As we are here to commemorate, Congress acted in 1968 to
make discrimination in housing illegal with the Fair Housing Act, and it passed the Equal
Credit Opportunity Act (ECOA) in 1974 to bar lending discrimination.
These landmark laws-now 55 and 40 years old-are the foundation of the
Federal Reserve's work in this area, we use our supervisory and enforcement authority to
ensure these laws are followed. Fair lending violations can come in the form of disparate
treatment, which is when a lender treats a credit applicant differently on the basis of a
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prohibited factor, as well as disparate impact, when a lender applies a racially neutral
policy or practice that disproportionately excludes or burdens certain persons on a
prohibited basis. We believe that the disparate impact test is an important tool to ensure
that lending decisions are fair.
Congress provided regulators with supervisory and enforcement tools to help
ensure that supervised firms resolve consumer protection weaknesses as well as the more
pervasive risk-management issues that often lead to those weaknesses. We evaluate fair
lending at each consumer compliance exam and engage a specialized team of lawyers,
economists, and analysts to help ensure we evaluate fair lending issues thoroughly and
consistently across firms. In these examinations, we evaluate the potential for
discriminatory conduct based on the lending activities of the institution and the risk that
discriminatory conduct may occur with respect to each of these activities.2 Our
examinations look at outcomes-what was a firm's lending record on mortgages? Were
there disparities in pricing? What was the extent of customer complaints? We also look
under the hood, considering a firm's marketing and outreach, the discretion and financial
incentives granted to loan officers, and a firm's branching strategy.
If we determine that a bank has engaged in a pattern or practice of discrimination,
we refer the matter to the Department of Justice (DOJ). Federal Reserve referrals have
resulted in DOJ actions in critical areas, such as redlining and mortgage-pricing
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discrimination.3 Last fall, the DOJ took action against a bank for mortgage pricing
discrimination based on a Federal Reserve referral.4
Beyond referring matters to the DOJ, we have a broad array of tools to address
consumer compliance violations and deficiencies, including supervisory findings and
memoranda of understanding that require the bank to take corrective action and remediate
consumer harm. We also conduct outreach efforts that actively promote sound
compliance management practices and programs, including regular outreach by our
Reserve Banks to state member banks and our public webinar series.5
Fair Lending Implications of Innovation
As our financial system evolves, it is critical that we adapt our application of the
Fair Housing Act and ECOA to deal with technological change and other developments.
The digital economy has produced alternative data sources, some of which can
provide a window into the creditworthiness of an individual who does not have a standard
credit history. And new artificial intelligence techniques such as machine learning have
the potential to leverage these data at scale and at low cost to expand credit to people who
3
See, e.g., the DOJ consent orders with Midwest BankCentre at
https://www.justice.gov/sites/default/files/crt/legacy/2013/04/15/mbcsettle.pdf ; SunTrust Mortgage at
https://www.justice.gov/sites/default/files/crt/legacy/2012/09/17/suntrustsettle.pdf; and Countrywide
Financial Corporation at
https://www.justice.gov/sites/default/files/crt/legacy/2012/01/27/countrywidesettle.pdf, and
http://www.justice.gov/opa/pr/justice-department-reaches-335-million-settlement-resolve-allegationslending-discrimination.
4
See the DOJ consent order with Evolve Bank and Trust at
https://www.justice.gov/d9/casedocuments/attachments/2022/10/17/settle_evolve-final-10-19.pdf.
5
The Board annually sponsors an interagency webinar on fair lending supervision. During the 2022
webinar, over 6,000 financial institutions registered, the majority of which were community banks. These
webinars are archived and free to the public. See "Consumer Compliance Outlook Live" at
https://www.consumercomplianceoutlook.org/outlook-live/archives/.
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otherwise can't access it. While these technologies have enormous potential, they also
carry risks of violating fair lending laws and perpetuating the very disparities that they
have the potential to address. Use of machine learning or other artificial intelligence may
perpetuate or even amplify bias or inaccuracies inherent in the data used to train the
system or make incorrect predictions if that data set is incomplete or nonrepresentative.6
There are also risks that the data points used could be correlated with a protected class
and lack a sufficient nexus to creditworthiness.
For instance, digital redlining in marketing-the use of criteria to exclude
majority-minority communities or minority applications-is one risk, and it has already
been the subject of several settlements, including one several years ago involving the
NFHA and Facebook.7 Digital redlining may result if advertisers select their audiences
based on a characteristic that is correlated with protected characteristics.8 New
technologies can also result in "reverse redlining," or steering in the advertisement of
more expensive or otherwise inferior products to minority communities.
6
See Request for Information and Comment on Financial Institutions' Use of Artificial Intelligence,
Including Machine Learning 86 Fed. Reg. 16,837 (March 31, 2021),
https://www.federalregister.gov/documents/2021/03/31/2021-06607/request-for-information-and-commenton-financial-institutions-use-of-artificial-intelligence.
7
National Fair Housing Alliance, et. al, Summary of Settlements Between Civil Rights Advocates and
Facebook (March 19, 2019), available at
https://nationalfairhousing.org/wpcontent/uploads/2022/01/3.18.2019-Joint-Statement-FINAL-1.pdf.
8
The Federal Reserve has highlighted some potential fair lending risks associated with digital marketing
activities in Consumer Compliance Outlook Live webinars and ways banks can mitigate them. For
instance, in 2021, the Federal Reserve presentation at the annual interagency fair lending webinar covered
fair lending risks relating to use of alternative data and machine learning in credit marketing. One of the
risk mitigation strategies discussed during the webinar was taking steps to ensure that institutions review
use of all criteria or filters in internet-based marketing and outreach activities to understand whether a
third-party advertising platform utilizes filters that could exclude majority-minority communities or
minority applicants. See "Fintech & Fair Lending Risk," Federal Reserve presentation at 2021 Fair
Lending Interagency Webinar (December 2021), available at
https://www.consumercomplianceoutlook.org/Outlook-Live/2021/2021-Fair-Lending-Interagencywebinar/.
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These risks are amplified when a model is opaque and lacks a sufficient degree of
explainability-the degree to which the bank can understand how data, variables, and
other features inform the credit decisions.
While banks are still in the early days of adopting artificial intelligence and other
machine learning technologies, we are working to ensure that our supervision keeps pace.
Through our supervisory process, we evaluate whether firms have proper risk
management and controls, including with respect to those new technologies.9
CRA Final Rule
Following the Fair Housing Act and ECOA, Congress recognized that more
needed to be done to address redlining and other systemic inequities in access to credit,
investment, and banking services and it passed the Community Reinvestment Act (CRA)
in 1977 to do that.
I have spent much of my career thinking and writing about aspects of fair lending
and the role of the CRA, and I'm honored for the opportunity to now lead the Federal
Reserve's efforts to update the rule. As you are well aware, the Federal Reserve is
working in partnership with the Office of the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation (FDIC) to release a final rule for the CRA. The
proposal would adapt the regulations to address changes in the banking sector, including
internet and mobile banking, and update the approach to assessment areas. It also would
provide more clarity, consistency, and transparency for CRA evaluations and eligible
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activities. The agencies are benefitting from the thoughtful comment letters we received
on the proposal, and all three agencies are hard at work finalizing the rule. Once
finalized, it is my hope and belief that this new CRA final rule, in parallel with the
existing protections of the Fair Housing Act and ECOA, will support bank lending,
investing, and services that meet the needs of all communities, including those that
continue to be underserved.
Special Purpose Credit Programs
And to that end, let me highlight one way that public interest and trade groups and
banks can come together to bring credit to where it counts. Special Purpose Credit
Programs (SPCPs) are one method to address discrimination and bias in mortgage credit
transactions, and many large financial institutions have publicly stated that they initiated
or expanded special purpose credit programs in the past year. As you know, SPCPs
support the creation of lending products to promote access to credit for economically
disadvantaged groups of people and can be designed to benefit those who are members of
protected classes under Fair Lending laws. In 2022, federal agencies, including the
Federal Reserve, issued a statement to remind creditors of the process for creating these
programs.10 I know that NFHA worked with the Mortgage Bankers Association on an
online toolkit for banks to create SPCPs, and that many large banks have adopted this
approach.11
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Policy Developments to Address Appraisal Discrimination and Bias in Housing
Mortgage Credit Transactions
Let me touch on two recent initiatives we've taken to address appraisal
discrimination and bias in housing mortgage credit transactions. On June 1 of this year,
several agencies invited public comment on a proposed rule designed to ensure the
credibility and integrity of automated valuation models.12 On June 8, the agencies also
invited public comment on guidance that would highlight risks associated with deficient
home appraisals. The guidance describes how financial institutions may incorporate
"reconsiderations of value" into their processes and controls around home appraisals.13
Deficient collateral valuations can contain inaccuracies because of errors, omissions, or
discrimination that affects the value of the appraisal, and a reconsideration of value may
help to properly value the real estate. I am fully supportive of both these proposals
because homeownership is an important way for families to build wealth, and we should
give them every opportunity to share in those benefits.
Conclusion
In closing, promoting fair and equitable treatment to all consumers is the right
thing to do, and this is also just good business. Ensuring that potential borrowers are
treated equally can mean developing previously underserved communities, creating more
12
Quality Control Standards for Automated Valuation Models, 88 Fed. Reg. 40,638 (proposed June 21,
2023) (to be codified at 12 C.F.R. pt.1026),
https://www.govinfo.gov/content/pkg/FR-2023-0621/pdf/2023-12187.pdf.
13
Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, FDIC, and
National Credit Union Administration, and OCC, Interagency Guidance on Reconsiderations of Value of
Residential Real Estate Valuations (proposed), available at
https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20230608a2.pdf.
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opportunities for lending, and expanding markets which can result in better returns for
banks.
Fair lending is safe and sound lending. By adopting sound credit policies that
include fair lending principles and controls on loan officer discretion, and by maintaining
strong compliance management practices, banks can help advance a safer and fairer
financial system.
Let me stress how important it is to remain ever vigilant against discrimination in
credit transactions. I appreciate the work of NFHA, you in the audience, and others, who
are on the front lines of fighting discrimination in housing and lending. Thank you, for
inviting me here today, and enjoy the conference.