Fair Lending: Race and Gender Data Are Limited for Nonmortgage Lending
Published: 2008-07-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Federal Reserve Board's (FRB) Regulation B, which implements the Equal Credit Opportunity Act of 1974 (ECOA), generally prohibits lenders from collecting certain data from loan applicants, such as their race or gender, for nonmortgage loans (e.g., small business loans). FRB has stated that this provision of Regulation B minimizes the chances that lenders would use such data in an unlawful and discriminatory manner. However, others argue that the prohibition limits the capacity of researchers and regulators to identify possible discrimination in nonmortgage lending. This testimony is based on the GAO report, Fair Lending: Race and Gender Data Are Limited for Nonmortgage Lending ( GAO-08-698 , June 27, 2008). Specifically, GAO analyzes (1) studies on possible discrimination in nonmortgage lending and the data used in them, (2) FRB's 2003 decision to retain the prohibition of voluntary data collection, and (3) the benefits and costs of a data collection and reporting requirement. For this work, GAO conducted a literature review; reviewed FRB documents; analyzed issues involving the Home Mortgage Disclosure Act (HMDA), which requires lenders to collect and publicly report data on personal characteristics for mortgage loan applicants; and interviewed FRB and others. FRB did not take a position on this report's analysis. In addition to restating its rationale for retaining the prohibition of voluntary data collection, FRB summarized GAO's findings, including the potential benefits and costs of additional data for fair lending enforcement.
section_title: What GAO Found
paragraphs: GAO's June 2008 report found that most research suggests that discrimination may play a role in certain types of nonmortgage lending, but data limitations complicate efforts by researchers and regulators to better understand this issue. For example, available studies indicate that African-American owned small businesses are denied loans more often or pay higher interest rates than white-owned businesses with similar risk characteristics. While the primary data source for these studies, a periodic FRB small business survey, provides important insights into possible discrimination, it also has limits compared to HMDA data. For example, the FRB survey data are collected from borrowers rather than lenders, which limit their usefulness as a means to assess lending practices. In addition, federal bank regulators that enforce ECOA said that HMDA data facilitates the identification of lenders that may be engaging in discriminatory mortgage lending. In the absence of such data for nonmortgage loans, regulators may rely on time-consuming and less reliable approaches to identify possible discrimination, such as assuming a loan applicant is Hispanic based on his or her last name. While testimony from researchers and other information GAO collected did not fully agree with all aspects of FRB's 2003 rationale for retaining the prohibition of voluntary data collection, there was general agreement that such voluntary data would have limited benefits. FRB did not adopt a proposal that would have allowed lenders to collect data, without any standards, because it said the proposal would have (1) created an opportunity for lenders to use the data for discriminatory purposes and (2) such data would not be useful since lenders may use different collection approaches. While some researchers and others agreed with FRB's first rationale, others said that data collection alone would not necessarily create the risk for discrimination because, in some cases (e.g., small business lending), lenders may already be aware of applicants' personal characteristics as such lending is often done on a face-to-face basis. Even so, a range of researchers, regulatory staff, and others agreed that voluntarily collected data would not likely materially benefit efforts to better understand possible discrimination because the data would be collected on an inconsistent basis or few lenders would participate out of concern for additional regulatory scrutiny of their nonmortgage lending practices and the potential for litigation. Requiring lenders to collect and publicly report data on personal characteristics for nonmortgage loan applicants could help address current data limitations that complicate efforts to better assess possible discrimination. However, such a requirement would impose additional costs on lenders that could be partially passed on to borrowers. These potential costs include those associated with information system integration, software development, data storage and verification, and employee training. Limiting a requirement to certain types of loans could help mitigate such costs but may also involve complexities that would need to be carefully considered. For example, to the extent that small business lending is more complicated than other types of lending, lenders may need to collect and report additional information on a range of underwriting standards in addition to data on personal characteristics so that informed judgments can be made about their lending practices.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the available research on the  potential for discrimination in nonmortgage lending and the Federal  Reserve Board’s (FRB) basis for largely retaining Regulation B’s  prohibition against the voluntary collection of data on personal  characteristics for nonmortgage loan applicants. As you know, the Equal  Credit Opportunity Act (ECOA) of 1974 prohibits discrimination in lending  based on an applicant’s personal characteristics, such as race, gender,  color, religion, national origin, marital status, or age. A provision of  Regulation B, which implements ECOA, generally prohibits lenders from  asking for, inquiring about, or documenting such information for  individuals who apply for nonmortgage loans, such as small business,  automobile, or credit card loans. In 1975, FRB established the general  prohibition as a means of discouraging discrimination in lending, based on  its belief that if lenders could not inquire about or note such information  on applicants’ personal characteristics, they would be less likely to  unlawfully consider it when making lending decisions. However, some  members of Congress and consumer advocates argue that the prohibition  on data collection has limited the ability of researchers, regulators,  Congress, and the public to monitor nonmortgage lending practices and to  identify possible discrimination.
In response to such criticism, the FRB, in 1999, proposed and considered  an amendment to Regulation B that would have removed the prohibition  and permitted lenders to voluntarily collect data on personal  characteristics, without any restrictions or standards, for nonmortgage  loan applicants. However, in 2003, after reviewing more than 600 public  comment letters on the proposed amendment and taking other steps, FRB  ultimately decided to leave the basic elements of the prohibition intact.  FRB did not adopt the amendment because the agency believed it would  have (1) created an opportunity for lenders to use the data for  discriminatory purposes; and (2) generated data that would not be useful  or reliable because lenders would likely adopt inconsistent data collection  approaches. However, some members of Congress and consumer  advocates questioned FRB’s decision, particularly its conclusion that such  data could be used for unlawful discrimination. To support their position,  they argued that requiring lenders to collect and publicly report data on  personal characteristics of mortgage loan applicants under the Home  Mortgage Disclosure Act of 1975 (HMDA), as amended, has made lenders  less likely to engage in discriminatory mortgage lending practices, and  facilitated the ability of regulators to monitor and enforce compliance with  fair lending laws.
My comments today are based on findings from our June 2008 report  entitled Fair Lending: Race and Gender Data Are Limited for  Nonmortgage Lending. Specifically, I will discuss (1) available research  on possible discrimination in nonmortgage lending and review the  strengths and limitations of the data used in the studies, (2) FRB’s 2003  basis for largely retaining Regulation B’s prohibition against the voluntary  collection of data on personal characteristic for nonmortgage loan  applicants, and (3) the potential benefits and costs of a data collection and  reporting requirement and options to mitigate such costs.
To prepare our June 2008 report, we conducted a literature review to  identify studies that used nationwide databases and statistical techniques  to identify possible discrimination in nonmortgage lending and assessed  the strengths and weaknesses of key data used to support the studies’  findings, particularly in comparison to HMDA data. Further, we reviewed  relevant FRB documents pertaining to Regulation B and did a content  analysis of a random sample of 90 from the more than 600 comment letters  that FRB received in response to the proposed 1999 amendment to the  regulation. We also conducted interviews with a range of researchers who  have assessed potential discrimination in nonmortgage lending, staff  involved in fair lending law enforcement from bank regulators,  representatives from banking organizations and consumer groups, and  officials from organizations that represent minority and women-owned  businesses.
We conducted the audit work underlying the report from September 2007  to June 2008 in Washington, D.C., in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
In summary, we found that most studies suggest that discrimination may  play a role in certain types of nonmortgage lending, but data limitations  have complicated efforts by researchers and regulators to understand the  extent to which possible discrimination occurs. For example, available  research on minority business lending generally indicates that African- American business owners are denied loans more often or pay  significantly higher interest rates than white-owned businesses with  similar risk characteristics. However, the data used in these studies are  collected from small business borrowers rather than lenders and,  therefore, cannot be used to conduct in-depth analyses of the practices of  individual lenders or the lending industry generally. In contrast, studies on  possible discrimination in mortgage lending often use HMDA data, which  are collected directly from a large population of lenders and thus provide  for more in-depth research among other benefits. Further, we found that  data limitations may also impede the relative efficiency of the bank  regulators’ fair lending examination process for the nonmortgage sector as  compared with the mortgage sector.
While testimony from researchers and other information we collected did  not reflect full agreement with all aspects of FRB’s 2003 rationale for  retaining Regulation B’s general prohibition on collecting data on personal  characteristics, most experts agreed with the agency’s overall conclusion  that voluntarily collected data would offer limited benefits as a means of  better identifying possible discrimination in nonmortgage lending. FRB’s  conclusion that voluntary data collection could create some risk of  discrimination, while supported by some interviewees, was challenged by  a range of researchers, regulatory staff, and others we contacted. For  example, several researchers said that voluntary data collection would not  necessarily increase the risk of discrimination because, in certain cases— such as small business lending, which is often done on a face-to-face  basis—lenders could already observe an applicant’s race and gender. Even  so, a range of researchers, regulatory staff, and representatives from both  consumer and banking groups we contacted generally agreed with FRB  that lenders would likely adopt different approaches to collecting and  using data on personal characteristics, potentially limiting the reliability  and usefulness of the information. They also said that relatively few, if any,  lenders would likely choose to collect such data out of concern that their  nonmortgage lending practices would become subject to increased  regulatory oversight and potential litigation.
Finally, we found that requiring lenders to collect and publicly report data  on personal characteristics for nonmortgage loan applicants, similar to  HMDA requirements, could help address current data limitations but  would also involve costs and complexities that would need to be  considered. In concept, such a requirement could facilitate efforts by  researchers, regulators, and others to better assess potential  discrimination in nonmortgage lending. However, such a requirement  would also impose additional costs on lenders for items such as system  integration, software development, and training that could be partially  passed onto borrowers. One option to potentially mitigate some of these  costs would be limiting data collection and reporting to specific types of  lending, such as small business lending, but this option may also involve  additional complexities and costs that must be considered. For example,  to the extent that small business lending is more complicated than other  types of lending, lenders may need to collect and report additional  information on a range of underwriting characteristics in addition to data  on personal characteristics so that informed judgments can be made about  their lending practices. Alternatively, lenders could be required to collect  data on personal characteristics and make such data available to  regulators to facilitate the fair lending examination process and potentially  decrease costs, but, in the absence of a public reporting requirement, this  option would not enhance the ability of researchers, Congress, and others  to better assess the potential for discrimination.
FRB did not take a position on this report’s analysis. In addition to  restating its rationale for retaining the prohibition of voluntary data  collection, FRB summarized GAO’s findings, including the potential  benefits and costs of additional data for fair lending enforcement.
subsections: section_title: Background
paragraphs: Regulation B imposes a general prohibition on collecting data on personal  characteristics for nonmortgage loan applicants. But in 2003, FRB  expanded its exceptions to this prohibition to include permitting lenders  to collect data on race, gender, and other personal characteristics in  connection with a self-test for the purpose of determining the  effectiveness of the lender’s compliance with ECOA and Regulation B. A  self-test is any program, practice, or study that is designed and used by  creditors to determine the effectiveness of the creditor’s compliance with  ECOA and Regulation B. The results of a self-test are privileged—that is,  they cannot be obtained by any government agency in an examination or  investigation in any lawsuit alleging a violation of ECOA.
Although Regulation B prohibits creditors, except in limited circumstances  such as conducting a self-test, from collecting data on personal  characteristics for nonmortgage loan applicants, creditors are required to  collect such data for mortgage loan applicants. Specifically, HMDA, as  amended in 1989, requires certain financial institutions to collect and  publicly report information on the racial characteristics, gender, and  income level of mortgage loan applicants. In 2002, FRB, pursuant to its  regulatory authority under HMDA, required financial institutions to report  certain mortgage loan pricing data in response to concerns that minority  and other targeted groups were being charged excessively high interest  rates for mortgage loans.
Authority for enforcing compliance with ECOA with respect to depository  institutions, such as Federal Reserve System member banks, national  banks, state-chartered banks, saving associations, and credit unions, lies  with the five federal regulators—FRB, the Office of the Comptroller of the  Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the  Office of Thrift Supervision (OTS), and the National Credit Union  Administration (NCUA). To carry out their responsibilities, the agencies  may conduct periodic compliance examinations of depository institutions.  These compliance exams generally assess depository institutions’ loan  underwriting guidelines and credit decisions to detect possible  discrimination in both mortgage and nonmortgage lending.
FRB’s Survey of Small Business Finances (SSBF) is one of the principal  sources of information available on the factors that affect the availability  of credit for small businesses. FRB has conducted the SSBF about every 5  years from 1987 through 2003 from a nationwide sample of small  businesses of varying sizes, locations, and ownership characteristics. In  2007, FRB decided to discontinue the SSBF due to its cost and other  considerations. However, according to FRB officials, FRB plans to include  elements of the SSBF in another survey, the Survey of Consumer Finances  (SCF), starting in 2010.
section_title: Studies Suggest That Discrimination May Play a Role in Certain Types of Nonmortgage Lending, but Data Limitations Complicate Efforts to Better Understand the Issue
paragraphs: The limited number of studies on nonmortgage lending that met our  criteria for selection in our June report focused primarily on the small  business sector, and suggested that certain minority-owned businesses  may be denied loans more often or be offered higher interest rates than  similar white-owned businesses. However, the key data source for most of  these studies, FRB’s SSBF, has certain limitations compared with HMDA  data, and this may limit the data’s usefulness as an analytical tool. The few  studies we identified that addressed possible discrimination in automobile  and credit card lending relied on SCF data, which has certain limitations  similar to those of the SSBF data. Further, our report found that data  limitations may also impede the relative efficiency of the bank regulators’  fair lending examination process for the nonmortgage sector as compared  with the mortgage sector.
subsections: section_title: Research Suggests That Possible Discrimination Exists in Small Business Lending, but the Data Used in Such Studies Have Limitations
paragraphs: Primarily using data obtained from FRB’s SSBF, all eight studies we  identified on minority business lending generally found that lenders denied  loans to minority-owned businesses (seven of the eight specifically refer to  African-American-owned businesses) or required them to pay higher  interest rates for loans significantly more often than white-owned small  businesses. This finding generally remained consistent after considering a  variety of risk factors, such as borrower creditworthiness, industry sector,  and other firm characteristics (e.g., business location, assets, and profits).  In addition, studies have found that Hispanic-owned businesses were  denied credit or charged higher interest rates more often when compared  with white-owned businesses with similar risk characteristics. On the  other hand, some studies we reviewed did not identify evidence that  women-owned businesses face credit denials or higher rates significantly  more often than male, white-owned businesses.
While studies using SSBF data have provided important insights into  possible discrimination in small business lending, researchers and FRB  officials also pointed out a number of limitations:    SSBF data are collected from individual small business borrowers rather  than lenders, which limit their analytical value. For example, SSBF data  do not allow researchers to assess the overall small business lending  underwriting standards or lenders’ performance by type of institution, by  size, or by geographic or metropolitan region.
SSBF survey data are self-reported and are not verified by FRB. For  example, FRB relies upon survey respondents to accurately report their  race, gender, and other characteristics, as well as requested information  on their business and their financing. Since the survey may be conducted  long after the survey respondent applied for credit, the timing of the SSBF  increases the risk that respondents may not accurately recall and report  information from the time when the credit decision was made.
FRB conducts the SSBF about every 5 years rather than annually and,  therefore, the survey results may not be timely. To illustrate, most of the  studies that we reviewed were based on data that are about 10 years old  from surveys conducted in 1993 and 1998. Researchers and FRB officials  that we spoke with said it may also take FRB a significant period of time  to review and process the SSBF data prior to releasing it to the public.
In contrast, HMDA data offer certain advantages over SSBF data as a  research tool to assess possible discrimination in mortgage lending. In  particular, HMDA data are collected directly from a large and identified  population of mortgage lenders on a consistent and annual basis.  Researchers have used HMDA data to conduct analyses of possible  discrimination by type of lending institution, size of the institution, and  geographic or metropolitan area. FRB also requires that lenders help verify  the HMDA data they report, such as applicant data on personal  characteristics and the interest rates charged on certain types of  mortgages.
Despite these advantages, we noted that analyses of HMDA data as a basis  for conducting research on possible discrimination in mortgage lending  have been criticized for not including key loan underwriting variables,  such as the borrowers’ credit scores or mortgages’ loan-to-value ratios.  Some argue that such underwriting variables may account for many  apparent discrepancies between minority and white mortgage borrowers.  To compensate for the lack of underwriting variables in the HMDA data,  several researchers have collected such data from proprietary sources and  matched it with HMDA data.
section_title: The Few Studies That Have Identified Possible Discrimination in Automobile and Credit Card Lending Use Data That Have Strengths but Also Limitations
paragraphs: According to a study on auto lending, racial discrimination could play a  role in differences between the treatment of minority and white  borrowers. The study relied on data from FRB’s SCF, which asks a  nationwide sample of about 4,500 U.S. consumers to provide detailed  information on the finances of their families and on their relationships  with financial institutions. Because SCF data is also collected from  borrowers rather than lenders, like SSBF data, it cannot be used as a basis  for assessing individual lenders’ lending practices or lending practices  industrywide (i.e., by type of institution, size of institution, or geographic  or metropolitan area).
The two studies we identified that also relied on SCF data had mixed  results with respect to possible discrimination in credit card lending. One  study found that minorities were likely to pay higher interest rates on  credit card debt than white credit cardholders even after considering the  payment history and financial wealth of each group. Another study did  not find that minority credit cardholders paid higher interest rates as  compared with white credit cardholders after controlling for  creditworthiness factors. These studies showed the strength of the SCF  as a data source (e.g., the ability to consider data on personal  characteristics and loan underwriting factors), as well as its limitations  (e.g., the data are collected from borrowers rather than lenders).
section_title: Data Limitations May Also Impede the Efficiency of the Fair Lending Examination Process for Nonmortgage Lending
paragraphs: Representatives from the four federal bank regulatory agencies we  contacted (FRB, OCC, FDIC, and OTS) said that the availability of HMDA  data has facilitated the fair lending law examination process. In particular,  agency staff said that the analysis of HMDA data provided insights into  lenders that might be at high risk of engaging in potentially discriminatory  practices in mortgage lending. While agency staff said that HMDA data  were only a first start in the investigative process (because they must  evaluate a range of underwriting criteria and practices that may help  explain disparities in a lender’s mortgage lending patterns), HMDA data  allowed them to prioritize their examination resources.
We found that in the absence of similar race, gender, and other data on  personal characteristics for nonmortgage loan applicants, examiners may  rely on time-consuming and possibly unreliable techniques to assess  lenders’ compliance with fair lending laws. Under the Interagency Fair  Lending Examination Procedures, examiners can use established  “surrogates” to make educated guesses as to the personal characteristics,  such as race or gender, of nonmortgage loan applicants to help determine  whether the lenders they regulate are complying with established laws and  regulations in extending credit to minority and other individuals targeted  for loan applicants. For example, examination guidance allows examiners,  after consulting with their agency’s supervisory staff, to assume that an  applicant is Hispanic based on the last name, female based on the first  name, or likely to be an African-American based on the census tract of the  address. While these techniques may help identify the racial or gender  characteristics of loan applicants, they have potential for error (e.g.,  certain first names are gender neutral, and not all residents of a particular  census tract may actually be African-American).
As a result of the limitations of the data on personal characteristics for  nonmortgage loan applicants, as well as regulatory guidance directing  examiners to consider using surrogates, federal oversight of lenders’ fair  lending law compliance in this area may be less efficient than it is for  mortgage lending. According to a comment letter submitted by a Federal  Reserve Bank to FRB as it considered amending Regulation B in 1999, its  examiners were unable to conduct thorough fair lending examinations or  review consumer complaints alleging discrimination for nonmortgage  products due to the lack of available data. Moreover, our reviews of  agency fair lending examination guidance and discussions with some  agency staff (OCC, FDIC, and OTS) suggest that, due in part to HMDA data  availability, agencies focus most of their resources on possible  discrimination in mortgage lending rather than nonmortgage lending. We  plan to further explore the issue of fair lending enforcement in future  work, including the impact of potential data limitations on regulatory  agencies’ oversight and enforcement of the fair lending laws for mortgage  and nonmortgage lending.
section_title: Voluntary Lender Collection of Data on Personal Characteristics Would Likely Offer Limited Benefits in Better Understanding Possible Discrimination in Nonmortgage Lending
paragraphs: While some individuals we contacted generally agreed with FRB’s 2003  conclusion that permitting lenders to voluntarily collect data on personal  characteristics for nonmortgage loan applicants could create some risk of  discrimination, many other individuals we contacted expressed skepticism  about this argument. Even so, a range of researchers, regulatory staff, and  representatives from both consumer and banking groups we contacted  generally concurred with FRB that voluntarily collected data might not be  useful or reliable and that very few banks would choose to collect it.  Consequently, the benefits of permitting lenders to voluntarily collect data  on personal characteristics as a means for researchers, regulators, and  others to better understand possible discrimination in nonmortgage  lending would likely be limited.
subsections: section_title: Researchers and Others Had Mixed Views on FRB’s Conclusion That Voluntary Data Collection Could Create Some Risk for Discrimination in Nonmortgage Lending
paragraphs: Some researchers, staff from a bank regulatory agency, and  representatives from banking and business trade groups we contacted  generally agreed with FRB that permitting voluntary data collection on  personal characteristics could create a risk that the information would be  used for discriminatory purposes. These officials told us that the best way  to protect borrowers against discrimination is to minimize the availability  of information to lenders about their personal characteristics.
However, many other researchers, staff from some regulatory agencies,  and officials from consumer groups expressed skepticism on this  conclusion. First, a staff member from a regulatory agency, several  researchers, and representatives from consumer groups said that, in  certain cases, lenders were already aware of the race and gender or other  information on personal characteristics of nonmortgage loan applicants.  Therefore, simply collecting data on personal characteristics on applicants  in such cases would not necessarily create a risk of discrimination. Other  researchers and officials from banking institutions disagreed. They noted  that, in some cases, lending decisions may be made by officials who do not  interact directly with loan applicants.
Second, lenders’ voluntary collection and use of data on personal  characteristics for nonmortgage loan applicants, outside of the ECOA self- test privilege, would also be subject to varying degrees of regulatory  scrutiny, which could serve to deter lenders from using such data for  discriminatory purposes. Similarly, all lenders that chose to collect and  use such data for discriminatory purposes would face the risk of public  disclosure of such practices through litigation. Further, according to a  variety of researchers and officials we contacted, as well as FRB  documents we reviewed, there is no evidence that lenders have used  HMDA data for discriminatory purposes. These officials generally  attributed the transparency of the HMDA program, through regulatory  reviews and public reporting requirements, as serving to help deter lenders  from using the data to discriminate in mortgage lending.
Finally, FRB could potentially have mitigated some of its concerns that  voluntarily collected data could be used for discriminatory purposes by  including, as part of its 1999 proposal, minimum procedures for the  collection and use of such data. FRB established such procedures for  federally regulated lenders that choose to conduct a self-test. These  procedures include developing written policies describing the  methodology for data collection and keeping data on personal  characteristics separate from loan underwriting data that are used to make  credit decisions. Imposing such minimum procedures and requirements  for a voluntary program could serve to enhance regulators’ oversight of  lenders’ data collection, processes, practices, and uses of the data, and  further deter possibly discriminatory practices.
section_title: Many Researchers and Others Agreed That Voluntarily Collected Data May Not Be Reliable or Useful in Helping to Better Identify Possible Discrimination in Nonmortgage Lending
paragraphs: Even so, many researchers, regulatory staff, and representatives from  consumer groups and banking trade groups agreed with FRB’s conclusion  that the reliability of voluntarily collected data may be limited in  identifying possible discrimination in nonmortgage lending. In particular,  they agreed with FRB that, due to potentially inconsistent data collection  standards, it would be difficult to use voluntarily collected data to  compare fair lending performance across different lenders. Additionally,  there may be data inconsistency problems for any given lender that  chooses to collect data on personal characteristics for nonmortgage loan  applicants. For example, a lender could “cherry pick,” or collect racial,  gender, and other data on personal characteristics on applicants only for  certain loan products that they felt would reflect favorably on their fair  lending practices and not collect data for other products.
Just as FRB could potentially have mitigated some of its concerns about  the possibility that lenders would use voluntarily collected data for  discriminatory purposes by adopting minimum procedures, as mentioned  previously, it could also potentially have considered adopting data  collection standards. Such standards could have served to better ensure  the consistency of the data and enabled regulators and others to use the  data to assess individual lender performance and compare lending  practices across different financial institutions. However, according to a  senior FRB official, a researcher, and a bank industry trade association  official, the imposition of such standards would have undermined the  voluntary nature of the data collection proposal. For example, FRB could  be required to conduct examinations to help ensure that federally  regulated lenders were collecting the data in a manner consistent with any  such standards. Moreover, the establishment of such data collection  standards might also have further diminished lender interest in a voluntary  program, which researchers, FRB officials, and others said was already  limited due to the potential for increased regulatory and public scrutiny of  their lending practices. According to bank regulators and banking trade  groups, very few, if any, lenders choose to conduct self-tests out of  concern that the results of such tests would be subject to regulatory  review even though they are privileged.
Finally, while some officials we contacted and documents we reviewed  said that any data that was collected and potentially reported by lenders  would provide important insights into nonmortgage lending practices that  are not currently available, other researchers and researchers suggested  that such data would be prone to substantial selection bias. That is, the  data would likely be skewed by the possibility that only lenders with good  fair lending compliance records would choose to collect such data.  Consequently, although voluntarily collected data on personal  characteristics could provide some benefits, it would not likely materially  assist the capacity of researchers, regulators, and others to better  understand possible discrimination in nonmortgage lending.
section_title: A Data Collection and Reporting Requirement Could Further Efforts to Better Understand Possible Discrimination in Nonmortgage Lending but Would also Involve Complexities and Costs That Would Require Consideration
paragraphs: In concept, a requirement that lenders collect and publicly report data on  the personal characteristics of nonmortgage loan applicants, similar to  HMDA requirements, could help address some of the existing data  limitations that complicate efforts by researchers, federal bank regulators,  and others to identify possible discrimination. However, mandatory data  collection and reporting would impose some additional costs on the  lending industry, although opinions differed on how burdensome these  costs might be. While options exist to potentially mitigate some of these  costs, such as limiting data collection and reporting to specific types of  lending, these options also involve additional complexities and costs that  must be considered.
subsections: section_title: Researchers and Regulators Could Benefit from Mandatory Data Collection and Reporting, but Lender Costs Would Increase
paragraphs: Required data collection and reporting for nonmortgage loan applicants,  similar to HMDA’s requirements, could help address some of the existing  limitations of available data and facilitate the efficiency of the fair lending  examination process for nonmortgage lending. Such data would be more  timely than SSBF data, and the implementation of data collection  standards could help ensure its reliability. For example, researchers and  financial regulators would be able to analyze the practices of specific  lenders and compare practices across lenders, assessing lending practices  by type, size, and location of the institutions, similar to analyses done  currently with HMDA data. While such analyses would represent only the  first step in determining whether or not particular lenders were engaging  in discriminatory practices, they could potentially help regulators  prioritize their examinations and better utilize existing staff and other  resources.
While it is not possible to quantify the potential costs associated with a  reporting requirement, in part because the requirements could vary,  banking organizations and banks that we contacted identified a variety of  additional costs that lenders might face. These officials also said that they  were concerned about such costs and that the additional expenses  associated with data collection and reporting would, in part, be passed on  to borrowers. According to the officials, most of the costs associated with  a reporting requirement would involve developing the information  technology necessary to capture and report the data, including system  integration, software development, and employee training. Moreover, the  officials said that, as with HMDA data, verifying, any reported data would  also entail costs, including expenses associated with conducting internal  audits. The regulatory agency responsible for assembling, verifying, and  reporting the data to the public would also accrue costs for these  activities.
Some researchers and representatives from consumer groups we  contacted said that they did not think that the costs associated with  required collection and reporting of data on personal characteristics of  nonmortgage loan applicants would be significant because many lenders  already collect and report data on personal characteristics under HMDA.  But representatives from banks and banking organizations, along with one  researcher, said that lending information systems and personnel were not  integrated in many mortgage and nonmortgage organizations. For this  reason, they reiterated that a data collection and reporting requirement  would involve additional system integration and employee training costs,  among others.
section_title: Limiting a Data Collection and Reporting Requirement to Specific Types of Nonmortgage Loans Would Also Have Benefits and Costs
paragraphs: One potential option to mitigate the costs associated with a requirement  that regulated lenders collect and report data on the personal  characteristics of those seeking nonmortgage loans would be to limit the  requirement to certain types of loans, such as small business and/or  automobile loans. Similar to mortgage loan applications, small business  and automobile loan applications are often made on a face-to-face basis,  which could enhance the ability of lenders to help verify the race, gender,  or other personal characteristics of the applicants. In contrast, lenders’  capacity to record data on personal characteristics for other types of  nonmortgage applicants, such as applicants for credit card loans, may be  limited by the fact that credit card loan applications and credit decisions  are typically done by mail or over the Internet.
However, researchers, federal bank regulatory staff responsible for fair  lending oversight, banking officials, and representatives from some  consumer groups we contacted cautioned that there were still significant  complexities and potential costs associated with a data collection and  reporting requirement that was limited to small business lending. Unlike  mortgage and automobile lending, which have relatively uniform  underwriting criteria, these officials said that small business loan  underwriting is heterogeneous and more complex. For example, the types  of financing that small businesses typically seek can vary widely, ranging  from revolving lines of credit to term loans, and the risk of the collateral  pledged against these loans may also vary widely (i.e., from relatively  secure real estate to inventory). As discussed previously, studies of  possible discrimination in small business lending that use SSBF data  consider a variety of other indicators of creditworthiness, such as  applicants’ credit scores, personal wealth, and history of bankruptcy.  Without information on key underwriting variables, the officials said,  research based on the reported data could be subject to significant  controversy and potential misinterpretation, much like research based on  HMDA data, which lacks information on these variables. At the same time,  costs for the necessary technology, employee training, and data  verification would likely increase as the range of data that lenders were  required to collect and report increases.
One option to potentially enhance federal oversight of the fair lending  laws, while mitigating lender cost concerns, would be to require lenders to  collect data on personal characteristics for small business loan applicants,  and perhaps other types of nonmortgage lending like automobile lending,  and make the data available to regulators but not require public reporting  of such data or any other information. This approach could facilitate  federal bank regulators’ ability to prioritize fair lending examinations for  regulated lenders because the agencies currently do not have ready access  to data on personal characteristics for nonmortgage loan applicants. It  could also limit lender costs because they would not have to collect,  publicly report, and verify data on a range of underwriting variables  because regulators already have access to this information. However, due  to the lack of a public data reporting requirement, such an option would  not enhance the capacity of researchers, Congress, and the public to better  understand the possibility of discrimination in nonmortgage lending.
In closing, assessing the potential for discrimination in nonmortgage  lending is an important and complex issue. While current data sources,  primarily FRB’s SSBF and SCF provide important insights into possible  discrimination in certain types of lending, they both have limitations that  may impede the ability of researchers, regulators, Congress, and the public  to further assess lender compliance with the fair lending laws. It is also not  yet clear how FRB’s decision to discontinue the SSBF and incorporate  elements of the survey into an expanded SCF beginning in 2010 will  impact the already limited amount of information about possible  discrimination in nonmortgage lending. Therefore, from a public policy  perspective, now may be the time to consider whether the benefits of  additional data for research and regulatory purposes outweigh the costs of  collecting the data, as well as the trade-offs of various options to enhance  available data, from a purely voluntary program to a data collection and  reporting requirement, and decide whether such a requirement is  warranted.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions you or other Members of the Subcommittee  may have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Orice M.  Williams on (202) 512-8678, or at williamso@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. Individuals making key contributions to  this testimony include Wesley M. Phillips, Assistant Director; Benjamin  Bolitzer; Emily Chalmers; Kimberly Cutright; John Forrester; Simin Ho;  Omyra Ramsingh; Robert Pollard; Carl Ramirez; and Ethan Wozniak.
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