Fair Lending: Race and Gender Data Are Limited for Nonmortgage Lending
Published: 2008-06-27T00:00:00

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 report 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. 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 other regulatory officials, researchers, banks, and consumer groups. 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: Most studies suggest 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 with 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 because 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, staff from regulatory agencies, and others agreed that voluntarily collected data would not likely materially benefit efforts by researchers, regulators, and others to better understand possible discrimination in nonmortgage lending because it 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 (e.g., the data may enhance regulators' ability to detect discriminatory practices). 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 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: The Equal Credit Opportunity Act (ECOA) of 1974, one of the federal fair  lending laws, 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 the Federal Reserve Board’s  (FRB) 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. 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 and in conjunction with an overall review of  Regulation B, the FRB in 1999 proposed and considered an amendment to  the regulation that would have permitted lenders to voluntarily inquire  about and collect, without any restrictions or standards, data on the  personal characteristics of nonmortgage loan applicants. However, in  2003, after reviewing more than 600 public comments on the proposed  amendment and taking other steps, FRB ultimately decided to leave the  basic elements of the prohibition intact. In so doing, FRB largely  reaffirmed the basis underlying its initial decision to impose the  prohibition—that allowing lenders to voluntarily collect and use such  information without restrictions or standards could create some risk that  it would be used for discriminatory purposes. In 2003, FRB also concluded  that data collected voluntarily and without standards would not be  reliable. However, FRB did revise Regulation B to permit lenders to  collect data on race, gender, and other personal characteristics of all  credit applicants (including applicants for nonmortgage credit) for the  specific purpose of conducting a “self-test” to allow lenders to assess their  compliance with ECOA. But such data may be privileged—that is, if the  requirements of a self-test are satisfied, the lender is generally not required  to disclose the results of these tests to regulators in connection with a fair  lending investigation or enforcement action involving the lender.
Some members of Congress, consumer advocates, and others have  questioned FRB’s 2003 rationale for leaving Regulation B’s general  prohibition on the collection of data on personal characteristics on  nonmortgage credit applicants largely intact. In particular, these critics  have questioned the conclusion that such data could be used for unlawful  discrimination. For example, they argue that the Home Mortgage  Disclosure Act of 1975 (HMDA), as amended, which requires many lenders  to collect and publicly report data on racial, gender, and other personal  characteristics for mortgage loan applicants, has facilitated the ability of  minorities and other targeted groups to obtain mortgages. The critics of  FRB’s rationale for Regulation B also contend that requiring lenders to  collect and publicly report HMDA data 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.
This report responds to your request that we conduct a review of the  issues surrounding Regulation B. Specifically, we agreed to (1) discuss  available research on possible discrimination in nonmortgage lending and  review the strengths and limitations of the data that researchers and  regulators use to detect possible discrimination, (2) analyze FRB’s basis  for largely retaining Regulation B’s prohibition against the voluntary  collection of data on personal characteristic for nonmortgage loan  applicants in 2003, and (3) assess the potential benefits and costs of  requiring lenders to collect and publicly report data on the personal  characteristics of nonmortgage loan applicants and options to mitigate  such costs.
To meet our objectives, we conducted a literature review to identify  studies that used nationwide databases and statistical techniques to  identify possible discrimination in nonmortgage lending, identified the  reports’ key findings, and assessed the strengths and weaknesses of key  data used to support the studies’ findings, particularly in comparison to  HMDA data. In addition, we reviewed relevant FRB documents pertaining  to Regulation B, did a content analysis of a random sample of 90 from the  more than 600 comment letters that FRB received in response to its 1999  Regulation B proposed rule, and analyzed existing standards on data  quality, as appropriate. We also conducted interviews with a range of  researchers, officials, and others who were knowledgeable about issues  surrounding Regulation B. We interviewed senior officials from FRB  regarding Regulation B and the agency’s documentary and analytical basis  for the 2003 regulatory ruling. Additionally, we interviewed researchers  and other experts on discrimination in nonmortgage and mortgage  lending, as well as staff from federal bank regulatory agencies responsible  for enforcing fair lending laws. We asked these officials to comment on  Regulation B, FRB’s analytical basis for largely retaining the data  collection prohibition, related HMDA issues, and the benefits and costs of  a data collection and reporting requirement. We also interviewed  representatives from banking and business trade groups, banks, consumer  and community groups, and groups that represent minority- and women- owned businesses.
We conducted this performance audit 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. Appendix I  describes the objectives, scope, and methodology of our review in more  detail.
subsections: section_title: Background
paragraphs: ECOA prohibits discrimination in any type of credit decision based on an  applicant’s race, color, gender, national origin, religion, marital status, or  age. Through Regulation B, FRB has established various requirements to  ensure and monitor lender compliance with ECOA, including the general  prohibition against collecting or noting data on the personal  characteristics of applicants for most nonmortgage loans. Additionally,  Regulation B establishes procedures for lenders’ evaluations of credit  applications to ensure that such evaluations are not done in an unlawfully  discriminatory manner.
While Regulation B imposes a general prohibition on collecting data on  personal characteristics for nonmortgage loan applicants, FRB, in 2003,  expanded its exceptions to this prohibition by permitting the collection of  data on race, color, gender, national origin, religion, marital status, and age  in connection with a self-test. 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 and that creates  data or factual information that is not available and cannot be derived  from loan or application files or other records related to credit  transactions. 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. However, the methodology  used or the scope of the test and the time period covered by the test are  not privileged.
Although Regulation B prohibits creditors, except in limited circumstances  such as conducting a self-test, from collecting data on personal  characteristics with respect to nonmortgage loan applicants, creditors are  required to collect such data for mortgage loan applicants. In 1976, FRB  amended Regulation B to implement a compliance monitoring program  that required lenders to request that applicants for residential mortgages  provide information on their national origin or race, marital status, sex,  and age. The amendment was adopted because, at the time, there were  specific concerns about unlawful discrimination with respect to mortgage  lending. In 1989, HMDA was amended to require 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. Specifically,  lenders were required to collect and disclose information about mortgages  with annual percentage rates above certain designated thresholds.
Federal Oversight of ECOA  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 banking regulators—FRB, the Office of the  Comptroller of the Currency (OCC), the Federal Deposit Insurance  Corporation (FDIC), Office of Thrift Supervision (OTS), and the National  Credit Union Administration (NCUA). Other agencies with enforcement  authority under ECOA with respect to certain nondepository institutions  include, among others, the Securities and Exchange Commission (for  broker dealers), the Small Business Administration (for small business  investment companies), and the Farm Credit Administration (for federal  land banks, federal land bank associations, federal intermediate credit  banks, and production credit associations). To the extent that ECOA does  not assign to another federal agency responsibility for enforcing  compliance with respect to a particular creditor, the Federal Trade  Commission (FTC) has enforcement authority for such creditors. For  example, FTC generally is responsible for ensuring compliance with ECOA  by retailers, finance companies, and mortgage companies. ECOA requires  federal regulators to refer matters to the Department of Justice (DOJ)  when there is reason to believe that a lender is engaging in a pattern or  practice of discouraging or denying applications for credit in violation of  the act.
The five banking regulators may carry out their ECOA and other fair  lending enforcement responsibilities with respect to depository  institutions through periodic examinations to assess their loan  underwriting guidelines and credit decisions to detect possible  discrimination in both mortgage and nonmortgage lending. Following the  Interagency Fair Lending Examination Procedures, examiners from the  five federal banking regulators are to (1) evaluate the institution’s overall  fair lending compliance program, including management commitment and  resources devoted to preventing violations, and (2) determine if the  institution has, in fact, violated the fair lending laws by, among other tasks,  reviewing lending policies and practices and testing the institution’s actual  lending record for specific types of discrimination, such as underwriting  discrimination in consumer and business loans or pricing discrimination in  mortgage or automobile lending.
subsections: section_title: FRB’s Survey of Small Business Finances
paragraphs: FRB’s 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. The most recent survey (2003) gathered data  from 4,240 firms that were selected to be representative of small  businesses in the United States. (i.e., firms with fewer than 500  employees). Through interviews, the firms answered questions about how  they applied for and obtained credit, and characteristics of their  businesses in addition to the race and gender of their owners. In 2007, FRB  decided to discontinue the SSBF due to its cost and other considerations.  However, 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 focused primarily on the small business sector,  largely because there is data available on this type of lending from FRB’s  SSBF. While these studies suggest that discrimination may play a role in  small business lending, SSBF data also have certain limitations as a  research tool. For example, SSBF data are collected from small business  borrowers rather than lenders, which means that SSBF data cannot be  used to assess the small business lending practices of individual lenders or  the lending industry. The few studies we identified that addressed possible  discrimination in automobile and credit card lending relied on a data  source that had certain limitations similar to those of the SSBF data. In  contrast, studies on possible discrimination in mortgage lending often use  HMDA data, which among their research advantages, are collected directly  from a large population of lenders that make mortgage loans. Staff from  federal bank regulatory agencies also said that HMDA data allowed them  to identify regulated lenders that might be at high risk of engaging in  possible mortgage lending discrimination and thereby to better prioritize  fair lending law examination and investigative processes. In the absence of  similar data on personal characteristics for nonmortgage loans, regulators  may rely on more time-consuming and possibly unreliable techniques to  conduct oversight, potentially impeding the relative efficiency of the fair  lending examination process for nonmortgage loans.
subsections: section_title: Research Suggests That Possible Discrimination Exists in Small Business Lending, but the Data Used in Such Studies Have Limitations
paragraphs: In a previous report, we summarized available studies and research that  address the challenges that minority- and women-owned businesses might  face in raising debt and equity capital. This research suggests that a  variety of business characteristics may make lenders reluctant to provide  credit to such businesses due to the perceived risks involved in doing so.  In summary, this research concluded that minority- and women-owned  businesses could face challenges in raising debt and other financing  because they were (1) primarily concentrated in the service and retail  sectors rather than capital intensive sectors (i.e., manufacturing) and,  thus, might have difficulties pledging collateral; (2) frequently new  businesses with limited credit histories; and (3) on average, relatively  small and often lack managerial and technical expertise.
Nevertheless, a majority of available research we reviewed on minority  business lending also suggested that discrimination might play a role in  lending patterns when comparing certain minority-owned businesses with  white-owned businesses. 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. These findings remained generally consistent  after considering a variety of risk factors, such as borrower  creditworthiness, industry sector, and firm size. In addition, studies have  also 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.
Two of the studies that we reviewed illustrate researchers’ analysis with  respect to possible discrimination in small business lending. Using 1998  SSBF data, the two studies found that African-American-owned businesses  were about twice as likely to be denied credit as white-owned businesses.  The studies analyzed a variety of factors that might help explain such  differences, such as the applicants’ credit scores, personal wealth (such  wealth can serve as collateral for business loans), history of bankruptcy,  and the timeliness of business obligations payments over several years. In  addition, the studies controlled for firm characteristics such as business  location, industry, assets, and profits. Even after controlling for these  factors, the studies could not rule out discrimination as a possible  explanation for differences in loan denial rates.
While studies using SSBF data have provided important insights into  possible discrimination in small business lending, researchers and FRB  officials also said the data had the following certain limitations as a  research tool:    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 and practices of the particular lenders with whom  individual survey respondents may be doing business. Further, the SSBF  data do not allow researchers to assess 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. The timing of the SSBF survey may  also call into question the reliability of reported data. For example, the  survey may be conducted long after the survey respondent applied for  credit, increasing 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 surveys conducted in 1993 and  1998. As a result, the majority of available research on possible  discrimination in nonmortgage lending is based on data that are about 10  years old. 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. For example, FRB did not release  the 2003 survey data until November 2006, and we identified and reviewed  only one study that was based on a preliminary analysis of the 2003 data.
In contrast, HMDA data offer certain advantages over SSBF data as a  research tool to assess possible discrimination in 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. In addition, under HMDA  regulations, lenders must note a mortgage applicant’s personal  characteristics such as race and gender if the borrower refuses to  voluntarily provide this information.
Despite these advantages, we note that analyses of HMDA data as a basis  for conducting research on possible discrimination in mortgage lending  have been subject to criticism. In particular, HMDA data have been  criticized for not including key loan underwriting variables, such as the  borrowers’ credit scores or mortgages’ loan-to-value ratios. Some critics  of HMDA studies argue that many apparent discrepancies between  minority and white mortgage borrowers can be accounted for by including  other underwriting variables in the analysis. While FRB required lenders to  include in reported HMDA data information for certain high-interest rate  mortgages starting in 2004, the data have still been criticized for not  providing a comprehensive basis for understanding mortgage lending  practices. To compensate for the lack of underwriting variables in the  HMDA data, several researchers have collected such data from proprietary  sources and match 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: We identified only one study meeting our criteria for selection that  specifically addressed possible discrimination in automobile lending.  According to this study, approximately 40 percent of minority households  with high credit ratings paid relatively high interest rates for new car loans  as compared with nonminority households with similar credit scores and  financial wealth. The study concluded that racial discrimination could play  a role in these differences between minority and white automobile loan  borrowers.
This study relied on data from FRB’s SCF, which has some limitations that  are similar to those of the SSBF. The SCF asks a nationwide sample of  about 4,500 U.S. consumers to provide detailed information on finances of  their families, and on their relationships with financial institutions. While  the SCF is conducted every 3 years and allows researchers to consider a  range of variables on personal characteristics and loan underwriting  factors in conducting their analysis, it is also collected from borrowers  rather than lenders. Therefore, SCF data, like SSBF data, 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). FRB also relies on SCF respondents to  provide accurate information about their personal characteristics and  finances.
We note that a number of lawsuits involving allegations of discrimination  in automobile lending have been settled in recent years. According to a  2006 study there had been a series of class action lawsuits filed against  several large automobile dealers and lenders alleging that minority  consumers—African Americans and Hispanics in particular—had  systematically been charged a higher markup, or interest rate, on auto  loans than white borrowers. According to the study, all of the cases were  eventually settled by the litigants, with one automobile lender agreeing to  pay individual cash amounts to the plaintiffs and make changes in its  business practices. Further, in 2007, DOJ announced the filing of  complaints and consent orders against two automobile dealerships and  one bank, in each case alleging that the lenders engaged in a practice of  discriminating on the basis of race (in the case of the automobile dealers)  or marital status (in the case of the bank) in violation of ECOA, by  charging them higher interest rates than other similarly situated  applicants. In all three consent orders, the defendants agreed to pay  monetary damages to remedy the allegations of discrimination.
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 card holders even after considering the  payment history and financial wealth of each group. Another study did  not find that minority credit card holders paid higher interest rates as  compared with white credit card holders 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 had 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. For example, the consistency of HMDA data  allows examiners to investigate whether a particular lender denies a  relatively high number of mortgage loan applications from minority  borrowers or may be charging relatively higher interest rates compared  with similarly sized lenders in the same geographic or metropolitan area.  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.
In the absence of similar race, gender, and other data on personal  characteristics for nonmortgage loan applicants, regulators 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 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 from 1999 to  2003, 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 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: FRB concluded in 2003 that lifting Regulation B’s general prohibition and  permitting voluntary collection of data on personal characteristic data for  nonmortgage loan applicants, without any limitations or standards, could  create some risk of discrimination and that such data would not be  reliable. While some researchers, regulatory agency staff, and banking  officials agreed with FRB that the voluntarily collected data could create  the potential that it would be used for discriminatory purposes, many  other researchers, regulatory staff, and representatives from consumer  groups expressed skepticism about this argument. For example, some  researchers said that data collection by itself would not necessarily mean  the information would be used to discriminate because in many cases— such as small business lending—lenders may already be aware of an  applicant’s personal characteristics because such lending is often done on  a face-to-face basis. 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: FRB Concluded That Permitting Data Collection without Standards Could Create Some Risk That the Data Would Be Used for Discriminatory Purposes and Result in Data of Questionable Reliability
paragraphs: The FRB concluded in its 2003 final rule that the general prohibition under  Regulation B’s long-standing prohibition should largely be retained after  considering a proposal that would have permitted lenders to voluntarily  collect data on personal characteristics, such as race and gender, for  nonmortgage loan applicants without restrictions or uniform standards.  FRB’s conclusion largely relied on staff analysis, including a review of  more than 600 public comment letters. Moreover, FRB held periodic  meetings (in 1999 and 2002) with its Consumer Advisory Council—a group  of representatives from consumer groups and banking institutions—to  discuss the benefits and costs of amending Regulation B. An FRB official  also said that the staff consulted FRB board members and fair lending  examiners to gather their views on permitting lenders to voluntarily  collect data on personal characteristics for nonmortgage loan applicants.
Upon completing this analysis, FRB concluded that amending Regulation  B to permit voluntary data collection, without restrictions or standards,  could create some risk that the information would be used for  discriminatory purposes. For example, under such permissive  circumstances, FRB concluded that a lender might selectively note  nonmortgage loan applicants’ personal characteristics, including their race  or gender, and use such data as a basis for unlawful lending  discrimination. By retaining Regulation B’s data collection prohibition,  FRB essentially reaffirmed its original view of the prohibition when it was  adopted in 1976. That is, possible discrimination is mitigated if lenders are  not permitted to collect data on personal characteristics.
FRB also concluded that voluntarily collected data on personal  characteristics for nonmortgage loan applicants would be of questionable  reliability. According to an FRB official, in the absence of data collection  standards, lenders could use different approaches to collecting data. For  example, they could collect the data within different time frames, for  different loan products and, in the case of business lending, using their  own definitions of what constitutes a minority business versus  nonminority business. Lenders would also have the opportunity to stop  collecting data whenever they decided that it was not advantageous to do  so. Consequently, regulators would not be in a position to use such  voluntarily collected data, as is currently possible with HMDA data for  mortgage lending, to compare a lender’s nonmortgage lending practices  with those of its peers or to conduct further analysis as appropriate to  follow up on evidence of possible discriminatory practices.
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, such as race and gender, could create a risk that  the information would be used for discriminatory purposes relative to  prohibiting data collection. Because ECOA prohibits the use of personal  characteristics, such as race and gender, as criteria to make lending  decisions, these officials told us that the best way to protect borrowers  against discrimination is to minimize the availability of information about  their personal characteristics. In addition, according to FRB’s analysis, as  well as our own analyses of the comment letters that FRB received in 1999  for the proposed rule, some commenters, mostly from the banking  industry, shared this view.
However, many other researchers, staff from some regulatory agencies,  and officials from consumer groups expressed skepticism that voluntarily  collected data on personal characteristics would create a risk of  discrimination. 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.  For example, three researchers said that, in the case of small business  lending, lending officials already were aware of the race and gender of  loan applicants because such lending was typically done on a face-to-face  basis. 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. Further, for  other types of lending, such as credit card lending, the data collection  prohibition may mitigate the risk of possible discrimination. An FRB  official said that lenders largely offer credit cards through the mail and  thus do not have specific access to the race and gender of their customers  and potential customers.
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 and potentially litigation, which could serve to deter lenders from  using such data for discriminatory purposes. For example, according to an  FRB representative, federal bank regulators would be in a position to  evaluate federally regulated lenders’ collection and use of data on personal  characteristics through the fair lending law examination and oversight  process. Further, 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. While FRB’s 2003 final rule is silent on the  potential deterrent effect of regulatory and public scrutiny in deterring  lenders from using data on personal characteristics for discriminatory  purposes, available evidence regarding HMDA suggests that it may be  significant. According to a variety of regulatory staff, researchers, and  other 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 minimum  procedures for federally regulated lenders that choose to conduct a self- test and avail themselves of the nondisclosure privilege. These procedures  include developing written policies describing the methodology for data  collection and keeping data on personal characteristics separate from loan  underwriting data (e.g., credit scores) 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 also 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. Thus lenders  would create their own standards that could be designed to systematically  enhance their reputations and business prospects.
Just as FRB could potentially have mitigated some if its concerns about  the possibility that lenders would use voluntarily collected data for  discriminatory purposes by adopting minimum procedures, as mentioned  previously, we note that 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 would  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 likely limited due to the  potential for increased regulatory and public scrutiny of their lending  practices. An apparent lack of interest by lenders in conducting ECOA  compliance tests under the self-test privilege of Regulation B provides  support for the contention that few lenders would choose to collect data  on personal characteristics on a voluntary basis even if permitted to do so.  Federal bank regulators generally said that very few, if any, lenders used  the self-test to assess their compliance with ECOA; nor were any of the  banking trade associations aware of any such institutions. Bank  representatives we contacted, as well as some of the comment letters  submitted by banking institutions, indicated that they still believed there  was a potential for regulators and the public to gain access to self-test  results, even with the self-test privilege. Lenders’ apparent reluctance to  collect data under the self-test privilege—which affords lenders protection  from being compelled to disclose such data to regulators—suggests that  they would be even less likely to collect such data under a general  voluntary data collection program, such as the one that FRB considered in  1999, given that such data would be subject to regulatory scrutiny and  potential litigation.
While a staff member from a regulatory agency, a researcher, and  representatives from some consumer groups we spoke with, as well as our  analysis of the comment letters, indicated that any data that were  collected and potentially reported would provide insights into  nonmortgage lending practices that were not currently available,  researchers and other comment letters we reviewed indicated 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. Conversely, it is  unlikely that lenders with weak fair lending compliance programs would  voluntarily collect data that might confirm fair lending violations.  Consequently, although voluntarily collected data on personal  characteristics could provide some additional insights into lending  practices than currently available data provide, 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 business  types, 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. For example, researchers 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. Such data  would also be more timely than SSBF data, and the implementation of data  collection standards could help ensure its reliability. As a result, the  availability of such data could also better inform Congress, regulators, and  the public about possible discrimination in nonmortgage lending.
Such a requirement on personal characteristics collection and reporting  could also facilitate the efficiency of the fair lending examination process  for nonmortgage lending. As is currently the case with fair lending  examinations for mortgage lending due to the availability of HMDA data,  bank examiners could potentially use data on personal characteristics that  were collected from lenders to focus the examination process on those  lenders they regulate that appeared to show the highest risk of engaging in  potentially discriminatory practices. Further, examiners could use such  data to compare practices across lenders to identify possibly  discriminatory practices. 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. They pointed out that  because many lenders already collect and report data on personal  characteristics under HMDA, it should not be prohibitively expensive for  them to collect similar data for nonmortgage applicants. But other  representatives from banks and banking organizations along with one  researcher said that in many cases mortgage and nonmortgage lending  information systems and personnel were not integrated. For example,  mortgage and nonmortgage lending might be conducted within different  subsidiaries of a single financial conglomerate. For this reason, they  reiterated that a new data collection and reporting requirement for  nonmortgage lending would involve additional system integration and  employee training costs, among other things.
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. As discussed previously, available research suggests  that the potential for discrimination exists in both types of lending, and a  data collection and reporting requirement would help in better  understanding this issue than is possible with current data. Similar to  mortgage loan applications, moreover, small business and automobile loan  applications are often made on a face-to-face basis. Therefore, lenders  would be in a position to record such information themselves based on  visual observation, if applicants choose not to provide such data, as is  currently required under the regulations implementing HMDA for loan  applications made in-person. 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. As a result, limiting a data collection and  reporting requirement to either small business or automobile lending, or  both could focus attention on areas that appear to be at risk of  discriminatory practices and potentially offset some of the costs to lenders  associated with a broader requirement.
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, while  mortgage lending has become more complicated in recent years, the type  of financing that applicants seek in order to buy homes is often more  standardized (e.g., 30-year fixed rate loans or variable rate products) and  the collateral securing mortgages, generally single-family residences, is  well understood and generally more marketable. In contrast, the types of  financing that small business typically seek can vary widely, ranging from  revolving lines of credit to term loans, and the risk of the collateral  pledged against loans may vary widely (i.e., from relatively secure real  estate to less secure inventory). As discussed previously, moreover,  studies on 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.  Consequently, the officials said that lenders would have to collect and  report significant additional information on a range of underwriting  standards and data for small business lending in order to make the data on  personal characteristics useful so that examiners, researchers, Congress,  and others are in a better position to determine whether a particular  lender’s practices may involve discrimination or not. Without the 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 lack  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.
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 state of information about possible discrimination in nonmortgage  lending. Therefore, from a public policy perspective, considering the trade- offs of various options to enhance available data, from a purely voluntary  program to a data collection and reporting requirement, may be  warranted.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a copy of a draft of this report to the Chairman of FRB, and  the Director of the Division of Consumer and Community Affairs provided  written comments that are reprinted in appendix II. In its written  comments, FRB did not take a position on our analyses but restated one of  its 2003 rationales for retaining Regulation B’s general prohibition on  collecting data on personal characteristics for nonmortgage loan  applicants. That is, FRB concluded that permitting voluntary data  collection would not produce reliable or useful market-wide data.  Moreover, FRB also summarized the draft report’s analysis that, while  there was not full agreement among those that we contacted with all  aspects of the FRB’s rationale for retaining the prohibition, there was  widespread agreement that such voluntary data would have limited  benefits. FRB also restated the draft report’s analysis that a data collection  and reporting requirement could help address current data limitations and  might enhance regulators’ ability to detect discriminatory practices.  However, such a requirement would impose additional costs on lenders  that could be partially passed along to borrowers. We note in the report  that, from a public policy perspective, considering the trade-offs  associated with various options to enhance available data on potential  discrimination may be warranted. Finally, FRB provided technical  comments on a draft of the report, which we incorporated as appropriate.  We also sent a draft of this report to FDIC, OCC, and OTS, which provided  technical comments that we incorporated into this report as appropriate.  In addition, we requested comments on selected excerpts of a draft of this  report from 12 researchers whose studies we cited. We received technical  comments from 5 of the 12 researchers and incorporated their comments  into this report as appropriate. The remaining 7 did not respond to our  request.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the Ranking  Member of the Committee on Financial Services, House of  Representatives; Chairman and Ranking Member of the Committee on  Banking, Housing, and Urban Affairs, U.S. Senate; and other interested  congressional committees. We are also sending copies to the Chairman,  Board of Governors of the Federal Reserve System; Chairman, Federal  Deposit Insurance Corporation; Comptroller of the Currency, Office of the  Comptroller of the Currency; Director, Office of Thrift Supervision; and  other interested parties. We will also make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-8678 or williamso@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made major contributions to this  report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of our report were to discuss (1) available research on  possible discrimination in nonmortgage lending and review the strengths  and limitations of the data that researchers and regulators use to detect  possible discrimination; (2) analyze the Federal Reserve Board’s (FRB)  basis for largely retaining Regulation B’s prohibition against the voluntary  collection of racial and gender data in 2003; and (3) assess the potential  benefits and costs of requiring lenders to both collect and publicly report  racial and gender data for nonmortgage loan applicants, as well as options  to mitigate such costs.
To address objective one, we conducted a literature review to identify  articles and studies using nationally recognized surveys or quantitative  data, which examine the possibility of discrimination in nonmortgage  lending (i.e., business loans, automobile loans, and credit card loans). We  identified and selected a population of literature by searching electronic  databases, using research from our past reports, and referrals from  interviews with published researchers, federal government officials, and  representatives from business and consumer, trade, industry and advocacy  associations. We also performed a more limited review of literature on the  possibility of discrimination in mortgage lending and assessed the  strengths and weaknesses of data on personal characteristics that lenders  are required to collect and report under the Home Mortgage Disclosure  Act (HMDA) of 1975, as amended.
The majority of studies we reviewed focused on small businesses lending  and used data from FRB’s Survey of Small Business Finances (SSBF). We  conducted analysis to assess the strengths and weaknesses of SSBF as a  data source by reviewing documents on the survey’s purpose, use, and  limitations, and discussing the survey with researchers including FRB  officials and compared SSBF data with HMDA data. We also (1) conducted  a similar analysis regarding FRB’s Survey of Consumer Finances (SCF),  which has been used to conduct studies on the potential for discrimination  in automobile and credit card lending, and (2) reviewed publicly available  information on litigation involving possible discrimination in automobile  lending.
We also conducted interviews with a range of researchers, federal  financial regulators and agencies, as well as consumer, business and  banking trade groups, and lenders. We interviewed seven researchers who  have published relevant works using statistical techniques to understand  the extent to which possible discrimination may occur in nonmortgage  lending. We selected researchers to interview based on the relevance of  their published studies, widespread recognition in their professional  community, related experience, recommendations from peers, and their  ability to represent a broad range of available perspectives. We also  interviewed fair lending examiners, specialists, supervisors, directors,  researchers, and counsel from four federal bank regulatory agencies,  which are FRB, the Office of the Comptroller of the Currency, the Federal  Deposit Insurance Corporation, and the Office of Thrift Supervision. In  addition, we met with officials from the Small Business Administration  (SBA), SBA’s independent Office of Advocacy, and the Department of  Commerce’s Minority Business Development Agency to gather information  regarding Objectives 1 and 3 for business lending. We conducted  interviews with officials from nine lenders across the nation —both large  and small—and banking industry representative organizations, including  the American Bankers Association, Consumers Bankers Association, and  Independent Community Bankers of America. We also interviewed  officials from consumer, trade, industry and advocacy organizations  including those that represent minority-owned and women-owned  businesses such as the National Black Chamber of Commerce, Pan Asian  American Chamber of Commerce, U.S. Hispanic Chamber of Commerce,  Women’s Chamber of Commerce, National Association of Women’s  Business Owners, and the Center for Women’s Business Research.
Further, we reviewed federal financial regulators’ examination procedures  from the Interagency Fair Lending Examination Procedures, data from  some of the regulators regarding complaints alleging possible  discrimination by type of nonmortgage lending (e.g., small business or  credit card), and the U.S. Department of Justice Annual Report to  Congress Pursuant to the Equal Opportunity Credit Act Amendments of  1976 (April 2008) for the number of fair lending referrals from regulators  regarding potential ECOA claims that DOJ had received in 2007.
To address Objective 2, we reviewed relevant FRB studies, proposed  rulings, final rulings, meeting notes from its Consumer Advisory Council,  congressional testimony, correspondence, a sample from the 600 plus  comment letters that FRB received in 1999, and other internal documents  assessing the 1999 proposal to amend Regulation B and permit lenders to  collect data on personal characteristics for nonmortgage loan applicants  on a voluntary basis. Additionally, we interviewed researchers who have  assessed the potential for discrimination in nonmortgage lending and  banking and representatives from business trade groups, banks, consumer  groups, and groups that represent minority- and women-owned businesses  representatives. We asked these researchers and officials to provide their  views on FRB’s 2003 rationale for largely retaining Regulation B’s  prohibition against collecting data on personal characteristics for  nonmortgage lending except, as is discussed in the report, for the  purposes of conducting a self-test for compliance with the Equal Credit  Opportunity Act. We also asked researchers and officials their views on  the extent to which, if at all, HMDA may have created a risk for  discrimination in mortgage lending. We compared the reliability of  voluntary data collection to the general data reliability standards that we  and others have established.
To supplement our analysis of FRB’s 1999 proposed amendment to  Regulation B, we conducted an independent review of the 600 public plus  comment letters. To do so, we conducted an independent content analysis  of a statistically valid random sample of these letters. To conduct our  content analysis, we removed a total of 194 duplicates and ineligible  comment letters from the original population of 608 and ultimately  selected a sample of 90 letters to review. We summarized the key  comments of each of these letters from our sample by categorizing the  letters by: (1) type of respondent; (2) their position of support, opposition,  or no opinion on voluntary and mandatory collection of data; and (3)  reasoning offered for support or opposition of voluntary collection and  mandatory data collection and reporting. We helped confirm that our  categorizations were reliable by having two analysts independently  categorize a small number of letters to determine if they were in  agreement.
For Objective 3, we found that researchers had not produced studies or  articles on the benefits and costs of requiring lenders to collect and report  data on personal characteristics, such as race and gender, for  nonmortgage loan applicants. Therefore, we spoke with a variety of  researchers, government officials, and representatives from lending and  business trade groups, including women- and minority-owned businesses,  to offer perspectives and analysis on the benefits and costs of requiring the  collection of racial and gender data for nonmortgage loan applicants. We  asked these officials to compare and contrast the benefits and costs of  collecting nonmortgage data with the benefits and costs of collecting  HMDA data, as appropriate. We also reviewed and analyzed options to  mitigate costs of a data collection and reporting requirement, as  appropriate, for regulators, researchers, lenders, businesses, and  consumers, such as limiting a possible collection and reporting  requirement to apply to only small business and automobile lenders. We  reviewed the Interagency Fair Lending Examination Procedures for  mortgage and nonmortgage loans and interviewed regulators on the  difference in which they perform fair lending examinations on mortgage  and nonmortgage lending, such as business lending. We also examined  available cost estimates for lenders and regulators to collect and process  data for nonmortgage loan applicants from FRB, researchers, and lenders  and compared and contrasted such estimates with HMDA cost estimates  for collecting and processing additional data as appropriate.
We conducted this performance audit 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.
section_title: Appendix II: Comments from the Board of Governors of the Federal Reserve System
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Wesley M. Phillips, Assistant  Director; Benjamin Bolitzer; Emily Chalmers; Kimberly Cutright; John  Forrester; Simin Ho; Omyra Ramsingh; Robert Pollard; Carl Ramirez; and  Ethan Wozniak made major contributions to this report.
section_title: Bibliography
subsections: section_title: Research on Discrimination in Nonmortgage Lending
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Bostic, Raphael W. and K. Patrick Lampani. Racial Differences In  Patterns Of Small Business Finance: The Importance Of Local  Geography. Proceedings, Federal Reserve Bank of Chicago. (March  1999):149-179.
Cavalluzzo, Ken, and John Wolken. “Small Business Loan Turndowns,  Personal Wealth and Discrimination.” Journal of Business 78, no. 6 (2005):  2,153-2177.
Cavalluzzo, Ken, and Linda Cavalluzzo. “Market Structure and  Discrimination: The Case of Small Businesses.” Journal of Money, Credit,  and Banking 30, no. 4 (November 1998): 1-15.
Cavalluzzo, Ken, Linda Cavalluzzo, and John Wolken. “Competition, Small  Business Financing, and Discrimination: Evidence From A New Survey.”  Journal of Business 75, no. 4 (2002): 641-679.
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Getter, Daryl E. “Consumer Credit Risk and Pricing.” The Journal of  Consumer Affairs 40, no. 1 (2006): 41-63.
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