Fair Lending: Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts
Published: 2009-07-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA)--the "fair lending laws"--prohibit discrimination in lending. Responsibility for their oversight is shared among three enforcement agencies--the Department of Housing and Urban Development (HUD), Federal Trade Commission (FTC), and Department of Justice (DOJ)--and five depository institution regulators--the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (Federal Reserve), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and Office of Thrift Supervision (OTS). This report examines (1) data used by agencies and the public to detect potential violations and options to enhance the data, (2) federal oversight of lenders that are identified as at heightened risk of violating the fair lending laws, and (3) recent cases involving fair lending laws and associated enforcement challenges. GAO analyzed fair lending laws, relevant research, and interviewed agency officials, lenders, and consumer groups. GAO also reviewed 152 depository institution fair lending examination files. Depending upon file availability by regulator, GAO reviewed all relevant files or a random sample as appropriate.
section_title: What GAO Found
paragraphs: The Home Mortgage Disclosure Act (HMDA) requires certain lenders to collect and publicly report data on the race, national origin, and sex of mortgage loan borrowers. Enforcement agencies and depository institution regulators use HMDA data to identify outliers--lenders that may have violated fair lending laws--and focus their investigations and examinations accordingly. But, HMDA data also have limitations; they do not include information on the credit risks of mortgage borrowers, which may limit regulators' and the public's capacity to identify lenders most likely to be engaged in discriminatory practices without first conducting labor-intensive reviews. Another data limitation is that lenders are not required to report data on the race, ethnicity, and sex of nonmortgage loan borrowers--such as small businesses, which limits oversight of such lending. While requiring lenders to report additional data would impose costs on them, particularly smaller institutions, options exist to mitigate such costs to some degree, such as limiting the reporting requirements to larger institutions. Without additional data, agencies' and regulators' capacity to identify potential lending discrimination is limited. GAO identified the following limitations in the consistency and effectiveness of fair lending oversight that are largely attributable to the fragmented U.S. financial regulatory system: (1) Federal oversight of lenders that may represent heightened risks of fair lending law violations is limited. For example, the enforcement agencies are responsible for monitoring independent mortgage lenders' compliance with the fair lending laws. Such lenders have been large originators of subprime mortgage loans in recent years and have more frequently been identified through analysis of HMDA data as outliers than depository institutions, such as banks. Depository institution regulators are more likely to assess the activities of outliers and, unlike enforcement agencies, they routinely assess the compliance of lenders that are not outliers. As a result, many fair lending violations at independent lenders may go undetected, and efforts to deter potential violations may be ineffective. (2) Although depository institution regulators' fair lending oversight efforts may be more comprehensive, the division of responsibility among multiple agencies raises questions about the consistency and effectiveness of their efforts. For example, each regulator uses a different approach to analyze HMDA data to identify outliers and examination documentation varies. Moreover, since 2005, OTS, the Federal Reserve, and FDIC have referred more than 100 lenders to DOJ for further investigations of potential fair lending violations, as required by ECOA, while OCC made one referral and NCUA none. Enforcement agencies have settled relatively few (eight) fair lending cases since 2005. Agencies identified several enforcement challenges, including the complexity of fair lending cases, difficulties in recruiting and retaining staff, and the constraints of ECOA's 2-year statute of limitations.

section_title: Letter
paragraphs: The Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA)  (collectively, fair lending laws) prohibit discrimination in making credit  decisions. Specifically, ECOA prohibits creditors from discriminating  against credit applicants on the basis of race, color, religion, national  origin, sex, marital status, age, because an applicant receives income from  a public assistance program, or because an applicant has in good faith  exercised any right under the Consumer Credit Protection Act. FHA  prohibits discrimination by direct providers of housing, as well as other  entities whose discriminatory practices, among other things, make housing  unavailable to persons because of race or color, religion, sex, national  origin, familial status, or disability. Under one or both of the fair lending  laws, a lender may not, because of a prohibited basis:  fail to provide information or services or provide different information or  services regarding any aspect of the lending process, including credit  availability, application procedures, or lending standards;   discourage or selectively encourage applicants with respect to inquiries  about or applications for credit; refuse to extend credit or use different standards in determining whether  to extend credit;   vary the terms of credit offered, including the amount, interest rate,  duration, or type of loan;   use different standards to evaluate collateral;  treat a borrower differently in servicing a loan or invoking default  remedies; or    use different standards for pooling or packaging a loan in the secondary  market or for purchasing loans.
Eight federal agencies—the Department of Housing and Urban  Development (HUD); the Federal Trade Commission (FTC); the  Department of Justice (DOJ)—and the regulators of insured depository  institutions—the Federal Deposit Insurance Corporation (FDIC), the  Board of Governors of the Federal Reserve System (Federal Reserve), the  National Credit Union Administration (NCUA), the Office of the  Comptroller of the Currency (OCC), and the Office of Thrift Supervision  (OTS)—principally share oversight and enforcement responsibility for the  fair lending laws. The enforcement agencies, HUD, FTC, and DOJ,  generally have jurisdiction over nondepository mortgage lenders,  including independent mortgage lenders that are not affiliated with  federally insured depository institutions or owned by federally regulated  lenders. The depository institution regulators oversee federally insured  banks, thrifts, and credit unions and, as appropriate, certain subsidiaries,  affiliates, and service providers of these institutions. While the  enforcement agencies can pursue investigations, file complaints, and  participate in litigation against lenders in administrative or federal district  courts for potential fair lending violations under their independent  investigative and enforcement authorities, depository institution  regulators are required to refer lenders under their supervision to DOJ for  further investigation whenever one has reason to believe a lender has  engaged in a pattern or practice of discouraging or denying applications  for credit in violations of ECOA. Furthermore, the depository institution  regulators must provide notice to HUD and the alleged injured parties  whenever they have reason to believe that an FHA violation occurred that  did not also constitute a pattern or practice violation of ECOA and thus  did not trigger a referral to DOJ. The depository institution regulators also  have authority to enforce the FHA and ECOA through administrative  proceedings.
Over the years, some members of Congress, researchers, consumer  groups, and others have raised questions about lenders’ compliance with  fair lending laws and the depository institution regulators’ and agencies’  enforcement of these laws. These concerns have been heightened in  recent years because of the availability of mortgage pricing data published  by the Federal Reserve, which many lenders are required to submit under  the Home Mortgage Disclosure Act of 1975, as amended (HMDA).  According to the Federal Reserve, researchers, and others, their analyses  of HMDA data indicate that on average, African-American and Hispanic  mortgage borrowers may pay substantially higher interest rates and fees  than similarly situated non-Hispanic white borrowers. Since 2005, the  Federal Reserve annually has used HMDA data to identify approximately  200 lenders with statistically significant pricing disparities based on  ethnicity or race and distributed this screening or outlier list to other  enforcement agencies, depository institution regulators, and state  regulators for their review and potential follow-up. Many of these entities  were independent lenders that specialized in subprime loans, which  appear to have been disproportionately offered to minority borrowers.  Critics argue that enforcement agencies and depository institution  regulators have not adequately pursued potential fair lending violations;  for example, in recent years few enforcement actions have been brought  against lenders alleging discrimination.
Federal enforcement agencies and depository institution regulators have  stated that they have processes to ensure effective oversight and  enforcement of the fair lending laws. In particular, enforcement agencies  and depository institution regulators said that they use the lists of  institutions that have statistically significant pricing disparities provided  by the Federal Reserve and/or develop their own screening or outlier lists  through independent analysis of HMDA data or consumer complaints and  focus investigative and examination resources on those institutions.  Federal agency and depository institution regulatory officials also stated  that limitations in HMDA data, particularly the lack of underwriting  information such as borrowers’ credit scores, explain why many  investigations and examinations are a result of false positives and thus do  not result in enforcement actions. In addition, as discussed in this report,  FTC officials said that HMDA data do not allow for assessing mortgage  pricing discrimination at all lenders. However, federal officials also stated  that they vigorously pursue cases where the inclusion of underwriting data  does not explain differences in denials and mortgage interest rates  between borrowers who fall into different protected groups based on  national origin, race, or sex and initiate enforcement actions where  appropriate.
This report responds to your request that we provide an overview of  federal oversight and enforcement of the fair lending laws and addresses a  range of relevant issues. Specifically, this report (1) assesses the strengths  and limitations of data sources that enforcement agencies and depository  institution regulators use to screen for lenders that have potentially  heightened risk for fair lending law violations and discusses options for  enhancing the data, (2) assesses federal oversight of lenders that may  represent relatively high risks of fair lending violations as evidenced by  analysis of HMDA data and other information, (3) examines differences in  depository institution regulators’ fair lending oversight programs, and   (4) discusses enforcement agencies’ recent litigation involving potential  fair lending law violations and challenges that federal officials have  identified in fulfilling their enforcement responsibilities.
To meet our objectives, we reviewed and analyzed fair lending  examination and investigation guidance, policies, and procedures,  agencies’ Inspectors General reports, testimonies, agency documents,  academic studies, and past GAO work, in particular our 1996 report on  federal oversight of fair lending laws. In addition, we assessed agencies’  compliance with fair lending examination procedures by selecting a  sample of 152 fair lending examination files and summaries derived from  each depository institution regulator’s annual list of lenders at potentially  heightened risk for fair lending violations (that is, outlier lists). For the  Federal Reserve, FDIC, and OTS, we reviewed summary documentation of  completed examinations for each lender based on their 2005 and 2006  HMDA data outlier lists. For OCC and NCUA, we reviewed randomly  selected samples of their outlier examination reports, largely due to the  time that it took these agencies to provide requested documentation. We  generally limited the scope of our examination file review to compliance  (that is, if such examinations were initiated on schedule and if they  contained key elements for which the depository institution regulators’  Interagency Fair Lending Examination Procedures call for, such as a  review of HMDA and underwriting and pricing data, reviews of loan  policies and files, and interviews with lending officials). Making  judgments on how well the depository institution regulators conducted  examinations (for example, if they selected a sufficient sample of loan files  to review or if they used an appropriate examination methodology) was  beyond the scope of this review. However, we did compare the depository  institution regulators’ overall outlier examination findings and assessed  the extent to which the interagency examination procedures allowed for  assessments of all phases of the mortgage loan application process. We  also reviewed agency referrals to DOJ since 2005, reviewed DOJ’s  investigative activities and settlements, and consulted with all agencies on  some of the challenges they encountered in enforcing fair lending laws.
Finally, we interviewed officials from each federal enforcement and  depository institution regulator—including senior officials, policy analysts,  economists, statisticians, attorneys, examiners, and compliance  specialists—state financial regulatory entities, lenders, and researchers.  We asked these officials to describe and comment on regulatory efforts to  enforce fair lending laws, which included screening lenders for potentially  heightened risk of violations, conducting examinations, and enforcing the  laws through referrals, investigations and examinations, or other means.  (See app. I for more information on our objectives, scope, and  methodology).
We conducted this performance audit from October 2008 to July 2009, 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.
subsections: section_title: Background
paragraphs: During the late 1960s and 1970s, Congress enacted several laws that were  intended to help ensure fair and equitable access to credit for both  individuals and communities. These laws included FHA in 1968, ECOA in  1974, and HMDA in 1975. ECOA and FHA constitute the federal  antidiscrimination statutes applicable to lending practices and commonly  are referred to as the “fair lending laws.” Although both statutes prohibit  discrimination in lending, FHA antidiscrimination provisions also apply  more generally to housing, such as prohibiting discrimination in the sale or  rental of housing. Unlike ECOA and FHA, HMDA does not prohibit any  specific activity of lenders, but it establishes data collection, reporting,  and disclosure obligations for particular institutions, which are discussed  below. The Federal Reserve has general rulemaking authority for ECOA  and HMDA, and HUD has similar rulemaking authority for FHA.
subsections: section_title: Federal Oversight and Enforcement of Fair Lending Laws Are Shared among Multiple Agencies and Depository Institution Regulators
paragraphs: Responsibility for federal oversight and enforcement of the fair lending  laws is principally shared among three enforcement agencies and five  depository institution regulators (see app. II for more details). In general,  with respect to the relevant fair lending law, HUD and DOJ have  jurisdiction over all depository institutions and nondepository lenders,  including “independent” mortgage lenders, such as mortgage finance  companies, which are not affiliated with, or owned by, federally insured  depository institutions such as banks, thrifts, or credit unions or owned by  a federally regulated bank or savings and loan holding company. FTC has  jurisdiction pursuant to ECOA over all nondepository lenders, including  independent mortgage lenders, subsidiaries and affiliates of depository  institutions, and nondepository subsidiaries of bank holding companies.  Unlike HUD and DOJ, FTC does not have enforcement authority over  federally regulated depository institutions.
The following describes the fair lending enforcement responsibilities of  HUD, FTC, and DOJ in more detail:    Under FHA, HUD investigates all complaints filed with it alleging  violations of FHA and may initiate investigations and file its own  complaints, referred to as Secretary-initiated complaints, against  independent mortgage lenders, or any other lender, including depository  institutions that HUD believes may have violated the act. FHA requires  HUD to seek conciliation between the parties to any complaint. If  conciliation discussions are unsuccessful, and HUD determines after an  investigation that reasonable cause exists to believe that a discriminatory  housing practice has occurred, or is about to occur, HUD must issue a  Charge of Discrimination against those responsible for the violation and  prosecute the claim before an administrative law judge. However, after a  charge has been issued, any party may elect to litigate the case instead in  federal district court, in which case DOJ assumes responsibility from HUD  for pursuing litigation. A HUD administrative law judge or federal judge   may order lenders to change their policies, compensate borrowers  affected by the violation, and take steps to prevent future violations, in  addition to imposing civil penalties.
FTC also may conduct investigations and file ECOA complaints against  nonbank mortgage lenders or brokers—including but not limited to  nonbank subsidiaries of banks and bank holding companies—that may be  violating ECOA. If FTC concludes that it has reason to believe ECOA is  being violated, the agency may file a lawsuit against the lender in federal  court to obtain an injunction and consumer redress. If FTC deems civil  penalties are appropriate, the agency may refer the case to DOJ.  Alternatively, FTC may bring an administrative proceeding against the  lender before the agency’s administrative law judges to obtain an order  similar in effect to an injunction.
DOJ, which has both ECOA and FHA authority, may initiate its own  investigations of any creditor—whether a depository or nondepository  lender—under its independent authority or based on referrals from other  agencies as described below. DOJ may file pattern or practice and other  fair lending complaints in federal courts.
The types of remedies that may be obtained in fair lending litigation  include monetary settlements for consumer redress or civil fines,  agreements by lenders to change or revise policies, and the establishment  of lender fair lending training programs, and other injunctive relief.
The five depository institution regulators generally have fair lending  oversight responsibilities for the insured depository institutions that they  directly regulate, as well as certain subsidiaries and affiliates (see table 1).  Along with the enforcement agencies, the Federal Reserve and OTS also  have general authority over lenders that may be owned by federally  regulated holding companies but are not federally insured depository  institutions. Many federally regulated bank holding companies that have  insured depository subsidiaries, such as national or state-chartered banks,  also may have nonbank subsidiaries, such as mortgage finance companies.  Under the Bank Holding Company Act of 1956, as amended, the Federal  Reserve has jurisdiction over such bank holding companies and their  nonbank subsidiaries. OTS has jurisdiction over the subsidiaries of  savings and loan-holding companies, which can include federally insured  thrifts as well as noninsured lenders.
Depository institution regulators conduct examinations of institutions they  oversee to assess their fair lending compliance, including determining  whether there is evidence that lenders have violated ECOA or the FHA.  Under ECOA, depository institution regulators are required to refer  lenders that may have violated the fair lending laws to DOJ if there is  reason to believe that a lender has engaged in a pattern or practice of  discouraging or denying applications for credit in violation of ECOA. The  depository institution regulators are required to notify HUD of any  instance where there is reason to believe that a FHA and ECOA violation  has occurred which has not been referred to DOJ as a potential ECOA  pattern and practice violation. Under the FHA, HUD must provide  information to DOJ regarding any complaint in which there is reason to  believe that a pattern or practice of violations occurred or that a group of  persons has been denied rights under FHA and the matter raises an issue  of general public importance.
In addition, ECOA granted the depository institution regulators  enforcement authority to seek compliance under section 8 of the Federal  Deposit Insurance Act and the Federal Credit Union Act. Depository  institution regulators have parallel jurisdiction over such matters, even  when the matter is referred to the DOJ, because there is a reason to  believe that a pattern or practice violation has occurred and DOJ does not  defer for administrative enforcement. The agencies must work together  to assure there is no duplication of their efforts. The Federal Reserve,  OCC, FDIC, and OTS generally may take an administrative enforcement  action against an insured depository institution or an institution-affiliated  party that is violating, or has violated a law, rule, or regulation. NCUA  may take administrative enforcement action against an insured credit  union or its affiliated party that is violating or has violated a law, rule or  regulation. Depository institution regulators also have cease and desist  authority, can order restitution for the victims of discrimination, and issue  orders to change or revise lending policies or institute a compliance  program or require external audits and compliance with these orders can  be enforced in federal court. Moreover, they can impose civil money  penalties for each day that a violation continues.
section_title: HMDA Data Provide Information on the Race, Sex, and Other Personal Characteristics of Mortgage Loan Borrowers and Applicants
paragraphs: HMDA, as amended, requires certain lenders to collect, disclose, and  report data on the personal characteristics of mortgage borrowers and  loan applicants (for example, their ethnicity, race, and sex), the type of  loan or application (for example, if the loan is insured or guaranteed by a  federal agency such as the Federal Housing Administration), and certain  financial data such as the loan amount and borrowers’ incomes. HMDA’s  purposes are to provide the public with loan data that can assist in  identifying potential risks for discriminatory patterns and enforcing  antidiscrimination laws, help the public determine if lending institutions  are meeting the housing credit needs of their communities, and help public  officials target community development investment. In 2002, the Federal  Reserve, pursuant to its regulatory authority under HMDA, required  financial institutions to collect certain mortgage loan pricing data for  higher priced loans in response to the growth of subprime lending and to  address concerns that minority and other targeted groups were being  charged excessively high interest rates for mortgage loans. This  requirement was effective on January 1, 2004. Specifically, lenders were  required to collect and publicly disclose information about mortgages with  annual percentage rates above certain designated thresholds. This 2004  revision to HMDA also was intended to provide depository institution  regulators and the public with more information about mortgage lending  practices and the potentially heightened risk for discrimination. The data  were first reported and publicly disclosed in 2005.
HMDA’s data collection and reporting requirements generally apply to  certain independent mortgage lenders and federally insured depository  institutions as set forth in Regulation C. As shown in figure 1, many more  depository institutions than independent mortgage lenders are required to  collect and report HMDA data (nearly 80 percent are depository  institutions, and 20 percent are independent lenders). Lenders subject to  HMDA’s requirements must submit the data by March 1 for the previous  calendar year. For example, lenders submitted calendar year 2004 data— the first year in which lenders were required to collect and report  mortgage pricing data—to the Federal Reserve by March 1, 2005. Through  individual contracts with the other depository institution regulators and  HUD, the Federal Reserve collects the HMDA data from all filers, performs  limited data validity and quality reviews, checks with lenders as  appropriate to clear up discrepancies, and publishes the data in September  of each year.
section_title: Data Available to Detect Potentially Heightened Risk for Fair Lending Violations Have Limitations, and Options to Enhance the Data Involve Trade-offs
paragraphs: Federal enforcement agencies and depository institution regulators use  analysis of HMDA data and other information to identify lenders that  potentially are at heightened risk of having violated the fair lending laws  and target their investigations and examinations accordingly. However,  there are several critical limitations in available HMDA data and other data  that limit federal fair lending oversight and enforcement efforts. First,  HMDA data lack key underwriting data or information, such as borrowers’  credit scores or loan-to-value ratios, which may help explain why lenders  may charge relatively higher interest rates or higher fees to some  borrowers compared with others. Second, limited data are available on the  premortgage loan application process to help determine if loan officers  engage in discriminatory practices, such as steering minority applicants to  high-cost loans, before a loan application is filed. Third, Regulation B, the  regulation that implements the ECOA, generally prohibits lenders from  collecting personal characteristic data, such as applicants’ race, ethnicity  and sex, for nonmortgage loans, such as small business and credit card  loans, which also impedes federal oversight efforts. Requiring lenders to  collect and publicly report additional data could benefit federal oversight  efforts as well as independent research into potential discrimination in  lending, but also would impose additional costs, particularly on smaller  institutions with limited recordkeeping systems. Several options, such as  limiting additional data collection and reporting requirements to larger  lenders, could help mitigate such costs while better ensuring that  enforcement agencies and depository institution regulators have critical  data necessary to help carry out their fair lending responsibilities.
subsections: section_title: Federal Enforcement Agencies and Depository Institution Regulators Use HMDA Data to Detect Lenders at Potentially Heightened Risk of Having Violated the Fair Lending Laws
paragraphs: Since 2005, when HMDA mortgage pricing data became available, the  Federal Reserve annually has screened the data to identify lenders with  statistically significant pricing disparities, based on ethnicity or race, and  voluntarily has shared the screening results with other federal and state  agencies. First, the Federal Reserve systematically checks the data for  errors (such as values that are outside the allowable ranges) or omissions,  which may include contacting individual institutions for verification  purposes. Second, using statistical analysis, the Federal Reserve matches  loans made to minorities with loans made to non-Hispanic whites for each  HMDA reporting lender, based on the limited information available in  HMDA (such as property type, loan purpose, loan amount, location, date,  and borrower income). Third, the Federal Reserve calculates disparities by  race and ethnicity for rate spreads (among those loans for which rate  spreads were reported) and the proportion of loans that are higher priced  (the incidence of higher priced lending). Finally, it identifies those lenders  with statistically significant disparities in either the amount of rate spread  or the incidence of higher priced lending and develops a list it shares with  the other agencies.
As shown in table 2, which breaks out the Federal Reserve screening list  for 2006 HMDA data, independent lenders that are under the jurisdiction  of enforcement agencies accounted for almost half of lenders on the list,  although they account for only about 20 percent of all HMDA data  reporters. Federally insured and regulated depository institutions such as  banks, thrifts, and credit unions, which comprise nearly 80 percent of all  HMDA data reporters, accounted for the other half of the outlier list.
Federal enforcement agencies generally use the Federal Reserve’s annual  screening list, but also conduct independent analyses of HMDA data and  other information to develop their own list of outliers, according to agency  officials. For example, all of the enforcement agencies said that they  incorporate the Federal Reserve’s annual screening list into their own  ongoing screening process to identify targets for fair lending  investigations. In addition, HUD and FTC officials said they also use other  information to identify outliers, including consumer complaint data.
Like enforcement agencies, depository institution regulators generally use  the Federal Reserve screening list, independent analysis of HMDA data,  and other information sources to identify potential outliers and other risk  factors. The approaches that the depository institution regulators use may  vary significantly. For example, OCC and OTS consider a range of  potential risk factors in developing its annual outlier list including, the  Federal Reserve’s annual pricing outlier list, independent analysis of  mortgage pricing disparities, approval and denial rate disparities, and  indications of potential redlining and marketing issues, among others.  Other depository regulators, such as the FDIC and the Federal Reserve  generally focus on independent analysis of HMDA data and other  information to develop outlier lists that are based on statistically  significant pricing disparities, although they also may assess other risk  factors, including approval and denial decisions and redlining, in assessing  fair lending compliance at other lenders under their jurisdiction. FDIC and  the Federal Reserve use this analysis to plan and scope their routine fair  lending compliance examinations. As shown in table 3, OCC, due to the  range of risks that it assesses, identified the largest number of outliers on  the basis of its analysis of 2006 HMDA data. We discuss the agencies’  differing approaches in more detail and the potential implications of such  differences later in this report.
Without HMDA data, enforcement agencies’ and depository institution  regulators’ ability to identify outliers and target their investigations and  examinations would be limited. According to the depository institution  regulators, analysis of HMDA data allows them to focus examination  resources on lenders that may have potentially heightened risk of violating  fair lending laws. In the absence of HMDA data, enforcement agencies and  depository institution regulators would have to cull through loan files or  request electronic data to assess a lender’s relative risk of having violated  the fair lending laws, which could be a complex and time-consuming  process.
section_title: Lack of Key Underwriting Information Can Limit Regulatory Screening and Independent Research on Discrimination in Mortgage Lending; Collecting That Information Entails Additional Costs, Which May Be Outweighed by the Benefits under Certain Options
paragraphs: Although the development of outlier lists on the basis of HMDA data may  allow enforcement agencies and depository institution regulators to  prioritize fair lending law investigations and examinations, the lack of key  information necessary to gauge a borrower’s credit risk, such as  underwriting variables, limits the data’s effectiveness. Agency and  depository institution regulatory officials have told us that the lack of key  mortgage loan underwriting variables, such as borrowers’ credit scores,  borrowers’ debt-to-income, or the loan-to-value ratios of the mortgages, is  a critical limitation of HMDA data. Underwriting variables are important  because they may help explain mortgage lending disparities among what  otherwise appear to be similarly situated loan applicants and borrowers of  different ethnicity, race, or sex and may help to uncover additional  disparities that may not be evident without the underwriting variables. The  lack of underwriting data may result in enforcement agencies and  depository institution regulators initiating investigations or examinations  of lenders that may charge relatively higher interest rates to certain  borrowers due to business necessities, such as risk-based pricing that  reflects borrower’s creditworthiness.
FTC officials also said that the information HMDA data has provided on  potential mortgage pricing disparities limits its usefulness for the agency’s  enforcement activities. In particular, FTC officials said that reported  HMDA data are geared toward assessing mortgage pricing disparities  among subprime lenders rather than lenders that may offer prime,  conventional mortgages or government-guaranteed (or –insured)  mortgages. The FTC officials said that lenders that originate such  mortgages generally do so at levels below the thresholds established in  HMDA data reporting requirements. Thus, the FTC officials said that  Federal Reserve’s annual outlier list is disproportionately represented by  independent and other lenders that have specialized in subprime mortgage  loans and that the agency’s capacity to assess the potential for  discrimination in the prime and government-guaranteed and -insured  mortgage markets is limited.
subsections: section_title: Agencies, Regulators, and Researchers Typically Supplement HMDA Data with Underwriting Information to Help Assess Potentially Risk for Fair Lending Law Violations
paragraphs: To compensate for the lack of key underwriting information included in  HMDA data, officials from enforcement agencies and depository  institution regulators said that they typically request additional data once  an outlier investigation or examination has been initiated. Some officials  said that while it generally is easier for larger lenders to provide the data  on a timely basis because most of them store it electronically, smaller  lenders with paper-based loan documentation may face greater challenges  in doing so or may not maintain requested data. When the underwriting  data are received, enforcement agency and depository institution  regulatory officials said that they use them to determine if statistically  significant pricing and denial disparities between mortgage loan applicants  and borrowers of different ethnicity, race, or sex still exist. Officials we  contacted generally agreed that the annual screening process would be  more efficient if they had access to additional underwriting data at the  time they screened the HMDA data to identify potential outliers. To try to  address the timing issue, in 2009, OCC began a pilot program to obtain this  information earlier in the screening process. Specifically, OCC has  requested that six large national banks separately provide certain specified  underwriting information to the agency at the same time they report  HMDA data.
The lack of key underwriting information in HMDA data also limits  independent research, advocacy, and private plaintiff case development  regarding potential discrimination in mortgage lending. Because HMDA  data are publicly available, researchers, community groups, and others use  them to assess the potential risk for discrimination in the mortgage  lending industry and at particular lenders. However, researchers,  community groups, and others have stated that the absence of sufficient  underwriting data makes determining if lenders had a reasonable basis for  mortgage pricing and other disparities—as identified through analysis of  HMDA data alone—difficult. As a result, researchers have obtained  aggregated mortgage underwriting data from other sources and matched  them with HMDA data to assess potential risk for discrimination in  mortgage lending. While this approach may help identify the potential risk  for discrimination, the underwriting data obtained may not be as accurate  as if reported directly by the lenders as part of HMDA. Additionally, FDIC  noted that although the data from other sources may reflect commonly  accepted standards for underwriting, they may or may not reflect a  particular lender’s actual policy.
section_title: Additional Costs to Lenders from Making Underwriting Data Available to Federal Agencies and Researchers Could Be Offset to Some Degree
paragraphs: Requiring lenders to collect and publicly report key underwriting data as  part of their annual HMDA data submissions would benefit regulatory and  independent research efforts to identify discrimination in mortgage  lending. With underwriting data included in HMDA data, enforcement  agencies and depository institution regulators may be better able to  identify lenders that may have disparities in mortgage lending, enabling  them to better target investigations and examinations toward the lenders  most at risk of having violated the fair lending laws. Moreover, this could  help minimize burdens on lenders that do not represent significant risks  but are flagged as outliers without the additional data. Similarly, such data  might help researchers and others better assess the risk for potential risk  for discrimination and independently assess the enforcement of fair  lending laws and enhance transparency. For example, researchers,  advocacy groups, and potential plaintiffs could use independent analysis  of the data to more efficiently monitor discrimination by particular lenders  and in the mortgage lending industry generally, which could help inform  Congress and the public about compliance with the fair lending laws.
Although expanding HMDA data to include certain underwriting data  could facilitate regulatory and independent research efforts to assess the  potential risk for mortgage discrimination, it would result in additional  costs to lenders. As we have reported previously, quantifying such costs in  a meaningful way can be difficult for a variety of reasons, such as  challenges associated with obtaining reliable data from potentially  thousands of lenders that have different cost accounting systems and  underwriting policies. According to representatives from a banking trade  group and a large lender, the additional costs likely would include  expenses associated with (1) establishing information systems or upgrades  to collect the data in the proper format, (2) training costs for staff who  would be responsible for collecting and reporting the data, and (3) legal  and auditing costs to help ensure that the data were accurate and in  compliance with established standards. The representative from the large  lender said that costs also would be associated with electronically storing  and securing additional types of sensitive data that eventually would be  made public. Additionally, the official said thousands of employees, who  currently look at underwriting, but are not associated with reporting  HMDA data, would have to receive fair lending compliance training.  Additionally, the official said ensuring compliance with additional public  reporting requirements would require additional legal support to certify  the accuracy of the additional data. Finally, the costs may be relatively  higher for smaller institutions because they may be less likely than larger  lenders to collect and store underwriting and pricing data electronically or  may not currently retain any pricing data.
While certain key underwriting data, such as borrower credit scores, DTI  ratios, and LTV ratios, generally would benefit regulatory screening efforts  and independent research, advocacy, and private enforcement, they may  not be sufficient to resolve questions about potential heightened risk for  discrimination by individual lenders or in the industry generally. As part of  fair lending investigations and examinations, enforcement agencies and  depository institution regulators may request a range of additional  underwriting data from lenders, such as detailed product information,  mortgage-rate lock dates, overages, additional fees paid, and counteroffer  information to help assess the basis for mortgage rate disparities identified  through initial analysis of HMDA data. However, according to  representatives from a banking trade group and a large lender, requiring  them to collect and publicly report such additional underwriting data as  part of their annual HMDA data submissions likely would involve  additional training, software, compliance, and other associated costs. In  addition, according to FTC, overage data may be closely guarded  proprietary information, which lenders likely would object to reporting  publicly on the grounds that they would represent disclosures to their  competitors.
Several options could reduce the potential costs associated with requiring  lenders to collect and report certain underwriting variables as part of their  HMDA data submissions. For example, these options include    Large lender requirement—requiring only the largest lenders to provide  expanded reporting. According to officials, many of these lenders already  collect and store such information electronically. According to published  reports, the top 25 mortgage originators accounted for 92 percent of total  mortgage loan volume in 2008. Thus, such a requirement would focus on  lenders that constitute the vast majority of mortgage lending and minimize  costs on smaller lenders, which may not record underwriting in electronic  form as most larger lenders reportedly do;   Regulatory (nonpublic) reporting of expanded data—requiring all  HMDA filers to routinely report underwriting data only to the  depository institution regulators in conjunction with HMDA data (as  OCC is requiring six large lenders in its pilot study). In so doing, lenders  may facilitate depository institution regulators’ efforts to identify potential  outliers while minimizing concerns about potential public reporting and  compliance costs; and   Nonpublic reporting limited to large lenders—requiring only the largest  lenders to report expanded data to the depository institution regulators in  conjunction with their HMDA data filings.
While all of these options would help mitigate additional costs to some  degree compared with a general requirement that lenders collect and  report publicly underwriting data, each would result in limited or no  additional information available to researchers and the public—one of the  purposes of the act. In addition, according to DOJ, it is not clear whether  the enforcement agencies would have access to the expanded data under  the second or third options described above. Nevertheless, any of these  options could help enhance depository institution regulators’ ability to  oversee and enforce fair lending laws. Without additional routinely  provided underwriting data, agencies and depository institution regulators  will continue to expend limited resources collecting such information on a  per institution basis as they initiate investigations and examinations.
section_title: Lack of Data during the Preapplication Phase of Mortgage Lending May Result in a Gap in Fair Lending Oversight, and Addressing This Gap Has Been Challenging
paragraphs: Another data limitation that might affect federal efforts to enforce the fair  lending laws is the lack of information about the preapplication process  for mortgage loans. HMDA data only capture information after a mortgage  loan application has been filed and a loan approved or denied. However,  fair lending laws apply to the entire loan process. The preapplication  process involves lenders’ treatment of potential borrowers before an  application is filed, which could affect whether the potential borrower  applies for a loan and the type of loan. In a 1996 report on federal  enforcement of fair lending laws, we reported that discrimination could  occur in the treatment of customers before they actually applied for a  mortgage loan. This type of discrimination, which also would be a  violation under ECOA, could include spending less time with minority  customers when explaining the application process, giving them different  information on the variety of products available, or quoting different rates.
Subsequent studies by researchers and fair housing organizations have  continued to raise concerns about the potential risk for discrimination in  mortgage lending during the preapplication phase. The methodology  used in these studies often included a technique known as matched pair  testing. In matched pair testing, individuals or couples of different  ethnicity, race, or sex pose as mortgage loan applicants, visit lenders at  different times, and meet with loan officers. The testers, or mystery  shoppers, usually present comparable financial backgrounds in terms of  assets, income, debt, and credit history, and are asked to request  information about similar loan products. For example, in a 2006 study th utilized testers who posed as low-income, first-time home buyers in  approximately 250 matched pair tests, researchers found evidence of  adverse treatment during the preapplication phase of African-Americans  at  and Hispanics in the Chicago metropolitan area. Specifically, the study found that African-American and Hispanic testers were less likely than  their white counterparts to be given detailed information about re or additional loan products and received less coaching and follow-up  communication. However, the authors of the study found that in Los  Angeles the treatment of white, African-American, and Hispanic testers  generally was similar.
Agency officials we contacted said that the use of testers may have certain  advantages in terms of identifying potential risks for discrimination by  loan officers and other lending officials, but it also has a number of  challenges and limitations. For example, officials from FTC, NCUA, and  OTS said that testers require specialized skills and training, which results  in additional costs. In the early 1990s, FTC officials said that they used  testers as a part of their fair lending oversight activities and found the  effort not only to be costly but also inconclusive because matching  similarly situated borrowers and training the testers was difficult. OCC  indicated that it conducted a pilot testing program from 1994 through 1995  and found that indications of differing treatment were weak and involved  primarily unverifiable subjective perceptions, such as how friendly the  loan officer was to the tester. FTC officials said that current  technological advances have made the use of testers even more difficult  because loan officers can check a potential loan applicant’s credit scores  during the initial meeting. Therefore, these officials said that loan officers  may suspect testers are not who they claim to be, thereby raising  questions about potential fraud that could affect the loan officer’s  interactions with the testers and make any results unreliable. FTC officials  also noted that it also was difficult to script identical scenarios because  testers often would ask questions, react, and respond differently, which  can make test results unreliable. DOJ officials said that they only  occasionally used testers in the context of fair lending enforcement due to  the difficulties described above and the complexities involved in analyzing  lender treatment of testers during the mortgage preapplication process.  However, FDIC officials said they were in the early stages of analyzing the  costs of using testers and considering whether it would be beneficial to  use them in conjunction with their fair lending reviews.
While the agencies and depository institution regulators’ generally do not  use testers to assess the potential risk for discrimination during the  preapplication phase, the alternative strategies that are used have  limitations. In general, officials said that they encourage lenders to  voluntarily test for fair lending compliance, which may include the use of  testers. Officials said that they would review any available analysis when  conducting fair lending examinations. However, according to Federal  Reserve and OCC officials, this information provided by the use of in- house testers may be protected by the ECOA self-testing privilege, which  limits their ability to use it for examination purposes. Federal Reserve  officials also noted that few lenders conduct such testing. Depository  institution regulators also said that they review customer complaint data;  compare the number of applications filed by mortgage loan applicants of  different ethnicity, race, or sex and investigate any potential disparities;  and review HMDA and additional data to help determine the extent to  which minority mortgage loan applicants may have been steered into  relatively high-cost loans although they might have qualified for less- expensive alternatives. However, these alternative sources share the same  limitations as the use of testers, including the information may provide  only an inferential basis for determining if discrimination occurred during  the preapplication process and may not be reliable. The depository  institution regulators have yet to identify robust data or means of  assessing potential discrimination during this critical phase of the  mortgage lending process. In a recent report on the financial regulatory  system, the Department of the Treasury suggested that surveys of  borrowers and loan applicants may be an alternative means of assessing  compliance with consumer protection laws, such as the fair lending laws.  Without adequate data from the preapplication phase such as through the  use of testers, surveys, or alternative means, any fair lending oversight and  enforcement will be incomplete because it will include only information  on the borrowers that apply for credit and not the larger universe of  potential borrowers who sought it.
section_title: Lack of Personal Characteristic Data for Nonmortgage Lending Limits Effectiveness of Efforts to Detect Potential Risk for Fair Lending Law Violations
paragraphs: A final data limitation is that depository institution regulators generally do  not have access to personal characteristic data (for example, race,  ethnicity, and sex) for nonmortgage loans, such as business, credit card,  and automobile loans. In a 2008 report, we reported that Federal Reserve  Regulation B generally prohibits lenders from requesting and collecting  such personal characteristic data from applicants for nonmortgage loans.  The Federal Reserve 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 that the information  would be used for discriminatory purposes. The Federal Reserve also  argued that amending Regulation B and permitting lenders to collect such  data on a voluntary basis would result in inconsistent and noncomparable  data. In the absence of personal characteristic data for nonmortgage loans,  we found that agencies tended to focus their oversight activities more on  mortgage lending rather than on areas such as automobile, credit card, and  business lending that are also subject to fair lending laws.
While the interagency procedures that depository institution regulators  use to conduct fair lending examinations provide for assessing the  potential risk for discrimination in nonmortgage lending, our 2008 report  concluded that such procedures had a high potential for error and were  time-consuming and costly. Under the interagency procedures, examiners  may make use of established “surrogates” to deduce nonmortgage loan  applicants’ race, ethnicity, or sex. For example, after consulting with their  agency’s supervisory staff, the procedures allow examiners 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. However, there is the potential for error in the use of such  surrogates (for example, certain first names are gender neutral, and not all  residents of particular census tract may be African-American).  Furthermore, using such surrogates may require examiners to cull through  individual nonmortgage loan files. In contrast, HMDA data allow  enforcement agencies and depository institution regulators to identify  potential outliers through statistical analysis.
As we reported, requiring lenders to collect personal characteristic data  for nonmortgage loans to facilitate the regulatory supervision and  independent research into the potential risk for discrimination would  involve additional costs for lenders. These potential costs included  information system integration, employee training, and compliance costs.  A requirement that lenders collect and publicly report such personal  characteristic data likely would need to be accompanied by a requirement  that they provide underwriting data to better inform assessments of their  lending practices. However, because certain types of nonmortgage  lending, such as small business lending, generally are more complicated  than mortgage lending, the amount of underwriting data that would need  to be reported to allow for informed assessments likely would be  comparatively higher as would the associated reporting costs. Similar to  the options for expanding HMDA data, several options could facilitate  depository institution regulators’ efforts to assess the potential risk for  discrimination in nonmortgage lending while mitigating potential lender  costs. In particular, lenders could be required to collect such data for  certain types of loans, such as small business loans, and make the data  available to depository institution regulators rather than publicly report it.
section_title: Lenders That May Pose Relatively Greater Risks of Violating Fair Lending Laws Generally Are Subject to Less Comprehensive Federal Oversight Due to the Fragmented Regulatory Structure and Other Factors
paragraphs: Lenders that may represent heightened risks of fair lending violations are  subject to relatively less comprehensive federal review of their activities  than other lenders. Specifically, the Federal Reserve’s annual analysis of  HMDA pricing data and other information suggest that independent  lenders and nonbank subsidiaries of holding companies are more likely  than depository institutions to engage in mortgage pricing discrimination.  While depository institutions may represent relatively less risk of fair  lending violations, they generally are subject to a comprehensive oversight  program. Specifically, depository institution regulators conduct oversight  examinations of most depository institutions that are identified as outliers  (more than an estimated 400 such examinations were initiated and largely  completed based on the 2005 and 2006 HMDA data analysis) and have  established varying policies to conduct routine fair lending compliance  oversight of many other depository institutions as well. In contrast,  enforcement agencies, which have jurisdiction over independent lenders  have conducted relatively few investigations of such lenders that have  been identified as outliers over the past several years (for example, HUD  and FTC have initiated 22 such investigations since 2005). HUD and FTC  also generally do not conduct fair lending investigations of independent  lenders that are not viewed as outliers. While the Federal Reserve can  conduct outlier examinations of nonbank subsidiaries as it does for state- chartered depository institutions under its jurisdiction, it lacks clear  authority to conduct routine consumer compliance, including fair lending,  examinations of such nonbank lenders as it does for state member banks.  To some degree, these differences reflect differences between the  missions of enforcement agencies and depository institution regulators, as  well as resource considerations. They also illustrate critical deficiencies in  the fragmented U.S. financial regulatory structure, which is divided among  multiple federal and state agencies. In particular, the current regulatory  structure does not ensure that independent lenders and nonbank  subsidiaries receive the same level of oversight as other financial  institutions. As we have stated previously, congressional action to reform  the financial regulatory system is needed and could, among a range of  benefits, help to ensure more comprehensive and consistent fair lending  oversight.
subsections: section_title: Federal Reserve’s Annual HMDA Analysis and Other Information Suggest That Independent Mortgage Lenders and Nonbank Subsidiaries of Holding Companies Pose Relatively Heightened Risks of Potential Fair Lending Law Violations
paragraphs: Based on the Federal Reserve’s annual screening lists, independent  mortgage lenders represent relatively heightened risks of fair lending law  violations than federally insured depository institutions (see table 4). On  the basis of 2004–2007 HMDA data, the Federal Reserve annually identified  on average 116 independent mortgage lenders through its pricing screens,  which represent about 6 percent of all independent mortgage lenders that  file HMDA data. In contrast, the Federal Reserve identified on average 118  depository institutions as outliers during the same period, which  represented less than 2 percent of depository institutions that file HMDA  data.
Independent mortgage lenders and nonbank subsidiaries of holding  companies have been a source of significant concern and controversy for  fair lending advocates in recent years. As we reported in 2007, 14 of the  top 25 originators of subprime and Alt-A mortgages were independent  mortgage lenders, and they accounted for 44 percent of such  originations. Similarly, we found that 7 of the 25 largest originators of  subprime and Alt-A mortgages in 2007 (accounting for 37 percent of  originations) were nonbank subsidiaries of bank and savings and loan  holding companies. The remaining four originators were depository  institution lenders. We also reported that many such high-cost, and  potentially heightened-risk mortgages, appear to have been made to  borrowers with limited or poor credit histories and subsequently resulted in significant foreclosure rates for such borrowers. In a 2007 report, we  found that the market share of subprime lending had grown dramatically  among minority and other borrowers and at the expense of the marke mortgage loans insured by the Federal Housing Administration.
section_title: Depository Institution Regulators Conduct Targeted Fair Lendin g Examinations of Most Institutions Identified a s Outliers as Well as Other Lenders through the Routine Examination Process
paragraphs: epository institution regulators oversee fair lending compliance through  D targeted examinations of institutions that are identified as outliers through screening HMDA data or routine examinations of the institutions under  compliance or safety and soundness examination programs. A key  r  objective of the depository institution regulators’ fair lending outlie examinations, which generally are to take place within 12–18 months lender being placed on such a list, is to determine if initial indications of  heightened fair lending risk warrant further review and potential  administrative or enforcement action, which can serve to punish v and deter violations by other lenders. To assess lender compliance, each  of the depository institution regulators is to follow the Interagency Fair  Lending Examination Procedures, which were established jointly by the depository institution regulators in 1999. While the interagency fair  lending procedures are intended to be flexible to meet the specific  requirements of each depository institution regulator, they contain general  iolators  procedures to be included in examinations, according to officials.  Specifically, under the guidelines, examiners are to request information  from each lender about its underwriting and pricing policies and  procedures, the types of loan products offered, and the degree of loan  officer discretion in making underwriting and pricing decisions. The  depository institution regulators also assess the accuracy of the lender’s  HMDA data and request loan underwriting and pricing data. The  depository institution regulators also interview lending officials to ensure  they properly understand the policies and procedures and discuss any  remaining discrepancies that have been identified between mortgage  applicants and borrowers of different ethnicity, race, or sex. The  examiners also generally review lender files to assess potential  discrepancies, particularly when disparities in the data persist after  accounting for underwriting variables. Finally, examiners may review the  lender’s marketing efforts to check for fair lending violations and assess  the lender’s fair lending compliance monitoring procedures and training  programs to ensure that efforts are sufficient for ensuring compliance with  fair lending laws.
Our reviews of completed fair lending outlier examinations indicated  general agency compliance with established policies and procedures.  Based on our file review, we estimate that the depository institution  regulators initiated and largely completed more than 400 examinations of  lenders that were identified as outliers on the basis of their analysis of  2005 and 2006 HMDA data. The combined outlier lists for each HMDA data  year contained more than 200 lenders. Furthermore, our analysis of  examination files generally identified documentation that showed that  depository institution regulators followed key procedures in the  interagency fair lending guidance, including reviewing underwriting  policies, incorporating underwriting data into analysis, and conducting  interviews with the lending institution officials. While we identified  documentation of these key elements, our review did not include an  analysis of the depository institution regulators’ effectiveness in  identifying potentially heightened risks for fair lending law violations.  However, our review identified certain differences and, in some cases,  limitations in the depository institution regulators’ fair lending  examination programs, which are discussed in the next section.
Depository institution regulators also have established varying policies to  help ensure that many lenders not identified through HMDA screening  routinely undergo compliance examinations, which may include fair  lending components. Such routine examinations may be critical because  HMDA data analysis may not detect all potentially heightened risks for  violations, and many smaller lenders are not required to file HMDA data.  For example, FDIC, Federal Reserve, and OTS officials said they have  policies to conduct on-site examinations of lenders for consumer  compliance, including fair lending examinations, generally every 12–36  months, primarily depending on the size of the lender and the lender’s  previous examination results. Moreover, FDIC, Federal Reserve, and OTS  officials said they conduct a fair lending examination in conjunction with  every scheduled compliance examination. OCC selects a sample of all  lenders—including those that are not required to file HMDA data—for  targeted fair lending examinations. OCC officials said its examiners then  conduct a more in-depth fair lending examination on these randomly  selected institutions, which averages about 30 institutions per year. NCUA  generally conducts fair lending examinations on a risk basis, as described  later in this report, and generally does not conduct routine fair lending  examinations of credit unions that are not viewed as representing  potentially heightened risks.
subsections: section_title: Limited Mission Focus and Resource Levels May Help Explain Breadth of Depository Institution Regulators Fair Lending Oversight Programs
paragraphs: While depository institution regulators may identify potentially heightened  risks for fair lending violations through their outlier and routine  examinations, ECOA requires that they refer all cases for which they have  a reason to believe that a pattern or practice of discrimination has  occurred to DOJ for further investigation and potential enforcement.  Moreover, depository institution regulators must provide notice to HUD  whenever they have a reason to believe that a FHA and ECOA violation  has occurred and the matter has not been referred to DOJ as a potential  pattern or practice violation of ECOA. Therefore, depository institution  regulators generally do not have to devote the time and resources  necessary to determine whether the federal government should pursue  litigation against depository institutions and, if so, conduct such litigation  as this is the responsibility of the enforcement agencies. However,  depository institution regulators may pursue other actions against lenders  for fair lending violations through their administrative authorities  including monetary penalties, cease and desist orders to remedy the  institution’s systems, policies and procedures, restitution to obtain  reimbursement and remedies for harmed consumers and order additional  ameliorative measures including creating community or financial literacy  programs to assist consumers.
Depository institution regulators also may have large examination staffs  and other personnel to carry out fair lending oversight. At the depository  institution regulators, fair lending oversight generally is housed in offices  that are responsible for oversight of a variety of consumer compliance  laws and regulations, and the CRA, in addition to the fair lending laws.  While ensuring compliance with these laws is challenging as there may be  thousands of depository institutions under the jurisdiction of each  depository institution regulator, regulators typically have hundreds of  examiners to carry out these responsibilities. Moreover, the Federal  Reserve, FDIC, OCC, and OTS also employ economists and statisticians to  assist in fair lending oversight. NCUA officials said that the agency does  not employ statisticians. However, all of the depository institution  regulators have attorneys who are involved in supporting fair lending  oversight and other consumer law compliance activities.
section_title: Federal Reviews of Independent Lenders and Nonbank Subsidiaries of Holding Companies Are Limited
paragraphs: While independent lenders and nonbank subsidiaries of holding  companies may represent higher fair lending risks than depository  institutions, federal reviews of their activities are limited. According to  HUD and FTC officials, since 2005, the agencies have initiated a combined  22 investigations of independent mortgage lenders for potentially  heightened risks for fair lending violations. FTC opened more than half,  13, of these investigations in 2009, and these investigations currently are in  the initial stages. DOJ has also opened several such investigations, as well  as conducting investigations of nonbank subsidiaries of bank holding  companies and savings and loan holding companies based on referrals  from the depository regulators. Therefore, the enforcement agencies have  not conducted investigations, in many cases, where the Federal Reserve’s  initial analysis of HMDA data suggests statistically significant mortgage  pricing disparities between minority and nonminority borrowers. As  discussed previously, the Federal Reserve has identified on average 116  independent lenders annually for mortgage pricing disparities based on its  analysis of HMDA data since 2005. While DOJ, HUD and FTC may  independently analyze HMDA data to identify lenders that they view as  representing the highest risks, and targeting their investigations  accordingly, as discussed previously, in the absence of underwriting data  the agencies cannot be assured that other lenders with statistically  significant differences in mortgage pricing for minority and nonminority  borrowers are in compliance with the fair lending laws. HUD and FTC also  generally do not initiate investigations of independent lenders that are not  viewed as outliers. According to FTC officials, such investigations are not  initiated largely due to resource limitations, which are discussed below.  Therefore, unlike most depository institution regulators, enforcement  agencies do not assess the fair lending compliance of independent lenders  through routine oversight.
Once DOJ, HUD or FTC identify a particular lender as potentially having  violated fair lending laws, their initial investigative efforts generally  resemble those of depository institution regulators’ outlier examinations.  For example, DOJ, HUD and FTC officials said they request that such  lenders provide loan underwriting policies and procedures, information on  the types of loan products offered, and information on the extent to which  loan officers have discretion over loan approvals and denials or the pricing  terms (interest rates or fees) at which an approved loan will be offered.  According to agency officials, if loan officers have substantial discretion  under lender policies, the risk of discriminatory lending decisions is  higher. DOJ, HUD and FTC officials also may request raw HMDA data  from lenders and test their accuracy and request loan underwriting or  overage data. With this information, DOJ, HUD and FTC officials said they  conduct additional statistical analysis to help determine if initial  disparities based on ethnicity, race, or sex can be explained by  underwriting information. DOJ, HUD and FTC officials also may determine  if the lender internally monitors fair lending compliance and interview  representatives of the lending institution. Finally, DOJ, HUD and FTC  may review loan files. In such reviews, investigators generally try to  identify, frequently through statistical analysis, similarly situated  applicants and borrowers of different ethnicity, race, or sex to determine if  there was any discrimination in the lending process. On the basis of their  investigations, HUD DOJ, and FTC determine if sufficient evidence exists  to file complaints against the lenders, subject to such investigations, and  pursue such litigation where deemed appropriate.
Enforcement agencies also have established efforts to coordinate their  activities and prioritize investigations of independent lenders and other  institutions, as necessary. For example, enforcement agency officials said  that they meet periodically to discuss investigations and have shared  information derived from investigations. According to DOJ, the agency,  FTC and HUD also have a working group that meets on a bimonthly basis  to discuss HMDA pricing investigations on nonbank lenders and to discuss  issues common to the three enforcement agencies in their shared  oversight of nonbank lenders.
subsections: section_title: Resource Considerations May Limit Enforcement Agencies Fair Lending Oversight Activities
paragraphs: The differences in the enforcement agencies’ capacity to pursue potential  risks for violating the fair lending laws, relative to the depository  institution regulators, results in part from resource considerations. For  example, in a 2004 report, we assessed federal and state efforts to combat  predatory lending (practices including deception, fraud, or manipulation  that a mortgage broker or lender may use to make a loan with terms that  are disadvantageous to the borrower), which can have negative effects  similar to fair lending violations. We questioned the extent to which FTC,  as a federal enforcer of consumer protection laws for nonbank  subsidiaries, had the capacity to do so. We stated that FTC’s mission and  resource allocations were focused on conducting investigations in  response to consumer complaints and other information rather than on  routine monitoring and examination responsibilities.
Our current work also indicates that resource considerations may affect  the relative capacity of enforcement agencies to conduct fair lending  oversight. For example, at HUD, responsibility for conducting such  investigations lies with the Fair Lending Division in the Office of Systemic  Investigations (OSI) in its Office of Fair Housing and Equal Opportunity  that was established in 2007. OSI currently has eight staff—including four  equal opportunity specialists and two economists. At FTC and DOJ, the  units responsible for fair lending oversight each have fewer than 50 staff,  and have a range of additional consumer protection law responsibilities.  FTC’s Division of Financial Practices (DFP) has 39 staff, including 27 line  attorneys, and is responsible for fair lending enforcement as well as the  many other consumer protection laws in the financial services arena, such  as the Fair Debt Collection Practices Act and Section 5 of the FTC Act,  which generally prohibits unfair or deceptive acts or practices. In  addition, economists and research analysts from FTC’s Bureau of  Economics assist in DFP investigations, particularly with data analysis. At  DOJ, the unit responsible for fair lending investigations, the Housing and  Civil Enforcement Section, includes 38 staff attorneys with a range of  enforcement responsibilities, including enforcing laws against  discrimination in rental housing, insurance, land use, and zoning, as well  as two economists and one mathematical statistician.
In the President’s proposed budget for fiscal year 2010, he requested  additional resources for fair lending oversight. For example, HUD’s  proposed budget includes $4 million for additional staff to address abusive  and fraudulent mortgage practices and increase enforcement of mortgage  and home purchase settlement requirements. This budget request would  increase staffing for HUD’s Office of Fair Housing and Equal Opportunity  to expand fair lending efforts and for the Office of General Counsel to  handle increased fair lending and mortgage fraud enforcement among  other initiatives. Further, the budget request includes an additional $1.3  million to fund increases for DOJ’s Housing and Civil Enforcement  Section’s fair housing and fair lending enforcement, including five  additional attorney positions. In its fiscal year 2010 budget request, FTC  requested nine additional full-time equivalent staff for financial services  consumer protection law enforcement, which officials noted include fair  lending.
section_title: The Federal Reserve’s Oversight Authority for the Nonbank Subsidiaries of Bank Holding Companies is Limited
paragraphs: While the nonbank subsidiaries of bank holding companies also may pose  heightened risks of fair lending violations, the Federal Reserve has  interpreted its authority under the Bank Holding Company Act, as  amended by the Gramm-Leach Bliley Act, as limiting its examination  authority of such entities compared with the examination authority that it  and other depository institution regulators conduct oversight of  depository institutions. The Federal Reserve interprets its authority as  permitting it to conduct consumer compliance oversight of nonbank  subsidiaries when there is evidence of potentially heightened risks for  violations, such as through annual analysis of HMDA data or other sources  of information such as previous examinations or consumer complaints.  However, pursuant to a 1998 policy, Federal Reserve examiners are  prohibited from conducting routine consumer compliance examinations of  nonbank subsidiaries. According to FTC, while the agency also has  authority over nonbank subsidiaries, its capacity to oversee them is  limited due to resource limitations as discussed earlier. Due to the risks  associated with nonbank subsidiaries, in 2004, we suggested that Congress  consider (1) providing the Federal Reserve with the authority to routinely  monitor and, as necessary, examine nonbank subsidiaries of bank holding  companies to ensure compliance with federal consumer protection laws  and (2) giving the Federal Reserve specific authority to initiate  enforcement actions under those laws against these nonbank  subsidiaries.
While Congress has not yet acted on our 2004 suggestion, Federal Reserve  officials said that they have implemented a variety of steps within their  authority to strengthen consumer compliance supervision, including fair  lending supervision of nonbank subsidiaries since our 2004 report. In  particular, they said the Federal Reserve created a unit in 2006 dedicated  to consumer compliance issues associated with large, complex banking  organizations, including their nonbank subsidiaries. In addition, Federal  Reserve officials said examiners are to conduct consumer compliance risk  assessments of nonbank subsidiaries in addition to their supervisory  responsibilities for bank holding companies. Based on these risk  assessments, the officials said examiners may conduct a targeted  examination on a case-by-case basis. Furthermore, when a nonbank  subsidiary has been identified as a potential outlier, Federal Reserve  officials said similar to oversight practices for state member banks, they  assess the entity for risk of pricing discrimination and may conduct  additional statistical pricing reviews through the use of HMDA data and  other information to better understand its potential risks. During such  reviews, Federal Reserve officials said that examiners closely review the  lender’s policies and procedures and with the approval of the Director of  Consumer Compliance also may conduct loan file reviews if there is  potential evidence of a fair lending violation. Federal Reserve officials said  that they have referred one nonbank subsidiary for pricing discrimination  to DOJ in recent years.
We also note that in 2007 the Federal Reserve began a pilot program with  OTS, FTC, and state banking agencies to monitor the activities of nonbank  subsidiaries of bank and savings and loan holding companies. OTS has  jurisdiction over savings and loan holding companies and any of their  nonbank subsidiaries. During the pilot program, agency officials said that  they conducted coordinated consumer compliance reviews of several  nonbank subsidiaries and related entities, such as mortgage brokers that  may be regulated at the state level, to assess their compliance with various  federal and state consumer protection laws, including fair lending laws.  According to the Federal Reserve, OTS, and FTC officials, they recently  completed their reviews of the pilot study and are evaluating how the  results might be used to better ensure consumer compliance, including fair  lending oversight, of nonbank subsidiaries.
While the Federal Reserve’s process for reviewing nonbank subsidiaries  identified as potentially posing fair lending risks and the pilot study are  important steps, its lack of clear authority to conduct routine  examinations of nonbank subsidiaries for compliance with all consumer  protection laws appears to be significant. Given the limitations in HMDA  data described in this report, agency screening programs may have limited  success in detecting fair lending violations. According to a Federal  Reserve official, many potential violations of the fair lending laws and  subsequent referrals of state-chartered banks are identified through  routine examinations rather than the outlier examination process. Without  clear authority to conduct similar routine examinations of nonbank  subsidiaries for their fair lending compliance, the Federal Reserve may not  be in a position to identify as many potential risks for fair lending  violations at such entities as it does through the routine examinations of  state member banks.
section_title: Limitations in Fair Lending Oversight of Independent Lenders and Nonbank Subsidiaries Also Reflect the Fragmented Regulatory Structure
paragraphs: The relatively limited fair lending oversight of independent lenders and  nonbank subsidiaries reflect the fragmented and outdated U.S. financial  regulatory system. As described in our previous work, the U.S. financial  regulatory structure, which is divided among multiple federal and state  agencies, evolved over 150 years largely in response to crises, rather than  through deliberative legislative decision-making processes. The resulting  fragmented financial regulatory system has resulted in significant gaps in  federal oversight of financial institutions that represent significant risks. In  particular and consistent with our discussion about fair lending oversight,  federal depository institution regulators lacked clear and sufficient  authority to oversee independent and nonbank lenders. Congress and the  administration currently are considering a range of proposals to revise the  current fragmented financial regulatory system.
In our January 2009 report, we stated that reforms urgently were needed  and identified a framework for crafting and evaluating regulatory reform  proposals that consisted of characteristics that should be reflected in any  new regulatory system. These characteristics include    clearly defined and relevant regulatory goals— to ensure that depository  institution regulators effectively can carry out their missions and be held  accountable;   a systemwide focus—for identifying, monitoring, and managing risks to  the financial system regardless of the source of the risk;    consistent consumer and investor protection—to ensure that market  participants receive consistent, useful information, as well as legal  protections; and    consistent financial oversight—so that similar institutions, products, risks,  and services are subject to consistent regulation, oversight, and  enforcement.
Any regulatory reform efforts, consistent with these characteristics,  should include an evaluation of ways in which to ensure that all lenders,  including independent lenders and nonbank subsidiaries, will be subject to  similar regulatory and oversight treatment for safety and soundness and  consumer protection, including fair lending laws. In the absence of such  reforms, oversight and enforcement of fair lending laws will continue to be  inconsistent.
section_title: Differences in the Depository Institution Regulators’ Fair Lending Oversight Programs Also Highlight Challenges Associated with a Fragmented Regulatory System
paragraphs: Although depository institution regulators’ initial activities to assess  evidence of potentially heightened risks for fair lending violations  generally have been more comprehensive than those of enforcement  agencies, their oversight programs also face challenges that are in part  linked to the fragmented regulatory structure. While depository institution  regulators have taken several steps to coordinate their fair lending  oversight activities where appropriate, the effects of these efforts have  been unclear. Each depository institution regulator uses a different  approach to screen HMDA data and other information to identify outliers,  and the management of their outlier examination programs and the  documentation of such examinations varied. For example, FDIC, Federal  Reserve, and OTS described centralized approaches to managing their  outlier programs while NCUA’s and OCC’s management approaches were  more decentralized. In contrast to other depository institution regulators,  OCC’s outlier examination documentation standards and practices were  limited, although the agency recently has taken steps to improve such  documentation. Finally, depository institutions under the jurisdiction of  FDIC, Federal Reserve, and OTS were far more likely to be subject to  referrals to DOJ for potentially being at heightened risk for fair lending  violations than those under the jurisdiction of NCUA and OCC. These  differing approaches raise questions about the consistency and  effectiveness of the depository institution regulators’ collective fair  lending oversight efforts, which are likely to persist so long as the  fragmented regulatory structure remains in place.
subsections: section_title: Depository Institution Regulators Have Coordinated Fair Lending Examination Procedures and Used an Interagency Task Force and Other Forums to Discuss Oversight Programs
paragraphs: Given the current fragmented structure of the federal regulatory system,  we have stated that collaboration among agencies that share common  responsibilities is essential to ensuring consistent and effective  supervisory practices. Such collaboration can take place through various  means including developing clear and common outcomes for relevant  programs, establishing common policies and procedures, and developing  mechanisms to monitor and evaluate collaborative efforts. In keeping with  the need for effective collaboration, depository institution regulators as  well as enforcement agencies have taken several steps to establish  common policies and procedures and share information about their fair  lending oversight programs. These steps include the following:    Since 1994, depository institution regulators and enforcement agency  officials have participated in an Interagency Fair Lending Task Force. The  task force was established to develop a coordinated approach to address  discrimination in lending and adopted a policy statement in 1994 on how  federal regulatory and enforcement agencies were to conduct oversight  and enforce the fair lending laws. Federal officials said that the task force,  which currently meets on a bimonthly basis, continues to allow depository  institution regulators and enforcement agencies to exchange information  on a range of common issues, informally discuss fair lending policy, and  confer about current trends or challenges in fair lending oversight and  enforcement. For example, officials said that depository institution  regulators and enforcement agencies may discuss how they generally  approach fair lending issues, such as outlier screening processes.  According to depository institution regulators, because the task force is  viewed as an informal information-sharing body, it has not produced any  reports on federal fair lending oversight and no meeting minutes are kept.  Moreover, officials said that economists from the depository institution  regulators contact each other separately from the task force to discuss  issues including their screening processes for high-risk lenders and  emerging risks. According to FDIC, attorneys from different agencies also  contact each other about specific legal issues and share relevant research.  DOJ officials indicated that they regularly discuss with attorneys from the  depository institution regulators, HUD and FTC specific legal issues.
As discussed previously, in 1999, the depository institution regulators  jointly developed interagency fair lending procedures. According to  depository institution regulatory officials, they are in the process of  revising and updating the procedures through the Federal Financial  Institutions Examination Council Consumer Compliance Task Force.  They expect the updated examination guidelines to be finalized and  adopted in 2009 with potential enhancements to pricing, applicant  steering, mortgage broker, and redlining sections of the guidance.
section_title: Differences in Depository Institution Regulators’ Fair Lending Oversight Programs include Screening Approaches, Examination Management and Documentation, and Referral Practices
subsections: section_title: Approaches to Screening HMDA Data and Other Information to Identify Fair Lending Outliers Varied among the Depository Institution Regulators
paragraphs: While the Federal Reserve annually reviews HMDA data to identify lenders  at potentially heightened risk for fair lending violations related to  mortgage pricing disparities, each depository institution regulator uses its  own approach to identify potential outliers. Specifically,    FDIC and Federal Reserve examination officials generally develop their  own outlier lists on the basis of statistically significant pricing disparities.  FDIC and the Federal Reserve’s approaches differ from one another and  from the Federal Reserve’s annual mortgage pricing outlier list that is  distributed to all agencies. FDIC officials said that the agency’s approach  to developing its pricing outlier list is geared toward the smaller state- chartered banks that primarily are under its jurisdiction. Federal Reserve  officials said they supplement the annual mortgage pricing outlier list for  lenders under their jurisdiction with additional information. For example,  the officials said this information includes assessments of the discretion  and financial incentives that loan officers have to make mortgage pricing  decisions, the lenders’ business models, and past supervisory findings. As  we discussed earlier, both FDIC and the Federal Reserve noted that they  also screen HMDA data and other information to assess other risk factors,  such as redlining. However, such screening is done in conjunction with  their routine examination processes rather than their outlier examination  processes.
In contrast, OCC and OTS generally consider a broader range of potential  risk factors beyond pricing disparities in developing their annual outlier  lists. According to OCC officials, in addition to the Federal Reserve’s  outlier list and OCC’s independent analysis of mortgage pricing disparities,  it also conducts screening relating to approval and denial decisions, terms  and conditions, redlining and marketing. Similarly, OTS officials said they  use other risk factors, such as mortgage loan approval and denial  decisions, redlining and steering, beyond mortgage pricing disparities, in  developing their outlier lists.
NCUA does not currently conduct independent assessments of HMDA data  as it does not have any statisticians to do so, according to an agency  official. Instead, NCUA officials said that the agency prioritizes fair lending  examinations based on several factors, which include the Federal  Reserve’s annual pricing screening list, complaint data, safety and  soundness examination findings, discussion with regional officials, and  budget factors. Over the past several years, NCUA has conducted  approximately 25 fair lending examinations each year, and these  examinations are generally divided equally among its five regional offices.  NCUA’s Inspector General reported in 2008 that analytical efforts for  identifying discrimination in lending were limited, but the agency was  developing analyses to screen for potential discriminatory lending  patterns, which were expected to be operational in 2009.
There may be a basis for depository institution regulators to develop fair  lending outlier screening processes that are suited towards the specific  types of lenders under their jurisdiction. Nevertheless, the use of six  different approaches among the five depository institution regulators (the  Federal Reserve’s annual analysis plus the unique approach at each  regulator) to assess the same basic data source raises questions about  duplication of effort and the inefficient use of limited oversight resources.  In this regard, we note that OCC’s independent analysis of HMDA data in  2007 identified twice as many national banks and other lenders under its  jurisdiction with mortgage pricing disparities as the Federal Reserve did in  its mortgage pricing analysis of lenders under OCC’s jurisdiction. With a  continued division of fair lending oversight responsibility among multiple  depository institution regulators, opportunities to develop a coordinated  approach to defining and identifying outliers and better prioritize oversight  resources may not be realized.
section_title: Management of the Fair Lending Examination Processes and Documentation Quality Varied
paragraphs: The depository institution regulators differed in the extent to which they  centrally manage examination processes, documentation, and reporting.  FDIC, the Federal Reserve, and OTS officials described a more centralized  (headquarters-driven) approach to ensuring that outlier examinations are  initiated and necessary activities carried out. Headquarters officials from  these agencies described approaches they used to ensure that fair lending  examiners and other staff in regional and district offices conduct outlier  examinations, document examination findings and recommendations, and  follow up on recommendations. In addition to running the HMDA data  outlier screening programs, FDIC, the Federal Reserve and OTS officials  said that they held ongoing meetings with headquarters and district staff to  discuss outlier examinations and their findings. FDIC officials said that the  agency has developed a process for conducting reviews of completed  outlier and routine examinations to assess if the agency is consistently  complying with the interagency fair lending examination procedures.  Officials from FDIC, the Federal Reserve, and OTS also said that  headquarters staffs were involved in conducting legal and other analyses  needed to determine if a referral should be made to DOJ for a potential  pattern or practice violation.
FDIC, OTS, and the Federal Reserve have developed fair lending  examination documentation and reporting standards and practices  designed to facilitate the centralized management of their outlier  programs. Such examination documentation and reporting standards  generally are consistent with federal internal control policies that require  that agencies ensure that relevant, reliable, and timely information be  readily available for management decision-making and external reporting  purposes. For example,    FDIC staff generally prepare summary memorandums that describe  critical aspects of outlier examinations. These memorandums discuss  when examinations were initiated and conducted; the initial focal point  (such as mortgage interest rate disparities in conventional loans between  African-American and non-Hispanic white borrowers) identified through  HMDA data analysis; the methodologies used to assess if additional  evidence of potential lending discrimination existed for each focal  point(s); and any findings or recommendations. According to an FDIC  headquarters official, FDIC headquarters manage the outlier reviews in  collaboration with regional and field office staff. In addition to the outlier  reviews, summary documents are reviewed on an ongoing basis to monitor  the nationwide implementation of the fair lending examination program  and allow the agency to assess the extent to which lenders are  implementing examination recommendations. Additionally, in 2007, FDIC  required that examiners complete a standardized fair lending scope and  summary memorandum to help ensure implementation of a consistent  approach to documenting fair lending reviews.
OTS also generally requires its examiners to prepare similar summary  documentation of outlier examinations, which agency officials said are  used to help manage the nationwide implementation of their outlier  examination programs.
The Federal Reserve has developed management reports, which track  major findings of outlier examinations and potentially heightened risks for  violations of the fair lending laws and referrals to DOJ, to ensure that fair  lending laws are consistently enforced and examiners receive appropriate  legal and statistical guidance. Federal Reserve officials said that the  Reserve Banks generally maintain documentation of the outlier  examinations in paper or electronic form; however, electronic versions of  examination reports generally are available at the headquarters level.
While NCUA and OCC officials also indicated that headquarters staff  performed critical functions, such as HMDA data screening or developing  policies for conducting fair lending examinations, they generally described  more decentralized approaches to managing their outlier examination  programs. For example, OCC officials said that the agency’s supervisory  offices are responsible for ensuring that examinations are initiated on  time, key findings are documented, and recommendations are  implemented. Among other responsibilities, OCC headquarters staff  provide overall policy and supervisory direction, develop appropriate  responses to emerging fair lending issues, and provide ongoing assistance  to field examiners as needed, and assist in determining whether referrals  or notifications to other agencies are necessary or appropriate. OCC also  conducts quality assurance reviews, which included an audit of fair  lending examinations at large banks, which was completed in 2007. NCUA  officials said that headquarters staff are involved in managing the selection  of the approximately 25 fair lending examinations that are conducted each  year, but regional staff play a significant role in selecting credit unions for  examination on a risk basis. NCUA officials said that they do not routinely  monitor regional compliance with the interagency fair lending  examination procedures as this is largely the responsibility of regional  officials. However, NCUA’s staff at their central office would randomly  review a select number of the fair lending examinations that are sent from  the regional offices to ensure compliance with established procedures.  NCUA’s examination files generally included a single summary document  that described scope, key findings, and recommendations made, if any,  which facilitated our review.
However, due to OCC’s approach to documenting outlier examinations, we  faced certain challenges in assessing the agency’s compliance with its  examination schedules and procedures for the period we reviewed. For  example, OCC was unable to verify when outlier examinations were  started for most of their large banks. OCC officials told us that part of the  reason for this was because OCC conducts continuous supervision of large  banks, and the database for large banks does not contain a field for  examination start and end dates. Also, the documentation of outlier  examination methodologies and findings and recommendations was not  readily available or necessarily summarized in memorandums for  management’s review. Rather, a variety of examination materials  contained critical items and retrieving such documentation from relevant  information systems was time consuming. In 8 of the 27 OCC outlier  examinations we reviewed, the documentation did not identify  examination activities undertaken to assess lenders’ fair lending  compliance as being part of the outlier examination program.
In 2007, an OCC internal evaluation of its large bank fair lending program  found that key aspects of the agency’s risk-assessment process, such as its  methodology, data analysis, and meetings with bank management were  not well documented. However, the report also found that OCC fair  lending examinations of large banks generally followed key interagency  examination procedures and that adequate documentation supported the  conclusions reached. The evaluation recommended that OCC develop a  common methodology to assess fair lending risk and better documentation  standards, which the agency is in the process of implemeting. In May 2009,  OCC officials told us that they recently had taken steps to improve the  ability to retrieve data from their documentation system. For example, for  their database for midsize and community banks, OCC added a keyword  search function to identify key information, such as the HMDA outlier year  on which the examination was based. However, it is too soon to tell what  effects these changes will have on OCC’s fair lending examination  documentation standards and practices. Unless these changes begin to  address documentation limitations that we and OCC’s internal evaluation  identified, OCC management’s capacity to monitor the implementation,  consistency and reporting of the agency’s fair lending examination  program will be limited.
section_title: Depository Institution Regulators Referral Practices Vary
paragraphs: There are significant differences in the practices that the depository  institution regulators employ to make referrals to DOJ and in the number  of referrals they made. In response to a previous GAO recommendation,  DOJ provided guidance to the federal depository institution regulators on  pattern or practice referrals in 1996. The DOJ memorandum identified  criteria for determining if an ECOA violation identified in a depository  institution regulatory referral is appropriate for DOJ’s further investigation  for potential legal action or returned to the referring agency for  administrative resolution. These criteria include the potential for harm to  members of a protected class, the likelihood that the practice will  continue, if the practice identified was a technical violation, if the harmed  members can be fully compensated without court action, and the potential  impact of federal court action, including the payment of damages to deter  other lenders engaged in similar practices. Moreover, DOJ officials told us  that they encourage depository institution regulators to consult with them  on potential referrals.
While DOJ has issued long-standing guidance on referrals, depository  institution regulatory officials indicated that different approaches may be  used to determine if initial indications of potential risks for fair lending  violations identified through HMDA screening warranted further  investigation or referral to DOJ. For example, OCC and OTS officials said  that they considered a range of data and information and conducted  analyses before making a referral to DOJ. According to agency officials,  this information might include statistical analysis of HMDA and loan  underwriting data, reviews of policies and procedures, and on-site loan file  reviews. OCC and OTS officials said that staff routinely conduct such file  reviews as one of several approaches to assessing a lender’s fair lending  compliance and likely would not refer a case without conducting such  reviews. In contrast, while FDIC and the Federal Reserve may also  conduct file reviews to extract data and/or confirm an institution’s  electronic data, officials said that statistical analyses of HMDA and  underwriting and pricing data could and have served as the primary basis  for concluding that lenders may have engaged in a pattern or practice  violation of ECOA and as the basis for making referrals to DOJ. NCUA  generally relies on on-site examinations and loan file reviews to reach  conclusions about lender compliance with the fair lending laws and, as  mentioned earlier, does not conduct independent statistical reviews of  credit unions’ HMDA data. OCC officials said referrals for potential fair  lending violations are not insignificant matters, either for the lender or  DOJ, and they have established processes to ensure that any such referrals  are warranted.
As shown in figure 2, the number of referrals varied by depository  institution regulator. FDIC accounted for 91 of the 118 referrals (77  percent) that depository institution regulators made to DOJ from 2005  through 2008. In contrast, OCC made one referral during this period and  NCUA none. OCC officials said that since 2005 their examiners have  identified technical violations of the fair lending laws and weaknesses in  controls that warranted attention of bank management, but that the  identification of potential pattern or practice violations was “infrequent.”  NCUA officials said their examiners had reported technical violations but  had not identified any pattern or practice violations, and thus made no  referrals to DOJ.
From 2005 to 2008, we found that about half of the referrals that the  depository institution regulators made resulted from marital status-related  violations of ECOA—such violations can include lender policies that  require spousal guarantees on loan applications. FDIC accounted for  about 82 percent of such referrals (see fig. 3). DOJ officials said they  generally returned such referrals to the depository institution regulators  for administrative or other resolution. The one institution that OCC  referred to DOJ in 2008 involved a marital status violation, which DOJ  subsequently returned to OCC for administrative resolution.   resolution.
FDIC noted that DOJ does not opine on a matter when a matter is deferred to the  depository institution regulator for administrative enforcement. Specifically, DOJ does not  make its own determination of whether there was discrimination or whether there was a  pattern or practice warranting the referral. The deferral of a matter is simply an agreement  that the depository institution regulator is in a better position to resolve the violation  through administrative measures. other key areas (see table 5). Specifically, in the 110 outlier examinations  that we reviewed that were conducted by these three depository  institution regulators, the regulators identified potential pattern or  practice violations based on statistically significant pricing disparities in  11 cases, or 10 percent of the examinations, and referred the cases to  DOJ. DOJ indicated that several of these referrals had been returned to  the depository institution regulators for administrative enforcement, while  the remaining referrals are still in DOJ’s investigative process.
While it is difficult to fully assess the reasons for the differences in  referrals and outlier examination findings across the depository institution  regulators without additional analysis, they raise important questions  about the consistency of fair lending oversight. In particular, depository  institutions under the jurisdiction of OTS, FDIC, and the Federal Reserve  appear to be far more likely to be the subject of fair lending referrals to  DOJ and potential investigations and litigation than those under the  jurisdiction of OCC and NCUA. Under the fragmented regulatory structure,  differences across the depository institution regulators in terms of their  determination of what constitutes an appropriate referral as well as fair  lending examination findings are likely to persist.
section_title: Enforcement Agencies Have Filed and Settled a Limited Number of Fair Lending Cases in Recent Years; Certain Challenges May Affect Enforcement Efforts
paragraphs: Enforcement agency litigation involving the fair lending laws has been  limited in comparison with the number of lenders identified through  analyses of HMDA data and other information. For example, since 2005,  DOJ and FTC have reached settlements in eight cases involving alleged  fair lending violations while HUD has not yet reached any settlements.  Among other factors, resource considerations may account for the limited  amount of litigation involving potential fair lending violations. Federal  officials also identified other challenges to fair lending oversight and  enforcement, including a complex and time-consuming investigative  process, difficulties in recruiting legal and economic staff with fair lending  expertise, and ECOA’s 2-year statute of limitations for civil actions  initiated by DOJ under its own authority or on the basis of referrals from  depository institution regulators.
subsections: section_title: Overview of HUD and FTC Fair Lending Law Enforcement Activities
paragraphs: According to HUD officials, the department has filed two Secretary- initiated complaints against lenders alleging discrimination in their lending  practices. The officials said that HUD is currently considering whether,  pursuant to FHA, to issue Charges of Discrimination in administrative  court in these two matters. If HUD decides to issue such charges in  administrative court, any party may elect to litigate the case instead in  federal district court, in which case DOJ assumes responsibility from HUD  for pursuing litigation.
Since 2005, FTC under its statutory authority has filed complaints against  two mortgage lenders in federal district court for potential discriminatory  practices and has settled one of these complaints while the other one is  pending. FTC’s settlement dated December 17, 2008, with Gateway  Funding Diversified Mortgage Services, L.P. (Gateway) and related entities  provides an example of potential fair lending law violations and insights  into federal enforcement activities. FTC filed a complaint against Gateway  on the basis of an alleged ECOA pricing violation that originated in prime,  subprime, and government loans such as FHA-insured mortgage loans.  According to FTC, Gateway’s policy and practice of allowing loan officers  to charge discretionary overages that included higher interest rates and  higher up-front charges resulted in African-Americans and Hispanics being  charged higher prices because of their race or ethnicity. FTC alleged that  the price disparities were substantial, statistically significant, and could  not be explained by factors related to underwriting risk or credit  characteristics of the mortgage applicants. Under the terms of the  settlement, Gateway agreed to pay $2.9 million in equitable monetary relief  for consumer redress ($2.7 million of which was suspended due to the  company’s inability to pay); establish a fair lending monitoring program  specifically designed to detect and remedy fair lending issues; and  establish, implement, operate, and maintain a fair lending training program  for employees.
The limited litigation involving potential fair lending violations reflects the  limited number of investigations these agencies have initiated since 2005.  From 2005 through 2009, HUD and FTC, as discussed previously, initiated  22 investigations of independent lenders at potentially heightened risk for  fair lending law violations. Resource constraints may affect their capacity  to file and settle fair lending related complaints. For example, FTC  officials said that most of their staff who work on fair lending issues were  dedicated to pursing the litigation associated with the three investigations  that the agency opened from 2005 through 2008.As two of these three  investigations have now been settled or concluded, additional staff  resources are available to pursue evidence of potential violations at other  lenders under the agency’s jurisdiction.
section_title: Overview of DOJ Fair Lending Enforcement Activities
paragraphs: Since 2005, DOJ has filed complaints and settled complaints in seven cases  involving potential violations of the fair lending laws (see table 6). These  cases involved allegations of racial and national origin discrimination,  sexual harassment against female borrowers, and discrimination based on  marital status in the areas of loan pricing and underwriting, and redlining.  One of these settlements—United States. v. First Lowndes Bank, Inc— involved an allegation that a lender had engaged in mortgage pricing  discrimination, which has been the basis of several depository institution  regulators’ referrals in recent years.
According to DOJ officials, the enforcement actions for mortgage lending  result both from investigations that were initiated under the department’s  independent authority and from referrals from depository institution  regulators. As shown in table 6, five of the seven fair lending cases settled  were initiated under DOJ’s independent investigative authority; one was  based on a referral from FDIC, and one from the Federal Reserve.  However, DOJ officials said that there are investigations based on other  referrals from depository institution regulators that are ongoing, including  one case in pre-suit negotiations based on a referral from the Federal  Reserve and another case that arose from a FDIC referral.
section_title: Officials Cited Several Challenges in Conducting Fair Lending Investigations and Initiating Enforcement Actions
paragraphs: According to officials from federal enforcement agencies, investigations  involving allegations of fair lending violations can be complex and time- consuming. For example, DOJ officials said that if the department decided  to pursue an investigation based on a referral from a depository institution  regulator, such an investigation may be broader than the information  contained in a typical referral. DOJ officials said that referrals typically  were based on a single examination, which may cover a limited period  (such as potential discrimination based on an analysis of HMDA data for a  particular year). They also pointed out that the standard for referral to  DOJ for the depository institution regulators is “reason to believe” that a  discriminatory practice is occurring. DOJ officials said that to determine  if a referred pattern or practice of discrimination warrants federal court  litigation, they may request additional HMDA and underwriting data for  additional years and analyze them. Furthermore, they said that lenders  often hire law firms that specialize in fair lending to assist the lender in its  response to the department’s investigation. DOJ officials said that these  firms may conduct their own analysis of the HMDA and underwriting and  pricing data and, as part of the investigation process, offer their views  about why any apparent disparities may be explained. Depending on the  circumstances, this process can be lengthy. According to a 2008 report by  FDIC’s Inspector General, fair lending referrals that are not sent back to  the referring agency for further review may be at DOJ for years before  they are resolved. Additionally, HUD officials said that their initial  investigations into evidence of potential fair lending violations may detect  additional evidence of discrimination that also must be collected and  reviewed.
According to officials from an enforcement agency and available research,  another challenge that complicates fair lending investigations involves  lending discrimination based on disparate impact, which we also raised as  an enforcement challenge in our 1996 report. As discussed in the  Interagency Policy Statement on Discrimination in Lending, issued in 1994,  fair lending violations may include allegations of disparate treatment or  disparate impact. It is illegal for a lender to treat borrowers from  protected classes differently, such as intentionally charging  disproportionately higher interest rates based on race, sex, or national  origin that are not related to creditworthiness or other legitimate  considerations. It also is illegal for a lender to maintain a facially neutral  policy or practice that has a disproportionately adverse effect on members  of a protected group for which there is no business necessity that could  not be met by a less discriminatory alternative. For example, a lender  might have a blanket prohibition on originating loans below a certain  dollar threshold because smaller loans might be more appealing to  borrowers with limited financial resources and therefore represent higher  default risks. While such a policy might help protect a lender against credit  losses, it also could affect minority borrowers disproportionately.  Furthermore, alternatives other than a blanket prohibition might mitigate  potential losses, such as reviewing applicant credit data. It may be difficult  for enforcement agencies or depository institution regulators to evaluate  lender claims that they have a business necessity for particular policies  and identify viable alternatives that would not have a disparate impact on  targeted groups. However, an official from the Federal Reserve told us that  the potential for disparate impact can be assessed through its examination  and other oversight processes. The official said the Federal Reserve has  evaluated lenders’ policies to assess the potential disparate impact and has  referred at least one lender to DOJ based on the disparate impact theory.
DOJ and FTC officials also said that recruiting and retaining staff with  specialized expertise in fair lending laws can be challenging. Both DOJ and  FTC officials said that recruiting attorneys with expertise in fair lending  investigations and litigation was difficult, and employees who develop  such expertise may leave for other positions, including at other federal  depository institution regulators or quasi-governmental agencies that offer  higher compensation. Additionally, DOJ and FTC officials said that  recruiting and retaining economists who have expertise in analyzing  HMDA data and underwriting data to detect potential disparities in  mortgage lending can be difficult. FTC officials said that due to the recent  departure of economists to depository institution regulators, the agency  increasingly relies on outside vendors to provide such economic and  statistical expertise.
subsections: section_title: ECOA’s Statute of Limitations May Limit Enforcement Activities
paragraphs: Finally, some federal enforcement agency and depository institution  regulators cited ECOA’s statute of limitations as potentially challenging for  enforcement activities. Currently, ECOA’s statute of limitations for  referrals to DOJ from the depository institution regulators and for actions  brought on DOJ’s own authority requires that no legal actions in federal  court be initiated more than 2 years after the alleged violation occurred.  According to federal officials, the ECOA statute of limitations may limit  their activities because HMDA data generally are not available for a year or  more after a potential lending violation has occurred. Consequently,  federal agencies and regulators may have less than a year to schedule an  investigation or examination, collect and review additional HMDA and  underwriting and pricing data, and pursue other approaches to determine  if a referral to DOJ would be warranted. According to OTS officials, an  extension of the statue of limitations beyond its current 2-year period  would provide valuable additional time to conduct the detailed analyses  that is necessary in fair lending cases. Accordingly, FDIC has  recommended that Congress extend ECOA’s statute of limitations to 5  years. DOJ officials noted that they would not be averse to the statute of  limitations being extended.
While federal officials said that there are options to manage the challenges  associated with the ECOA statutes of limitations, these options have  limitations. For example, some enforcement officials said that ECOA  violations may also be investigated under FHA, which has longer statutes  of limitations. Specifically, under FHA, DOJ may bring an FHA action  based on a pattern or practice or for general public importance within 5  years for civil penalties and within 3 years for damages; there is no  limitation period for injunctive relief. However, not all ECOA violations  necessarily constitute FHA violations as well. Enforcement agency  officials also said that in some cases they may be able to obtain tolling  agreements as a means to manage the ECOA and FHA statutes of  limitations. Tolling agreements are written agreements between  enforcement agencies, or private litigants, and potential respondents, such  as lenders subject to investigations or examinations for potential fair  lending violations, in which the respondent agrees to extend the relevant  statute of limitations so that investigations and examinations may  continue. Enforcement agency officials said that lenders often agree to  tolling agreements and work with the agencies to explain potential fair  lending law violations, such as disparities in mortgage pricing. The  officials said that the lenders have an incentive to agree to tolling  agreements because the enforcement agencies otherwise may file wide- ranging complaints against them on the basis of available information  shortly before the relevant statute of limitations expires. However,  enforcement officials said it is not always possible to obtain lenders’  consent to enter into tolling agreements, and our review of fair lending  examination files confirmed this assessment. We found several instances  in which depository institution regulators had difficulty obtaining tolling  agreements. Because federal enforcement efforts to manage ECOA’s 2- year statute of limitations may not always be successful, the agencies’  capacity to thoroughly investigate potential fair lending violations and take  appropriate corrective action in certain cases may be compromised.
section_title: Conclusions
paragraphs: Federal enforcement agencies and depository institution regulators face  challenges in consistently, efficiently, and effectively overseeing and  enforcing fair lending laws due in part to data limitations and the  fragmented U.S. financial regulatory structure. HMDA data, while useful in  screening for potentially heightened risks of fair lending violations in  mortgage lending, are limited because they currently lack the underwriting  data needed to perform a robust analysis. While requiring lenders to  collect and report such data would impose additional costs on them,  particularly for smaller institutions, the lack of this information  compromises the depository institution regulators’ ability to effectively  and efficiently oversee and enforce fair lending laws. Such data also could  facilitate independent research into the potential risk for discrimination in  mortgage lending as well as better inform Congress and the public about  this critical issue. A variety of options could mitigate costs associated with  additional HMDA reporting, including limiting the reporting to larger  lenders or restricting its use for regulatory purposes. While these  alternatives would limit or restrict additional publicly available  information on the potential risk for mortgage discrimination compared to  a general data collection and reporting requirement, these are tradeoffs  that merit consideration because additional data would facilitate the  consistent, efficient, and effective oversight and enforcement of fair  lending laws.
The limited data available about potentially heightened risks for  discrimination during the preapplication process also affects federal  oversight of the fair lending laws for mortgage lending. Currently,  enforcement agencies and depository institution regulators lack a direct  and reliable source of data to help determine if lending officials may have  engaged in discriminatory practices in their initial interactions with  mortgage loan applicants. While researchers and consumer groups have  conducted studies using testers that suggest that discrimination does take  place during the preapplication process and federal officials generally  agree that testers offer certain benefits, federal officials also have raised  several concerns about their use. For example, they have questioned the  costs of using testers and the reliability of data obtained in using them.  Nevertheless, the lack of a reliable means to assess the potential risk for  discrimination during the preapplication phase compromises depository  institution regulators’ capacity to ensure lender compliance with the fair  lending law in all phases of the mortgage lending process. In this regard,  FDIC’s possible incorporation of testers into its examination process,  depository institution regulators’ ongoing efforts to update the interagency  fair lending examination guidance, or the Interagency Task Force on Fair  Lending may offer opportunities to identify improved means of assessing  discrimination in the preapplication phase. Moreover, the potential use of  consumer surveys as suggested by the Department of the Treasury in its  recent report on regulatory restructuring may represent another approach  to assessing the potential risk for discrimination during the preapplication  phase.
Data limitations may have even more significant impacts on depository  institution regulators’ and enforcement agencies’ capacity to assess fair  lending risk in nonmortgage lending (such as small business, credit card,  and automobile lending). Because Federal Reserve Regulation B generally  prohibits lenders from collecting personal characteristic data for  nonmortgage loans, agencies generally cannot target lenders for  investigations or examinations as they can for mortgage loans.  Consequently, federal agencies have limited tools to investigate potentially  heightened risks of violations in types of lending that affect most U.S.  consumers. While depository institution regulators and enforcement  agencies have tried to develop ways to provide oversight in this area, the  existing data limitations have affected the focus of oversight and  enforcement efforts. While requiring lenders to collect and report personal  characteristic data for nonmortgage loans as well as associated  underwriting data as may be appropriate raises important cost and  complexity concerns, the absence of such data represents a critical  limitation in federal fair lending oversight efforts.
There also are a number of larger challenges to fair lending oversight and  enforcement stemming from the fragmented U.S. regulatory structure and  other factors such as mission focus and resource constraints. Specifically,  Independent lenders, which were the predominant originators of subprime  and other questionable mortgages that often were made to minority  borrowers in recent years, generally are subject to less comprehensive  oversight than federally insured depository institutions and represent  significant fair lending risks. In particular, enforcement agencies do not  conduct investigations of many independent lenders that are identified as  outliers through the Federal Reserve’s annual analysis of HMDA data to  determine if these disparities represent fair lending law violations. The  potential exists that additional instances of discrimination against  borrowers could be taking place at such firms without being detected.  Such limited oversight could undermine enforcement agencies’ efforts to  deter violations. While depository institution regulators’ outlier  examinations differ in important respects from enforcement agency  investigations, depository institution regulators generally conduct  examinations of all lenders identified as outliers to assess the potential  risk for discrimination, which likely contributes to efforts at deterrence.  Moreover, enforcement agencies, unlike most depository institution  regulators, generally do not initiate fair lending investigations of  independent lenders on a routine basis that are not viewed as outliers,  which represents an important gap in fair lending oversight.
The Federal Reserve lacks clear authority to assess fair lending  compliance by nonbank subsidiaries of bank holding companies, which  also have originated large numbers of subprime mortgages, in the same  way that it oversees the activities of state-chartered depository institutions  under its jurisdiction. The lack of clear authority to conduct routine  consumer compliance examinations of nonbank subsidiaries is important  because the Federal Reserve identifies many potential fair lending  violations at state-chartered banks through such routine examinations.  Without similar authority for nonbank subsidiaries, the Federal Reserve’s  capacity to identify potential risks for fair lending violations is limited.
Despite the joint interagency fair lending examination guidance and  various coordination efforts, we also found that having multiple  depository institution regulators resulted in variations in screening  techniques, the management of the outlier examination process,  examination documentation standards, and the number of referrals and  types of examination findings. While differences in these areas may not be  unexpected given the varied types of lenders under each depository  institution regulator’s jurisdiction, these differences raise questions about  the consistency and effectiveness of regulatory oversight. For example,  the evidence suggests that lenders regulated by FDIC, the Federal Reserve,  and OTS are more likely than lenders regulated by OCC and NCUA to be  the subject of referrals to DOJ for being at potentially heightened risk of  fair lending violations. Our current work did not fully evaluate the reasons  and effects of identified differences and additional work in this area could  help provide additional clarity.
Finally, federal depository institution regulators and enforcement agencies  also face some challenges associated with the 2-year statute of limitations  under ECOA applicable to federal district court actions brought by DOJ.  Because it takes about 6 months for the Federal Reserve to reconcile and  review HMDA data, depository institution regulators and enforcement  agencies typically review the HMDA data almost one year after the  underlying loan decisions occurred, and may have a limited opportunity to  conduct thorough examinations and investigations in some cases. While  strategies may be available to manage the ECOA 2-year statute of  limitations, such as obtaining tolling agreements, they are not always  effective. Therefore, ECOA’s statute of limitations may work against the  act’s general objective, which is to penalize and deter lending  discrimination.
section_title: Matters for Congressional Consideration
paragraphs: To facilitate the capacity of federal enforcement agencies and depository  institution regulators as well as independent researchers to identify  lenders that may be engaged in discriminatory practices in violation of the  fair lending laws, Congress should consider the merits of additional data  collection and reporting options. These varying options pertain to  obtaining key underwriting data for mortgage loans, such as credit scores  as well as LTV and DTI ratios, and personal characteristic (such as race,  ethnicity and sex) and relevant underwriting data for nonmortgage loans.
To help ensure that all potential risks for fair lending violations are  thoroughly investigated and sufficient time is available to do so, Congress  should consider extending the statute of limitations on ECOA violations.
As Congress debates the reform of the financial regulatory system, it also  should take steps to help ensure that consumers are adequately protected,  that laws such as the fair lending laws are comprehensive and consistently  applied, and that oversight is efficient and effective. Any new structure  should address gaps and inconsistencies in the oversight of independent  mortgage brokers and nonbank subsidiaries, as well as address the  potentially inconsistent oversight provided by depository institution  regulators.
section_title: Recommendation for Executive Action
paragraphs: To help strengthen fair lending oversight and enforcement, we recommend  that DOJ, FDIC, Federal Reserve, FTC, HUD, NCUA, OCC, and OTS work  collaboratively to identify approaches to better assess the potential risk  for discrimination during the preapplication phase of mortgage lending.  For example, the agencies and depository institution regulators could  further consider the use of testers, perhaps on a pilot basis, as well as  surveys of mortgage loan borrowers and applicants or alternative means to  better assess the potential risk for discrimination during this critical phase  of the mortgage lending process.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the heads of HUD, FTC, DOJ, FDIC,  the Federal Reserve, NCUA, OCC, and OTS.  We received written  comments from FTC, FDIC, NCUA, the Federal Reserve, OCC, and OTS,  which are summarized below and reprinted in appendixes III through VIII.   HUD provided its comments in an e-mail which is summarized below.   DOJ did not provide written comments.  All of the agencies and regulators,  including DOJ, also provided technical comments, which we incorporated  into the report where appropriate. We also provided excerpts of the draft  report to two researchers whose studies we cited to help ensure the  accuracy of our analysis.  One of the researchers responded and said that  the draft report accurately described his research, while the other did not  respond.
In the written comments provided by FDIC, the Federal Reserve, NCUA,  OCC, and OTS, they agreed with our recommendation to work  collaboratively regarding the potential use of testers or other means to  better assess the risk of discriminatory practices during the premortgage  loan application process, and generally described their fair lending  oversight programs and, in some cases, planned enhancements to these  programs. In particular, the Federal Reserve stated that it would be  pleased to provide technical assistance to Congress regarding potential  enhancements to HMDA data to better identify lenders at heightened risk  of potential fair lending violations and described its existing approaches to  fair lending oversight, including for the nonbank subsidiaries of bank  holding companies.  Further, the Federal Reserve stated that it is  developing a framework for increased risk-based supervision for these  entities.  While such enhancements could strengthen the Federal Reserve’s  oversight of nonbank subsidiaries, the lack of clear authority for it to  conduct routine examinations continues to be an important limitation in  fair lending oversight and enforcement.
OCC also described its fair lending oversight program and planned  revisions. First, OCC stated that it planned to enhance its procedures by  formalizing headquarters involvement in the oversight process. For  example, senior OCC headquarters officials will receive reports on at least  a quarterly basis on scheduled, pending, and completed fair lending  examinations to facilitate oversight of the examination process.  Second,  OCC plans to strengthen its fair lending examination documentation  through, for example, changes in its centralized data systems so that the  systems contain, in standardized form: relevant examination dates, the risk  factors that were identified through the screening and other processes for  each lender, the focal points of the examination, the reasons for any  differences between the focal points and the areas identified through the  risk screening processes, and the key findings of the examinations. OCC  also noted that it (1) plans to expand its “HMDA-plus” pilot program to  collect underwriting data from large banks at an earlier stage to facilitate  screening efforts, (2) views working with other regulators to enhance the  effectiveness and consistency of screening efforts as appropriate, and (3)  will undertake work with other regulators and DOJ to address variations  in referral practices.
NCUA’s Chairman generally concurred with the draft report’s analysis and  recommendations and offered additional information.  First, the Chairman  stated that additional study is needed to assess the depository institution  regulators’ varying referral practices, but that such study should be  conducted before drawing any conclusions about the effectiveness of  NCUA’s fair lending oversight.  The Chairman stated that NCUA has not  made any referrals to DOJ because the agency did not identify any  potential violations during the period covered by the report.  Further, the  Chairman stated NCUA uses the same examination procedures as the  other depository institution regulators and offered reasons as to why  violations may not exist at credit unions.  For example, the Chairman said  that credit unions have a specified mission of meeting the credit and  savings needs of their members, especially persons of modest means (who  typically are the target of discriminatory actions).  We have not evaluated  the Chairman’s analysis as to why fair lending violations may not exist at  credit unions, but note that there is a potential for discrimination in any  credit decision and that all federal agencies and regulators have a  responsibility to identify and punish such violations as well as deter  similar activity.  The Chairman also (1) concurred that additional data  collection under HMDA could enhance efforts to detect lenders at  heightened risk of violations, but believes that such requirements should  pertain to all lenders rather than a subset; (2) agreed that ECOA’s statute  of limitations should be extended; and (3) concurred with the  recommendation that NCUA work collaboratively with other regulators  and agencies to better assess the potential for discrimination during the  preapplication phase of mortgage lending.
In an e-mail, HUD said that improved communication and cooperation  among the federal agencies responsible for overseeing federal fair lending  laws could improve federal compliance and enforcement efforts.  HUD  also concurred with the draft report’s analysis that expanding the range of  data reported, by mortgage lenders pursuant to HMDA would significantly  expand the department’s ability to identify new cases of potential lending  discrimination.  In particular, HUD stated that requiring lenders to report  underwriting data, such as borrowers’ credit scores, would allow the  department to more accurately assess lenders’ compliance with the Fair  Housing Act.  However, HUD urged careful consideration be paid to any  proposal to limit the range of lenders subject to new reporting  requirements under HMDA.  HUD stated that, in its experience, smaller  lenders, no less than larger lenders, may exhibit disparities in lending that  warrant investigation for compliance with federal law.  In addition, HUD  stated that many smaller lenders may already collect and maintain for  other business purposes the same data, which may be sought through  expanded HMDA reporting requirements.
FTC’s Director, Bureau of Consumer Protection, stated that the draft  report appropriately drew attention to limitations in HMDA data as a  means to identify lenders at heightened risk of fair lending violations.  The  Director also highlighted two conclusions in the draft report and noted  that limitations of the data warranted collecting additional data before any  conclusions about discrimination could be drawn.  First, the Director  stated that the report concluded that independent lenders have a  heightened risk of potential violations compared to depository institutions.   The Director said that many lenders make very few or no high-priced loans  and thus cannot be evaluated by an analysis of HMDA pricing data  whereas independent lenders disproportionately make such loans.   Therefore, the Director said it is not possible to draw conclusions as to  which types of lenders are more likely to have committed violations solely  on the basis of HMDA data or the outlier lists and that such a conclusion  about independent lenders is especially tenuous.  The Director also stated  that the report recommends that additional underwriting data be collected  to supplement current mortgage data but does not address the importance  of discretionary pricing data.  The Director stated that lender discretion in  granting or pricing credit represents a significant fair lending risk, and that  the agency collects such information, in addition to underwriting  information, as part of its investigations.  In sum, the Director stated that  while HMDA data is useful, additional data must be collected from lenders  before any conclusions about discrimination can meaningfully be drawn.
We have revised the draft to more fully reflect the Director’s views  regarding limitations in HMDA data and its capacity to identify lenders at  heightened risk of fair lending violations and draw conclusions about  potential discrimination in mortgage lending. However, HMDA data may  have limitations with respect to identifying mortgage pricing disparities as  the Director noted. We do not concur that statements in the draft report  suggesting that independent lenders may represent relatively heightened  risks of fair lending violations are especially tenuous.  As stated in the  draft report, subprime loans and similar high cost mortgages, which are  largely originated by independent lenders and nonbank subsidiaries of  holding companies, appear to have been made to borrowers with limited  or poor credit histories and subsequently resulted in significant  foreclosure rates for such borrowers. Further, our 2007 report noted that  subprime lending grew rapidly in areas with higher concentrations of  minorities. While the scope or our work did not involve an analysis of the  feasibility and costs of incorporating discretionary pricing data into HMDA  data collection and reporting requirements, we acknowledge that the lack  of such information may challenge oversight and enforcement efforts.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from report  date. At that time, we will send copies of this report to other interested  congressional committees, and 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; Acting Director, Office of Thrift Supervision; Inspector General,  the National Credit Union Administration; the Chairman of the Federal  Trade Commission; the Secretary of the Department of Housing and Urban  Development; the Attorney General; and other interested parties. 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 IX.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of our report were to (1) assess the strengths and  limitations of data sources that enforcement agencies and depository  institution regulators use to screen for lenders that have potentially  heightened risk for fair lending law violations and discusses options for  enhancing the data; (2) assess federal oversight of lenders that may  represent relatively high risks of fair lending violations as evidenced by  analysis of Home Mortgage Disclosure Act (HMDA) data and other  information; (3) examine differences in depository institution regulators’  fair lending oversight programs; and (4) discuss enforcement agencies’  recent litigation involving potential fair lending law violations and  challenges that federal officials have identified in fulfilling their  enforcement responsibilities.
To address the first objective for assessing the strengths and limitations of  data to screen for lenders that appear to be at a heightened risk for  potentially violating fair lending laws, we reviewed and analyzed fair  lending examination and investigation guidance, policies, and procedures,  and other agency documents. We gathered information on how  enforcement agencies—the Department of Housing and Urban  Development (HUD), the Federal Trade Commission (FTC), and the  Department of Justice (DOJ)—and depository institution regulators—the  Board of Governors of the Federal Reserve System (Federal Reserve), the  Office of the Comptroller of the Currency (OCC), the Federal Deposit  Insurance Corporation (FDIC), the National Credit Union Administration  (NCUA), and the Office of Thrift Supervision (OTS)—use data sources  such as HMDA data to screen for high-risk lenders. HMDA requires many  mortgage lenders to collect and report data on mortgage applicants and  borrowers. In 2004, HMDA was amended to require lenders to report  certain mortgage loan pricing data. To assess the strengths and limitations  of these data, we reviewed academic research, studies from consumer  advocacy groups, Inspectors General reports, Congressional testimonies,  and prior GAO work on the strengths and limitations of HMDA data and  the limited availability of data for nonmortgage lending. We also reviewed  available information on current initiatives to gather enhanced HMDA data  (adding underwriting information such as loan-to-value ratios and credit  scores) earlier in the screening and examination process, such as OCC’s  pilot project. In addition, we interviewed officials from the enforcement  agencies and depository institution regulators listed above—including  senior officials, examiners, policy analysts, economists, statisticians,  attorneys, and compliance specialists—to discuss how they use various  data sources to screen for high-risk lenders, gather their perspectives on  the strengths and limitations of available data sources, and obtain  information on the costs of reporting HMDA data. We did not interview  NCUA economists or attorneys and NCUA does not have statisticians. We  did interview senior officials, examiners, policy analysts and compliance  specialists. We also discussed current initiatives to address screening  during the preapplication phase of lending, and the potential benefits and  limitations of using testers during this phase. We evaluated the depository  institution regulators’ examination guidance and approaches for the  preapplication phase. We interviewed researchers, lenders,  representatives from community and fair housing groups, and independent  software vendors to gather perspectives on the strengths and limitations of  HMDA data in the fair lending screening process and the benefits and  costs of requiring the collection of additional or enhanced HMDA data.
To address the second objective, we reviewed and analyzed enforcement  agency and depository institution regulator documents. More specifically,  we reviewed and analyzed internal fair lending examination and  investigation guidance, policies, and procedures; federal statutes and  information provided by the agencies on their authority, mission and  jurisdiction; the Federal Reserve’s annual HMDA outlier lists; information  on staffing resources; documentation on the number of fair lending  enforcement actions initiated and settled; and other agency documents to  compare and contrast the agencies’ and depository institution regulators’  authority and efforts to oversee the fair lending laws, including  enforcement and investigative practices. We also obtained information on  depository institution regulators’ outlier examination programs from  internal agency documents and our file review of examinations of outlier  institutions, as discussed below. Furthermore, we interviewed key agency  officials from the eight enforcement agencies and depository institution  regulators that oversee the fair lending laws to gather information on their  regulatory and enforcement activities and compare their approaches. To  gather information on state coordination of fair lending oversight with  federal agencies, as well as to compare and contrast fair lending  examination policies and practices, we also interviewed state banking  regulatory officials and community groups.
We also evaluated certain aspects of depository institution regulators’  compliance with fair lending outlier examination schedules and  procedures. Specifically, we conducted a systematic review of 152 fair  lending examination summary files derived from each depository  institution regulator’s annual list of institutions identified to be at higher  risk for fair lending violations (that is, their outlier lists). We examined  outlier lists based on 2005 and 2006 HMDA data because they fully  incorporated pricing data (first introduced in 2004 HMDA data), and  because the examinations based on these lists had a higher likelihood of  being completed. We systematically collected information and evaluated  each examination’s compliance with key agency regulations and  interagency and internal fair lending guidance. For instance, we reviewed  the files to determine if outlier examinations had been initiated in a timely  fashion; if examination scoping, focal points, and findings had been  documented; and if recommendations were made to correct any  deficiencies. We limited our focus to assessing regulatory compliance with  applicable laws, regulations, and internal guidance and did not make  judgments on how well agencies conducted the examinations. For three of  the depository institution regulators—the Federal Reserve, FDIC, and  OTS—we reviewed summary documentation (such as reports of  examination, scope and methodology memorandums, exit and closing  memorandums, and referral documentation to DOJ) of completed  examinations for every institution on their 2005 and 2006 HMDA data  outlier lists when relevant.  This amounted to 32 examinations for the  Federal Reserve, 38 for FDIC, and 40 for OTS.  Because NCUA (1) does not  have a centralized process for identifying outliers, (2) was unable to  respond to our document request in a timely manner, and (3) had a  relatively low number of credit unions identified as outliers by the Federal  Reserve, we randomly selected and reviewed summary documentation for  a sample of 10 examinations conducted in 2007 to capture examinations  that analyzed loans made in 2005 and 2006 (out of 25 examinations).
We also reviewed a random sample of national banks due to limitations in  OCC’s fair lending examination documentation and the need to conduct  our analysis in a timely manner. We randomly selected a simple sample of  27 examinations of institutions from a population of 231 institution  examinations derived from OCC’s annual outlier lists for 2005 and 2006  HMDA data. Because OCC also randomly selects a sample of banks (both  HMDA and non-HMDA filing) to receive comprehensive fair lending  examinations, we also reviewed examination files from 2005 for five of  these institutions (out of a population of 31). Thus, our sample totaled 32  lender examinations and we requested that OCC provide all fair lending  oversight materials for each of these lenders from 2005 through 2008 so  that we could discern the extent to which OCC was complying with  regulations and guidance for its outlier examination program. We  collected the same information for these examinations as from the other  depository institution regulators.
In addition, we reviewed guidance, policies, procedures, relevant statutes,  and other documents from the Federal Reserve to assess the extent of fair  lending oversight conducted for nonbank subsidiaries of bank holding  companies. We also reviewed past GAO reports on the history of oversight  of nonbank subsidiaries of bank and thrift holding companies. We  interviewed agency officials and consumer advocacy groups to gather  their perspectives on the extent of current oversight for nonbank  subsidiaries of bank holding companies. We also spoke with agency  officials to gather information on a current interagency pilot program  between the Federal Reserve, OTS, FTC, and the Conference of State Bank  Supervisors to monitor the activities of nonbank subsidiaries of holding  companies.
For the third objective, in addition to reviewing our analysis of depository  institution regulators’ compliance with fair lending examination policies as  described above, we (1) conducted further comparisons of their outlier  examination screening processes, (2) reviewed documentation and reports  related to their management of the outlier examination process and  documentation and reporting of examination findings; and (3) reviewed  documentation related to their referral practices and outlier examination  findings. We also reviewed relevant federal internal control standards for  documentation and reporting and compared them to the depository  institution regulators’ practices as appropriate. We also discussed these  issues with senior officials from the depository institution regulators and  state financial regulatory officials from New York, Washington, and  Massachusetts. In addition, we discussed their efforts to coordinate fair  lending oversight programs through the development of interagency  examination guidance and participation in meetings of the Interagency  Task Force on Fair Lending and related forums.
To address the fourth objective, we reviewed agencies’ internal policies,  procedures, and guidance as well as federal statutory requirements that  depository institution regulators use when making referrals or  notifications to HUD or DOJ for potential violations of the Equal Credit  Opportunity Act (ECOA) and the Fair Housing Act. We also analyzed  information on enforcement agencies’ and depository institution  regulators’ staff resources and any time constraints they might face related  to ECOA’s 2-year statute of limitations for making referrals to DOJ for  follow-up investigations and potential enforcement actions. To obtain  information on the enforcement activities of federal agencies, we  conducted an analysis of the number of fair lending investigations  initiated, complaints filed, and settlements reached by each enforcement  agency. We also interviewed officials from each depository institution  regulator and enforcement agency to gather information on investigative  practices that enforcement agencies use when deciding whether to pursue  a fair lending investigation or complaint against an institution and possible  challenges that enforcement agencies and depository institution regulators  face in enforcing the fair lending laws, specifically ECOA’s 2-year statute  of limitations.
For all the objectives, we interviewed representatives from financial  institutions and several consumer advocacy groups and trade associations  such as the Center for Responsible Lending, the National Community  Reinvestment Coalition, and the National Fair Housing Alliance,  Leadership Conference on Civil Rights, a large commercial bank, and  Consumer Bankers’ Association. We obtained their perspectives on  regulatory efforts to enforce fair lending laws, which include screening  lenders for potential violations, conducting examinations, and enforcing  the laws through referrals, investigations, or other means, and any  collaborative activities between depository institution regulators and state  entities.
We conducted this performance audit from September 2008 to July 2009 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: Federal Oversight Authority for FHA and ECOA
subsections: section_title: The table below lists the federal regulatory and enforcement agencies that examine and enforce compliance with the fair lending laws Fair Housing Act (FHA), and Equal Credit Opportunity Act (ECOA) at depository institutions and their affiliates and subsidiaries, independent lenders, servicers, holding companies, and the nonfunctionally regulated subsidiaries of their holding companies. See the table notes for statutory cites and brief explanations of the statutory authorities.
section_title: Appendix IV: Comments from the Federal Deposit Insurance Corporation
section_title: Appendix V: Comments from the Board of Governors of the Federal Reserve System
section_title: Appendix VI: Comments from the National Credit Union Administration
section_title: Appendix VII: Comments from the Office of the Comptroller of the Currency
section_title: Appendix VIII: Comments from the Office of Thrift Supervision
section_title: Appendix IX: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual name above, Wesley M. Phillips, Assistant  Director; Benjamin Bolitzer; Angela Burriesci; Kimberly Cutright; Chris  Forys; Simin Ho; Marc Molino, Carl Ramirez; Linda Rego; Barbara  Roesmann; Jim Vitarello; and Denise Ziobro made major contributions to  this report.  Technical assistance was provided by Joyce Evans and  Cynthia Taylor.