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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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.