Concerns about discrimination in the credit markets, particularly in the market for home mortgages, have existed for some time and have recently moved to the fore among civil rights issues. This resurgence of interest is due in large part to repeated reports in the media and elsewhere suggesting that the problem of lending discrimination is of such magnitude that it demands immediate and increased public attention. Most prevalent among these reports are ad hoc statistical analyses of data collected under the Home Mortgage Disclosure Act (HMDA), which reveal that applicants who are members of various racial and ethnic groups are more likely to be denied credit for a home mortgage than are white applicants with comparable incomes. In addition, a few widely-cited econometric studies of mortgage lending decisions have also reported results that indicate that lenders discriminate against minority applicants. While none of these studies or analyses has offered conclusive evidence that lending discrimination is pervasive or represents an industrywide problem, their collective weight has raised concerns. In light of these continuing reports, Congress and others have questioned the effectiveness of supervision and oversight in the fair lending area and the zeal with which the nation’s antidiscrimination laws governing the credit markets have been enforced. As a consequence, responsible federal agencies have rededicated themselves to upholding the fair lending laws, and have revamped outdated supervisory and compliance policies as well as examination procedures in the fair lending area. Even so, the fair lending laws still pose many difficult policy and legal questions and offer a number of operational challenges to federal oversight enforcement efforts. This report responds to a request from the former Chairmen of the House Committee on Banking, Finance and Urban Affairs, and its Subcommittee on Consumer Credit and Insurance, asking us to review federal efforts to oversee and enforce the nation’s “fair lending laws”—principally the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA)—and to discuss the challenges federal regulators face in their efforts to detect discrimination and ensure compliance. In conjunction with the Chairmen’s request to review enforcement of the fair lending laws, we were also asked to evaluate compliance with the Community Reinvestment Act (CRA) and report on the strengths and weaknesses of current reform efforts. Our response to the request regarding CRA is contained in a separate report. During the late 1960’s and 1970’s, Congress enacted a number of laws for the purpose of ensuring fair and equitable access to credit for both individuals and communities. These laws included the Fair Housing Act (1968), the Equal Credit Opportunity Act (1974), the Home Mortgage Disclosure Act (1975), and the Community Reinvestment Act (1977). Two of these laws, ECOA and FHA, comprise the federal antidiscrimination statutes applicable to lending practices and have become commonly referred to as the “fair lending laws.” Additionally, HMDA, as amended in 1988, is intended to support enforcement of ECOA, FHA, and CRA by requiring certain lending institutions to provide federal regulators and the public with information on mortgage loan applicants and borrowers. Such information can be useful in identifying possible discriminatory lending patterns. Unlike ECOA and FHA, HMDA does not prohibit any specific activity of lenders, but only establishes a reporting obligation for particular institutions. For more detail on the scope, applicability, and evolution of these laws and their related implementing regulations, see appendix I. General rulemaking authority for implementing the fair lending laws is divided between the Federal Reserve Board (FRB), which has such authority for ECOA and HMDA, and the Department of Housing and Urban Development (HUD), which has similar authority for FHA. Oversight and enforcement responsibilities, however, are divided among at least 12 separate federal agencies, including but not limited to the 5 federal banking regulatory agencies, the Department of Justice (DOJ), HUD, the Federal Trade Commission (FTC), the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight (OFHEO), the Securities and Exchange Commission (SEC), and the Farm Credit Administration (FCA). These agencies use varying approaches to discharge their oversight and enforcement responsibilities. For depository institutions, compliance with ECOA, FHA, and HMDA is primarily assessed through regularly scheduled consumer compliance examinations conducted by the federal bank regulators. These agencies are also responsible for administrative enforcement of both ECOA and HMDA, whereas HUD has such authority for FHA (and for HMDA in the case of independent mortgage companies). In addition, federal regulatory agencies are required to refer to DOJ any matter in which an agency has reason to believe that a pattern or practice of lending discrimination has occurred. Moreover, the agencies are also required to notify HUD of apparent FHA violations. In contrast, mortgage companies and other nondepository lending institutions are generally not subject to regularly scheduled compliance examinations, but may be periodically investigated for noncompliance by their primary regulator or HUD, DOJ, or FTC. In addition to federal supervision, private litigation also serves as a prominent enforcement method under the fair lending laws. Under both ECOA and FHA, however, private civil suits must be brought within prescribed periods—generally within 2 years of the date of the occurrence or termination of the alleged violation. Individual claimants under ECOA can recover actual damages and punitive damages up to $10,000. In class action suits, punitive damages are limited to the lesser of $500,000 or 1 percent of the institution’s net worth. Under FHA, plaintiffs can also recover both kinds of damages, but the amount of punitive damages is not limited. To assist private enforcement of FHA, amendments to FHA in 1988 created within HUD an administrative system within which a complainant could pursue a fair lending complaint at little or no cost. Within HUD’s system, a case can be heard in a formal administrative proceeding before an administrative law judge, or the complainant or respondent can elect to move the case to federal district court. The objectives of this study were to (1) review recent federal efforts to oversee and enforce the fair lending laws and (2) discuss the challenges federal regulators face in their efforts to detect discrimination and ensure compliance. To achieve this, we began by reviewing the legislative and case history of the laws to discern their original intent and to see how the interpretation of that intent has evolved over time. We also undertook an extensive review of the literature on lending discrimination. We then interviewed officials from the five federal banking regulatory agencies, HUD, and DOJ. These interviews served to help us more fully understand the existing regulatory system, including the practices and procedures used to detect discrimination, and the policies in place to deal with violations, especially violations of a serious or substantive nature. Information and documentation regarding various aspects of the agencies’ fair lending oversight and enforcement activities were collected from all of the federal banking regulators, HUD, FTC, and DOJ. Also, the impressions and experiences of 40 bank compliance officers and agency examiners, who were participants in compliance examinations during 1993, were obtained through surveys and interviews. These surveys and interviews were conducted as part of our work related to our review of CRA. In that review, the case study approach was used to review in detail compliance examinations at 40 banks and thrifts. The institutions included in the review were judgmentally chosen to represent a cross section of geographic areas, federal banking regulatory agencies, and depository institutions. Of the institutions studied, 6 were examined by FRB, 13 by FDIC, 9 by OCC, and 12 by OTS. In addition to contacts with federal agency officials, we also judgmentally selected and interviewed individuals from the banking industry, industry trade groups, and consumer groups, as well as a number of private consultants, academic and legal experts, and officials at firms active in the secondary mortgage market. We also attended workshops and conferences on fair lending sponsored by a variety of industry and community groups, professional law associations, and the federal banking regulatory agencies. Finally, we reviewed letters submitted by bankers and other concerned parties responding to public policy statements and proposed rule changes related to the fair lending laws. We did the work underlying this report between January 1994 and December 1995 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from FRB, FDIC, OCC, OTS, NCUA, HUD, and DOJ. Their written comments, along with our evaluation, are summarized at the end of chapter 4 and are presented in appendixes VI through XII. The fair lending laws prohibit discrimination with regard to any aspect of a consumer, commercial, or real estate credit transaction based on a number of protected personal characteristics, including but not limited to race, color, religion, gender, and national origin. However, interpretation and applicability of the fair lending laws is unclear in a number of areas and federal regulatory agencies have had to translate and apply the laws to a wide variety of lending practices, including some that are not specifically mentioned in the statutes. Lenders, federal regulators, and consumers have not always agreed on these interpretations. As a result, there has been, and continues to be, some controversy and confusion regarding the scope and applicability of the laws and what it means in practice to discriminate against a credit applicant. Moreover, this uncertainty has been compounded by numerous difficulties encountered in measuring and assessing the nature of lending discrimination. In fair lending cases, courts and the federal agencies have adopted the analytical framework applicable to employment discrimination cases under Title VII of the Civil Rights Act of 1964. Under this framework, two methods of analysis are used to evaluate discrimination claims. The first method, known as disparate treatment analysis, determines whether a borrower has been treated less favorably than his or her peers due to race, sex, or other characteristic that places the individual within a group protected by ECOA or FHA.