October 27, 1999
National Community Reinvestment Coalition
Comment Letter to Federal Reserve
Regarding Changes to Regulation B
October 27, 1999
Jennifer J. Johnson
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington DC 20551
RE: Docket No. R-1008
Dear Secretary Johnson:
On behalf of the National Community Reinvestment Coalition (NCRC), I am urging that you update Regulation B, which implements the Equal Credit Opportunity Act (ECOA), to allow the voluntary reporting of the race and gender of applicants for small business and other non-mortgage loans. The reporting of these borrower characteristics must become mandatory after experience with improving data accuracy under a voluntary reporting regime.
As the nation’s CRA trade association of more than 700 community reinvestment organizations, NCRC believes that discrimination, incomplete information flows, and other barriers to credit are most effectively removed by partnerships between lenders and community organizations. Partnerships between lenders and community organizations established by NCRC and its members depend upon access to loan data by race, gender, income, and neighborhood. Without this data, it is exceedingly difficult for financial institutions and their neighborhood partners to identify underserved populations and then create loan products targeting these populations.
Enforcement of the Equal Credit Opportunity Act (ECOA) and other fair lending laws is greatly enchanced by the availability of detailed data on the race and gender characteristics of loan applicants. In late September, for example, Deposit Guaranty National Bank of Mississippi agreed to pay $3 million to an estimated 250 African-American loan applicants that had experienced discrimination. The Department of Justice and the Office of the Comptroller of the Currency analyzed HMDA (Home Mortgage Disclosure Act) data to idenfity African-American denial rates for Deposit Guaranty that were signficantly higher than denial rates for comparable banks. This data analysis was instrumental in starting a fair lending investigation and enforcement process that resulted in Deposit Guaranty promising far-reaching reforms of its lending and underwriting practices.
The case for reporting the race and gender of small business and other non-mortgage applicants is made even more compelling when considering that data disclosure has resulted in significant increases in lending to traditionally underserved populations. NCRC maintains that HMDA data reporting has bolstered access to credit for minority and working class populations by holding financial institutions publicly accountable for their lending practices and by helping financial institutions identify missed market opportunities in underserved communities. Low- and moderate-income borrowers (under 80 percent of area median income) received 29 percent of all home mortgage loans made in the country in 1998 — up significantly from 18 percent in 1990. Likewise, Black and Hispanic borrowers received 14 percent of all mortgage loans in 1998, and only 10 percent in 1990.
The lack of detailed data in the small business lending area has contributed to minorities and working class populations experiencing less access to small business loans than home loans. In a paper published by the National Bureau of Economic Research, economists David Blanchflower, David Zimmerman, and Phillip Levine report that Black-owned firms experienced a whopping denial rate of 65.9 percent in contrast to a rejection rate of 26.9 percent for whites. Even after controlling for a series of firm characteristics, Black-owned firms still experienced rejection rates 25 percentage points higher than for white-owned firms.
Blanchflower, et. al. report that the ratio in denial rates for Black and white-owned firms was much higher than the ratio of Black and white denial rates for home mortgage loan applicants applicants documented by the seminal Boston Federal Reserve Bank study on discrimination in the home mortgage market. In a conference sponsored by the Federal Reserve Board in the spring of 1999, the Blanchflower paper was one of three papers using a Federal Reserve-sponsored 1993 survey of 4,600 small businesses which found statistically significant disparities among denial rates of Black-owned and white-owned small businesses.
Additional research has documented disparities in access to small business data in minority neighborhoods. NCRC conducted data analysis of small business lending in the Washington DC area in which we found that lenders were offering loans in proportion to the population and small businesses in low- and moderate-income census tracts in the suburbs but not in the city. In sharp contrast to the suburbs, most of the low- and moderate-income census tracts in the city contained populations that were more than 80 percent minority (NCRC study is attached). Similarly, Gregory Squires and Sally O’Connor of the University of Wisconsin and Dan Immergluck of the Woodstock Institute document that minority and low-income neighborhoods receive relatively small shares of small business loans in Milwaukee and Chicago, respectively.
NCRC believes that the small business data should resemble as closely as possible the home loan data reported under the Home Mortgage Disclosure Act (HMDA). Small business data reporting should include the annual revenue and sales volume of the business as well as the gender and race of the business owner. In addition to revealing borrower characteristics, the HMDA data includes information on the disposition of applications such as denials, approvals not accepted by the applicants, and incomplete applications. The reporting of actions taken on applications for small business loans will enable all concerned parties to understand more fully the types of barriers encountered by traditionally underserved populations. For example, do some underserved business owners confront outright denials disproportionately while others receive loan offers but reject them in disproportionate amounts because of high interest rates?
As a first step, the Federal Reserve Board must allow and should encourage the voluntary disclosure of detailed data. It should then work with lenders and community organizations to improve the accuracy of data reporting. Developing standards for accurate data will be more challenging with small business data than HMDA data. For instance, how would lending institutions report the race of a small business owner for enterprises owned by both whites and minorities? How would reporting the race of a small business owner differ if the enterprise was privately owned as opposed to being publicly traded? After a year or two of voluntary small business reporting, NCRC recommends that the Federal Reserve Board hold public forums and a public comment period that considers how small business data will be reported under a mandatory reporting requirement. Lending institutions, community groups, and officials of federal regulatory agencies will be able to share their insights regarding data reporting and accuracy gained during the years of voluntary data reporting.
NCRC believes that mandatory data collection must be the ultimate objective. Officials of some lending institutions have told NCRC that their preference is a mandatory requirement under which all lenders must report data. NCRC agrees with these lenders that a mandatory system ensures 100 percent coverage whereas a voluntary system may result selection bias. In other words, the only lenders that may report data voluntarily are those that know they are doing a good job reaching minority- and women-owned busineses. Mandatory data collection is the best way to ensure that all lenders are making more loans to traditionally underserved populations in a non-discriminatory manner.
When Congress passed the Equal Credit Opportunity Act, it stated that “the Congress finds that there is a need to insure that the various financial institutions and other firms engaged in extensions of credit exercise their responsibility to make credit available with fairness, impartiality, and without discrimination…Economic stabilization would be enhanced and competition among the various financial institutions and other firms engaged in the extension of credit would be strengthened by an absence of discrimination…” NCRC believes that the Congressional intent would be augmented significantly by the disclosure and availability of detailed data on borrower characteristics. Data disclosure strengthens fair lending enforcement, encourages partnerships between banks and community organizations, and stimulates competition among banks for an underserved market. Data disclosure therefore plays a significant role in revitalizing and stabilizing working class and minority communities.
NCRC thanks the Federal Reserve Board for proposing the voluntary reporting of the race and gender of small business loan applicants. NCRC’s 700 members support this proposal as an interim step leading to mandatory reporting requirements. The rest of NCRC’s comments respond to the other important issues raised by the Board’s requests for comments on its proposed changes to Regulation B.
President and CEO