December 6, 1999
Senate Banking Committee Republicans
Comment Letter to Chairman Greenspan
Regarding Changes to Regulation B
December 6, 1999
The Honorable Alan Greenspan
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Re: FRB’s Regulation B Voluntary Data Collection Proposal
Dear Chairman Greenspan:
The Federal Reserve Board currently has a proposal pending to amend Regulation B to permit creditors to collect information on the race, color, sex, religion and national origin of credit applicants. We strongly urge the Board not to adopt that proposal and instead to preserve the current ban on creditors collecting such data.
The current prohibition was adopted by the Board in 1977 to prevent creditors from collecting data about an applicant’s race, color, sex, religion and national origin. At that time, the Board correctly recognized that the prohibition provides the most effective tool for preventing discrimination, because a creditor cannot discriminate against an applicant based on race, color, sex, religion and national origin if the creditor never collects such data. The Board also correctly recognized that this prohibition plays an important role in underscoring that factors unrelated to creditworthiness, such as race, color, sex, religion and national origin, should not be part of the credit decision. The Board’s policy reasons for instituting the prohibition in 1977 are equally valid today since the current prohibition still provides the best way to protect an applicant against discriminatory lending based on such information. As a result, there simply is no justification for removing the existing prohibition.
Some have argued that the proposal would help prevent discrimination by allowing creditors to identify possible discriminatory lending practices. Indeed, advocates of the proposal point to the Home Mortgage Disclosure Act (HMDA) as an example of how data collection on mortgages has identified discriminatory lending practices. We believe, however, that HMDA data is faulty and that it is far more likely that the data collection proposal would produce inaccurate and unreliable data, and therefore, would not be effective in assessing discriminatory lending practices.
The Federal Reserve Board has articulated similar concerns with the lack of reliability of HMDA data on several occasions. In SunTrust Banks*, the Board stated that HMDA data does “not account for the possibility that an institution’s outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not provide a basis for an independent assessment of whether the applicant who was denied credit was, in fact, creditworthy. Credit history problems and excessive debt levels relative to income (reasons most frequently cited for credit denial) are not available from HMDA data.” We agree and believe that such data collection actually provides a disincentive for institutions to conduct such outreach efforts.
In addition, some Federal Reserve Banks have also questioned whether the proposed data collection rule would yield accurate and reliable data. For example, the Federal Reserve Bank of Atlanta indicated in its earlier comment letter on this same subject that any data collected under such a rule would be biased because only those consumers who believe they will benefit are likely to produce such data. In fact, consumers may actually give inaccurate information about their race, color, sex, religion and national origin to creditors if they believe they will benefit from doing so.
Today, many lenders consider applications and grant credit without face-to-face contact with the borrower; for example, through telephone applications and the Internet. When this occurs, lenders have absolutely no opportunity to verify that the data collected from applicants is accurate. Thus, the data collected under the Board’s proposal would, at best, be inaccurate and unreliable and is likely to provide little help in identifying possible discriminatory lending practices.
We strongly object to the Board’s voluntary data collection proposal and we encourage the Board not to adopt it.
Richard C. Shelby
*SunTrust Banks, Inc., 84 Fed. Res. Bull. 1115 1118-1119 (December 1998).