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February 20, 1998<\/p>\n
The Honorable Laurence H. Meyer
Board of Governors Of the Federal Reserve System
Washington, D.C. 20551<\/P>
Dear Governor Meyer:<\/P>
Thank you very much for talking with me about proposed amendments to Regulation B to improve the government’s ability to enforce fair lending laws. I am pleased to attach a position paper that sets forth the reasons we believe Regulation B should be amended to allow lenders covered by the Equal Credit Opportunity Act to collect and maintain data on the race, ethnicity and sex of applicants for loans other than those secured by the applicant’s residence. <\/P>
I hope this information is helpful to you and answers the questions you raised. While the intent of the prohibition on data collection in Regulation B — to prohibit the discriminatory use of such data — was laudatory, our experience with monitoring home mortgage loan data has shown that this data collection has been critical to our successful fair lending enforcement, and has not led to the discriminatory or improper use of the data. We believe extending data collection and monitoring to certain categories of business and consumer loans similarly will lead to more effective fair lending enforcement. <\/P>
Please call me if I can provide further information on this matter. <\/P>
Sincerely,
Janet Reno<\/P>
Enclosure<\/P>
cc: The Honorable Alice Rivlin, Vice Chair, Federal Reserve System
The Honorable Edward Gramlich, Governor of the Federal Reserve System<\/P>
The Department of Justice believes Regulation B should be amended to require, or at least allow, lenders to keep monitoring data concerning applicants for certain business and consumer loans. Consistent with the treatment of home purchase and refinance loans, there should be written applications, and there should be summary reporting or disclosure of the results.<\/P>
Fair lending enforcement is too narrowly focused<\/B><\/P>
Regulation B should be strengthened in order to allow more effective enforcement of the Equal Credit Opportunity Act. Without this change, enforcement efforts will continue to be concentrated on home mortgage loans made by regulated banks, because the Department of Justice and the fair lending enforcement agencies will not have the tools to enforce the ECOA effectively with respect to business and consumer loans, particularly those made by non-depository institutions.<\/P> <\/LI>
Evidence indicates that discrimination in business and other consumer lending remains a serious problem<\/B><\/P>
For example, when the Department of Justice proposed changes to the federal procurement system following the Supreme Court’s decision in Adarand<\/I> v. Pena<\/I>, 515 U.S. 200 (1995), the Department documented that lending discrimination continued to play a major role in suppressing the formation and development of minority owned businesses. See<\/I> "Appendix–The Compelling Interest for Affirmative Action in Federal Procurement: A Preliminary Survey", in Proposed Reforms to Affirmative Action in Federal Procurement, 61 Fed. Reg. 26042, 26057, May 23, 1996.<\/P> <\/LI> Regulation B’s current strength derives from its monitoring rules<\/B><\/P> Applicant data has allowed enforcement agencies and public interest groups to identify problem lenders. But even this requirement would have minimal enforcement value without the related reporting requirements of the Home Mortgage Disclosure Act, and even HMDA reporting had minimal impact until that statute was amended in 1988 to require reporting of denied<\/I> applications<\/P> <\/LI> When Regulation B was changed to prohibit the collection of data on race, ethnicity, and gender, but to allow data collection for home mortgage loans, the intent was not to preclude future additional data collection<\/B><\/P> In 1977, when Regulation B was changed to prohibit data collection in order to avoid discriminatory use of such data, but to allow for the collection of home mortgage data, the Board justified this narrow scope based on three grounds: the magnitude of home purchase compared to all other consumer loans; the severity and frequency of complaints in this area; and the per unit cost of making the monitoring information notations. At that time, little was known (but assumptions were made) about the nature and scope of lending discrimination. Since then, as Chairman Greenspan recently noted, much has been learned about such discrimination, due to the collection of home mortgage data under Regulation B. The fears about discriminatory use of these data have not been realized and we do not think that they would be if the requirement was extended in a similar fashion to business and consumer loans. <\/P> The remarks preceding the published 1985 final rule contain an extensive discussion of the Board’s reasons for declining to issue further rules on business credit. The Board pointed out that, although creditors were relieved "from some of the more technical procedural requirements of the regulation," women and minority applicants for business credit were entitled to the basic protections of the ECOA. Such applicants "are entitled to notice of the action taken and, upon request, to a written statement of the reasons for denial," and they "have the right to ask the creditor to retain records. . . ." The Board noted that any modification of the business credit rules would require new rulemaking because the subject had not been raised in the proposed changes. Further:<\/P> Where applicable, these rules have had a salutary impact<\/B><\/P> We think that the requirement for recording and reporting of applicant monitoring data alone has benefitted minority home loan applicants as much or more than all federal enforcement efforts combined. When lender-by-lender approval and denial data, broken down by race and ethnicity, were made public for the first time in the fall of 1991 (for the 1990 calendar year), the event sent shock waves through the mortgage lending industry. At first, the severe disparities in denial rates between white and minority applicants elicited reactions of denial and disbelief. After our initial settlements of lawsuits charging lenders with a pattern or practice of lending discrimination, and after increased enforcement efforts by the bank regulatory agencies, those attitudes changed.<\/P> <\/LI> Where applicable, these rules have produced results<\/B><\/P> Over the past five years, there has been a dramatic change in the approach of the regulated home mortgage lenders toward fair lending issues. Top management has demanded explanations of their employees of "poor HMDA statistics," second reviews and other internal controls have become commonplace, banker associations have conducted hundreds of conferences and training sessions on the subject, and home mortgage lending to minorities has markedly increased throughout the country.<\/P> <\/LI> Allowing voluntary collection of monitoring data also would be of value<\/B><\/P> Although the Department of Justice prefers mandatory data collection and reporting, the current Regulation B could be improved by at least allowing willing lenders voluntarily to record applicant monitoring information for loan types other than those now specifically permitted. This would allow such institutions to monitor their own performance and would give regulators better information to assess complaints. While the efficacy of such a system is hard to predict, we believe that many lenders would voluntarily collect such data, especially if there were peer and public pressure to do so. We believe, however, that mandatory data collection, with a requirement for written applications, the retention of records, and reporting or disclosure, would be more effective.<\/P> <\/LI> Mandatory data collection may better address privacy concerns (for applicants and lenders)<\/B><\/P> In 1985, when the Board last addressed comprehensive suggestions for change in Regulation B, there was considerable discussion of additions to the monitoring information requirements. Before the 1985 changes, creditors could request monitoring information, but they could not require it. Under the change adopted in 1985, creditors must collect the data, and if the applicant does not provide it, the creditor must collect it through visual observation or surname.<\/P> As a result, the current Regulation B contains, in an appendix under the heading, "INFORMATION FOR GOVERNMENT MONITORING PURPOSES," model application form language designed to assuage privacy concerns:<\/P> The collected monitoring data have not been used to discriminate, and it has been an invaluable enforcement tool <\/B><\/P> The monitoring system has worked well under these procedures. We have not had reports of monitoring data being used to discriminate, and we expect the same if the requirement is extended to business and consumer loans. In fact, it is unlikely that the enforcement successes of the past six years on home mortgages could have occurred without this information.<\/P> Without these data, the DOJ investigations and lawsuits likely would not have occurred.<\/B><\/BLOCKQUOTE> Most of the discriminatory practices DOJ has uncovered to date have involved the failure to make loans to minority applicants (through unfair underwriting and processing of applications or by intentional redlining of minority residential neighborhoods). The required monitoring data, reported by decision (accept\/deny) and geography (Census tract) have been crucial — not as evidence of discrimination but in pointing the way toward possible problems. <\/BLOCKQUOTE> A central theme common to these investigations has been the different treatment given to minority applicants by lender employees who have face-to-face<\/I> contact — not by those who later see the monitoring data on the application forms. <\/BLOCKQUOTE> Without these data, responsible lenders would not have been able or willing to develop strategies for voluntary correction of their lending practices.<\/B><\/BLOCKQUOTE> Without monitoring information, the ability of the DOJ and the regulators to detect price discrimination in consumer loans or discriminatory business loan denials will be severely limited<\/B>.<\/P> Most of the progress in understanding credit discrimination has occurred since the Board’s 1985 revision of Regulation B. For example, there is no indication during previous deliberations that price discrimination was even considered to exist, particularly as practiced by consumer lenders and creditors engaged in what has become known as "overages." We have reason to believe that price discrimination in lending may be widespread. The two cases resulting from referrals by bank regulatory agencies to the Department of Justice concerning consumer loan price discrimination were based on painstaking analysis by examiners — one where the examiners suspected that persons with Hispanic surnames were being charged higher interest rates; the other where examiners were able to rely on loan officers’ knowledge of which borrowers were Native Americans.<\/P> The subject of discrimination in business lending has been virtually ignored, other than in a minor change prompted by Congress in 1989: an amendment to ECOA in the Women’s Business Ownership Act of 1988 required the Board to provide that creditors (1) give written notice of the right to obtain reasons for a business credit denial in writing and (2) retain records on business credit applications for at least a year. The only other improvement affecting business lending has been outside the context of Regulation B — the 1995 agreement by the four major regulatory agencies to add a provision in the Community Reinvestment Act regulations requiring depository institutions to report the number of business loans made (but not the total number of applications or the number of denials) by Census tract (but not by the characteristics of applicants such as, national origin or gender).<\/P> <\/LI> Chairman Greenspan has called for fighting discrimination in lending not just on moral grounds, but on economic grounds. <\/B><\/P> As Chairman Greenspan recently said at the Wall Street Project Anniversary Conference of the Rainbow\/PUSH Coalition (New York, New York, January 16, 1998):<\/P> CONCLUSION<\/B><\/P> The Board left open the possibility of revising Regulation B to improve protection against discrimination, should additional information suggest that such changes were appropriate. The experience we have had with home mortgage loan data collection and monitoring indicates that extending such requirements to business and consumer loans will have a similar laudatory effect.<\/P> <\/P><\/p>\n","protected":false},"excerpt":{"rendered":" February 20, 1998Department of JusticeComment Letter to Federal ReserveRegarding Changes to Regulation B February 20, 1998 The Honorable Laurence H. Meyer Board of Governors Of the Federal Reserve System Washington, D.C. 20551 Dear Governor...<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":true,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[56,6],"tags":[104],"class_list":["post-1002","post","type-post","status-publish","format-standard","hentry","category-advocacy-and-comment-letters","category-government","tag-government"],"jetpack_publicize_connections":[],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p89tuq-ga","jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/posts\/1002","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/comments?post=1002"}],"version-history":[{"count":1,"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/posts\/1002\/revisions"}],"predecessor-version":[{"id":2354,"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/posts\/1002\/revisions\/2354"}],"wp:attachment":[{"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/media?parent=1002"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/categories?post=1002"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/multiracial.com\/index.php\/wp-json\/wp\/v2\/tags?post=1002"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}} The Board believes that [without further changes] these provisions should fully protect women and members of minority groups against unlawful discrimination in business credit transactions, but has not ruled out changing the regulations to increase protections [in particular, requiring creditors to give denied business credit applicants written notice of their right to receive a statement of reasons for the denial]. . . . The Board will monitor developments in this area, and if it appears that the regulatory changes are needed, the Board will take appropriate action.<\/BLOCKQUOTE> <\/LI>
The following information is requested by the government for certain types of loans related to a dwelling in order to monitor the lender’s compliance with equal credit opportunity and fair housing laws. You are not required to furnish this information, but are encouraged to do so. The law provides that a lender may neither discriminate on the basis of this information, nor on whether you choose to furnish it. However, if you choose not to furnish the information, under federal regulations the lender is required to note race or national origin and sex on the basis of visual observation or surname. If you do not wish to furnish the information, please check below.<\/BLOCKQUOTE> <\/LI>
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Without these data, the public and interested groups would not have been aware of the seriousness of discrimination in home mortgage lending. Under Regulation C (which implements HMDA and is also promulgated by the Board), the same summary data that are available to the DOJ are also available to the public. Interested groups and the media have used this information effectively, and for the most part responsibly, in drawing attention to disproportionate minority denial rates and to residential neighborhoods that appear to have been ignored by lenders.<\/BLOCKQUOTE>
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It has been the DOJ’s experience that the greatest value of the monitoring data has been to inform lender management of the status of fair mortgage lending in their institutions. In our outreach efforts to promote self-evaluation and self-correction, we constantly stress that the data should be used by banks just as we do in trying to identify potential problems. We believe these efforts have been successful, and we have every reason to believe that lenders would use similar data in the same positive way with respect to business and consumer loans.<\/BLOCKQUOTE> <\/LI>
Our experience with mortgage applications is one that underscores the role that free market competitive pressures can play in undermining discrimination and improving the profitability of business activity. Discrimination is patently immoral, but it is now increasingly being seen as unprofitable. <\/BLOCKQUOTE>
Prices, interest rates, stock prices, and other signals produced by market economies to encourage the distribution of productive resources have no inherent moral content. However, to the extent that market participants discriminate–consciously or, more likely, unconsciously–the setting of wages and prices and the distribution of output are distorted. In the end, costs are higher, less real output is produced, and national wealth accumulation is slowed. If markets were fully efficient–that is, if all resources were allocated optimally and fully employed without discrimination–profit maximizers would arbitrage away such non-economic differences in the returns to human capital and other productive resources.<\/BLOCKQUOTE> <\/LI> <\/UL>