Fair-Lending Enforcement Is in Chaos, GAO Finds

Inadequate training, rushed reviews, and unclear rules are hampering the government's enforcement of fair-lending laws, according to a General Accounting Office study.

The 130-page report, released last week, urges banking agencies to standardize fair-lending exams. For example, the GAO said the Federal Reserve concentrates heavily on statistics to identify lending bias while the Office of the Comptroller of the Currency uses mystery shoppers.

"The lack of uniform examination procedures raises an important equity issue regarding the evenhanded application of the law," the GAO said.

Regulators are taking the congressional watchdog agency's advice.

"We support the recommendation for uniform fair-lending examination procedures," Fed Governor Lawrence B. Lindsey wrote in a letter to the GAO. "We have been working on the development of uniform standards and anticipate submitting a draft for consideration by the other agencies in the very near future."

Judith A. Walter, senior deputy comptroller for administration, said her agency began beefing up its fair-lending training this summer.

The GAO report shines a spotlight on fair-lending problems just as pressure was easing on the industry to lend more to minorities. Statistics released this month showed bank mortgage lending to minorities sky-rocketed during the past three years. And contrary to expectations, the Justice Department has not brought any controversial discrimination cases since 1994.

The GAO study, however, could give new ammunition to lawmakers, such as Rep. Joseph P. Kennedy 2d, who say the regulators are not doing enough to ferret out discrimination. The GAO study was done at the Massachusetts Democrat's request.

The report carries weight because it is based not on the conclusions of GAO investigators, but on interviews with bank examiners conducted over two years stretching from January 1994 to December 1995.

Nearly half of the 39 examiners interviewed said they did not receive enough training to detect lending bias and interpret Home Mortgage Disclosure Act data.

Examiners also complained about pressure to conduct fair-lending reviews quickly, saying they do not have the time needed to compare mortgage applications from whites and minority borrowers with similar incomes and credit histories to determine if discrimination is occurring.

"It would be more helpful ... if HMDA analyses were done by well-trained specialists prior to each examination," the GAO said.

Examiners also told the GAO that they are unsure when they must refer cases to the Justice Department. The law requires a referral whenever officials identify a "pattern or practice" of bias, but it doesn't define what this phrase means.

The Justice Department said it plans to flesh this issue out soon, said Deval Patrick, assistant attorney general for the civil rights division, in a letter to the GAO. This information is expected by the end of September, according to a department spokesman.

The GAO also urged regulators to evaluate the conduct of bank employees before loan applications are filed. The agency recommended using mystery shoppers to uncover loan officers who discourage qualified minorities from applying for mortgages.

GAO praised the Comptroller's Office for embracing this issue early on. It also said fair-housing groups have found mystery-shopping a particularly potent tool.

But the watchdog agency criticized regulators for not penalizing banks that submit inaccurate HMDA data. The GAO said a Fed audit found that 20% of banks submitted 1992 data that required subsequent corrections. But regulators did not impose their first civil money penalty for inaccurate HMDA data until 1994.

"Even though HMDA data are widely used by both federal regulatory agencies and the public in overseeing compliance with the fair-lending laws, the quality of the data remains suspect," according to the report.

Finally, the GAO said Congress should clarify fair-lending laws. For example, lawmakers must decide whether lawyers can use the results of a bank's fair-lending self-assessment against the institution. It also said Congress must decide whether credit-scoring systems are legal.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER