Julia Seward, community reinvestment officer for the Signet Banking Corp., represented the Consumer Bankers Association in testifying on how to guard against discrimination in mortgage lending before joint hearings by the Consumer Affairs and Coinage Subcommittee and the Banking, Housing and Community Development Sub-committee of the House Banking, and Urban Affairs Committee. Following are excerpts from her testimony in which she describes specific programs adopted by lenders to increase service to minorities. Additional excerpts will be carried in the June 1 issue.
CBA members have learned a great deal from their self-assessment process and community outreach. It is, of course, a long-term effort-begun before the release of the 1990 HMDA data and nowhere near completion. Nevertheless, whether they began before the recent release of the HMDA information, or were prompted by the information, CBA members have adopted new and in some cases creative policies to address the problem. Among other things, these have involved (1) taking affirmative steps to ensure consistent lending policies and actively seeking to approve loan applications from minorities and low- and moderate-income applicants, consistent with safe and sound banking practices; (2) providing education and counseling services that teach prospective home buyers about the process of establishing credit history, resolving credit problems, and applying for a mortgage loan; (3) providing or supporting home buying programs that offer easier access to first-time home buyers and others, often predicated on the successful completion of counseling programs; and (4) creating or participating in community development corporations, public/private partnerships, and multibank and consortia of banks that have provided millions of dollars in loans to low- and moderate-income communities.
The first approach adopted by many of CBA's member institutions has been to take a close look at their own operations to assure themselves that whatever they can do internally to prevent disparities in loan denials is in fact being done. Some banks, for example, have instituted a procedure whereby any recommendation to turn down a mortgage loan application from a low-income applicant is reviewed automatically by a credit supervisor. This provides a second, experienced judgment to ensure that the banks lending standards are applied fairly and appropriately in each case. Morover, a few banks are comparing the credit characteristics - for example, appraised property value and borrower's debt-to-income ratio - associated with declined applications of minority applicants with the same characteristics of approved applications to detect any unwarranted disparities in treatment.
One money-center bank in the West has created a new review process for real estate loan applications involving low-income applicants and applicants in lower-income census tracts. If the original underwriter in the bank's residential loan center does not approve the application, it is passed to a senior officer at the loan center for another review. If a decline is recommended at that level, it is forwarded to corporate underwriting officers at the bank's headquarters. In addition the bank has allocated a special $30 moon fund for loans of this type that do not meet even the liberalized underwriting guidelines of the bank!s home loan program for low-income areas. The bank has found that the process is helping it become more aware of why the loans are not approved at the field level, and enabling it to take steps where appropriate to modify the credit review process.
On the East Coast, another money center bank has re-examined all its credit policies, procedures, advertising and other information relating to mortgages, to be certain that they are nondiscriminatory. It has also begun a process whereby each denial of a loan application that is from an applicant in a lower-income census tract is afforded a "one-up" review before the ultimate credit decision is rendered. This permits the bank to ensure that its lending policies are being consistently applied by its underwriters and that it has sought every opportunity to make the loan.
The bank has also begun a process whereby it will perform, on a quarterly basis. a fair lending review of the applications it receives. This review entails determining the reasons for the credit denial arid looks for disparities based on racial or ethnic factor. Many other banks have instituted similar procedures.
A number of other approaches have been adopted by CBA members to address problems highlighted by HMDA data: Many institutions periodically (for example on a quarterly basis) review samples of withdrawn (rather than denied) mortgage applications to determine the reasons for the withdrawal. Some institutions have begun tracking consumer loan credit denials to ensure that no pattern of geographic discrepancies exists in a given sector. (Collection and use of racial data continues to be prohibited by ECOA for nonhousing loans.)
Although generally satisfied that their credit criteria are being applied fairly and uniformly, some CBA members have begun to re-examine aspects of their loan underwriting standards to determine if changes could be made that would allow additional applicants to be approved without materially increasing credit risk. As many of the standards reflect requirements of the secondary market. discussions have taken place and are ongoing with the two key determiners of secondary market policies: The Federal National Mortgage Corporation and the Federal Home Loan Mortgage Corporation. Among the changes in credit criteria that have been implemented or are being considered are increases in acceptable debt-to-income and housing-expense-to-income ratios and a broadening of what constitutes a suitable credit history. For example, the community development corporation of one large CBA member bank accepts as a substitute or supplemental credit history a borrower's record of paying rent and utility bills. To the extent that lack of credit history has been a detriment to some applicants, this change can be significant.
Nevertheless, the process has had to be undertaken everywhere with great care. Early efforts at relaxing loan criteria to increase acceptance ratios (by the Atlanta Mortgage Consortium, for one) resulted in unacceptably large increases in delinquencies and defaults.
In addition to reviewing their own practices and making attempts to address the disparities internally, many CBA member banks have discovered. by outreach and other assessment of community needs, that education and counseling form one of the most critical needs in their low- and moderate-income communities. In a very short time, anecdotal evidence has suggested that there are rewards for efforts banks make in this area.
For example, as a direct result of community needs assessment, Provident National Bank and ACORN are negotiating an agreement in Philadelphia whereby a CORN will provide credit counseling services to individuals who are applying for Provident's CRA mortgage product.
In Pittsburgh, Pittsburgh National Bank in conjunction with other local institutions and the local coalition of community groups - Pittsburgh Community Reinvestment Group - are jointly creating a Credit Counseling Program, where prospective minority and low-income home buyers will receive intensive credit and financial counseling. In Cincinnati, Central Trust is working with the Better Housing League to establish a system to refer denied minority applicants to the League for credit counseling.