WASHINGTON - Federal banking regulators are scrambling to respond to mounds of new data showing that minorities are several times as likely as whites to get a high-cost mortgage.
Regulators have said that the pricing data will be used to screen lenders that warrant a closer look. They have not - and probably will not - be more specific.
"Part of our strategy is to look at information and identify outliers," said Tim Burniston, an associate director in the Federal Deposit Insurance Corp.'s division of supervision and consumer protection. "We don't have particular red-flag numbers. We don't sit here and say before we get concerned about something [that] it has to be three times greater or four times greater or eight times greater."
Instead, Mr. Burniston said, "we're looking for raw differences for how certain groups are treated apparently based on the pricing data, compared to a control group, which is typically a white group if we're doing a race-based analysis."
As of April 1, Home Mortgage Disclosure Act rules require lenders to release data on first mortgages priced 3 percentage points over the comparable Treasury yield and secondary mortgages priced 5 percentage points over. Regulators expect the data to show regions where subprime loans are concentrated and disparities in borrowers' income, race, ethnicity, and sex that might indicate discrimination.
The Federal Reserve Board is checking the data for accuracy and technical problems and will then begin aggregating and analyzing.
However, community groups are beating regulators to the punch. Much of the groups' analysis has shown banks are two to four times more likely to make high-priced loans to minorities than to whites.
On Monday, Inner City Press/Fair Finance Watch released a report showing that HSBC Bank USA was 6.5 times more likely to make a subprime loan to an African-American or a Hispanic customer than to a white one.
The agencies plan to wait for the official Fed data before responding to such reports. They said that when they find a problem, they will first ask the bank for an explanation.
"We've been advising banks they need to be studying their data right now and be prepared to tell us and the public why there are any disparities," said one federal regulator, who asked not to be named.
"They're going to have to say more than, 'Well, it's risk-based pricing.' They're going to need to explain to us, in detail, how they price for risk, how they apply that policy, and why still there are clusters of disparities," the regulator said.
Officials said banks will need to demonstrate they have a policy for monitoring and dealing with such variances, including when corrective action is needed.
If a bank's explanation is not convincing, regulators said, they will begin looking at loan files and conduct a formal fair-lending exam. If a "pattern or practice" of bias is found, the case will be referred to the Justice Department, which can prosecute or let the appropriate agency address the issue in the supervisory process.
In 2003, the last year for which such data is available, the FDIC was the only regulator to pass cases to the Justice Department. It referred 29, two of which were investigated.
The federal regulator said a bank reporting just a handful of subprime loans will probably not be targeted.
But higher prices and clusters of disparities in terms of race or national origin are "going to be the red flag," he said. "I can't tell you that they would automatically be examined, but it's probably likely. Certainly the worst performers probably would."
Regulators said some banks may be able to account for what initially appears to be major variances, while other banks may fail to adequately explain small ones.
Community groups said they understand that it is impossible to conclude that lenders discriminate solely from the new data, because vital proprietary information is lacking, but they challenged regulators and banks to provide that information.
"As long as we have a system where there isn't enough data, we're going to have these fights," said John Taylor, the president of the National Community Reinvestment Coalition.
