For over 20 years lenders have been prohibited from gathering information about the race, religion, ethnicity, or gender of their loan applicants - except in the case of mortgage lending, where the data must be collected and reported for government monitoring purposes. The Federal Reserve Board has now issued a proposal to drop that prohibition.
The change would have consequences that were not intended. And the cost -particularly to banks and others who are trying to increase minority access to credit - would far exceed any benefit.
A decade ago, Congress amended the Home Mortgage Disclosure Act, or HMDA, to require the reporting of application data by race, national origin, gender, and income level. The subsequent decade saw a dramatic increase in mortgage lending to and homeownership by minorities. Some have argued that the availability of the HMDA data, reflecting lower minority lending and higher decline rates, acted as a wakeup call to the industry.
Now, with the focus having shifted to other credit products such as small-business lending, the same argument is being advanced to support the collection of data on the race and sex of borrowers.
But the argument is based on the false premise that another wakeup call is needed. In recent years banks have been very focused on the needs of minorities and women, and have been actively seeking ways to meet those needs in every product line. In particular, a great deal of effort has been devoted to increasing access for small businesses.
Creative partnerships, targeted investments, technical assistance, counseling and training, and other innovative programs - some of them first developed in the mortgage context - are being undertaken by banks to assist in the development of small businesses owned by minorities and women, and to provide for their particular needs. The Consumer Bankers Association's 1999 small-business banking survey reported, for example, that nearly 80% of the banks surveyed have loan programs specifically targeted to minority-owned small businesses.
Financial institutions would benefit from some additional information on the characteristics of their small-business customers - because it could assist them in meeting their customers' needs or measuring performance goals. But many of them are genuinely concerned that the proposed change in the law would hurt them more than it would help. Their experience with HMDA data taught them that any statistical difference in the numbers of loans to different groups or in their denial rates - whatever the social or economic cause of the difference - could be used to target banks for enforcement actions.
Lenders trying to do the right thing have been forced to publicly defend their HMDA data, which paint an incomplete picture of lending decisions and take no account of historical and economic factors outside of the lenders' control. Nevertheless, the data have been used repeatedly to target lenders for enforcement actions by the regulators, the Department of Housing and Urban Development, and the Justice Department.
Justice and the other regulatory and enforcement agencies have urged the Fed to relax the prohibition so that they can obtain the information collected by the lenders and use it in enforcement actions - just as they use the HMDA data. As the agencies explained in a letter urging the Fed to issue the proposal, "The prohibition [on data collection] inhibits effective monitoring and enforcement of ECOA [the Equal Credit Opportunity Act]. Without the necessary data, enforcement agencies must rely on other investigative techniques that are less efficient, accurate, or complete."
It is not hard to see why many financial institutions are concerned about the impact of the proposal. Any data collected by a financial institution would be available to examiners, regulators, enforcement agencies, and ultimately the public. The bank could expect to be the target of costly enforcement actions, regardless of the merits, with its own data used against it. Without any protection against the public availability of the data and its misuse, very few lenders would take the risk of gathering it. The Fed has even declined to extend the protection - slight as it is - of the new ECOA self-testing privilege to the voluntarily collected data.
Every meaningful effort to eradicate discrimination should be supported. But the Fed's proposal would do little to assist that effort. The information generated would be useful neither to draw broad conclusions about the level of lending nationwide nor to target individual lenders in any significant way. The only source for the data would be the lenders who voluntarily collect the information, and that would amount to only a small percentage of the industry.
Of course, there would always be some banks that would collect the information, once it was allowed, because their genuine desire to use it for outreach and monitoring would overcome their concerns. It would be ironic if the ones who are most eager to expand access found themselves the latest targets of enforcement agencies and class-actions.
Even if it were widely collected, however, how significant would this information really be to anyone but the lender who collected it?
Those who did collect information would gather only what was appropriate for their purposes - for example, for the internal monitoring of a particular product or service. Each institution would approach the process differently, relying on its own definitions and measures. (For example, what is the definition of a woman-owned small business? What is the size of a small business?) The data would not be of any relevance outside of the business unit conducting the survey. Public availability of the information would lead inevitably to erroneous conclusions about both the lender and the industry as a whole.
If, on the other hand, the purpose is to encourage lenders to undertake self-evaluation for fair lending compliance, then this approach is misguided. Banks already recognize that minorities and women have historically faced barriers, including limited access to capital, and they are looking for ways to overcome those barriers. Rather than being threatened with prosecution, banks need some assurance that the information they collect for that purpose would not be made available to those whose goal is to find legal violations. Self-evaluations cannot be undertaken in a fishbowl. Strong protections against the public availability of this information would do more than threats of enforcement to encourage lenders to monitor their own practices.
When the Fed issued a similar proposal several years ago, it listened to arguments on both sides of the debate and unanimously concluded that the decision was a sensitive one of public policy that should be left to Congress. Nothing has happened to change the facts or the concerns on either side of this debate, and the Fed has no basis for reversing its previous position. Mr. Zeisel is senior counsel at the Consumer Bankers Association.