Fair Lending:

Federal Oversight and Enforcement Improved but Some Challenges Remain

GGD-96-145: Published: Aug 13, 1996. Publicly Released: Aug 13, 1996.

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Pursuant to congressional requests, GAO reviewed federal oversight and enforcement of fair lending laws, focusing on: (1) efforts to strengthen law enforcement procedures; and (2) challenges bank regulators face in their efforts to detect discrimination and ensure compliance.

GAO found that: (1) since 1992, bank regulators and other enforcement agencies have increased enforcement of fair lending laws and encouraged greater compliance by the lending industry; (2) bank regulators have also overhauled their compliance policies and examination procedures which strengthened their ability to detect discriminatory lending practices; (3) several agencies have recommended a number of compliance programs and activities that could help lenders ensure fair treatment of all loan applicants; (4) referrals to the Department of Justice (DOJ) have increased significantly and DOJ has settled several civil suits that alleged fair lending violations; (5) challenges to fair lending oversight and enforcement include nonuniform examination procedures among regulatory agencies, inadequate provisions to detect discrimination prior to submission of a formal loan application, inadequate disclosure data, examiners' inexperience and lack of training, and insufficient time allowances; (6) unresolved legal issues associated with the interpretation and application of these laws impede formulation of concise guidance and leave lending institutions confused and reluctant to implement voluntary compliance programs; and (7) resolution of these problems may require civil or administrative judicial proceedings or legislative action.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress enacted section 2302 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which created a legal privilege for information developed by creditors through voluntary self-tests that are conducted for ECOA compliance. The act also established a privilege for creditor self-testing under the Fair Housing Act, which is administered by HUD. The 1996 act directed FRB and HUD to issue implementing regulations. In December 1997, both FRS and HUD issued the implementing regulations.

    Matter: Congress may wish to consider measures that would remove or diminish the disincentives associated with self-testing by alleviating the legal risks of self-testing when conducted by lenders who in good faith are seeking to prevent discriminatory lending activity and who move to correct such discriminatory practices when they are identified.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Over the past 2 years, an interagency subcommittee of the Compliance Task Force of FFIEC has worked to develop a joint set of fair lending examination procedures. On December 4, 1998, the members of FFIEC (FRS, FDIC, OCC, OTS, and NCUA) approved the final interagency fair lending examination procedures on December 4, 1998. OTS provided training to all its compliance examiners on the Interagency Fair Lending Examination Procedures during the first quarter of 1996. OTS has implemented the procedures for all compliance examinations initiated after March 1, 1999.

    Recommendation: The heads of the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) should work together to develop and adopt uniform fair lending examination procedures and provide all compliance examination staff with the necessary training to implement those procedures.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

  2. Status: Closed - Implemented

    Comments: Over the past 2 years, an interagency subcommittee of the Compliance Task Force of FFIEC has worked to develop a joint set of fair lending examination procedures. On December 4, 1998, the members of FFIEC (FRS, FDIC, OCC, OTS, and NCUA) approved the final interagency fair lending examination procedures on December 4, 1998. FDIC provided its compliance examiners with the draft Interagency Fair Lending Examination Procedures on September 29, 1998, to be used as interim procedures for all examinations commenced after October 31, 1998. The draft procedures were superseded by the final fair lending examination procedures that were issued on February 11, 1999, as Financial Institution Letter FIL-14-99.

    Recommendation: The heads of the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) should work together to develop and adopt uniform fair lending examination procedures and provide all compliance examination staff with the necessary training to implement those procedures.

    Agency Affected: Federal Deposit Insurance Corporation

  3. Status: Closed - Implemented

    Comments: Over the past 2 years, an interagency subcommittee of the Compliance Task Force of the Federal Financial Institutions Examination Counsel (FFIEC) has worked to develop a joint set of fair lending examination procedures. On December 4, 1998, the members of FFIEC (FRS, FDIC, OCC, OTS, and NCUA) approved the final interagency fair lending examination procedures on December 4, 1998. FRS adopted the FFIEC fair lending examination procedures and required their use on all examinations effective January 12, 1999. Training for experienced examiners regarding the new procedures was completed for all Federal Reserve districts in February 1999.

    Recommendation: The heads of the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) should work together to develop and adopt uniform fair lending examination procedures and provide all compliance examination staff with the necessary training to implement those procedures.

    Agency Affected: Federal Reserve System: Board of Governors

  4. Status: Closed - Implemented

    Comments: Over the past 2 years, an interagency subcommittee of the Compliance Task Force of FFIEC has worked to develop a joint set of fair lending examination procedures. On December 4, 1998, the members FFIEC (FRS, FDIC, OCC, OTS, and NCUA) approved the final interagency fair lending examination procedures on December 4, 1998. NCUA subsequently developed additional guidance to use in conjunction with the interagency examination procedures that were specific to credit unions. NCUA plans to train its compliance examiners on the augmented fair lending examination procedures on October 4, 1999, and require the use of the augmented procedures effective from the point forward.

    Recommendation: The heads of the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) should work together to develop and adopt uniform fair lending examination procedures and provide all compliance examination staff with the necessary training to implement those procedures.

    Agency Affected: National Credit Union Administration

  5. Status: Closed - Implemented

    Comments: The new Interagency Fair Lending Examination Procedures adopted by OTS include procedures for examiners to follow in looking for potential discrimination at the pre-application stage of the lending process. In addition, OTS has initiated a project to: (1) determine the feasibility of conducting pre-application testing program; (2) initiate a pilot for such a program; and (3) evaluate the pilot. This project was in step one as of June 29, 1999. The estimated completion of the project is the first quarter 2000 although it may be completed earlier.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should adopt, as a component of their fair lending examination and training programs, guidelines and procedures for the use of testing methodologies for detection of discrimination at the preapplication stage of the lending process.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

  6. Status: Closed - Implemented

    Comments: OCC has adopted matched-pair preapplication testing as a viable tool for detecting discrimination at the inquiry stage of the credit process.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should adopt, as a component of their fair lending examination and training programs, guidelines and procedures for the use of testing methodologies for detection of discrimination at the preapplication stage of the lending process.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  7. Status: Closed - Not Implemented

    Comments: According to the FDIC, it does not engage the use of testers in Fair Lending examinations to pose as applicants. However, FDIC examiners undergo training on the potential inherent in a bank's self-testing program as outlined in the Advanced Fair Lending Workshop. Additionally, the FDIC has proactively encouraged financial institutions to institute their own pre-application testing programs.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should adopt, as a component of their fair lending examination and training programs, guidelines and procedures for the use of testing methodologies for detection of discrimination at the preapplication stage of the lending process.

    Agency Affected: Federal Deposit Insurance Corporation

  8. Status: Closed - Implemented

    Comments: Federal Reserve procedures for conducting the fair lending component of compliance examination include authorization for the use of "testing" as a means to determine "whether people have been prescreened on a prohibited basis."

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should adopt, as a component of their fair lending examination and training programs, guidelines and procedures for the use of testing methodologies for detection of discrimination at the preapplication stage of the lending process.

    Agency Affected: Federal Reserve System: Board of Governors

  9. Status: Closed - Implemented

    Comments: NCUA indicated that it has developed augmented procedures for the new Interagency Fair Lending Examination Procedures that will be tailored for credit unions. The augmented Interagency Fair Lending Examination Procedures developed by NCUA include procedures for examiners to follow in looking for potential discrimination at the pre-application stage of the lending process. NCUA plans to train its compliance examiners on the augmented fair lending procedures on October 4, 1999, and require the use of the augmented procedures effective for that point forward.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should adopt, as a component of their fair lending examination and training programs, guidelines and procedures for the use of testing methodologies for detection of discrimination at the preapplication stage of the lending process.

    Agency Affected: National Credit Union Administration

  10. Status: Closed - Implemented

    Comments: OTS indicated that it uses various efforts to ensure the timely and accurate submission of HMDA data. Institutions failing to submit HMDA data approximately 10 days after the deadline are contacted by OTS staff. A letter is also sent to the institution which indicates that the failure to submit accurate information on a timely basis may result in the assessment of civil money penalties. OTS runs edits of the HMDA data submissions and institutions with more than 30 validity errors are sent a warning letter. According to OTS, these letters are a first step toward by possible imposition of civil money penalties. In April 1998, OTS assessed civil money penalties against an institution for violations of the HMDA data collection and reporting requirements. The institution's 1996 and 1995 HMDA filings contained serious deficiencies and inaccuracies that materially affected the quality of the data.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should use their full range of enforcement authority, including the use of civil money penalties, to ensure that the Home Mortgage Disclosure Act data are submitted in a timely and accurate manner.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

  11. Status: Closed - Implemented

    Comments: In a memorandum dated January 22, 1997, OCC stated that it is OCC policy to consider assessing a civil money penalty against a national bank whenever a bank submits a delinquent or inaccurate HMDA data.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should use their full range of enforcement authority, including the use of civil money penalties, to ensure that the Home Mortgage Disclosure Act data are submitted in a timely and accurate manner.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  12. Status: Closed - Implemented

    Comments: FDIC has developed a policy for ensuring that HMDA data is submitted in an accurate and timely manner through the examination programs and procedures for the imposition of civil money penalties. FDIC provided a copy of its policy for imposing civil money penalties. The policy states that civil money penalties may be imposed for violations of HMDA in two different instances: (1) failure to report the data to the FDIC in a timely or accurate manner; and (2) when an examination or investigation reveals an institution improperly recorded or failed to record application information on its Loan Application Register (LAR). FDIC's civil money penalty log indicated several instances in which FDIC assessed civil money penalties for banks' failure to accurately report HMDA data.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should use their full range of enforcement authority, including the use of civil money penalties, to ensure that the Home Mortgage Disclosure Act data are submitted in a timely and accurate manner.

    Agency Affected: Federal Deposit Insurance Corporation

  13. Status: Closed - Implemented

    Comments: Regarding the imposition of civil money penalties on institutions that failed to submit timely and accurate HMDA data, the Federal Reserve has not found it necessary to use that remedy in order to achieve substantial compliance. According to the FRB, HMDA reporting accuracy among state member banks has continually improved over the past 3 years. FRB staff believe that the availability of the civil money penalty remedy may have played a part in that improvement.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should use their full range of enforcement authority, including the use of civil money penalties, to ensure that the Home Mortgage Disclosure Act data are submitted in a timely and accurate manner.

    Agency Affected: Federal Reserve System: Board of Governors

  14. Status: Closed - Not Implemented

    Comments: NCUA indicated that timely and accurate HMDA data has not been identified as a problem for credit unions and, therefore, it has not had the need to use civil money penalties as an enforcement tool to achieve compliance.

    Recommendation: The heads of FRB, FDIC, OCC, OTS, and NCUA should use their full range of enforcement authority, including the use of civil money penalties, to ensure that the Home Mortgage Disclosure Act data are submitted in a timely and accurate manner.

    Agency Affected: National Credit Union Administration

  15. Status: Closed - Implemented

    Comments: The DOJ indicated that on November 21, 1996, the Attorney General met with representatives of the banking regulatory agencies, the Department of HUD, and the Federal Trade Commission to discuss fair lending enforcement. During the meeting, the Attorney General and other representatives of the DOJ advised regulators regarding the types of cases that might constitute a "pattern or practice" of unlawful conduct and also distributed a memorandum identifying characteristics that may form the basis of a pattern or practice referral under the Equal Credit Opportunity Act and the Fair Housing Act.

    Recommendation: The U.S. Attorney General should provide updated guidance to the banking regulatory agencies and to the HUD on the characteristics of referable "pattern or practice" cases under the Equal Credit Opportunity Act and the Fair Housing Act.

    Agency Affected: Department of Justice

 

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