TRANSPARENCY POLICIES

13. Disclosing Lending Practices to Reduce Discrimination

The Home Mortgage Disclosure Act (HMDA), initially enacted in 1975 and substantially expanded in 1989,175 required banks to disclose detailed information about their mortgage lending. The law aimed to curb discrimination in such lending to create more equal opportunity to access credit. The disclosure requirement compelled banks, savings and loan associations, and other lending institutions to report annually the amounts and geographical distribution of their mortgage applications, origins, and purchases disaggregated by race, gender, annual income, and other characteristics. The data, collected and disclosed by the Federal Financial Institutions Examination Council, were made available to the public and to financial regulators to determine if lenders were serving the housing needs of the communities where they were located.176 The Examination Council was an interagency body that included the Federal Reserve System, the Federal Deposit Insurance Corporation, and other agencies. In 2004, as many as 33.6 million loan records were reported by nearly nine thousand financial institutions.177

Mortgage lending disclosure was part of Congress’s response to activists’ calls, in the later stages of the civil rights movement of the 1960s and 1970s, for greater economic equality. It followed congressional action in 1968 to bar racial discrimination in housing sales or rentals; a settlement negotiated by the Department of Justice to end racial discrimination in the appraisal profession; and approval of the federal Equal Credit Opportunity Act in 1974, which outlawed racial and ethnic discrimination in lending.178 Community-based organizations pressed for disclosure requirements to aid their local campaigns to end lending discrimination. One of the most prominent figures in this debate was Gale Cincotta, a Chicago-based leader of the fair housing and community reinvestment movement, who foundedNational People’s Action and theNational Training and InformationCenter, two of the local organizations that documented the retreat of banks from inner-city neighborhoods in the 1960s and 1970s and pressed for more equitable lending. She and other activists found an ally in Senate Banking Committee chair William Proxmire (D – Wis.). In 1975, Proxmire sponsored a bill requiring disclosure of lending practices.179 Despite opposition from the banking industry, the requirement was ultimately approved by a narrow margin in both the Senate (47–45) and the House (177–147).180

Under initial disclosure requirements, banks were required to report minimal data about the geographic location of home loan approvals and purchases. Additional legislation expanded and refined these disclosure requirements. In 1977,Congress approved the Community Reinvestment Act (CRA), which required lending institutions to meet the credit needs of the communities in which they operated and linked community lending records to approval of merger applications.181 In 1980, Congress approved the Housing and Community Development Act, which directed the Federal Financial Institutions Examination Council to serve as a central clearinghouse for mortgage lending data.182 Finally, in response to the savings and loan crisis of the 1980s, Congress approved in 1989 the Federal Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA),183 which sought to stabilize and provide new oversight for the savings and loan industry. Community reinvestment groups lobbied successfully to include improvements in disclosure, such as reporting of applications as well as loans; reporting of the race, sex, and income of borrowers and applicants; and reporting by a broader range of mortgage lenders.184

As Congress expanded the scope and depth of this transparency system, it gained wider use. Advocacy groups used mortgage lending data to document constraints on credit in their communities and to negotiate new mechanisms for low-income lending with individual banks. Broad-based community reinvestment task forces in Washington, Rhode Island, New Jersey, and Michigan forged partnerships among community organizations, lending institutions, and state and local governments to address access problems. Investigative reporters, financial analysts, and intermediaries used the information to document pervasive patterns of discriminatory lending and the exodus of banks from low-income neighborhoods. In 1988, for example, the Atlanta Journal- Constitution reported on widespread redlining in that city in “The Color of Money,” a series of articles that received extensive national attention.185 In 1992, the Boston Federal Reserve conducted a rigorous study that concluded that race had a strong influence in lending decisions.186 The study received broad media coverage, confronting banks with discrimination allegations from a particularly authoritative source.

As they responded to a wave of requests for bank mergers in the late 1980s and 1990s, federal regulators also employed mortgage lending data in deciding whether to grant approvals. The banking industry was shaken in 1989 when the Federal Reserve Bank first exercised this power by denying amerger request from Continental Illinois National Bank and Trust Company of Chicago on the ground that the bank had not met its community reinvestment requirements. Advocacy groups that tracked the performance of particular banks often petitioned regulators to turn down merger requests if their performance indicated unfair lending practices.

This shift in the competitive environment led many more banks to improve lending practices in the 1990s.187 The competitive shift resulted in part from mortgage lending disclosure and the requirements of the Community Reinvestment Act, as well as from the proliferation of sophisticated community organizations that had developed the expertise to understand bank lending patterns and negotiate with financial institutions. More banks developed products, divisions, and methods to compete in low-income markets, and bankers acknowledged that disclosure and community reinvestment requirements had proven less burdensome than expected.188

The accuracy and scope of disclosed lending data also continued to improve. Disclosure became more frequent, data quality increased, more financial institutions were required to report, and data were collected and distributed electronically.189 After the successes of the 1990s, community organizations and regulators turned their attention to predatory lending, a practice in which vulnerable minorities were offered higher-interest mortgages and less-favorable terms than other borrowers.190 In 2002, mortgage lending disclosure rules were amended to require banks to disclose not only the disposition of loan applications but also mortgage prices. Beginning in 2004, lenders were required to report data on loan pricing for loan originations in which the annual percentage rate exceeded the yield of comparable Treasury securities by a specified amount. These new data allowed intermediaries such as the National Community Reinvestment Coalition and the Association of Community Organizations for Reform Now to document disparities in access to credit and press for measures to address predatory lending.191 Regulators used the expanded information to enforce fair lending laws. In 2005, the Federal Reserve incorporated these new data into their statistical strategies for identifying potentially discriminatory institutions that warranted closer regulatory scrutiny.192

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FOOTNOTES
175. Home Mortgage Disclosure Act of 1975, Pub. L. 94–299, Title III, December 31, 1975, 89 Stat. 1125 (codified at 12 U.S.C. §2801 et seq. (2000)), amended by Financial Institutions, Reform, Recovery and Enforcement Act of 1989, Pub. L. 101–73, August 9, 1989, 103 Stat. 183 (codified in scattered sections of 12 U.S.C.).
176. See http://www.ffiec.gov/about.htm (site accessed May 24, 2006).
177. See http://www.ffiec.gov/hmda (site accessed June 8, 2006).
178. Legislative History, Pub. L. 94–200.
179. Proxmire also playeda leading role in the enforcementof fair lending legislation. In 1988 he held public hearings in which he urged regulatory agencies to be more aggressive in assuring lending to low-income areas. In the late 1980s regulators started to deny banks’ merger applications on the grounds of poor lending to local communities.
180. See 121 Cong. Rec. 34,581 (1975) (passage in the House) and 121 Cong. Rec. 27,623 (1975) (passage in the Senate.) 181. 12 U.S.C. §2901.
182. Housing and Community Development Act, Pub. L. 96–399, October 8, 1980, 94 Stat. 1614 (codified as amended at scattered sections of 12 U.S.C., 15 U.S.C., and 42 U.S.C.)
183. Financial Institutions, Reform, Recovery and Enforcement Act of 1989, Pub. L. 101–73, August 9, 1989, 103 Stat. 183 (codified in scattered sections of 12 U.S.C.). Following a wave of deregulation in the early 1980s, many savings and loans diversified their investments into unfamiliar areas. By 1987, hundreds of savings and loans had failed, the Federal Savings and Loan Insurance Corporation was insolvent, and losses amounted to more then $100 billion.
184. Community organizations argued that they represented neighborhoods that had not benefited from the bad loans that caused the savings and loan scandal and should not suffer the public costs of the bailout.
185. In 1989, Bill Dedman was awarded a Pulitzer Prize in investigative reporting for his series titled “The Color of Money,” published in the Atlanta Journal and Constitution on May 1–4, 1988. The articles are available online at http://powerreporting.com/color/colorofmoney.pdf (site accessed May 24, 2006).
186. Munnell et al., 1996, p. 25.
187. From1977 to 1991, banks committed $8.8 billion in CRA agreements involving lending, investments, and other services to communities. From 1992 to 2000, banks committed more than $1.09 trillion. National Community Reinvestment Coalition, 2001.
188. A 2000 Federal Reserve Board study found that the vast majority of banks operated profitably in CRA-related loans. The study analyzed the performance and profitability of CRA-related lending and reported that nearly two-thirds of responding institutions agreed that CRA-related lending had opened new business opportunities and served as a tool to promote a good image of banks in the community. Board of Governors of the Federal Reserve System, 2000, pp. 63–64. The study showed that CRA lending was overall profitable or marginally profitable and that performance of CRA lending activities in general did not differ from mortgage activities not related to CRA. Board of Governors of the Federal Reserve System, 2000, pp. 52, 58, 62–63, 69.
189. These improvements were introduced through subsequent amendments of the Federal Reserve Board’s Regulation C, which implements HMDA.
190. See Apgar and Calder, 2005.
191. See National Community Reinvestment Coalition, 2005, and Association of Community Organizations for Reform Now, 2005.
192. Avery, Canner, and Cook, 2005, pp. 344–394.
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