Statement Of
Sandra L. Thompson, Director Division Of Supervision
And
Consumer Protection, Federal Deposit Insurance Corporation
On
Upholding The Spirit Of CRA:
Do CRA Ratings Accurately Reflect Bank Practices;
before the
Domestic Policy Subcommittee of the Oversight
And
Government Reform Committee,
U.S. House Of Representatives;
October 24, 2007
2154 Rayburn House Office Building
Chairman Kucinich, Ranking Member Issa and members of the Committee, I appreciate
the opportunity to testify today on behalf of the Federal Deposit Insurance Corporation
(FDIC) regarding the enforcement of the Equal Credit Opportunity Act (ECOA) and the
Fair Housing Act (FHA) and how the FDIC considers compliance with these laws, often
known as the "fair lending" laws, in assigning Community Reinvestment Act (CRA)
ratings.
CRA was signed into law thirty years ago on October 12, 19771. The purpose of CRA is
to encourage banks to serve the credit needs of their entire communities, including low
and moderate income neighborhoods. At the time CRA was enacted, there was a
severe shortage of credit available to low and moderate income neighborhoods and
concern about racial redlining and discrimination. While CRA and the federal fair lending
laws have had significant positive impact, there remains much work to be done. My
testimony will describe the fair lending review conducted as part of consumer
compliance examinations, the separate CRA performance evaluation process, and the
FDIC's supervisory and enforcement actions to enforce these laws. Finally, I will explain
the effect of fair lending violations on the CRA ratings we assign.
FDIC's Fair Lending Examination Program
The FDIC is committed to protecting consumers and ensuring that the institutions under
our supervision adhere to the letter and spirit of the fair lending laws. When the FDIC
finds practices that violate these laws, we take action to ensure that the practices cease
and that harm to consumers is remedied, using a range of supervisory and enforcement
tools.
Applicable laws
The fair lending laws applicable to FDIC-supervised institutions -- ECOA and FHA-- are
somewhat different in scope and applicability2. While ECOA applies to all credit
Sandra L. Thompson, Director Division Of Supervision
And
Consumer Protection, Federal Deposit Insurance Corporation
On
Upholding The Spirit Of CRA:
Do CRA Ratings Accurately Reflect Bank Practices;
before the
Domestic Policy Subcommittee of the Oversight
And
Government Reform Committee,
U.S. House Of Representatives;
October 24, 2007
2154 Rayburn House Office Building
Chairman Kucinich, Ranking Member Issa and members of the Committee, I appreciate
the opportunity to testify today on behalf of the Federal Deposit Insurance Corporation
(FDIC) regarding the enforcement of the Equal Credit Opportunity Act (ECOA) and the
Fair Housing Act (FHA) and how the FDIC considers compliance with these laws, often
known as the "fair lending" laws, in assigning Community Reinvestment Act (CRA)
ratings.
CRA was signed into law thirty years ago on October 12, 19771. The purpose of CRA is
to encourage banks to serve the credit needs of their entire communities, including low
and moderate income neighborhoods. At the time CRA was enacted, there was a
severe shortage of credit available to low and moderate income neighborhoods and
concern about racial redlining and discrimination. While CRA and the federal fair lending
laws have had significant positive impact, there remains much work to be done. My
testimony will describe the fair lending review conducted as part of consumer
compliance examinations, the separate CRA performance evaluation process, and the
FDIC's supervisory and enforcement actions to enforce these laws. Finally, I will explain
the effect of fair lending violations on the CRA ratings we assign.
FDIC's Fair Lending Examination Program
The FDIC is committed to protecting consumers and ensuring that the institutions under
our supervision adhere to the letter and spirit of the fair lending laws. When the FDIC
finds practices that violate these laws, we take action to ensure that the practices cease
and that harm to consumers is remedied, using a range of supervisory and enforcement
tools.
Applicable laws
The fair lending laws applicable to FDIC-supervised institutions -- ECOA and FHA-- are
somewhat different in scope and applicability2. While ECOA applies to all credit
transactions, FHA applies to housing-related credit. ECOA and FHA both prohibit
creditors from discriminating against any applicant in any stage of a credit transaction
on the basis of race, color, religion, national origin, or sex. In addition, FHA prohibits
discrimination on the basis of familial status and handicap, while ECOA includes
prohibitions against discrimination based on age, marital status, public assistance
income, and the exercise of rights under the Consumer Credit Protection Act. ECOA
also requires that a creditor take or refrain from taking certain actions regarding what
information can be sought in an application process, what notices are mandated to be
provided to an applicant, and when a spouse can be required to co-sign a loan.
Fair lending reviews
FDIC conducts a fair lending review as part of every regularly scheduled consumer
compliance examination of the institutions we supervise3. Our examiners also have the
authority -- outside of a regularly scheduled examination -- to visit any FDIC-supervised
institution to investigate a concern that has been brought to our attention4.
To conduct a fair lending review, examiners follow the Interagency Fair Lending
Examination Procedures5. These procedures were developed by the federal financial
institution regulatory agencies in consultation with the Departments of Justice (DOJ)
and Housing and Urban Development (HUD). Pursuant to the procedures, examiners
begin by reviewing a bank's lending operations to determine the areas at most risk for
discrimination. Examiners next analyze the bank's reasons for approving and denying
loans, and, as part of this analysis, conduct interviews of bank personnel to determine
the bank's underwriting and pricing criteria, both as written and as actually implemented.
Examiners also conduct individual loan file reviews -- focusing on targeted loan
products -- to obtain and confirm the underwriting and pricing criteria. If a file
comparison shows differences in treatment, the examiner determines whether these
differences are based on a prohibited factor.
Review of Home Mortgage Disclosure Act (HMDA) data also is an important component
of fair lending reviews, and provides examiners with valuable information about a bank's
home mortgage operations. In addition to considering loan application information, FDIC
examiners review HMDA pricing data as a part of each fair lending examination of
banks required to report the data6. Where the data show a larger pricing disparity for
minorities or women in one or more product areas than is evident for other FDIC-
supervised institutions, examiners scrutinize the institution's lending more closely.
When examiners identify a potential fair lending violation, they consult with FDIC fair
lending and legal staff at the regional office. If FDIC regional staff concurs with the
finding of a likely violation, a formal letter is sent to the bank apprising its management
of the finding and the bank is provided an opportunity to respond. In the event the
institution's response does not provide credible nondiscriminatory reasons that refute
the evidence of discrimination, the FDIC cites the violation in the examination report and
seeks corrective action. As required by ECOA7, a referral is made to DOJ with a
creditors from discriminating against any applicant in any stage of a credit transaction
on the basis of race, color, religion, national origin, or sex. In addition, FHA prohibits
discrimination on the basis of familial status and handicap, while ECOA includes
prohibitions against discrimination based on age, marital status, public assistance
income, and the exercise of rights under the Consumer Credit Protection Act. ECOA
also requires that a creditor take or refrain from taking certain actions regarding what
information can be sought in an application process, what notices are mandated to be
provided to an applicant, and when a spouse can be required to co-sign a loan.
Fair lending reviews
FDIC conducts a fair lending review as part of every regularly scheduled consumer
compliance examination of the institutions we supervise3. Our examiners also have the
authority -- outside of a regularly scheduled examination -- to visit any FDIC-supervised
institution to investigate a concern that has been brought to our attention4.
To conduct a fair lending review, examiners follow the Interagency Fair Lending
Examination Procedures5. These procedures were developed by the federal financial
institution regulatory agencies in consultation with the Departments of Justice (DOJ)
and Housing and Urban Development (HUD). Pursuant to the procedures, examiners
begin by reviewing a bank's lending operations to determine the areas at most risk for
discrimination. Examiners next analyze the bank's reasons for approving and denying
loans, and, as part of this analysis, conduct interviews of bank personnel to determine
the bank's underwriting and pricing criteria, both as written and as actually implemented.
Examiners also conduct individual loan file reviews -- focusing on targeted loan
products -- to obtain and confirm the underwriting and pricing criteria. If a file
comparison shows differences in treatment, the examiner determines whether these
differences are based on a prohibited factor.
Review of Home Mortgage Disclosure Act (HMDA) data also is an important component
of fair lending reviews, and provides examiners with valuable information about a bank's
home mortgage operations. In addition to considering loan application information, FDIC
examiners review HMDA pricing data as a part of each fair lending examination of
banks required to report the data6. Where the data show a larger pricing disparity for
minorities or women in one or more product areas than is evident for other FDIC-
supervised institutions, examiners scrutinize the institution's lending more closely.
When examiners identify a potential fair lending violation, they consult with FDIC fair
lending and legal staff at the regional office. If FDIC regional staff concurs with the
finding of a likely violation, a formal letter is sent to the bank apprising its management
of the finding and the bank is provided an opportunity to respond. In the event the
institution's response does not provide credible nondiscriminatory reasons that refute
the evidence of discrimination, the FDIC cites the violation in the examination report and
seeks corrective action. As required by ECOA7, a referral is made to DOJ with a