November 01, 1999
Pending changes to the Federal Reserve's Regulation B would allow financial institutions to collect data on the race, sex and national origin of its borrowers for non-mortgage loans. Under the current regulation, this practice is expressly prohibited.
Regulation B was promulgated pursuant to the Equal Credit Opportunity Act, which prohibits a creditor from discriminating against a loan applicant based on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public benefits or the exercise in good faith of rights under the Consumer Credit Protection Act. Originally, it was thought that Regulation B would prevent illegal discrimination by preventing the collection and dissemination of this irrelevant data. Federal reserve governors and staff have long debated the validity of this premise, however, with some arguing that the bar makes discrimination harder to detect. Also, the current rule conflicts with the practice in the mortgage lending area, where the collection of such data is mandatory.
The proposed rule change comes after the Board's Division of Consumer and Community Affairs requested approval to publish the proposed changes for comment. In a June 18, 1999 memo, the division staff recommended removal of the prohibition against the notation of race, national origin, sex or other prohibited bases of discrimination under the ECOA.
This proposal is not new. In 1995 the Board made a similar proposal but withdrew it in December of 1996. After soliciting comments, the Board concluded that, given the politically sensitive nature of the proposal and the issues involved, the matter was best left to Congress.
In response to concerns raised by the Justice Department and other "federal financial enforcement agencies," another advance notice was circulated in 1998. These agencies cited anecdotal evidence of discrimination in small business lending and other areas. Providing such data, they argued, would help, rather than hinder, the goal of non-discrimination in non-mortgage lending.
In response to the Advance Notice, 300 commentators addressed the issue of allowing lenders to collect data in the prohibited areas. Banks and banking associations mainly opposed the changes. They believe that regulators and outside groups will pressure them to collect the data and that its collection will be required in fact if not in law. Also, they are concerned that it is a first step to a de jure requirement as well. Those institutions that choose to collect such data, they fear, would be subject to even greater scrutiny from the federal government and outside groups. Banks were also concerned that data collection would invade their customers' privacy and lead to a perception that it was being misused in the loan approval process. Finally, they argue that allowing the collection of such data would expand loan officers' opportunities to discriminate and undermine the ECOA's goals. Finally, they fear that data on race, sex and national origin could be used by outside advocacy groups to claim discrimination without looking at other potential factors for the rejection of loans.
There is a sense that this has occurred in the mortgage lending area already. In the late 1980s, various newspapers, such as the Atlanta Journal-Constitution, the Detroit Free Press and the Washington Post, ran stories about racial discrimination in mortgage lending based on data required to be collected under the Home Mortgage Disclosure Act. Looking superficially at the data, these stories alleged widespread discrimination in mortgage lending. Years later, more sophisticated analysis by various federal reserve and home loan banks disproved these allegations, but only after changes in the law had been made to expand anti-discrimination measures. In fact, very few of the nation's thousands of mortgage lenders have been sued successfully for discrimination.
How this came about is particularly instructive for the debate over proposed Regulation B changes. The studies that claimed lenders were engaged in discrimination could not rely entirely on Home Mortgage Disclosure Act data because it did not provide information on mortgage terms and the borrowers' financial situation and credit histories, the activity of lenders other than banks and thrifts, or the demand for mortgages in central city areas. As a result, HMDA data provided an inaccurate picture of the mortgage lending situation. Because it would require that the same types of information to be disclosed, proposed Rule B changes could likely lead to the same scenario: an incomplete data picture purporting to show discrimination being used to bludgeon lenders.
Some banks and financial institutions will welcome the change because it will allow (though not require) them to collect data to ensure their compliance with the ECOA. Most of the comments in support of the change were from federal agencies, small businesses, "consumer advocates," and community organizations. Many of them also perceived this as a first step towards mandatory collection of such data, which they favor.
The proposed rule would not require applicants to provide information about their race, color, religion, national origin or sex. Creditors who requested such information would have to advise applicants that providing such information is optional and that the bank would not take such information into account in deciding to grant the applicant's loan.
* Mr. Rogers is Legislative Director and Counsel to US Representative Nick Smith (R-Michigan). The views expressed here are Mr. Rogers' own.