Alec D. Rogers *
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.
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