Banks Balance Minority Lending, Reputation

The Federal Reserve Board chairman made his comments in a speech Friday via satellite to attendees of the Independent Community Bankers of America National Convention recently held in San Antonio, Texas.

“I sense that concern about the burden of regulation is high on your agenda,” Greenspan said in a prepared remarks statement.

The chairman pointed out that bank supervision, with the supplement of “safety and soundness” regulations over the years, has become less invasive and increasingly more systems-and policy-oriented due to evolving technology, increased complexity, lessons learned from significant banking crises, as well as constructive criticism from bankers.

“Because we understand that regulatory changes can be quite costly, we recognize as well the important regulatory responsibility to balance the cost of change with the desired benefits,” Greenspan said. “But markets are not static, and changes must be made from time to time to fulfill the objectives of the law being implemented.”

Greenspan cited the new rules regarding HMDA disclosures as an example of the need for and the cost of change, and perhaps the risk of unintended consequences.

The structure of residential mortgage lending has significantly changed over the past decade or so due to several factors including: developments in information processing technology that permit more-efficient and more-accurate risk assessment and management; marketplace dynamics that have induced banks to seek new lending opportunities; and earlier HMDA data collections that have led many institutions to review and sometimes modify their marketing and underwriting practices, according to the prepared remarks.

Such developments prompted banks to change their policies from simply not making riskier mortgage loans to making subprime loans but charging higher interest rates for the additional risk taken. While expanding credit has given borrowers, who would have been denied credit at lower rates in the past, access to higher-rate loans, “some banks are concerned about the risk to their reputation that might be precipitated by the new HMDA data on rates charged for the higher-rate segment of the market,” Greenspan said.

“Specifically, by doing what public policy intended–increasing credit availability to less creditworthy, often minority, borrowers — banks might be accused unfairly of discrimination by those who fail to connect risk to price or to evaluate rates in terms of risk measures,” he continued. “Such concerns are understandable as, indeed, also are concerns that race, gender, ethnicity or other characteristics not reflective of risk per se may still adversely affect the cost of credit to some borrowers. The adoption of risk-based pricing, together with elements of discretion that are often afforded loan officers or brokers in the pricing of credit, does raise the concern that some borrowers, in fact, may not be treated fairly.”

To determine if differences in rates are driven by differences in risks and costs and not tainted by discrimination, the Fed was prompted to revise HMDA data collection to gather information on rates. While more detailed evaluations than HMDA data alone would be required to come up with such conclusions, pricing data will assist as a screening tool to facilitate self-monitoring and enforcement activities. If the screening suggests a fairness issue is at hand, additional information will need to be collected from banks’ loan files or other sources, the chairman said.