	Background

Regulation B imposes a general prohibition on collecting data on personal  characteristics for nonmortgage loan applicants. Studies Suggest That Discrimination May Play a Role in Certain Types of Nonmortgage Lending, but Data Limitations Complicate Efforts to Better Understand the Issue

The limited number of studies on nonmortgage lending that met our  criteria for selection in our June report focused primarily on the small  business sector, and suggested that certain minority-owned businesses  may be denied loans more often or be offered higher interest rates than  similar white-owned businesses. However, the key data source for most of  these studies, FRB’s SSBF, has certain limitations compared with HMDA  data, and this may limit the data’s usefulness as an analytical tool. While studies using SSBF data have provided important insights into  possible discrimination in small business lending, researchers and FRB  officials also pointed out a number of limitations:    SSBF data are collected from individual small business borrowers rather  than lenders, which limit their analytical value. These studies showed the strength of the SCF  as a data source (e.g., the ability to consider data on personal  characteristics and loan underwriting factors), as well as its limitations  (e.g., the data are collected from borrowers rather than lenders). We found that in the absence of similar race, gender, and other data on  personal characteristics for nonmortgage loan applicants, examiners may  rely on time-consuming and possibly unreliable techniques to assess  lenders’ compliance with fair lending laws. For example, examination guidance allows examiners,  after consulting with their agency’s supervisory staff, to assume that an  applicant is Hispanic based on the last name, female based on the first  name, or likely to be an African-American based on the census tract of the  address. Researchers and Others Had Mixed Views on FRB’s Conclusion That Voluntary Data Collection Could Create Some Risk for Discrimination in Nonmortgage Lending

Some researchers, staff from a bank regulatory agency, and  representatives from banking and business trade groups we contacted  generally agreed with FRB that permitting voluntary data collection on  personal characteristics could create a risk that the information would be  used for discriminatory purposes. Similarly, all lenders that chose to collect and  use such data for discriminatory purposes would face the risk of public  disclosure of such practices through litigation. FRB established such procedures for  federally regulated lenders that choose to conduct a self-test. Many Researchers and Others Agreed That Voluntarily Collected Data May Not Be Reliable or Useful in Helping to Better Identify Possible Discrimination in Nonmortgage Lending

Even so, many researchers, regulatory staff, and representatives from  consumer groups and banking trade groups agreed with FRB’s conclusion  that the reliability of voluntarily collected data may be limited in  identifying possible discrimination in nonmortgage lending. Moreover, the establishment of such data collection  standards might also have further diminished lender interest in a voluntary  program, which researchers, FRB officials, and others said was already  limited due to the potential for increased regulatory and public scrutiny of  their lending practices. A Data Collection and Reporting Requirement Could Further Efforts to Better Understand Possible Discrimination in Nonmortgage Lending but Would also Involve Complexities and Costs That Would Require Consideration

In concept, a requirement that lenders collect and publicly report data on  the personal characteristics of nonmortgage loan applicants, similar to  HMDA requirements, could help address some of the existing data  limitations that complicate efforts by researchers, federal bank regulators,  and others to identify possible discrimination. For this  reason, they reiterated that a data collection and reporting requirement  would involve additional system integration and employee training costs,  among others. Limiting a Data Collection and Reporting Requirement to Specific Types of Nonmortgage Loans Would Also Have Benefits and Costs

One potential option to mitigate the costs associated with a requirement  that regulated lenders collect and report data on the personal  characteristics of those seeking nonmortgage loans would be to limit the  requirement to certain types of loans, such as small business and/or  automobile loans. One option to potentially enhance federal oversight of the fair lending  laws, while mitigating lender cost concerns, would be to require lenders to  collect data on personal characteristics for small business loan applicants,  and perhaps other types of nonmortgage lending like automobile lending,  and make the data available to regulators but not require public reporting  of such data or any other information.
Why GAO Did This Study

The Federal Reserve Board's (FRB) Regulation B, which implements the Equal Credit Opportunity Act of 1974 (ECOA), generally prohibits lenders from collecting certain data from loan applicants, such as their race or gender, for nonmortgage loans (e.g., small business loans). FRB has stated that this provision of Regulation B minimizes the chances that lenders would use such data in an unlawful and discriminatory manner. However, others argue that the prohibition limits the capacity of researchers and regulators to identify possible discrimination in nonmortgage lending. This testimony is based on the GAO report, Fair Lending: Race and Gender Data Are Limited for Nonmortgage Lending ( GAO-08-698 , June 27, 2008). Specifically, GAO analyzes (1) studies on possible discrimination in nonmortgage lending and the data used in them, (2) FRB's 2003 decision to retain the prohibition of voluntary data collection, and (3) the benefits and costs of a data collection and reporting requirement. For this work, GAO conducted a literature review; reviewed FRB documents; analyzed issues involving the Home Mortgage Disclosure Act (HMDA), which requires lenders to collect and publicly report data on personal characteristics for mortgage loan applicants; and interviewed FRB and others. FRB did not take a position on this report's analysis. In addition to restating its rationale for retaining the prohibition of voluntary data collection, FRB summarized GAO's findings, including the potential benefits and costs of additional data for fair lending enforcement.

What GAO Found

GAO's June 2008 report found that most research suggests that discrimination may play a role in certain types of nonmortgage lending, but data limitations complicate efforts by researchers and regulators to better understand this issue. For example, available studies indicate that African-American owned small businesses are denied loans more often or pay higher interest rates than white-owned businesses with similar risk characteristics. While the primary data source for these studies, a periodic FRB small business survey, provides important insights into possible discrimination, it also has limits compared to HMDA data. For example, the FRB survey data are collected from borrowers rather than lenders, which limit their usefulness as a means to assess lending practices. In addition, federal bank regulators that enforce ECOA said that HMDA data facilitates the identification of lenders that may be engaging in discriminatory mortgage lending. In the absence of such data for nonmortgage loans, regulators may rely on time-consuming and less reliable approaches to identify possible discrimination, such as assuming a loan applicant is Hispanic based on his or her last name. While testimony from researchers and other information GAO collected did not fully agree with all aspects of FRB's 2003 rationale for retaining the prohibition of voluntary data collection, there was general agreement that such voluntary data would have limited benefits. FRB did not adopt a proposal that would have allowed lenders to collect data, without any standards, because it said the proposal would have (1) created an opportunity for lenders to use the data for discriminatory purposes and (2) such data would not be useful since lenders may use different collection approaches. While some researchers and others agreed with FRB's first rationale, others said that data collection alone would not necessarily create the risk for discrimination because, in some cases (e.g., small business lending), lenders may already be aware of applicants' personal characteristics as such lending is often done on a face-to-face basis. Even so, a range of researchers, regulatory staff, and others agreed that voluntarily collected data would not likely materially benefit efforts to better understand possible discrimination because the data would be collected on an inconsistent basis or few lenders would participate out of concern for additional regulatory scrutiny of their nonmortgage lending practices and the potential for litigation. Requiring lenders to collect and publicly report data on personal characteristics for nonmortgage loan applicants could help address current data limitations that complicate efforts to better assess possible discrimination. However, such a requirement would impose additional costs on lenders that could be partially passed on to borrowers. These potential costs include those associated with information system integration, software development, data storage and verification, and employee training. Limiting a requirement to certain types of loans could help mitigate such costs but may also involve complexities that would need to be carefully considered. For example, to the extent that small business lending is more complicated than other types of lending, lenders may need to collect and report additional information on a range of underwriting standards in addition to data on personal characteristics so that informed judgments can be made about their lending practices.