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 focused primarily on the small business sector,  largely because there is data available on this type of lending from FRB’s  SSBF. In addition, studies have  also found that Hispanic-owned businesses were denied credit or charged  higher interest rates more often when compared with white-owned  businesses with similar risk characteristics. While studies using SSBF data have provided important insights into  possible discrimination in small business lending, researchers and FRB  officials also said the data had the following certain limitations as a  research tool:    SSBF data are collected from individual small business borrowers rather  than lenders, which limit their analytical value. In the absence of similar race, gender, and other data on personal  characteristics for nonmortgage loan applicants, regulators may rely on  time-consuming and possibly unreliable techniques to assess lenders’  compliance with fair lending laws. For example, some  researchers said that data collection by itself would not necessarily mean  the information would be used to discriminate because in many cases— such as small business lending—lenders may already be aware of an  applicant’s personal characteristics because such lending is often done on  a face-to-face basis. Even so, a range of researchers, regulatory staff, and  representatives from both consumer and banking groups we contacted  generally concurred with FRB that voluntarily collected data might not be  useful or reliable and that very few banks would choose to collect it. 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, such as race and gender, could create a risk that  the information would be used for discriminatory purposes relative to  prohibiting data collection. 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. Such data  would also be more timely than SSBF data, and the implementation of data  collection standards could help ensure its reliability. Further, examiners could use such  data to compare practices across lenders to identify possibly  discriminatory practices. Consequently, the officials said that lenders would have to collect and  report significant additional information on a range of underwriting  standards and data for small business lending in order to make the data on  personal characteristics useful so that examiners, researchers, Congress,  and others are in a better position to determine whether a particular  lender’s practices may involve discrimination or not. 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. In its written  comments, FRB did not take a position on our analyses but restated one of  its 2003 rationales for retaining Regulation B’s general prohibition on  collecting data on personal characteristics for nonmortgage loan  applicants. Moreover, FRB also summarized the draft report’s analysis that, while  there was not full agreement among those that we contacted with all  aspects of the FRB’s rationale for retaining the prohibition, there was  widespread agreement that such voluntary data would have limited  benefits. However, such a requirement would impose additional costs on lenders  that could be partially passed along to borrowers. Appendix I: Objectives, Scope, and Methodology

The objectives of our report were to discuss (1) available research on  possible discrimination in nonmortgage lending and review the strengths  and limitations of the data that researchers and regulators use to detect  possible discrimination; (2) analyze the Federal Reserve Board’s (FRB)  basis for largely retaining Regulation B’s prohibition against the voluntary  collection of racial and gender data in 2003; and (3) assess the potential  benefits and costs of requiring lenders to both collect and publicly report  racial and gender data for nonmortgage loan applicants, as well as options  to mitigate such costs.
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 report 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. 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 other regulatory officials, researchers, banks, and consumer groups. 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

Most studies suggest 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 with 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 because 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, staff from regulatory agencies, and others agreed that voluntarily collected data would not likely materially benefit efforts by researchers, regulators, and others to better understand possible discrimination in nonmortgage lending because it 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 (e.g., the data may enhance regulators' ability to detect discriminatory practices). 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 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.