Federal Oversight and Enforcement of Fair Lending Laws Are Shared among Multiple Agencies and Depository Institution Regulators

Responsibility for federal oversight and enforcement of the fair lending  laws is principally shared among three enforcement agencies and five  depository institution regulators (see app. HMDA Data Provide Information on the Race, Sex, and Other Personal Characteristics of Mortgage Loan Borrowers and Applicants

HMDA, as amended, requires certain lenders to collect, disclose, and  report data on the personal characteristics of mortgage borrowers and  loan applicants (for example, their ethnicity, race, and sex), the type of  loan or application (for example, if the loan is insured or guaranteed by a  federal agency such as the Federal Housing Administration), and certain  financial data such as the loan amount and borrowers’ incomes. Data Available to Detect Potentially Heightened Risk for Fair Lending Violations Have Limitations, and Options to Enhance the Data Involve Trade-offs

Federal enforcement agencies and depository institution regulators use  analysis of HMDA data and other information to identify lenders that  potentially are at heightened risk of having violated the fair lending laws  and target their investigations and examinations accordingly. Requiring lenders to  collect and publicly report additional data could benefit federal oversight  efforts as well as independent research into potential discrimination in  lending, but also would impose additional costs, particularly on smaller  institutions with limited recordkeeping systems. Furthermore, using such surrogates may require examiners to cull through  individual nonmortgage loan files. In contrast,  enforcement agencies, which have jurisdiction over independent lenders  have conducted relatively few investigations of such lenders that have  been identified as outliers over the past several years (for example, HUD  and FTC have initiated 22 such investigations since 2005). HUD and FTC  also generally do not conduct fair lending investigations of independent  lenders that are not viewed as outliers. OCC selects a sample of all  lenders—including those that are not required to file HMDA data—for  targeted fair lending examinations. At the depository  institution regulators, fair lending oversight generally is housed in offices  that are responsible for oversight of a variety of consumer compliance  laws and regulations, and the CRA, in addition to the fair lending laws. These  differing approaches raise questions about the consistency and  effectiveness of the depository institution regulators’ collective fair  lending oversight efforts, which are likely to persist so long as the  fragmented regulatory structure remains in place. In contrast, OCC made one referral during this period and  NCUA none. Because federal enforcement efforts to manage ECOA’s 2- year statute of limitations may not always be successful, the agencies’  capacity to thoroughly investigate potential fair lending violations and take  appropriate corrective action in certain cases may be compromised. Without similar authority for nonbank subsidiaries, the Federal Reserve’s  capacity to identify potential risks for fair lending violations is limited. For example,  the evidence suggests that lenders regulated by FDIC, the Federal Reserve,  and OTS are more likely than lenders regulated by OCC and NCUA to be  the subject of referrals to DOJ for being at potentially heightened risk of  fair lending violations. Appendix I: Objectives, Scope, and Methodology

The objectives of our report were to (1) assess the strengths and  limitations of data sources that enforcement agencies and depository  institution regulators use to screen for lenders that have potentially  heightened risk for fair lending law violations and discusses options for  enhancing the data; (2) assess federal oversight of lenders that may  represent relatively high risks of fair lending violations as evidenced by  analysis of Home Mortgage Disclosure Act (HMDA) data and other  information; (3) examine differences in depository institution regulators’  fair lending oversight programs; and (4) discuss enforcement agencies’  recent litigation involving potential fair lending law violations and  challenges that federal officials have identified in fulfilling their  enforcement responsibilities. We gathered information on how  enforcement agencies—the Department of Housing and Urban  Development (HUD), the Federal Trade Commission (FTC), and the  Department of Justice (DOJ)—and depository institution regulators—the  Board of Governors of the Federal Reserve System (Federal Reserve), the  Office of the Comptroller of the Currency (OCC), the Federal Deposit  Insurance Corporation (FDIC), the National Credit Union Administration  (NCUA), and the Office of Thrift Supervision (OTS)—use data sources  such as HMDA data to screen for high-risk lenders. HMDA requires many  mortgage lenders to collect and report data on mortgage applicants and  borrowers.
Why GAO Did This Study

The Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA)--the "fair lending laws"--prohibit discrimination in lending. Responsibility for their oversight is shared among three enforcement agencies--the Department of Housing and Urban Development (HUD), Federal Trade Commission (FTC), and Department of Justice (DOJ)--and five depository institution regulators--the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (Federal Reserve), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and Office of Thrift Supervision (OTS). This report examines (1) data used by agencies and the public to detect potential violations and options to enhance the data, (2) federal oversight of lenders that are identified as at heightened risk of violating the fair lending laws, and (3) recent cases involving fair lending laws and associated enforcement challenges. GAO analyzed fair lending laws, relevant research, and interviewed agency officials, lenders, and consumer groups. GAO also reviewed 152 depository institution fair lending examination files. Depending upon file availability by regulator, GAO reviewed all relevant files or a random sample as appropriate.

What GAO Found

The Home Mortgage Disclosure Act (HMDA) requires certain lenders to collect and publicly report data on the race, national origin, and sex of mortgage loan borrowers. Enforcement agencies and depository institution regulators use HMDA data to identify outliers--lenders that may have violated fair lending laws--and focus their investigations and examinations accordingly. But, HMDA data also have limitations; they do not include information on the credit risks of mortgage borrowers, which may limit regulators' and the public's capacity to identify lenders most likely to be engaged in discriminatory practices without first conducting labor-intensive reviews. Another data limitation is that lenders are not required to report data on the race, ethnicity, and sex of nonmortgage loan borrowers--such as small businesses, which limits oversight of such lending. While requiring lenders to report additional data would impose costs on them, particularly smaller institutions, options exist to mitigate such costs to some degree, such as limiting the reporting requirements to larger institutions. Without additional data, agencies' and regulators' capacity to identify potential lending discrimination is limited. GAO identified the following limitations in the consistency and effectiveness of fair lending oversight that are largely attributable to the fragmented U.S. financial regulatory system: (1) Federal oversight of lenders that may represent heightened risks of fair lending law violations is limited. For example, the enforcement agencies are responsible for monitoring independent mortgage lenders' compliance with the fair lending laws. Such lenders have been large originators of subprime mortgage loans in recent years and have more frequently been identified through analysis of HMDA data as outliers than depository institutions, such as banks. Depository institution regulators are more likely to assess the activities of outliers and, unlike enforcement agencies, they routinely assess the compliance of lenders that are not outliers. As a result, many fair lending violations at independent lenders may go undetected, and efforts to deter potential violations may be ineffective. (2) Although depository institution regulators' fair lending oversight efforts may be more comprehensive, the division of responsibility among multiple agencies raises questions about the consistency and effectiveness of their efforts. For example, each regulator uses a different approach to analyze HMDA data to identify outliers and examination documentation varies. Moreover, since 2005, OTS, the Federal Reserve, and FDIC have referred more than 100 lenders to DOJ for further investigations of potential fair lending violations, as required by ECOA, while OCC made one referral and NCUA none. Enforcement agencies have settled relatively few (eight) fair lending cases since 2005. Agencies identified several enforcement challenges, including the complexity of fair lending cases, difficulties in recruiting and retaining staff, and the constraints of ECOA's 2-year statute of limitations.