Now that Allan Greenspan has been sworn in for
another term as chairman of the Federal Reserve, it is time for him to
get serious about the Fed’s fair lending responsibilities. These
responsibilities include providing information about mortgage
discrimination, developing standards for fair-lending enforcement, and
detecting discrimination by the lenders under the Fed’s supervision.
Mr. Greenspan’s record on this issue is not very
good. When he first became chairman of the Fed in 1987, the
homeownership rate for non-Hispanic whites was 22.9 percentage points
higher than the homeownership rate for blacks and 28.1 percentage points
higher than the rate for Hispanics. By 2003, these gaps had risen to
26.6 and 28.7 percent, respectively. In 1995 (the earliest date with
data comparable to the present), the conventional mortgage loan denial
rate for blacks was 97 percent higher (and the rate for Hispanics 43
percent higher) than the loan denial rate for whites. By 2003, these
differences had climbed to 108 percent for blacks and 58 percent for
Hispanics.
These figures show the relative position of blacks
and Hispanics in the mortgage market has not improved during Mr.
Greenspan’s tenure at the Fed, but they do not prove that there is
discrimination in mortgage lending. After all, they do not account for
loan history and other factors that influence a loan applicant’s
creditworthiness. The only study that accounts for these factors in a
satisfactory way, a study sponsored by the Boston Fed, is based on data
from 1990. This study found that blacks and Hispanics were 82 percent
more likely to be turned down for a mortgage than were whites with the
same credit qualifications—a clear sign of discrimination. I do not
know whether mortgage discrimination persists at this level, but the
recent growth of loan-approval and homeownership gaps certainly suggests
that it has not yet gone away.
Independent scholars have no way to collect the
data needed to update the Boston Fed study, and the Federal Reserve,
which could easily collect the data, has refused to do so. As a result,
there is no direct evidence on the extent of discrimination after 1990.
Surely the first obligation of any fair-lending enforcement agency is to
provide the public with information on the extent of the problem. The
Fed under Allan Greenspan has failed to meet this responsibility.
The Fed under Greenspan has also fallen short in
developing fair-lending enforcement procedures. Some background is
needed to see why.
One type of discrimination is disparate treatment,
which exists when different rules are used for people in different
racial or ethnic groups. A lender who uses different standards to
evaluate applications from blacks and whites is practicing
disparate-treatment discrimination.
Our civil rights laws also prohibit
disparate-impact discrimination, which exists when a business uses the
same rules for everyone, but these rules place people in certain racial
or ethnic groups at a disadvantage without any business justification.
Suppose, for example, that homeowners in largely rental neighborhoods
are no more likely to default on their mortgages than are homeowners in
largely owner neighborhoods, all else equal, and that blacks are more
likely than whites to want a house in largely rental neighborhood when
they apply for a mortgage. Then any underwriting scheme giving positive
weight to the homeownership rate in the neighborhood involves
disparate-impact discrimination; this rate has no business purpose and
puts blacks at a disadvantage.
The Fed’s fair-lending enforcement procedures
focus on disparate-treatment discrimination in the underwriting
decisions of large lenders. These procedures have detected flagrant
discrimination by a few lenders and have led to settlements between
these lenders and the Fed. Unfortunately, however, these procedures
fail to find many other cases of disparate-treatment discrimination,
such as discrimination by small lenders or discrimination in
pre-application procedures. More importantly, these procedures make no
attempt to uncover disparate-impact discrimination.
One might think that the rise of credit scoring
and automated underwriting schemes will minimize discrimination because
the loan-approval decisions are computerized and the lenders may not
observe the customer’s racial or ethnic identity. Indeed, some mortgage
applications are approved over the internet with no face-to-face contact
between the applicant and the lender. In fact, however, this view
ignores disparate-impact discrimination, which can exist even when a
lender does not know the racial or ethnic group to which a customer
belongs. Moreover, disparate-impact discrimination might even be
magnified by recent developments, because it can be hidden in the
weights placed on the factors in credit scoring or automated
underwriting schemes. Instead of ignoring this possibility, the Fed
should be pioneering methods to determine whether these schemes involve
disparate-impact discrimination.
The Fed’s important role in monetary policy should
not blind us to its fair-lending responsibilities. I call on Chairman
Greenspan to implement effective fair-lending enforcement procedures and
on Congress to hold Mr. Greenspan accountable for progress in fighting
mortgage lending discrimination.