How Capitalism Saved America and How Government is Destroying It

[Bigjon]

http://www.youtube.com/watch?feature=player_embedded&v=OLJaBJwYHHc


http://www.youtube.com/watch?feature=player_embedded&v=OLJaBJwYHHc

How Capitalism Saved America and How Government is Destroying It | Thomas J. DiLorenzo

[Bigjon]

This document is a smoking gun that shows the Fed created the housing bubble and the methods employed.

http://www.bos.frb.org/commdev/closing-the-gap/closingt.pdf




Home Mo r t g a g e Di s c l o s u r e
Act (HMDA)•Equality•Flexible
C om mi tm e n t • F a i r L e n d i n g
A n t i – D i s c r i m i n a t i o n
Fa i rHous ingAc t •Re s o u r c e s
E q u a l C r e d i t Op p o r t u n i t y
A c t ( E COA ) Re g u l a t i o n B
C i v i l R i g h t s L a w •R e a l i t y
Community Reinvestment Act
A l t e r n a t i v e L o a n P r o d u c t s
M a r k e t i n g S t r a t e g i e s
UnderwritingStandards & Practices
{Closing The Gap:}
A Guide To EqualOpportunity Lending
Federal Reserve Bank of Boston
1
We would like to acknowledge the following Federal Reserve Bank
of Boston staff members for their commitment and tireless effort in the
writing, editing, design, and production of this publication: Patricia
Allouise, Mary Hughes Bickerton, David Mann, Elizabeth McMurtrie,
Joan Poskanzer, Kristen Taylor, and Paul Williams.
We would also like to thank the following individuals from both
inside and outside the Bank for their helpful comments and contributions
to the document: Robert Augusta, Jr., Andrew Burkle, David Cotney,
Maureen Elliot, Ann Fogarty, Joseph Feaster, Robert Fichter, Sunny–
Brent Harding, Bonnie Heudorfer, Ozell Hudson, James McGovern,
John McPherson, Larry Meeker, Shirley Parish, Barbara Rabin, Warren
Smith, and Ronald Zimmerman.
Susan E. Rodburg and Richard C. Walker, III
Project Coordinators
A c k n o w l e d g m e n t s
2
E d i t o r s ’ N o t e
A 1992 study of mortgage
lending by the Federal
Reserve Bank of Boston
analyzed the effects of race
on denial rates for blacks
and Hispanics in the
Boston metropolitan area.
However, around the
country, members of other
racial and ethnic groups
may also experience
credit discrimination.
For editorial purposes,
it was necessary to select
a single term to refer to
underserved borrowers.
In this publication, the
terms “minority” or
“minority group” are
used to refer to borrowers,
including blacks and
Hispanics, who are not
members of the dominant
culture in a particular
lending area.
3
T a b l e o f C o n t e n t s
Foreword.......................................... ....................................5
Introduction .................................................. .......................6
Recommendations .................................................. ..............9
Staff Training .................................................. ................ 10
Hiring and Promotion Practices ........................................ 11
Compensation Structure .................................................. . 12
Underwriting Standards and Practices ................................ 13
Alternative Loan Products ................................................. 17
Second Review Policies .................................................. ... 18
Marketing Strategies .................................................. ....... 19
Buyer Education......................................... ...................... 21
Third Party Involvement in the Loan Process ..................... 22
Testing Fairness in Lending Practices ................................ 24
Conclusions .................................................. ...................... 25
Summary of Fair Lending Laws .......................................... 26
Home Mortgage Disclosure Act ......................................... 26
Equal Credit Opportunity Act ........................................... 26
Fair Housing Act .................................................. ........... 26
Community Reinvestment Act ........................................... 27
4
55
Fair lending is good business. Access to credit, free from considerations
of race or national origin, is essential to the economic health of
both lenders and borrowers.
Working together, progress has been made over the past few
years since patterns of racial disparity in mortgage lending were first
documented. While few people believe that purposeful discrimination is
prevalent, ending those patterns has become a top priority of both public
and private sector participants in the home mortgage market. But clearly,
more needs to be done.
The Federal Reserve Bank of Boston wants to be helpful to
lenders as they work to close the mortgage gap. For this publication,
we have gathered recommendations on “best practice” from lending
institutions and consumer groups. With their help, we have developed a
comprehensive program for lenders who seek to ensure that all loan
applicants are treated fairly and to expand their markets to reach a more
diverse customer base.
I am confident that, together, we can make equal credit opportunity
the reality that everybody wants.
Richard F. Syron
President and Chief Executive Officer
Federal Reserve Bank of Boston
F o r e w o r d
66
Lending bias is inseparable from the broader issue of race in our
society: discrimination is not unique to mortgage lending. In our nation
of some 250 million people, approximately 76 percent are white, 12
percent are black, 9 percent are Hispanic, 3 percent are Asian and Pacific
Islanders, and less than 1 percent are Native Americans. For the most
part, we live and work separate from each other in rural areas, suburbs, and
urban neighborhoods.
Cultural separation perpetuates social biases – biases that are
expressed in our work and in our institutions. It is beyond the scope of this
guide to analyze the complex, historical forces that have shaped race
relations in the United States. For the purposes of this publication,
we distinguish among three types of discrimination: overt, intentional
discrimination; subtle, deliberate discrimination; and unintentional
discrimination.
Overt discrimination in mortgage lending is rarely seen today.
Discrimination is more likely to be subtle, reflected in the failure to market
loan products to potential minority customers and the failure of lenders
to hire and promote staff from racial and ethnic minority groups.
Unintentional discrimination may be observed when a lender’s underwriting
policies contain arbitrary or outdated criteria that effectively
disqualify many urban or lower–income minority applicants.
While the banking industry is not expected to cure the nation’s
social and racial ills, lenders do have a specific legal responsibility to ensure
that negative perceptions, attitudes, and prejudices do not systematically
affect the fair and even–handed distribution of credit in our society. Fair
lending must be an integral part of a financial institution’s business plan.
The first step for financial institutions to take in narrowing the
lending gap is to incorporate fair lending goals into their mission
statements. By pledging to make fair lending a primary strategic goal of
the institution, management and the board of directors set a standard for
loan production staff and other employees. Management of financial
institutions must establish a corporate culture in which fair lending and
serving minority markets are seen to contribute to shareholder value and
are rewarded.
This publication offers a program for financial institutions
seeking to apply their mortgage lending standards in accordance with equal
opportunity goals and to expand their activity in underserved minority
markets. Banks, mortgage companies, and other lenders subject to the
I n t r o d u c t i o n
77
Home Mortgage Disclosure Act (HMDA) are referred to as “financial
institutions” or “lenders.” Specific recommendations are followed by the
Federal Reserve Bank of Boston’s conclusions with respect to fair lending
challenges. The recommendations are geared primarily to mortgage
products but they may be modified to address small business, commercial,
and consumer lending. A summary of fair lending laws is also provided.
Lenders, and also their regulators, must look for ways to eliminate
the unjustified lending disparities that have been documented. To ensure
fair lending, those of us responsible for providing credit should regularly
ask ourselves questions such as the following:
1. When we hire, do we promote a cultural diversity that is
reflective of the communities we serve?
2. When hiring lending staff, do our interviewers take into
account possible racial prejudices of job applicants?
3. Do we train all of our staff in the area of equal lending?
4. Do we have any mechanisms through which unfair lending
practices, policies, or procedures may be detected? If so, are we
able to determine the effectiveness of these mechanisms?
5. Do we inform all potential borrowers, regardless of their race
or ethnicity or the location of the property, about all of our
lending programs so they may decide which best fit their needs?
6. Do we deliberately steer minority mortgage applicants to
federally insured programs because we assume that minorities
are less creditworthy?
7. Do we have mortgage lending practices that include location of
property as a risk factor?
8. Does our mortgage pre–qualifying procedure tend to encourage
or discourage minority applicants?
9. Do we offer homebuyer education programs for potential
applicants who are unfamiliar with the mortgage lending process?
10. Do we regularly review our advertising to see if the choice of illustrations
or models suggests a customer preference based on race?
11. Are we as assertive in attracting minority loan applicants as
we are in attracting white applicants?
12. Are we familiar with the practices of the real estate and
mortgage brokers and appraisers with whom we do business?
13. Do we encourage the brokers and appraisers with whom we
do business to be constructively active in minority communities?
14. All things being equal, do white and minority credit applicants
have the same chance of getting a loan from this financial
institution?
88
99
R e c o m m e n d a t i o n s
The recommendations that follow were gathered from a variety
of sources, including mortgage lenders, bankers’ associations, credit
counseling agencies, fair housing organizations, and social research
groups. All of these organizations agree that an effective strategy for equal
opportunity in lending must be driven by economic, social, and legal
incentives. They also believe that each institution must develop its own
strategy, based on local market dynamics, and that this strategy must be
comprehensive, flexible, and integrated into daily business operations.
Finally, each organization stressed the importance of having the Board of
Directors take an active role in guiding the development, implementation,
and monitoring of an equal opportunity lending strategy.
The recommendations are organized to address three distinct
levels within a financial institution, theBoard ofDirectors,Management,
and Loan Production Staff. The Board of Directors refers to the
governing body of a financial institution. The term can also refer to
the Board of a holding company that owns the financial institution.
Management refers to the people responsible for the decision–making and
supervision necessary to carry out the objectives of the financial institution.
The term encompasses both senior management and other levels of
management staff. Loan Production Staff refers to loan originators,
interviewers, underwriters, and loan processors. The term can also refer
to any staff member who is involved in the loan process,
including tellers and customer service representatives.
These recommendations are intended as guidelines.
As with any business strategy, each institutionmust define for
itself what is appropriate, effective, and feasible. Some of
the recommendations focus on working with lower–income
consumers, first–time homebuyers, urban residents, or
applicants unfamiliar with conventional financial practices.
It should be recognized, however, that many minority
borrowers do not possess these characteristics.
“The regulatory
issues in the 1990s
will not be limited
to safety and soundness,
but will increasingly
emphasize
fairness: whether
or not banks are
fulfilling the needs
of their communities.”
Lawrence B. Lindsey
Member
Board of Governors
of the Federal
Reserve System
Address to the
California Bankers
Association
May 11, 1992
10
Staff training is a crucial component of a financial institution’s
efforts to combat possible discriminatory lending practices. All employees
involved in the loan process should be familiar with the federal laws that
protect prospective borrowers from biased treatment, as well as applicable
state laws. Training should address such laws and regulations as the
Equal Credit Opportunity Act (Regulation B), the Fair Housing Act,
the HomeMortgage Disclosure Act (Regulation C), and the Community
Reinvestment Act. In addition to a regular training program on compliance
with laws, financial institutions should ensure that employees have
been trained on how they are expected to treat customers, since poor
customer service can be perceived as discrimination. Lenders may also
wish to consider training designed to encourage employees to accept and
appreciate racial and ethnic diversity.
The Board of Directors should adopt a policy that provides all
employees with regular, ongoing training on laws and regulations that
protect prospective borrowers from biased treatment. A conscientious
Board will recognize the potential liability associated with noncompliance
with these laws and regulations, as well as the business opportunities that
may be lost. In addition, the Board may wish to provide for
diversity training. The Board itself should participate in training
programs and it should require management to report
regularly on the programs’ effectiveness.
Management should develop training programs that
address all aspects of the lending process. For example, a key
concern among regulators and theminority community is that
potential minority customers may be discouraged from applying
for mortgage loans. Accordingly, training should include
a section on understanding and preventing unlawful pre–
screening. (See the section on Testing Fairness in Lending
Practices.) Training should also cover the consequences of
noncompliance with the laws and regulations that protect
prospective borrowers from biased treatment. Diversity training
can help build a multicultural work force, as well as help
employees understand their attitudes about different cultures.
Management should regularly evaluate the effectiveness of
training programs; this evaluation should include input from
the loan production staff.
Loan Production Staff should attend staff training programs
and providemanagement with feedback on the quality of both internal and
external training programs.
S t a f f T r a i n i n g
Did You Know?
Failure to comply with
the Equal Credit
Opportunity Act or
Regulation B can subject
a financial institution
to civil liability for actual
and punitive damages
in individual or class
actions. Liability for
punitive damages can
be as much as $10,000
in individual actions
and the lesser of
$500,000 or 1 percent
of the creditor’s net
worth in class actions.
Regulation B
Equal Credit
Opportunity
12 CFR
202.14(b)
11
Hiring and promotion practices that foster racial and ethnic
diversity can help a financial institution gain a competitive edge in
cultivating business in underserved markets. A staff that encompasses a
variety of viewpoints and experiences can create an environment in which
minority applicants feel welcome, strengthen ties to minority
communities, and design policies and products that more
effectively meet the needs of minority customers. Moreover,
by explicitly encouraging employees and directors to participate
in community development activities, institutions demonstrate
their commitment to serving minority communities
to both staff members and the public.
TheBoardofDirectors should reviewthe institution’s
record, in both policy and practice, on hiring and promoting
minorities and should direct management to make any necessary
changes to the institution’s policies.The racial and ethnic
diversity amongmanagement and the Board must be included
in this examination. The Board may wish to develop a policy
to encourage community development activity by employees,
and to seek out ways in which Board members can participate
as well.
Management should take steps to ensure that racial
and ethnic diversity extends throughout the institution – and is not
confined to branches located in minority communities. Recruitment
programs that targetmembers of the minority communities served by the
institution may be desirable.Management should also review promotion
practices to ensure that no real or perceived biases limit the advancement
of minorities; this review process should include input from the loan
production staff. Management should encourage employee participation
in community development activities that develop employees’ skills and
also bring minority customers into the bank. Such activities include
involvement with local community development organizations, attendance
at seminars and conferences, and participation in credit counseling
and homebuyer programs.
Loan Production Staff should share with management their
insights into how hiring and promotion practices might be altered to
encourage greater diversity. Minority staff members may be able to assist
in recruiting. Staff should explore opportunities for community development
activity and should consider participation in in–house community
service programs or institutional partnerships with intermediaries that
offer credit counseling or homebuyer education.
Did You Know?
U.S. Census data
predict that by the
year 2000 minorities
will make up nearly
30 percent of the
country’s population,
and that minorities
may well form the
nation’s majority
by the year 2050.
U.S. Bureau
of the Census
Population
Projections
of the U.S. by Age,
Sex, Race, and
Hispanic Origin:
1992 to 2050
Hiring and Promotion Practices
12
C o m p e n s a t i o n S t r u c t u r e
The compensation structure for loan production staff should not
discourage them from working with lower–income or financially unsophisticated
applicants. If staff are compensated according to a pay
structure based simply on the number and size of loans closed, they will
be reluctant to work with applicants who requiremore time and assistance
or who are requesting relatively small loans.
The Board of Directors should ensure that the compensation
structure does not penalize loan production staff for working with
applicants who are lower–income or unfamiliar with the lending process.
For an institution to effectively target underserved markets, the pay
structure must reward loan production staff for spending time with these
applicants and for participating in buyer education programs and other
activities that build ties with these markets.
Management should determine whether the existing compensation
structure discourages loan production staff from working with
applicants who are seeking smaller mortgages or who are unfamiliar with
conventional lending practices. Surveying the loan production staff may
help define the needs of these borrowers. The nature of the assistance
needed – allowing additional time to work through the application,
providing information on the homebuying process, or gathering
resources targeted for first–time and lower–income homebuyers – will
suggest where adjustments to the pay structure for loan production staff
may be appropriate or where alternative approaches to servicing these
customers may be necessary.
Loan Production Staff should review their own practices to
determine whether the existing compensation structure or other policies
limit their ability to effectively serve applicants who are lower–income or
unfamiliar with the lending process. They should alert management to
policies that they perceive as encouraging or discouraging them from
working with these applicants.
13
Even the most determined lending institution will have difficulty
cultivating business fromminority customers if its underwriting standards
contain arbitrary or unreasonable measures of creditworthiness.
Consistency in evaluating loan applications is also critical to ensuring
fair treatment. Since many mortgage applicants who are approved do not
meet every underwriting guideline, lending policies should have mechanisms
that define and monitor the use of compensating factors to ensure
that they are applied consistently, without regard to race or ethnicity.
The Board of Directors should establish a policy to detect and
eliminate biases in underwriting standards and practices. As part of this
policy, management should be directed to review existing underwriting
standards and practices to ensure that they are valid predictors of risk.
Special care should be taken to ensure that standards are appropriate to
the economic culture of urban, lower–income, and nontraditional
consumers. The Board should require management to define acceptable
compensating factors and to monitor their use by loan production staff.
The Board may also wish to establish a written policy on equal
opportunity lending, in which its underwriting guidelines are explained.
This policy can describe the institution’s commitment to the community
and to minority and lower–income consumers and explain how its
products can meet homebuyers’ needs.
Management should review both underwriting standards
and practices. (See also the sections on Second Review
Policies and Testing Fairness in Lending Practices.)
Underwriting Standards
Property Standards and Minimum Loan Amounts:
These standards should be checked for arbitrary rules as to
the age, location, condition, or size of the property. Such
standards could negatively affect applicants who wish to purchase
two– to four–family homes, older properties, or homes
in less expensive areas.
Obligation Ratios: Special consideration could be
given to applicants with relatively high obligation ratios who
have demonstrated an ability to cover high housing expenses
in the past. Many lower–income households are accustomed
to allocating a large percentage of their income toward rent. While it is
important to ensure that the borrower is not assuming an unreasonable
level of debt, it should be noted that the secondary market is willing to
consider ratios above the standard 28/36.
“Underwriting
guidelines, along
with the interpretation
and application
of the guidelines,
were created based
on historical data
that primarily reflect
nonminority mortgage
loan participants
and therefore may
be unintentionally
racially biased.”
HMDA Task
Force Report
Mortgage Bankers
Association of America
September, 1992
U n d e r w r i t i n g
S t a n d a r d s a n d P r a c t i c e s
14
Down Payment and Closing Costs: Accumulating enough savings
to cover the various costs associated with a mortgage loan is often
a significant barrier to homeownership by lower–income applicants.
Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit
organizations, or municipal agencies to cover part of these costs. Cash–
on–hand could also be an acceptable means of payment if borrowers
can document its source and demonstrate that they normally pay their
bills in cash.
CreditHistory:Policies regarding applicantswithno credithistory
or problemcredit history should be reviewed. Lack of credit history should
not be seen as a negative factor. Certain cultures encourage people to “pay
as you go” and avoid debt. Willingness to pay debt promptly can be
determined through review of utility, rent, telephone, insurance, and
medical bill payments. In reviewing past credit problems, lenders should
be willing to consider extenuating circumstances. For lower–income
applicants in particular, unforeseen expenses can have a disproportionate
effect on an otherwise positive credit record. In these instances, paying off
past bad debts or establishing a regular repayment schedule with creditors
may demonstrate a willingness and ability to resolve debts.
Successful participation in credit counseling or buyer education
programs is another way that applicants can demonstrate an ability to
manage their debts responsibly. (See the section on Buyer Education.)
Property Appraisal/Neighborhood Analysis: Terms like “desirable
area,” “homogeneous neighborhood,” and “remaining economic life” are
highly subjective and allow room for racial bias and bias against urban
areas. The same holds true when lenders evaluate properties based on
their market appeal or compatibility with the rest of the neighborhood.
(See the section on Third Party Involvement in the Loan Process.)
It should be noted that the Federal Home Loan Mortgage Corporation
(Freddie Mac) has stated that neighborhoods undergoing revitalization
should be assessed on their potential as well as their existing condition.
Also, the Federal National Mortgage Association (Fannie Mae) will
accept block–by–block underwriting analyses in urban neighborhoods
being rehabilitated.
Employment History: It is important to distinguish between
length of employment and employment stability. Many lower–income
people work in sectors of the economy where job changes are frequent.
Lenders should focus on the applicant’s ability tomaintain or increase his
or her income level, and not solely on the length of stay in a particular job.

[Bigjon]

15
Sources of Income: In addition to primary employment income,
Fannie Mae and Freddie Mac will accept the following as valid income
sources: overtime and part–time work, second jobs (including seasonal
work), retirement and Social Security income, alimony, child support,
Veterans Administration (VA) benefits, welfare payments, and unemployment
benefits.
Underwriting Practices
Review and monitoring of the mortgage origination and underwriting
process will help determine whether the institution is treating all
potential and actual applicants fairly, and whether it is communicating
its lending policies clearly to the public.
To ensure fair treatment, it is important that the lending
institution document its policies and practices regarding acceptable
compensating factors. If an institution permits flexibility in applying
underwriting standards, it must do so consistently. Management should
consider developing a checklist for loan production staff to ensure that
all allowable compensating factors are requested of the borrower (such
as explanations of late debt payments or a demonstrated ability to carry
high housing costs). The checklist will also make loan production staff
aware of the institution’s commitment to serving borrowers who may not
meet traditional underwriting standards.
One way to help ensure that compensating factors are applied
consistently among racial and ethnic groups is to document and monitor
their use. Debt–to–income ratios and credit history are two areas in
which lenders frequently allow for compensating factors.
Informed borrowers are more likely to ask loan production staff
about ways to enhance their applications. Thus, another way to encourage
consistent treatment is by clearly communicating the institution’s lending
policies and underwriting standards to the public. The lender’s commitment
to the community and to minority and lower–income consumers
can be described in mortgage–related documents, including marketing
materials, pre–qualification worksheets, and applications. These documents
could also explain the institution’s credit evaluation and underwriting
criteria.
16
Loan Production Staff must review their practices to ensure
that they use compensating factors consistently. If a formal checklist
does not exist, loan production staff should have a mental checklist
of compensating factors that they should request from borrowers.
Loan production staff can also draw on their experience with minority
applicants, particularly lower–income or first–time homebuyers, to help
determine how the institution can improve its loan products. They may
wish to note which compensating factors they frequently record during the
application process. They can also inform management of any vague or
unclear wording in loan application documents that could present a
stumbling block for first–time mortgage loan applicants.
17
Lenders should be aware of the programs available to reduce the
costs and risks of lending to customers who do not meet conventional
underwriting standards. Lenders can participate in loan programs offered
by federal, state, and local agencies, or develop products to serve these
customers in cooperation with public and private nonprofit organizations.
The Board of Directors should direct management to explore
the various public programs designed for borrowers with special needs.
The Board may also wish to encourage management to work with the
public sector to develop products that assist lower–income borrowers by
using public money to reduce interest rates, provide down payment
assistance, or otherwise reduce the cost of themortgage.TheBoard should
also encourage management to work with special secondary mortgage
market programs designed for lower–income homebuyers.
Management should seek out federal and state mortgage programs
targeted to first–time or lower–income homebuyers.State and local
agencies may offer soft second mortgages, down payment assistance, and
other enhancements that can help an otherwise creditworthy applicant
qualify for a conventional first mortgage. Management
should also be aware of the special programs for lower–income
homebuyers offered through Fannie Mae and Freddie Mac.
Finally, in order to ensure that these alternative loan products
are used effectively, loan production staff must be trained in
both the mechanics and the appropriate use of such products.
Loan Production Staff should be aware of all the
alternative loan products their institution offers to applicants
who do not meet conventional underwriting guidelines. They
should be familiar with the guidelines of any government–
sponsored mortgage loan programs that the institution offers,
as well as any public programs that would help qualify an
applicant for a conventional loan (such as soft secondmortgage
and down payment assistance programs). They should also
be familiar with the criteria of special secondary mortgage
market programs for lower–income homebuyers. If they do
not believe they have received sufficient training in the mechanics
or applicability of such programs, they should relay
their concerns to management.
A l t e r n a t i v e L o a n P r o d u c t s
“We will pursue every
avenue – mortgage
lenders, community
groups, builders and
developers, housing
finance agencies,
mortgage insurers,
and federal, state, and
local governments –
to find partners that
will help us fulfill our
corporate objective of
providing viable financial
products and services
that will increase the
availability and
affordability of housing
for low–, moderate–,
and middle–income
Americans.”
Federal National
Mortgage Association
Lender Letter
January 24, 1992
(Source: Public
Information Office)
18
S e c o n d R e v i e w P o l i c i e s
A prompt and impartial second review of all rejected applications
can help ensure fairness in the lending decision and prevent the loss of
business opportunities. Denied applications should be compared with
applications that did not meet the institution’s stated loan policy but
were approved based on compensating factors. Including these approved
applications in the second review process can help ensure that compensating
factors are handled fairly and consistently among different racial
and ethnic groups. Financial institutions may also wish to organize and
participate in multi–bank mortgage review boards. These boards review
applications that do not meet the underwriting criteria of a particular
institution but may qualify under another lender’s guidelines.
Financial institutions should also review and analyze withdrawn
applications to ensure that these applicants have not been unfairly counseled
to withdraw.
The Board of Directors should adopt second review policies and
require that management report the results to the Board.
Management should implement and monitor second review
policies. Particular attention should be directed to verifying that the loan
production staff is aware of all underwriting guidelines and consistently
applies compensating factors. Management should participate
in the second review process to ensure impartiality and should
report its results to theBoard.This processmay lead to changes
in the institution’s underwriting policies. (See also the section
on Underwriting Standards and Practices.)
Loan Production Staff should record exceptions to
underwriting standards based on allowable compensating
factors. In addition, loan production staff may find that their
experience with minority applicants indicates that the
institution’s stated loan policy should be modified to incorporate
some of the allowable compensating factors. Frequently
recorded compensating factors should be communicated
to management for a review by the Board of Directors.
“We see evidence
that there are a
significant number
of prospective home
buyers in this country
whose only barrier
to achieving their
dream of home
ownership is not their
economic status, but
their racial status.”
James A. Johnson
Chairman
Federal National
Mortgage Association
Wall Street Journal
November 30, 1992
19
M a r k e t i n g S t r a t e g i e s
An effectivemarketing strategy can establish a lender as a familiar
face in minority communities and can provide the institution with
information concerning local credit and service needs. In designing an
effective strategy, mortgage lenders, particularly banks and thrifts, must
address several issues. First, many minority neighborhoods
lack access to basic banking services; it may be difficult to
convince residents of these communities that an institution
canmeet theirneedswithouthaving an office nearby. Second,
consumers who have little interaction with banks and thrifts
may best be reached through institutions with which they are
familiar, such as community service agencies and religious
institutions. Regular contact with these organizations can
also provide lenders with valuable information that may help
with marketing and product development. Third, marketing
materialsmust reflect the racial and ethnic composition of the
targeted communities.
For financial institutions that conduct their mortgage
lending through amortgage company subsidiary, referral
practices must not be allowed to provide opportunities for
illegal pre–screening. (See the discussion on the pre–application
stage in the section on Testing Fairness in Lending Practices.)
The Board of Directors should ensure that the institution’s
marketing strategy includes all minority communities in its service area
and reflects the racial and ethnic composition of its customer base. The
Board may find it necessary to direct management to undertake a
thorough review of existing marketing efforts, to determine their effectiveness
and to focus on developing ties with established institutions in
minority communities. The Board should require management to report
regularly on the manner and effectiveness of their advertising campaigns.
The Board may wish to establish a written policy on equal
opportunity lending that explains the institution’s commitment to the
community and to minority and lower–income customers. This can be
included in all marketing materials.
The Board should also see that the institution’s HomeMortgage
Disclosure Act (HMDA) data are used fully and effectively.Management
should be required to report the volume, location, and composition of loan
applications received, and the disposition of those applications.TheBoard
should be informed of inexplicably low numbers of applications from
minorities or high percentages of denials issued to minority applicants.
Did You Know?
The Fair Housing
Act prohibits
advertisements or
published material,
related to the sale
of a dwelling, that
suggest a preference
based on
race, color, sex,
or national origin.
Ragin v. New
York Times
923 F.2d 995
(2nd. Cir. 1991)
and 42 U.S.C.
3604(c)
20
Management should ensure that any policy statements regarding
the institution’s commitment to its local community, and tominority and
lower–income customers, are included in all marketingmaterials.Marketing
plans should be reviewed to ensure that they are effective in reaching
minorities and reflect the racial and ethnic composition of the service area.
This may mean using local newspapers, electronic media, and foreign
language advertisements; advertising through informal channels such as
religious institutions and community service agencies; and encouraging
feedback from community groups on product awareness and suitability.
Call programs should also be reviewed to ensure that brokers and realtors
who operate in minority neighborhoods are included. Consideration
should be given to the development of homebuyer education seminars;
these can be held in–house or in conjunction with community organizations
or local government. (See the section on Buyer Education.)
Surveys of customers and the community–at–large can provide
information on whether the institution is perceived to be giving quality
service. For example, an institution might survey loan applicants to find
out why they chose to apply to the institution, whether they understood
the institution’s underwriting standards, whether their questions were
satisfactorily answered, and whether they felt they were treated properly.
Management should also reviewHMDA data regularly,monitoring
the volume, location, and composition of loan applications received,
and the disposition of those applications. If the number of applications
received from minorities seems disproportionately low, the cause should
be determined. If denial rates are relatively high for minority applicants,
management should be able to explain the disparity.
Loan Production Staff should call regularly on brokers, realtors,
community development agencies, community service providers, and
community and political leaders. They should encourage feedback and
suggestions for improvements to the institution’s formal and informal
methods of marketing and relay this information to management. They
should participate when possible in programs that build awareness of their
institution and enhance its image in the minority community.
21
Providing counseling and education on homeownership is a
significant and effective way for lenders to familiarize themselves with the
needs of minority customers, particularly first–time homebuyers. This
service can be provided in many ways, including in–house programs and
publications as well as joint sponsorship of educational programs with
local community service providers and government agencies. Helping to
educate consumers will make the lender’s job easier overall; homebuyers
will be more knowledgeable and better prepared when applying for a loan.
Lenders should also be aware of existing credit counseling services
that can help consumers who have problem credit histories to develop
responsible budgets and feasible repayment plans.
The Board of Directors should encourage management to
explore ways of providing buyer education. This can be accomplished
through direct in–house services, such as buyer education seminars, open
houses, and publications, or in conjunction with community or public
agencies that have established homebuyer counseling programs. If no
such programs exist in the community, theBoard should considerworking
with other lenders either to establish a buyer education program or to
provide financial resources so that a local community service agency can
set up a program. The Board should require management to report
regularly on the effectiveness of these programs.
Management should establish relationships with existing
homebuyer education and counseling programs, in both the
private and public sectors. Management should also encourage
participation by loan production staff in community–based
homebuyer education programs. Further, it might consider
offering special incentives to graduates of these programs who
qualify for a loan, such as waived application fees or reduced
closing costs.
Loan Production Staff should participate in education
programs to assist first–time homebuyers. These programs
typically cover the entire homebuying process, from
working with realtors to understanding the responsibilities
of homeownership. Loan production staff can educate and
inform potential homebuyers by explaining the mortgage
financing process in a setting where people are likely to be freer
with their questions. Further, lenders can develop a better
understanding of the concerns or misperceptions of first–time
homebuyers, particularly minorities.
B u y e r E d u c a t i o n
“The great myth
that may exist
among bankers is
that their customers
have some way of
knowing their bank’s
credit standards
and other credit
decision criteria.”
Lawrence B. Lindsey
Member
Board of Governors
of the Federal
Reserve System
Address to the
Community
Reinvestment
Conference
Santa Monica, CA
September 21, 1992
22
T h i r d P a r t y I n v o l v e m e n t
i n t h e L o a n P r o c e s s
A financial institution that is committed to fair lending and to
expanding its markets to a more diverse customer base should work with
appraisers, private mortgage insurance companies, real estate brokers,
mortgage brokers, and other third parties in the loan process who are also
committed to these goals.
Institutions that sell loans to the secondary market should be
fully aware of the efforts of FannieMae and FreddieMac to modify their
guidelines to address the needs of borrowers who are lower–income, live in
urban areas, or do not have extensive credit histories.
The Board of Directors should adopt a policy that requires the
financial institution to advise all third parties involved in the loan process
of its commitment to equal opportunity lending.TheBoard can also adopt
a policy that encourages any third party associated with the lending process
to receive training on federal laws that protect prospective borrowers from
biased treatment. The lender can invite third parties to attend training
sessions conducted by the lender.
Management should ensure that all third partieswith
which it works are aware of the institution’s equal opportunity
lending policies. It may be desirable to invite third parties to
attend in–house training programs on consumer credit protection
laws.
Management should be aware that Fannie Mae and
Freddie Mac have issued statements to the effect that they
understand urban areas require different appraisal methods.
Accordingly, it may be advantageous to use the services of
appraisers with experience in conducting appraisals in minority
and lower–income neighborhoods. Management should
consider having all appraisal reports that would cause an
application to be denied reviewed by another experienced
appraiser. This can help protect the financial institution as
well, as it may be held liable if an appraisal is found to be
discriminatory.
Management should be aware of any differences in
standards used by private mortgage insurance companies. If
a private mortgage insurance company refuses to issue insurance
on a particular loan, the financial institution may wish
to have another reputable company review the application.
Did You Know?
A HUD study estimates
that 59 percent of black
homebuyers and 56
percent of Hispanic
homebuyers experience
some form of discrimination
in their encounters
with real estate
agents. Discrimination
occurs in the areas of
information given on
housing availability,
contributions to completing
the transaction
(including assistance in
obtaining financing), and
steering toward particular
neighborhoods.
Housing Discrimination
Study: Synthesis
U.S. Department of
Housing and Urban
Development
Office of Policy
Development and
Research
August, 1991
23
Lenders should question any differences that arise fromthe review process
and consider the results when determining which private mortgage
insurance companies they use. In addition, financial institutions may
wish to work with private mortgage insurance companies that have
demonstrated a commitment to minority and lower–income applicants.
Management should ensure that their loan production staff works
with reputable real estate brokers and mortgage brokers who operate in
minority neighborhoods. The institution’s community contacts can be a
useful source of information about brokers active in these communities.
Loan Production Staff should be aware of the practices of third
parties associated with the financial institution. For example,members of
the loan production staff whose service area includes minority communities
should informmanagement of anymortgage or real estate brokerswho
do not refer minorities to the financial institution. Loan production staff
should be familiar with the amendment to the Equal CreditOpportunity
Act that requires a financial institution to provide a copy of the appraisal
to an applicant whomakes a timely request. Reviewing and responding to
complaints about appraisals can alert loan production staff to problems.
The loan production staff should relay any concerns about appraisal
practices to management.
24
T e s t i n g F a i r n e s s i n
L e n d i n g P r a c t i c e s
Institutions should systematically review loan files to ensure that
underwriting standards have been applied consistently to applicants of different
races. A large financial institution with significant loan volumemay be able to
use statistical analysis to determine if race or ethnicity has affected lending
decisions.
Lenders can test for discrimination in the pre–application stage by
using shoppers. Testing by use of paired individuals who assume similar
characteristics other than race can assist financial institutions in determining
whether discrimination occurs in the pre–application stage. Of particular
interest should be whether the institution is engaging in illegal pre–screening
by discouraging prospective borrowers from applying for a mortgage.
Testing can also allow a financial institution to determine if loan production
staff spend less time explaining the institution’s products to minority applicants;
if white applicants receive more coaching than minorities; or if loan
personnel direct minorities to particular products, such as Federal Housing
Administration–insured loans, or to other mortgage lenders. Of particular
interest to a parent holding company will be the process by which subsidiary
banks refer potential borrowers to subsidiary mortgage companies.
The Board of Directors should direct management or an audit
committee to develop procedures for the systematic review of loan files to
determine if underwriting standards are being applied consistently to applicants
of different races. TheBoard can work withmanagement to determine
the feasibility of using shoppers to test for discrimination in the pre–
application stage.
Management or an audit committee should establish procedures
to systematically review loan files to determine if loan standards
are being applied consistently to applicants of different races. A
comprehensivemortgage loan checklist completed by the loan production
staff can confirm that each member of the staff has followed the
same procedure for each applicant and solicited all the information
necessary tomake the loan decision. (See the section on UnderwritingStandardsandPractices.)
Thismonitoringmechanismcanhelp
the institution identify any discrepancies in practices. Management
should report to the Board of Directors periodically regarding the
ongoing review. In addition,management can work with theBoard of
Directors to determine the feasibility of using shoppers.
LoanProduction Staff should be conscious of how they treat
prospective borrowers of all races and ethnic groups in all aspects of the
lending process. Loan production staff should pay particular attention
to staff training that focuses on illegal pre–screening and steering.
“We strongly
recommend that
lenders develop
an internal
program to test
for discrimination
in mortgage
lending at both
the prequalification
and application
stages.”
HMDA Task
Force Report
Mortgage Bankers
Association
of America
September, 1992
25
Discrimination based on race, color, religion, age, gender, or
national origin is unlawful, insidious, and harmful. It is harmful to the
individual, to society, and to the marketplace. Discrimination prevents the
financial market from operating effectively and efficiently by disregarding
or discounting information about minorities that should be used to make
credit decisions. As we move to a more competitive world economy, we
cannot afford inefficiency based on bias and misinformation.
This publication has outlined a comprehensive approach that financial
institutions can use to combat possible discrimination in lending. While
the focus has been on mortgage lending, most of the recommendations apply
to other lending areas, including consumer, commercial, and small business
lending. The approach emphasizes participation and involvement at all levels
of bank operation.
Lenders at smaller institutions may ask: All this is fine, but what resources
do we have to conduct such a program? Even with limited resources,
small institutions can incorporate elements of the program into their business
plans. Whether your institution is large or small, you may want to consider
the following steps to getting started on an anti–discrimination program.
First, approach your state trade association. It may already be
organizing efforts to share the costs of conducting training and of setting
up mortgage review programs or other anti–discrimination programs.
It may also know of resources to help your institution individually. If
your association is not yet active, your institution can be a catalyst to get
it to respond to this pressing need. Next, contact the American Bankers
Association, the Mortgage Bankers Association, the National Bankers
Association, or the Independent Bankers Association. They have programs
to assist their member institutions in dealing with this issue.
Finally, talk to fellow lenders. They are likely to be facing the same
problems, and resources can be shared among institutions to implement
the recommendations in this booklet. Remember that most of these
recommendations focus on working within and building upon the existing
structure of your institution. The “solution” is not to adopt quick–fix
programs that are tangential to your daily business operations, but to
modify established policies and develop new procedures so you can better
reach underserved markets.
Much work remains to be done in eliminating discrimination
from the marketplace. To the extent that individual financial institutions
adopt the program outlined in this brochure, it will benefit the institution
and its community, and contribute to a more effective, efficient, competitive,
and just economy.

[Bigjon]

C o n c l u s i o n s
26
Summary of Fair Lending Laws
Home Mortgage Disclosure Act (Regulation C)
Enacted by Congress in 1975 and amended during the period
from 1988 to 1991, the Home Mortgage Disclosure Act (HMDA) is
intended to provide the public with loan data that can be used to determine
whether financial institutions are serving the housing credit needs of their
communities, to assist public officials in distributing public sector
investments, and to assist in identifying possible discriminatory lending
patterns. Financial institutions are required by Regulation C, which
implements HMDA, to report data regarding loan applications, as well as
information concerning their loan originations and purchases. HMDA
requires most lenders to report the race, sex, and income of mortgage
applicants and borrowers.
Equal Credit Opportunity Act (Regulation B)
The Equal Credit Opportunity Act (ECOA) was enacted in 1974
to promote the availability of credit to all creditworthy applicants without
regard to race, color, religion, national origin, sex, marital status, age,
receipt of public assistance funds, or the exercise of any right under the
Consumer Credit Protection Act. Regulation B, issued under the ECOA,
prohibits creditor practices that discriminate on the basis of any of these
factors.
The federal agencies that regulate financial institutions have
authority to enforce Regulation B administratively. Civil suits for unlawful
credit discrimination may be brought within two years of the date of
the occurrence of the alleged violation. Damages include actual damages
and punitive damages of up to $10,000 in individual actions. Punitive
damages are limited to the lesser of $500,000 or 1 percent of the creditor’s
net worth in class actions.
Fair Housing Act
A 1968 civil rights law, the Fair Housing Act prohibits discrimination
in the sale or rental of a dwelling on the basis of race, color, religion,
handicap, sex, familial status, or national origin. Under the Fair Housing
Act, it is unlawful for any person who engages in the business of making
or purchasing residential real estate loans, or in the selling, brokering, or
appraising of residential real property, to discriminate on the basis of the
factors listed above.
27
Enforcement of the Fair Housing Act may be obtained administratively
through the U.S. Department of Housing and Urban Development,
or by civil action commenced within two years of the alleged
discriminatory housing practice.
Community Reinvestment Act
The Community Reinvestment Act (CRA) was enacted in 1977
to require each federal financial supervisory agency to encourage financial
institutions to help meet the credit needs of their delineated communities,
including low– and moderate–income neighborhoods within those
communities, consistent with safe and sound banking practices. Each of
the four supervisory agencies (the Board of Governors of the Federal
Reserve System, the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, and the Office of Thrift Supervision) has issued
regulations to implement the CRA. The CRA regulations of each agency
require the board of directors of each institution to adopt, and at least
annually review, a CRA statement. The statement must include a map
depicting the area served by the institution, a list of all types of loans the
institution is prepared to extend within its community, and a copy of its
CRA Notice. In addition, an institution must maintain a public file
containing its most recent CRA evaluation, any CRA statements in effect
for the most recent two–year period, and any written comments received
on its CRA performance for the same period.
29
If you have any comments or questions
about the contents of Closing the Gap,
contact:
Richard C. Walker, III
Associate Director
Community Affairs
Federal Reserve Bank of Boston
P.O. Box 2076
Boston, MA 02106 – 2076
(617) 973 – 3095
For additional copies of the publication
contact:
Publications
Federal Reserve Bank of Boston
P.O. Box 2076
Boston, MA 02106 – 2076
(617) 973 – 3459
4/93

[Bigjon]

How Crackpot Egalitarianism Caused the Sub-Prime Mortgage Crisis (http://www.lewrockwell.com/dilorenzo/dilorenzo154.html)

by Thomas J. DiLorenzo


DIGG THIS

"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing credit requirements on loans that it will purchase . . . [to] encourage . . . banks to extend home mortgages to individuals whose credit is generally not good . . . . Fannie Mae is taking on significantly more risk."

~ New York Times, September 30, 1999

The main cause of the current economic crisis is the boom-and-bust cycle that was caused by the Greenspan Fed. Years of artificially-lowered interest rates caused trillions of dollars in mal-investment in real estate and other industries, and now we must endure the bust. But crackpot egalitarianism within the Fed and, indeed, in the entire Washington establishment, has made the crisis infinitely worse.

In the early 1990s the Boston Fed did all that it could to fabricate "evidence" of widespread lending discrimination against racial minorities. But when Peter Brimelow and Leslie Spencer of Forbes magazine asked Boston Fed official Alicia Munnel what evidence of discrimination she really had, she was forced to admit that she had none.

Fighting discrimination was not the Fed's real goal. The real goal was to achieve a more "egalitarian distribution" of housing, period. So under the phony guise of "fighting discrimination" the Fed, the Congress, Fannie Mae, Freddie Mac, and myriad other federal government agencies forced, bribed, and extorted mortgage lenders of all kinds into making literally trillions of dollars in bad loans to unqualified borrowers. Countrywide Bank alone was praised by the Fed for making $600 billion in such loans (shortly before it went bankrupt).

The Fed's "smoking gun" in this entire charade is a Boston Fed publication entitled "Closing the Gap: A Guide to Equal Opportunity Lending." There is a gap, you see, between the value of real estate owned by middle- and upper-income Americans on the one hand, and lower-income Americans on the other. (There is also a luxury automobile gap, a two-week European vacation gap, a luxury boat gap, an expensive suit gap, and many others). The federal government has used all of its powers of threats, force, and intimidation over the past two decades to try to close the housing "gap." "The Federal Reserve Bank of Boston wants to be helpful to lenders as they work to close the mortgage gap," the publication states.

In addition to closing the "mortgage gap," the Fed also pressured lenders to adopt a more vigorous racial hiring quota system, presumably under the theory that minority loan officers would be more likely to acquiesce in the Fed's dictates to make more mortgage loans to its political mascots, sub-prime borrowers.

The Boston Fed report claims that it is only offering lenders "guidelines," and "suggestions," but it is very clear that failure to obey the Fed's "guidelines" can lead to serious financial problems for any mortgage lender. The report states in bold type that "Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor's net worth in class actions."

All lenders — banks, independent mortgage companies, etc. — were told that they needed to pay close attention to "such laws and regulations as the Equal Credit Opportunity Act (Regulation B), the Fair Housing Act, the Home Mortgage Disclosure Act (Regulation C), and the Community Reinvestment Act." A "conscientious [bank] Board will recognize the potential liability associated with noncompliance . . ." Ah, the subtle power of suggestion.

The Fed instructed lenders to ignore traditional measures of creditworthiness when it came to "minority and low-income consumers." Traditional underwriting standards were said to contain "arbitrary or unreasonable measures of creditworthiness." "Special standards" that "are appropriate to the economic culture of urban, lower-income, and non-traditional consumers" were urged. For example, traditional underwriting standards take into consideration such things as age, location, and condition of a house, but these should be abandoned when it comes to sub-prime borrowers, said the Fed.

Traditional ratios of mortgage payments to monthly income can also be ignored, said the Fed. And besides, "the secondary market [i.e., Fannie Mae and Freddie Mac] is willing to consider ratios above the standard" ones for other borrowers. "Lack of credit history" should not be a factor either. "Successful participation in credit counseling" was said to be an adequate substitute.

Lenders were repeatedly urged to "work with special secondary mortgage market programs" such as those administered by Fannie and Freddie. Lenders were told to "be aware that Fannie Mae and Freddie Mac have issued statements to the effect that they understand urban areas require different appraisal methods." If a sub-prime borrower has a property appraisal problem, then the Fed or Fannie Mae could help to find "another experienced appraiser" who would presumably see to it that the property was "correctly" reappraised so that the sub-prime loan could be made. Yours truly was always under the impression that shopping around for "the right" appraiser who would give you the number you wanted (for a fee) was fraudulent and illegal. Silly me.

In sum, the Fed's policy of housing market socialism (endorsed and supplemented by numerous federal laws and regulations), combined with the boom-and-bust cycle that it created, has been an unmitigated economic catastrophe for the entire world. Naturally, the Fed's response has been to grant itself even more powers, while the executive branch and Congress are busy nationalizing the capital markets, a move that will kill American capitalism. Abolishing the Fed would be a very modest first step in dismantling our rotten Leviathan state so that the next generation can at least have some hope of living in a reasonably free and prosperous society.

October 18, 2008

Thomas J. DiLorenzo [send him mail] is professor of economics at Loyola College in Maryland and the author of The Real Lincoln; Lincoln Unmasked: What You're Not Supposed To Know about Dishonest Abe and How Capitalism Saved America. His latest book, Hamilton's Curse: How Jefferson's Archenemy Betrayed the American Revolution — And What It Means for America Today, will be published on October 21.

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