Regulators Have not been Regulating!

Although evidence suggests widespread disparaties in the treatment of borrowers at different lending institutions, regulators have done little in the way of enforcement.

Two pieces of data really help to make that point.

On one hand, the General Accounting Office in report GAO-09-704,  has shown that enforcement agencies (HUD, FTC, DOJ) were provided with many cases of violations of the Fair Housing Act, it was very rare that any of those cases were followed up with an enforcement action.  In fact, although the FDIC, OTS, and Federal Reserve submitted 100s of cases to enforcement agencies, only eight led to settlements.  Of those eight, only three involved mortgage lending and only four involved depository institutions.  The rest involved things like auto loans or other consumer debt products.

Moreover, DOJ reports that most of their settlements were the result of independent investigation – only two came from a regulator (Compass Bank by the Federal Reserve, Lowndes Bank by the FDIC.)  The regulators only found two instances, while regulating more than 8,000 mortgage lenders for more than four years, that led to settlements.

That should not be that surprising, though, in light of evidence published this month in a Washington Post article.  Binyamin Appelbaum discloses documents from meetings at the Federal Reserve Board of Governors in 1998.  The meeting included a decision to formalize “a long-standing” policy to not enforce fair lending laws to

The GAO suggests that policy should be created to specifically counter these shortcomings.  Their ideas are good and worth thinking about:

• extend the statute-of-limitations for violations of the Equal Credit Opportunity Act beyond two years.
• increase reporting of data on mortgage lending to include relevant underwriting factors.  These are very figures that should either exonerate or protect lenders from complaint by community groups.  Why then is there so much resistance to more data.  Sunlight, as the saying goes, is the best disinfectant.
• address gaps in regulatory oversight.  Right now, banks and thrifts have to follow rules that are not applied to independent mortgage companies.
• Increase efforts to identify discrimination during the intitial stages of loan applications.  Use testers.  Survey borrowers.  Make sure that consumer’s rights are being observed.

Going back to the lack of fair lending enforcement, it is worth mentioning that fair lending enforcement might actually be more active than examinations for the Community Reinvestment Act.  Time was, CRA exams were tough.  About one in ten lenders was given some kind of reprobration for the lack of involvement in the low or moderate income communities.  Times have changed.  In recent years, banks poured tons of subprime credit into LMI neighborhoods.  The CRA examiners never found a way to make some kind of subjective method of differentiating between subprime and prime credit.  Granted, it shouldn’t have been that hard – a negatively amortizing loan with a huge balloon payment is probably not good credit, for example.

That’s what makes the complete lack of CRA exam grading even harder to believe.  I have said this in earlier entries, but it is always possible, it seems, to find new places where the examiners were out to lunch.

Today, for instance, I’ve been reading the GAO’s comments on regulatory oversight.  I noticed that the Department of Justice reached a settlement with only two depository institutions (banks or thrifts) for fair lending violations since 2005.  Those banks – Centier Bank and First National Bank of Pontotoc, both had satisfactory ratings on the CRA exams at the time of the settlement.  The settlement with Centier, where Centier denied any wrongdoing but agreed to open new branches in majority-minority census tracts, specifically focused on the lack of service to minority groups.