What's Wrong?
The HMDA data of 2004 is not very different from the information collected in 1974. African Americans are turned down for loan applications significantly more often than whites. Hispanics fare slightly better than African Americans but not as well as white Americans. Asians fare well or poorly depending on their market. For three decades, the banking industry has worked to change this picture. Why does the 2004 snapshot look so much like the one taken in 1974?
To find the answer, let's look at what we have done. The first step was stopping differential treatment (on a conscious level) and conducting affirmative advertising. The approach amounted to saying "the door is open; come and get it!" Some did come. Most lenders who have conducted energetic affirmative advertising programs can show an increase in minority applicants and in minority lending.
Next came the question: is the door really open all the way? Over the past decades we have conducted training, performed self-assessments, and been carefully examined for fair treatment of customers. Each year, something is found that fails the smell test - or worse. But these problems do not seem to be any sort of industry standard. Quite the contrary: they are the exception.
In fact, the most recent problem trends identified by examiners, discriminatory treatment of unmarried co-applicants, does not even appear as a small bump in the data even though examiners have found this to be a trend.
Another important piece was CRA. Special lending programs were designed, flexible underwriting was introduced, and new applicant groups were reached.
In fact, when we pile up what we have done in the past three decades, the pile is impressive. We have done a lot. Lending practices and treatment of customers have changed significantly since 1974. Gone are color-coded application forms. Gone are the "baby" letters. And, judging by the HMDA reports, redlining has been reduced to almost nothing - almost.
Advertising practices have changed and are now designed to open doors instead of close them. Products are more diverse, having features such as low down payments, graduated payments, and variable rates.
There are more opportunities for customers than ever before. But the numbers stay the same. Why?
In spite of all the effort to stop discrimination, the self-enforcement and regulatory enforcement of fair lending laws does not seem to be the key to change. It is important for fairness and has clearly made a significant difference. But much is still the same - the numbers.
In looking over three decades of fair lending activities, there is really only one area that has not been included: consumer education. Finance and borrowing are complicated. The formulas that lenders use are mysterious and confusing. Consumers of all education and experience levels are at a disadvantage. What consumers do not know can be surprising to those of us in the lending business. But what they don't know or understand is precisely what gets them into trouble - and what disqualifies them for credit.
The picture painted by the HMDA data is not likely to change until consumers know more. Knowing more means that they will manage their finances in ways that improve their qualifications for credit. Consumers need to understand when to borrow and when to pay cash. They need to know that making regular payments counts and catching up later doesn't.
Thanks to the FACT Act, there is now a lot of educational material out there and there is more to come. This is what consumers (and their lenders) have needed. Hopefully this education process will prove to be the missing piece. So use it!
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 12, 10/05
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