Watch Out - Here Comes DOJ!

For some time, the Department of Justice has been urging the Federal Reserve Board to expand the monitoring data collection provisions of Regulation B to cover all consumer and business loans subject to Regulation B, rather than limit data collection to certain mortgage loans. The Federal Reserve has officially opened the issue for public comment in its proposed changes to the reg. This fall is a critical time for the next and possibly the disposative decision on the issue. If you are opposed to expanding data collection and plan to write a comment letter, it is worth knowing what the Department of Justice considers important.

In February of last year, Janet Reno forwarded a DOJ position paper on monitoring data rules in Regulation B. In her cover letter, Reno stated that the existing data collection rule "has not led to the discriminatory or improper use of the data." She stated that DOJ believes that expanding data collection "will lead to more effective fair lending enforcement."

DOJ begins with the argument that fair lending is too narrowly focused. Most of the enforcement efforts are directed at mortgage lending. This happens simply because of the availability of monitoring data. So the DOJ's first argument is that with expanded monitoring data, DOJ could expand its fair lending enforcement efforts. It is worth noting that the emphasis would also necessarily shift from the Fair Housing Act to the ECOA which is the primary discrimination law affecting non-mortgage consumer and business credit.

Second, DOJ alleges that "evidence indicates that discrimination in business and other consumer lending remains a serious problem." To support their position recommending changes to Reg B the DOJ used an analysis of small business lending in the federal procurement system. The position paper does not identify any evidence to support the statement regarding consumer loan discrimination.

The DOJ also argues that the current strength of Reg B is driven by its monitoring rules. Monitoring information has enabled the DOJ and other interested groups to identify problem lenders. This argument seems to be based on the fact that HMDA data has served as the DOJ's primary resource for identifying lenders for investigation. However, in the context of self assessment and bank examination, other rules, including the signature provisions, are powerful tools for ensuring fairness in lending.

Monitoring data has also has a significant impact on lending by prompting the industry to make changes and take actions to reverse any discrimination. DOJ cites the industry response to the first publication of HMDA data, that showed significantly higher denial rates for minorities.

DOJ believes that allowing voluntary collection of monitoring data would be of value, but argues that "mandatory data collection, with a requirement for written applications, the retention of records, and reporting or disclosure, would be more effective." Even if the provision is to allow voluntary data collection, DOJ believes that there would be peer and public pressure on banks and thrifts to collect the data.

One of the primary objections that lenders have raised to collecting monitoring data is that the process itself is considered discriminatory by the borrower. However, the Justice paper points out that the purpose of monitoring data is to identify differences in treatment to minority applicants by those who have face to face contact. DOJ observes that monitoring data enables public interest groups, the DOJ, and the lender itself to evaluate what is in fact happening.

This is a critical time for the monitoring data requirements. The FRB has already noticed the fact that collecting monitoring data when it is prohibited - which happens when customers or the loan officer use the wrong application form - is one of the leading violations of Reg B. This violation could be wiped out by making the collection of monitoring data permissible on all loans. So, on the one hand, there is some inclination to adopt the proposal and rid ourselves of a nuisance violation.

On the other hand, the voluntariness of any monitoring data is likely to be a deception rather than a reality. Financial institutions can expect community groups, the Department of Justice, and even their examiner to pressure banks into collecting monitoring data on all loans. Resisting this pressure may be extremely difficult. Lenders that refuse to collect information are likely to be accused of hiding something and face pressure to collect the information. As a practical matter, if that happens, the voluntariness of any collection would be nothing more than nominal. Reality would be that it must be collected in self-defense.

ACTION STEPS

Talk with your mortgage and home equity lenders about the process of asking for and collecting monitoring data. Find out whether they would support expansion of the monitoring data requirements and why.
Next, meet with your operations and systems staff to find out what compiling monitoring data on consumer and business loans would involve. Get information on systems capacity, cost of system development, and staff availability.
Write a comment letter, using the information you have gathered. If possible, include specific costs for managing a data collection system. Also include specific examples of problems lenders encounter when gathering monitoring data.