PART IV: RECOMMENDATIONS FOR STRENGTHENING FAIR LENDING ENFORCEMENT.

1. The federal Fair Lending enforcement agencies should routinely determine each mortgage lender's effective lending territory and assess from a Fair Lending perspective whether minority neighborhoods have been excluded from this territory or underserved.

   A critical issue in enforcing the federal ban against racial redlining is the question of how to define the geographic scope of a lender's effective lending territory for Fair Lending enforcement purposes. If a minority neighborhood lies within a lender's effective lending territory, as defined for Fair Lending enforcement purposes, then that lender cannot lawfully exclude the neighborhood from its marketing efforts. On the other hand, if the minority neighborhood is deemed to lie outside the lender's effective lending territory, then the lender is under no Fair Lending obligation to serve it. Remarkably, however, the federal regulatory agencies charged with enforcing the Fair Lending laws have never addressed the issue of defining a lender's effective lending territory for Fair Lending enforcement purposes. This serious gap in the federal Fair Lending enforcement strategy is a principal reason why worst case lending patterns, such as those depicted in this report, have gone unchallenged.

   One factor underlying the federal Fair Lending enforcers inattention to the effective lending territory issue has been the general perception among the enforcement agencies that the issue of racial redlining has been adequately addressed by the Community Reinvestment Act. In the late 1960s and early 1970s, the refusal or reluctance of many savings and loans and banks to extend mortgage credit in older urban neighborhoods sparked neighborhood efforts to halt redlining practices. This grassroots activity ultimately led Congress to enact two landmark pieces of legislation: the Home Mortgage Disclosure Act of 1975, which, as explained above, requires each mortgage lender to disclose geographic information on its mortgage lending activity and is the foundation of this study; and the Community Reinvestment Act of 1977, which establishes that each bank and savings institution has an affirmative obligation to serve its entire local community, including any low and moderate income neighborhoods located within this community.

   The federal banking agency regulations implementing the Community Reinvestment Act require a commercial bank or a savings association to delineate its local community on a map. This delineation cannot exclude low and moderate income neighborhoods. Both the regulatory agencies and neighborhood organizations then review these community delineations to determine whether any low and moderate income neighborhoods have been improperly excluded.

   In sharp contrast, the federal regulations implementing the Fair Lending laws do not require mortgage lenders to delineate their "local community" for Fair Lending enforcement purposes. Nor do the federal regulatory agencies in their Fair Lending enforcement activities routinely review a lender's effective lending territory to determine whether minority neighborhoods have been excluded and, if so, whether this exclusion constitutes a violation of the Fair Lending laws.

   However, it is not recommended that the CRA concept of a priori local community delineations be extended to Fair Lending enforcement. Rather Fair Lending enforcement should adopt an empirical approach to defining a lender's effective lending territory. Under this de facto approach, an effective lending territory would be the geographic area within which a lender actually makes most of its loans. This effective lending territory should then be scrutinized to determine if minority neighborhoods have been improperly excluded.

   An important advantage of the de facto effective lending area approach is that it can be applied to mortgage lenders that are not subject to CRA and who therefore have not delineated a local community under CRA. However, even where a lender is subject to CRA and a local community delineation has been made for CRA purposes, the lender's de facto effective lending territory should be examined for Fair Lending enforcement purposes.

2. The federal Fair Lending enforcement agencies should routinely create and review lending pattern maps for individual mortgage lenders as an aid in defining effective lending territories and assessing whether there is evidence of racial redlining.

   No Fair Lending enforcement program to curb racial redlining will truly be effective unless it routinely maps the lending patterns of individual mortgage lenders. A lending pattern map sheds direct light on two key factors that must be assessed in any investigation of racial redlining: (i) the scope and shape of a lender's effective lending territory and (ii) the extent to which minority neighborhoods may have been excluded or underserved. A lending pattern map concisely documents a lender's de facto effective lending territory. And, as shown in this report, a lending pattern map readily allows for direct comparison between a lender's effective lending territory and the location of minority neighborhoods within a metro area, including different types of minority neighborhoods. By doing so, it provides a powerful tool for judging whether a lender has improperly excluded minority neighborhoods from its effective lending territory.

   From a regulatory perspective, a lending pattern map will provide a valuable targeting mechanism with which to identify situations in which an in-depth racial redlining investigation is warranted. Moreover, as demonstrated by this report, new computer technology now allows for the very efficient production of lending pattern maps.

   Lending pattern maps can provide compelling prima facie evidence of discrimination in marketing home mortgage loans. When a lending pattern map indicates that a lender has excluded minority neighborhoods from its effective lending territory and the accompanying HMDA statistics show that the lender has received few applications from such neighborhoods, the most compelling presumption is that the lender has unlawfully excluded minority neighborhoods from its marketing efforts. Indeed, such patterns of exclusion with respect to application activity could be depicted directly by mapping the lender's market share of home purchase loan applications, rather than its market share of home purchase loan originations.

   Lending pattern maps can also provide prima facie evidence of racial redlining that involves more subtle forms of discrimination. For example, a lending pattern map showing that a major lender has excluded all moderate income neighborhoods from its effective lending territory in a metro area in which the great majority of minority neighborhoods are moderate income would support a claim of unlawful disparate impact or discriminatory effect. Similarly, in many metro areas, a lending pattern that excluded all neighborhoods within the central city area would have a harsh disparate impact on minority neighborhoods.

3. In implementing the ban on racial redlining, the federal Fair Lending enforcement agencies should fully develop the "disparate impact" or "effects test" theory of discrimination.

   In implementing an enforcement program to curb racial redlining, the federal Fair Lending enforcement agencies must bring into play a full-fledged disparate impact or effects concept of mortgage lending discrimination. This concept of discrimination provides a vital basis for challenging many lending policies and practices that result in racial redlining. Failure to employ it will inevitably limit the scope of any enforcement program to curb racial redlining.

   As shown in this report, upscale marketing strategies are in many instances the driving force behind mortgage lending patterns. Where such policies have the effect of excluding minority neighborhoods -- as they often do -- they can be challenged under the disparate impact or effects test standard.

   Similarly, restrictive lending criteria often have a disproportionate adverse impact on mortgage loan applicants from minority neighborhoods and thus can be a cause of racial redlining. When a lender employs restrictive lending criteria, this can lead to a low approval rate for home purchase loans in minority neighborhoods or discourage residents of minority neighborhoods from submitting home purchase loan applications to the lender. Restrictive lending criteria should be challenged by the federal Fair Lending enforcement agencies and the lender involved should be required to demonstrate that the criteria are, in fact, needed as a matter of business necessity.

4. HUD should promulgate new Fair Lending regulations that would establish an effective enforcement strategy against racial redlining.

   HUD has ample regulatory authority to promulgate Fair Lending regulations that will establish the enforcement standards that are necessary if the federal ban on racial redlining is to be a reality in the nation's minority neighborhoods, rather than just a congressional promise.

   Section 3614a of the Fair Housing Act grants HUD broad legislative rulemaking authority to interpret the general language of the Act.[21] This grant of authority provides HUD with broad latitude in defining specific policies and practices that violate the Fair Housing Act. Moreover, where Congress has granted such legislative rulemaking authority to a federal agency, the courts may not substitute their own construction of the statute for a reasonable interpretation made by the agency.[22]

   Most importantly, HUD's rulemaking authority under the Fair Housing Act extends to all mortgage lenders, not just a particular type of mortgage lender, such as independent mortgage companies. Thus, any Fair Lending regulations promulgated by HUD to implement the federal ban on racial redlining must be implemented by all the federal Fair Lending enforcement agencies.

   The new HUD regulations should firmly establish the effective lending territory concept as a key element of the Fair Lending enforcement strategy. Any serious enforcement strategy to curb racial redlining must have a clear method for defining the geographic scope of a mortgage lender's effective lending territory.

   The new HUD regulations should also establish criteria or guidelines for determining whether minority neighborhoods have been improperly excluded from a lender's effective lending territory. For example, these regulations should make it clear that if a major lender makes loans broadly throughout most of a metro area, then the lender is obligated to include most of the metro area's minority neighborhoods within its effective lending territory. Many of the worst case lending patterns mapped in this study would fall within this category.

   Specifically, the new HUD Fair Lending regulations should accomplish the following:

   1. Declare that mortgage lenders may not pursue marketing or lending policies or practices that exclude minority neighborhoods from their effective lending territories or substantially underserve minority neighborhoods;

   2. Establish standards for defining a mortgage lender's effective lending territory;

   3. Establish standards for determining whether minority neighborhoods have been improperly excluded from a mortgage lender's effective lending territory or substantially underserved;

   4. Establish that lending pattern maps showing virtually no lending or very limited lending in minority neighborhoods within the lender's effective lending territory (properly defined for Fair Lending purposes) are important evidence of unlawful exclusion or underserving;

   5. Establish that where marketing strategies that target upscale neighborhoods have a clear discriminatory effect with respect to the inclusion of minority neighborhoods within a lender's effective lending territory, these marketing strategies constitute unlawful discrimination;

   6. Establish that where restrictive lending criteria have a discriminatory effect on minority neighborhoods, such lending criteria constitute unlawful discrimination, unless the lender can show that the criteria are required by business necessity and that alternative, less discriminatory criteria are not practical.

   7. Direct the primary Fair Lending enforcement agencies to review the effective lending territories of mortgage lenders and to take supervisory action where minority neighborhoods have been improperly excluded or underserved;

   8. Establish that where minority neighborhoods have been improperly excluded or underserved, the primary Fair Lending enforcement agency shall at a minimum require the lender to develop and implement an affirmative lending program for such neighborhoods; and

   9. Explicitly recognize the importance of computerized of HMDA data as a tool to enforce the prohibition against racial redlining.

   A Fair Lending enforcement policy that fails to come to grips with the exclusion of minority neighborhoods from effective lending territories will have counterproductive consequences. If mortgage lenders that actively serve minority neighborhoods are rigorously scrutinized -- while lenders that summarily exclude minority neighborhoods are exempt from scrutiny (because their lending territories do not include minority neighborhoods) -- lenders will be more inclined to steer clear of minority neighborhoods entirely. Lenders might logically conclude that avoiding minority neighborhoods entirely is the best way to minimize their exposure to Fair Lending enforcement.

   The lending pattern maps for Cambridgeport Savings Bank (Map 40) and Shawmut Mortgage Company (Map 41) in the Boston metro area illustrate this concern. Cambridgeport Savings Bank originated no home purchase loans in the high minority neighborhoods of the Boston metro area during 1991 (Table 11; Map 40). On the other hand, Shawmut Mortgage Company is an affirmative lender actively involved in the minority neighborhoods of the Boston metro area (Table 11; Map 41). Yet, somewhat ironically, it was Shawmut Mortgage Company that was referred by the Federal Reserve Board to the Justice Department in early 1993 for possible Fair Lending violations because its HMDA data suggested the presence of discriminatory bias in its lending decisions. Certainly a side-by-side comparison of the two lending pattern maps would suggest that even if Shawmut is found to have engaged in unlawful discrimination, Cambridgeport Savings is no less culpable than Shawmut in terms of negating the underlying purposes of the Fair Lending laws.

5. The federal Fair Lending enforcement agencies should adopt a policy statement that would establish a presumption against consolidating home purchase loans made by affiliated lenders for Fair Lending evaluation purposes.

   Where two affiliated lenders operate in tandem in providing mortgage loans in the same metro area and can demonstrate on the public record that their tandem operation provides minority neighborhoods with the same access to mortgage loans as white neighborhoods, then consolidation of their home purchase loan data for Fair Lending enforcement purposes may be permissible. However, major mortgage lenders that operate in many different metro areas should be evaluated independent of any such tandem operations with affiliates.

6. The federal Fair Lending enforcement agencies should adopt a policy statement that would establish a presumption against consolidating loan originations and loan purchases for Fair Lending evaluation purposes.

   A mortgage lender's home purchase loan originations and home purchase loan purchases should be consolidated for Fair Lending evaluation purposes only if the lender can demonstrate on the public record that the rates, fees, and terms of the home purchase loans that it purchases are no less favorable to borrowers than the rates, fees, and terms of the home purchase loans that it originates.