For example, during Bill Clinton’s presidency, then–attorney general Janet Reno and comptroller of the currency Eugene Ludwig led an effort to amend the underlying regulations and increase enforcement measures under the CRA. (See “Community Reinvestment Act: Ensuring Credit Adequacy or Enforcing Credit Allocation?” Winter 1994.) Candidate Clinton had campaigned on the issue, which was highlighted in his “Putting People First” campaign document. The Biden administration is now considering the state of fair lending legislation in the wake of a decreased emphasis during the Trump administration.
Tory Haggerty gives his take on the state of the fair lending laws in his new, self-published book Unfair Lending, the title of which implies that there is still a long way to go on the issue. Haggerty is a former bank examiner for the Federal Deposit Insurance Corporation (FDIC) who worked on nearly 100 fair lending compliance examinations. He now owns his own consulting business that focuses on providing advice regarding fair lending. Unfair Lending is his first book.
Types of bank examiners and fair lending / Haggerty gives some indication throughout the book of the type of work he did as a bank examiner, but he does not clearly explain the various types of bank examiners. There are so-called safety-and-soundness examiners, who “crunch the numbers” to assess the financial solvency and liquidity, asset portfolio quality, and earnings of banks, as well as the quality and judgment of bank management (so-called safety-and-soundness analysis). In contrast, the type of examiner that Haggerty was and the type most relevant to Unfair Lending is a compliance bank examiner. Compliance experts need to understand the relevant fair-lending laws and underlying regulations, as well as have some knowledge of statistical analysis and sampling, which is used to look at historical lending patterns to determine a bank’s compliance with the fair lending laws.
Haggerty begins the book with his own definition of fair lending: “the process of making consistent loan decisions based on someone’s creditworthiness and not on their personal characteristics.”
He then dedicates a chapter to summarizing the FHA, ECOA, HMDA, and CRA. There is some overlap in the enforcement realm of the FHA and ECOA, as both set forth a list of prohibited bases, such as race, color, religion, sex and national origin, among others. Lenders that fall under the scope of these laws cannot use a prohibited basis when making a loan decision. The FHA focuses on home loans while the ECOA has a broader scope. HMDA requires the collection of data on home loans, and bank examiners use the data to test fair-lending compliance. Finally, the CRA requires banks to reinvest the funds collected in the communities where they operate.
These laws were drafted in response to “redlining,” the discriminatory practice by which bank managers (with government support, at least until the civil rights era) would literally draw a red line on a map around certain neighborhoods or other geographic areas with a high concentration of minority residents and inform their loan officers to avoid lending in those areas. Haggerty dedicates a chapter late in the book to this practice. The FHA and ECOA address redlining directly. The HMDA requires collection of lending data to, in part, test for redlining or similar practices. The CRA is intended to prevent a bank from drawing deposits from a redlined geographic area and extracting those deposits to fund lending in areas outside that geographic area.
Fair lending risk and the current level of discrimination / Most of the rest of the book is broken down by chapter based on Haggerty’s seven stages of the loan lifecycle, as he walks through the different types of “redlining risk.” This focuses on the sequential process of lending and the accompanying risks of running afoul of the fair lending laws at each of its stages: the collecting of information on a prospective borrower for the application process, the steering of customers to the appropriate product for their needs, underwriting the loan by making a determination on the financial standing of the borrower, determining the pricing of the loan, making exceptions to the lending procedures, determining whether to deny a loan, and the marketing of lending products.
A few of these chapters (those on underwriting and pricing) raise issues concerning the automation of some of these processes based on algorithms. (See “Algorithms: The Life Blood of the FANGs” Fall 2020.) Automation can potentially reduce the risk of fair lending violations if applied properly.
The chapters on the loan lifecycle have a common format of introducing the topic, including some background information on the credit process. This is followed by a case study of the specific type of risk based on Haggerty’s experience as a bank examiner and consultant. Each of these sections concludes with some detailed advice on avoiding fair-lending pitfalls.
Criticisms / There is a lot of useful information on fair lending and the book is a good refresher for those who have worked with the topic in the past but have not done so recently. There are also weaknesses with the book, and I think some of them may be attributable to its being self-published. Unfair Lending did not have the typically more intensive third-party review that accompanies a title that comes out of a publisher.
More importantly, I was disappointed that the book did not have more of a policy orientation. Its promotional material, in particular its subtitle, gives the impression that Unfair Lending analyzes and does some form of statistical analysis of the current extent of discriminatory lending in the industry. There was an oft-cited Federal Reserve Bank of Boston study that justified many of the Reno–Ludwig fair-lending interventions of the 1990s. David Horne, an economist with the FDIC, uncovered many flaws with that study and there was an intensive discussion in the industry at that time about the extent of discrimination. I thought Haggerty would pull together more recent analysis of lending discrimination in that same vein. It is not enough to provide a few references to policy topics and some anecdotal examples from his own personal experience to prove the extent that such discrimination “still exists.”
There is a lot of useful information on fair lending and the book is a good refresher for those who have not worked with the topic recently.
There are no footnotes or endnotes in the book at all, even when Conclusions of a policy nature are declared. For example, early in the book Haggerty makes the claim, “People can’t get funding to start a business or go to college because of their race.” In fact, there are stories in the business press about the opposite problem regarding funding for college loans, as students of all races are overburdened with student debt that they struggle to repay and they were not properly informed of the risks they were taking on when they agreed to the debt. It would have been very useful to have some citations to the most up-to-date research to support the contention of lingering discrimination on both business and student loans.
In summary, I would describe Unfair Lending as a practitioner’s guide. The book’s promotional information that might draw potential policy readers, even if unintended, is a little misleading. Online samples of a half-dozen pages of Unfair Lending are available, but they are not enough for a prospective reader to understand the breadth of the book’s coverage. This reflects a flaw with today’s world of online book purchases, as prospective readers (in most cases) cannot thumb through the full book for content to see that it meets expectations set in the title or promotional material.
