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BANKING ISSUANCE
Comptroller of the Currency
Administrator of National Banks
Type:  Banking Circular
Subject:  National Bank Fair Lending Efforts

TO:  Chief Executive Officers and Directors of National Banks and All
     Examining Personnel

PURPOSE

This issuance is intended to strongly encourage national banks to continue
exploring ways to ensure that all mortgage loan applicants receive fair
and equal treatment in the lending decision process. It provides
encouragement and suggestions that may help bank management and boards of
directors fulfill their responsibility to comply with fair lending laws
and regulations. It is not intended to provide a blueprint for compliance.

BACKGROUND

The 1991 Home Mortgage Disclosure (HMDA) data released in October continue
to reveal considerable racial and ethnic disparities in mortgage loan
denial rates. Although the OCC recognizes that those disparities are
caused in part by differences in applicant credit qualifications, two
recently completed studies conclude that illegal lending discrimination
does occur. Those studies, one by the Department of Justice and the other
by the Federal Reserve Bank of Boston, found that nonminority applicants
for home mortgage loans receive preferential treatment not always given to
minority applicants.

After a three-year investigation of an Atlanta mortgage lender, the
Department of Justice alleged that "white applicants who failed to meet
certain underwriting standards have been extended special considerations"
not extended to black applicants. It also alleged that "the lender
counseled white applicants about their deficiencies and reworked their
applications in order to help them qualify with underwriting guidelines,
but did not consistently supply comparable assistance to black
applicants." In a settlement of the suit in September 1992, the lender
agreed to certain corrective actions, including the creation of a $1
million fund to provide relief to 48 black creditseekers.

In October 1992, the Federal Reserve Bank of Boston published the results
of a detailed review of about 130 Boston lenders, which found that some
lending showed differences in approval rates that were unwarranted by
economic factors. Since the Boston study found that 80 percent of
applicants had some flaw in their credit qualifications but only 15
percent of applications were denied, it is clear that most applicants
benefit from some judgment or initiative that neutralizes the flaws. The
study found, however, that minority applicants benefitted less frequently
than nonminority applicants.

The study suggested that differential treatment may begin with the
presumption that nonminority applicants are creditworthy, but that
minority applicants need to prove their creditworthiness to the lender.
The positive presumption about nonminority applicants leads lenders to
justify many kinds of judgments, accommodations, and efforts to help them
qualify for loans in spite of shortcomings. However, when one group of
customers benefit from considerations not given to another group, or
benefit to a different degree, antidiscrimination laws are violated.

SUGGESTED ACTIONS FOR LENDERS

Management and boards of directors of national banks should take steps to
eliminate any illegal discrimination from their lending practices. In that
effort, they need to determine the reasons for any disparities in the way
their institutions review and decide home mortgage applications. The
thorough analysis of the bank's HMDA data outlined in the OCC's December
11, 1991, Advisory Letter (attached) is a valuable start in making that
determination. Further, we suggest you:

Ensure Equality in Customer Service -- All applicants should receive the
same beneficial presumptions and equal measures of assistance, diligence,
patience, and flexibility. Similarly qualified applicants should benefit
equally from those discretionary and dynamic aspects of bank lending
processes.

This effort should begin in training programs for lending officers.
Training should anticipate and address participants' stereotyped
assumptions, and describe options that should be offered equally to
borrowers who do not meet conventional lending standards. Internal bank
compliance programs should be designed to monitor these elements of
customer service.

An application checklist can help banks ensure that compensating factors,
unconventional documentation of creditworthiness, and explanations of
negative information are considered equally for every applicant. The
checklist the Department of Justice required in its Atlanta settlement is
a good example of a tool that can make sure that information that might
overcome apparent deficiencies in an applicant's credit qualifications is
not solicited selectively. The settlement documents filed in the Atlanta
case are highly detailed and can provide valuable guidance to lenders.

Record and Evaluate the Reasons for Denials -- National banks should
record the "reasons for denial" on their HMDA loan application registers.
Many financial institutions already maintain this voluntary information,
which allows them to determine whether reasons for denial are equally
distributed among applicants. For example, a pattern of higher rejections
for "lack of verification" or "incomplete information" for a minority
group might indicate that lending personnel are not working as diligently
to qualify those applicants.

A complete tabulation of reasons for denial can show if an overall
disparity in denial rates reflects a disproportionate use of one or two
reasons with respect to minority applicants. That information allows the
lender to focus on minority denials for those reasons to identify the
flaws they contain. If the bank then performs a parallel review of
nonminority approvals, it can determine if those approvals included
deficiencies comparable to those in the denied minority applications. When
a bank finds such a pattern, it should determine why similar flaws were
treated differently.

Establish Review Systems -- A system of review underwriters and a mortgage
review board can help banks make sure that applicants receive equal
treatment. The Atlanta settlement included a requirement for a review
underwriter, but often lenders voluntarily establish reviews that provide
a second consideration of denied minority applications. Other lenders have
review systems that also consider a sample of nonminority applications,
both approved and rejected, to ensure that their lending standards are
being applied consistently. In some cities, financial institutions have
established joint mortgage review boards. Such boards are composed of
lending personnel from the participating financial institutions who
reviewed rejected applications from all members.

To be valuable, second reviews must provide the reviewer with a sense of
how frequently and why nonminority applicants with deficiencies are
granted loans. A review that only verifies that denied applicants have
deficiencies in their credit qualifications does not answer the crucial
question of equality of treatment. A good review must discover whether
rejected minority applicants' deficiencies were worse than those of
successful nonminority applicants and whether the lender made equal
efforts to help all customers qualify.

Well designed and operated review systems help banks comply with
nondiscrimination laws, provide them with valuable information, and can
result in the banks making more loans. One lender recently reported that
on second review it approved 35 percent of initially rejected
applications.

Initiate Testing Programs -- When a bank's best efforts to prevent
discrimination with training, procedures, and accountability are not fully
successful, it should consider the use of "shoppers." The additional
documentation and information from self-testing can help identify and
dislodge subtle and even unintentional discriminatory attitudes and
practices.

Professional testers can conduct paired tests to determine if treatment of
equally qualified loan applicants with different racial, ethnic, or other
characteristics is substantially the same. In addition to identifying
situations in which treatment is not equal, self-testing can find
situations in which established lending practices are not followed, and
can provide management with valuable customer service data.

SUMMARY

Eliminating discrimination in mortgage lending depends on the commitment
of bank management and boards of directors. It is their responsibility to
establish the systems and procedures necessary to comply with fair lending
laws and regulations and to monitor those systems. Examiners will evaluate
banks' efforts to comply and to review and monitor their compliance.

The approaches in this issuance are suggestions that may be useful
additions to measures already in place. They do not constitute a checklist
of required activities or steps that guarantee compliance.

RESPONSIBLE OFFICE

If you have any questions concerning this issuance or fair lending, you
should contact your supervisory office or the Compliance Management
Department in Washington, D.C.

Stephen M. Cross
Deputy Comptroller for Compliance Management

Date:  December 3, 1992