FRB: Consumer Affairs Letter CA 05 - 8 - Racial and Ethnic Control Groups Used in Fair Lending Analyses

In order to reflect the 2002 changes to the Home Mortgage Disclosure Act (HMDA) that implemented the Office of Management and Budget’s (OMB) 1997 revisions to the standards for classification of data on race and ethnicity, the Board is redefining the control groups used for fair lending analyses.

With 2004 data going forward, our default control group will be white non-Hispanic. In making that determination, several factors were considered, in particular, the following: first, denial disparities can be an indicator of creditworthiness differences between racial/ethnic groups; that is, to the extent that blacks, Hispanics, and whites have differing credit qualities, they are likely to be reflected in the disparities. From that perspective, the control group should not be a mixed white/Hispanic group, as that may well introduce some corrupting element into the measurement. Second, from a fair lending perspective, discrimination can often be about perception. A Hispanic applicant may regard him/herself as white, but the loan officer may React --consciously or subconsciously--to either an appearance that does not register with him/her as "white" or to a Hispanic surname. If such a perception drives discriminatory treatment, some degree of measurement of that treatment would be lost if the control group is other than white non-Hispanic.

The new Step One Regression tool and Chat Web software already incorporates this guidance. Other possible control group modifications to CHAT Web will be discussed during the HMDA/CRA Users Group meeting being held in November 2005.

If you have any questions, please contact Beverly Smith, Manager, Applications and Special Projects Section (202-452-5291).