On March 4, 2013, I sent a letter to Chairman Ben S. Bernanke and the members of the Board of Governors of the Federal Reserve System (Fed) explaining the problems with fair lending enforcement arising from the failure to recognize the way standard measures of differences between outcome rates tend to be affected by the prevalence of an outcome. One crucial problem involves the fact that the federal government encourages lenders to engage in conduct that makes it more likely that the federal government will sue them for discrimination, as explained in the various works collected on the Lending Disparities page and recently in “Misunderstanding of Statistics Leads to Misguided Law Enforcement Policies” (Amstat News, Dec. 2012). The letter to the Federal Reserve Board (Federal Reserve Letter) may be found here.
There are several reasons why one might expect the Fed to give greater attention to this issue
than the Department of Justice (DOJ) gave to a letter involving enforcement of fair lending law and a range of other issues (see the Holder/Perez Letter subpage of the Lending Disparities page) and the Department of Education (DOE) gave to a letter involving discipline disparities (see Duncan/Ali Letter subpage of the Discipline Disparities page). These included that there are many more people at the Fed capable of understanding the issues and that the Fed has a strong institutional interest in obviating questions about its statistical expertise.
As it happened the Fed did take the letter much more seriously that the DOJ or DOE took their letters they received. One cannot competently consider the issues raised in any of these letters without reviewing the electronic copies of the letters and exploring the materials made available by the links in the electronic copies of the letters. But, while it is not impossible that I overlooked at visit to my site by the DOJ or DOE between the time of the receipt of the letter and the agency’s responding, review of my web site traffic information appears to indicate that neither agency even downloaded the letter. By contrast, following receipt of the March 4 letter, persons at the Fed repeatedly examined the online copy or the letter and various pertinent web pages on jpscanlan.com. Given the extent of that review and the statistical expertise of the Fed, it seems a fair assumption that enough persons at the Fed now understand the issue that one can regard the Fed to understand the issue in an institutional sense.
Such fact dramatically alters the situation. Previously, as a result of a statistical understanding that was the exact opposite of reality, the Fed was encouraging lenders to engage in conduct that would make it more likely that the federal government would sue them for discrimination. Now, to extent that the Fed continues the present policies, it will be doing so notwithstanding that it is aware that is encouraging lenders to engage in conduct that makes it more likely that the federal government will sue them.
Nevertheless, by letter dated April 23, 2013, on behalf of the Governors, Sandra F. Braunstein, Director of the Fed’s Division of Consumer and Community Affairs, responded to the March 4 letter in a way that failed to show any recognition of implication of the issues raised in my letter – specifically of recognition that the government is engaged in a policy whereby it encourages lenders to engage in conduct that makes it more likely that the government will sue them for discrimination. The text of the letter is set out in an end note.[i] I will not endeavor to attach significance of particular language. I will note, however, that in general the language is such that would suggest that letter to which it responded had merely raised some nuance of measurement rather that the agency was acting on the basis of a perception that was the exact opposite or reality, with enormously perverse consequence. I will also note that it does not suggest that the issues I raised will be addressed among the two tasks forces the letter describes. That, of course, does not rule out such possibility.
One question at this point is whether it would be more disturbing that the Fed does not yet understand that reducing the frequency of adverse lending outcomes tends to increase relative differences in adverse outcomes or that, now understanding such pattern, the Fed intends to make not effort to alter the manner in which it and other agencies monitor fair lending laws.
One must be mindful that even when federal agencies have been made to recognize problems with existing practices, the manner in which they respond is not invariably useful. See discussion at pages 28-32 of the Harvard University Measurement Letter regarding actions of the National Center for Health Statistics once made aware that relative differences in favorable health and healthcare outcomes and relative differences in the corresponding adverse health and healthcare outcomes tend to change systematically in opposite directions as the prevalence of an outcome changes.
Thank you for your letter dated March 4, 2013 regarding fair lending analysis. The Governors have asked me to respond.
The Federal Reserve is committed to fair lending compliance. As a supervisor of approximately 800 state member banks, we regularly assess fair lending risk for the institutions that we supervise and take appropriate action when we find evidence of illegal discrimination. We share your concerns about evaluating potential fair lending violations in a manner that is fair and consistent. To that end, the Federal Reserve coordinates with other agencies to facilitate consistent and effective enforcement of the fair lending laws through the Financial Fraud Enforcement Task Force and the Joint Agency Task Force on Fair Lending. In addition, the Federal Reserve participates in numerous meetings, conferences, and trainings with industry and consumer advocates to discuss fair lending matters and receive feedback. Through this outreach, the Federal Reserve is able to address emerging fair lending issues and promote sound fair lending compliance. The Federal Reserve strives to ensure that its methods for evaluating fair lending compliance meet the highest standards and are consistent with agency guidelines made available to the public.
We appreciate you keeping the Federal Reserve informed of your views. The Federal Reserve seeks to apply rigorous analyses to evaluations of fair lending risk, and welcomes the opportunity to consider the potential for new methodologies. Thank you again for sharing your concerns.