The Federal Reserve’s top regulator wants to “root discrimination” out of the financial services industry and is willing to use every tool at its disposal to do so.
Fed Vice President of Supervision Michael Barr delivered a speech on financial inclusion Tuesday afternoon at Jackson State University, a historically black research university in Mississippi. In it, he said the central bank would incorporate the detection of discriminatory practices into all of its supervisory practices, including the evaluation of merger and acquisition applications.
“Congress provided regulators with oversight and enforcement tools to help ensure supervised companies address consumer protection weaknesses, as well as the more pervasive risk management issues that often lead to those weaknesses,” Barr said. “We have a close working relationship with the Consumer Financial Protection Bureau and other regulators and we integrate consumer-focused reviews from other regulators, such as reviews of unfair, deceptive or abusive acts or practices, as well as fair lending, into our assessments. of bank holding companies, including in the context of merger and acquisition requests”.
During his prepared remarks, Barr highlighted racial wealth gaps, the difficulties black-owned small businesses have obtaining credit, and the fact that black households are nearly six times more likely to be unbanked than their white counterparts. He said many of these problems are part of the “long shadow” of past discriminatory practices at banks and policies set by the US government.
“For most of our country’s history, the United States government and many state and local governments, as well as many private individuals, corporations, and organizations, have not only failed to protect minorities from discrimination, but have reinforced actively segregated, entrenched inequality and pursued unequal policies,” he said, “including through brutal violence.
Barr pointed to auto and small business loans as areas of great concern for banking regulators, noting that black borrowers have faced higher interest rates and more restricted access to these products than their white peers.
He also expressed concern about home loans, noting residential appraisals as an area of great interest to the Federal Reserve and other regulators, picking up on a topic that has been a top priority of the Biden administration in its effort to eradicate systemic racial inequality.
Barr nodded to the Fed’s involvement in a hearing on appraisal bias by the Federal Council on Financial Institutions’ Evaluation Subcommittee last month, saying, “I look forward to working with my fellow regulators to help ensure that people are treated equally in the evaluation process, regardless of race or racial composition. of the neighborhoods”.
The central bank sits on the council along with other banking and housing regulatory agencies, including the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency, and the Department of Housing and Urban Development. .
Barr said the Fed will rely on improved data collection to identify discriminatory practices by banks and craft policy accordingly. She noted that under section 1071 of the Dodd-Frank Act, banks should report more data on small business loans. Once this provision is fully implemented, he said, the Fed will have “tangible insights into the availability and price of credit” that will extend to black-owned businesses.
At the same time, Barr also encouraged banks to be proactive in identifying discriminatory practices, suggesting they use “mystery shopper” tests to assess the practices of their employees. These are two people who have identical profiles except for a different protected class, such as race, applying for similar loans. The idea is to test whether people receive different offers of credit based solely on their race, gender, or personal attributes.
Another focal point for the Fed and other regulators, Barr said, will be the use of artificial intelligence or computer algorithms to determine credit scores or evaluate loan applications.
Banks “should review underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models,” he said.
He CFPB also expressed skepticism about the ability to AI and evaluation algorithmic models adhere to fair lending standards.
Barr said ongoing efforts to update the Fed’s regulatory and supervisory policies on bank mergers and the Community Reinvestment Act will prioritize access to financial services for low- and moderate-income communities.
He added that it’s also important for regulators to encourage innovations that help banks extend services to traditionally underserved areas, especially with regard to community development financial institutions and minority depository institutions, which he said provide services that traditional banks cannot.
“Something we do is make sure our examiners understand the CDFI space and the MDI space and the role that CDFIs and MDIs play, and the particular types of circumstances that MDIs and CDFIs face, like being able to make small consumer loans and making character lending and lending to people with no credit score,” Barr said during a question-and-answer session after his speech. “The need for our examiner to know and understand what are the compensatory risk mitigation measures used by CDFIs and MDIs, including knowing the family. It makes a difference.”
Barr also said the Fed is doing its part to help facilitate better services for underserved and low-income customers, specifically highlighting its instant payments network, FedNow, which is set to launch this summer. He said that FedNow will enable faster services at lower costs for consumers.
“We can also make a difference by updating our check clearance rules so that consumers and small businesses that still receive checks have access to their funds in a more timely manner,” Barr said. “And of course we need strong consumer protections so that consumers don’t have to worry about making payments securely.”
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