Its official - Fed ignored subprime abuses

What were US financial regulators doing when the subprime market was spinning out of control? Answer: sweet FA, nothing; they were sitting in their offices drinking coffee and waiting for the monthly paycheck.

Once the subprime market began to crash, what does the Fed do? Why, it does what bureaucrats do when confronted with a crisis; it writes a report. Nevertheless, the report does contain some useful information. For example, no one has been censured for violating fair lending laws; half of all foreclosures are subprime borrowers; and minorities are invariably the victims.

(Bloomberg) -- The U.S. agencies that supervise more than 8,000 banks haven't censured any of them for violating fair-lending laws, three years after Federal Reserve researchers began assembling data showing blacks and Hispanics are more likely than whites to be saddled with high-priced home loans.

Minorities stand to be hardest hit by rising delinquencies and foreclosures in subprime loans. While Census Bureau data show that homeownership rates rose to records among blacks in 2004 and among Hispanics in 2005, they still trail whites by 25 percentage points, and the gap may widen in the current bust.

"Black people and Hispanics have been targeted,'' said Alphonso Jackson, secretary of Housing and Urban Development, whose department is hiring to expand its own probe of discriminatory lending.

Subprime loans -- those made at higher interest rates to people whom banks consider risky or who have sketchy credit histories -- accounted for more than half of the home foreclosures in the fourth quarter of last year. The Fed's review, conducted by economists from its research and statistics division, covered lending data from 2004 and 2005, the first two years of expanded disclosure requirements for banks and the final two years of Alan Greenspan's tenure as chairman.

Fed researchers singled out 470 lenders for closer scrutiny over two years, with some lenders showing up in both 2004 and 2005. The Fed has turned the names over to the relevant regulators and other authorities, including in some cases state officials.

The supervision of America's 8,650 banks is split among five agencies: the Fed, the Office of Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the National Credit Union Administration. Each has the power to uphold fair-lending laws and to punish offenders.

None of the five national regulators has published an enforcement action based on the data, according to agency spokespeople. Some lenders have been referred to the Justice Department for possible action, and investigations are continuing.

Consumer groups say minority neighborhoods may be intentionally marketed for high-cost loans by non-bank lenders, while poor financial literacy among low-income borrowers may lead to wrong choices. A legacy of discrimination that has kept minorities from owning assets, building wealth and improving credit history may also put them at a disadvantage when loans are priced.

FDIC Chairman Sheila Bair said she is troubled by the data and may act on two cases. "I don't believe, and I don't know that I have ever heard my colleagues say, that these disparities -- and they are significant -- can all be explained away through risk-based pricing,'' Bair said in an interview in Washington.

Consumer advocates using the Fed figures in their own research assert they do find evidence of discrimination. The Center for Responsible Lending in Durham, North Carolina, last year took the same mortgages analyzed by the Fed and matched them with its own proprietary information. The new data subset, of 177,487 subprime loans made in 2004, included credit scores, loan-to-value ratios and property locations.

The model concluded that African-American and Latino borrowers were more likely to receive higher-rate loans than white borrowers with similar risk. The mortgage industry disputes the center's conclusions. ``We have some real questions about the accuracy of that study,'' said Douglas Duncan, chief economist at the Mortgage Bankers Association in Washington. He called the loan match-ups a ``crude approximation.''

Kevin Petrasic, a spokesman for the Office of Thrift Supervision, said no violations were found in the 20 lenders under his agency's jurisdiction that showed disparities along ethnic lines in 2004. The National Credit Union Administration fined some institutions for filing their loan reports late, according to spokesman Justin Grove.

The Fed itself conducted a fair-lending review of several of the 35 lenders it supervises that it had flagged for 2004, according to spokeswoman Susan Stawick. Of the 45 institutions that surfaced in 2005, examiners did ``a full risk assessment for pricing discrimination on each,'' she added. The central bank is now studying figures for 2006.

The Justice Department's 2006 fair-lending report shows that one Fed referral on red-lining -- where a lender refuses to write mortgages in certain neighborhoods -- remained under investigation. Stawick said the central bank referred a discrimination case this year.