Tuesday, March 27,
2018 11.11AM / By Randal K. Quarles, Federal Reserve
Being a speech delivered
by Federal Reserve Vice Chairman For Supervision, Randal K. Quarles, At The
HOPE Global Forums Annual Meeting, Atlanta, Georgia
Good evening. Thank you to John Bryant
and Operation HOPE for inviting me today to open the HOPE Global Forums.1 I commend our hosts for bringing
together such an impressive group of speakers and attendees, diverse in their
perspectives, yet all of whom share the vital goal of advancing economic
opportunity and inclusion. It is fitting that this event is being held on the
50th anniversary of several notable events, including the publication of Dr.
Martin Luther King's last book, Where
Do We Go from Here: Chaos or Community, which urged unity in order
to create equal opportunity, and the enactment of the Fair Housing Act of 1968,
which enshrined our nation's commitment to equal access to housing. These
milestones remind us of the progress we have made to date as well as the
challenges that remain, and inspire us to persist in our efforts.
The conference has a robust agenda
ahead. Over the next few days, you will be discussing many issues relating to
financial inclusion--such as housing, small businesses, workforce
participation, and other topics--to which we at the Federal Reserve share a
commitment, and that we view as critical to our mission. Our economy is
stronger when everyone has a chance to contribute fully and share in our
national prosperity. And I personally believe that financial inclusion helps us
realize a founding notion of our country--that this is a place where
opportunity, innovation, and productivity are encouraged and rewarded. I'm
particularly pleased to see on the conference agenda a number of sessions on
issues to which we, at the Federal Reserve, devote considerable attention:
access to credit and financial inclusion for consumers and small businesses.
Conversations like these are enormously important to understanding the
challenges Americans face and why a multitude of voices and approaches are
needed to address them.
In my remarks today, I'd like to focus
on the consumer protection and credit accessibility aspects of financial
inclusion, and some of the ways that the Federal Reserve promotes a fair and
transparent consumer financial services marketplace. In recent speeches, I have
emphasized my view that we should aim for an effective safety and soundness
regulatory approach that is as efficient, transparent, and simple as feasible.2 I consider these principles to apply
equally to our consumer protection supervision program; that is, we should also
strive to promote consumer protection with as much efficiency, transparency,
and simplicity as possible. I believe that a commitment to these principles is
not only compatible with financial inclusion, but in fact helps promote it.
Regulatory burden can make it harder for institutions to serve their customers
and communities. This is especially the case for community banks and minority
depository institutions (or MDIs), which play an important role in serving the
needs of their local communities, including historically underserved
populations. I'd also like to share some thoughts on an area to which I have
devoted a good portion of my career: the importance of small business access to
credit, which is a critical part of financial inclusion and a catalyst for
economic growth in local communities.
Let me start with the foundation of why financial inclusion is important. In
broad terms, financial inclusion means access to affordable financial products
and services that meet the needs of individuals and businesses and that are
delivered in a responsible and sustainable way.3 At the Federal Reserve, we recognize
the influence that financial inclusion has on the broader economic performance
of our country.4 Inclusion is essential to advancing the
Federal Reserve's goal of promoting maximum employment, as well as supporting
the stability of the financial system. Likewise, we support and share your goal
of ensuring a fair and transparent marketplace for financial products and
services--including credit--that can provide a pathway toward economic
prosperity for all Americans. Overall, our economy is performing
well, and unemployment is low. However, many households and communities
continue to face financial challenges.5 Consider that more than two-thirds of
white households own their homes as compared to less than half of African
Americans and Hispanics.6 And consider that all important human
asset: education. One-third of white adults have at least a bachelor's degree
as compared to one in four African Americans and 17 percent of Hispanics.7 This matters because the advantages of
a college degree for accumulating income and wealth are lifelong and
inter-generational.8 We likewise see evidence of financial
disparities in the Federal Reserve's Survey of Household Economics and
Decisionmaking and Survey of Consumer Finances.9
When individuals have unequal or
insufficient access to financial products and services, such as credit, they
may be deprived of a chance to fund an education, finance a business, or pursue
homeownership--opportunities that can provide greater financial security for
themselves and their families and future generations. And as a nation, we are
deprived of the benefits of their potential contributions to the economy.
In the context of my earlier discussion of financial inclusion, federal
consumer protection laws are critical to ensuring consumers are treated fairly
when offered financial products and services. Discrimination and deception have
no place in a fair and transparent marketplace. These practices can close off
opportunities and limit consumers' ability to improve their economic circumstances,
including through access to homeownership and education.
The Federal Reserve's consumer
compliance supervisory program reflects our commitment to promoting financial
inclusion and ensuring that the financial institutions under our jurisdiction
fully comply with applicable federal consumer protection laws and regulations.
Let me give two examples involving the Federal Trade Commission Act's
prohibition against unfair or deceptive practices in products and services that
will undoubtedly be familiar to the audience--student financial aid and
mortgage lending. In the last few years, the Federal Reserve has addressed
deceptive practices in these areas through public enforcement actions that have
collectively benefited hundreds of thousands of consumers and provided millions
of dollars in restitution.
In the financial aid context, our
actions required restitution for students who were not given full information
about the potential fees and limitations associated with opening deposit
accounts for their financial aid refunds.10 And in mortgage lending, our action
required restitution by a bank that had given borrowers the option to pay an
additional amount to purchase discount points to lower their mortgage interest
rate, but that did not actually provide the reduced rate to many of those
As we mark the 50th anniversary of the
Fair Housing Act, the fair lending laws remain critical in fostering vibrant
communities and a fair and transparent consumer financial services marketplace.
For all state member banks, we enforce
the Fair Housing Act, and for banks of $10 billion dollars or less in assets,
we also enforce the Equal Credit Opportunity Act. Our examiners evaluate fair
lending risk at every consumer compliance exam. While we find that the vast
majority of our institutions comply with the fair lending laws, we are
committed to identifying and remedying violations when they occur. Pursuant to
the Equal Credit Opportunity Act, if we determine that a bank has engaged in a
pattern or practice of discrimination, we refer the matter to the U.S.
Department of Justice (DOJ). Federal Reserve referrals have resulted in DOJ
public actions in critical areas, such as redlining and mortgage-pricing
discrimination. For example, in our redlining referrals, the Federal Reserve
found that the banks treated majority-minority areas less favorably than
non-minority ones, such as through lending patterns, marketing, and Community
Reinvestment Act assessment-area delineations. For our mortgage-pricing
discrimination referrals, the Federal Reserve found that the banks charged
higher prices to African American or Hispanic borrowers than it charged to
non-Hispanic white borrowers and that the higher prices could not be explained
by legitimate pricing criteria.12
Simplicity, and Transparency of Consumer Compliance Supervision
Consumers deserve to be treated fairly, regardless of the size of the banking
institution. Yet, we can achieve this goal and still reduce regulatory burden
through a balanced program of tailored and risk-focused supervision.
Accordingly, we continue to seek opportunities to promote efficient, simple,
and transparent supervision where possible, so that the institutions we
supervise can focus on finding solutions that work for all consumers and
communities. In an effort to promote consumer compliance, our community bank
supervisory program focuses our examinations on the areas of highest consumer
risk. This has improved the efficiency and effectiveness of our examinations
and reduced regulatory burden for many community banks. Banks and consumers
benefit when supervision is timely and effective.
Put simply, our role as supervisors
should not be to play "gotcha" with our banks, but to support their
compliance efforts. The Interagency Consumer Compliance Ratings System,
published in November 2016, is an example of this approach.13 This guidance provides incentives
for institutions to focus on managing their consumer compliance risks,
preventing consumer harm, and helping to create a culture that identifies and
corrects problems. Another example of how we support our institutions is how we
work with MDIs, which as I noted earlier, play an important role in serving the
needs of their local communities. We have dedicated Reserve Bank staff who are
in frequent contact with MDI leadership. Based on what we've learned in the
course of this outreach, we have expanded our Partnership for Progress--a
program for outreach and technical assistance to MDIs14--to include staff from our Community
Development function, and we have enhanced our MDI-related programing. Our commitment to transparency also
includes a robust outreach program for banks. This includes Consumer Compliance Outlook, a
widely subscribed Federal Reserve System publication focused on consumer
compliance issues, and its companion webinar series, Outlook Live.15 For example, in 2017, we sponsored
an interagency webinar on fair lending supervision with almost 6,000
registrants, a substantial share of which were community banks.16
Business Access to Credit
At the Federal Reserve, we view small business credit from several
perspectives. For the economy, small businesses need adequate and affordable
credit in order to form, grow, and succeed; otherwise they may underperform,
slowing growth and employment. For many small business owners, personal and
business finances are intertwined. A well-functioning housing finance market is
vital for small business owners who may draw upon the equity in their homes to
fund their businesses. Student loans may be needed to help fund the education
that is important for both small business owners and their employees to boost
profits and productivity. And, short-term credit matters for day-to-day
management of cash flow, while longer-term credit is essential for capital
investments. So, entrepreneurs--just like consumers--need access to a variety
of credit sources.
Recently, I had the pleasure of
meeting a group of small businesses from across the country. By
"small," I mean some of these companies have just a handful of
employees. The group included owners of a catering company from Dallas, a
mechanical engineering company from Philadelphia, a marketing consulting firm
from Cleveland, a combination bar and bakery from Brooklyn, and a gluten-free
bakery from my hometown, Salt Lake City.
They shared with me the joys of
running their own businesses, of creating jobs, and of providing for their
families as well as creating opportunities for their employees. They also spoke
of their challenges, which I'm sure are familiar to many of you in this room.
For one, the owners wear many hats, including CEO, chief operating officer,
chief finance officer, head of sales and marketing, and some--quite
literally--chief bottle washer. They also spoke of the day-to-day difficulties
of finding, training, and retaining employees. And, they raised the challenges
they often face in gaining access to working capital, the lifeblood to
sustaining and growing their businesses.
The anecdotes I heard touched on three
related trends we have been observing in the small business credit environment.
First, although lending standards have eased since the recession and the
financial condition of businesses has improved, some small business credit
needs, especially for the smallest of firms and minority small business owners,
continue to go unmet. According to a 2016 Small Business Credit Survey
conducted by our 12 Federal Reserve Banks, some small businesses still face
persistent credit gaps, even though they often seek credit in small amounts. Of
the firms that apply for credit, more than two-thirds apply for less than
$100,000, with substantial numbers of these applying for less than $25,000.17 However, smaller firms often
struggle to qualify for bank credit, and among firms that were denied, low
credit scores and insufficient credit history were the most frequently cited
reasons. In addition, our survey suggests that some low-credit-risk minority-
and women-owned firms are less likely than low-risk white-owned and male-owned
firms to receive financing; and if they are approved, it is for less than the
Second, there have been shifts in the
composition of commercial bank lending to small businesses. Large banks' share
of small business lending has grown, especially among the smallest loans.
This represents a change from 20 years
ago when small businesses relied more on a relationship with local community
banks for access to credit. For loans under $100,000, small banks of less than
$1 billion in assets now hold a 19 percent share, down from 60 percent two
decades ago. Today, it is the largest banks--those with greater than $50
billion in assets--that account for more than 60 percent. Some of this trend
may be due to industry consolidation, which has reduced the number of very
The composition of credit offered also
is shifting. Loans entail high fixed costs that are roughly the same regardless
of whether a loan is for $100,000 or $1 million, reducing the profitability of
smaller-dollar loans.19 Our data suggest that the growing
share of small business lending at larger banks may be partly due to their use
of automated underwriting for credit cards.20 By providing credit cards, banks are
expanding credit available to small businesses; however, some small business
advocates note that this form of credit is generally more expensive and lacks
the flexibility of other products.21 For example, personal or business
credit cards may be suitable for purchasing supplies, but not for payroll. In
addition, this automated approach may be more "cookie cutter,"
meaning that firms that don't meet standard lending criteria may not qualify.22
These developments have created a
space for the third trend we have been observing--the emergence of nonbank
online alternative lenders that provide small-dollar business credit. For
example, some of the large technology firms are providing credit, at a rapidly
growing pace, to their built-in customer base of merchants. Several of the
businesses I met with mentioned they had turned to nonbank online lenders after
being turned down by banks. Some online lenders obtain access to a prospective
borrower's accounting software, merchant accounts, shipping, and payroll data
in real time in order to underwrite businesses. Business owners can receive
funds in a couple of days or even hours.
This emergence of online lenders is
part of a broader evolution of financial technology--or "fintech"--as
seen in a wide range of products and services for both consumers and small
businesses. I'm not surprised to see this important topic on your conference
agenda. The use of fintech to expand access to credit has great promise and also
associated risks. For example, online origination platforms and more
sophisticated algorithms may enable credit to be underwritten and delivered in
a manner that is still prudent but with greater efficiency, convenience, and
lower processing costs. And as regulators, we do not want to unnecessarily
restrict innovations that can benefit consumers and small businesses. At the
same time, our interest is in ensuring that banks understand and manage their
risks when introducing new technologies or partnering with fintech companies,
and that consumers and small businesses remain protected.23 This is why the Federal Reserve has
been engaged in a broad and multidisciplinary effort to develop a robust
understanding of the technologies and activities in this space, in order to
study fintech's opportunities and risks, and assess policy and supervisory
Fintech is also one of the factors
driving calls for regulators to modernize the Community Reinvestment Act, or
CRA, as technology changes how financial products and services are accessed. As
I'm sure most of you know, the CRA is an important law that recognizes banks'
affirmative obligation to meet the credit needs of the communities they serve,
including low- and moderate-income communities. The CRA promotes financial
inclusion by encouraging banks to extend mortgages, small business loans, and
other types of credit as well as to provide investments and other services in
communities where they take deposits, consistent with safe and sound banking
operations. The arrival of new financial technologies, along with significant
industry consolidation and other structural changes, has changed the way that
financial services are delivered to consumers and the ways in which banks lend
in communities. We continue to study these shifts, and share the common goal of
improving the current supervisory and regulatory framework for CRA to further
the statute's core objective of promoting access to credit and financial
Finally, I'll note that we will continue to learn about issues concerning
financial inclusion through our research, such as by collecting new data in our
Survey of Household Economics and Decisionmaking and Survey of Consumer
Finances that I mentioned earlier. The information we gather helps us better
understand factors affecting consumers and households, including low- and
moderate-income and historically underserved populations. We also continue to
convene experts and practitioners from industry, academia, and community-based
organizations to help provide context on what we are seeing in the data, to
identify emerging issues, and to consider where there may be data gaps and
opportunities for additional research. In addition to yielding important
insights that inform our policymaking, we hope these efforts can support the
conversations you are having at conferences like this one.
Thank you, again, for inviting me to
speak at your conference as we mark the notable anniversaries that this year
brings. Together, our work clearly has a great deal of synergy, and I thank you
for your efforts. Making the economy work for the benefit of all Americans,
including lower-income communities, is of the utmost importance.
The views I express here are my own and not
necessarily those of the Federal Reserve Board or the Federal Open Market
e.g. Randal K. Quarles, "Early
Observations on Improving the Effectiveness of Post-Crisis Regulation"
(speech at the American Bar Association Banking Law Committee Annual Meeting,
Washington, DC, January 19, 2018).
Inclusion," World Bank, last modified April 5, 2017.
e.g., Lael Brainard, "Why
Opportunity and Inclusion Matter to America's Economic Strength"
(speech at the Opportunity and Inclusive Growth Institute Conference, sponsored
by the Federal Reserve Bank of Minneapolis, May 22, 2017); Janet L. Yellen,
on Inequality and Opportunity from the Survey of Consumer Finances"
(speech at the Conference on Economic Opportunity and Inequality, Federal
Reserve Bank of Boston, Boston, MA, October 17, 2014); Ben S. Bernanke, "The
Level and Distribution of Economic Well-Being" (speech before the
Greater Omaha Chamber of Commerce, Omaha, NE, February 6, 2007).
Policy Report (PDF) has included a discussion of the economic
experiences of major demographic groups. See, e.g., "Have the Gains of the
Economic Expansion Been Widely Shared?" in Monetary Policy Report (Washington: Board of
Governors, June 21, 2016), p. 6.
to the U.S. Census Bureau's "Quarterly Residential Vacancies and
Homeownership" statistics for the fourth quarter of 2017, the
homeownership rates by race were 72.7 percent for non-Hispanic white
households; 42.1 percent and 46.6 percent for black and Hispanic households, respectively;
and 58.2 percent for Asian, Native Hawaiian, and Pacific Islanders. See www.census.gov/housing/hvs/files/currenthvspress.pdf.
Census Bureau, Current Population Survey, 2017 Annual Social and Economic
Attainment in the United States: 2017," December 14, 2017.
R. Emmons, Ana H. Kent, and Lowell R. Ricketts, The
Demographics of Wealth: How Education, Race and Birth Year Shape Financial
Outcome (PDF), Essay No. 1 (St. Louis: Federal Reserve Bank of
St. Louis, February 2018).
example, data from our Survey of Household Economics and Decisionmaking (SHED)
show that in 2016, only about half of white households had three months of
emergency savings, but this was the case for less than two-fifths of black and
Hispanic households. The 2016 SHED is at www.federalreserve.gov/consumerscommunities/shed.htm.
See also the Survey of Consumer Finances at www.federalreserve.gov/econres/scfindex.htm.
10. In the
Matter of Cole
Taylor Bank, Docket Nos. 14-021-E-SMB, 14-021-CMP-SMB (July 1, 2014);
In the Matter of Higher
One, Inc., Docket Nos. 15-026-E-I, 15-026-CMP-I (December 23, 2015);
2. In the
Matter of Customers
Bank, Docket Nos. 15-027-B-SM, 15-027-CMP-SM (December 6, 2016).
11. In the
Matter of Peoples
Bank, Docket No. 17-041-B-SM (November 28, 2017).
e.g., DOJ settlements with Midwest
Mortgage Inc.; and Countrywide
Financial Corporation. More information about recent referrals to the DOJ
can be found in the Federal Reserve's annual report at www.federalreserve.gov/publications/2016-ar-consumer-and-community-affairs.htm#14890.
13. See www.ffiec.gov/press/PDF/FFIEC_CCR_SystemFR_Notice.pdf.
14. See the
partnership's website at www.fedpartnership.gov.
15. See https://consumercomplianceoutlook.org/
Interagency Fair Lending Hot Topics," Outlook Live webinar series, November 16,
there are many working definitions of "small," figures from the Small
Business Credit Survey (SBCS) use firms with less than 500 employees as a proxy
for small businesses. Some 28 percent are seeking credit in amounts less than
$25,000 and 42 percent reported seeking between $25,000 and $100,000. The SBCS
is available at www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-Report-EmployerFirms-2016.pdf.
to special analyses of the Joint Federal Reserve Banks' Small Business Credit
Survey, among low- credit-risk firms, 60 percent of minority firms that were
approved received only partial funding, whereas 68 percent of low-risk,
non-minority firms were approved for the full amount of financing requested.
Women-owned firms also reported a funding gap. Among low-credit-risk firms, 48
percent of women-owned firms received all of the financing requested, compared
to 57 percent of men-owned firms. Reports are available at www.newyorkfed.org/smallbusiness/small-business-credit-survey-employer-firms-2016.
Banking Strategies, "Making
Small Loans Profitably," July 7, 2015.
20. Based on
Federal Reserve analysis of FR-Y14 data for scored loans and cards (i.e.,
underwritten by owner's personal credit) for 2007 to 2016.
of Meeting (PDF), Community Advisory Council and the Board of Governors,
May 26, 2017, p. 2.
Rebel A. Cole, Lawrence G. Goldberg, and Lawrence J. White, "Cookie Cutter
vs. Character: The Micro Structure of Small Business Lending by Large and Small
Banks," Journal of Financial
and Quantitative Analysis 39, no. 2 (June 2004): 227–51. Also see
Karen Gordon Mills and Brayden McCarthy, "The State of
Small Business Lending: Innovation and Technology and the Implications for
Regulation," Working Paper No. 17-042, (Harvard Business School,
December 1, 2016), p. 36.
e.g., Carol A. Evans, "Keeping
Fintech Fair: Thinking about Fair Lending and UDAP Risks," Consumer Compliance Outlook
(Second Issue 2017).
24. See Lael
Opportunities and Challenges of Fintech" (speech at the Conference on
Financial Innovation at the Board of Governors of the Federal Reserve System,
Washington, DC, December 2, 2016).
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