The CHAIRMAN. Our final witness is Prof. Calvin Bradford, of the University of Illinois. This seems to be Illinois' day here. We have three of the six witnesses that are from Illinois.

STATEMENT OF PROF. CALVIN BRADFORD, UNIVERSITY OF ILLINOIS

Mr. BRADFORD. Thank you.

Mr. Chairman, Senator Garn, I'm the codirector of the urbansuburban investment study group which is a collection, a loose collection of a group of lawyers, academics and researchers in Chicago which has been studying urban investment and disinvestment in relation to central city decay and suburb development for about 51⁄2 years now. I think we probably represent the largest considered effort to study this process in the country. We have worked for governors' commissions for the State of Illinois. We have published in the field and worked for State and local agencies for the last 4 of those 51⁄2 years.

I presently have a contract with the Equal Opportunity Office of HUD to do my own summary of their administrative meeting in Philadelphia and to place it in the larger redlining issue. I'd like, since I can't share the reports with you since they are not complete, to draw on them in my testimony today. I certainly don't want to submit the transcript of that meeting as part of this record, but I commend them to you and the staff to read.

Those particular hearings I think are important because although your own hearings on the Home Mortgage Disclosure Act represent the most aggressive study of community studies-and we wish those would be reprinted because a lot of people still would like copiesthe hearings that were held by HUD in Philadelphia represented an expansion of this to a larger group of actors. They not only had community groups and members of lending institutions and regulatory agencies, but representatives of the real estate and insurance industry and representatives of the secondary mortgage market. It represents a broadening of the issue which I think reflects a movement of the community groups and the State regulators to deal with the larger range of those actors and people involved in the disinvestment process. As I summarize both the history and, I think, the legislative trends in this area, it strikes me that it is very similar to the process that we often see in civil rights cases. We have a complaint filed and we have peopple showing that there is a law which has been broken or may have been broken by whatever acts they, the defendants, are charged with. Then they develop a prima facie case. If the court accepts this prima facie case they move to a period of discovery which is, in essence, to gather all information that would be necessary to make a decision on the merits of the case.

It strikes me that the Home Mortgage Disclosure Act represents that point of discovery and I wish to suggest to you that the trend of the disinvestment redlining issue has moved to a point where the rules of discovery are the critical issue.

I would say first of all that it's quite evident from your own hear

by the community organizations. I would commend to you a background paper prepared for the HUD hearings called Redlining and Disinvestment Causes, Consequences and Proposed Remedies, and I'm sure you can get a copy from Assistant Secretary Blair's office. It is a legal background paper prepared by the housing and economic law development project at Berkeley. It is a very detailed study of the progress of civil rights law in this area. It not only describes progress particularly through title VIII in the 1968 law, but ends with very strong statements about the case of Laufman versus Oakley and a summary ruling last February of 1976 by that court that if in fact. the institution charged had redlined there would be a violation of title VIII. Therefore it establishes clearly that such redlining would be a violation of the act.

While I just recommend that to you, I would like to read one short statement from the court's opinion. Rather than just ruling that it was a violation of the law, the court went on to say:

Little imagination is required to understand that the imposition of barriers to occupancy in the form of higher mortgage interest rates or refusals to make loans in housing in changing neighborhoods works to discourage families, white and black, which could afford to purchase homes in such neighborhoods. The practical effect is to discourage whites who may freely move elsewhere from moving into vacancies in "changing" neighborhoods, thereby inducing "massive transition" and ultimately "white flight." Thus, according to this view, redlining directly contributes to the decay of our cities.

That's the opinion of the court in that case. So I think we have moved to that legal stance, and if you will refer to that document, it will be very instructive.

On the point of developing a prima facie case, since it appears there would be a law violated if people did redline, we have all the community studies, which, I and most of the community people concede, have some weaknesses in data as is often the case prior to discovery. I'm only suggesting that there is some evidence that in fact discrimination took place and that discovery is required to see if, in fact, it did. Although some of the studies are very weak, some of the studies are very sophisticated. One of the studies, done by Ms. Cincotta of Chicago, showed that while the quality of housing stock in selected neighborhoods was similar, redlining took place only in those neighborhoods undergoing racial change. There are also some other careful studies done which were part of your previous hearings, particularly studies done in northwest Philadelphia and in Baltimore. In the Philadelphia hearings there were some interesting additional studies presented as well.

The industry response to this was basically, at the outset, to say there was no redlining. That didn't hold up very well and rather early on in the game I can recall attending meetings of the five regulatory agencies in Chicago where the Director of the Federal Home Loan Bank of Chicago said, "Of course, there is redlining." He conceded that it existed and since then I find that the regulatory agencies have not denied redlining, but in essence have said redlining exists but it represents a sound business practice. That is basically, I think, the tack they have been taking ever since.

In your own hearings going through Federal regulations (I won't quote them) but if you look at the Federal Home Loan Bank Board's

regulations, they suggest that while racial discrimination in underwriting is an unsound practice it can be allowed when there is no less discriminatory option available to the lenders under the sound business practice criteria.

What I have found striking as I have gone through the literature, through your testimony, through HUD's hearing which they had in Philadelphia in 1976, and through the research that I found produced by the industry as well as for these committees, is a lack of any evidence on the part of the lenders that there are in fact higher risks in these areas prior to their disinvestment. There are cases-and Mr. de Vise showed one today-showing all kinds of terrible things that happen in neighborhoods that have already been redlined, but the critical question was when the redlining was begun was the neighborhood viable? Did the lenders withdraw full credit from a neighborhood which was in fact viable? Most of the lending organizations admit if they do in fact withdraw their money in a viable neighborhood, its chances of surviving are minimal since no neighborhood can survive without credit.

We see the parallel clearly on the new development side where the Government policy has been for a long time to create mortgage availability for new construction understanding quite clearly that building does not take place without the flow of capital. Neither does the maintenance of the neighborhood continue without the flow of capital. So the question really boils down to one of a business question of whether or not the neighborhood was in fact inevitably declining, as the real estate model suggests, or whether or not it was an arbitrary decision which after it has been made can result in the fact that only questionable buyers will go into the area. The lending data which has been presented as easily fits with interpretations it seems to me.

But I think the people who have been characterized as antiredliners have looked at the data and said that may not be true considering the HUD practices and the incentives for real estate brokers and mortgage bankers to get a very high turnover rate and generate high sales volume. There's a strong tendency on their part to grab anybody who will suit FHA standards. Therefore, after the credit has been withdrawn the neighborhood, unsurprisingly, finds deterioration and foreclosure and the like.

So what I sought for in vain was some evidence on the part of the lenders that they had any evidence to indicate to them that prior to the time they disinvested the neighborhood was in a state of inevitable decline. That's the crux of the issue. Because they would need that type of information in order to show it was a sound business decision which could not be avoided; which is the way they describe avoiding discriminating practices.

I submit to you my testimony before in the HUD Philadelphia hearings because I think it describes the nature of real estate models, which have assumed, over a period of years, that a neighborhood undergoing racial change will in fact deteriorate. It talks about the lack of evidence in Chicago, particularly in certain neighborhoods, where I have actually studied mortgage foreclosure rates, and it describes the present position of the industry. It's about a 15-page

I have discovered, again referring particularly to the Philadelphia hearings, that there have been a number of investigations as to actual credit risks and while the foreclosure rate in urban areas is higher than in suburban areas, if you do a split between FHA loans and conventional loans as I have done in South Shore in Chicago and the Banking Commissioner has done in Massachusetts and some other researchers have done in Denver (which are in the Philadelphia hearings)--you will find that in fact where lenders did make conventional loans in these redlined neighborhoods their foreclosure rates are not any higher than the foreclosure rates for the areas where they do make most loans. In South Shore I found that the FHA rates were very high, 22 to 3 percent. But the conventional foreclosure rates were less than half of 1 percent, which, in terms of total conventional portfolio for that year, was characteristic of the Chicago region and therefore not out of line. This suggested to me while there may be problems with the particular type of financing being used, not necessarily with the FHA programs, they serve a very useful purpose for people, but with the ways in which they are used. It was a singular type of lending that showed up as a matter of abandonment of buildings abandoned in South Shore. We sampled 500 properties. Every abandonment we had as of 1975 was an FHA home. So the deterioration and abandonment and blight which was moving into South Shore was attributable to a certain kind of lender, basically mortgage lenders, and not to the conventional loans. But there were no abandonments as a result of conventional loans, so it didn't appear that the area was at fault, but together, particular decisions that were being made.

Therefore, while I found no evidence from the lending institutions that the risks are actually higher, I have found evidence which may be interpreted to the contrary. Part of the testimony which I submitted and I recommend to you-because of its length I won't offically submit it-is a reply by the Justice Department to a set of interrogatories in the case of the Justice Department against the American Society of Real Estate Appraisers, and others in the Northern District Court of Illinois, which is a suit the Justice Department has filed against the two largest appraisal organizations-the U.S. League of Savings Associations and against the Mortgage Bankers Association of Americafor racial discrimination in their training practices.

You will see in there a very detailed analysis of the biases in their literature, basically the biases in the appraisal underwriting literature which are the basis upon which decisions are made not to loan in an area. I think you will see without me summarizing at great length what the literature is like.

I will read from my HUD testimony one quote from the authors which first set up those racial models because I think it is very instructive, and I quote my fellow sociologist, Robert Park, who set up the model which talked about what happens when neighborhoods change, a basic model which was drawn on without proof I think. He writes of the Jews at that time occupying the ghetto in Chicago.

In the great city of the poor, the victims of the delinquent crushed together in an unhealthful and contagious intimacy breed in and in, soul and body, so it has often occurred to me that the Jews and tribes of Ishmaei would not show such a persisting and distressing uniformity of vice, crime and poverty unless they were peculiarly fit for the environment in which they were condemned to exist.

I think that represents the essence of the sociological, theoretical underpinning of that model.

Since I found no risk, I add one other thing to that, the last thing in the question of whether or not they are performing an arbitrary function, which is the question which we address most reasonably in the local service area defined in chartering requirements. I can recall in the Illinois Governors' Commission reports in a meeting with the regional home loan bank president where he said that while it was true. in an analysis our group did showing that all charters required a definition of service area-this is the president of the Federal Home Loan Bank in Chicago-while it was true they had to define a service area, after they received a charter there was no obligation at all to lend in that area.

We have a law student now researching the history of the Federal Home Loan Bank Board's legislation and while she's uncovered very little about what the bank president talked about, she has discovered a wealth of information saying, basically, it was set up to protect people's need for credit. I would like to quote from the 1932 House Report which proposed the Federal home loan bank. It says:

The investment in the homes of the country is a significant and imposing portion of our national law. Much of the decline of values in residential real estate has been due to the lack of credit. Foreclosure and inability to borrow-(on homes create distress conditions on low prices in homes. The existence of the Home Loan Bank system will prevent the recurrence of the present condition. It strikes me that the existence of the Federal Home Loan Bank Board system has not prevented the recurrence of this type of condition, or we would not be here today. We have a situation where the burden of proof has now shifted to lenders and the disclosure act represents an analogy to the rules of discovery. I will submit to the committee under separate cover seven pages of detailed recommendations which basically follow the patterns recommended in Ms. Cincotta's recommendations.

They can be broken down into changes in the law, in the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act, and a series of recommendations, 11 recommendations, which the regulatory agencies, HUD and the like, can act on without changes in the law. Basically they are summarized as suggesting that you look closely at the California regulations drafted by the Commissioner of the Department of Savings and Loan in California, which, in addition to talking about mortgage made, requires information be kept on applications, application turndowns, information on the financing, financial situation of the applicant, the race of the applicant, location of the property, and conditions of the property.

As detailed as that information seems to be and as much as the lenders have said that it's an awful lot of information to collect, I will point out that the regulators in California had to note to the lending institutions that they weren't requiring anything that a prudent lender wouldn't ask for anyway.

Finally, one thing they were asking for was census record infor