Updates on the Midwest Economy and What Bankers Need to Know Regarding Recent Fair Lending Discrimination Settlements: A Summary from a Wisconsin Economic Development Forum

The Federal Reserve Bank of Chicago’s Community Development Division regularly holds economic development forums around the Seventh District that provide both a general economic overview and focus on topics of interest to stakeholders. On May 23, the topic was “Updates on the Midwest Economy & What Bankers Need to Know Regarding Recent Fair Lending Discrimination Settlements.”

Updates on the Midwest economy

Thomas Klier, senior economist and research advisor at the Federal Reserve Bank of Chicago, made the following key points regarding the current state of both the U.S. and Midwest economy, as well as provided some comments regarding the impact of trade policy:

• The U.S. economy exhibited stronger than expected growth in 2019Q1; expectations are for growth to moderate going forward.
• Labor markets continue to be rather tight and inflation remains “well-behaved.”
• Growth in the Midwest economy is near its long-term trend; Seventh District labor markets are tight (particularly in Iowa and Wisconsin).
• However, uncertainty over trade is affecting decisions of businesses, consumers, and the agricultural community.

National economy

The U.S. economy exhibited stronger than expected growth in 2019Q1: per the BEA’s NIPA data the economy grew by 3.2 percent last quarter. Expectations are for growth to moderate going forward, averaging just below 2 percent through the end of 2020, according to the Blue Chip forecast (chart 1).

Chart 1

Labor markets continue to be rather tight. The national unemployment rate has been below full-employment as defined by the concept of the NAIRU (the non-accelerating inflation rate of unemployment) for some time. NAIRU is a theoretical concept of employment; if actual employment falls below that threshhold, inflation is expected to rise (chart 2).

Chart 2

Yet, inflation remains well-behaved; neither of the two main indicators of inflation show signs of growth. The core Personal Consumption Expenditure (PCE) price index for March came in at 1.6 percent and the core Consumer Price Index (CPI) for April came in at 2.1 percent (chart 3).

Chart 3

Midwest economy

Growth in the Midwest economy is near its long-term trend, after steadily slowing from a strong growth rate over the last nine months. While activity is slower than a year ago, the economy is currently growing at a respectable pace and conditions in the labor market remain very good. Our business contacts do not expect the economy to slow much more than it already has. Note that in the chart below, the red line shows the Chicago Fed Survey of Business Conditions (CFSBC) Activity Index. It is constructed from monthly survey data. The Midwest Economic Index is smoothed, calculated as the moving three-month average of state level data, as those data tend to bounce around quite a bit. It includes data from January of this year, which were unusually strong, suggesting the CFSBC provides a more current view of the District’s level of economic activity (chart 4).

Chart 4

The Seventh District labor markets are tight, with Wisconsin and Iowa reporting unemployment rates noticeably below the national average (chart 5).

Chart 5

Trade policy

Uncertainty over trade has remained a key component of the economic environment. At the moment, trade with China has taken center stage. The key question is how far the imposition of tariffs between China and the U.S. will escalate. There is little clarity regarding the outcome of the negotiations. The uncertainty has shown little sign of abating over the past several months, affecting decisions of businesses, consumers, and the agricultural community in the process.

What bankers need to know regarding recent fair lending discrimination settlements

Scott Grotewold, fair lending risk specialist at the Federal Reserve Bank of Chicago, discussed salient recent fair lending allegations, settlements, and charges of discriminatory acts or practices that resulted from weaknesses in risk management and internal controls. While his presentation focused on three matters that surfaced in March 2019,¹ he concluded these deficiencies could have been prevented with better oversight and risk monitoring.

Specifically, an effective fair lending risk management program should review lending guidance, policies, and procedures, as well as compare them to actual implementation or practices. Training should include loan program applications, guidelines, terms, and conditions rather than merely a high-level overview of statutory and regulatory requirements or prohibitions. Risk monitoring efforts should include an evaluation of lending, branching, marketing, and outreach trends for fair lending risk along with a determination for the adequacy of controls to mitigate redlining risk. Strategic marketing plans should evaluate the content, distribution, and rationale for certain advertisement criteria to avoid the exclusion of individuals or geographies on a prohibited basis. Finally, the use of filters, keywords, or limitations in advertising should be scrutinized for fair lending risk.