GAO says mortgage finance giants lack diversity at managerial levels

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The financial services industry, at least from a management perspective, isn’t all that diverse. That’s true of government-chartered Federal Home Loan Banks, and the supervised Fannie Mae and Freddie Mac mortgage finance giants – known as the enterprises. They’re all the subject of a recent look-see by the Government Accountability Office. For highlights, Federal Drive with Tom Temin turned to the GAO’s Managing Director for financial markets and community investment issues, Daniel Garcia-Diaz.

Interview transcript:

Tom Temin: Mr. Garcia-Diaz, good to have you on.

Daniel Garcia-Diaz: Thank you for having me.

Tom Temin: And to be clear, you didn’t look specifically at how diverse they are. But whether they use data in a way that they are required to to measure their own diversity and inclusion at the managerial and workforce levels.

Daniel Garcia-Diaz: That’s correct. For the testimony that we recently did for House Financial Services, we looked at how these organizations were using data to promote diversity. But some of our older work has actually looked at some of the diversity characteristics of these firms’ senior leadership.

Tom Temin: And everybody I think, knows Fannie Mae and Freddie Mac forever as seemingly in federal receivership ever since the financial crisis. But the 11 Federal Home Loan Banks, tell us more about who they are and how they came to be under federal supervision, if you will, or oversight, I guess, is a better word.

Daniel Garcia-Diaz: That’s right. Unlike Fannie Mae and Freddie Mac, they are running independently, but are overseen by the federal government, in particular, the Federal Housing Finance Agency. And these Federal Home Loan Banks, and there are 11 of them, throughout the nation, are actually a key tool for providing liquidity in the banking system so that local banks can provide mortgages and loans to consumers. Collectively, they have almost over a trillion dollars worth an asset. So it’s a big part of the finance system.

Tom Temin: So you look at their use of data in diversity. But then I guess you can’t help but look at how diverse they are at the same time.

Daniel Garcia-Diaz: Exactly. And so in examining that, what we find is a pattern that’s very similar that you find in the broad financial markets. And that is, as you look at the whole organization, there is quite a bit of diversity in terms of race and ethnicity, and gender. But as you start looking at the different levels of the organization, particularly in the senior management level, you see a tapering off of diversity. And that’s been a chronic concern committee, in part, because these are the positions that basically set the tone, set the policy and strategic direction of these firms. And there’s a growing interest that the demographics of this level of the organization should reflect the population to the extent possible.

Tom Temin: Because between the use of data and the actual change in makeup of the upper level workforce, something else has to happen because as the old saying goes, you don’t fatten the pig by weighing it.

Daniel Garcia-Diaz: Exactly. So you need you first need diagnostics, right? What’s going on? What’s the shape of an organization? Why does it look the way it does? And in particular, when you think about these positions at the upper level, it has to do with are people staying in your organization long enough to be promoted. Are they leaving because of a variety of reasons? And that’s where data comes to play. It informs management about what is going on. Do I have a leak in my pipeline, where I have qualified, talented minorities or women who are departing my organization? And that leads to the kind of information you need. So part of it is quantitative, I need to know that just the percentages and things like that. But there’s another part of it, you need to know qualitatively what’s going on here. And so one of the things and the institutions we looked at do this, and that is they use employee feedback surveys, or they do exit interviews for people who are departing. And all this provides a narrative so that we can make sense of the numbers we’re seeing. And we can actually diagnose what the issue is and tailor a response to address that.

Tom Temin: And I want to get back to some of those action items and some of the statistics. but I wanted to also ask, is there any evidence that the makeup of the boards and the upper management of these institutions, the 11 banks and the to Fannie Mae and Freddie Mac? Does it have any effect on loans and fairness of their practices vis-à-vis the public that is dealing with them?

Daniel Garcia-Diaz: Yeah, we didn’t examine that in an empirical way to try to make that determination. But in our interviews with leaders in these organizations, advocacy groups and others, they do cite that there is a potential that the demographics of your leadership in their organizations may translate into developing products that may not be responsive to the entirety of the population that these firms serve. And so the idea is really to bring in a diversity of backgrounds experience and thought that help inform and shape how these firms do business.

Tom Temin: Because at the lower level, say the individual loan officers where there might be greater diversity, it would seem that if those are the people making the initial yes stamping okay on a loan application, that if that workforce to use the common expression looks like the public it’s serving, then you shouldn’t have a problem.

Daniel Garcia-Diaz: You would think, but if at the higher level, there’s not a focus on how clients customers might be treated differently, maybe getting different price products, and things like that, it could lead to some disparity in the services that are offered to the client base.

Tom Temin: Alright, so getting back to the data analysis and the use of data, there’s one other aspect that’s measurable that you didn’t mention, and that is not necessarily whether people are leaving before they get to the higher levels — but are certain groups, women say or people of color existing at that junior vice president level for a long time, instead of moving up along with everybody else in proportions that would be expected in a random sample of a population?

Daniel Garcia-Diaz: That’s correct. So one of the things that we’re able to do with the data that we analyze coming from the Equal Employment Opportunity Commission, is look at that higher level management area and then divide it between lower management, sort of these junior positions that are management, but they’re certainly not in the top tier. And then the senior level, of course, are things like what we normally call the C suite, and these sort of very high level positions. And again, in the data, we see a real drop off from the more lower mid level management positions to the senior position. And so we see in, for instance, like the Federal Home Loan Bank and the Fannie and Freddie Mac, that generally for these senior positions, generally 33% are women and about, let’s say, 21%, are minority. And that’s a big drop off from what we see at the mid level.

Tom Temin: And did you have recommendations then having the statistical base that the institutions and the government needs any recommendations to translate that into greater diversity over time at the upper levels?

Daniel Garcia-Diaz: Yeah. So when we examine the oversight that federal agencies are providing, particularly the Federal Housing Finance Agency oversight of these government sponsored enterprises, they are taking a lot of action to oversee the regulated institutions efforts. And it’s, in some ways, quite robust. But we did have in one of our reports and recommendation related actually to data collection and the boards. So board members don’t always report their ethnicity. And so it’s difficult to tell whether they didn’t report because they didn’t want to, or was it because the data collection process was uneven or not well executed by the Federal Home Loan Banks in this case. And so we had recommended that FHFA actually take steps to collect information about how the banks are assembling the information and share best practices so that ultimately people don’t have to disclose that information to their employer or to the board. But to the extent that they are willing, we shouldn’t let bad data collection process get in the way of that, because there are a lot of folks who want to know what the composition is regarding the board.

Tom Temin: Lots of moving parts here. Daniel Garcia-Diaz is managing director for Financial Markets and Community Investment Issues at the Government Accountability Office. Thanks so much for joining me.

Daniel Garcia-Diaz: Thank you, Tom. Always a pleasure.

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