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Using the New HMDA Data to Expand
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Are bankers being subjected to new HMDA reporting requirements that simply expose them to controversy — or do the data create opportunities for lenders to serve unmet needs of more prospective homeowners?
We probe these timely questions from a variety of perspectives in this issue of Community Developments. And the answers demonstrate, I believe, that the new HMDA data-reporting requirements are beneficial tools for any bank that is committed to shaping financial products and services to fit the needs of all of its customers. This is particularly true when banks partner with experienced housing counseling organizations to improve the creditworthiness and the financial savvy of potential homeowners who might not otherwise meet a lender’s criteria for prime or even subprime financing.
The primary goals of the Home Mortgage Disclosure Act (HMDA) of 1975 are to determine whether financial institutions are meeting the housing credit needs of their communities as well as to assist in attracting private capital to areas where it is needed. In addition, the data, when properly analyzed, have proved helpful in identifying possible disparities in lending patterns. The law, which has been broadened in scope several times during its 30-year history, requires lenders to collect and report data on the race, gender, income, and ethnicity of loan applicants by geography in order to determine whether the nation’s fair-lending and anti-discrimination goals are being met.
Beginning in 1989, most banks and other mortgage lenders were required to report all mortgage and home-improvement loan applications; identify the race, ethnicity, gender and income of applicants; and report on the disposition of applications. Revisions that took effect in January 2004 required, among other things, the collection and reporting of more detailed data, including pricing information for higher-priced loans by borrower characteristics — race, ethnicity, gender, and income level — and the racial and ethnic composition and income level of the census tract in which the property is located.
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These revisions to the HMDA regulations stem in large measure from the changes in the mortgage markets, which through improvements in information and technology have facilitated more efficient and accurate borrower risk assessment. These developments have made it feasible for institutions to lend to higher-risk (subprime) borrowers, albeit at prices commensurate with the higher risk.
Many borrowers receiving higher-priced loans today would have been denied credit in the past. On the whole, the growth of lending to these subprime borrowers has to be seen as a decidedly positive development. It has expanded access to credit, helped boost homeownership in the United States to record levels, and created new opportunities for consumers to tap the equity in their homes.
A few numbers tell the story. Subprime mortgage originations rose by 25 percent annually between 1994 and 2003, a nearly tenfold increase in nine years. Prime mortgage lending did almost as well, growing at 17 percent annually. These trends helped drive the overall rate of homeownership nationwide from 64 percent in 1994 to 70 percent in 2004.
In this short span of time, more than 9 million households became homeowners — and more than half of these new homeowners are minorities. While white homeownership increased by 4 million, African Americans gained 1.2 million, Hispanics 1.9 million, and Asians and other minorities 1.6 million.
However, the growth of the subprime market has also raised public policy concerns. Among those concerns are whether consumers who obtain higher-priced loans are sufficiently informed about their options to make the market work as efficiently as it could and to protect themselves against unfair or deceptive lending practices. Such concerns are heightened because some borrowers, particularly those tapping their home equity, are facing financial emergencies — such as urgent home repairs — that may cause them to focus more on securing credit and less on scrutinizing loan terms and prices. Indeed, the wide range of prices available in the marketplace today has raised concerns about whether such price variations reflect unlawful discrimination as well as legitimate risk- and cost-related factors.
Lenders, in turn, are naturally concerned about how the new HMDA data are interpreted by the media and the public — especially if it is not well understood that the data, because of inherent limitations, do not support definitive conclusions about the fairness or lawfulness of a lender’s policies and practices. While this is clearly a legitimate concern (for regulators as well as the banking community), it shouldn’t be allowed to obscure the opportunities that the availability of the new data will create. In many cases, banks may find that the data provide opportunities to strategically target competitively attractive and affordable products and services to qualified borrowers. Conversely, the data may also be helpful in strengthening community relationships by indicating that a bank has worked hard to reach out to potential customers regardless of income, ethnicity, or other historically discriminatory barriers to credit.
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The articles in this issue will help lenders tap new markets and improve overall market efficiency while promoting compliance with consumer protection and anti-discrimination laws and regulations. In these pages, you’ll find useful information such as:
• “The ABCs of HMDA” — a guide to the key revisions and what they’re expected to accomplish;
• Information about the OCC’s new mortgage lending guidelines, including monitoring activities within higher-risk loan sourcing channels;
• How you can use HMDA data to identify new opportunities to better serve customers with a broad range of credit profiles;
• How to partner with housing counseling agencies and marshal technology to educate borrowers, improve their creditworthiness, and combat predatory lending; and
• How to serve millions of potential borrowers lacking traditionally established credit by using nontraditional mortgage credit reports.
Among economists and others who follow homeownership trends, there’s widespread agreement that, over the years, HMDA reporting requirements have played an important role in encouraging more lending to low- and moderate-income households — and, thus, in improving credit services in low- and moderate-income communities. If the new requirements create new challenges, they also create new opportunities.
The bottom line, of course, is reputation. Like any other institution, a bank ultimately succeeds or fails on how well the institution is treating its customers — all of them. HMDA data can provide valuable new insights that will help bankers improve loan lending and pricing practices — and identify new and unexplored housing markets. It’s my hope that you’ll use this issue of Community Developments to advance those goals — and, in so doing, to enhance your institution’s reputation for customer and community service.
