Do Home Mortgage Disclosure Act Data Prove Lending Discrimination?

This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, appears at least once each month.

In my January 2018 blog post, I addressed the challenges and opportunities of the Community Reinvestment Act (CRA). As part of that post, I referenced several laws that complement the CRA in promoting “fair lending,” including the 1974 Equal Credit Opportunity Act (ECOA) and the 1968 Fair Housing Act (FHA).

CRA Complements

The ECOA and FHA were passed in response to troublesome lending and housing practices in the early 20^th century.For additional information, see U.S. Department of Justice, Equal Credit Opportunity Act; U.S. Department of Justice, Fair Housing Act; and Federal Financial Institutions Examination Council, Interagency Fair Lending Examination Procedures (PDF). For example, prior to the ECOA, it was acceptable for lenders to deny loans to women and instead ask them to have their husbands apply.

And prior to the FHA, lenders could explicitly consider race, religion and national origin when making decisions in the underwriting of home loans. The ECOA and FHA made it illegal to discriminate in lending on a “prohibited basis.”

Importantly, though, these laws did not bar lenders from denying loans based on credit risk or capacity to repay.

A New Tool

To aid in the implementation of the ECOA and FHA and to promote public transparency, Congress passed the Home Mortgage Disclosure Act (HMDA) in 1975. The HMDA and its subsequent amendments detail public reporting requirements for most mortgage lenders. Loans covered include home purchase loans, home improvement loans and mortgage refinancings. HMDA reports contain information about the location and demographics of applicants, as well as some terms of the loans.Beginning in 2018, lenders are required to provide much more detailed data about loan applicants and loan terms. For an overview of the HMDA and these new requirements, see the Sept. 25, 2017, Lexology article, “Major Changes Looming for HMDA Reporting.”

HMDA data are used by examiners, community groups and consumer advocates to identify potential fair lending risks. Sometimes, HMDA data are cited in the press as evidence of discrimination when, for example, very high interest rates are more common on mortgages to persons of color than those on mortgages to others.

HMDA Data Just a Starting Point

While HMDA data provide a useful start in assessing lending practices, the data alone do not prove discrimination. If HMDA data trigger concern, bank examiners conduct a comprehensive review, including an in-depth statistical analysis. The statistical analysis looks for legitimate credit underwriting factors, such as minimum credit scores and maximum debt-to-income ratios.

If statistically meaningful disparities exist after these data are considered, the examiner will then complete a detailed and exhaustive investigation. The investigation includes lender interviews, physical loan file reviews and data verification and validation.

It is rare for examiners to find discrimination after this exhaustive analysis. More typically, examiners identify opportunities for the bank to strengthen its policies and procedures, risk monitoring, training or internal controls to ensure that discrimination does not occur.

After all, the goal of fair lending supervision should be to prevent discrimination before it happens.

Notes and References

¹ For additional information, see U.S. Department of Justice, Equal Credit Opportunity Act; U.S. Department of Justice, Fair Housing Act; and Federal Financial Institutions Examination Council, Interagency Fair Lending Examination Procedures (PDF).

² Beginning in 2018, lenders are required to provide much more detailed data about loan applicants and loan terms. For an overview of the HMDA and these new requirements, see the Sept. 25, 2017, Lexology article, “Major Changes Looming for HMDA Reporting.”

Follow the Series

• Why Are Banks Regulated?
• Did the Dodd-Frank Act Make the Financial System Safer?
• Bank Supervision and the Central Bank: An Integrated Mission
• Why Are There So Many Bank Regulators?
• Why Didn’t Bank Regulators Prevent the Financial Crisis?
• Who Funds the Cost of Bank Supervision?
• Why Does the Fed Supervise Small Banks?
• Regulation and Regulatory Burden
• Why America's Dual Banking System Matters
• Fintech Interest in Industrial Loan Company Charters: Spurring the Growth of a New Shadow Banking System? 
• Consumer Protection Laws and Regulations: Cost and Benefit Trade-offs
• Are Bank Holding Company Structures Still Beneficial?
• The Community Reinvestment Act’s History and Future
• Why Are Banks Shuttering Branches?