New information reported under HMDA and its application in fair lending enforcement

Federal Reserve Bulletin, Summer, 2005 by Robert B. Avery, Glenn B. Canner, Robert E. Cook, Shannon C. Mok, Caitlin G. Coslett, Patricia J. Dykes, Sylvia A. Freeland

Most lending institutions with offices in metropolitan statistical areas are required by the Home Mortgage Disclosure Act of 1975 (HMDA) to disclose information to the public about applications for home loans and the home loans that they originate or purchase during each calendar year. The law's requirements arose from concerns that, in some cases, lenders were contributing to the decline of certain neighborhoods by failing to provide adequate home financing to qualified applicants on reasonable terms and conditions. The disclosure of lending activity is intended to help determine whether lenders are adequately serving their communities' housing finance needs, to facilitate enforcement of the nation's fair lending laws, and to guide investment activities in both the public and the private sectors. HMDA is implemented by the Federal Reserve Board's Regulation C.

Underlying HMDA's disclosure requirements is a presumption that more publicly available information will improve market performance and help prevent market failures. The data reported under HMDA are certainly extensive: Taken together, the 8,853 lenders covered by the law as of the end of 2004 are estimated to have accounted for about 80 percent of home loans extended that year.

The Congress has amended HMDA on several occasions to extend the reach of the law to more lenders and to expand the types of information that must be disclosed. Amendments passed in 1989 have been the most sweeping to date. They require that lenders disclose the disposition of each application they process for home loans and the income, race, ethnicity, and sex of the individuals applying for the loans. As this new information became available, it revealed wide differences in rates of approval of loan applications across racial and ethnic lines and thereby heightened concerns about whether lending decisions complied with the nation's fair lending laws. The disclosures triggered a continuing debate about the proper interpretation of the data and the significance of the differences in lending decisions. Many lending institutions have responded to the concerns raised in the debate by adopting new loan-underwriting procedures to help ensure fair treatment of all applicants and by initiating a wide variety of community outreach and affordable lending programs intended to benefit minority borrowers and lower-income individuals and neighborhoods.

In 2002, in its most recent review of Regulation C, the Federal Reserve Board made a number of important changes to the disclosure requirements that substantially increase the types and amount of information made available through HMDA. (1) The revisions are intended to better advance the purposes of the law by keeping the regulation in step with recent developments in home-loan markets and by incorporating the revised standards of classification for the collection of information on race and ethnicity as established by the Office of Management and Budget (OMB).

Most of the recent changes in the information that is required to be reported under HMDA apply to data relating to loans extended in 2004. Individual lenders covered by HMDA were required to make their 2004 data available to the public beginning on March 31, 2005. However, only the September 2005 release of the data will have been comprehensively checked by the supervisory agencies for the errors and omissions that are detectable from a review of the data.

Perhaps the most important change to Regulation C is the requirement that lenders now disclose pricing (interest rates and fees) for loans with prices above designated thresholds. Loans with prices above the thresholds are referred to here as "higher-priced loans." Other important new information being reported under the revised regulation is whether the loan is a first lien, a junior lien, or unsecured (characteristics referred to here as a loan's lien status), whether it is secured by a manufactured home, and whether it is subject to the protections of the Home Ownership and Equity Protection Act of 1994 (HOEPA). These new pieces of information allow for a better understanding of lending activity in the higher-priced segment of the home-loan market, a segment that was virtually nonexistent a decade or so ago and is now a substantial part of the market. The growth of this market segment, while affording some consumers greater access to credit, has been accompanied by concerns about abusive lending practices, often referred to as "predatory lending." (2) These concerns lend importance to a better understanding of the higher-priced segment of the market and a greater ability to monitor the activities of the individual lenders involved in it.

This article presents a first look at the greatly expanded 2004 HMDA data and considers some of their implications for the continuing concerns about fair lending. (3) The analysis highlights some key relationships revealed in an initial review of the types of data that are new for 2004. Some parts of the analysis focus on nationwide statistics, and others examine patterns across groups of lenders, loan products, and various groupings of applicants, borrowers, and neighborhoods. The authors explore, in particular and in some depth, the strengths and limitations of the information on loan pricing.