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

Of all applications involving one- to four-family units in the 2004 HMDA data, about 2 million, or 7 percent, were filed before 2004, and thus the data reported on those applications (pertaining to about 1 million loans) might not reflect the new reporting rules. Users of the 2004 data should be aware of this limitation.

To help users of the HMDA data better distinguish loans subject to the transition rules, the Federal Financial Institutions Examination Council (FFIEC) has added a data item to the 2004 CD-ROM that contains a copy of the HMDA/LAR for each institution that indicates whether or not an application was filed before January 1, 2004 (see box "Distribution of HMDA Data and Pre-2004 Requirements of Regulation C"). Users of the 2004 data can make assumptions or restrict their analysis in various ways to address problems created by the transition rules. For example, in preparing the institution and aggregate MSA disclosure reports for 2004, the FFIEC excluded applications filed before January 1, 2004, from all tables reporting pricing (but not other) information.

The transition rules should have little effect on the data in future HMDA filings. However, because some applications have application filing dates that precede a decision on the application by more than a year, a few applications subject to the transition rules may be included when the 2005 HMDA data are reported in 2006.

Lien Status

Information on lien status differentiates home loans secured by a first lien, those secured by a junior (second or third) lien, and those not secured. (The last category arises only among home-improvement loans, for which a security interest in a property may or may not be taken.) Knowledge of lien status is basic to credit underwriting because loans secured by first liens have a lower incidence of default than loans secured by junior liens or unsecured loans; consequently, loans secured by a first lien are generally offered at the lowest rates of interest.

The information on lien status serves a number of public policy interests. First, the information improves the measurement of the overall size of the home-loan market and particular segments within that market, such as home-purchase lending. Although HMDA data have always included information about the purpose of a loan, recent market developments have made that information less useful for measuring lending. Today, many home purchases involve both first- and junior-lien loans. The junior-lien loan in such transactions is often used to avoid requirements to purchase private mortgage insurance (PMI) or to avoid exceeding the loan-size limits used by some secondary-market purchasers, especially Fannie Mae and Freddie Mac (see the appendix for more information about PMI and the availability of data on loans backed by PMI). In the past, a loan backed by a junior lien could not be distinguished directly in the home-purchase loan data from one backed by a first lien and was therefore often assumed to represent a separate home-purchase loan rather than to be one of two used to purchase a single property. (7) The expanded HMDA data allow such distinctions to be made and consequently help avoid the double counting of loans in the home-purchase market.