Watch for HMDA data

Northwestern Financial Review, Apr 1-Apr 14, 2005 by Bengtson, Tom

It seems that every time the government mandates some event in the banking industry, the press turns it around into something negative. Check 21 became a story about greedy banks taking away customer float instead of a story about new efficiencies in the payments system. My fear is that banks are going to take a hit again this fall when government agencies release pricing data along with Home Mortgage Disclosure Act information. Bankers should prepare for this now by talking to reporters and customers so everyone understands what the new information means.

Banks subject to HMDA are now required to submit pricing information along with their mortgage information. When the information is made public for the first time in late September, at first glance it may suggest that banks are charging minorities more for loans than they are charging whites. This is such an explosive story line that I am confident many news outlets will go with it before digging deeper into the facts. A detailed analysis of the data will show that banks do a better job today of pricing for risk than ever. That means that marginally creditworthy people who may not have been able to get credit a decade ago can now get it, albeit at a price that reflects a greater risk.

Regulators have been nudging bankers toward risk-based pricing on loans for years. By now, many banks are getting pretty good at it, which means a lot more people are getting loans. This is a good news story and bankers should be prepared to use the new HMDA data to tell that story. But, bankers will have to get out there now and begin talking if they want the reporters to get it right.

Federal Reserve Board Chairman Alan Greenspan, who seems to have a high level of credibility with the press, gave a speech at the ICBA convention in San Antonio where he mentioned the new HMDA data. He said: "By doing what public policy intended - increasing credit availability to less creditworthy, often minority borrowers - banks might be accused unfairly of discrimination by those who fail to connect risk to price or to evaluate rates in terms of risk measures." Bankers could start their discussion with reporters on this topic by referring to this speech, which is posted on the Fed web site.

Few people - especially reporters - understand banking. But just about everyone thinks they understand discrimination. Bankers have to be out in front on this story or their industry will be dragged through the mud, one more time.

By Tom Bengtson, Publisher