Photo by Todd Lappin via flickr, CC BY-NC 2.0.
The Home Mortgage Disclosure Act (HMDA) provides indispensable data to assess whether lenders are meeting consumer credit needs, and to protect against discrimination. The Consumer Financial Protection Bureau (CFPB) enacted a final HMDA rule in 2015, implementing enhancements that were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank additions included information about important loans terms and conditions, loan types, and borrower characteristics.
Recently, the American Bankers Association (ABA) issued a white paper, “HMDA—More Really is Less: The Data Fog Frustrates HMDA,” maintaining that the CFPB exceeded its mandate under Dodd-Frank, including adding unnecessary data variables to HMDA that increase regulatory burden for banks and putting consumers at risk for identify theft and predatory marketing. Full of rhetoric, the white paper makes a number of unfounded allegations about HMDA data and the CFPB final rule.
The Benefits of HMDA Data
HMDA data has been essential in achieving the statutory purpose of facilitating an assessment of housing and credit needs, particularly for modest income and minority borrowers and communities. Dodd-Frank increased the volume of information in HMDA data because changing lending practices necessitated an update. For example, lenders responded to the growth of the middle-aged and elderly populations by dramatically increasing their reverse mortgage and home equity lines of credit in the 2000s. Yet a significant amount of this lending was high cost and abusive in the years preceding the financial crisis. Therefore, Dodd-Frank required that HMDA data include the age of the borrower and authorized the CFPB to collect additional data. The CFPB responded by including reverse mortgage lending and home equity lines of credit in the enhanced data so that the public can know whether the credit needs of the middle age and elderly were being met responsibly.
HMDA data enables stakeholders to work together in assessing credit needs. Community groups and banks engage in extensive dialogue when banks seek to merge and use HMDA data analysis to determine where the merging banks can better serve traditionally underserved borrowers. These discussions have led to community benefit plans and conditional merger approvals in which banks agreed to increase their responsible lending to undserserved borrowers. In other words, the HMDA data facilitates a win-win outcome for communities and banks in which banks execute their merger transactions and have clear lending and investment goals to work toward, and communities are assured of increased access to credit and banking services.
Another illustration of HMDA’s benefits in assessing credit needs is the regular use of HMDA data in the fair housing planning process. HMDA data analysis is used in Assessment of Fair Housing (AFH) plans developed by local governments to identify communities in need of additional public and private sector investment as a means of improving the affordable housing stock and economic condition of communities. In order to help local jurisdictions assess credit needs and plan investment strategies, HMDA data needs to be periodically updated in order to capture new lending trends and practices that can be helpful in meeting needs, or should be curtailed because they are abusive.
HMDA data has also proven central to fair lending enforcement. The CFPB and the Department of Justice have recently concluded redlining and price discrimination settlements in which HMDA data on lending patterns by geographical area and disparities in pricing were key to the detection of discrimination. With the new Dodd-Frank data elements, HMDA data will become more effective in combating discriminatory lending by enabling improved documentation of disparities in pricing and in loan terms and conditions among equally qualified applicants who only differ by their race, ethnicity, age, or gender.
The new data elements are essential to prevent discriminatory and harmful lending. As early as 2004, the Government Accountability Office warned that “serious data limitations make the extent of predatory lending difficult to determine.” This prescient warning anticipated that no stakeholder—the regulatory agencies, the private sector, or community organizations—had comprehensive data that revealed the extent of abusive lending in the mid-2000s.
Accordingly, the Dodd-Frank HMDA data enhancements will now make it possible to determine the extent of lending that features exorbitant interest rates and fees, low teaser rates that adjust rapidly, and high loan-to-value ratios and debt-to-income ratios that render loans unaffordable and unsustainable. It is precisely because HMDA data lacked important information about loan terms and conditions that it was not an effective tool for federal agencies or the public to detect and stop abusive lending before the global economy slid into the worst recession since the Great Depression.
The ABA asserts that the new information required by the CFPB simply pads the CFPB’s research database and amounts to “market monitoring” that exceeds HMDA’s statutory purpose of preventing discrimination and assessing whether community credit needs are being met. However, insufficient information on loan terms and conditions are what allowed unscrupulous lenders to operate in a veil of secrecy, enabled discriminatory and harmful lending, and stripped communities of wealth instead of meeting their credit needs. Dodd-Frank corrects this with HMDA data enhancements that will shed sunlight on lending practices.
False Privacy Concerns
Claiming that HMDA data will allow bad actors to identify and exploit individual borrowers is an old and discredited trick. The ABA white paper quotes a former Federal Reserve adviser who states at a conference that HMDA data can be combined with other data to identify borrowers 95 percent of the time. The ABA paper continues, “This will be a treasure trove for identity thieves or others who want to commit financial crimes.”
First, the lack of this additional information in HMDA data enabled predatory lenders to commit the greatest financial crimes imaginable in the years leading up to the financial crisis, by hoodwinking vulnerable consumers unfamiliar with lending and stripping trillions of dollars of community wealth. Opacity, including in the lending marketplace, only breeds criminals and rip-off artists.
Second, HMDA data is not an effective data source to commit crimes in comparison to other existing data available to unscrupulous actors. While not condoning this use of data, county deed records can be readily combined with inexpensive sources of private sector data to identify and target vulnerable consumers (one widely used private sector data source charges 8 cents per record, and provides information such as borrower name, address, loan terms, and name of lender). HMDA data, in contrast, is not well suited to this purpose because unlike other readily available data, it does not have the address of consumers, their Social Security numbers, their up-to-date credit scores and histories, and other intimate data about their financial information.
The former Federal Reserve adviser quoted by the ABA would have had a stronger point if he had said that borrowers can be identified most effectively when county deed records are combined with existing private sector data that is inexpensive to acquire. If the lending industry wants to better protect consumers, it should stop attacking enhancements to HMDA data and should instead advocate for better protections in the use and dissemination of private sector data and local and state data on property transactions.
The white paper suggests that the CFPB in its rulemaking activities carelessly glossed over privacy concerns. However, the CFPB engaged in a lengthy rulemaking process that concluded toward the end of 2015, five full years after Dodd-Frank, which carefully considered written comments from a variety of stakeholders as well as meetings and discussions. This process was open, transparent, and participatory, in marked contrast to the opaque lending marketplace operating in the years before the crisis.
Regulatory Burden
The ABA’s white paper cites unimpressive and unconvincing data about supposed regulatory burden when discussing the 2015 final HMDA rule. No one denies that HMDA data costs money, but the more relevant point is whether the benefit exceeds the cost.
Annually, the final HMDA rule adds between $177 million to $326.6 million of compliance costs for the lending industry. This additional cost pales in comparison to the trillions of dollars of assets in the banking industry. Moreover, the cost of compliance will be highest for the largest-volume lenders with the greatest assets because they make the bulk of HMDA reportable loans. Additional costs for smaller-volume lenders will be considerably less. Not surprisingly, the ABA paper does not include thoughtful discussion of the costs of compliance for different size lenders.
We’re Not Going Back
Broad consensus in the economics profession maintains that market outcomes are more equitable when information is readily available to all participants, including buyers and sellers. This applies directly to the lending marketplace where lenders have a considerable information advantage over borrowers. HMDA data helps level the playing field by shedding sunlight on lending practices and patterns, and enables regulators, community organizations, and lenders to spot and stop discriminatory and predatory practices before they inflict widespread damage. Repealing the Dodd-Frank and CFPB improvements to HMDA data only invites a new round of unscrupulous lending that does not serve legitimate credit needs.
(Photo by Todd Lappin, via flickr, CC BY-NC 2.0)
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