Home Mortgage Disclosure Act: expanded data on residential lending

Federal Reserve Bulletin,  Nov, 1991  by Glenn B. Canner,  Dolores S. Smith

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Since 1976, most banks and other depository institutions that have offices in metropolitan areas have been required, under the Home Mortgage Disclosure Act (HMDA), to disclose to the public information about the geographic distribution of their loans for home purchase and home improvement. The data have revealed wide variations in the number and dollar volume of loans approved across neighborhoods grouped by the income and race of residents. These variations, together with data from other sources, have raised questions about whether the efforts of lenders have been adequate to help meet the credit needs of the low-income and minority residents of their communities.

The variations in lending patterns also have generated controversy about whether lenders treat applicants for home loans fairly and on a racially nondiscriminatory basis. Some people interpret the variations as evidence of illegal discrimination. Others suggest that the patterns are attributable to differences in the demand for housing and home loans among individuals and across neighborhoods, and that they reflect the application of legitimate credit standards by lenders as they review individual requests for home loans.

Recent changes in HMDA have substantially increased the type and amount of information available about residential lending, beginning with data for 1990. In the past, covered institutions were required to disclose information only on loans they originated or purchased. Now, in disclosure statements released to the public in October 1991, lenders for the first time have reported on all home loan applications they received and their disposition, plus the race or national origin, gender, and annual income of the applicants. In addition, more lenders are now subject to the reporting requirements.

The changes in the act's requirements, as implemented by the Federal Reserve Board's Regulation C, will increase the usefulness of the HMDA data to community organizations, local governments, financial institutions, and others. The expanded data will make it possible, for example, to review how lenders act on applications and are likely to stimulate dialogue between institutions and members of their communities. Observed differences in the number of applications received and loans extended to various groups and neighborhoods are likely to lead financial institutions to reexamine their marketing and community outreach efforts.

Differences in approval and denial rates among groups and neighborhoods revealed by the new data can be expected to raise questions about the adequacy and fairness of the home lending process. The data have important limitations, however, and care must be taken in drawing conclusions from observed lending patterns. Foremost among these limitations is a lack of information about factors that are important in determining the creditworthiness of applicants and the adequacy of the collateral offered as security for their loans. Without taking into account such information, one cannot determine whether individual applicants or applicants grouped by a common characteristic (such as race or gender) have been treated fairly.

Major use of the expanded HMDA data will be made by the agencies charged with ensuring that covered institutions comply with the fair lending laws (the Fair Housing and Equal Credit Opportunity Acts) and the Community Reinvestment Act (CRA). Because bank examiners have access to loan application files, they will be able to overcome most of the limitations of the HMDA data. By using the HMDA data in conjunction with loan application files, related information, and other materials related to evaluating CRA performance, the agencies will be able to carry out their enforcement responsibilities more effectively.

This article gives an overview of the HMDA reporting system and describes analytical studies based on the geographic data available under the old reporting system. It presents some preliminary numbers drawn from nationwide aggregates of the 1990 data and sounds some cautions about limitations of the data. The article discusses potential uses of the data, with a focus on the supervisory agencies. Finally, it looks at an area newly covered by HMDA-sales of home loans to the secondary mortgage market.

HMDA's PURPOSE: IDENTIFICATION OF HOME LENDING PATTERNS IN URBAN AREAS

The Congress passed the Home Mortgage Disclosure Act in 1975 in response to concerns that, by failing to provide adequate home financing to qualified applicants on reasonable terms and conditions, some depository institutions "have sometimes contributed to the decline of certain geographic areas." The law was intended to provide information about residential lending activity that could be used on several fronts:

Generally, the data could help determine whether financial institutions are serving the housing needs of the communities in which they are located, by identifying pockets in which they are and are not providing credit.

By providing information about the distribution of loan originations, the data could help guide public officials in distributing public funds so as to attract private investment to areas where it is needed.