When Congress began tackling financial reform, the overhaul quickly became labeled as "historic" and "sweeping," with attention deservedly focused on regulating derivatives, winding down large financial institutions, and creating the new Consumer Financial Protection Bureau to regulate mortgages and other financial products. But lost in the torrent of news coverage was a significant move to change the way key information on borrowers and mortgage loans is collected and made public. Those changes, to the Home Mortgage Disclosure Act (HMDA) represent a benchmark in the long fight against lending discrimination. They could become an invaluable tool for consumer activists, regulators, and researchers trying to identify egregious lenders and their loans. They could transform the predatory-lending debate from arguments over anecdotes to conclusions based on hard evidence.
Or maybe not.
In the crucial rule-making to follow final passage of a financial-reform bill, the HMDA changes could also potentially get lost in the weeds, watered down by industry lobbyists and made public in a format that's difficult to access and hard to use. The new Consumer Financial Protection Bureau could end up owning another problem it doesn't have the tools to fix. Like so much in the reform bill, the proposals to transform HMDA data raise important issues, without fully resolving them.
"The industry is very nervous about making detailed information on loans and borrowers available," says Kathleen Engel, a financial-services law professor at Suffolk University in Massachusetts. "It will take a lot of time to get these rules right, and there will be tremendous industry pushback. They're going to try to make it as difficult as possible to detect wrongdoing."
HMDA is a 1975 anti-redlining measure that calls for the Federal Reserve to collect and make public loan data from mortgage lenders and banks. The financial-reform bill calls for major changes to the law. First, it would move responsibility for the collection and reporting of the data to the new Consumer Financial Protection Bureau. Second, it would require an expansion of the loan details to be collected under HMDA, including, for the first time, credit-score information and age of the borrower, total fees and points, presence of teaser rates or prepayment penalties, and the use of a mortgage broker, loan officer, or other agent.
Those changes are hardly headline grabbers -- but depending on how they ultimately play out, they could help settle the continuing and unresolved debate over whether some lenders are making discriminatory and higher-priced mortgages to minority borrowers.
For years, consumer advocates raised concerns about unfair and discriminatory lending in the sub-prime market. The lending industry regularly dismissed the complaints as anecdotal, Engel says. HMDA didn't settle the argument, because it didn't include important details, such as the borrower's creditworthiness or the true cost of loans. The banking industry could, and did, argue that while there were clusters of sub-prime loans in black and Hispanic neighborhoods, the prevalence of high-cost loans reflected the creditworthiness of the borrowers, not their race.
With the new data, number crunchers of all stripes should be able to determine with greater certainty whether a borrower's race played a role in a loan's pricing and whether some lenders in particular failed to comply with fair-lending laws by making higher-priced loans based on race. That's why some consumer advocates who dwell in the weeds of lending details are relishing the new proposals and hoping for Senate passage of the financial-reform bill with the HMDA changes.
The expansion of HMDA is "really critical, and it is very exciting," says Keith Ernst, a senior policy counsel with the nonpartisan Center for Responsible Lending. "It gives us a much better picture. Having the data means you're learning the lessons from the last crisis and trying to prevent or blunt the next one. It's particularly important for people who do evidence-based policy-making."
Controversy over HMDA has a long history. The mortgage data has been a resource, however flawed, for consumer advocates trying to document where lenders are making loans, and on what terms. The database records where loan applications are filed, whether the loan is approved, and some information on interest rates. For decades, advocacy groups and journalists have used HMDA to track lending patterns, often showing high-cost sub-prime loans concentrated in communities of color. But limitations in the data in turn limited what the activists and reporters could prove.
And as the mortgage industry changed, HMDA fell behind. Even with the dramatic transformation of the mortgage markets, from liar's loans to pick-a-pay mortgages, HMDA has mostly stayed intact. Lenders agreed HMDA wasn't sufficient but opposed expansion of the law, arguing that making more data public would be burdensome, increase the cost of credit, and raise consumer privacy concerns.
As lobbyists battled over the financial-reform bill, the HMDA changes didn't just fly under the radar of financial reform. They barely registered a blip, despite their potential impact. A banking-industry lobbyist this spring insisted that moving HMDA to the new bureau wasn't even in the bill. He then reviewed the measure and called this reporter back to acknowledge he was wrong. With a sigh, he said the changes would probably pass. American Bankers Association spokesperson Peter Garuccio said he wasn't sure whether his group had taken an official position on HMDA, given that it was so busy with all the other proposals.
But the data's low profile could change going forward. The New York Times noted recently that the lending industry is gearing up for the rule-making battle ahead. That means there's still a long way to go before consumer activists can call the HMDA moves a victory.
American Banker, a prominent industry publication, in addition, recently reported that some advocates want the new bureau to tackle HMDA early on. If the HMDA moves gain a higher profile, the changes may become more vulnerable. The banking industry will be battling on many fronts over the bill, but there's no guarantee it will roll over and let the HMDA changes through without a fight. Most likely, the industry will argue that lenders will be subject to costly frivolous lawsuits from the unabridged release of the data and will cite the need to protect investors' interests.
And just because a new law might call for collecting additional data, it doesn't mean the data will be meaningfully accessible, Suffolk University's Engel notes. As it stands now, the regulation requires the bureau to collect the data, but specifically what is made public, and in what format, is yet to be decided. The new bureau should adopt rules allowing for public disclosure of the data in a way that allows for robust analyses by people outside the agency, Engel says. "The goal should be to make the data accessible to people outside of government who want to be able to analyze what's going on in the market," she says.
That's not the only trip-up facing the HMDA data.
While HMDA moves under the new bureau, existing bank regulators will oversee enforcement of the Community Reinvestment Act, says Josh Silver, a policy researcher with the National Community Reinvestment Coalition. CRA is the 1977 anti-redlining law that has come under fire as a cause for the housing crisis, a charge consumer advocates dispute. HMDA and CRA are used together by community groups to challenge bank-lending practices.
Chatter around Washington is that the most skilled regulators will shift to the new Consumer Financial Protection Bureau, leaving weaker oversight of the CRA. "I think it is unfortunate that it will not move to the new bureau," says Gregory Squires, a George Washington University professor who studies redlining.
In addition, a proposal to require banks to report the census tract location, often the narrowest defined area available, of their depositors failed. The idea behind the proposal was to find out whether banks were serving residents of minority and working-class neighborhoods or whether residents in these neighborhoods had to turn to check-cashing stores instead. In a win for consumer advocates, however, lenders for the first time will be required to report the race and gender of borrowers of small-business loans.
In the meantime, the Federal Reserve this summer begins a round of long-scheduled hearings on HMDA data. The hearings aren't likely to alter the reforms, but they may raise HMDA's profile just a bit more. And in doing so, they may also draw some necessary attention to what's happening deep in the weeds of the continuing fair-lending debate.