Using HMDA Data: What to Expect
There is no better indicator of how HMDA data will be used than the ideas expressed by members of the Federal Reserve Board's Consumer Advisory Council ("CAC"). The council membership is drawn from financial institutions, other types of creditors, lawyers, academics, community development specialists, and consumer representatives.
The CAC's discussion at the meeting on March 17 included how HMDA data would be used and what the consumer interests would be. Discrimination and disparate treatment are high priorities. But the way in which consumer groups are planning to analyze the data is based on pricing.
The new HMDA reports will contain information not only on loan amounts, property locations, and borrower identities. It will also contain information - even if inconsistent - on pricing. For this reason, those interested in HMDA analysis plan to use the data to evaluate the distribution of products and the pricing of products.
The findings may be interesting. For example, Hattie Dorsey, CEO of the Atlanta Neighborhood Development Partnership, has found that property location makes a difference in pricing even for equal borrower qualifications. Pricing by product and by location will be an important first analysis, replacing the traditional first look at race, age, and gender.
Another target for analysis will be neighborhoods that have not yet been revitalized. These neighborhoods could be considered as the original targets of CRA and HMDA. Those active in community development already have their eyes on these problem areas and will use HMDA data to structure their planning and their approaches to financial institutions. (Hint: find it first and be the one to make the first contact.)
Although bankers often get the impression that consumer advocates are more interested in bank-bashing than helping consumers, the CAC membership clearly illustrates that this is not the case. Much of the HMDA discussion turned on what consumers need to understand. In fact, several of the consumer representatives expressed concern that catchy HMDA headlines could actually misinform consumers.
When consumers who are not financially sophisticated read headlines about lending patterns that allege disproportionately low lending in their neighborhoods or to their ethnic group, they are likely to assume it is because they are not qualified. The publicity about HMDA data and allegations of redlining or discrimination may actually reinforce their presumption that they are not qualified or cannot get a conventional loan from a financial institution. This presumption simply makes them more vulnerable to predatory lenders.
Consumer representatives were also concerned that consumers would misunderstand the headlines and assume that, if entering a financial institution, they could expect discrimination. Headlines are likely to play up the inference that the data shows unfairness and discrimination. We can expect confusion when consumers try to distinguish between fair pricing and fair treatment, and unfair pricing and discrimination.
Stella Adams, Executive Director of the North Carolina Fair Housing Center, warned the FRB that we should not let HMDA data get ahead of us - an interesting point. She stated that if consumers don't understand their qualifications, they are likely to end up with sub-prime loans. She argued that in releasing HMDA data, the goal should be to deliver a complete message, and not simply that risk influences price. Consumers need to know how much risk influences price and what else influences price.
These concerns raise some interesting opportunities for lenders. In the context of the FACT Act and pending regulations on risk-based pricing disclosures, she points the way to opportunity out of compliance. If lenders use FACT Act disclosures and other information about mortgages that is currently available, lenders can make lemonade out of lemons.
However, Adams made another point that adds dimension to the education approach. She said that their testing shows that rate quotes vary by race and ethnicity. Because of this, the solution should not rely exclusively on consumer education.
The council member from HSBC North America Holdings, Lisa Sodeika, also stressed the importance of balancing consumer education with good lender practices. One challenge that she has identified is how to get consumers interested in learning. Other council members spoke to this problem - that consumers often ignore learning about credit until they have started shopping. At that point, it is late to be learning how to shop.
Several consumer representatives were critical of the sales culture that exists in lending. Sheila Canavan, a consumer attorney from Utah, suggested that lenders should be more transparent about how they run their businesses. Borrowers should understand that when they walk into a mortgage lenders office they are entering a sales culture. She suggested that the term "loan officer" should be changed to "loan salesman" to make this clearer.
Another member pointed out that consumers apply for mortgages so infrequently that they are unpracticed and facing someone who handles many applications a day. This unequal bargaining situation can only be balanced by stressing the importance of honesty among lenders.
The sales culture problem is often exacerbated by the motivations given to lenders. If lenders are motivated by the profitability of a loan, they may be motivated to treat customers and neighborhoods differently.
One solution to the problems resulting from the sales culture and limited consumer skills is to offer only locked rates and terms - the black box approach which lenders cannot tamper with. This has the negative of limited flexibility which could limit credit availability.
When the HMDA data is released to the public, the die will be cast. Prudent and alert lenders should analyze their data long before it is publically released. Since the agencies are now estimating a September release, there is time to get this done.
Lenders should know what their reports say and what to do about it. Marva Williams, SVP at the Woodstock Institute, urged lenders to reach out to community organizations and discuss the data findings. This has several advantages. First it gives an early read on how consumer and community organizations are likely to react to the report. Second, it lays the foundation for taking action before the data is released, enabling the institution to be ready with an answer.
What is coming when the HMDA reports are released is much more than data analysis. The issues that will be debated go to core lending practices. The debate will revive the redlining charges, raise statistical examples of possible disparate treatment, and focus attention on pricing. Be ready!
In short, fair lending is very much a front-burner, high risk issue. Fact situations, data and concerns may be raised from fair lending exams, CRA assessments, and from HMDA reports. Discrimination questions may also emerge from the close attention now being given to subprime or predatory lending. Together, these provide a rich resource that is likely to keep fair lending hot for the foreseeable future.
- Review your HMDA data now. Give special attention to pricing of loans by location and type of borrower.
- Identify any geographic weak points that could be interpreted as redlining. Understand why lending in those areas is weak.
- Study pricing by each category of monitoring data - race, ethnicity, age and gender. Identify weak points and understand the causes.
- When it becomes available, look at other lending data in your market and compare your market penetration and rates.
- If your market has neighborhoods that have not been revitalized, take a hard look at the number and type of loans made in those neighborhoods. If lending is low, start meeting with community organizations now.
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 4, 4/05
First published on 04/01/2005