The Home Mortgage Disclosure Act is a United States federal law that requires certain financial institutions to provide mortgage data to the public. Congress enacted HMDA in 1975.
Purposes
HMDA grew out of public concern over credit shortages in certain urban neighborhoods. Congress believed that some financial institutions had contributed to the decline of some geographic areas by their failure to provide adequate home financing to qualified applicants on reasonable terms and conditions. Thus, one purpose of HMDA and Regulation C is to provide the public with information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. A second purpose is to aid public officials in targeting public investments from the private sector to areas where they are needed. Finally, the FIRREA amendments of 1989 require the collection and disclosure of data about applicant and borrower characteristics to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes. As the name implies, HMDA is a disclosure law that relies upon public scrutiny for its effectiveness. It does not prohibit any specific activity of lenders, and it does not establish a quota system of mortgage loans to be made in any Metropolitan Statistical Area or other geographic area as defined by the Office of Management and Budget.
Who reports HMDA data?
US financial institutions must report HMDA data to their regulator if they meet certain criteria, such as having assets above a specific threshold. The criteria is different for depository and non-depository institutions and are available on the FFIEC website. In 2012, there were 7,400 institutions that reported a total of 18.7 million HMDA records.
Details of the law
Companies covered under HMDA are required to keep a Loan Application Register. Each time someone applies for a home mortgage at an institution covered by HMDA, the company is required to make a corresponding entry into the LAR, noting the following information.
The new requirements also require the collection of disaggregated data on Asian borrowers, identifying their ethnic origins with more precision. HMDA data can be used to identify probable housing discrimination in various ways. It is important to understand that in all cases of possible discrimination, the basic regulatory inquiry revolves around whether a protected class of persons being denied a loan or offered different terms for reasons other than objectively acceptable characteristics.
If an institution turns down a disproportionate percentage of applications by certain races, ethnicities, or genders, then there is reason to suspect that the institution may be discriminating against these classes of borrowers by unfairly denying them credit. Such discrimination is illegal in the United States. Although well-documented during the period of local bank dominance in American history, the rise of mass financial institutions since the early 1990s has led to increasing investor scrutiny regarding profits, and hence a lower likelihood that a bank can afford to subsidize such outright discrimination by forgoing loan originations. Yet several recent studies using HMDA data still detect racial and ethnic disparities in lending activity, even when factors such as income are accounted for statistically.
If an institution has a disproportionately low percentage of applications by certain races, ethnicities or genders then there is reason to suspect that the institution may be discriminating against these classes of borrowers by unfairly discouraging them from applying for mortgage loans. Such discrimination is illegal in the United States. However, there is tension in this arena between attempts by banks to attract high quality borrowers and the extent to which borrower quality corresponds with a protected status. This type of monitoring, however, has been particularly effective as reducing implicit or referral based discrimination, where a discriminatory body, e.g. a local sporting club who quietly favors an all-white membership, is relied upon to recommend applicants. Banks are now wary of entering such relationships, insofar as they expose the lender to the liability associated with the discriminatory behavior of the partner organization.
If an institution has a disproportionately low percentage of applications from certain areas, compared to areas immediately surrounding the area in question, then there is reason to suspect that the institution is engaging in redlining. However, note that few banks are found to be in violation of redlining clauses, as many pricing or approval models that are deemed legally valid are driven by factors with the implicit effect of redlining geographic areas if these areas contain a disproportionate number of poorly qualified borrowers. Rather, redlining must be quite overt to draw attention.
If there is a disproportionate prevalence of high-interest loans to certain classes of borrowers, other attributes equal, then there is a reason to suspect that the institution is engaging in price based discrimination. This is the most active area of compliance monitoring with respect to HMDA data, since risk management policies at many financial institutions are quick to identify outright discrimination by lending officers.
Simultaneously, this area is the rifest for contention with respect to discriminatory claims, since there are market driven reasons for charging a higher rate that may exhibit discriminatory patterns. For example, a loan officer may query applicants to see if they have applied and been approved for a loan at any other banks. The rate for those that can produce another institution's offer may then be adjusted accordingly to remain competitive. However, if a certain ethnic group is less likely to "shop around" for the best rate, then the mere application of this principle — which is otherwise non-discriminatory in intent — can produce discriminatory effects. Many disputes between lenders and regulators in the context of price discrimination relate to such scenarios. Again, the key litmus test is whether the objective characteristic being used to lower or raise the mortgage rate for a given group is substantive in its own right with respect to the risk or profitability of the potential loan, rather than mere a proxy for racial discrimination.
