Is Too Much HMDA A Bad Thing?

October 28, 2014 at 9:13 am Leave a comment

Imagine if every decision you make could be scrutinized not just by your supervisor but by any stranger with an interest in knowing what you are doing. These strangers would not only be able to look at what decisions you made but the information you analyzed to make it. If they had the time, they could compare the decisions you made to the decisions made by your counterpart down the street. Would this type of scrutiny influence your decision-making process for the better? Would you be more cautious or more aggressive? Would you feel as if your privacy had been violated?

If you do mortgage underwriting for a living, these are not hypothetical questions. Tomorrow is the last day to submit comments on the CFPB’s proposal amending Regulation C. Regulation C requires all financial institutions with $43 million or more in assets to record key mortgage application information in a LAR. The information is available to the public and regulators. If the CFPB goes forward with its plans, we are about to make a dramatic shift in banking. You will be making your underwriting decisions in a fish bowl. Look at your underwriting file, strip away the applicant names and social security numbers and you pretty much have your new LAR. Think I’m exaggerating? I lost count, but I believe there are 25 additional data points that the CFPB is proposing to collect, the majority of which aren’t mandated by Congress but proposed by the Bureau that Never Sleeps. The drive for transparency could help bring about a more mature debate about this nation’s housing policies but, ultimately, it will provide more data for opposing sides to cherry pick and limit your business judgment along the way.

First, some clarification with apologies to those of you for whom this is basic stuff. HMDA was passed in 1975 for the purpose of giving the public, regulators, and policy makers access to data about banking activity in urban areas. Congress was investing big money into urban revitalization efforts and highly suspicious of bank red lining activities. By making sure that larger banks reported information about their lending decisions, Congress could see what impact its policies were having on banking commitments and whether more need to be done. The statute was never applied to all financial institutions and wasn’t intended to enable the tracking of individual loans. Information is broken down by census tract, which is more than sufficient to identify distinct lending patterns, particularly in urban areas. Today, unless you make the aforementioned $43 million dollars you don’t have to comply with Regulation C. Furthermore, the Bureau is proposing a threshold of 25 mortgages below which financial institutions wouldn’t have to comply with Regulation C, regardless of their size.

What regulators and, to a lesser extent, Congress are seeking with these proposed regulations is something quite different. Mortgages would be reported by property address as opposed to census tract and the Bureau wants to be able to track all loans at every stage of the lending process. Both an applicant’s credit score and the “scoring system” used by the financial institution in making the lending decision will be reported, and the reasons for a denial would be included in the LAR. (Currently, members have a right to know the reasons a loan is denied but it isn’t included in data collected and ultimately aggregated under HMDA). These are just a few examples of a much more expansive list. The majority of this information is not required by Congress, but by the CFPB.

What’s wrong with a little underwriting sunshine? First, as one commenter has already pointed out to the CFPB, the information it is seeking is so detailed that private information is at risk of being exposed to the general public. Considering that the Bureau has already been criticized for its data protection safeguards, this is not a minor concern.

But let’s look at the big picture. There has always been distrust between banks and poor people, particularly minorities and immigrant groups. Credit unions are able to bridge that divide and banks have made tremendous strides in ending biased lending practices, but the distrust is still there and it profoundly impacts policy. Banks used to be accused of redlining — refusing to lend to people in certain areas because of its racial makeup. Today the industry is accused – I believe unfairly — of exacerbating the Mortgage Meltdown by lending to those same communities but with sub- prime loans that borrowers couldn’t repay. Was there reckless underwriting? Absolutely. Are there individuals more than willing to discriminate against other individuals? Absolutely. But was the Mortgage Meltdown and subprime lending motivated by systemic racism on the part of large groups of lenders looking to rip off minorities? No.

Behind the push to expand HMDA is a belief that with enough data, housing advocates can prove that we can have a housing system that provides reasonably priced loans and a house to everyone who wants one. I believe that what more data will show is that, in an age of computer generated lending decisions, systemic racism is extremely rare.

Many of the problems that HMDA was designed to assess are still around today, but it is dangerously simplistic and counterproductive to believe that financial institutions could solve all of the nation’s housing problems if only they would implement fairer lending policies.  

It’s a shame that credit unions have to get caught in the crossfire of this counterproductive, unending debate. In the meantime get ready for life in a fishbowl.

Does Uber threaten the value of Medallions?

Anyone with a medallion loan or a participation interest in one should read this article in this morning CU Times.


Entry filed under: Compliance, Mortgage Lending. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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