New federal scrutiny looms for mortgage banking, and with it may come sweeping changes that may ultimately mean a facelift for the industry - with HUD wielding the scalpel.
Bankers may look ahead to tough new tests and regulations, as well as onerous legislation, as Washington takes aim at what it perceives as lending practices biased against racial and ethnic minorities.
HUD Secretary Henry Cisneros used strong words during the 80th annual Mortgage Bankers Association Convention Oct. 26 to describe the department's goal of ending lender discrimination.
"We mean business," he said in describing his plan to use more testers to help eliminate lending bias. "I hope the industry is getting the word that discrimination is unacceptable, counterproductive and that we will be watching - we do have some sticks to work with if we can't get the elimination of this insidious practice ... you're going to find HUD uncompromising on [situations] where discrimination manifests itself."
Cisneros said penalties for discrimination have been handed down this year by HUD's Mortgagee Review Board and of the 43 referrals the board received, three cases drew withdrawal of approval for FHA lending because of failure to meet Home Mortgage Disclosure Act data and other Federal Housing Administration requirements.
But Cisneros' words came as no surprise to the nearly 7,000 in attendance, many of whom seemed resigned to the fact that more intense federal scrutiny was inevitable. Mortgage bankers still believe using HMDA data as a lending discrimination tool may not be accurate.
During a media briefing Oct. 28, Warren Lasko, MBA executive vice president likened the HMDA data to a 50% positive cancer test. "If there's a 50% positive reaction, then there's still a 50% chance it's negative.' he said, explaining that as with a cancer test under those conditions, a doctor would conduct more tests before operating. "So more data still needs to be collected here." he said.
Lasko also said that many lenders were already performing self tests to determine if discriminatory practices occur at their respective institutions. But, he said, a problem has arisen as to whether those institutions should provide the information to a tester when a request is made for other exam-related material.
The problem is that if a lender discovers something negative during the self-test, that institution could then be subject to some sort of HUD penalty. And because such a practice might eventually lead to an unwillingness to cooperate with inspectors. Lasko said the MBA is discussing a "safe harbor" provision for banks with HUD and believes that a compromise will be reached.
Cisneros cited independent studies based on Home Mortgage Disclosure Act data, particularly a Boston Federal Reserve Bank study that reported the denial rate for minority applicants was consistently higher than for white applicants, a statement that drew more than a few grumbles from the disenchanted crowd.
Lasko maintains that while the study had some merit, it was still inherently flawed - a position the MBA also holds with the use of HMDA data for determining if discrimination has occurred.
"As a greater outreach takes place, as more marketing takes place, then there's a chance that a lender's numbers will look worse." said newly sworn in MBA President Stephen Ashley, who assumed the role surrendered by outgoing MBA President Herb Tasker.