In order to identify specific reasons for mortgage loan denials, one federal regulatory agency will require the banks it supervises to say why they rejected applications on their HMDA LARS forms beginning next year.
The Office of the Comptroller of the Currency, which supervises about 2,000 banks that report HMDA data, said the mandatory inclusion of reasons for denials will help in the analysis of individual bank data. It may give us a road map for conducting individual loan file analysis, said Janis Smith, OCC spokesperson.
This change is intended to address one of the widespread complaints about HMDA, that it can identify trends but that it cannot fully explain them. It will be accomplished by requiring national banks to fill in a portion of the HMDA reporting form that is now optional.
HMDA data reflect mortgage denial rates nationwide according to race and income level only. They do not necessarily indicate that the the higher rejection rates in 1993 of loan applications by blacks and Hispanics compared with whites can be traced to race. A closer look is needed of each lending institutions applications to determine if disparate treatment because of race has occurred, said Stephen M. Cross, deputy comptroller for compliance management.
We cant draw sweeping generalizations based on HMDA data, Cross said, adding that many decisions go into approving or denying a loan application that are not included in HMDA reports. [If you study aggregate HMDA data alone] you are getting a picture where there may be some red flags, but youre not getting the whole picture, he said. Its very difficult to say what it means in the big picture.
The Federal Financial Institutions Examination Council (FFIEC), which compiled HMDA data from more than 9,600 lenders, stated in its report July 29 that differences in the distribution of applicants by income account for some of the differences in loan disposition rates among racial or ethnic groups. Other factors are more important, however, since white or Asian applicants, in all income groups, had substantially lower rates of denial than black or Hispanic applicants.
The extent to which racial discrimination may account for these differences is not known. ... Poor credit history or no credit history was the most frequently cited reason for denial of conventional home purchase loan applications, the report stated.
None of this should be surprising to anybody, said John Taylor, director of the National Community Reinvestment Coalition. What we are dealing with is the need for institutional and cultural changes in the industry. Changing a systemic problem does not occur by passing a law or rewriting a regulation. It changes by neighborhoods and individuals in communities forcing the hand of each individual lender in the system to make changes. Long term discrimination in lending will take long term affirmative involvement from lenders to reverse that pattern.
Despite the bleak HMDA numbers, some bankers said financial institutions are making strides to change these problems. It wont change overnight, agreed Herbert M. Wayne, senior vice president and CRA coordinator for Wachovia Bank of North Carolina. It will take years for a credit report to reflect a change. [A potential borrower with a bad credit history] probably wouldnt be able to get a 30-year loan for a long time.
In fact, Wayne pointed out, many banks are trying to make these loans. HMDA figures for 1993 showed the number of conventional home purchase loans extended to blacks and Hispanics in the lowest income groups to have increased the most over 1992 figures. Banks are doing a lot of things such as automatic second reviews, [instituting] education programs, flexible ratios and credit history programs and looking at rent and utility payments, said Wayne.
Wachovia, according to Wayne, already has made about 2,000 loans totaling about $100 million with low down payment requirements all across the state of North Carolina, but he said the bank cant keep adding to that.
Fannie [Mae] and Freddie [Mac] are loosening up, but in order to reach low to moderate income borrowers you have to go to a 3% down payment, he said. They have very few programs for that.
Wachovia, which has nine major banks and about 65 smaller banks according to Wayne, is able to have a special program to accommodate the lack of private mortgage insurance. Fannie and Freddie have no PMI program, and thats another problem. We did that ourselves to make loans more affordable.
When Brenda Skidmore, senior vice president for government and regulatory affairs, at Crestar Bank in Richmond analyzed its HMDA numbers, she found a very different picture from the aggregate figures. For conventional loans in the low to moderate income borrowers we booked $26.5 million in 1992 with a denial ratio of 3.5 to 1; in 1993 we booked $40.6 million with a denial ratio of 2 to 1. 86%.
The aggregate HMDA data clearly raises a lot of questions, he said. Why is it that the denial rate of African Americans is twice as high than it is for whites? Why is it, even for lower levels of income in the aggregate, higher for whites than African Americans? Only one of the possibilities is discrimination. It is one factor.