Only the Reckless Ignore Latest Report on Lending Bias
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 mandated the submission of greatly expanded Home Mortgage Disclosure Act reports by institutions involved in making first mortgages.
The first expanded report had to be filed by March of this year to the filing institution's primary federal regulator.
Since the report was in a greatly expanded form and was significantly more detailed than the previous report, a collective sigh of relief was most certainly breathed by institutions that successfully met the filing deadline.
What will follow, however, could ultimately prove to be of much greater significance to the banks and other institutions. The Federal Reserve, acting on behalf of the Federal Financial Institutions Examination Council, will process the massive amount of raw data that were submitted.
The forms that lenders must submit are called Loan Application Registers, and on these forms institutions must provide information on applications regarding type, occupancy, amount, and date of filing.
The forms also call for data on the disposition of the loan application and the date of disposition, as well as for the location of the property by state, county, metropolitan statistical area, and important by census tract.
The lender must also include on the forms the race, sex, and income level of the applicant and the type of purchaser of the loan, if it was purchased, and an optional "reason for denial."
The clear intent of this enormous data collection effort, called the largest in Federal Reserve history, is to afford regulators concrete data with which to "monitor the housing-related lending activities of commercial banks, thrift institutions, credit unions, and mortgage banking companies."
Regulators will also be able to assess such aspects of the lending process as the passage of time between application submission and disposition, and to compare lending patterns in differing geographic and demographic areas.
Patterns of Lending
In toto, the information provided will be of immense value to regulators and lenders in determining whether there are differences in an institution's lending patterns in areas with different personal incomes.
Readers will recall the Federal Reserve Bank of Boston study released in August 1989 and titled, "Geographic Patterns of Lending in Boston, 1982-1987."
This study compared mortgage loans in white and black neighborhoods. In its statement on the study, the Boston Fed wrote: "The number of mortgage loans relative to the potentially mortgageable housing stock is substantially lower in predominantly black neighborhoods than in white neighborhoods."
The Home Mortgage Disclosure Act data will offer regulators similar information with which to evaluate the performance of every bank and other first-mortgage lender in the nation.
The data will be disseminated in 10 tables. One table will outline loans sold by race, gender, and income. Another will aggregate data on "Reasons for denial of FHA, FmHA, and VA home purchase loan applications." A third table will detail: "Disposition of loan applications by geographic location categories."
A Comprehensive Picture
The data in the 10 tables will deliver a comprehensive picture of the first-mortgage loan activity of the lender. This picture, of course, will have important ramifications for evaluating an institution's Community Reinvestment Act performance.
And the aggregate data will be made public. Each individual bank's report must be made available by the bank no later than 30 days after receipt from the Federal Reserve.
Aggregate reports for metropolitan statistical areas as well as the individual bank reports will be available in central depositories in each of these areas.
CRA Ratings at Stake
One thing is certain: Banks that have not conducted extensive reviews of this data risk negative CRA ratings.
Another point to keep in mind is that the data to be released in 1992 (the 1991 data) have already been substantially determined, as more than two-thirds of the current year have passed.
Efforts must be undertaken immediately to analyze data, develop any necessary remedial programs, and to clearly indicate the commitment of the organization to remedy any shortcomings evident in the 1991 data before the end of 1991, if possible.
Home Mortgage Disclosure Act data provide an opportunity as well as potential CRA-related problems for reporting institutions.
Fortunately there are software programs available that not only provide the ability to compile and file the Loan Application Registers easily, but some also provide Federal Reserve-like reports that will enable the bank to closely monitor its lending patterns.
It is in the marketing area, however, that the data may have the most positive impact on the communities and for the banks. The data will alert institutions to an opportunity to market products and services to areas in their communities.
This will provide positive opportunities to increase market share, reach new customers, and simultaneously contribute to meeting CRA requirements.
Banks and other first mortgage lenders must (if they haven't already) begin a comprehensive program of Home Mortgage Disclosure Act data analysis if they are to ensure that they will meet both community needs and regulatory lending requirements.
Michael J. DeVito is a consultant based in Franklin, Mass. Until recently he was executive director of the Rhode Island Bankers Association.