Wading Through HMDA-Data Muck

The Federal Reserve's final release of aggregate Home Mortgage Disclosure Act data on September 13, presumably disclosed to spur more lenders to lend fairly to racial and ethnic minorities and by gender, may do much to further the cause of fair lending.

A Bronx, NY-based consumer advocacy group, Inner City Press/Fair Finance Watch, is pressing the Fed to either fine or prevent institutions from expanding if their HMDA data shows it discriminated against minorities in granting mortgages. "They have a duty to act on specific patterns in specific lenders," says Matthew Lee, executive director of ICP/FFW. Moreover, he says the group is "vetting class-action attorneys" to determine if there is sufficient evidence to bring a suit against one of the five big lenders the group claims has the worst records. ICP/FFW has also requested action, from federal regulators and 50 state attorneys general, on lenders who have refused to provide data. ICP/FFW's analysis of data from 100-plus banks since March showed many disparities among the top lenders, including: At Citigroup, blacks were seven times more frequently than whites to be confined to higher-cost rate-spread loans in 2004 in the metropolitan New York City area. "We consider each applicant by the same objective criteria, which are blind to race, ethnicity, gender and any other prohibited basis," the bank said in an e-mail statement. "Using these criteria, otherwise known as risk-based pricing, gives millions of consumers who in the past might have been denied credit the opportunity to own a home. These objective criteria include FICO scores, loan to value ratios, and debt-to-income ratios." At Washington Mutual, ICP/FFW found that black couples nationally were confined to high-cost loans 4.5 times more frequently than white couples. The bank disputes the analysis. "More than 97 percent of our two entities' loans with reportable rate spreads are extended through Long Beach Mortgage," notes the bank in an e-mail statement. "At Long Beach Mortgage, black borrowers are 1.6 times more likely to receive a loan with a reportable rate spread than white borrowers. At Washington Mutual Bank, such a small fraction of loans have reportable spreads that such comparisons are difficult to make with precision. Where there are disparities among borrowers, there are a variety of reasons, as pointed out in the Fed's recent HMDA analysis. Certainly, the credit history of the borrower will affect the price of a loan. Our underwriting, approval and pricing decisions are blind to borrower race, ethnicity, and gender. We know we have more work to do in this area, and are determining the best way to address this." In the industry overall, blacks in metropolitan New York had more high-cost loans for conventional mortgages, compared to whites.

Lee couldn't identify any banks that had done a good job in issuing and pricing home mortgage loans. "Are we saying the industry discriminates?" he asks. "No, but if everyone is guilty, no one is. ...They don't dispute the data, just what the data means," he says.

Even the Fed's 51-page study by staffers Bob Avery, Glenn Canner and Robert Cook, concluded that "black and Hispanic borrowers taken together are much more likely than non-Hispanic white borrowers to obtain credit from institutions that report a higher incidence of higher-priced loans. ...This pattern may be benign and reflect a sorting of individuals into different market segments by their credit characteristics. ...It may be symptomatic of a more serious issue. Lenders that report a lower incidence of higher-priced products may be either less willing or less able to serve minority neighborhoods. More troubling, these patterns may stem, at least in part, from borrowers being steered to lenders or to loans that offer higher prices than the credit characteristics of these borrowers warrant. Reaching accurate determinations among these alternative possible outcomes is one goal of the supervision system."

The 2004 HMDA data is drawn from information supplied by 8,853 institutions. For the first time this year, the analysis includes loan pricing data, whether a loan or application relates to manufactured housing, and whether a loan is secured by a first or subordinate lien, or is unsecured.

However, the Fed authors and Lee agree a key factor missing from the data is applicants' credit scores, which would help determine the fairness of loan pricing. The most critical elements of that score are the applicant's debt-to-income ratio and loan-to-value ratio. Perhaps for any finger-pointing to be useful, the Fed needs to incorporate this very important figure into its 2005 data, so more accurate analysis can unveil the true story of what's happening at banks. (c) 2005 U.S. Banker and SourceMedia, Inc. All Rights Reserved. http://www.us-banker.com http://www.sourcemedia.com