Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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CFPB ponders how well HMDA captures discrimination

The data reporting requirements are a key part of the watchdog agency's redlining enforcement


The Consumer Financial Protection Bureau (CFPB) is launching a voluntary review of its mortgage data collection — a key tool in bringing redlining cases — to assess its effectiveness in detecting discrimination.

The evaluation of rules implementing the Home Mortgage Disclosure Act will support the CFPB in its efforts to maintain a “fair, competitive, and non-discriminatory mortgage market,” the watchdog agency said.

The CFPB wants to hear from stakeholders about “industry outcomes” as a result of the HMDA rule, including how financial institutions comply with the rule’s criteria, and the impact of changes to coverage thresholds and data points. The agency asks for comment on whether the HMDA rule has “brought greater transparency to the mortgage market,” and whether it helps identify possible discriminatory lending patterns and enforcement of anti-discrimination laws. The operational and compliance costs of the HMDA rule for financial institutions is also an area of interest.

The Bureau said it plans to start its assessment process soon, or may have already started it. The analysis will rely on data from HMDA, as well as third-party servicing data, Fannie Mae and Freddie Mac public loan level data, and the National Mortgage Database.

The HMDA rule, enacted in 1975, was intended to document and discourage redlining, although the discriminatory banking practice had been made illegal in 1968. HMDA was one of several rules — the expansion of the Equal Credit Opportunity Act in 1976, and the passage of the Community Reinvestment Act the following year — to increase public scrutiny of lending patterns and expand access to credit.

Since HMDA was introduced, regulators’ definition of redlining has evolved. In a virtual seminar Thursday on “modern-day redlining,” attorneys from Garris Horn, LLP, said the CFPB’s current definition of the practice is better termed “marketing discrimination.”

The HMDA data is a crucial tool for the CFPB in constructing redlining cases.

The CFPB typically prepares a redlining case by comparing lenders’ performance in minority areas to a group of their peers to identify a potential disparity. The agency might also analyze marketing materials, outreach efforts, branch locations, hiring practices and even internal communications to find evidence of redlining.

CFPB Director Rohit Chopra has said combating “modern-day redlining” is a top priority, and the agency has partnered with other federal agencies to increase enforcement. It has also pledged to significantly increase its stable of compliance attorneys.

The agency also uses HMDA data to identify and call attention to systemic issues in mortgage lending. A July analysis of lending patterns in Asian American Pacific Islander communities found that some subgroups have much higher mortgage denial rates. In August, the CFPB found that mortgage lenders often deny credit and charge higher interest rates to Black and Hispanic applicants.

The Dodd-Frank Act transferred HMDA rulemaking authority from the Federal Reserve Board to the CFPB, and the agency has made several tweaks to the act over the years. The CFPB expanded HMDA reporting requirements in 2015, doubling the number of data fields it required lenders to submit, and modifying some of the existing fields.

The agency further refined the HMDA rule in 2017. In 2018, it issued clarifications, after Congress amended parts of HMDA, to exempt banks and credit unions that originate fewer than 500 open- or closed-end mortgages from the recently expanded data reporting requirements. Along with the clarifications, the agency signaled in 2018 it would take up another comment period and rule-making in 2019 to get input on what HMDA data will be disclosed in the future.

In March 2020, amid the early days of the COVID pandemic, the CFPB announced flexibilities to “reduce administrative burden.” It would not penalize institutions for not submitting quarterly HMDA reports, although it cautioned that institutions should still continue to collect and record HMDA data in anticipation of a return to the normal data reporting requirements.

The next month, it also set a final rule to amend Regulation C, increasing the permanent threshold for collecting and reporting data about closed-end mortgage loans from 25 to 100 loans. It made 2020 HMDA reporting optional for lenders that did not meet the 100-loan threshold in 2018 or 2019. The mortgage industry cheered those changes.

But the relationship between the mortgage industry and the CFPB has since soured.

In March, under then-acting director Dave Uejio, the agency back-tracked on its Covid flexibilities, and said it would increase its focus on enforcement. On April 1, it instructed all financial institutions to resume the quarterly HMDA reports. The first deadline arrived swiftly: May 31, just two months later, lenders’ first quarterly HMDA report was due.

The data reporting requirements also facilitate public scrutiny of mortgage lending. The Markup, an investigative news outlet, used HMDA data to show that conventional loan applicants of color were much more likely to be denied than their white counterparts. The findings got pushback from the mortgage industry, in large part because the analysis did not include credit scores, or loans backed by the Federal Housing Administration or Department of Veterans Affairs. A former Obama-era HUD official said the findings were more an indication of GSE pricing and underwriting that pushes borrowers of color to other government programs, rather than evidence of secret bias, as the article claims.

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