A Brief History of HMDA and Fair Lending

Last week, we reviewed what's new in the updated Home Mortgage Disclosure Act (HMDA) rule. This week, we'll explore the history of HMDA and fair lending.

The history of HMDA is best understood in a broader context of fair housing. Despite positive changes brought about by the Fair Housing Act of 1968, congressional hearings just a few years later revealed a continued lack of credit in urban communities, which in turn contributed to declining housing conditions. (To learn more about the current status of fair housing, click here to read our our blog post about the 2015 Supreme Court decision on the Fair Housing Act and disparate impact.)

Over the course of three years, Congress enacted a series of fair housing efforts:

• The Housing and Community Development Act (CDA) in 1974 created Section 8 grants to support public housing.
• The Home Mortgage Disclosure Act (HMDA) in 1975 ensured that communities were not denied access to lending according to location.
• The Community Reinvestment Act (CRA) in 1977 encouraged depository institutions to help meet the credit needs of communities in which they operate, including low- and moderate-income neighborhoods.

Thus, the Federal government implemented a three-pronged solution: a law that requires fair practice (CRA), a method to monitor that practice (HMDA), and a stimulus to move liquidity into urban renewal (CDA).

HMDA as a Tool to Support Fair Lending

Almost immediately, the data collected by HMDA enabled researchers and community groups to understand the fundamental relationship between mortgage lending and community development. In other words, HMDA data showed evidence of location discrimination. This community effect was even more socially charged in the context of racial history. In the Second Great Migration, the period after World War II, African Americans became a highly urbanized population. Using HMDA data, community mortgage discrimination (where urban areas lacked access to funding) could be seen for what it was: racial discrimination. 

However, HMDA could not yet fulfill its statutory goal—to ensure fair lending practices—since HMDA data only accounted for lending at the community level and did not include information related to the demand for mortgage credit or creditworthiness at the individual level. The available data was not specific enough to draw conclusions about community fair lending. And banks simply argued that HMDA data only revealed disparity where there were relatively few applications or where applicants were disproportionately lacking in creditworthiness.

As part of its response to the savings and loan crisis of the late 1980s, Congress amended HMDA in 1988 to expand the types of institutions it covered. And in 1989, the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) required HMDA to include transaction-level data, including data on race, gender, and income. With these amendments, HMDA data was now detailed enough for regulatory agencies to identify potential discrimination in mortgage application denial decisions.

Introducing Pricing Information to HMDA

Throughout the 1990s, banking deregulation led to industry consolidation through mergers. As part of this process, the industry introduced new types of loans, including sub-prime loans. These mergers and product expansions introduced new opportunities for disparities in community banking. For example, studies have found discrimination and predatory practices in the sub-prime market.¹

As the housing industry changed through the late 1990s, mortgage discrimination cases began to shift away from access issues and toward pricing issues. In 2001, the Federal Reserve Board (FRB) amended HMDA regulations to require mortgage lenders to report certain information about their loan prices. This amendment provided both regulators and private litigators with a tool to study discrimination in pricing. However, HMDA data still lacked information on several key loan characteristics (e.g. property value, debt-to-income ratio, and borrowers’ credit scores) and was still insufficient to provide a full understanding of the changing mortgage landscape.

Latest Changes in HMDA

In 2010, Congress amended HMDA in the Dodd-Frank Act and transferred rule-making authority from the FRB to the CFPB. In 2014, the CFPB issued a new draft HMDA rule designed to increase transparency in the mortgage industry. That 2014 draft rule underwent a year-long public comment period and emerged as the new rule released last week.

The new HMDA rule will collect more housing data—including information related to points and loan fees—to more closely monitor the banking industry and, ideally, help avoid another sub-prime mortgage crisis. With more comprehensive housing data available through HMDA, the mortgage lending industry should gain a deeper understanding of both lending and communities.

Join us next week to explore how HMDA data helps reveal redlining and other types of mortgage lending discrimination. 

In case you missed it, check out the first post in this series: HMDA's New Rule and What It Means. Also, see our blog post about the recent Supreme Court ruling on fair housing: SCOTUS Affirms: The Fair Housing Act Authorizes Disparate Impact Claims.

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¹ To learn more about the history of sub-prime mortgages, see the following reports:

• “Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages” by the Center for Responsible Lending
• “Mortgage Pricing Differentials Across Hispanic, Black, and White Households: Evidence from the American Housing Survey” by the U.S. Department of Housing and Urban Development
• “Foreclosed: State of the American Dream” by United for a Fair Economy