Does the HMDA’s Database Need More Transparency?

After gathering a sample of more than 1.7 million mortgage applicants from 2016 who were either approved for denied for a mortgage, the Clever Real Estate research team discovered something unsettling: 26 percent of African-American applicants were denied mortgages, compared to 10 percent of white applicants. Even when controlling for income, the researchers believe that racial discrepancies still exist.

For instance, according to Clever’s findings:

  • Disparity between white and black mortgage approval rates is most pronounced in the South: 89 percent of white applicants are approved in southern states, compared to 76 percent of black applicants when controlling for income.
  • The West has the least racial disparity between white and black applicants, but the difference in approval rates is still statistically significant, indicating racial discrimination in the mortgage industry is a nationwide issue.
  • Mortgage applicants are overwhelmingly white: Of the 1.7 million applicants sampled, 1,482,248 were white, compared to 80,442 African Americans, 93,762 Asian Americans, 29,293 American Indians and 15,645 Native Hawaiian or Pacific Islanders.
  • Moreover, African-American and Hispanic home buyers are respectively 105 percent and 78 percent more likely to use high-cost mortgages for home purchases, putting them at greater risk of foreclosure.

The Home Mortgage Disclosure Act grew out of public concern over credit shortages in urban neighborhoods, but the data is alarmingly sparse: 52 percent of black applicants who were denied a mortgage were given no reason — i.e., the data set is incomplete in important areas needed for careful scrutiny.

While Clever believes the study helps shed light on important discriminatory issues in lending, the bigger takeaway is what can’t be gleaned from the HMDA database, the firm asserts. “I think increasing transparency and disclosing as much information as possible would be the most straightforward solution,” said report author Eylul Tekin. “Important metrics like credit score and debt-to-income ratio aren’t required in lender disclosures, so it’s difficult to run an analysis that includes all the complicated variables involved in mortgage lending. If lenders disclosed this data to the public, we’d have a very clear picture of where discriminatory lending occurs and how to combat it.”

As an example, the report offered that New Jersey-based TD Bank, which denied a higher proportion of black and Latino applicants than any other major lender, said it “makes credit decisions based on each customer’s credit profile, not on factors such as race or ethnicity.”

Here’s the problem, according to Tekin and Clever: Credit scores, debt-to-income ratio and other important control variables aren’t included in the HMDA’s database. These key applicant metrics are not mandated by the HMDA, so lenders aren’t required to disclose this critical information to the public. Another critical piece of information, why the loan was denied, is an optional field for mortgage lenders not regulated by the Office of the Comptroller of the Currency.

However, the report notes that the American Bankers Association would prefer to keep credit scores and other variables out of lender disclosures. According to a 2017 April policy paper, the ABA stated amending HMDA to require more data collection would be expensive and adds volumes of irrelevant data. Yet, Clever believes that these amendments would also reveal whether applicants are offered above-average APRs and unconventional lender fees. (Because of Dodd-Frank, several new applicant metrics are being recorded by mortgage lenders for 2018 data sets and beyond.)

“It’s important to increase public knowledge about the process of approval and disclosing why an applicant wasn’t approved,” said Tekin. “Standardizing the education process for potential buyers would help everyone understand the complicated mortgage process. For example, lenders could explain up-front the most common reasons applicants are denied, so there’s no ambiguity.”

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