Home Mortgage Disclosure Act (HMDA)

It outlines a requirement for financial institutions

The Home Mortgage Disclosure Act (HMDA) outlines a requirement for financial institutions such as banks to maintain, report, and publicly disclose loan-level information about mortgages. 

Home Mortgage Disclosure Act

The Act ensures that loan-issuing financial institutions are serving the needs of their communities and operating with moral standards.

The Act was put into law by Congress in 1975 and implemented under the Home Mortgage Disclosure (Regulation C). You can look over the details of the Act in this regulation, however, be aware of whether any changes have been made to the Act.

You can now publicly access data under the HMDA through the Consumer Financial Protection Bureau (CFPB) through this link. Currently, nationwide records from 2007 to 2017 are available. 

The HMDA mainly requires lenders to disclose the race, sex, income, and other demographic data of those applying for mortgages. Note that data disclosed by the HMDA is modified to ensure that borrower anonymity and privacy standards are met. 

Purpose of the Home Mortgage Disclosure Act

The HMDA has made it simpler for public officials to keep track of lending financial firms and monitor them for their practices, allowing officials to take action against discriminatory behavior if needed.

House

The other goal of the HMDA is to protect and prevent borrowers from receiving unethical treatment by lending firms. This was achieved by requiring firms to maintain certain records of information on loans, indirectly influencing them to treat borrowers equally. 

Moreover, publicly-available data allows individuals to research and understand a lending firm's practices if needed. 

Before the introduction of the HMDA, lending firms were regularly found to have engaged in predatory and discriminatory lending practices using geographical and client data to maximize revenues.

Today, the HMDA data is used by government agencies, individuals, borrowers, investors, bank examiners, and other parties to evaluate firms' lending practices and for many other purposes. 

The data is commonly used to ensure compliance with the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act (CRA), and relevant state-specific laws.

HMDA data is used by public officials to understand capital requirements. This means officials can track public investment, distribute capital in areas with requirements, and monitor the efficacy of capital distribution.

Mortgage

Investors can use the transparency of the statistics provided under the Act to their advantage. The data allows for an analysis that can conclude whether the lender is growing its core business. Further, it can answer many of the questions that investors may have.

Thus, HMDA data has become a common research tool to evaluate firms in the lending space, as it provides a transparent picture of the company. Such detailed information is time-consuming to analyze, however, it can provide insightful conclusions.

To learn more about the Home Mortgage Disclosure Act (HMDA), you may read through Title 12, Chapter 29 of the United States Code

For further clarification, Regulation C can also be read through, as it is an important component that outlines the standards by which Banks have to operate.

HMDA in action: An example

Assume that you are a borrower seeking a conventional mortgage for a residential home. The HMDA is at work from the moment you start talking with the lender and working out the details of your mortgage. 

Magnifying Glass

Here are some details that the lender may record, as required by the HMDA:

  • Date of borrower application: This includes the date of the official application made by the borrower

  • Type of loan: This section outlines the terms and structure of the loan, for instance, whether the loan has a fixed or variable interest rate.

  • Type of property: Whether the property being purchased by the borrower is a commercial, residential, or, perhaps, agricultural property.

  • Purpose of loan

  • Loan amount: This is the amount you owe to the lender. You can calculate this after accounting for the down payment on the property.

  • Loan status (approved, withdrawn, or denied)

  • Location of the property

  • The ethnicity of borrowers: Such information is requested to ensure that the lender firm is not practicing in a discriminatory manner.

  • Race of borrowers: For the same reason as above.

  • Gender of borrowers: For the same reason as above.

  • Gross annual income: This provides a common denominator for government agencies to take action against discriminatory practices. This is done by controlling for the credit quality of borrowers to monitor borrowers' demographic differences.

  • Rate Spread

  • Whether the lien is a first or junior

  • If the loan was denied, the reason why it was denied.

Remember that your anonymity is maintained and for any concerns, you can speak with your lender or contact the relevant regulatory authority. 

Lenders report the data annually to regulatory authorities and also to requesting parties within 30 days of inquiry.

HMDA Reporting 

Since the HMDA was enacted, lenders have continuously reported their lending practices. For instance, in 2019 alone, 5,496 lenders reported 8.1 million loan originations-representing 88% of the total estimated loan originations in the U.S.

Report

Regulation C further requires lenders to display a poster in every branch office lobby that provides information displaying HMDA statistics.

In April of 2020, the CFPB issued a rule that raised the data reporting thresholds for collecting and reporting data on closed-end mortgages under the HMDA from 25 to 100 loans. This rule was effective July 1, 2020.

All in all, reporting standards required due to the Act have had strong implications on the way that firms operate. For instance, firms are indirectly incentivized to ensure that mortgages are provided to all that are eligible without discrimination.

Reporting standards have made significant amounts of data available for any party interested in lending firms. As outlined before, reporting standards have only increased the transparency between parties with key interests.

Reporting such data requires firms to incur significant costs due to the time taken to track and record an enormous number of transactions. However,  the firms themselves can benefit from such diligence by conducting an internal analysis.

An internal analysis can reveal inefficiencies and highlight which types of mortgages they are best at managing. Furthermore, such an analysis can be compared to competitors in the space for deeper insights.

Key Takeaways

  • The Home Mortgage Disclosure Act (HMDA) has created change in the industry through transparency between shareholders and competing firms. Today, lenders are used to keeping track of enormous datasets to meet reporting standards.

  • Humans have a variety of biases, many of which subconsciously impact decision-making. Thus, cultural biases may bleed into an individual or a firm, causing unethical or unwise business decisions.

  • Therefore, the fact that firms are required to record the type of people that are issued mortgages means that there is a conscious effort against human biases. This is merely one of the ways reporting standards have created benefits for consumers and firms.

  • Lenders can be easily identified and accused of discriminatory lending practices through the data collected. Such transparency creates an environment where lending firms are kept in check for their practices.

  • Further, it allows the relevant authorities to step in if and when needed. This means that any individual, regardless of race, ethnicity, gender, or other demographic characteristics, is treated fairly.

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Research and authored by Imran Husain l Linkedin

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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