Utilizing HMDA data to tell your story right

April 25, 2018

The concept of storytelling often is viewed through a somewhat whimsical lens. However, in the context of Home Mortgage Disclosure Act (HMDA) compliance, it is viewed through in a much more serious light.

A panel of industry insiders discussed what takeaways could be extrapolated from HMDA data about a company’s lending practices and how lenders can utilize the data they collect to navigate the new HMDA environment at the Consumer Bankers Association’s 2018 Annual Convention. They also highlighted potential issues that could come to light through HMDA reporting and what they believe regulators should keep in mind when evaluating the information.

It is imperative for companies to take an active role in shaping the narrative around the HMDA data that becomes public, Akerman LLP Partner and former CFPB attorney Thomas Kearney said during the forum. Otherwise, they run the risk of having someone else do it for them.

“The most important thing is to be able to tell your story,” Kearney said. “You should know what your data looks like, at least before the regulators see it and before the public sees it.”

Providing a more accurate and detailed view of what problems truly are present among lenders so they can be addressed is what Center for Responsible Lending President Michael Calhoun said he believes should be the goal of HMDA. He noted that there are issues in the way of that goal that must be addressed.

“We’ve had HMDA for a long time and we’ve never had a lot of the data being considered necessary to tell what’s really a problem versus what’s a false positive,” he said. “You get so much noise in the way of what has been revealed and studied and, as even [the CFPB] has acknowledged, they’ve been missing key elements that would have told a much more accurate story that could have helped us understand what really happened.”

Pondering whether their data reporting efforts will reveal them to be among the norm in terms of minority lending activity or an outlier is stressful for companies, noted Jeff Jaffee, senior vice president of Fair Lending and Responsible Banking at Bank of the West. He said many organizations are concerned that they have no way of knowing what percentages of various ethnic groups will answer certain questions, and what effect that will have on overall results.

“I think the regulators need to probably give us better guidance, and I think that we all need to think about, as we’re [assessing] HMDA performance context, ‘what does this mean, what does this show and when and where this information will be available,’ ” he said.

Given the controversy about whether HMDA data should be made public, Jaffee said it is best for lenders and consumers to assume that any reported information that would not jeopardize the privacy of borrowers is fair game for publication and that it is unlikely any information that would pose privacy risk would be published.

When asked what data would be released, Kearney referenced the proposed policy guidance the CFPB released in September 2017 noting what changes would be made to the existing data points and what information would be withheld. He noted that the CFPB has yet to issue final guidance on the matter.

HELOCs under the microscope

The panelists discussed concerns for lenders stemming from the fact that home equity line of credit (HELOC) data is now HMDA reportable. Many lenders question whether it is fair to treat HELOC data the same as information collected for a home purchase.

Although many people do not think about HELOCs in terms of discriminatory impact, Kearney said there are occasions when questions arise to that effect.

He offered an example that arose in the aftermath of Hurricanes Harvey and Irma while dealing with a question about whether a lender or servicer could freeze credit repayment requirements in impacted areas as a means of helping borrowers. Kearney asked whether they intended to implement such a freeze in certain neighborhoods but not others.  They had not thought about that perspective. This response, Kearney said, highlights the need to think about HELOCs in a different way given the new HMDA requirements.

“You also have to think about the trade-offs between a home equity loan and a home equity line of credit and about marketing HELOCs,” Kearney said. “It’s one thing if you’re going to market HELOCs to people who have been in their homes for a long time and will take out a loan for repairs, paying for their grandchildren's college, or other major expenses. What we should really be concerned about is people who are of lower or moderate income and perhaps shouldn’t have HELOCs marketed to them.”

Jaffee pointed out that lenders would have an almost impossible task if they made a concerted effort to distribute HELOCs equally among consumers of all races and ethnicities, rather than simply approving applicants based on their financial situations, because the racial and ethnic makeup of American homeowners is far from even.

“Because of the nature of a home equity loan, you’re going to market it to someone who owns a home,” he said. “Who owns a home? Seventy-four percent of whites own homes; 49 percent of African Americans own homes. If you do your best distribution, you’re going to be at 74 and 49. It’s going to look bad, and it’s not because you’re trying to [be unfair]. It’s something the industry needs to think about and think about how you’re going to try and help this.”

Jaffee asserted that there also are disparities between borrowers of varying income brackets, which he believes regulators should take into account when evaluating HMDA data for Community Reinvestment Act (CRA) compliance. He noted that borrowers with the most equity in their homes to be tapped through a HELOC often tend to be the highest earners. 

The baseline standard by which companies determine whether or not they are outliers in terms of HELOC lending could change over time, Jaffee argued, impacting how the industry approaches customer relationship management (CRM). He said that companies continually will have to reassess their CRM practices against the previous year’s HMDA reporting results to adjust appropriately to emerging trends in performance contexts.

Saving consumers from themselves

Noting that he staunchly believes in equal access to credit, Calhoun said he also knows that borrowers sometimes make bad decisions, such as applying for credit when they are in a less-than-ideal financial position to do so. He further noted that HELOCs have not been subject to as stringent ability-to-repay guidelines as mortgage purchase loans.

Calhoun worries that lenders may feel pressured to approve credit applications in some instances where doing so may be ill-advised from a fiscal standpoint, out of fear that not doing so will reflect poorly on them or their institution if the applicant happens to be a minority.  

“A lot of [HELOCs] are structured as essentially an open line of credit with little or no payment down of principal,” Calhoun said. “A lot of the leading banks have put some guardrails on that, but that will be a challenge because, aside from credit scores, there are still huge differences in wealth availability and home equity levels by demographic and, particularly, by race in this country. So that’s very much connected to what you have to ask yourself, ‘How do you walk that tightrope when making these loans fully available and not ending up with differences in performance and foreclosures, etc., on the back end?’ I think that will be a huge challenge.”

Research shows…

Calhoun’s organization has assisted with studies conducted by the National Community Reinvestment Coalition and the National Fair Housing Alliance to identify disparate borrower treatment. He noted that one of the studies, which took place across multiple car dealerships throughout Virginia, used a common methodology of having minority borrowers and white borrowers apply for the same types of loans. The minority borrowers were more qualified than their white counterparts from a credit and income standpoint, and yet the studies found that the minority borrowers were offered less favorable terms than the white borrowers.

“We have one of the salespersons on tape saying to one of the white buyers, ‘We size people up the moment they walk on the lot,’ ” Calhoun said. “Auto sales, in some ways, are the extreme there, but study after study shows that within less than two seconds of meeting someone, we recognize and internalize their race and their gender and, a second or two later, their age. That is the society that we live in and it’s unlikely to change soon. On home equity lines, I think this is going to be a challenge because this does show that, somewhat, you are what you measure. And we have not been measuring this and I don’t think there has been as much focus on how home equity lines are offered or what bank accounts people are offered.”

To overcome the challenges presented by more expansive HMDA requirements, Calhoun said companies will need to realize that it is going to take training and a willingness to evaluate compensation and performance measures.

Having invested significant effort towards studying HMDA data findings and the impact they have on businesses, Calhoun said his organization is hopeful the CFPB will continue to recognize good-faith efforts companies make to comply with expanded requirements. He said that appears likely given the bureau’s shift in leadership with Mick Mulvaney taking over for Richard Cordray on an interim basis and that Mulvaney has expressed an intent to take a much less stringent approach to enforcement and supervision.