By James Chessen
ABA Chief Economist
On Aug. 30, the Federal Financial Institutions Examination Council made available data on mortgage lending transactions in 2018 as required by the Home Mortgage Disclosure Act. The HMDA data set provides important information on U.S. mortgage market activity and is an important tool for all stakeholders to consider how to enhance efforts to expand homeownership in their communities.
Banks are in the business of making loans and want to provide safe and sound mortgages to as many qualified borrowers as possible. Since HMDA captures lending information across all populations, this data is beneficial to banks to assess how well they meet their customers’ needs, to identify business opportunities, and most importantly, to detect possible trends that would suggest unfair treatment of any group, region or population. We hold as a fundamental tenet that race, ethnicity, or another prohibited basis should never factor into lending and pricing decisions. Banks strictly adhere to the principle that mortgage lending must be based on a careful analysis of the individual applicant, not of groups.
The data collected in 2018 was expanded to include more comprehensive information about applicant and loan characteristics, underwriting, and lending outcomes than has previously been available to the public. Because of the expanded data set and importance of homeownership in our country—which drives a significant amount of U.S. economic activity and long-term wealth accumulation—the data will be analyzed by both government regulators and interested stakeholders. We welcome this analysis and commend the Consumer Financial Protection Bureau for its in-depth review of the findings and its cautions about the limitations of the data—including the important reminder that HMDA data alone cannot be used to assess fair lending compliance.
The CFPB’s detailed review of 2018 data shows improving trends. Key takeaways include:
- The number of originations of home-purchase loans secured by one-to-four-family properties remained unchanged between 2017 and 2018 at 4.3 million, but the share of such home-purchase loans made to low-to-moderate-income borrowers rose from 26.3 percent to 28.1 percent, and the share of refinance loans to LMI borrowers increased from 22.9 percent to 30 percent.
- The share of 1-4 family, owner-occupied home purchase loans made to black borrowers rose from 6.4 percent to 6.7 percent, the share made to white Hispanic borrowers increased from 8.8 percent to 8.9 percent, and those made to Asian-American borrowers rose from 5.8 percent to 5.9 percent.
- The share of refinance loans made to black borrowers increased from 5.9 percent to 6.2 percent, the share made to white Hispanic borrowers remained constant at 6.8 percent, and the share made to Asian-American borrowers fell from 4.0 percent to 3.7 percent.
- The average loan amount for first-lien home-purchase loans rose 2.6 percent in 2018, with such amounts increasing for all racial and ethnic groups between 2017 and 2018.
While these are noticeably positive trends in the HMDA data, important work still needs to be done to increase access by LMI and minority borrowers to safe, affordable, and sustainable mortgage loans. The ABA pledges to work with all stakeholders to achieve the goal of expanding financial access and homeownership across all communities.
To that end, ABA recommends that policymakers take the following steps to expand financial access:
Remove overly restrictive underwriting standards that disproportionately impact LMI and minority access to credit. Underwriting standards in mortgages are strictly regulated by federal law, and such regulation may be too restrictive. As advocated by a broad coalition of mortgage stakeholders, which includes an unusual alliance of consumer groups, civil rights organizations and financial institutions, the CFPB should eliminate the 43 percent debt-to-income ratio and the associated requirements for determining and documenting income set out in Appendix Q to the Ability-to-Repay/Qualified Mortgage rule.
A 43 percent DTI threshold is arbitrary and imposes inflexible underwriting requirements that result in the rejection of many creditworthy applicants. ABA believes that the QM rules should not prescribe inflexible underwriting criteria, and the bureau should allow creditors discretion to set their own appropriate DTI standards.
Appendix Q’s definitions and standards for calculating and documenting DTI constitute only one option among many market standards for safe underwriting. It is widely recognized that Appendix Q’s underwriting and documentation requirements present challenges for borrowers who are self-employed, or who have liquid assets, seasonal income or income from multiple jobs. We recommend the elimination of Appendix Q as a rigid requirement.
Encourage the responsible use of alternative data in underwriting. About 14 percent of Hispanic households in the U.S. are “unbanked” and rely on cash and prepaid debit cards, according to the FDIC’s latest survey of unbanked and underbanked households. Another 17 percent of African-American households were also unbanked according to the survey. As a result, a significant percentage of minority borrowers do not use credit regularly and lack a credit history or have a “thin file,” which limits credit access. As the report notes, credit scores are widely used in credit decisions and are among the most significant factors in mortgage underwriting and pricing. Responsible use of predictive alternative data such as education status and timely bill payment history has increased credit access and lowered borrowing costs, and should be encouraged.
Devote additional resources to financial education. Financial education plays a critical role in preparing consumers for home ownership. It enables consumers to set financial goals, navigate choices, and evaluate options to achieve those goals in an increasingly complex and rapidly changing economy. We recommend additional support for public and private financial education. In the meantime, the ABA Foundation will continue to provide financial education programs through ABA member banks. Last year, more than 25,000 bank volunteers provided financial education to more than 700,000 Americans.
Support and preserve accessibility to specialized federal, state and local programs and grants to assist first-time homeowners. Rising home prices and closing costs prevent many qualified borrowers from purchasing a home. Federal Housing Administration down payment assistance programs can offer qualifying participants thousands of additional dollars to help; in addition, many housing finance agencies and local municipalities have assistance programs that can help with closing and prepaid costs. Growing these programs would provide a pathway to expanding homeownership.
Identify and address barriers to serving limited English proficiency customers. Banks want to serve increasingly diverse communities but face significant legal risk. In the past, regulators discouraged serving LEP consumers through a series of enforcement actions suggesting that it may be unfair or deceptive to market a product in another language if the lender is not prepared to service the product in that language from “cradle to grave.” Lenders need clear guidance on how to serve LEP customers, including a reasonable and realistic framework for transitioning a product into another language that indicates which documents and communications should be supported first. In addition, regulators should provide disclosures and model forms in those languages they want to encourage financial institutions to support.
The HMDA data set is an important tool for all stakeholders to consider how to enhance efforts to expand homeownership in their communities. A preliminary review of the 2018 data shows improving trends, though deeper analysis is needed to assure mortgage credit flows to all creditworthy individuals. As more analysis is undertaken, researchers must be cognizant of the fact that HMDA data cannot alone identify causes or establish whether improper discrimination has occurred. As regulators have repeatedly cautioned, such issues are highly complex, and any analysis of the HMDA data must recognize its limitations.
Banks want to expand safe and sound lending across the board and remain committed to enhancing the availability of credit to all qualified borrowers. ABA and its member banks pledge to engage in full analysis of this HMDA data to better understand financial impact of mortgage lending practices across all communities. We also pledge to work with all stakeholders to achieve the goals of safe and fair lending and expand credit availability for all. The policy recommendations outlined here offer a good starting point for discussion.
- This year, ABA partnered with an independent statistical analysis firm, Asurity technologies, to conduct our own review of the publicly available 2018 data. We are currently comparing Asurity’s analysis with the CFPB’s data points and may publish additional articles highlighting key findings of both.
- CFPB, “Data Point: 2018 Mortgage Market Activity and Trends,” 2019; CFPB, “Introducing New and Revised Data Points in HMDA,” 2019.
- Patrice Ficklin and Paul Watkins, “An Update on Credit Access and the Bureau’s First No-Action Letter,” Aug. 6, 2019.