Ash Center for Democratic Governance and Innovation The Transparency Policy Project

ISSUES/CASES

Disclosing Lending Practices to Reduce Discrimination

The Home Mortgage Disclosure Act (HMDA), initially enacted in 1975 and substantially expanded in 1989, 2002 and 2010 required banks to disclose detailed information about their mortgage lending. The law aimed to curb discrimination in lending to create more equal opportunity to access credit. The disclosure requirement compelled banks, savings and loan associations, and other lending institutions to report annually the amounts and geographical distribution of their mortgage applications, origins, and purchases disaggregated by race, gender, annual income, and other characteristics. The data, collected and disclosed by the Federal Financial Institutions Examination Council, were made available to the public and to financial regulators to determine if lenders were serving the housing needs of the communities where they were located. The Examination Council was an interagency body that included the Federal Reserve System, the Federal Deposit Insurance Corporation, and other agencies. In 2012, 7,400 financial institutions reported data about 18.7 million mortgage applications and loans. 

Mortgage lending disclosure was part of Congress’s response to activists’ calls, in the later stages of the civil rights movement of the 1960s and 1970s, for greater economic equality. It followed congressional action in 1968 to bar racial discrimination in housing sales or rentals; a settlement negotiated by the Department of Justice to end racial discrimination in the appraisal profession; and approval of the federal Equal Credit Opportunity Act in 1974, which outlawed racial and ethnic discrimination in lending. Community-based organizations pressed for disclosure requirements to aid their local campaigns to end lending discrimination. One of the most prominent figures in this debate was Gale Cincotta, a Chicago-based leader of the fair housing and community reinvestment movement, who founded National People’s Action and the National Training and Information Center, two of the local organizations that documented the retreat of banks from inner-city neighborhoods in the 1960s and 1970s and pressed for more equitable lending. She and other activists found an ally in Senate Banking Committee chair William Proxmire (D – Wis.). In 1975, Proxmire sponsored a bill requiring disclosure of lending practices. Despite opposition from the banking industry, the requirement was ultimately approved by a narrow margin in both the Senate (47–45) and the House (177–147).

Under initial disclosure requirements, banks were required to report minimal data about the geographic location of home loan approvals and purchases. Additional legislation expanded and refined these disclosure requirements. In 1977, Congress approved the Community Reinvestment Act (CRA), which required lending institutions to meet the credit needs of the communities in which they operated and linked community lending records to approval of merger applications. In 1980, Congress approved the Housing and Community Development Act, which directed the Federal Financial Institutions Examination Council (FFIEC) to serve as a central clearinghouse for mortgage lending data. Finally, in response to the savings and loan crisis of the 1980s, Congress approved in 1989 the Federal Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which sought to stabilize and provide new oversight for the savings and loan industry. Community reinvestment groups lobbied successfully to include improvements in disclosure, such as reporting of applications as well as loans; reporting of denial rates; reporting of the race, sex, and income of borrowers and applicants; and reporting by a broader range of mortgage lenders.

As Congress expanded the scope and depth of this transparency system, the data gained wider use. Advocacy groups used mortgage lending data to document constraints on credit in their communities and to negotiate new mechanisms for low-income lending with individual banks. Broad-based community reinvestment task forces in Washington, Rhode Island, New Jersey, and Michigan forged partnerships among community organizations, lending institutions, and state and local governments to address access problems. Investigative reporters, financial analysts, and intermediaries used the information to document pervasive patterns of discriminatory lending and the exodus of banks from low-income neighborhoods. In 1988, for example, the Atlanta Journal-Constitution reported on widespread redlining in that city in “The Color of Money,” a series of articles that received extensive national attention.  The same year, the Detroit Free Press published a series describing lending discrimination in the Detroit area. In 1992, the Boston Federal Reserve conducted a study that concluded that race had a strong influence in lending decisions. The study received broad media coverage, confronting banks with discrimination allegations from a particularly authoritative source.

As they responded to a wave of requests for bank mergers in the late 1980s and 1990s, federal regulators also employed mortgage lending data in deciding whether to grant approvals. The banking industry was shaken in 1989 when the Federal Reserve Bank first exercised this power by denying amerger request from Continental Illinois National Bank and Trust Company of Chicago on the ground that the bank had not met its community reinvestment requirements. Advocacy groups that tracked the performance of particular banks often petitioned regulators to turn down merger requests if their performance indicated unfair lending practices. Expanded HMDA data also allowed regulators to focus on the enforcement of the Fair Housing Act and Equal Credit Opportunity Act and the Department of Justice brought suits against several lenders for lending and price discrimination. 

This shift in the competitive environment led many more banks to improve lending practices in the 1990s. The competitive shift resulted in part from mortgage lending disclosure and the requirements of the Community Reinvestment Act, as well as from the proliferation of sophisticated community organizations that had developed the expertise to understand bank lending patterns and negotiate with financial institutions. More banks developed products, divisions, and methods to compete in low-income markets, and bankers acknowledged that disclosure and community reinvestment requirements had proven less burdensome than expected.

The accuracy and scope of disclosed lending data also continued to improve. Disclosure became more frequent, data quality increased, more financial institutions were required to report, and data were collected and distributed electronically. After the successes of the 1990s, community organizations and regulators turned their attention to the sub-prime market and to predatory lending, a practice in which vulnerable minorities were offered higher-interest mortgages and less-favorable terms than other borrowers. In 2002, mortgage lending disclosure rules were amended to require banks to disclose not only the disposition of loan applications but also mortgage prices. Beginning in 2004, lenders were required to report data on loan pricing for loan originations in which the annual percentage rate exceeded the yield of comparable Treasury securities by a specified amount. These new data allowed intermediaries such as the National Community Reinvestment Coalition and the Association of Community Organizations for Reform Now to document disparities in access to credit and press for measures to address predatory lending. Also researchers identified patterns of pricing discrimination and some concluded that, although it is difficult to separate the effect of HMDA from other regulations, mortgage disclosure might have contributed to expanding lending for minorities. Regulators used the expanded information to enforce fair lending laws. In 2005, the Federal Reserve incorporated these new data into their statistical strategies for identifying potentially discriminatory institutions that warranted closer regulatory scrutiny. In 2009, a GAO report found that banking regulators referred over 100 lenders to the Department of Justice for possible violations of fair lending law. 

Since 2008, it became possible for lenders to submit data via the Web, which is more secure and efficient than submission via e-mail or CD-ROM. The 2010 Dodd-Frank Act introduced a significant change when it put the newly created Consumer Financial Protection Bureau (CFPB) in charge of HMDA rulemaking. In 2014, the CFPB proposed to update HMDA reporting to improve the quality and type of data, and make submission and data use easier. The rule would exempt from reporting institutions that generate a low volume (less than 25) of loans, align HMDA data with existing industry standards for data collection, and intensify reporting for institutions that handle a large volume of loans, requiring quarterly rather than annual reporting.    

Updated February 2015

This case study is drawn from Full Disclosure, Fung, Graham and Weil, 2007.
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