In a blow to small community banks, a federal judge reversed a rule enacted by the Consumer Financial Protection Bureau under the Trump administration that relieved thousands of lenders from reporting data on home mortgages that is used to enforce anti-discrimination laws.
Chief District Court Judge Beryl Howell of the federal District Court in Washington last week
The judge ruled that the CFPB overstated the costs to lenders of complying with HMDA reporting requirements for home loans. The bureau did not adequately take into account the negative impact that the loss of the data from 1,700 financial institutions would have on communities, particularly rural and low-income areas, the judge found.
"It's a very big deal to the hundreds of small lenders that received an exemption and now will need to report," said Warren Traiger, senior counsel at the Buckley law firm.
The 2020 rule significantly reduced the portion of lenders required to report data on home loan applicants from 43% to 27%, and for those issuing home equity lines of credit from 15% to 9%.
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Consumer advocates that sued the CFPB two months after it issued the 2020 rule declared victory. Advocates claimed that HMDA data is invaluable in uncovering and addressing redlining and fair lending violations.
"It's really important that we have well-substantiated rules that can stand the test of time, whatever administration is in power," said Brad Blower, general counsel at the National Community Reinvestment Coalition, one of five nonprofits that sued the CFPB. The other plaintiffs were Montana Fair Housing, Texas Low Income Housing Information Service, Empire Justice Center and the Association for Neighborhood & Housing Development.
The 2020 rule issued under Kraninger raised the threshold for reporting HMDA data to 100 closed-end home loans, up from 25. However, the judge did not make a change to the threshold for open-end loans, or home equity lines of credit, which was increased under the 2020 rule to 200 from 100.
In a partial victory for the CFPB, Howell found that the bureau did not exceed its statutory authority in issuing the rule because Congress gave the agency broad discretion to create exceptions to the reporting requirements. The CFPB said it is reviewing the decision but had no further comment on whether it planned to appeal.
The judge found that the CFPB under Kraninger exaggerated the benefits to lenders "by relying on overinflated estimates of the cost savings to newly-exempted lending institutions with small loan volumes." The CFPB also failed to consider the "non-quantifiable harms of raising reporting thresholds," Howell wrote.
"CFPB's efforts to explain how the goals of a sunshine statute like HMDA are furthered by a rule newly exempting 40% of institutions — all of which hold at least $50,000,000 in assets — from any HMDA public disclosure requirements, beyond even what Congress had so recently deemed appropriate in EGRRCPA, are on shaky ground," she wrote, referring to the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018.
The ruling resolves for the time being a complicated regulatory process that began when the CFPB overhauled existing HDMA data collection and reporting requirements in 2015. At that time, the initial threshold for lenders to report HMDA data was set at 25 home loans for closed-end mortgages, and 100 for home equity lines of credit, known as open-end lines of credit.
"It's all about transparency and the ability to see where there are credit deserts and patterns of discrimination," said Blower. "By raising the threshold for closed-end loans with 20- and 30-year mortgages, [the CFPB] excluded institutions from having to report particularly in rural areas and Native American areas where we really need that data to make sure that institutions are being fair."
