Will HMDA data carve-out for small banks make discrimination easier?

As critics of the Senate banking bill have rallied in recent weeks, an important argument has begun to gain traction: The legislation would make it easier for banks to discriminate.

Opponents have pointed to a provision that, at first glance, seems straightforward enough — a carve-out for small lenders from certain mortgage data reporting requirements.

But the debate around this measure is more complicated than many realize. Every policy change comes with both benefits and costs — and this particular fight highlights how difficult weighing those costs and benefits can really be, even when it comes to what can seem like a harmless tweak.

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The Senate bill calls for exempting banks and credit unions that provide fewer than 500 mortgages a year from having to report on a series of expanded data points required by the Home Mortgage Disclosure Act.

HMDA got its start in the 1970s as a way to help root out unfair — yet pervasive — lending practices and patterns that harmed minorities and other groups. In 2015, the Consumer Financial Protection Bureau added roughly 25 new data fields to the information already gathered under HMDA — a mix of data points required by the Dodd-Frank Act and added under the agency’s discretion. The data include items like borrower credit scores, mortgage loan terms and the points and fees assessed in a sale. It’s those 25 additional pieces of data that are at stake in the Senate bill — not all HMDA data (another 23 data fields), as some have suggested. And the exemption is only available for banks and credit unions, not other mortgage lenders.

“We're not talking about throwing out any existing, historical, always-reported HMDA data,” said Paul Merski, executive vice president of congressional relations and strategy for the Independent Community Bankers of America. “It's really disingenuous that many are saying the HMDA data is being thrown out.”

Earlier this month the legislation’s sponsors added language that small banks that receive poor grades on two consecutive Community Reinvestment Act exams will be subject to the expanded reporting. The bill also mandates a study after two years to evaluate the impact that the exemptions have had on HMDA data.

“This is only a safety net for banks that are good actors,” said Andrea Mitchell, a partner at the law firm Buckley Sandler. “It's not a shield for lenders to hide behind so they can potentially engage in bad conduct.”

Critics, however, have called the new language a “ridiculous fig leaf,” noting that the vast majority of banks tend to earn a satisfactory ranking or higher on their exams, although discrimination in mortgage lending still happens.

There’s also been debate over how much of the industry would be covered by the carve-out. While supporters note that the vast majority of mortgage loans would be subject to full HMDA reporting, a significant portion — up to 85% — of banks would be let off the hook. This reflects the fact that the top mortgage lenders make up such a significant portion of the overall market.

But it’s that latter figure — the consideration of how many banks are being tracked — that’s crucial to critics of the measure.

“The goal of preventing racism in lending isn't confined to the largest players,” said Aaron Klein, a fellow at the Brookings Institution.

The cost and burden of the additional HMDA data on small institutions has also been emphasized, as it is in almost every case of proposed deregulation. The CFPB estimated in its rulemaking that the additional variable costs on “low-complexity institutions” — those providing relatively few mortgages — would be roughly $23 per application for closed-end mortgages. It would be just 10-20 cents for institutions doing higher volumes of loans. (The costs run higher for open-end lines of credit, around $41 for smaller institutions per application and $3-6 each for larger players.)

Industry observers insist the CFPB rule is weighing on small bankers.

“It’s certainly not a contrived annoyance to simply get out of having to file an extra form or two,” said Matthew Stromquist, a partner at the law firm Pilgrim Christakis. “The burden is real and felt and has market effects and market implications.”

That burden includes not just the digital systems to be put into place with the help of vendors or new training for mortgage lenders — it also encapsulates preparing for the additional public exposure and the threat of penalty that hangs over banks, especially community banks, if their data is reported incorrectly. The CFPB, under former Director Richard Cordray, hit Nationstar Mortgage last year with a $1.75 million fine for inaccuracies in its HMDA reporting.

The carve-out may also provide a shield to small banks from being called out for discrimination based on data sets with limited sample sizes.

“This is a legislative way of recognizing that if you originate less than 500 loans each year, it's a blip,” said Mercedes Tunstall, a partner at the law firm Pillsbury. “I just don't see how it's going to impact discriminatory lending, to the extent that it’s happening, because you are talking about such small numbers — you’re not going to have meaningful results.”

Those in the industry emphasize, for example, that there are other tools for going after discriminatory lending. That includes employing mystery shoppers and collecting complaints from individuals, in addition to examining the existing HMDA data, which will still need to be reported in most cases.

Opponents of the Senate provision argue, however, that banks are already collecting the much of the necessary data in the course of doing business. While there may be additional steps required, it’s not as if institutions must start from scratch.

Removing the exemption would also limit the ability of consumer advocates to push for improvements in lending practices during bank mergers using mortgage lending data.

“One of the single most effective ways a community group can advance its cause is to submit a protest when banks submit a merger or acquisition application to the Federal Reserve,” said Mitchell.

Yet the added data, while a boon for watchdogs, offers more risk for small banks — perhaps outsize risk, say industry officials.

“Once you have more data points, you have more potential risk and you have more people on the plaintiff side wanting to take advantage of that risk whether that’s through class actions or through individual lawsuits,” said Stromquist.

And for remote, rural areas where there isn’t much diversity to begin with, banks could find themselves facing heightened scrutiny based on analyses that aren’t reflective of their communities.

“The expanded information has been used by CFPB in their disparate impact analyses,” said Tunstall. “For smaller institutions in rural, fairly homogeneous areas, you could have a disparate impact finding when that's just not appropriate given the surrounding area.”

Still, critics note that, if anything, the extra data requirements could help limit false positives in the data — accusations of discrimination where there really isn't any.

“Credit scores, the loan-to-value ratio, how long the prepayment penalty is — all of these things and more could give a clearer picture,” said John Taylor, president and CEO of the National Community Reinvestment Coalition.

Klein, of Brookings, added that “facts like credit scores help explain differences in outcome that statistical methods could otherwise infer were due to race.”

“Adding more variables to help explain disparities reduces false positives and more accurately detects true racial impact,” he said.

Ultimately, the debate seems to be about this public exposure — a core component of HMDA for decades. And that’s where critics of the measure make their strongest case. The information that is collected under the law can be analyzed not just by federal regulators, but by state attorneys general, consumer groups and researchers. The CFPB has called the dataset “a public good.”

The most concerning element of the policy fight is that lawmakers are talking about limiting this public data at a time when the administration is pulling back on federal oversight of consumer protection and fair-lending issues. The shift is likely to prove stark relative to the Obama administration, which prioritized the issues at both the CFPB and the Department of Justice.

Even if the HMDA data can’t provide a perfect snapshot of lending activity, especially at smaller institutions with limited sample sizes, the information is not necessarily worthless. Wiping out data collection for smaller institutions takes away a key tool, despite clear signs that discrimination in lending still exists across the country.

At the same time, the acting CFPB Director Mick Mulvaney has already said he plans to reconsider portions of the HMDA expansion rule and has stripped the agency’s Office of Fair Lending of its enforcement powers.

“This isn't a bill to reduce regulatory burden, this is a bank bill that allows them to continue to hide the data from the public,” said the NCRC’s Taylor. “We are seeing a wholesale withdrawal by this administration, away from making homeownership available to working-class Americans.”

Taken together, these various changes amount to a substantial shift in approach and emphasis when it comes to fair lending. And that bigger picture shouldn’t fall by the wayside as the two sides battle over this single, arguably modest provision.

Small chips in the regulatory foundation have a way of adding up — and it’s worth considering them comprehensively.