Expanded mortgage disclosure through HMDA reform would detect discrimination, unsustainable loans

Written by Geoff Smith and Katie Buitrago on September 13, 2010 - 1:49pm

Even though the comment period on CRA modernization is now closed, there are other opportunities to provide input on policies that hold lenders accountable to their communities. Federal bank regulators are holding public hearings on updating the Home Mortgage Disclosure Act (HMDA), which requires mortgage lenders to provide detailed public reports of their mortgage lending activities to regulators and the public (register here by September 15 for the Chicago hearing).

HMDA is a crucial tool in the fight against discriminatory and predatory lending. If you’ve read any of our reports on mortgage lending or used our community lending fact book, you’ve seen how HMDA data can be used to detect and target discriminatory lending practices and study patterns of community investment. The HMDA data currently collected is not sensitive enough, however, to detect some of the problematic practices that triggered the foreclosure crisis. Over the next few weeks, we’ll explain where data collection must be improved so that regulators can stop problems before they balloon into crises and advocates can effectively fight for community investment.

One of the driving factors behind the foreclosure crisis was lenders putting borrowers into loans they could not reasonably afford. Some lenders required little or no income documentation when underwriting the loan and disregarded how much debt a borrower already had to pay every month.  In order to prevent this from happening again, lenders should be required to report the level of income documentation used when underwriting the mortgage and a borrower’s debt load.

It is important to know how lenders are using no- or limited-income documentation loan products and if such products are concentrated in certain vulnerable segments of the market or in certain communities.  A strong concentration of “no-doc” loans in a low-income community, for example, could indicate that a lender is systematically using lax documentation requirements to put borrowers in loans they are unable to afford.

It is also important to know the borrower’s debt load as a share of their monthly income, called the debt-to-income ratio. The “front-end debt-to-income ratio” shows how much of a borrower’s income goes to monthly mortgage payments, and the “back-end debt-to-income ratio” shows how much of a borrower’s income goes to all debt payments, such as auto and student loans or credit cards. We recommend that HMDA collect back-end ratios because they include other types of monthly debt payment obligations in addition to the mortgage and are a better reflection of a borrower’s overall debt burden.  If a lender consistently makes loans above certain back-end ratio levels, particularly if these loans are concentrated within certain borrower segments, it would raise concerns about that institution’s lending practices.