Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators (MLOs). This video explains the purpose and use of HMDA data. For course credit toward renewing your NMLS license, visit firsttuesday.us.
HMDA purpose and coverage
By 1975, mortgage lenders had contributed measurably to the decline of redlined urban areas by failing to offer or permit adequate home financing to qualified applicants on reasonable terms and conditions. This coordinated conduct of the mortgage bankers took place despite bankers being in violation of their bank charters.
To counter this collective misallocation of mortgage originations, or by conscious parallelism within mortgage banking operations, congress enacted the Home Mortgage Disclosure Act (HMDA). [12 United States Code §§2801 et seq.]
Later, from 1988 to 1992, mortgage lenders who met certain loan volume criteria were further required to collect HMDA data by compiling home loan purchase, application and origination data. Thus, federal and state banks, credit unions, savings associations and independent mortgage lenders are required to comply with HMDA to compile and report on mortgage transactions. [Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Federal Deposit Insurance Corporation Involvement Act (FDICIA)].
HMDA rules are published under Regulation C (Reg C). [12 Code of Federal Regulations §§1003 et seq.]
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The purpose of HMDA regulations
HMDA requires consumer mortgage lenders to gather and report data on consumer mortgage purchases, applications and originations as regulated. HMDA does not prohibit or endorse any particular type of lending or establish quotas for mortgage originations in any particular area or require that they be made available to any particular type of home purchase borrower. [12 USC §2801(c)]
Rather, the information reported by mortgage originators and collected by HMDA is used to:
- provide regulators — and the public — information to ensure lenders are universally serving the housing financing needs of their respective areas;
- aid public officials to support housing for areas with population in need of public and private housing investment; and
- assist in identifying discriminatory lending patterns and enforcing anti-discrimination laws. [12 USC §2801; 12 CFR §1003.1]
Compiling and reporting HMDA data is a lengthy, detailed, and cost-incurring process for mortgage originators. And as is always the case, these costs are passed on to the consumer in fees and rates charged for originating these mortgages. Thus, for mortgage lenders, the financial penalties HMDA imposes for failing to comply are as severe as is the failure of the mortgage originators to gather and supply HMDA data.
How HMDA data is collected
HMDA data is collected and reported on mortgage purchases, applications and originations. [12 CFR §1003.4(a)]
Whether HMDA data collection and reporting is required of a consumer mortgage originator depends on:
- the lender’s location;
- the lender’s size;
- the extent of its residential mortgage lending business in metropolitan statistical areas (MSAs); and
- whether the transaction is covered by HMDA.
Transactions are reported for both closed-end mortgages — fully amortized mortgages — and open-end mortgages — reverse mortgages and HELOC lines of credit, covering:
- mortgages originated to fund the purchase and are secured by a buyer-occupant dwelling, called a home purchase loan [12 CFR §1003.2(j)];
- mortgages originated to improve, repair or rehabilitate the borrower’s dwelling or the parcel of real estate the dwelling occupies, called a home improvement loan [12 CFR §1003.2(i)]; and
- mortgages used to refinance an existing home loan, called a [12 CFR §1003.2(p)]
Editor’s note — Learn the details of who is required to collect HMDA data, what data needs to be collected and how it is to be reported in the next section.
How HMDA information is used
Government agencies use HMDA data to evaluate lender compliance with anti-discrimination and consumer protection rules, including the:
- Equal Credit Opportunity Act (ECOA); and
- Fair Housing Act.
Discrimination in home mortgage transactions — the purchase, application or origination — on the basis of race, national origin, sex and age, etc., is prohibited conduct prosecuted under the ECOA and Federal Fair Housing Act.
The HMDA rules apply to banks, mortgage lenders, loan officers (MLOs), independent loan originators, real estate agents (MLOs) — the entire industry of mortgage arrangers. Think of these consumer protection laws as a housing mortgage consumer’s shield against discriminatory business practices, and a regulators sword for prosecuting consumer mortgage lending offenders.
In application, HMDA data is a bloodhound, sniffing out potential mortgage transaction patterns pointing to abuse. Through all the applications submitted or mortgages originated, regulators (and the public) can glean what is a lender’s mortgage transaction history to determine whether fair lending and housing regulations are being followed.
HMDA directs regulators to red flag lending patterns that appear in violation of the discrimination rules. Mortgage lending patterns in violation of HMDA prompt investigation, and when deemed in violation ultimately lead to prosecution for failure of the mortgage lender to implement fair lending practices.
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HMDA’s consumer protection role
Data collected by HMDA from consumer mortgage lenders alone does not establish violations due to discrimination. For example, annual aggregate HMDA reports for consumer mortgage applications received by all mortgage lenders consistently show that applications from protected classes of borrowers are more likely to be denied than in areas housing others.
Does this prove that all lenders are actively discriminating?
No! Without looking at other factors, such as credit history, debt-to-income ratio data and loan-to-value ratio for loan files, regulators don’t get a full picture of why loan applications were denied.
However, HMDA data can be used for the basis of a full investigation. For example, in 2023, the U.S. Department of Justice won a settlement of $31 million from City National Bank in Los Angeles, after finding the bank:
- maintained only three of its 37 branches in minority neighborhoods;
- generated applications from their existing customers instead of marketing or advertising in minority neighborhoods;
- failed to provide adequate staff resources to serve the mortgage lending needs of residents from minority neighborhoods; and
- failed to act on internal reports indicating fair lending and redlining risk.
As a result of this conduct, the bank achieved disproportionately low numbers of mortgages and mortgage applications from minority areas compared to similarly situated lenders.
For example, City National received 8,593 mortgage applications within Los Angeles from 2017 through 2020. Of those applications, a mere 8% came from residents of majority-Black and Latino Census tracts. Meanwhile, peer lenders during the same period generated 46% of their applications from Black and Latino Census tracts.
These figures demonstrate a statistically significant failure by City National Bank, relative to its lender peers, to draw applications for mortgages and affirmatively provide mortgage services to residents from minority neighborhoods on a non-discriminatory basis. [United States of America v. City National Bank (January 12, 2023) __ F.supp __]
In addition to singling out discriminatory practices, HMDA data is used by lawmakers, city planners, advocates, activists, non-profits, universities and various other entities. For example, in 2012, the American Civil Liberties Union (ACLU) used HMDA data to make a case against Morgan Stanley for predatory lending practices in Detroit.
HMDA data may be used by the public to forecast loan origination patterns. Freddie Mac uses HMDA data to adjust its forecasts for loan origination. Trends in originations and applications also provide mortgage industry participants — such as mortgage originators — with much-needed information about trends developing on the horizon.
