#163 Fall 2010 — Neighborhood Stabilization

HMDA at 35

The improved Home Mortgage Disclosure Act can be a tool for fighting predatory lending, but it could and should go further.

2002 – 2010: Anti-Reverse Redlining

The late 1990s saw tremendous growth in subprime lending. With this growth came evidence that subprime loans were disproportionately distributed among borrowers by race, and allegations that lenders were targeting predominantly minority neighborhoods for subprime loans, and that as a result, borrowers who were eligible for prime rate loans received subprime loans at higher cost. In essence, this was a claim of reverse redlining. The Fed reacted to this evidence in 2002, amending HMDA to require lenders to report the interest rate on their loans. With this change, the Fed expanded HMDA’s mission again, this time to detect and deter reverse redlining, but it did so without requiring lenders to disclose the borrower’s credit rating, which is crucial in determining whether a subprime loan recipient should have received a prime loan.

In 2005, the Fed released a study based on data lenders reported pursuant to the 2002 HMDA amendments. The study showed that in 2004, blacks and Latinos were more likely than whites to receive subprime home mortgage loans: 32.4 percent of conventional first-lien home purchase loans to blacks were subprime, compared to 20.3 percent for Latinos and 8.7 percent for whites. The Fed concluded that some of the difference in the subprime lending rates could be explained by differences in credit scores, but even after taking these into account, there were unexplained differences. The Fed neither concluded nor ruled out discrimination as the reason. Several studies by community advocates confirmed the same disproportionate incidence of subprime lending by race in various areas around the country. For example, in New York City in 2005, 42 percent of all HMDA loans in predominantly minority neighborhoods were subprime, compared with 11.7 percent in predominantly white neighborhoods. However, because advocates lacked access to credit scores, these studies were not as persuasive as they might have been.

In contrast to the firestorm that the disclosure of HMDA data showing discrimination pursuant to the 1989 amendments caused, the disclosure of data under the 2002 amendments that indicated reverse redlining did not have the same effect. Headlines did not materialize. Government enforcement efforts were sluggish. Lenders did not make significant changes to their lending practices. Ultimately, the data did not seem to have much impact.