HMDA at 35

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

2010: Anti-Predatory Lending

Although many factors contributed to the economic crisis of 2008, one of the big culprits was the high default rate on risky, unsafe, and abusive loans, known collectively as “predatory” loans. Predatory loans contain characteristics that make them highly risky, difficult if not impossible to repay, or without any economic benefit to the borrower. These characteristics include prepayment penalties, balloon payments, negative amortization, high loan-to-value ratios, confusing adjustable rate periods, and excessively high fees, interest rates, and points. Additionally, predatory loans are frequently made based on little or no documentation of the borrower’s income, employment, assets, or source of funds; the value of the property exclusively; or very high borrower debt/income and housing debt/income ratios.

The CPA amendments expanded HMDA’s mission once again, this time, to detect and deter predatory lending. The CPA amendments require lenders to disclose the following new information: total number of mortgage loans according to total points and fees, difference between interest rate and a benchmark rate, term in months of any prepayment penalty, and total number of mortgage applications and loans according to: value of property pledged as collateral, term in months after which interest rate may change, contractual terms that would allow borrower to make non-fully amortizing payments, term in months of loan, channel through which loan was made, and credit score of mortgage applicant.

The new HMDA disclosures will allow advocates to identify several types of predatory loans, including:

  • Adjustable rate mortgages with prepayment penalties: These loans were particularly vulnerable when housing prices declined in 2008, triggering high default rates and contributing to the recession. The HMDA amendments requiring lenders to disclose the interest rate, adjustable rate periods, and prepayment penalty terms on loans will help identify these loans.
  • Excessively costly loans: The mandated disclosure of a loan’s interest rate and points and fees, the borrower’s credit rating, and an interest rate benchmark will help determine whether a loan is more costly than average and whether it is tied to the borrower’s risk.
  • Negatively amortizing loans: The balance on these loans increases even if the borrower makes all monthly payments on time. Disclosure of whether any loan payments are negatively amortizing will identify this type of predatory loan.

The new disclosures do not, however, contain enough information to identify several other types of predatory loans, including:

  • “Unsuitable” loans: These are loans that the borrower does not have a reasonable chance of repaying because of her economic circumstances. Some of the new disclosures, including the interest rate and fees, interest rate adjustment periods, prepayment penalties, and the value of the collateral, are relevant to whether a loan is suitable. However, also relevant to determining suitability, and perhaps most relevant, are the borrower’s housing debt/income ratio and overall debt/income ratio, which the CPA amendments do not require lenders to disclose.
  • “Low-doc” and “no-doc” loans: These highly risky loans require little or no documentation of the borrower’s income, employment, assets, or source of funds. Lenders are not required under the new amendments to disclose whether a loan was based on little or no documentation.
  • “Asset-based” loans: These loans are often unsuitable for the borrower because they are based only on the value of the collateral. The HMDA amendments do not require lenders to disclose whether a loan was asset-based.
  • Loan “flipping”: Another type of predatory loan requires frequent refinancing, often because of unaffordable balloon payments due before the end of the loan term. These refinancings have increasingly higher rates and fees, rendering the loan unaffordable. The new amendments do not require lenders to disclose balloon payments or the time between loans to the same borrower, making it difficult for advocates to identify loan flipping.

In order for the data to reveal these additional kinds of predatory loans, the BCFP should use its authority to require lenders to disclose:

  1. The borrower’s debt/income and housing debt/income ratios;
  2. Whether the loan was low- or no-doc;
  3. Whether the loan was based on the value of the property only;
  4. Whether the loan included a balloon payment; and
  5. The length of time between loans to the same borrower.

HMDA’s success so far has been in direct proportion to how thoroughly the information it requires lenders to disclose can be used to identify the problematic practice in question. Hopefully, the BCFP will learn from HMDA’s history and use its power to make HMDA as effective a tool as possible in fighting predatory lending.

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Richard D. Marsico is a professor of law at New York Law School. This article is based on his “Looking Back and Looking Ahead as the Home Mortgage Disclosure Act Turns Thirty-Five: The Role of Public Disclosure of Lending Data in a Time of Financial Crisis,” Review of Banking and Financial Law 29 (2009-2010): 205.

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