Former Fair-Lending Prosecutor Looks at the New HMDA
Cocheo, Steve, ABA Banking Journal
Fifteen years ago, lenders whose federal loan data seemed to indicate that they weren't treating minority borrowers just as they treated white borrowers in the credit evaluation process were accused of redlining.
"If it's not redlining, prove it," was the gauntlet thrown down then, said a prime mover of the federal cases of that era.
Now, with the latest federal monitoring data also including certain loan pricing information, the gauntlet has become, "If it's not pricing discrimination, prove it!" said attorney Paul F. Hancock at ABA's recent Regulatory Compliance Conference.
Voice of fair-lending experience
It was a blast from the past with lessons for the present and the future, from one of the attorneys best equipped to give bankers a reading on the implications and risks of the new Home Mortgage Disclosure Act rules.
If bankers don't necessarily know his name, they certainly know his work. Many of the landmark fair-lending law settlements reached between banks and other mortgage, consumer loan, and small business loan lenders and the U.S. Department of Justice were directed by Hancock. The attorney spent more than 20 years in Justice's Civil Rights Division, working his way up to the top career slot in the section that prosecuted and settled cases of alleged lending discrimination under federal fair-credit laws.
The flurry of cases announced by Justice during the 1990s are now a memory, but much of the foundation of those cases rested on analyses of lending patterns observed under the Home Mortgage Disclosure Act.
While technical HMDA reporting issues have long dogged the industry--it is rife with confusing reporting issues, for instance--the latest challenge is the expanded HMDA reporting required under recent changes to the regulations. Now in private practice, Hancock, of counsel to Hogan & Hartson, LLP, Miami, Fla., gave compliance officers at the compliance conference his take on what the new HMDA numbers will mean--and not mean.
"Today, you don't hear claims that there is discrimination in underwriting technique in the industry," said Hancock, noting that Justice never felt that HMDA definitively proved discrimination, but "was a useful starting point."
The issue for today, he said, is loan pricing. Concern over subprime lending practices and alleged predatory lending now dominate the picture.
Tongue partly in cheek, Hancock said that nowadays, lenders caught in prosecutors' cross-hairs will say, "We don't discriminate--we treat everyone poorly." By poorly, he meant that some lenders are charging all customers higher rates than the "norm." The shift from discrimination in granting credit to alleged discrimination in pricing of that credit, said Hancock, has shifted the way that Justice and the Federal Trade Commission look at lenders' actions. Now, the concern is that while protected groups are receiving loans, they are obtaining them at higher rates than similarly situated white borrowers.
HMDA rules were refined to require reporting institutions, effective with the 2004 reporting year, to report on home loan pricing. Specifically, lenders had to begin reporting higher-rate loans, as defined in the new rules, and on the race and ethnicity of the recipient.
The first report to the government was required in March of this year, and in early fall the Federal Financial Institutions Examination Council will be publishing summary tables by metropolitan area, by lender, and nationwide. Individual lenders' numbers have already been the subject of numerous data requests by community activists and other parties investigating potential pricing discrimination.
Hancock said that his early observation is that some subprime lenders aren't reporting all that many loans falling under the parameters established in the new rules, and that, paradoxically, some prime lenders are reporting more loans under those rules than he would have expected. …