Update on Fair Lending in Mortgage Originations

The Senate is poised to pass a bill this week that would weaken the government’s ability to enforce fair-lending requirements, making it easier for community banks to hide discrimination against minority mortgage applicants and harder for regulators to root out predatory lenders.

The sweeping bill would roll back banking rules passed after the 2008 financial crisis, including a little-known part of the Dodd-Frank Act requiring banks and credit unions to report more detailed lending data so abuses could be spotted.

The bipartisan plan, which is expected to pass, would exempt 85% of banks and credit unions from the new requirement, according to a Consumer Financial Protection Bureau analysis of 2013 data.

The mortgage industry says the expanded data requirements are onerous and costly, especially for small lenders. But civil rights and consumer advocates say the information is critical to identifying troubling patterns that warrant further investigation by regulators.

“The data operates as a canary in the coal mine, functioning as a check on banks’ practices,” said Catherine Lhamon, chair of the U.S. Commission on Civil Rights. “The loss of that sunlight allows discrimination to proliferate undetected.”

For decades, banks have been required under the 1975 Home Mortgage Disclosure Act to report borrowers’ race, ethnicity and ZIP Code so officials could tell whether lenders were serving the communities in which they are located and identify racist lending practices such as redlining.

But discriminatory practices continued, with the financial industry disproportionately targeting black and Latino borrowers with subprime mortgages loaded with high fees and adjustable interest rates that skyrocketed after the stock market crashed in 2008.

“The experience of the financial crisis taught us that we really need to know more about the loan terms and conditions, not just a borrower’s race,” said Josh Silver, senior advisor at the National Community Reinvestment Coalition.

Lenders were supposed to start gathering extra information about borrowers’ ages and credit scores, as well as interest rates and other loan-pricing features in January.

Congress had charged the Consumer Financial Protection Bureau, an independent watchdog agency formed after the financial crisis, with collecting, analyzing and publishing the data. But White House budget director Mick Mulvaney, named the CFPB’s acting director last November, said the agency plans to reconsider the new requirements and that banks would not be penalized for data collection errors in 2018. He also stripped the bureau’s fair-lending office of its enforcement powers.

The Senate bill would repeal many of the new reporting requirements, exempting small lenders making 500 or fewer mortgages a year from the expanded data disclosure.

“Banks say they don’t treat borrowers differently, but the data shows a different story,” Sen. Catherine Cortez Masto (D-Nev.) said on the Senate floor Thursday. “Redlining remains a major problem for communities of color.”

A February report by the Center for Investigative Reporting showed that redlining persists in 61 metro areas — from Detroit and Philadelphia to Little Rock, Ark., and Tacoma, Wash. — even when controlling for applicants’ income, loan amount and neighborhood, according to its analysis of Home Mortgage Disclosure Act records.

Nevada saw the highest foreclosure rate for 62 straight months during the Great Recession, especially in minority communities, said Cortez Masto, a former state attorney general. More than 219,000 families lost their homes. Whole neighborhoods were hollowed out — with boarded-up homes, for-sale signs and empty lots dotting Las Vegas and Reno, she said.

“With everything we saw 10 years ago, I cannot now believe that we’re considering restricting access to this kind of data,” said Cortez Masto, who has introduced an amendment to preserve the expanded information. “I’ve seen what happens when you don’t have strong enough protections against housing discrimination.”

But 12 of her Democratic colleagues have co-sponsored the bill, which would be the most significant revision of banking rules since Dodd-Frank. Five more from the Senate Democratic caucus voted last week to advance the legislation. Sponsors of the financial regulation rollbacks include 2016 vice presidential candidate Tim Kaine (D-Va.), a former fair-housing lawyer. The bill’s supporters say they don’t think it would widen the door for discriminatory lending, arguing that mortgage data such as race and gender collected before Dodd-Frank would still be gathered.

The mortgage industry says the proposed deregulation would cut costs and help smaller community banks remain competitive, enabling them to make even more loans. The Mortgage Bankers Assn. estimates that expanded data would still be collected on 95% of loans.

“If you want to provide some regulatory relief, it makes sense to do it for these institutions that aren’t making a lot of loans,” said Mike Fratantoni, chief economist for the Mortgage Bankers Assn. “You’re not losing much in terms of your visibility into trends in the market.”

The problem with the former reporting requirements, advocates say, is that banks often blamed racial lending discrepancies on borrowers’ credit scores or other characteristics that were impossible to verify without additional reported data that lenders already collect as part of the mortgage application and underwriting process.

The rollback in reporting requirements would potentially hurt not only minority borrowers, but also older applicants and those living in rural communities and small towns that are disproportionately served by community banks, advocates say.

“Lending discrimination is occurring in real time, and we have to have the tools to be able to address it,” said Vanita Gupta, who headed the Justice Department’s civil rights division during the Obama administration and now is the president of the Leadership Conference on Civil and Human Rights. “It’s not just happening in the context of big banks, it’s also happening in community banks and credit unions.”

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