The Home Mortgage Disclosure Act (HMDA) was enacted in 1975 to gather information from lenders regarding mortgage loans and loan applications. The intent was to verify that lenders were providing proper access to credit in their communities. A later expansion was designed to verify that financial institutions were not engaging in discriminatory or improper home lending practices.
While the HMDA database is helpful, it contains gaps in information and is fairly cumbersome to use. The reporting requirements are also uneven, as banks and non-bank mortgage lenders have different thresholds. Nevertheless, it contains useful information from over 7,400 financial institutions, covering almost 19 million home loans and applications.
The Dodd-Frank reform legislation that created the Consumer Finance Protection Bureau (CFPB) gave the CFPB the authority to expand and refine the data in the HMDA to understand aspects of the mortgage market better. In plain English, this means collect more and better data so regulators and legislators can spot dangerous practices and take action to prevent housing bubbles and crashes in the future.
The public comment phase on the proposed reforms just closed at the end of October. They can be roughly divided into these categories:
- Simplify Reporting Practices – The CFPB intends to standardize the reporting requirements and make electronic reporting easier. Presumably, a simpler process will lead to full compliance and less incomplete information.
- Expand the Reported Information – Part of the reason the existing database failed to stave off the mortgage crisis is that fundamental information is not collected, such as the loan term, property value, applicant’s age and credit score, fees, points, borrower debt/income ratios, any teaser rates, and reasons for credit denial. It is hard to spot credit that is too loose when the fundamental data necessary to prove it is not collected.
The information changes will extend to the property as well as the borrower. Property values and construction methods are examples of that data expansion.
- Increase Transparency – The CFPB intends to make the data available through an online tool that is easier to use. The tool extends to the public as well as industry analysts and government regulators.
When more eyeballs can access the data in an understandable form, it is more likely that poor practices will be discovered and reported.
Privacy advocates are rightfully concerned about the increased reporting and transparency requirements. The access to expanded information about a loan may make it easier to identify a specific borrower, especially when cross-referenced with other publicly available data. While this may be true, keeping the database open to public access seems more likely to make it effective and useful.
How can this reform effort help you as a potential homebuyer? Frankly, there is no guarantee that it will. Even so, by collecting data that is more useful and making it more accessible, it is more likely that discriminatory practices or issues with unusually tight localized credit will be identified.
If you are adversely affected by these practices and there is data to back up your claim, the CFPB may be able to take corrective action. You may be able to receive financing where you would not have been able to before.
However, many well-intentioned programs have gone on to further gum up the works. This reform is probably a step in the right direction, and it should be if executed properly. Let’s see what feedback the CFPB gets and if they alter their proposals as a result and whether or not privacy issues scuttle the effort or render it ineffective.