More Banks & Non-Bank Lenders are Omitting Racial Information from Home Loan Data — Preventing the Identification of Lending Discrimination

 

The Home Mortgage Disclosure Act (HMDA) legally requires 5,000 financial institutions that originated a home loan in the U.S. to collect information about race to help identify potential discrimination against borrowers. The data has in the past year been cited by the Consumer Financial Protection Bureau among others.

However, over 12% of borrowers do not give the information requested by the law and some 90% of loans sold to third parties do not provide the racial data that is acquired, according to the National Community Reinvestment Coalition (NCRC). “The impact is profound,” according to a new NCRC report “as these gaps hinder our ability to understand who is receiving loans and under what terms, which is vital for assessing fairness and inclusivity.”

To help fight the problem, the NCRC has pledged to never again use any data that doesn’t include demographics on race. “Beginning with this report, NCRC is eliminating records without demographic data from our calculations of the percent of loans made to specific races.” 

The NCRC and others say the missing data is largely due to loopholes in the HMDA. Passed in 1975, the HMDA rule requires that in-person and phone applicants provide demographic data - but online applicants can opt out.

Third-party loan purchasers are not required to track demographic information. Seven of the top 10 loan-purchasing institutions from 2023 used a loophole that allows them to erase borrower demographic data on the mortgages they bought, according to an NCRC report. “A few years ago, it was rare for lenders to buy loans and strip demographic data, but Citibank pioneered this practice. Now, many lenders who purchase loans use this loophole.” Citi declined to comment.

The NCRC report shows “in what might be a sign of a historic point” that Hispanic lending for home loans -16.5% of all 2023 home purchases - was nearly identical to their overall share of the U.S. adult population. Black borrowers' lending rates improved, though not near to their overall share of the population.

Unfortunately, these seemingly positive trends are difficult to confirm because of the incomplete data. Any increase in data collection about borrowers comes with increased risk of invasion of privacy. Though the CFPB says there’s low, if any, privacy risk in the HMDA, a 2017  report  by economist Anthony Yezer stated concerns such data collection could lead to widespread violations of privacy.

To the NCRC. “The extensive benefits of detailed data collection, encompassing income, race, sexual orientation and gender identity, decisively outweigh any concerns over burden or privacy. It’s imperative t hat efforts to curtail this essential data collection be recognized as not just misguided but as detrimental to the health and well-being of our communities.”

Read the October 4, 2024 Yahoo Finance article.

Read the October 3, 2024 Fortune article.

The largest credit union rejected over 50% of its Black home mortgage applicants

A CNN analysis has found that Navy Federal Credit Union (Navy Federal) - the largest credit union - has the widest disparity in mortgage approval rates between White and Black borrowers of any major lender. In 2022, the disparity increased.

Navy Federal was founded in 1933 to serve Navy employees, but is now open to all members of the armed forces, Department of Defense personnel, veterans, and their relatives. With a membership around 13 million, it has over $165 billion in assets. Navy Federal lends to military servicemembers and veterans. 

Navy Federal approved more than 75% of the White borrowers who applied for a new conventional home purchase mortgage in 2022, according to the most recent data available from the Consumer Financial Protection Bureau. Less than 50% of Black borrowers who applied for the same type of loan were approved. In 2022, the credit union rejected about 3,700 Black applicants for home purchase mortgages. Navy Federal also approved Latino borrowers at significantly lower rates than White borrowers.

While many banks - in Baltimore and elsewhere - also approved White applicants at higher rates than Blacks, the almost 29% gap in Navy Federal’s approval rates was the widest of any of the 50 U.S. lenders that originated the most mortgage loans in 2022. The disparity was the same for White and Black applicants who had similar incomes and debt-to-income ratios. Navy Federal approved a slightly higher percentage of applications from White borrowers making below $62,000 a year than it did of Black borrowers making $140,000 or more.

CNN's statistical analysis also found that Black applicants to Navy Federal were over twice as likely to be denied as White applicants even when over 12 different variables – such as income, debt-to-income ratio, property value, downpayment percentage, and neighborhood characteristics – were the same.

Mortgage lending experts and fair housing advocates commented that the racial gaps in Navy Federal’s approval rates were very large and raised questions about the institution’s lending practices. Lisa Rice, the president and CEO of the advocate National Fair Housing Alliance said the racial gaps in Navy Federal’s lending identified by CNN were “some of the largest I’ve seen.”

It is important to note that CNN’s analysis doesn’t prove that Navy Federal discriminated against any borrowers. However, it does show significant disparities in the credit union’s approval rates for borrowers of different races – and that it has larger racial gaps than many other large financial institutions. The analysis was based on data collected under the Home Mortgage Disclosure Act.

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Read the December 14, 2023 CNN article.

 CFPB Sues Repeat Offender Freedom Mortgage Corporation for Providing False Information to Federal Regulators

The Consumer Financial Protection Bureau (CFPB) filed a lawsuit in federal court on October 10, 2023, alleging that Freedom Mortgage Corporation submitted legally-required mortgage loan data that was riddled with errors. The CFPB alleges that Freedom’s practices violate both the Home Mortgage Disclosure Act (HMDA) and a 2019 consent order. In a recent separate matter, in August 2023 the CFPB fined Freedom $1.75 million for paying illegal kickbacks for mortgage loan referrals. 

Freedom is a privately held nonbank mortgage loan originator and servicer with headquarters in Boca Raton, Florida. In 2020, Freedom reported HMDA data on more than 700,000 mortgage loan applications and originated nearly 400,000 HMDA-reportable loans worth almost $100 billion. Under HMDA, mortgage lenders are required to report information about loan applications and originations to the CFPB and other federal regulators. The public and regulators can use HMDA information to assess if the financial institutions are serving the housing needs of their communities, and to identify possible discrimination.

In 2019, the CFPB found that Freedom had intentionally misreported HMDA data about applicants’ race and ethnicity. For example, certain loan officers were told by managers or other loan officers that when applicants did not provide their race or ethnicity, they should select non-Hispanic white. The 2019 order required Freedom to pay a $1.75 million penalty, improve its compliance management system, and avoid future HMDA violations.

The 2023 lawsuit alleges that the HMDA data Freedom submitted for 2020 contained widespread errors across multiple data fields, and that the errors constitute violations of HMDA, the Consumer Financial Protection Act, and the 2019 order. Specifically, the CFPB alleges: (1) Freedom reported information to regulators with widespread inaccuracies: After the CFPB found 51 errors in an initial review of 159 files in Freedom’s 2020 submission, the company had to resubmit its data. In that resubmission, Freedom corrected errors in 35 different required HMDA data fields. There were errors in over 174,000 data entries affecting nearly 20% of Freedom’s mortgage loan applications; and (2) Freedom violated a 2019 law enforcement order to clean up its deficient data practices. It has failed to do this, and has continued to provide federal regulators with error-ridden data.

Under the Consumer Financial Protection Act (CFPA), the CFPB has the authority to take action against financial institutions violating consumer financial laws, including HMDA. The lawsuit seeks to stop Freedom’s alleged unlawful conduct and for it to pay a civil money penalty which will be deposited in the CFPB’s victims relief fund. 

Read today’s complaint.

Read the October 10, 2023 CFPB release.