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.

NCRC and Fintechs Urge Federal Regulators to Use AI to Detect and Eliminate Lending Discrimination

 

The National Community Reinvestment Coalition (NCRC) and a group of financial technology firms submitted a joint letter urging regulators issue clear guidelines to lenders on how the new AI fair lending tools could better evaluate disparities in lending. The letter to the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA) - signed by NCRC, Zest AI, Upstart, Stratyfy, and FairPlay - was issued in response to the White House’s Executive Order on AI in October, 2023.

Some lenders have not adopted these newer tools for underwriting analysis because they believe they can remain compliant with existing fair lending laws despite evidence that suggests older scoring models continue to contribute to systemic discrimination. Newer fair lending tools can allow lenders to conduct searches for new underwriting models that perform as well as older scoring models, while also mitigating the risk of discrimination in their analysis of an LMI credit applicant.

From the companies’ perspective, the power of the new AI tools can help lenders comply with regulations and improve their ability to expand credit access to applicants who have traditionally been underserved or considered too risky by old underwriting models.

The key recommendations of the letter include:

1. Don’t wait for perfect information to act. AI will continue to rapidly evolve. Supervisory highlights should be used by regulators to highlight best practices within the industry.
2. Provide written guidance on activity that triggers fair lending oversight. The CFPB should provide clearer guidelines on the conditions that would require a lender to engage in a Less Discriminatory Alternative (LDA) search, as well as the frequency with which such searches will be conducted.
3. Clarify that fair lending applies not only to how applicants are treated, but also how they are selected. Evaluating the creditworthiness of applicants can happen at the earliest stages of the lending process, including during marketing campaign planning. AI tools that can more comprehensively assess the risk of an applicant should be adopted earlier and favored over older models and tools.
4. The FHFA should continue to build upon its 2022 AI Advisory Opinions. The prior advisory opinions offered AI-specific guidance to the GSEs based on select use cases with potential to improve housing finance for consumers.
5. The CFPB should assert that fair lending compliance should be as high a priority as all other parts of the lending process. For companies using AI in credit decisioning, the CFPB should make clear the usage of outdated tools is not sufficient to remain compliant with fair lending laws.
6. Supervisory examination and training should address routine review of financial institutions’ model testing protocols and results. Fair lending examinations should also include reviews of the models used, testing protocols and positive assessment of LDA searches. Data concerning the efficacy of tools and practices should be shared in a forum with regulators and policymakers.

Photo by BoliviaInteligente on Unsplash

Read the September 30, 2024 NCRC article.

There will be four focused sessions on changes to the Community Reinvestment Act (CRA) at NCRC's April 3-4 2024 Just Economy Conference.

 

The National Community Reinvestment Coalition (NCRC) will be hosting four focused sessions on changes to the Community Reinvestment Act (CRA) at its 2024 Just Economy Conference. The CRA requires banks to lend in the communities where they do business. The federal regulators overseeing CRA announced late in 2023 a much-needed overhaul of this important economic justice law. These sessions will treat the changes as well as the implications for community development and equity.

Register Now

The sessions are:   The New CRA 101 (ROUND 1) This session covers the updated CRA, which encourages financial institutions to meet the credit needs of low- and moderate-income (LMI) neighborhoods and requires federal banking agencies to assess the record of meeting these standards and evaluate their efforts. We will explore how CRA can be used to increase affordable housing and small business reinvestment in your communities, including crucial updates to the rule announced in late 2023.    The New CRA 101 (ROUND 2) Addressing the Climate Crisis through CRA and federal funding Climate change is increasing the frequency and severity of storms, heat waves, fires and other weather-related disasters, with communities of color and low-income households the most affected. CRA’s definition of community development was recently updated to encourage banks to finance weather resiliency. This session will cover climate/weather resiliency projects and priorities, including how best to work with communities to prevent bluelining, a trend where financial institutions withdraw services or increase costs due to climate change.    What's Next With The CRA Final Rule This session will focus on what's coming next with CRA reform and upcoming opportunities to further shape the development of the new CRA rule. Speakers will be covering topics including: developing a statistical model that identifies markets where all banks are underperforming, best practices for reviewing the impact of community development on neighborhoods, and how the regulators can be proactive in preventing a decline in critical investments.   State CRA And Non-Banks Community advocates, along with state and local elected officials, are increasingly pushing for state CRA laws that bring in more resources and fix gaps in the federal CRA rules, especially since more and more lending is done by institutions not covered by federal CRA. This session will explore how state CRA laws include a review of credit unions and mortgage companies' loans and investments in underserved people and neighborhoods, in addition to banks.    Register now.

 KeyBank Provided Less Loans to Black And Low-Income Homebuyers in 2022

A National Community Reinvestment Coalition (NCRC) analysis of the most recent federal data on mortgage lending has found that Black borrowers were 2.6% of the Cleveland-based bank’s home purchase mortgage lending in 2022, down from 3% in 2021. KeyBank has provided fewer percentage of its loans to Blacks each year since 2018, when 6.5% were to Blacks.

In 2022, KeyBank made 19.2% of its home purchase loans to low- and moderate-income (LMI) borrowers, down from 19.7% in 2021. In 2018 more than 38% of such KeyBank loans went to an LMI borrower. Other top lenders made more than 30% of their 2022 purchase mortgages to LMI borrowers and about 7% of them to Black borrowers. 

This performance by KeyBank is "counter to the spirit of the agreement it made with community leaders while seeking clearance for a merger in 2016," as a report NCRC published last year documented. From 2018 to 2022, the Bank's executives hiked shareholder dividends using the new profits from the merger. NCRC's 2022 report detailed KeyBank’s failure in serving low and moderate-income (LMI) and Black borrowers within the communities it pledged to assist. KeyBank in 2016 signed a Community Benefits Agreement (CBA) with the NCRC and various community groups representing those same borrowers’ interests across the U.S. The deal was instrumental in satisfying legal and regulatory requirements in KeyBank’s merger with First Niagara Bank.  

By 2021, KeyBank had become the worst major mortgage lender for Black borrowers. NCRC cut ties with KeyBank after discovering the bank’s lower performance regarding Black and LMI borrowers, and notified regulators that the bank should receive a downgraded Community Reinvestment Act rating. The Bank first released "misleading and inaccurate responses asserting it had not done what the numbers show, it was later forced to commission a racial equity audit once shareholders applied pressure."

Read the November 9, 2023 NCRC article.

Maryland Needs Its Own CRA Law

 A Maryland CRA Law Would Help Underserved Communities and Support Economic Development

Economic Action Maryland and the National Community Reinvestment Coalition — released reports this month advocating for a statewide community reinvestment act in Maryland, that they say would help increase homeownership and other financial lending opportunities for residents and business owners, especially people of color. Both groups and other housing advocates plan to push for the legislature to pass a bill next year. Del. Melissa Wells (D-Baltimore City) introduced legislation this year to propose a state-level community reinvestment act, but withdrew it.

The proposed act would apply to roughly two dozen state-charted banks and seven credit unions that include Cecil Bank, EagleBank, Sandy Spring Bank, HAR-CO Credit Union, and Post Office Credit Union of Maryland Inc.

If enacted, a Maryland Community Reinvestment Act (CRA) law would apply to banks and credit unions with about $46 billion in assets. It would cover mortgage companies that made over 68,000 loans in 2018-2020. These assets and lending activity are considerable resources that should have a CRA obligation for reinvesting in underserved neighborhoods. 

Unfortunately, the Federal CRA law has not significantly reduced inequalities and discrimination in Maryland. Between 2018-2020 in Maryland, some statistics from Economic Action’s policy brief and a 20-page paper found that Black applicants were denied at all financial institutions at a rate 1.6 times higher than white applicants; credit unions denied Black and Native American applicants slightly more than two times more frequently than white applicants; although Black residents account for 29% of the state’s population, about 20% received single-family loans; in Baltimore City, where the Black population was 62%, about 33% of those residents received those same loans; and in Montgomery County, where the Latino population was 18%, about 10% of those residents received single-family loans.

According to a June 20, 2023 whitepaper by Josh Silver of the National Community Reinvestment Coalition (NCRC), a Maryland CRA law would:

(1) Help narrow racial and equity gaps in lending. In Baltimore City, 33% of the loans went to African Americans whereas they constituted 62% of the population.

(2) Plug gaps in the federal law. While Federal CRA law applies to banks, other state laws in Massachusetts and Illinois also apply to mortgage companies and credit unions. A state law would address needs and neighborhoods not explicitly addressed by the federal CRA. Maryland’s Commissioner of Financial Regulation could conduct separate exams for counties, assessing performance more rigorously in Baltimore City and underserved rural counties. Federal CRA exams usually rate performance on a metropolitan level that hides poor performance most often occurring in the underserved counties.

(3) Increase loans, investments, and services in communities of color and modest-income neighborhoods across the state in both urban and rural areas. While some gaps have narrowed modestly, underserved communities continue to be overlooked. For the state as whole, lending institutions made 32% of their loans to low- and moderate-income (LMI) borrowers during 2018-2020 while 31.6% of the population was LMI. A significant disparity, however, emerges in the City of Baltimore where LMI borrowers received 58% of the loans but were 73% of the residents.

(4) Would apply CRA to institutions with tens of billions of dollars which offer tens of thousands of loans. State-chartered banks have about $38 billion in assets and state-chartered credit unions have almost $8 billion in assets. The top ten independent mortgage companies issued almost 68,000 home purchase loans in Maryland in 2018-2020.

(5) Would channel significant increases in loans and investments to Maryland’s neglected communities. Moreover, a state CRA law is needed to address sizable racial and income disparities in access to loans. In the state as a whole, lenders made 20% of their single-family loans to African Americans from 2018 through 2020 while 29% of the population was African American. The gap is even wider in Baltimore, a city that is 62% Black but where just 33% of loans went to African American borrowers.

(6) Could have the examiners consider the sustainability of lending by considering default and delinquency rates. This is particularly important for vulnerable and underserved communities and is often overlooked by federal CRA exams.

(7) Could contain provisions that counter CRA ratings inflation and that would motivate improvements in performance to communities of color. On a federal level, banks pass their CRA exams about 98% of the time. Banks that fail their exams cannot receive deposits from a state agency. The Commissioner could also adjust fees based on ratings received.

Finally, a state CRA is one of the most effective economic development strategies a state can undertake. Studies have shown that the federal CRA has increased lending and banking services in modest income communities. A state CRA law could build on this success. A rigorous Maryland CRA would homeownership and small business ownership, and benefit the state many times over in terms of higher gross domestic output, higher tax revenues, and reduced dependence on the state safety net.

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Read the June 20, 2023 Maryland Matters article.