Expanded HMDA Data Shows Racial Disparities Persist in Mortgage Lending

An FDIC economist has found racial disparities in mortgage lending persist even after weighting costs and denial rates by the greater range of data in recent HMDA data.

Stephen J. Popick, senior financial economist at the FDIC, examined Home Mortgage Disclosure Act (HMDA) numbers from 2020, which has a richer array of data on credit risks and costs than data before 2018.

His paper released June 9 by the FDIC showed the extent the racial and ethnic differences diminish. He wrote that the remaining differences might be bias, or they might “reflect the importance lenders place on non-HMDA reportable data fields, such as residency and employment stability requirements, bankruptcies and previous foreclosures.”

“Therefore, differences in loan underwriting or loan pricing decisions between population groups in this paper should not be interpreted as evidence of discrimination under fair lending,” he wrote.

Banks and credit unions have criticized studies using pre-2018 HMDA data that claimed to show intentional or unintentional racial bias by lenders, saying the data lacked the necessary detail to determine that. When the data collection was expanded to include more of those relevant details, they complained about the regulatory burden, and pushed to exempt smaller institutions from being required to provide data.

Lisa Rice, president/CEO of the National Fair Housing Alliance, said the study shows why it is important for lenders to report a broad range of information about the loans they underwrite.

“Even after controlling for important factors like credit scores and debt-to-income ratios, racial disparities in mortgage lending persist and Black and Latino borrowers are paying more for mortgage loans than their similarly situated White counterparts,” Rice said. “This research underscores why solutions like Special Purpose Credit Programs and downpayment assistance for first-generation homebuyers are critically important for closing these gaps.”

Since 2018, HMDA data has included data used to make loan decisions, including the applicant’s credit score, debt-to-income ratio and loan-to-value ratio. New data allowing greater analysis of pricing included interest rates, discount points, lender credits, points and fees.

Before the expansion of the dataset in 2018, HMDA data did not include credit factors commonly used by lenders to make loan decisions. This meant studies on pre-2018 could only show raw, unadjusted differences between Blacks, Hispanics and non-Hispanic whites.

“While researchers used pre-expansion HMDA data to understand mortgage lending patterns, they could not easily account for differences in credit risk affected by those patterns,” Popick wrote.

Popick compared the raw denial rates with those controlled for credit factors, lender characteristics (such as total origination volume), timing of the loan and the location of the loan.

He found the controls explained about 70% of the difference in denial rates for conventional loans.

“The impact of these controls on denial rate differences in FHA lending is noticeably lower, though it likely reflects that minority and white borrowers are more similar in FHA purchase lending than in conventional lending and that underwriting requirements are quite different between these two loan types,” he wrote.

After controls, Blacks and Hispanics had denial rates that were still 2 to 3 percentage points higher than those for white non-Hispanic applicants.

Minority borrowers also paid more than whites for loans after controls. On a $200,000 30-year purchase loan, Blacks paid $1,583 more than similar white borrowers for conventional loans and $542 more for FHA loans through interest, discount points, lender credits and fees. The costs were cumulative over 30 years with the payments adjusted to present value.

Popick’s study also found:

• Black borrowers paid $1,211 more for a conventional no cash-out refinance on a 30-year, 200,000 loan, and $1,909 more for a conventional cash-out refinance.
• Hispanic borrowers paid $1,725 more for a conventional 30-year, $200,000 purchase loan. However, the cost disparities with whites were substantially lower on other types of loans than the disparities between Blacks and whites.
• For conventional purchase lending among prime borrowers (those with credit scores above 660), interest rate differences between minority and white borrowers in the same credit score bin fall as credit scores rise.