The long awaited release of the expanded Home Mortgage Disclosure Act Loan Application Register (HMDA LAR) Data reported by filers in 2018 is now publicly available. These data contain elements that have not been reported by filers before, including critical loan decision attributes as well as specific data concerning loan pricing. In all, there are now 48 data points collected, and nearly doubles what had been reported previously.
Required data collection and submission in previous years included information on borrower characteristics, such as race, gender, and ethnicity; but data concerning the applications were limited to the type of loan, loan amount, and income of the borrower. Additional information also reported included lien position as well as occupancy and property type.
Pricing data were also limited to the “rate spread”, which is the difference between the Annual Percentage Rate (APR) and a survey-based estimate of APRs currently offered on prime mortgage loans of a comparable type utilizing the “Average Prime Offer Rates”. These are obtained from fixed table or adjustable tables, action taken, amortization type, lock-in date, APR, fixed term (loan maturity) or variable term (initial fixed-rate period), and reverse mortgage. There is an online tool available here for the calculation.
The 2018 HMDA now reports the actual interest rate charged as well as points and fees, and total loan costs.
Critical loan attributes now required to be reported include credit score, combined loan-to-value ratio (CLTV), and debt-to-income ratio (DTI). These proved to be the most controversial measures being required, as there were significant confidentiality concerns. The public release suppressed these data somewhat. Credit score, for example, is not available at all publicly, and DTI was released only as categories. (Age of the borrower, which had not been previously reported, was also released only in categories.)
There were also (2) important changes concerning reportable applications. The first was the omission of loans that are not secured by a property (no lien loans) and the addition of home equity lines of credit (HELOC).
It is important to note that certain smaller-volume financial institutions are not required to report all of these data, pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).
The Federal Financial Institutions Examination Council (FFIEC) released highlights from the 2018 data. Some of these are summarized below.
2018 Data Volume
The total number of originated loans decreased by about 924,000 between 2017 and 2018, or 12.6 percent. Refinance originations decreased by 23.1 percent from 2.5 million, and home purchase lending increased by 0.3 percent from 4.3 million.
A total of 2,251 reporters made use of the EGRRCPA’s partial exemptions for at least one of the 26 data points eligible for the exemptions. In all, they account for about 425,000 records and 298,000 originations.
From 2017 to 2018, the share of home purchase loans for first lien, 1-4 family, site-built, owner-occupied properties (1-4 family, owner-occupied properties) made to low- and moderate-income borrowers (those with income of less than 80 percent of area median income) rose slightly from 26.3 percent to 28.1 percent, and the share of refinance loans to low- and moderate-income borrowers for 1-4 family, owner-occupied properties increased from 22.9 percent to 30.0 percent.
Volume by Lender Type
The share of mortgages originated by nondepository, independent mortgage companies has increased in recent years. In 2018, this group of lenders accounted for 57.2 percent of 1-4 family, owner-occupied home-purchase loans, up from 56.1 percent in 2017. Independent mortgage companies also originated 56.1 percent of 1-4 family, owner-occupied refinance loans, an increase from 55.8 percent in 2017.
Credit Score Data
Credit score information was reported for 73.1 percent of all applications. Equifax Beacon 5.0, Experian Fair Isaac, and FICO Risk Score Classic 04 were the three most commonly reported credit scoring models at 22.8 percent, 18.8 percent and 18.2 percent of total applications, respectively. For originated loans, the median primary applicant scores for these three models were between 738 and 746. This compares to medians ranging from 682 to 686 for denied applications.
Debt-to-income ratio (DTI) was reported for 75.3 percent of total applications. Approximately 45.1 percent of applications had DTIs between 36.0 percent and 50 percent, with 7.0 percent of applications with less than 20 percent, and 7.1 percent with greater than 60 percent.
Combined loan-to-value ratio (CLTV) was reported for 74.3 percent of total applications. For originations of closed-end, conventional home purchase loans, the median CLTV was 80, with 46.2 percent of originations over 80.0. For originations of closed-end, FHA-insured home purchase loans, the median CLTV was 96.5, with 24.9 percent over 96.5.
The 2018 HMDA also contains additional pricing information. For example, the median total loan costs for originated closed-end loans were $3,949. For about 42.5 percent of originated closed-end loans, borrowers paid no discount points and received no lender credits. The median interest rate for these originated loans was 4.8 percent. The median interest rate for originated open-end lines of credit excluding reverse mortgages was 5.0 percent.
Information on the data can be found on the CFPB website. Online reports and tools are available as well as the raw data and other information.
The key question that remains is how this information may be used by regulatory agencies in fair lending and Community Reinvestment Act examinations. There is clearly a lot of data that the agencies can analyze prior to an examination, as well as to monitor institutions that are not scheduled for examinations.
Although recent regulatory focus has been on underwriting and redlining, the largest expansion of HMDA reporting relates to pricing. The rate environment has become much more dynamic and there have been a number of product developments related to mortgage lending and lenders that have created much more variation in interest rates charged relative to previous years. These combined forces elevate fair lending pricing risk, and lenders should take note.
The above is further augmented by the increasing delivery channel avenues for mortgage loan origination, some of which can affect pricing as well as product distribution. These include the growth in the types of online promotion that are available as well as the use of third-party originators. These can effect distributions in terms of race, gender, and ethnicity as well as geographic distributions.
Although the enhanced HMDA reporting adds fair lending and other risks for institutions, it also provides opportunities to quantify and mitigate such risks.
At the basic level, risk management is simply reducing uncertainty. The data now reported affords institutions the chance to evaluate their underwriting and pricing practices relative to key criteria, such as credit score, DTI, and CLTV – factors that examiners will now have readily available. These data can now be used to better evaluate the impact of pricing and underwriting on protected groups. Comparisons can also be conducted to other lenders as well, which further provide more specific evaluation.
It is critical for lenders that are expanded HMDA reporters have regression and statistical analyses performed on their data at a minimum on an annual basis. However, more frequent analysis is necessary to truly evaluate and create the ability to mitigate risks. Such analysis should monitor pricing, underwriting, redlining, and steering risks.