The Home Mortgage Disclosure Act (HMDA), initially enacted in 1975 and substantially expanded in 1989, 2002, and 2010 required banks to disclose detailed information about their mortgage lending. The law aimed to curb discrimination in lending to create more equal opportunity to access credit. The disclosure requirement compelled banks, savings and loan associations, and other lending institutions to report annually the amounts and geographical distribution of their mortgage applications, origins, and purchases disaggregated by race, gender, annual income, and other characteristics. The data, collected and disclosed by the Federal Financial Institutions Examination Council, were made available to the public and to financial regulators to determine if lenders were serving the housing needs of the communities where they were located. The Examination Council was an interagency body that included the Federal Reserve System, the Federal Deposit Insurance Corporation, and other agencies.
Mortgage lending disclosure was part of Congress’s response to activists’ calls, in the later stages of the civil rights movement of the 1960s and 1970s, for greater economic equality. It followed congressional action in 1968 to bar racial discrimination in housing sales or rentals; a settlement negotiated by the Department of Justice to end racial discrimination in the appraisal profession; and approval of the federal Equal Credit Opportunity Act in 1974, which outlawed racial and ethnic discrimination in lending. Community-based organizations pressed for disclosure requirements to aid their local campaigns to end lending discrimination. One of the most prominent figures in this debate was Gale Cincotta, a Chicago-based leader of the fair housing and community reinvestment movement, who founded National People’s Action and the National Training and Information Center, two of the local organizations that documented the retreat of banks from inner-city neighborhoods in the 1960s and 1970s and pressed for more equitable lending. She and other activists found an ally in Senate Banking Committee chair William Proxmire (D – Wis.). In 1975, Proxmire sponsored a bill requiring disclosure of lending practices. Despite opposition from the banking industry, the requirement was ultimately approved by a narrow margin in both the Senate (47–45) and the House (177–147).
Under initial disclosure requirements, banks were required to report minimal data about the geographic location of home loan approvals and purchases. Additional legislation expanded and refined these disclosure requirements. In 1977, Congress approved the Community Reinvestment Act (CRA), which required lending institutions to meet the credit needs of the communities in which they operated and linked community lending records to approval of merger applications. In 1980, Congress approved the Housing and Community Development Act, which directed the Federal Financial Institutions Examination Council (FFIEC) to serve as a central clearinghouse for mortgage lending data. Finally, in response to the savings and loan crisis of the 1980s, Congress approved in 1989 the Federal Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which sought to stabilize and provide new oversight for the savings and loan industry. Community reinvestment groups lobbied successfully to include improvements in disclosure, such as reporting of applications as well as loans; reporting of denial rates; reporting of the race, sex, and income of borrowers and applicants; and reporting by a broader range of mortgage lenders.
As Congress expanded the scope and depth of this transparency system, the data gained wider use. Advocacy groups used mortgage lending data to document constraints on credit in their communities and to negotiate new mechanisms for low-income lending with individual banks. Broad-based community reinvestment task forces in Washington, Rhode Island, New Jersey, and Michigan forged partnerships among community organizations, lending institutions, and state and local governments to address access problems. Investigative reporters, financial analysts, and intermediaries used the information to document pervasive patterns of discriminatory lending and the exodus of banks from low-income neighborhoods. In 1988, for example, the Atlanta Journal-Constitution reported on widespread redlining in that city in “The Color of Money,” a series of articles that received extensive national attention. The same year, the Detroit Free Press published a series describing lending discrimination in the Detroit area. In 1992, the Boston Federal Reserve conducted a study that concluded that race had a strong influence in lending decisions. The study received broad media coverage, confronting banks with discrimination allegations from a particularly authoritative source.
As they responded to a wave of requests for bank mergers in the late 1980s and 1990s, federal regulators also employed mortgage lending data in deciding whether to grant approvals. The banking industry was shaken in 1989 when the Federal Reserve Bank first exercised this power by denying a merger request from Continental Illinois National Bank and Trust Company of Chicago on the ground that the bank had not met its community reinvestment requirements. Advocacy groups that tracked the performance of particular banks often petitioned regulators to turn down merger requests if their performance indicated unfair lending practices. Expanded HMDA data also allowed regulators to focus on the enforcement of the Fair Housing Act and Equal Credit Opportunity Act and the Department of Justice brought suits against several lenders for lending and price discrimination.
This shift in the competitive environment led many more banks to improve lending practices in the 1990s. The competitive shift resulted from mortgage lending disclosure and the requirements of the Community Reinvestment Act as well as from the proliferation of sophisticated community organizations that had developed the expertise to understand bank lending patterns and negotiate with financial institutions. More banks developed products, divisions, and methods to compete in low-income markets, and bankers acknowledged that disclosure and community reinvestment requirements had proven less burdensome than expected.
The accuracy and scope of disclosed lending data also continued to improve. Disclosure became more frequent, data quality increased, more financial institutions were required to report, and data were collected and distributed electronically. After the successes of the 1990s, community organizations and regulators turned their attention to the sub-prime market and to predatory lending, a practice in which vulnerable borrowers were offered higher-interest mortgages and less-favorable terms than others. In 2002, mortgage lending disclosure rules were amended to require banks to disclose not only the disposition of loan applications but also mortgage prices. Beginning in 2004, lenders were required to report data on loan pricing for loan originations in which the annual percentage rate exceeded the yield of comparable Treasury securities by a specified amount. These new data allowed intermediaries such as the National Community Reinvestment Coalition and the Association of Community Organizations for Reform Now to document disparities in access to credit and press for measures to address predatory lending. Also, researchers identified patterns of pricing discrimination and some concluded that, although it is difficult to separate the effect of HMDA from other regulations, mortgage disclosure might have contributed to expanding lending for minorities. Regulators used the expanded information to enforce fair lending laws. In 2005, the Federal Reserve incorporated these new data into their statistical strategies for identifying potentially discriminatory institutions that warranted closer regulatory scrutiny. In 2009, a GAO report found that banking regulators referred over 100 lenders to the Department of Justice for possible violations of fair lending laws. Beginning in 2008, lenders could submit data electronically, which was more secure and efficient than submission via e-mail or CD-ROM. The 2010 Dodd-Frank Act introduced a significant change when it put the newly created Consumer Financial Protection Bureau (CFPB or Bureau) in charge of rulemaking, supervision of financial institutions’ HMDA compliance, and enforcement of consumer protection laws. The CFPB was structured as an independent agency to educate consumers, respond to their complaints, and research measures to promote fairness in consumer-financial industry interactions.
From the start, the CFPB was controversial. By 2016, a series of high-profile enforcement actions resulting in billions of dollars in judgments against lenders revealed persistent, if more hidden, redlining practices. While consumer advocates favored increased transparency, lenders expressed concerns about potential legal liability and rule-enforcement deadlines. Challenges to the CFPB and its actions were addressed in the courts, through Congress and within the Bureau. By passing Public Law 115-74 in 2017 the U.S. Congress blocked a CFPB rule that would have allowed consumers to file class-action lawsuits against financial groups instead of mandating arbitration. The U.S. Court of Appeals, District of Columbia Circuit ruled that the CFPB’s structure was unconstitutional, as it placed too much power in the hands of one Director. That decision was upheld by the US Supreme Court in a separate 2020 case, making the CFPB Director removable by the will of the President rather than solely for cause. In 2022, the Fifth Circuit Court of Appeals questioned the constitutionality of the Bureau’s funding structure through the Federal Reserve system rather than by congressional appropriation.
The Trump administration’s focus on deregulation led to a hiring freeze, a hold on actions, and internal restructuring at the CFPB. The Bureau’s published mission statement changed to include a new effort to address old or unduly burdensome regulations. The Bureau’s 2017 decision to reverse its payday mandatory underwriting rule protecting consumers from debt cycles sparked a 2019 Congressional hearing. The payday lending rule, requiring lenders to establish consumers’ ability to repay a loan, was revoked by the CFPB in 2020.
Despite these challenges, the scope and accuracy of disclosure improved. The Bureau continued research, rulemaking, and implementation, issued new and revised data points for lenders, and undertook some enforcement efforts. HMDA data were aligned with existing industry standards for data collection, and reporting for institutions that handled a large volume of loans was changed from annual to quarterly. Financial institutions were required to reveal whether their reports of applicants’ race, ethnicity, and other characteristics were self-identified or determined by the lender. The CFPB created new disclosure forms for lenders to provide borrowers with statements of loan terms and costs and required the application process to conclude in a timely manner.
The CFPB also explored the use of alternative data in the mortgage lending process, including nontraditional metrics such as rental payment history not used in the calculation of FICO scores and thought to increase access to credit for borrowers with insufficient credit records. In 2019, the CFPB and other federal financial regulators issued a joint statement endorsing the use of alternative data in underwriting.
The Bureau continued to find evidence of subtle forms of discrimination, including lenders locating offices outside of predominantly Black neighborhoods and targeted racial marketing. Advances in technology held promise for improving lending fairness. Studies found that the emergence of online lenders (fintechs) and algorithms for credit scoring reduced discrimination. But online lending and the use of algorithms were not without potential pitfalls to fair lending practices, since bias was sometimes hidden in personal factors considered. In 2022 the CFPB Director announced an expanded effort to examine nonbank lenders, including fintechs.
In 2021 the U.S. Attorney General announced the Combatting Redlining Initiative, a new effort with financial regulators to address the practice of lenders failing to provide financial services to communities of color. The CFPB’s Strategic Plan 2022-2026 included a revised examination manual to detect discrimination in all consumer financial sectors and noted that borrowers could be harmed by discrimination regardless of whether it is intentional. In 2022, the Bureau created an Office of Competition and Innovation to expand competition among lenders, planned research into ways to enable consumers to change lenders, and stated that borrowers would be granted access to their own data.
Updated December 2022
This case study is drawn from Full Disclosure, Fung, Graham and Weil, 2007.
