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Use of HMDA data may lead to increase in enforcement actions and litigation

Posted in CFPB General, Fair Lending, Mortgages

The CFPB announced yesterday the release of both the 2012 Home Mortgage Disclosure Act (HMDA) data and a new web-based tool to access that data. In both Director Cordray’s remarks and the blog post, the CFPB appeared to indicate that HMDA data may be used to identify institutions that may be discriminating against protected classes of borrowers. Although the CFPB’s emphasis was on the use of the mortgage tool by the public, at this time the more important message for the industry is that the CFPB appears to be gearing up to use HMDA data to identify institutions that may be discriminating.

HMDA requires financial institutions to collect and disclose certain data about applications and approvals for home purchase loans, home improvement loans, or refinancings. Lenders must collect information about the loan and the applicant, including the ethnicity, race, sex, and income of the applicant. A number of these fields, particularly those regarding the ethnicity, race, and sex of the borrower, could be used by regulators and plaintiff’s attorneys to target lenders for examinations, enforcement actions, and litigation relating to discrimination.

HMDA data has historically been publically available on the Federal Financial Institutions Examination Council (FFIEC) website; the tool released by the CFPB merely repackages that information into a more consumer-friendly format. The tool includes maps and charts summarizing changes in loan volumes, the number of loans originated by type, and the purpose for loan applications and originations. In addition, the CFPB appears to be in the process of creating additional tools that will allow borrowers to sort and review records online.

In its statements announcing the new tool and the HMDA data, the CFPB appears to be foreshadowing the use of HMDA data to identify institutions that may be discriminating. The CFPB stated in its press release announcing the tool that the HMDA data “can shed light on lending patterns that could be discriminatory.” Similarly, in remarks given by Director Cordray to announce the new data, he stated that this data “helps shine a spotlight on lending disparities” and “reveals lending patterns, including some that might be discriminatory.” This use of HMDA data may lead to targeted examinations for these institutions and an increase in enforcement actions under ECOA based on HMDA data.

Significantly, Director Cordray did not state that HMDA lending disparities necessarily establish discrimination. A much deeper analysis is required to determine whether and the extent to which other factors (e.g., credit scores and histories, loan-to-value ratios, etc.) explain any statistical disparities. And, of course, we have taken issue in the past with the view that disparate impact on a protected basis is sufficient to ground an ECOA or Fair Housing claim. See here, here, here, here, here, here, and here

Still, Director Cordray’s remarks make it clear that, at a minimum, the CFPB, like the federal banking agencies before it, will statistically sample HMDA data to determine whether a lender merits a targeted fair lending examination.

Plaintiff’s attorneys too may be tempted to cull HMDA data to identify lenders ripe for class actions and private litigation based on similar theories. However, private parties will have a much tougher time using HMDA data in lawsuits since, in light of the manifold potential legitimate explanations of HMDA statistical disparities, any violation remains speculative.