Lenders are prohibited by Regulation B of the Equal Opportunity Credit Act from asking loan applicants about their race or ethnicity—except when they are required to do so by Regulation C of the Home Mortgage Disclosure Act (HMDA). Addressing that complication, this week the Consumer Financial Protection Bureau gave flexibility to lenders in how they collect demographic data.
“Mortgage lenders will not be required to maintain different practices depending on their loan volume or other characteristics, allowing more lenders to adopt application forms that include expanded requests for information regarding a consumer’s ethnicity and race, including the revised Uniform Residential Loan Application (URLA),” the bureau announced.
Specifically, institutions not subject to HMDA reporting may use either the aggregate race and ethnicity categories required by Reg B, or the disaggregated and more expansive categories of Reg C.
Benefits of bureau’s shift
“Those with smaller loan volumes may fall in and out of HMDA requirements, so this gave them the option to pick and choose,” explains Richard Andreano, a partner at Ballard Spahr and Practice Leader of its Mortgage Banking Group. “They can do Reg B the old way and Reg C if they’re subject to HMDA.”
The option to use the URLA form revised last year by Fannie Mae and Freddie Mac should be beneficial. “That gives you a safe harbor if you follow this model form, so that was very helpful for the industry,” Andreano says.
The Independent Community Bankers of America (ICBA) supported the change, saying the inconsistent reporting requirements were a substantial burden.
Nonetheless, ICBA said in a statement, “The implementation of the revised Regulation C and the adoption of the 2016 URLA represent a huge investment in time and resources for community bank mortgage lenders. These changes will require community banks to train staff, update policies and procedures, and add additional quality control measures to ensure data integrity.”
What can you know? (And when?)
Separately, CFPB is seeking comment on proposed policy guidance that would limit the public availability of data collected in compliance with HMDA.
“As originally promulgated, HMDA and Regulation C required a covered financial institution to make available to the public at its home and branch offices a disclosure statement reflecting aggregates of certain mortgage loan data,” the bureau said. In 2015 it relieved financial institutions from providing disclosure statements directly to the public and required them only to provide a notice referring the public to CFPB. Now, the bureau proposes restricting how much of that information it will release.
“Tension has always existed—and is now more acute—between the benefits to consumers of disclosure and the countervailing interest in protecting borrower privacy,” says Kathleen “Kitty” Ryan, former deputy assistant director for the Office of Regulations at CFPB and now Counsel at Buckley Sandler. “When the Dodd-Frank Act required the bureau to start collecting highly sensitive information like credit scores and applicant age, it also instructed the bureau to consider privacy impacts.”
CFPB is not worried that information disclosed could be used for identify theft or financial fraud. The bureau states that it “believes that the HMDA data would be of minimal use for these purposes.”
But not everyone agrees. “They generally have been dismissive of that concern,” Andreano says. “That’s troublesome to the industry and should be to consumers. This new [Reg C] rule requires you to have one file in the end that has a lot of private information.”
CFPB is more worried about “potential adversaries” who may use the information for marketing.
“Although these data could be used to market products and services that would be beneficial for applicants and borrowers—perhaps increasing competition among lenders that could help consumers receive the best loan terms possible—they could also be used to target potentially vulnerable consumers with marketing for products and services that may pose risks that are not apparent,” the bureau states.
Ryan says that’s reasonable for an agency charged with protecting consumers.
“The bureau noted in the policy that some marketing could be beneficial for consumers,” she says. “However, the bureau is also concerned about those who it believes might use the data to market harmful products to consumers, and is erring on the side of protecting applicants from those data users.”
Additionally, CFPB is worried about HMDA information being available to scholars and journalists.
“Although most academics, researchers, and journalists use HMDA data only for HMDA purposes or market monitoring, some may be interested in re-identifying the HMDA data for purposes of research,” the report states. “Further, those academics or journalists may be affiliated with organizations that have reputational or institutional interests that would not be served by re-identifying the HMDA data.”
Ryan points out that anyone who disagrees with the bureau’s proposal is free to say so. “
They think they’re giving enough information that people can do solid analyses,” she says. “But they’re seeking comment, so they’re open to hearing from researchers and consumer groups that maybe they’re not right about that.”
For bureau, striking a balance
CFPB proposes excluding from public disclosure the following HMDA data:
• Universal loan identifier
• Application date
• Action taken date
• Property address
• Credit score
• The unique identifier assigned by the Nationwide Mortgage Licensing System and Registry for the mortgage loan originator
• Automated underwriting system result.
CFPB also proposes excluding the content of free-form text fields used to report ethnicity; name and version of credit score model; reason for denial; and AUS system name.
For other data, such as borrowers’ age and debt-to-income ratio, CFPB recommends reporting those numbers within ranges.
Ryan finds the latter somewhat surprising.
“They proposed not to publish credit scores at all, as too sensitive to publish even in large bins or ranges,” she says. “However, they have proposed to publish debt-to-income ratios within ranges. Both data elements seem equally sensitive and also equally useful to researchers and consumer groups.
The bureau must strike a balance between protecting borrower privacy and fulfilling HMDA’s public disclosure purposes, and Ryan says this is a start.
“CFPB’s publication of the policy and its willingness to take comment on it are steps in the right direction,” she says. “At the same time, bankers may determine that the policy does not go far enough to address data breaches and other invasions of their customers’ privacy. They should use this opportunity to inform the Bureau in comment letters about their concerns.”