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Put Net Tangible Benefit in HMDA

Adam Rust's picture

Posted July 13, 2010

More and more, it seems like any changes to the Community Reinvestment Act that come out of a new CFPA will be limited to data collection requirements. That is a missed opportunity. Still, if updates to the CRA can repair the framework for data, that is still a plus.

Everyone knows that HMDA data could be better. It doesn't really offer a means to separate the prime loans from those that are subprime. There is one clue: since 2004, the data has included information about interest rates. Even that data is limited, though. It isn't sensitive to adjustable rates that reset. Moreover, the exotic loan terms that are the feature of so many subprime loans are also ignored. There is no indicator for a stated income product, or for a balloon, or for an unusual loan term. In general, if it isn't a practice that was characteristic of the mortgage market in 1985, then it isn't in HMDA.

This frustrates bankers and policy wonks alike. Bankers cringe when prime loans are indistinguishable from subprime.

I spoke with the head of the mortgage division at one of the larger banks in the country yesterday. I put the question to him. "If you could change one thing

about how your loans are reported for HMDA," I said, "then what would you want to see done?"

"Net tangible benefit," he said. "Some calculation that I can look at and instantly evaluate if a borrower was put in a better place by a new refinance loan."

That is the kind of light that needs to shine on loans. Refinance lending was prone to abuse by predatory lenders in the era of easy credit. Lenders targeted older neighborhoods where residents had plenty of equity, but not a lot of liquidity. Any lender that wouldn't feel comfortable identifying the tangible benefit of their loan to a regulator is probably one with something to hide.

The CFPA is likely to create the expectation that loans demonstrate a net tangible benefit. The only gap will be how that information is shared.

Why This Matters

If reforms to HMDA data sounds like a narrow topic, that is because only a small community of people make regular use of the data.  One person called it a "small ecology." That said, the data is central to any effort to understand the activities of a bank in a community. Some groups can afford to buy data from LPS, but that is very expensive.  It is a problem of power. People "out of power" need a means to know about lending, but their economic status dictates that they don't have the resources to spend upwards of $10,000 on data. HMDA is free.

The larger issue is about creating a system that can prevent the next catastrophe. You may be familiar with argument, popularized by James Surowiecki, that says that decision-making is enhanced when more people can participate in the process. Surowiecki called it "the wisdom of crowds," but the principle can be seen in many places. Stock markets are one example. It should be the same with HMDA data and mortgage markets. There are many ways to get it right. Net tangible benefit is only an example of a simple idea that is already going to be calculated by regulators and that would do a lot of give a simple "thumbs up, thumbs down" on determing the value of a loan. Better HMDA data would enable more people to shout "fire." We don't want there to be a fire next time. Certainly, it is worth a few more keystrokes of data reporting.