Home Mortgage Disclosure Act: expanded data on residential lending.

Since 1976, most banks and other depository institutions that have offices in metropolitan areas have been required, under the Home Mortgage Disclosure Act (HMDA), to disclose to the public information about the geographic distribution of their loans for home purchase and home improvement. The data have revealed wide variations in the number and dollar volume of loans approved across neighborhoods grouped by the income and race of residents. These variations, together with data from other sources, have raised questions about whether the efforts of lenders have been adequate to help meet the credit needs of the low-income and minority residents of their communities.

The variations in lending patterns also have generated controversy about whether lenders treat applicants for home loans fairly and on a racially nondiscriminatory basis. Some people interpret the variations as evidence of illegal discrimination. Others suggest that the patterns are attributable to differences in the demand for housing and home loans among individuals and across neighborhoods, and that they reflect the application of legitimate credit standards by lenders as they review individual requests for home loans.

Recent changes in HMDA have substantially increased the type and amount of information available about residential lending, beginning with data for 1990. In the past, covered institutions were required to disclose information only on loans they originated or purchased. Now, in disclosure statements released to the public in October 1991, lenders for the first time have reported on all home loan applications they received and their disposition, plus the race or national origin, gender, and annual income of the applicants. In addition, more lenders are now subject to the reporting requirements.

The changes in the act's requirements, as implemented by the Federal Reserve Board's Regulation C, will increase the usefulness of the HMDA data to community organizations, local governments, financial institutions, and others. The expanded data will make it possible, for example, to review how lenders act on applications and are likely to stimulate dialogue between institutions and members of their communities. Observed differences in the number of applications received and loans extended to various groups and neighborhoods are likely to lead financial institutions to reexamine their marketing and community outreach efforts.

Differences in approval and denial rates among groups and neighborhoods revealed by the new data can be expected to raise questions about the adequacy and fairness of the home lending process. The data have important limitations, however, and care must be taken in drawing conclusions from observed lending patterns. Foremost among these limitations is a lack of information about factors that are important in determining the creditworthiness of applicants and the adequacy of the collateral offered as security for their loans. Without taking into account such information, one cannot determine whether individual applicants or applicants grouped by a common characteristic (such as race or gender) have been treated fairly.

Major use of the expanded HMDA data will be made by the agencies charged with ensuring that covered institutions comply with the fair lending laws (the Fair Housing and Equal Credit Opportunity Acts) and the Community Reinvestment Act (CRA). Because bank examiners have access to loan application files, they will be able to overcome most of the limitations of the HMDA data. By using the HMDA data in conjunction with loan application files, related information, and other materials related to evaluating CRA performance, the agencies will be able to carry out their enforcement responsibilities more effectively.

This article gives an overview of the HMDA reporting system and describes analytical studies based on the geographic data available under the old reporting system. It presents some preliminary numbers drawn from nationwide aggregates of the 1990 data and sounds some cautions about limitations of the data. The article discusses potential uses of the data, with a focus on the supervisory agencies. Finally, it looks at an area newly covered by HMDA-sales of home loans to the secondary mortgage market.

HMDA's PURPOSE: IDENTIFICATION OF HOME LENDING PATTERNS IN URBAN AREAS

The Congress passed the Home Mortgage Disclosure Act in 1975 in response to concerns that, by failing to provide adequate home financing to qualified applicants on reasonable terms and conditions, some depository institutions "have sometimes contributed to the decline of certain geographic areas." The law was intended to provide information about residential lending activity that could be used on several fronts:

Generally, the data could help determine whether financial institutions are serving the housing needs of the communities in which they are located, by identifying pockets in which they are and are not providing credit.

By providing information about the distribution of loan originations, the data could help guide public officials in distributing public funds so as to attract private investment to areas where it is needed.

After examining data about a bank's lending, households could better decide where to invest their savings.

Following the most recent amendments to HMDA, contained in the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989, the data may serve a fourth purpose: to assist in identifying possible discriminatory lending patterns and in enforcing antidiscrimination laws.

Recent Changes in Coverage

For more than a decade, HMDA applied only to depository institutions-commercial banks, savings banks, savings and loan associations, and credit unions-and their subsidiaries. Among that group, only those with assets exceeding $10 million and a home or branch office in a metropolitan statistical area (MSA) have been covered.

Over time, the number and type of lenders and the specific institutions covered by the act have changed (table 1). Even as some institutions closed or merged into larger ones, many small institutions that once were exempt grew in assets, losing their exemption as they passed the $10 million mark. For example, in 1977 roughly 22 percent of commercial banks that had offices in MSAs had assets of $10 million or less, compared with fewer than 3 percent in 1990.

In 1988 and again in 1989, the Congress expanded the scope of HMDA. First, amendments passed in 1988 extended coverage to certain nondepository lenders that extend home loans, specifically to savings and loan service corporations and the mortgage banking subsidiaries of bank and thrift holding companies. The 1988 amendments took effect August 19, 1988.

The FIRREA amendments of August 1989 brought in independent mortgage companies for the first time capturing lenders unaffiliated with depository institutions. For 1990, the first year of coverage, more than 400 independent mortgage companies disclosed information about their lending activity. Although the addition of these lenders increased the number of covered institutions in 1990 by only 5 percent, it increased the lending activity reported by roughly 15 percent.

Pre-1990 Data: Focus on Geography of Lending

Through 1989, lenders reported only their originations and purchases of home purchase and home improvement loans, under conventional and government-backed lending programs (those insured or guaranteed by the Federal Housing Administration (FHA), the Veterans Administration (VA), or the Farmers Home Administration (FmHA)). Lenders prepared two reports for each MSA in which they had offices-one for loans originated and the other for loans purchased during the calendar year.

From 1976 through 1989, the focus was strictly on where a lender made or purchased loans. Of primary interest was the volume of lending within the MSAs in which the lender had its home office or branch offices. In most instances, the location within an MSA of the property securing the mortgage (or of the property related to the home improvement loan) was identified by census tract number. For purposes of public disclosure, the number and dollar volume of lending for each census tract was reported as an aggregate. For counties having populations of 30,000 or less, the data were aggregated and reported by county rather than by census tract. Loans on properties outside the MSA were grouped to show the total number and the dollar value of such loans by type of loan.

Since 1980, the Federal Financial Institutions Examination Council (FFIEC) has aggregated HMDA data to show the overall lending activity of covered institutions in each MSA.2 The FFIEC makes these reports available at a central data depository in each of the nation's 341 MSAs.3

1990 Data: Disclosure Procedures and Scope of Information

With the 1989 FIRREA amendments, institutions must continue to disclose information about residential loans extended and purchased and also must report on applications that did not result in an extension of credit. They are also making public for the first time information about loan applicants-their race or national origin, gender, and annual income.4 Further, for loans originated or purchased during the year, institutions must report the loans they sold, classified by type of secondary market purchaser. Finally, they may, if they wish, report their reasons for denying loans.

Loan/Application Register. The Federal Reserve Board is charged with implementing the HMDA amendments. The Board's approach to collecting the data (developed in consultation with the other supervisory agencies) is a relatively simple one that minimizes the burden on the reporting institutions and, at the same time, provides a reporting format that offers a large base of information for use by the public and the supervisory agencies. Covered institutions record data for each loan application acted on and each loan purchased on a separate line of a reporting form, the Loan/Application Register (LAR). At the end of the year, the institutions submit the LARs to their respective supervisory agencies, which send them to the Federal Reserve Board for processing. The Board, acting on behalf of the FFIEC, produces disclosure statements and sends them to the reporting institutions for release to the public. Under this system, institutions collect the required information but do not have to undertake the additional costly step of preparing their own disclosure statements, which would involve sorting and aggregating their data in multiple cross-tabulations.

Disclosure Statements and Aggregate MSA Reports. The disclosure statements made available to the public consist of a series of tables. An individual institution's statement may consist of as many as thirty-one tables for each MSA in which it has offices. The tables show the following:

* Disposition of loan applications, by type of loan and geographic location of the property (in most instances the census tract number)

* Loans purchased, by type of loan and geographic location of the property

* Loans sold, by type of secondary market purchaser

* For each of six categories of loans, the disposition of applications, by applicant characteristics (annual income, race or national origin, and gender) and characteristics of the neighborhood in which the property related to the loan application is located (median family income and percentage of the population that is minority). The disclosure statement is available to the public at the lender's home office and at one branch office in each other MSA in which the lender has a branch. Copies of the disclosure statements for all lenders in an MSA also are available to the public at the central data depository in that MSA.

In addition, the FFIEC compiles and provides to the central data depository an aggregate report showing the overall lending activity for all covered institutions in that MSA. The aggregate report for an MSA may contain as many as thirty-three tables. The first thirty-one are an aggregate version of the individual institution disclosure tables. The other two show the disposition of loan applications by median age of homes in census tracts in the MSA and by the central city or non-central city location of the property.

One disadvantage of the new system is that processing the enormous volume of data takes a long time. Although more information is available, the data were not available to the public this year by March 3 1, as in earlier years. In this first year under the expanded coverage, the disclosure statements for 1990 were made public in mid-October 1991. To shorten the dataprocessing time, agencies are implementing such measures as having tenders submit reports in machine-readable form.

Scope and Volume of Disclosures. However measured, the 1990 effort to collect and process the data has been immense. The disclosure reports contain data on nearly 6.4 million loan and application records. At the Federal Reserve, the volume of HMDA data processed on behalf of the FFIEC this year was greater than that for any other single subject handled by the System. To put the effort in context, the amount of data processed was roughly eleven times the quantity of HMDA data handled prior to the 1989 amendments.6 Moreover, given the relatively weak housing market in many sections of the country through most of 1990, the volume of loan activity reported can be expected to be significantly greater in subsequent years.

For lending activity in 1990, the FFIEC distributed disclosure statements to 9,281 reporting institutions, consisting of 23,891 individual MSA reports (table 2, memo item). Disclosure statements for the vast majority of institutions (81 percent) covered a single MSA; for roughly 275 lenders, the reports encompassed ten or more MSAs.

In terms of paper, the volume of output is staggering: The FFIEC distributed 1.2 million printed pages of HMDA data to reporting institutions and central data depositories. The depositories in particular face a significant burden in storing and keeping track of the HMDA reports in their current paper form. The average central data depository received a printout of nearly 1,700 pages showing lending activity in its area. Depositories in MSAs with a large number of lenders are hardest hit: Los Angeles, Chicago, and New York, for example, received printouts of roughly 19,200, 18,500, and 11,200 pages respectively.

Efforts to Facilitate Public Access

In paper form, the HMDA data can be awkward to use and costly to duplicate. Consequently, the FFIEC is exploring ways to distribute the data in forms that reduce the volume of paper and facilitate public use, including microfiche, PC diskette, and CD-ROM discs. The FFIEC also is investigating the possible use of the government's Federal Depository Library System to increase public access to the data. These libraries-of which there are some 1,400 across the nation-are repositories for a wide range of documents and data produced by federal government agencies.

The standard disclosure statements and aggregate reports prepared by the FFIEC display the HMDA data in the cross-tabulations thought to be most generally useful. However, many other permutations of the data are possible. The FFIEC will make available to the public, in machine-readable form, an edited version of the microdata application by application and loan by loan) for all the financial institutions covered by HMDA.7 The data files, on magnetic tape, can be purchased from the FFIEC for a nominal fee, enabling the public to analyze the data in the manner that best suits their needs. Given the widespread use of personal computers, computerized access should enhance the ability to use the data. The supervisory agencies are exploring with members of the private sector the formats in which the computerized data might be most useful.

PRE-1990 STUDIES: FINDINGS AND DATA LIMITATIONS

HMDA data have long been the primary source of public information about the geographic distribution of home loans originated and purchased by financial institutions.8 Dozens of studies have examined the distribution of home loans across neighborhoods stratified by residents' income and race.

The HMDA data most often have been used to assess the residential lending activities of individual financial institutions. For the most part, one basic lending pattern has stood out: Considerable differences exist in the levels of home lending activity across neighborhoods within local communities when the neighborhoods are grouped by median family income or racial composition. Although these differences in lending activity vary greatly among different institutions, depending on their specific circumstances, overall the HMDA data show that a smaller proportion of home purchase loans made by reporting lenders are for properties in low- or moderate-income neighborhoods (those where median family income is less than 80 percent of the median family income of their MSA). Although the proportion varies somewhat from year to year, since 1985 it generally has been between 10 and 12 percent of all the home purchase loans granted in MSAS. In comparison, roughly one-third of the home purchase loans are for properties in upper-income neighborhoods (those where median family income exceeds 120 percent of the median family income of their MSA).9 The remainder are for properties in middle-income neighborhoods.

The HMDA data also have been used to assess the home lending activities of creditors as a group within selected geographic markets. In 1988, newspapers in Atlanta and Detroit gained nationwide attention when they used HMDA data to compare lending activity in predominantly white middle-income neighborhoods and seemingly similar, but predominantly minority, middle-income neighborhoods in their respective cities. 10 The analyses found that, as a group, the depository institutions covered by HMDA extended roughly three to four times more home purchase loans per single family housing unit in the predominantly white neighborhoods than in the predominantly minority areas. Other studies in such diverse locations as Louisville, Minneapolis, Washington, D.C., Chicago, and Denver found similar patterns in home lending activity across neighborhoods.

For home improvement lending, HMDA data have revealed an entirely different pattern in many cities: Covered institutions have extended more home improvement loans per single family housing unit in minority neighborhoods than in similar-income predominantly white areas.

Although the statistical disparities cited in these studies clearly exist, opinions on the reasons for the differences vary widely. Some people believe racial discrimination by commercial banks and thrift institutions is a contributing, if not the primary, source of these patterns. Others suggest that the patterns reflect fundamental differences in the economic circumstances of population groups (whether already living in or seeking to reside in the different areas) and in market specialization by different types of lending institutions.

Consider, for example, the analyses that focus on the level of home lending per housing unit in seemingly similar minority and nonminority neighborhoods. An assumption underlying these analyses is that by selecting neighborhoods that have certain similarities in aggregate characteristics (such as neighborhood median family income), one has effectively accounted for differences in the economic circumstances of the residents and that the only factor that differs-and that consequently would influence lending activity-is the racial makeup of the areas.

That assumption may not always be valid. In the Atlanta study, for instance, important differences existed between the two groups of "similar" neighborhoods selected for analysis. For one thing, the analysis did not account in a realistic manner for differences in the demand for home purchase loans from the current and would-be residents of the two areas.11 It attempted to account for the differences in demand by controlling for differences in the number of single family units in each group of neighborhoods. Yet the predominantly white neighborhoods had experienced nearly twice as many property transfers per single family unit as had the minority areas. This finding suggests that demand for home purchase loans may have differed significantly between the two groups of neighborhoods.

In Atlanta, another factor that appeared to reduce demand for home purchase loans from depository institutions covered by HMDA was a much heavier reliance on government-backed forms of credit in the minority middle-income neighborhoods than in the predominantly white areas. Mortgage bankers, most of which were not then covered by HMDA, are much more likely to be the source of such credit. Nationwide, they extend roughly 80 percent of FHA and VA loans. Thus, the use of government-backed loans by home buyers in the minority community in effect reduced demand for credit offered by lenders covered by HMDA.

A review of Atlanta real estate transfer records revealed that 52 percent of the home purchases in the predominantly minority neighborhoods had been insured or guaranteed by the FHA or VA, compared with only 13 percent in the predominantly white neighborhoods. Undoubtedly a variety of factors contributed, in turn, to this difference in loan product utilization. The choice of FHA financing or conventional financing, for instance, may have reflected differences in the distribution of property prices in the two groups of neighborhoods. In Atlanta, the median value of owner-occupied units was considerably higher in the white areas than in the minority areas. This finding suggests that FHA loan-amount limits in some cases may have restricted the use of FHA loans in predominantly white areas.

The relatively heavy reliance on government-backed loans in Atlanta's minority neighborhoods also may have reflected differences in the ability of applicants in the two groups of neighborhoods to meet the underwriting standards for conventional loans established by creditors, including downpayment amounts and debt-to-income ratios. Information about the amount of assets available for downpayment and levels of debt burden of the Atlanta home buyers was not available. On a national level, however, black households have far fewer liquid assets, on average, than whites, even after controlling for differences in income.12

The findings about FHA financing patterns are consistent with the results of two recent studies that were based on nationwide consumer surveys. The first found that black and Hispanic purchasers of moderately priced homes are roughly 70 percent more likely to use FHA-insured loans than are similarly situated white home buyers. 13 Although all the reasons for these differing usage patterns are not clear, they may reflect differences in loan product recommendations made by real estate agents, self steering by loan applicants, or differences in marketing efforts by lenders.14

The second study estimated the proportion of families that could afford to buy a home using either a thirty-year, fixed-rate conventional loan or an FHA-insured loan of similar maturity and rate structure. 15 It found that the availability of FHA-insured credit, with its relatively low downpayment and more liberal standards for qualifying, increased the proportion of black and Hispanic households that could afford to buy a home more than it did for white households. With FHA financing, the proportion of white households that could afford to buy a home increased only slightly-from roughly 89 percent to 92 percent-compared with an increase from 60 percent to 78 percent for blacks and from 66 percent to 79 percent for Hispanics. Thus, everything else the same, one would expect to see FHA loans being used relatively more often in neighborhoods with modestly priced homes and high concentrations of minority households.

A 1989 study by the Federal Reserve Bank of Boston also documented differences in lending patterns across neighborhoods grouped by the race of residents.16 The study used title lien records to gather information about lenders and the geographic distribution of their loans. As in the other studies, the researchers did not have information about the prospective home buyers and how their applications were treated by lenders. The study sought to determine whether differences in economic and other nonracial characteristics (primarily neighborhood characteristics) as reported in census data might account for the disparities. The researchers found that, after controlling for a wide variety of neighborhood factors, predominantly minority neighborhoods in Boston had been granted 24 percent fewer mortgage loans per housing unit than predominantly white areas. They concluded from this evidence that race may have been a factor in the lending patterns. They also indicated, however, that from their data it was not possible to determine with certainty the causes of the observed differences in lending.

Although the various studies can neither confirm nor refute the presence of systematic illegal lending practices based on race, they have raised questions about the effectiveness of depository institutions' efforts to help meet the residential credit needs of all segments of their communities. These questions have, among other things, caused many institutions to reexamine their marketing and community outreach efforts, and in some cases to establish or join with others in offering or participating in special lending programs to expand affordable housing opportunities.

SOME PRELIMINARY FINDINGS FROM THE 1990 DATA

Because the 1990 HMDA data have just been released, little is yet known about what the expanded data may reveal once they are thoroughly analyzed. This section takes a first look at some loan and application patterns discernible from the data. Myriad levels of analyses are possible, particularly with respect to different geographic areas and different groupings of financial institutions. The focus here is on nationwide totals and on some potential uses of the new and expanded data. In reviewing the nationwide data, it should be noted that the lending records of individual institutions may vary greatly, both from one another and from patterns for the nation as a whole, depending on their location, the types of applicants they serve, the types of loan products they offer, and their credit standards.

The statistics presented here are based on preliminary data and are subject to revision. It is anticipated that revised data will be available in January 1992. At that time, updated versions of the tables presented here will be made available to the public.

In 1990, lenders covered by HMDA took action on roughly 5.26 million home loan applications-million 3.09 for purchase, 1.02 million for refinancing, and 1.10 million for improvement of residences housing one to four families, and the balance for loans on multifamily dwellings for five or more families (table 3).17 Among home purchase loan applications, 74 percent were for conventional mortgage loans, and the remainder were for government-backed forms of creditFHA, VA, and FMHA loans.

Use of Various Home Purchase Loan Products

Application patterns for various kinds of home purchase loans differ according to applicant income. Government-backed loans are much more likely to be used by households with relatively low incomes than by households with high incomes. The 1990 HMDA data indicate that 39 percent of applicants with low incomes (less than 80 percent of the median family income for their MSA) applied for government-backed home purchase loans, compared with only 15.6 percent of applicants with high incomes (more than 120 percent of the median family income for their MSA).

The new data also indicate that black (and to a much lesser extent Hispanic) applicants are more likely than either white or Asian applicants to seek government-backed home purchase loans. 18 Blacks in particular are relatively more likely to seek FHA and VA loans: Blacks constituted 4.3 percent of all applicants for conventional home purchase loans in 1990, but they accounted for 10.5 percent of all applicants for FHA loans and 11.7 percent of all applicants for VA credit (detailed data not shown in tables). Viewed in another way, 46 percent of all black home loan applicants applied for either an FHA or a VA loan, while only 28.6 of Hispanic applicants, 24.4 percent of white applicants, and 10.2 percent of Asian applicants sought such loans.

These simple summary statistics, though revealing, do not take into account the financial circumstances of the applicants that make up the various racial or ethnic groups. Income is the only financial characteristic of the applicant reported in the HMDA data. After controlling for applicant income, however, the 1990 HMDA data still indicate that blacks, and to a lesser extent Hispanics, are more likely than whites to use FHA and VA loans. For instance, 60 percent of low-income black applicants sought government-backed home purchase loans, compared with 37 percent of low-income white applicants. Lenders approved the majority of home purchase loan applications they received-roughly 72.3 percent of applications for conventional loans and 71.7 percent of applications for government-backed loans (table 3).19 Among the applications for conventional loans, 16.6 percent were denied by the lender and 10.2 percent were withdrawn by the consumer; in a relatively small number of cases (less than I percent) the application file was closed after the applicant was asked for but failed to submit information required for the credit decision. For government-backed home purchase loans, the denial rate was 16.5 percent and the withdrawal rate 10.6 percent.

The relatively high approval rates for home purchase loans likely reflect two characteristics of this market. First, prospective home buyers frequently work with real estate sales agents who help them determine in advance of any application the size of the loan for which they are likely to qualify. Second, because consumers incur upfront costs to file a home loan application-to cover, at a minimum, a property appraisal and credit bureau check-they have a strong incentive to learn about the prevailing standards for credit used by the industry and by particular lenders they might approach for credit. Approval Rates for Minorities Although the majority of home purchase loan applications are approved, many are not. Approval rates vary according to the applicant's income and demographic characteristics and the characteristics of the area in which the applicant resides or seeks to purchase a home.

Data previously available from sources other than HMDA indicate that blacks and Hispanics applying for mortgage loans at thrift institutions are significantly more likely than white applicants to be denied credit and that the experience of Asians is not greatly different from that of whites.20 The 1990 HMDA data reveal a similar pattern for all lenders covered by HMDA.

Conventional Home Purchase Loans. Nationally, about 14.4 percent of white applicants for conventional home purchase loans were denied credit in 1990. In sharp contrast, the rate for black applicants was 33.9 and for Hispanics 21.4 percent (tables 4 and 5).21 At 12.9 percent, the denial rate for applicants of Asian extraction was lower than for any other racial or ethnic group.

Applicant income can be expected to affect the ability to qualify for a home purchase loan, but income is just one criterion considered by lenders in evaluations of creditworthiness. A household with relatively low income may qualify for a loan of a given size and set of terms when a high-income household cannot because of differences in such things as level of their nonhousing debt, assets available for downpayment, employment experience, and credit history. On average, however, low-income households have relatively fewer assets and lower net worth, experience more frequent employment disruptions, and are more likely than high-income households to fall behind on scheduled debt repayments.22

The 1990 HMDA data reveal that the lower the income, the lower the acceptance rate (tables 4 and 5). Nationwide, 78.9 percent of the loan applicants whose income equaled or exceeded the median family income for their MSA were approved for conventional home purchase loans, compared with 69.4 percent of the loan applicants with lower incomes. Differences are even greater when comparisons are made at the extremes of the income distributions (as shown by table 5).

The national level of denial rates for applicants categorized by race or national origin reflects, in part, differences in the proportion of each group that has relatively low incomes. For example, among white applicants for conventional home purchase loans, 14 percent had incomes below 80 percent of their MSA's median family income. Low-income black and Hispanic applicants, in contrast, accounted for 25 percent and 16 percent of all applicants in their respective groups. Low-income Asians accounted for only 8 percent of the conventional home purchase loan applications filed by Asians overall.

The differences in denial rates when applicants are grouped by race or national origin do not change notably when they also are categorized by income (table 6). For example, among applicants whose incomes place them in the lowest income group, the denial rates for blacks, Hispanics, and Asians were 40.1 percent, 31.1 percent, and 17.2 percent respectively, compared with 23.1 percent for white applicants. Among applicants in the highest income group, denial rates for blacks, Hispanics, and Asians were 21.4 percent, 15.8 percent, and 11.2 percent respectively, compared with 8.5 percent for whites.

The application withdrawal rate for conventional home purchase loans for both black and white applicants was 9.4 percent. The rates were higher for both Hispanic and Asian applicants, 12.4 percent and 13.5 percent respectively.23

The 1990 HMDA data also indicate some differences when home loan applicants are categorized by gender-male (one or more males), female (one or more females), or joint (one male and one female) (tables 4 and 5). For instance, joint applicants are more likely than either male or female applicants to have a conventional home purchase loan approved. Female applicants are somewhat more likely than male applicants to have a home purchase loan approved.

Government-Backed Home Purchase Loans. The pattern for denial of government-backed home purchase loans is similar to that for conventional home purchase loans. The rates of denial were 26.3 percent for blacks, 18.4 percent for Hispanics, and 12.8 percent for Asians, compared with 12.1 percent for whites. The rates of application withdrawal were 11.3 percent for blacks, 11.6 percent for both Hispanics and Asians, and 9.7 percent for whites.

Looking at disposition of applications for government-backed loans by gender, joint applicants are somewhat more likely than either male or female applicants to have a home purchase loan approved. Female applicants are more likely than male applicants to have a home purchase loan approved.

Home Improvement Loans. The patterns for denial and withdrawal of home improvement loan applications are broadly similar to those for home purchase loan applications. Generally, for all groups the denial rates are higher than for home purchase loans, and the withdrawal rates lower; 36.9 percent of black, 32.5 percent of Hispanic, and 24.6 percent of Asian applicants were denied loans, compared with 17 percent of white applicants.

Looking at disposition by gender, joint applicants were more likely than either male or female applicants to have a home improvement loan approved. Males were somewhat more likely than females to have a home improvement loan approved.

Relation of Approval Rates to Neighborhood Income and Composition The HMDA data make it possible to compare lending across neighborhoods grouped by racial makeup and the income level of their residents. Considerable caution should be exercised, however, when making such comparisons. The usefulness of these data is currently limited by the lack of an up-to-date match with the characteristics of census tracts. The recently released HMDA disclosure statements are based on 1980 census tract boundaries and population characteristics (neighborhood income level, racial composition, and housing stock characteristics). This census information is now more than ten years old, and in some cases the resulting figures may be misleading. For example, a low-income, predominantly minority neighborhood in 1980 may have undergone substantial change and may now have a much higher average income and a different racial composition. The Federal Reserve Board has published proposed amendments to HMDA reporting requirements, calling for a switch to the 1990 census tract definitions beginning January 1992. The FFIEC plans to reflect socioeconomic information about these areas in the disclosure tables portraying 1992 lending activity, which will be released in 1993.

Approval of Home Purchase Loan Applications. Although the majority of applications for home purchase loans are approved, experience differs across neighborhoods grouped by racial composition and the income levels of their residents. The patterns of loan acceptance and denial do not differ greatly whether the type of home purchase loan sought is conventional or government-backed.

Neighborhood income. The 1990 HMDA data indicate that the rate of loan denial declines as the income of the residents of an area increases. The rate of loan denial for conventional home loans relating to properties in low- or moderate-income neighborhoods was 20.2 percent, appreciably higher than the 13.9 percent for middle-income and 9.7 percent for upper-income neighborhoods (table 7). For government-backed loans, the rates of loan denial were 17.8 percent for low- or moderate-income, 13 percent for middle-income, and 11.2 percent for upper-income neighborhoods.

Neighborhood racial composition. The 1990 HMDA data indicate that the rate of loan denial increases as the proportion of minority residents increases. For conventional home loans, the denial rate is about 12 percent for areas with less than 10 percent minority residents and rises to about 24 percent for areas with 80 percent or more minority residents. The pattern of loan denial for government-backed loans is virtually the same as that for conventional loans.

Neighborhood income and racial composition. The difference in denial rates across neighborhoods of different racial composition is roughly the same even when differences in neighborhood median family income levels are taken into account. For the most part, whether the neighborhood is low or moderate income, middle income, or upper income, the proportion of home purchase loan applicants denied credit increases as the percentage of minority residents increases. This pattern is present for applications for both conventional and government-backed forms of credit.

Approval of Home Improvement Loan Applications. Like home purchase loans, the majority of home improvement loan applications are approved regardless of neighborhood income or racial composition (table 7). Also like home purchase loans, the denial rate for home improvement loans increases as neighborhood income declines and the percentage of minority residents increases.

CAUTIONS IN INTERPRETING THE 1990 DATA

The 1990 HMDA data offer more detailed information about the home lending activities of reporting institutions, bringing the prospect for a better understanding of lending patterns through analyses previously not possible. Knowing the personal characteristics of loan applicants and the disposition of their applications makes it feasible, for example, to gauge more accurately the level of loan demand faced by an individual lender or a group of lenders seeking to serve different types of customers and various geographic areas within their communities. At the same time, the limitations of the data must be recognized.

The 1990 HMDA data document differences in the experiences of loan applicants grouped by their personal characteristics or by the characteristics of the neighborhood in which they seek to purchase or improve homes. Most prominently, the data indicate that black and Hispanic applicants are denied home loans more frequently than are white or Asian applicants who have similar incomes. The data also indicate that applicants seeking to purchase homes in low- or moderate-income neighborhoods (regardless of the race of the residents) are denied credit more frequently than are applicants seeking to buy homes in upper-income neighborhoods.

The HMDA data can and should be used to raise questions about lending activity and to develop hypotheses for further investigation. The application-disposition patterns, however, reflect a wide variety of economic factors that determine the creditworthiness of individual home loan applicants and the adequacy of the collateral provided by the properties they seek to purchase or improve. Thus, caution in interpreting the numbers is called for. For example, although the expanded HMDA data show loans denied by race or national origin, that information alone does not provide a basis for an independent assessment of whether an applicant who was denied credit was in fact creditworthy. Similarly, the HMDA data do not establish whether the property involved in the proposed credit extension was appropriately valued. Thus, it is not possible to determine, from the HMDA data alone, whether loan applicants are being treated fairly and on a racially nondiscriminatory basis.

Fundamentally, the rates of approval and denial of loan applications reflected by the 1990 HMDA data represent the separate outcomes of a credit review process carried out by the more than 9,000 covered financial institutions located across the country. That process seeks to ensure that individuals granted credit will repay their debt as scheduled and that, should they fail to do so, the collateral offered as security will pay off the loan plus costs associated with foreclosure. Consequently, lenders evaluate the factors that they believe allow them to predict an applicant's ability to repay; among these factors are several consumer financial characteristics-the proportion of the consumer's income that will need to be dedicated to the repayment of the proposed loan plus other outstanding debts, the level of equity (through the downpayment) that the consumer is able and willing to put into the property, the consumer's employment experience and prospects, and the consumer's history of repaying debts. Lenders also consider the appraised value of the property serving as the collateral for the loan.

The HMDA data reveal little about the financial characteristics of loan applicants-only their annual income. Even here, two applicants who have similar incomes may be strikingly different in their asset levels, existing debt burdens, and credit histories. Applicants of different race and gender may differ systematically in their financial characteristics. Other sources of information, such as consumer surveys conducted by the Federal Reserve, provide extensive data on the financial situations of households grouped, for example, by annual income, race, or gender. Here, too, caution is called for, however. Consumer surveys generally represent a wider population of respondents than do the HMDA data, which represent only individuals who have applied for a home loan. To the extent that group profiles developed from these surveys reflect the characteristics of home loan applicants, such information may prove helpful in understanding variations in loan disposition rates among applicants grouped by race or gender.

Federal Reserve and other consumer surveys show the financial situation of households grouped by income. These data indicate that, compared with high-income households, lowincome households tend to have relatively few assets available for a downpayment on a home; if they have consumer debt, tend to have relatively high repayment burdens and are more likely to have fallen behind in their scheduled debt repayments; and generally have more periods of involuntary unemployment or reduced work hours.

Generally, black and Hispanic households are much more likely to be in a low-income grouping than are white households. For example, the median income of households headed by blacks and Hispanics is roughly 57 percent and 71 percent respectively of the median income of families headed by whites.24 These disparities reflect, among other things, sharp differences in employment experiences. For example, in middle of the 1991 national unemployment rate for blacks was nearly twice that of whites.25 Also, the financial asset and net worth positions of nonwhite and Hispanic households are substantially different from those of whites.26 For instance, in 1986 the mean amount of financial assets held by black families was $5,900, compared with $64,000 for white families. Differences in net worth were even more pronounced, with black families having an average net worth of 29,000 and white families $165,000.

USES OF NEW AND EXPANDED HMDA DATA

Users of the HMDA data include community-based and other types of consumer-interest organizations, financial institutions, state and local government agencies, and federal supervisory agencies. Community-based organizations have long used HMDA data in assessing the home lending activities of institutions in their communities. Financial institutions covered by HMDA use the information to evaluate the success of their loan marketing efforts and community outreach programs and to compare their performance with the home lending activities of their competitors. State and local governments find the data useful in identifying areas that may need assistance.

Supervisory Agencies

Supervisory agencies will be a major user of the expanded HMDA data. The new information will help them better assess the performance of financial institutions in satisfying their obligations under the Community Reinvestment Act and their compliance with the fair lending laws.

Community Reinvestment Act. The CRA requires federal agencies to encourage depository institutions to help meet the credit needs of their communities, including low- and moderate-income neighborhoods, consistent with safe and sound lending practices. Historically, examiners have used the HMDA data to help them assess lenders' compliance. The regulations that implement the CRA establish twelve criteria for evaluating the record of depository institutions. The HMDA data help measure institution performance against several of the criteria, including the following:

* The geographic distribution of the institution's credit applications, extensions, and denials

* The institution's record of originating or purchasing residential mortgage loans, housing rehabilitation credit, home improvement loans, and loans to small businesses and small farms within its community

* Evidence of prohibited discriminatory or other illegal credit practices.

The HMDA data also help supervisory agencies evaluate lenders' CRA records when processing applications for charters, deposit insurance, branch or other deposit facilities, office relocations, mergers, and acquisitions. In addition, the HMDA data are used in assessing the merits of specific protests challenging an institution's performance in the context of these applications.

The recent amendments to HMDA enhance the agencies' ability to conduct that portion of CRA evaluations focusing on home lending. For instance, in the past it was difficult to determine whether the geographic distribution of a lender's home purchase credit extensions reflected the demand for its loan products. Although information about applications has been available to examiners, until now it has been available only through the original applications and loan documents. With ready access to a listing of applications from the LAR data, examiners will be able to identify easily the geographic distribution of a lender's loan applications.

Examiners can compare an institution's record with the records of other lenders serving the same locality to see if, for example, performance reflects an absence or low level of lending activity in the locality. If some peer lenders are receiving a significant number of applications and are extending home loans, the data likely will focus greater attention on the institution's efforts to determine community credit needs, on its marketing and outreach programs, and on the mix of loan products it offers. On the other hand, if peer lenders are receiving few applications for home loans, weak demand may be the explanation. Few applications might also indicate, however, that outreach efforts and marketing among all lenders are either ineffective or not aimed at the community in question.

The new HMDA data also can be used in assessing whether a lender has established a reasonable CRA community delineation.27 Although many factors affect a lender's choice of the primary service area it seeks to serve, analyses of HMDA data can help determine whether the distribution of home loan applications received by a lender is consistent with this geographic delineation. If most of the lender's applications for home purchases come from outside its delineated community, examiners may question why it is not receiving more applications from its delineated community and whether the existing delineation is reasonable. The lender might need to reconsider the basis for its delineation and perhaps revise the boundaries of the area it seeks to serve.

Fair Lending Laws. Supervisory agencies also will use the expanded HMDA data in evaluating compliance with the fair lending laws-the Fair Housing Act and the Equal Credit Opportunity Act. For example, during on-site evaluations, Federal Reserve examiners currently review a sample of approved and denied loan applications to determine whether a bank is applying its stated lending standards consistently and fairly. Examiners look for instances in which loan applicants met established standards but were denied credit and, conversely, for instances in which applicants failed to meet the guidelines but were nonetheless granted credit. When they find exceptions, examiners seek to determine whether similarly situated applicants, particularly members of protected groups, were accorded like treatment.

With the new information about applicant race or national origin, gender, and annual income, examiners will be able to look for statistical indicators of possible discrimination, such as differences in denial rates among groups. They will then review individual home loan application records for specific evidence of any disparate treatment. Although different denial rates for majority and minority group applicants, for example, ultimately may be found to have a legitimate basis, the identification of such differences is one step in the assessment process.

To facilitate these statistical analyses, the supervisory agencies are working to develop a computer-based system that will help examiners identify groups of applicants whose application-disposition rates are significantly different from those of other groups. This system can provide examiners with lists of individual application files that can be targeted for in-depth review during on-site examinations. (The application or loan number on the institution's LAR will facilitate retrieval of individual files.) The on-site review will allow examiners to evaluate the specific factors considered by a lender when it acted on an application and to assess an institution's compliance with the fair lending laws.

HMDA DATA ON SECONDARY MORTGAGE MARKET ACTIVITY

The 1989 amendments to HMDA require lenders to report the type of secondary market purchaser of home loans they sold during the year. The legislative history of the amendments indicates that the Congress sought the new information to help identify, indirectly, secondary market requirements that might have a discriminatory effect on protected groups. The HMDA data provide an opportunity for the first time to profile, for loans covered by HMDA, the characteristics of both the borrowers whose loans are purchased by secondary market entities and the neighborhoods in which they reside.

Because not all financial institutions that deal with secondary market institutions are covered by HMDA, the patterns revealed by the HMDA data may differ from those that would be observed in a review of all secondary market activity. Moreover, information on borrower characteristics is not available for all loans sold by covered lenders-only for loans they themselves originated. Although HMDA information about the census tract location of properties is available for roughly 75 percent of the loans sold to, or securitized by, secondary market entities, information on borrowers' race or national origin, gender, and income is available for only about two-thirds of the loans (table 8). In most instances when information is unavailable, lenders had purchased the loans from other institutions and were not required to report applicant characteristics.

General Relation between Borrowers and Secondary Mortgage Purchasers Participants in the secondary mortgage market buy and sell mortgage loans or securities backed by mortgage loans. They also guarantee payments on pass-through securities issued against pools of residential mortgage loans. In so doing, they enable institutions that originate loans to raise new funds. By selling assets that are otherwise relatively illiquid, loan originators are able to extend additional loans or to use the funds in other ways.

Three government-sponsored agencies dominate secondary market activity-the Federal National Mortgage Association (FNMA, or Fannie Mae), the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac), and the Government National Mortgage Association (GNMA, or Ginnie Mae)-although banks, thrift institutions, insurance companies, and other entities are active as well. FNMA and FHLMC mainly buy conventional mortgage loans. Most of these loans are packaged into securities and sold to investors. GNMA does not purchase loans, but rather guarantees the timely payment of principal and interest for privately issued securities backed by FHA-insured and VA-guaranteed loans. Secondary market institutions generally do not originate loans, but they do specify the underwriting guidelines that loans must meet to be eligible for purchase or securitization by the secondary market. These guidelines and related loan-size purchase limitations vary among secondary market institutions; thus, it should be expected that, for the loans these institutions purchase or securitize, the characteristics of the borrowers and neighborhoods where properties are located will differ as well.

For example, in 1990 the FNMA and FHLMC limit on home purchase loans on single family properties they purchased or securitized was $187,450. The maximum loan amounts backed by FHA insurance-between $67,500 and $124,875 (the larger amount corresponding to localities where housing costs were higher)-were the limits for GNMA's FHA-related activities. The limit on VA loans eligible for the loan pools that GNMA would back was $144,000 at the beginning of 1990, and was increased to $184,000 during the year.

Other secondary market purchasers do not necessarily follow these loan-size limitations. In particular, so-called jumbo loans" (those exceeding the loan limit set by FNMA and FHLMC) are purchased by depository institutions, pension funds, insurance companies, and others.

Basic underwriting guidelines (such as maximum loan-to-value ratios and monthly debt-to-income ratios) also differ among the secondary market participants, although FNMA and FHLMC follow essentially the same guidelines. In the case of GNMA, underwriting standards are established by HUD and the VA. Given that HUD and the VA impose less-stringent loan standards than originators of conventional loans, and that they have different rules about the size of loans they will back, it should be expected that, overall, FHA and VA borrowers will differ markedly from conventional loan users. Consequently, borrowers whose loans are securitized by GNMA are also likely to differ from those whose loans are sold to or securitized by FNMA or FHLMC.

Borrowers using loans backed by GNMA may differ from those using loans supported by FNMA and FHLMC for another reason. FHA and VA loans are almost exclusively fixed-rate loans, whereas adjustable-rate mortgage loans (ARMs) are widely used in the marketplace (in 1990, ARMs accounted for about 30 percent of all loan originations). Both FNMA and FHLMC buy and securitize many ARMS. Thus, it should be anticipated that differences among groups of borrowers who choose ARMs and those who choose fixed-rate loans will be reflected in sales to secondary market institutions as well.

Preliminary Findings from the HMDA Data

Lenders covered by HMDA sold roughly 2.3 million loans to secondary market institutions in 1990 (table 8). Most of the activity (some 70 percent) was with FNMA, FHLMC, and GNMA.

Not surprisingly, given GNMA's focus on government-backed loans, the HMDA data indicate that GNMA is supporting home purchase loans made to low- or moderate-income, and to a lesser extent minority households, relatively more often than are other secondary market institutions. Overall, 22 percent of the loans backed by GNMA guarantees were made to families whose incomes were 80 percent or less of the median family income of the MSAs in which they reside. The comparable figures for both FNMA and FHLMC were roughly 10 percent. The average 1990 income of borrowers whose loans were guaranteed by GNMA was $43,535, compared with $64,390 for FNMA and $63,914 for FHLMC (data not shown in tables).

Differences in borrower income are also reflected in the size of loans purchased or backed by secondary market institutions table 8, memo item). In 1990, the average loan backed by GNMA was $73,730, compared with 101,050 for FNMA and $100,890 for FHLMC.

Compared with other secondary market purchasers, relatively more GNMA-supported borrowers purchased properties in low- and moderate-income and middle-income areas. This pattern is similar to the lending patterns revealed in the HMDA data for loan originations, which showed that, compared with conventional loans, government-backed loans were used to finance home purchases relatively more often in neighborhoods whose residents had moderate incomes.

IN SUMMARY

The more complete information about home lending now being gathered under the Home Mortgage Disclosure Act will give many groups-financial institutions, community organizations, supervisory agencies, and others-a better understanding of the residential mortgage market. Financial institutions will be able to compare their performance with that of their peers, to help them better evaluate the effectiveness of their own marketing and outreach efforts. Such self-assessment may lead to more creative approaches to meeting the housing needs of low-and moderate-income families.

Differences in approval and denial rates revealed by the 1990 HMDA data-among applicants grouped by their personal characteristics or by the characteristics of the neighborhoods in which they seek to live-and differences in the number of applications from these groups will focus increased attention on whether lenders are treating individuals and groups of applicants within their communities in a fair and nondiscriminatory manner. Because of certain limitations (the most important being incomplete information about applicants' financial characteristics), the expanded data alone cannot provide the answers to these questions. Nonetheless, the data can be expected to prompt useful dialogue between financial institutions and members of their communities.

The expanded data will make it possible for supervisory agencies to evaluate more thoroughly lenders' compliance with community reinvestment and fair lending obligations. With access to individual applications and to information about institution lending standards, agency examiners are able to overcome most of the data's limitations. Computerization of the data will increase their efficiency. Finally, a switch to 1990 delineations of census tract boundaries, proposed for the 1992 data, will make the HMDA information more reflective of current lending practices.