The United States Home Mortgage Disclosure Act, or HMDA, was passed in 1975. It requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings. It also requires branches and loan centers to display a HMDA poster.
HMDA was designed by the Federal Reserve Board in order to:
Help public officials to distribute public-sector investments
Discover if financial institutions are serving housing needs of communities
Identify where there are discriminatory lending practices
Details of the Law
A US company is covered by HMDA if
It has at least $36 million in assets (as of December 31, 2007; the limit varies each year)
It has made at least one home mortgage loan in the preceding year
The company itself is Federally insured or regulated or at least one of the loans it made were intended to be sold to Fannie Mae or Freddie Mac
Approximately 8,400 companies are covered by HMDA.
Companies covered under HMDA are required to keep a Loan Application Register (LAR). Each time someone applies for a home mortgage at an institution covered by HMDA, the company is required to make a corresponding entry into the LAR, noting the following information.
The loan amount
The purpose of the loan (home purchase, home improvement, refinancing)
The type of property involved (single-family, multifamily)
The loan type (conventional loan, FHA loan, VA loan or a loan guaranteed by the Farmers Home Administration)
The location (state, county, MSA and census tract) of the property
The race of the borrower(s)
The ethnicity (Hispanic or non-Hispanic) of the borrower(s)
The gender of the borrower(s)
Whether or not the loan was granted
If the loan was denied, the reason why it was denied
If the loan was denied, whether the interest rate charged was over a certain threshold
If the loan was subsequently sold in the secondary market, the type of entity that purchased it
Every March reporting institutions are required to submit their LARs to the Federal Financial Institutions Examination Council (FFIEC), an interagency body empowered to administer HMDA. Nowadays reporting takes place electronically. FFIEC screens the data for errors and the releases it to the public electronically (on CD-ROM and over the internet). Reporting institutions are also required to disclose their individual LARs to members of the public upon request.
Ways to Use HMDA to Pinpoint Discrimination
HMDA data can be used to identify probable housing discrimination in various ways:
If an institution turns down a disproportionate percentage of applications by certain races (e.g. African Americans), ethnicities (e.g. Hispanics) or genders (typically women) then there is reason to suspect that the institution may be discriminating against these classes of borrowers by unfairly denying them credit. Such discrimination is illegal in the United States.
If an institution has a disproportionately low percentage of applications by certain races (e.g. African Americans), ethnicities (e.g. Hispanics) or genders (typically women) then there is reason to suspect that the institution may be discriminating against these classes of borrowers by unfairly discouraging them from applying for mortgage loans. Such discrimination is illegal in the United States.
If an institution has a disproportionately low percentage of applications from certain areas, compared to areas immediately surrounding the area in question, then there is reason to suspect that the institution is engaging in redlining.
If there is a disproportionate prevalence of high-interest loans to certain classes of borrowers (e.g., Hispanics or women) then there is a reason to suspect that the institution is engaging in price discrimination.