WOODSTOCK INSTITUTE | October 2012 October 4-5 | Birmingham, UK US Financial Data Disclosure Policy...

What is redlining?

Overview

Data disclosure requirements and how they are used to advocate for community reinvestment


What is redlining?


Regulatory history of financial services transparency requirements

Overview

Data disclosure requirements and how they are used

to advocate for community reinvestment

What is redlining?


How advocates use HMDA and small business disclosure


Overview



What is redlining?


Challenges and opportunities



Overview



1975

1977

1992-96

1995

Home Mortgage Disclosure Act (HMDA)

1977-87

1990

Community Reinvestment Act (CRA)

Limited adherence to CRA requirements

New data added to HMDA

Boston Fed analyses of CRA reports

Lending, investments, services test added

1989 CRA Exams made public for the first time

2004 Rate spread added to HMDA

Movement towards financial transparency

Expansion of HMDA and the establishment of the Community Reinvestment Act

drive debate on financial services accountability

2010 Dodd-Frank changes, open HMDA regulatory docket


WOODSTOCK INSTITUTE | JUNE 2012

Loan application and origination data

- Financial institutions with assets of at least $41M (£25.3M) – Includes most banks and thrifts

- Loan applications

- Loan disposition (approved, denied, originated, withdrawn, incomplete)

- Loan approval/denial

- Loan amount

- Loan purpose (purchase, refinance, home improvement, multifamily)

- Rate spread (basis points over prime)

- Secondary market (Fannie Mae, Freddie Mac, Ginnie Mae, Private MBS, etc).

- Conventional/government backed

- Lien status (first lien, junior lien)

Borrower data

- Borrower race/ethnicity

- Borrower income

Neighborhood data

-Census tract

- Income

- Minority composition

- County

- Metropolitan Statistical Area

- Small county/rural county

Loan application and origination data

- Loan applications

- Loan disposition (approved, denied, originated, withdrawn, incomplete)

- Loan approval/denial

- Loan amount

- Loan purpose (purchase, refinance, home improvement, multifamily)

- Rate spread (basis points over prime)

- Secondary market (Fannie Mae, Freddie Mac, Ginnie Mae, Private MBS, etc).

- Conventional/government backed

- Lien status (first lien, junior lien)

Home Mortgage Disclosure Act data

HMDA represents the most robust publicly

available mortgage lending data available

Recommendations to regulators

The level of income documentation used when underwriting the mortgage

Debt-to-income ratio

Total applicant income

Close gaps in types of loans that are required to be reported

Require disclosure of a lender’s parent company

Link data on loan performance and loan modifications to HMDA

Current mandate to expand disclosure

Mortgage loans that are delinquent by more than 30 days;

Mortgage loans that are delinquent by more than 90 days;

Properties that are real estate-owned (REO);

Mortgage loans that are in the foreclosure process;

Mortgage loans that have an outstanding principal obligation amount that is greater than the value of the property for which the loan was made (“underwater”)


Dodd-Frank mandates additional disclosures on delinquencies, regulators also held hearings on how HMDA should be expanded

Expansion efforts

Using Home Mortgage Disclosure Act data for market analyses

Change in Prime Home Purchase and Refinance Lending

in Communities of Color, 2006 to 2008

Boston Charlotte Chicago ClevelandLos Ange-

les New York RochesterAvg All Cities

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

-55.8%

-70.9%

-53.7%

-68.5%-64.5%

-56.0%-52.5%

-60.3%

-16.3%

-29.9%

-20.3%

-42.7%

-33.0% -31.2%

-25.3%-28.4%

Census Tracts with 80% or More Residents of Color

Census Tracts with Less Than 10% Residents of Color

Source: Home Mortgage Disclosure Act



Market share ratios identify a lender’s presence in low- and moderate-income (LMI) communities

Firm Loans to LMI borrowers / All Loans to LMI borrowers

Firm Loans in Region / All Loans in Region= Market Share Ratio

Using HMDA for firm-level lending analyses


Market share ratios identify a lender’s presence in low- and –moderate income (LMI) communities


Firm Loans in Region / All Loans in Region

Interpreting the results

= Market Share Ratio

<0.25 - 0.25 - 0.5 - 0.75 - 1.0 - 1.5 - 2.0 - 4.0 - >4.0








<0.25 - 0.25 - 0.5 - 0.75 - 1.0 - 1.5 - 2.0 - 4.0 - >4.0

Low Presence in LMI communities








<0.25 - 0.25 - 0.5 - 0.75 - 1.0 - 1.5 - 2.0 - 4.0 - >4.0


Good Presence in LMI Communities








<0.25 - 0.25 - 0.5 - 0.75 - 1.0 - 1.5 - 2.0 - 4.0 - >4.0


Good Presence in LMI Communities

Overconcentration in LMI Communities

(typical of subprime)


Disclosure requirements

- Loan status includes origination and purchase

-Firm turnover - indicate whether a loan is extended to a borrower with annual revenues of $1 million or less

- Loan volume is aggregated into three categories based on loan size and reported at the census tract level

Market coverage

- Reported by financial institutions with assets of at least $1.098B (£677M) – Includes most banks and thrifts

- Small business data reporters represent about 93 percent of the small business loan market

Small business lending data

Disclosure, gaps and

market coverage

Gaps

-No data on applications or denials

-No borrower demographic information

- No loan-level information, only census tract aggregates

- Aggregates by financial institution only available at the MSA region

- Many very small business, particularly start-ups are capitalized through small business or personal credit cards


Recommendation

Disclosure should be expanded to all business loans regardless of business size owners’ race and gender to permit better market sizing

Expanded disclosure mandated by 2010 financial reforms

Requires collection of data for minority-owned businesses, women-owned businesses, and small business of <$750,000 in annual sales:

Type and purpose of credit requested

Amount of credit applied for and approved

Type of action taken and the date of action

Census tract of business

Race, sex, and ethnicity of principal business owners


2010 financial reforms required the adoption of new disclosure rules,

but additional data are still necessary

Dodd-Frank financial reforms expand small business data collection mandate and additional recommendations

MSA, income characteristics, loan count, loan volume,

and loans to smaller businesses

Example of data aggregates (Chicago region, Illinois)



Source: Woodstock Institute and the New Economics Foundation: Full Disclosure: Why Bank Transparency Matters

Using small business data for market-level analyses

Loans per 100 businesses in Chicago region communities

by racial/ethnic composition


Market share ratios identify a lender’s presence in low- and moderate-income (LMI) communities or lending to very small businesses

Firm SBLs to Small Firms / All SBLs to Small Firms

Firm SBLs in Region / All SBLs in Region


= Small Firm Market Share Ratio

<0.25 - 0.25 - 0.5 - 0.75 - 1.0 - 1.5 - 2.0 - 4.0 - >4.0

Low penetration to small firms

Good penetration to small firms

Specialization in small firms (rare)

Using small business lending data for firm-level analysis


Source: Woodstock Institute and the New Economics Foundation: Full Disclosure: Why Bank Transparency Matters


Using small business data for firm-level lending analyses

Lending Test

-Market share analysis of:- Home purchase

- Home improvement

- Refinance

- Multi-family lending

- Community Development Lending

- Number and volume of loans to CDFIs

- Responsiveness to community needs

Services Test

-Bank branch locations in low-wealth communities

-Record of opening and closing branches in low-wealth communities

- Use of alternative service delivery among low-wealth customers

- Telephone- Online, mobile banking- prepaid cards

- Community development services

- Housing counseling- Technical assistance- Home purchase counseling

Investment Test

Count and volume of community development investment vehicles

- Low income housing tax credits

- Mortgage revenue bonds

- Investments in CDFIs

- LMI targeted mortgage backed securities

- Investments in new market tax credits

Community Reinvestment Act evaluation

considers three factors

Regulatory evaluations use public data about financial institutions to evaluate reinvestment performance


Non-binding CRA agreements between regional non-profits and financial institutions set reinvestment targets

Using data disclosure to expand reinvestment in low wealth communities: reinvestment agreements

Mortgage lending goals

Small business lending goals

Bank branch targets in low wealth communities

Expanding down-payment assistance programs for low wealth borrowers

Investment in CDFIs and disclosure of CDFI investments


Issues

Fewer CRA exams conducted by regulators

The consolidation of the banking and thrift industry means fewer opportunities for actionable public scrutiny of a bank’s CRA performance.

Fewer mergers of healthy institutions. Many recent mergers happened on an emergency basis with no opportunity for public comment, reinvestment commitments

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Source: Woodstock Institute Analysis of FDIC data

Number of CRA Exams conducted1990 to 2009

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

0

100

200

300

400

500

600

Bank mergers 1994-2003

Source: Pillof, Steven. “Bank Merger Activity in the United States 1994-2003


Reinvestment obligations tied to depository insurance,

merger opportunities

Challenges to using data disclosure requirements

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0

1,000

2,000

3,000

4,000

5,000

6,000

Outstanding

Satisfactory

Needs to Improve

Substantial Noncompliance

Source: Woodstock Insti-tute analysis of FDIC data

+ Expansion of CRA obligations

CRA Ratings 1990 to 2009

+ Gramm-Leach-Bliley

+ CRA regs revised


96 percent of all financial institutions receive

either satisfactory or outstanding scores

Fewer opportunities for public impact reduce the effectiveness of data disclosure for advocacy

Source: Avery, et al. “The CRA within a Changing Financial Landscape“

Issues

Percent of household financial assets deposited in CRA-regulated financial institutions continues to decline.

Market share of assets in both large and small banks declines as market share of top 25 lenders more than doubles.

Role of non-CRA-regulated lenders varies with market conditions.

Figure 4. Shares of Households’ Financial Assets

Figure 5. Mortgages Originated by Institution Type


Reinvestment obligations tied to depository insurance, merger opportunities

Fewer opportunities for public impact reduce the effectiveness of data disclosure for advocacy

What is redlining?

Moving forward

Redlining, data disclosure requirements, and public efforts

to increase community reinvestment


Challenges and opportunities



WOODSTOCK INSTITUTE | October 2012 October 4-5 | Birmingham, UK US Financial Data Disclosure Policy...

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