What is the Home Mortgage Disclosure Act?

The website, dictionary.com explains the term, “American Dream” as follows:

“The ideals of freedom, equality, and opportunity traditionally held to be available to every American.”

The dream of home ownership is closely linked to those ideals as well. When it came to light over 40 years ago that some mortgage lenders were discriminating against some prospective borrowers, the U.S. government created the Home Mortgage Disclosure Act (HMDA).

Established in 1975, the HMDA serves to keep lenders in check by requiring them to record certain aspects of their lending practices and make that information available to the public. Examples of the types of details they keep track of as a result of the HMDA legislation include, details on how many pre-approvals are made in a given amount of time, how many mortgages are granted, and the average loan amounts. Theses aspects are monitored in order to prevent predatory lending practices and to ensure that eligible borrowers are given access to any government resources they may qualify for.

As part of the HMDA legislation, Federal Regulation C requires mortgage lenders to display a poster in the lobby of each branch of their firm. These posters instruct any interested customer on how they may obtain details on the firm’s mortgage lending practices. Such information is also readily available to the public here: www.FFIEC.gov

Although this type of information is of particular interest to anyone considering applying for a home loan, it is also a relevant tool for investors who are curious about a financial firm’s practices and if they would be beneficial.

A very critical part of Regulation C stipulates that in addition to the statistics on the numbers of loans and their amounts, lenders must also disclose which communities the bulk of their residential borrowers come from. The goal is to ensure that each lender is working to meet the needs of its local prospective borrowers.

When the realization that the urban decay many of the nation’s cities suffered in the late 1960s and early 1970s could have been fuelled in part by discriminatory lending practices, there was a public outcry. After fielding scores of accusations and reviewing numerous cases, members of the U.S. Congress realized that this was indeed a real problem and created the HMDA in 1975.

However, not all financial institutions in the U.S. are required to report HMDA data-only those that meet certain criteria, such as having assets beyond the set limit. Different rules apply also depending on whether or not the firm is a depository or non-depository institution. According to the Federal Financial Institutions Examination Council-FFIEC, in 2012, there were 7,400 institutions who reported in with a total of 18.7 million HMDA records.

A very important part of the HMDA holds lenders responsible for keeping a Loan Application Register (LAR). For every hopeful borrower who applies for a home loan, the lender handling their application must record information detailing a variety of information, including:

• Income information
• The loan amount
• The purpose of the loan-refinancing, purchase, home improvement
• The type of loan-FHA, USDA, VA, conventional
• The potential borrower’s race or ethnicity and sex
• The location of the property
• The date of the action and which action was taken-granted, denied, withdrawn
• If the loan was denied, an explanation as to why
• Rate spread sheet

For a complete list of what is recorded on an LAR, click here: http://www.ffiec.gov/hmda/forms.htm

The FFIEC requires all participating lenders to submit their LARs by the end of March each year. In turn, they are reviewed to identify any discrepancies or discriminatory actions.