A comprehensive product analysis of Home Mortgage Disclosure Act (HMDA) lending and housing credit needs can be a crucial component of a bank’s compliance and fair lending risk management program. Such an analysis can address redlining concerns related to minority geographies and the race and ethnicity of borrowers, as well as Community Reinvestment Act (CRA) concerns, including income levels by geography and borrower.
This blog post outlines the approach to such an analysis and its general findings as an example, offering a guide for institutions looking to enhance their lending practices.
Analytical Approach
The analysis typically focuses on specific assessment areas, considering various factors in the context of fair lending and CRA:
- Population Trends: Examining how demographic shifts impact housing needs.
- Socioeconomic Housing Characteristics: Understanding the economic and housing landscape.
- Historic Lending Trends: Comparing an institution’s lending trends to those of its peers and the aggregate market.
- Market HMDA Application Distribution: Analyzing the overall distribution of HMDA applications.
- Product-Specific Analysis: Evaluating HMDA loan originations for specific products.
- CRA Reportable Lending Analysis: Reviewing lending activities that are reportable under the CRA. The analysis also usually benchmarks an institution’s HMDA reportable loans against peers, considering geographic penetration in majority-minority (MMCT), majority-black (MBCT), majority-Hispanic (MHCB) and low-to-moderate income (LMI) census tracts. It also looks at loans to Black and Hispanic applicants and LMI borrowers.
Peer Comparisons
Peer groups are generally selected based on lenders within 50% to 200% of the bank’s origination volume in each area. This helps in comparing the institution’s penetration in terms of race, ethnicity, and geography. The institution’s penetration for each product is then compared to its peers.
Key Metrics and Indicators
- Penetration Rates: These show the proportion of loans in specific categories (e.g., minority census tracts) compared to overall lending.
- Indexes: Ratios that compare an institution’s lending proportion in each category to those of its peers, indexed to 1.0. An index above 1.0 suggests better-than-average penetration.
- Bank-Peer Difference: The difference between the bank’s penetration and that of its peers, highlighting areas where the bank is above or below peer levels.
General Findings and Opportunities
If analyses produce consistent results across various assessment areas, a bank can deploy a comprehensive marketing strategy throughout its entire footprint. This overarching strategy can subsequently be customized to align with the specific product mix of each assessment area.
Below are some example observations that may emerge from such analysis and recommendations on how to operationalize them:
- Income and Loan Amounts: Incomes and loan amounts are generally lower in majority-minority and LMI census tracts, as well as for minority and LMI borrowers.
- Loan Products: Home improvement and home purchase loans are more common than refinance loans in meeting housing needs in target areas.
- Government-Sponsored Products: FHA loans are often more utilized in majority-minority and LMI areas. Increasing the volume of government-sponsored loans can positively impact lending distributions.
- Commercial and Investment Property Lending: There is a consistently higher loan demand for commercial and investment properties in majority-minority and LMI geographies.
By focusing on these areas, banks in this example could better serve under-served communities and ensure fair lending practices are observed at the same time.
It is critically important for any bank to understand each of the markets it serves and its own strengths and weaknesses in each of those markets. The analytical approach outlined here is a fantastic starting point for developing that understanding.
