The Lending Letter of the Law

by Dr. Jim Goodnight and Clark Abrahams, SAS

As the Home Mortgage Disclosure Act is stepped up, lending institutions
are working to comply with the letter of the law by providing fair credit to their communities.

Regulations and laws are often created to ensure that businesses operate in a manner that is consistent with fundamental principles of ethics and social responsibility in order to protect consumers, and whole communities, from any and all forms of exploitation or mistreatment.

The Home Mortgage Disclosure Act (HMDA) was passed by the U.S. Congress in 1975. It requires lending institutions (banks, savings associations, credit unions, etc.) to provide the public with loan information that can help individuals, communities and public officials assess the degree to which lenders are serving housing needs. It also helps identify where public sector investment is needed to attract private investment, and identify suspected discriminatory lending patterns.

The Community Reinvestment Act (CRA), passed two years later, spells out how a financial institution's obligation to meet community needs would be assessed via lending, investment and service tests. Over decades, HMDA has been amended to expand the scope of data to be filed, while immigration patterns and population migration trends have contributed to revisions of metropolitan statistical areas (MSAs), and are reflected in new socioeconomic and ethnic compositions at the census-tract level.

Amid all of the regulatory, economic and demographic change, financial institutions have struggled to effectively and efficiently capture and analyze their lending performance and report it in the most accurate and timely manner possible. These institutions want the assurance that they are not only complying with the letter of the law, but that they also fully understand their track record, know what potential exists to extend their goals in meeting the needs of their customers and the communities in which they operate, and have the ability to put plans into motion that will enable them to achieve both tactical – and strategic – objectives.

In the past few years, changes to HMDA have aimed beyond the goal of fully understanding who gets approved for a real estate secured loan, to knowing how much borrowers are paying for specific types of loans in different geographic markets under a variety of circumstances. This has been done with the goal of fostering parity by identifying and correcting even small imbalances. In the summer of 2005, with the release of more new HMDA data, the full range of constituencies will seek to better determine not only if, but also how, lending institutions are meeting their community's housing credit needs and whether or not regulatory enforcement efforts need to be stepped up.

With the 2002 amendment to HMDA, the new data capture requirements effective in 2004, and the subsequent reporting of new information in 2005, there is a renewed focus on HMDA. For example, some financial institutions are creating comprehensive solutions that streamline and automate as many HMDA reporting processes as possible – equipping compliance executives with the tools to meet strategic objectives.

Bio: Dr. Jim Goodnight is CEO of SAS. Clark Abrahams specializes in HMDA requirements.