(Bloomberg Opinion) -- For more than four decades, U.S. law has required banks to lend fairly and equitably, meaning that they must serve everyone in their communities on equal terms, and can’t discriminate on the basis of race or class.
So do they? If Donald Trump’s administration has its way, the world might never know.
In 1975, Congress created the Home Mortgage Disclosure Act to ensure that U.S. authorities — and the broader public — would have the data needed to ensure that banks were complying with laws on fair lending and community investment. It required institutions that made mortgage loans to report information such as the race of borrowers and the type and amount of loans. The government aggregated the data, providing the most comprehensive available picture of mortgage credit in the U.S.
Yet the subprime-lending boom of the 2000s exposed unacceptable blind spots. Without information on credit scores, actual interest rates, debt ratios, and specific loan features, regulators couldn’t see the extent to which lending standards were deteriorating, or to which low-income borrowers — particularly minorities — were being steered into unduly expensive and badly designed mortgages. This blindness allowed the practices to get worse, and made the resulting crisis more destructive.
After the crisis, Congress and the Consumer Financial Protection Bureau, newly charged with collecting data and enforcing lending laws, sought to shed more light. They added fields that would, for example, allow researchers to better understand the reasons behind denials and to identify loans with risky features such as special introductory rates or the option to pay interest only. In large part, they asked for information that lenders should be collecting for their own purposes.
Now, though, this progress is being reversed. It started last year, when Congress freed banks that make fewer than 500 loans a year from all the new reporting requirements. The change affects the majority of U.S. lenders, which tend to be small operations. And while it doesn’t apply to the larger banks that account for most credit, it severely curtails the information available on certain kinds of lending, particularly in poor and rural areas. By one estimate, for example, it excludes about 16% of all loans of less than $100,000.
Even where changes affect only a small portion of loans, the damage can be much greater than the percentages suggest. That’s because the excluded loans typically aren’t a representative sample, so extrapolating from the remaining data to gain a fuller picture can be difficult or impossible. As the CFPB itself put it in 2015, when considering moving the reporting threshold above a mere 25 loans per year, the loss of data “would substantially impede the public's and public officials' ability to understand access to credit in their communities.”
Now the CFPB wants to go where it previously feared to tread. It has proposed raising the threshold for reporting all HMDA data — not just the newly added fields — to as high as 100 loans per year. This would potentially allow more than 1,700 lenders to go completely dark, and exclude information on about 10% of the multifamily loans crucial to financing low-income housing. It’s also considering scrapping some of the data fields it added just a few years ago. This could, for example, eliminate all data on manufactured homes, an area rife with lending abuses.
It’s hard to see what benefit these changes could have. They won’t save the banks much time or money: The CFPB estimates that raising the reporting threshold, for example, would reduce banks’ costs by as much as $4,700 a year on average — less than 1% of the typical small bank’s net income.
The primary effect, then, will be to hinder enforcement of laws that have been crucial to the advancement of equal rights. If the CFPB goes ahead, consumer groups should mount a challenge in court. If such an abrupt about-face doesn’t qualify as arbitrary and capricious, and hence outside the bureau’s legal authority, it’s hard to imagine what would.
—Editors: Mark Whitehouse, Timothy Lavin.
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