CFPB Home Mortgage Disclosure Act Proposal May Enable Redlining

By Alex Ulam, a journalist who focuses on architecture, landscape architecture, urban planning issues and housing. A Nation Investigative Fund article he wrote in 2010 for The Nation magazine was the first to expose the major flaws in the landmark 2008 state Attorneys General settlement with Bank of America over its subsidiary Countrywide’s abuses. Ulam’s work has appeared in publications such as The New York Times, Discover, Macleans, The National Post of Canada, and Archaeology.

The Consumer Financial Protection Bureau (CFPB) is in the process of fixing holes in the Home Mortgage Disclosure Act (HMDA), the most important law for identifying and prosecuting some of the most damaging discriminatory practices in the history of our country. Reforming HMDA, which is a key requirement of the Dodd-Frank Act, should improve the abilities of regulators and housing advocacy organizations to spot and stop the types of predatory lending that helped fuel the 2008 financial crisis.

However, nowhere in the CFPB’s 572-page HMDA proposal is there any requirement for financial institutions to include information about mortgage modifications. The CFPB needs to respond to widespread concerns and address this gaping omission. Reports, including one from last year by the U.S. Government Accountability Office (GAO), indicate that large financial institutions could be violating fair lending laws in the ways they handle mortgage modifications for minority homeowners, the very people who suffered the most when the housing bubble burst.

“It is not that we are looking for litigation,” says Kevin Stein, Associate Director of the California Reinvestment Coalition, one of the groups advocating for inclusion of mortgage modification data in HMDA. “We hope that transparency will lead to accountability.”

Mortgage modifications are a potential lifeline for many of the seven million American homeowners who are seriously underwater—meaning they owe at least 25 percent more on their mortgages than the estimated value of their homes. For many of these homeowners the Great Recession hasn’t ended—as the economists Atif Mian and Amir Sufi have documented in their work, areas with high percentages of underwater homeowners struggle with higher levels of foreclosure and higher levels of unemployment.

Underwater homeowners also are particularly vulnerable to predatory mortgage servicing by the financial institutions that collect their mortgage payments and tack on late fees and other charges. “There is an element of ‘suck the loan dry,'” Howard Glaser, a former top official at the U.S. Department of Housing and Urban Development, once told me in an interview, “And then once you have gotten everything out of it that you can, you leave the carcass on the side of the road.’”

Although the Obama administration bailed out the “Too-Big-to-Fail” banks, whose very solvency was at stake after the mortgage meltdown, many homeowners who took out loans during the 2004-2008 housing bubble remain trapped in negative equity territory. Currently, according to the housing data company RealtyTrac, 28 percent of all loans originated in 2005 are seriously underwater, 36 percent of all loans originated in 2006 are seriously underwater, and 32 percent of all loans originated in 2007 are seriously underwater.

Indeed, the Obama administration’s unsuccessful attempts to address the plight of underwater homeowners are among its its biggest failures. The U.S. Treasury Department, through its troubled Home Affordable Modification Program (HAMP), has offered the “Too-Big-To-Fail” banks billions of dollars in subsidies in exchange for writing down loans. On the other hand, the U.S. Justice Department and has made mortgage modifications the primary form of consumer relief in many of its multi-billion dollar settlements with the big banks. However, as ProPublica has extensively reported, both HAMP and the big bank settlements have been rife with major problems.

A significant proportion of the most distressed homeowners are located in African American and Latino neighborhoods, which mortgage brokers and banks targeted for predatory subprime loans during the housing bubble. Because African American and Latino homeowners typically have most of their net worth tied up in their houses, minority communities were devastated when the bubble burst. Hispanic households lost a whopping 48.3 percent in home equity between 2007-2010. To put the underwater housing crisis in perspective, last year in 64 percent of the 395 zip codes deepest underwater, African Americans and Latinos accounted for at least half the population.

Public disclosure of data on all loan modifications broken out by race, ethnicity, gender, and census tract could help answer critical questions about whether or not mortgage servicers, which often are big banks, are fulfilling their legal obligations to treat distressed borrowers equally. For example, is a particular mortgage servicer primarily offering financially unsustainable mortgage modifications likely only to postpone foreclosure in a particular Latino neighborhood? Or is a particular mortgage servicer violating fair lending laws by concentrating most of their relief efforts in white suburban neighborhoods?

“HMDA data is an important resource that helps regulators and the public to spot problems in the housing market, identify potential discrimination, and ensure that lenders are serving the housing needs of their communities,” said CFPB spokesperson Samuel Gifford in an email response to questions about why mortgage modifications are not being included in the proposed HMDA revisions, adding, “…we cannot at this time comment on the matters under consideration, or on particular feedback received.”

However, considering the complaints being lodged with the CFPB, you would think that the Bureau would have found space in their 572-page HMDA revision proposal to include reporting requirements for mortgage modifications. A February 2015 report by the American Civil Liberties Union (ACLU) and MFY Legal Services, which is the first to analyze mortgage complaint data from the CFPB, reveals that predominantly minority neighborhoods are filing a higher percentage of complaints about mortgage servicer misconduct than are predominantly white neighborhoods.

“The most shocking thing is that there were such clear relationships between the concentration of people in color in the community and the seriousness of the mortgage complaints they were filing,” said Rachel Goodman, staff attorney with the ACLU’s Racial Justice Program, who had to file a Freedom of Information Act request with the CFPB to obtain the mortgage complaint data. Said Goodman, “The reason we looked at the complaint data is because there aren’t sources that track modifications either at the loan level or the community level in a way that you could do a rigorous analysis of the disparities that we know exist.”

Reports from housing counselors working in the field also raise red flags. In a California Reinvestment Coalition survey of 66 housing counselors in California, more than half of the responding counselors reported that homeowners with limited English speaking proficiency and homeowners of color have been receiving significantly worse results on loan modifications intended to prevent foreclosure than was the case with white homeowners. The obstacles cited included potential violations of Fair Housing and Fair Lending laws such as the failure by mortgage servicers to make loan modification documents available in the native language of borrowers and the alleged steering of minority homeowners into mortgage modifications with financially unsustainable terms.

Even the U.S. Treasury Department run Home Affordable Modification Program (HAMP), which provides mortgage servicers with financial incentives to modify mortgages, appears to have serious Fair Lending problems. A 2014 GAO report that used non-public information to examine four unidentified large mortgage servicers participating in HAMP, found evidence of “statistically significant differences” in the rate of denials and cancellations of trial mortgage modifications for borrowers with limited English proficiency as well as African American borrowers. However, although the GAO report took to task the Treasury Department’s monitoring of the program and found possible evidence of discriminatory practices, it withheld the identities of the mortgage servicers it flagged and denied a recent Freedom of Information Act request for the records.

Then there are the Fair Lending and transparency issues that have plagued the U.S. Justice Department’s settlements with the big banks over their allegedly illegal lending and mortgage securitization activities during the housing bubble. On paper, the recent $17 billion U.S Department of Justice settlement with Bank of America (BofA), which includes $7 billion in consumer relief, certainly is an improvement over previous ones. The settlement requires 50 percent of the mortgage debt reduction to be in designated Hardest Hit Areas. It also requires BofA to report the census tracts in which it provides the relief. However, the settlement doesn’t require reporting on the race and ethnicity of the borrowers applying for mortgage modifications. Further, the settlement’s court-appointed monitor, Eric Green, has yet to determine whether the demographic data that the settlement does require will in fact be made public.

Local governments clearly are interested in learning about whether particular financial institutions doing business in their communities are abiding by fair lending laws. And it is not as though banks are unable to make this kind of information publicly available. The city of San Francisco, for example, in a Request for Proposal (RFP) for its banking and credit card business required bank applicants to provide data on the race, ethnicity, and census tract for both foreclosure filings and loan modifications, broken out by type. In 2013, to get the business, BofA, one of five that responded to the RFP provided the demographic data about mortgage modifications that San Francisco was requesting.

In the interests of ensuring that mortgage servicers are fulfilling their legal obligations to treat distressed borrowers equally, it shouldn’t be too much to ask for public disclosure on mortgage relief efforts. As the original consumer advocate and later Supreme Court justice Louis Brandeis once said, “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”