Major Gaps in Home Loan Data Raise Concerns Over Discriminatory Lending and Accountability

A new report from the National Community Reinvestment Coalition reveals that over 12% of U.S. home loan applicants fail to provide race data, undermining efforts to detect discriminatory lending. The lack of complete data could obscure both biased and positive trends in loan distribution.

Data Gaps in U.S. Home Loans Hinder Efforts to Address Discrimination, Says New NCRC Report

By law, the 5,000 financial institutions in the United States that originated a home loan must compile race information. This policy is intended to identify potential discrimination against borrowers and has produced a vast amount of data that researchers, academicians, and lenders utilize to prevent it.

The Consumer Financial Protection Bureau, the Federal Financial Institutions Examinations Council, and the Office of the Comptroller of the Currency have all cited the data collected per the Home Mortgage Disclosure Act in the past year.

The issue is that over 12% of consumers fail to provide the information required by law, and 90% of loans sold to third parties need more data collected. That is the assertion of the National Community Reinvestment Coalition, a non-profit organization researching social and ethnic economics.

“The impact is profound,” according to an NCRC report published today, “as these gaps hinder our ability to understand who is receiving loans and under what terms, which is vital for assessing fairness and inclusivity.”

The NCRC committed on October 3 to utilizing only data that includes demographics on race to address the issue. "NCRC is removing records that lack demographic data from our calculations of the percentage of loans made to specific races, commencing with this report," the researchers stated.

HMDA Data Gaps and Loopholes Allow Lenders to Omit Demographics, Obscuring Fair Lending Efforts

According to the NCRC and other organizations, the HMDA's deficiencies are the primary cause of the absence of data. The HMDA rule, implemented in 1975 to promote a more equitable distribution of loans, mandates that applicants submit demographic data via phone and in person. However, online applicants have the option to decline.

“In the past, it was assumed that those choosing not to select a race were more likely white,” said Richardson. “However, in this report, we demonstrate that loans without data likely reflect racial diversity more accurately than previously thought. Thus, the correct approach is to exclude these loans.”

Third-party loan purchasers are not required to monitor demographic information, which can exacerbate the issue of inconsistent data. In a conversation with Fortune, Jason Richardson, a senior researcher at the NCRC and co-author of the report, disclosed that seven of the top 10 loan-purchasing institutions from the previous year employed a loophole that enabled them to eliminate borrower demographic data from the mortgages they acquired.

“A few years ago, it was rare for lenders to buy loans and strip demographic data, but Citibank pioneered this practice,” said Richardson. “Now, many lenders who purchase loans use this loophole.” Citi did not respond to a request for comment.

Some more positive trends are also obscured, but many prejudiced lenders can conceal themselves behind this data black hole.

Incomplete Data on Hispanic and Black Lending Hinders Verification of Positive Trends, NCRC Calls for Enhanced Reporting to Address Redlining

The NCRC report indicates that Hispanic lending for home loans—16.5% of all home purchases last year—was nearly identical to their overall share of the U.S. adult population "in what might be a sign of a historic point." Black borrowers also experienced increased lending rates, although less substantial than their aggregate population percentage.

Regrettably, the incomplete data makes verifying these ostensibly positive trends challenging.

“We urgently need more comprehensive data on small business and community investment to effectively craft policies that mitigate the harsh realities of redlining,” according to the report.

Indeed, any increase in data collection about borrowers heightened the risk of privacy invasion. Despite the CFPB's assertion that the HMDA poses "low, if any, privacy risk," economist Anthony Yezer expressed apprehensions in a 2017 report that the data collection could result in pervasive privacy violations.

That’s of little concern to the NCRC. “The extensive benefits of detailed data collection, encompassing income, race, sexual orientation and gender identity, decisively outweigh any concerns over burden or privacy,” the authors wrote. “It’s imperative that efforts to curtail this essential data collection be recognized as not just misguided but as detrimental to the health and well-being of our communities.”