All Lenders Are Not Alike: Making Sense of your HMDA Data by Debby Lindsey, PHD and Michael

Taliefero In his book Competitive Advantage: Creating and Sustaining Superior Performance Michael Porter develops the notion of "value chain," defining a company in terms of its strategically relevant activities, in order to understand its behavior. His idea is that a firms value chain may differ from that of its competitors, representing a potential source of competitive advantage or disadvantage. In our original article 1 on this subject, published over 15 years ago, we applied Porters basic concept of a value chain to the analysis of mortgage lending practices, producing results that may help lenders trying to interpret HMDA data for fair lending or CRA strategic management purposes. Expanding on Porters basic concept, we developed what we called the fair lending value chain, including, in addition to Porters positive values, negative value activities, which weaken a companys value chain by limiting opportunities or increasing costs or liabilities. In the time that has passed since that original work a lot has happened in mortgage lending and the technological platforms used to analyze it. So we thought that it might be useful to explore a new insights that may be gained from exploring the HMDA data with a powerful new tool, LendingPatterns. We intend to provide practical illustrations of how large volumes of mortgage lending data can be effectively disaggregated to construct profiles that contribute to or mitigate origination, denial and fallout rates and related fair lending issues as measured by disparities between non-Hispanic whites and various members of minority groups. Methodology Most public discussions of racial disparities in lending are limited to comparisons of the companys originations, denial and fallout rates. We can gain insight as to the operational and/or strategic effects on fair lending by comparing these disparities across various lender groupings. For example, if the lender population were segmented into groups like national banks, credit unions, independent mortgage companies, wholesale lenders, top retail lenders, manufacture housing lender, and perhaps other groupings, we may be able to infer something from the comparison and contrasts among these groups. We can do something similar by product as well. Thus, we gain quantitative evidence as to whether various types of lending furthers fair lending more or less than other strategies and whether this varies by race or ethnicity. The original article on the fair lending value chain was based in large measure on anecdotal experience from consulting engagements. At the time of the original piece there was no efficient way, technically speaking, to analyze the universe of HMDA data for all or even a significant portion of the HMDA data. All that has changed with the advent of
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What Lenders and Secondary Market Agencies Can do to Help Remove Barriers to Mortgage Credit, Michael Taliefero and Debby Lindsey, PHD.

LendingPatterns. This cloud based application allows users to observe every morsel of HMDA data for any one lender or any group of lenders reporting HMDA data since 2004. It is from observing general patterns of rates and disparity in these segmented HMDA data that new insights about fair lending are uncovered. This article seeks to inform the reader about patterns and tendencies in the data so that individual performance of a lender might be better understood. It is also hoped that the results will help those who analyze HMDA data to look at these data in a new way. All Lenders Are Not Alike This statement, our company tagline, makes the point that each and every lender that reports HMDA data has its own unique story to tell influenced by their organizational structure/charter, company size, origination strategy (wholesale, retail, e-tail), the markets where they compete, the mortgage products originated, and the income characteristics of applicants. Using the LendingPatterns cloud-based software, origination, denial and fallout rates were calculated for 26 segments without regard to race or ethnicity. The segments were sorted and ranked. Origination rates are determined by dividing the number of originations for each segment by the total applications for that segment. Denial and fallout rates were calculated in an analogous manner. Origination, denial and fallout rates are compared to the respective benchmark established for all lenders. With this as a background, we then examine credit decision performance using the racial/ethnic lending disparities for the same 26 segments, also in comparison to the All Lenders benchmark.. The list of 26 segments used in the analysis and the origination, denial and fallout rates for each segment follow in the next three tables. Table 1 indicates an origination rate for all lenders of 63%. There were 14 segments above the national benchmark and 12 segments below it. Depending on the segment examined, origination rates ranged from a high of 72% for Small Lenders reporting 1,000 or fewer applications on their HMDA loan application register (LAR) to a low of 30% for non-prime lenders. Non-prime lenders are those lenders that had more that 50% of their originations meeting the HMDA reporting thresholds for what may be viewed as subprime lending 2. As one might expect, manufactured housing applications frequently associated with subprime also show a relatively low origination rate of 32%. It may surprise some to see the origination rate for FHA 1-4 family owner occupied refinance applications to be so low at 52% during a year when rates were low and demand high. This could be explained in part by collateral valuation issues and lender credit overlays. Also, surprising is the fact that the top three origination rate segments are associated with smaller depository institutions. Finally, it is also good to know that those brave men and women who serve our country had a better than average origination outcome of 67% when attempting to finance the purchase of a home through the VA and 63% when refinancing a home.

Table 1: Comparison of origination rates by segment

Segment
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Small Lenders LAR <=1,000 apps State chartered non-member banks (FDIC) Bank Regulated Depositories including Credit Unions VA 1-4 family Owner Occupied home purchase Apps Conventional 1-4 family Owner Occupied home purchase Apps Lending to Middle / Upper income applicants FHA 1-4 family Owner Occupied home purchase Apps Bank Holding Co Affiliate / State member banks (FRS) Lending to Middle / Upper census tracts Conventional 1-4 family Owner Occupied refi Apps For-Profit Financial Institutions (Excludes Credit Unions) Prime (Spread Frequency <51% VA 1-4 family Owner Occupied Refi Apps Retail Dominant Firms Significant Wholesale Lenders (2012) National banks (OCC) Mid-size Lenders 10,000-50,000 LAR Independent Mortgage cos. (HUD) Lenders with $10+ billion in assets (CFPB) Larger lenders 50,000+ LAR applications Credit Unions (NCUA) Lending to Low / Mod income applicants Lending to Low / Mod census tracts FHA 1-4 family Owner Occupied Refi Apps Manufactured Housing Apps Non-Prime (Spread Frequency >=51% National for all lenders

Originations / Rate
# 890,111 1,331,828 2,696,141 205,641 1,245,152 6,733,293 699,816 746,743 8,535,963 4,950,698 6,128,969 9,696,655 346,218 7,396,561 2,288,285 3,899,839 2,014,287 3,050,964 4,106,978 4,456,785 754,592 2,218,885 1,189,386 554,043 123,628 87,311 9,783,966 % 72.17 70.12 68.99 67.35 67.34 66.69 66.03 65.73 65.63 65.46 64.07 63.67 63.25 63.12 62.91 62.37 62.04 61.79 60.65 59.22 58.11 56.60 56.19 52.40 32.36 29.69 63.02

Source: 2012 HMDA FFIEC via LendingPatterns

Table 2 indicates an overall denial rate for all lenders of 18.75%. There were 15 segments above the national benchmark and 11 segments below it. Depending on the segment examined, denial rates ranged from a low of 14.5% for small lenders reporting 1,000 or fewer applications on their HMDA loan application register (LAR) to a high of 45% for non-prime lenders and manufactured housing applications. CFPB regulated institutions as a group had higher than average denial rate, somewhat surprisingly, in line with denial rates for low/moderate income applicants or low/moderate census tracts, 2426%. At first blush it appears that independent mortgage companies were spectacular in denying only 15% of its applicants, about the same rate as the very small lender segment. Unfortunately, the excitement dissipates when we get to the next table on fallout rates where the low denial rate is probably explained by lender confusion on how to code a rejected application as denied, incomplete or withdrawn for HMDA reporting.
Table 2: Comparison of denial rates by segment

Segment
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Small Lenders LAR <=1,000 apps Independent Mortgage cos. (HUD) Conventional 1-4 family Owner Occupied home purchase Apps State chartered non-member banks (FDIC) Lending to Middle / Upper income applicants Bank Regulated Depositories including Credit Unions VA 1-4 family Owner Occupied Refi Apps Lending to Middle / Upper census tracts Conventional 1-4 family Owner Occupied refi Apps Mid-size Lenders 10,000-50,000 LAR Retail Dominant Firms FHA 1-4 family Owner Occupied home purchase Apps Bank Holding Co Affiliate / State member banks (FRS) Prime (Spread Frequency <51% FHA 1-4 family Owner Occupied Refi Apps VA 1-4 family Owner Occupied home purchase Apps For-Profit Financial Institutions (Excludes Credit Unions) Credit Unions (NCUA) Significant Wholesale Lenders (2012) Larger lenders 50,000+ LAR applications National banks (OCC) Lenders with $10+ billion in assets (CFPB) Lending to Low / Mod census tracts Lending to Low / Mod income applicants Manufactured Housing Apps Non Prime (Spread Frequency >=51% National for all lenders

Denials / Rate
# 178,726 722,648 278,308 286,859 1,556,186 603,875 85,217 2,173,342 1,265,885 573,924 2,082,571 189,764 205,224 2,777,326 193,350 59,985 1,992,825 273,241 793,234 1,687,404 1,422,725 1,595,688 522,323 1,011,346 173,142 133,371 2,910,697 % 14.49 14.64 15.05 15.10 15.41 15.45 15.57 16.71 16.74 17.68 17.77 17.91 18.07 18.24 18.29 19.65 20.83 21.04 21.81 22.42 22.75 23.56 24.67 25.80 45.32 45.36 18.75

Table 3 indicates an fallout rate for all lenders of 18%. There were 16 segments above the national fallout benchmark and 10 segments below it. Depending on the segment examined, fallout rates ranged from a low of 13% for VA 1-4 family owner occupied home purchase applications and small lenders, to a high of 29% for FHA 1-4 family owner occupied refinance applications. The relatively high number of aborted FHA refi applications was even higher than the fallout rate for manufactured housing and nonprime applications. Since FHA has been the darling of mortgage banks the higher fallout rate for FHA refi could be explained in part by HMDA action code classification issues. In contrast, all of the banking related segments have below average fallout rates. This suggests a mastery of HMDA preparation by banks, fine-tuned through years of regular bank examinations to which mortgage companies will eventually adapt. Again, it is good to know that America's finest who served their country are experiencing the lowest fallout rate of all segments examined at 13%.
Table 3: Comparison of fallout rates by segment

Segment
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 VA 1-4 family Owner Occupied home purchase Apps Small Lenders LAR <=1,000 apps State chartered non-member banks (FDIC) National banks (OCC) For-Profit Financial Institutions (Excludes Credit Unions) Significant Wholesale Lenders (2012) Bank Regulated Depositories including Credit Unions Lenders with $10+ billion in assets (CFPB) FHA 1-4 family Owner Occupied home purchase Apps Bank Holding Co Affiliate / State member banks (FRS) Lending to Low / Mod income applicants Conventional 1-4 family Owner Occupied home purchase Apps Lending to Middle / Upper census tracts Conventional 1-4 family Owner Occupied refi Apps Lending to Middle / Upper income applicants Prime (Spread Frequency <51% Larger lenders 50,000+ LAR applications Retail Dominant Firms Lending to Low / Mod census tracts Mid-size Lenders 10,000-50,000 LAR Credit Unions (NCUA) VA 1-4 family Owner Occupied Refi Apps Manufactured Housing Apps Independent Mortgage cos. (HUD) Non Prime (Spread Frequency >=51% FHA 1-4 family Owner Occupied Refi Apps National for all lenders

Fallout / Rate
# 39,705 1,646 280,741 929,974 1,444,484 556,083 608,046 1,068,823 170,239 184,042 689,967 325,626 2,296,177 1,346,095 1,806,844 2,755,934 1,381,667 2,238,546 405,195 658,610 270,713 115,982 85,275 1,163,841 73,377 309,928 2,829,311 % 13.00 13.34 14.78 14.87 15.10 15.29 15.56 15.78 16.06 16.20 17.60 17.61 17.66 17.80 17.90 18.10 18.36 19.10 19.14 20.28 20.85 21.19 22.32 23.57 24.95 29.31 18.23

Credit Decision Performance Metrics At a very high level, fair lending underwriting performance can be measured by two types of lending disparities: 1. denial rate disparity and 2. fallout rate disparity. We compute a denial disparity index (DDI) by dividing the denial rate for each traditional minority group by the denial rate for whites (non-Hispanic). 3 While denial rate disparity is clearly the primary metric that gets most of the attention in the media, the fallout disparity index (FDI) should not be ignored because of the widespread miscoding of HMDA action codes by lenders. The fallout rate is calculated by grouping transactions with HMDA action codes for approved not accepted, incomplete and withdrawn and then dividing by total applications. This is done for each racial group. As with DDI, FDI is calculated by dividing the rate for the minority by the rate for nonHispanic whites. For some, fallout represents potential evidence that a lender may be discouraging applications. One can argue that income and affordability play a factor in application denial rate disparities, but it is a little harder to explain why the rate of incomplete or withdrawn applications is higher for minorities than whites. Thus fallout disparities may suggest differential customer service or quality of assistance that needs to be studied. Denial rate disparity (DDI). This ratio compares denial rates of minorities to whites. This denial rate disparity is what comes to mind when many people think of HMDA analysis. We call the measure the denial disparity index (DDI). We examine the denial rate disparity for African Americans across the 26 segments in Table 4 below, ranking the segments from highest to lowest DDI. Table 4 indicates a black denial rate disparity for all lenders of 1.94. This means that the denial rate of African Americans is 94% higher than the denial rate of non-Hispanic whites. Stated another way, African Americans were denied at nearly twice the rate of whites. There were 9 segments above the national black DDI benchmark and 17 segments below it. Depending on the segment examined, DDI ranged from a high of 2.79 for Conventional 1-4 family Owner Occupied home purchase Apps to a low of 1.43 for Non-Prime lender applications. This finding is interesting on several fronts. First, it sadly tells us that from standpoint of a national benchmark for conventional loans, the bar is set pretty low. Secondly, it shows us that black DDI is managed better with government lending and subprime. (It remains to be seen whether the lower disparity comes at a cost.) Third, the data tell us that notwithstanding the earlier reported high origination rates of the smaller institutions, when it comes to black denial rate disparity, the smaller institutions do not perform so well. One case in point is the situation with the credit unions, which as a whole, deny black applications at 2.5 times the rate of whites. Finally, it is surprising that the denial rate disparity for middle and upper income African Americans is right at the national average DDI(1.93) while African American applicants of lower income (1.76)
3

Denial rates are determined by dividing the number of denials for each group by the total applications for that group.

who live in lower income neighborhoods (1.75) experience less disparity relative to similarly situated whites.
Table 4: Black Denial Rate disparity (DDI)

Segment
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Conventional 1-4 family Owner Occupied home purchase Apps Credit Unions (NCUA) Bank Holding Co Affiliate / State member banks (FRS) Small Lenders LAR <=1,000 apps Bank Regulated Depositories including Credit Unions Mid-size Lenders 10,000-50,000 LAR Independent Mortgage cos. (HUD) State chartered non-member banks (FDIC) Retail Dominant Firms Lending to Middle / Upper income applicants Prime (Spread Frequency <51% For-Profit Financial Institutions (Excludes Credit Unions) Conventional 1-4 family Owner Occupied refi Apps Lending to Low / Mod census tracts Significant Wholesale Lenders (2012) Lenders with $10+ billion in assets (CFPB) Lending to Low / Mod income applicants Lending to Middle / Upper census tracts National banks (OCC) Larger lenders 50,000+ LAR applications VA 1-4 family Owner Occupied home purchase Apps FHA 1-4 family Owner Occupied home purchase Apps Manufactured Housing Apps VA 1-4 family Owner Occupied Refi Apps FHA 1-4 family Owner Occupied Refi Apps Nonprime (Spread Frequency >=51% National for all lenders DDI 2.79 2.49 2.40 2.25 2.19 2.09 2.06 2.02 1.99 1.93 1.90 1.90 1.88 1.83 1.82 1.76 1.76 1.75 1.71 1.71 1.68 1.66 1.56 1.47 1.45 1.43 1.94

Black FDI 1.13 0.98 1.07 1.13 1.17 1.15 1.15 1.13 1.16 1.24 1.17 1.15 1.23 1.09 1.19 1.12 1.09 1.20 1.18 1.14 1.09 1.26 0.92 1.09 1.17 0.83 1.16

Table 5 indicates a Hispanic denial rate disparity for all lenders of 1.5. This means that the denial rate of Hispanics is 50% higher than the denial rate of non-Hispanic whites. There were 11 segments above the national Hispanic DDI benchmark and 15 segments below it. Depending on the segment examined, Hispanic DDI ranged from a high of 1.8 for Credit Unions (NCUA)/Conventional 1-4 family Owner Occupied home purchase/bank depositories to below 1.2 for FHA/VA refi and applications to non-prime lenders. Like the case with blacks, middle/upper income Hispanics (1.51) experienced more disparity than Hispanics of low/moderate income (1.32) or those living in low/moderate income neighborhoods (1.40). The situation with blacks and credit unions appears again with Hispanics where credit unions deny Hispanic applications at 1.9 times the rate of whites.
Table 5: Hispanic Denial Rate disparity (DDI)

Segment
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Credit Unions (NCUA) Conventional 1-4 family Owner Occupied home purchase Apps Bank Regulated Depositories including Credit Unions Bank Holding Co Affiliate / State member banks (FRS) Small Lenders LAR <=1,000 apps State chartered non-member banks (FDIC) For-Profit Financial Institutions (Excludes Credit Unions) Conventional 1-4 family Owner Occupied refi Apps Mid-size Lenders 10,000-50,000 LAR Significant Wholesale Lenders (2012) Lending to Middle / Upper income applicants Prime (Spread Frequency <51% National banks (OCC) Retail Dominant Firms Lenders with $10+ billion in assets (CFPB) Lending to Middle / Upper census tracts VA 1-4 family Owner Occupied home purchase Apps Larger lenders 50,000+ LAR applications Lending to Low / Mod census tracts FHA 1-4 family Owner Occupied home purchase Apps Independent Mortgage cos. (HUD) Lending to Low / Mod income applicants Manufactured Housing Apps VA 1-4 family Owner Occupied Refi Apps FHA 1-4 family Owner Occupied Refi Apps Nonprime (Spread Frequency >=51% National for all lenders

Hispanic DDI FDI 1.88 1.08 1.87 1.18 1.85 1.28 1.76 1.16 1.69 1.20 1.68 1.37 1.59 1.20 1.56 1.19 1.55 1.09 1.53 1.17 1.51 1.17 1.50 1.49 1.49 1.46 1.42 1.41 1.41 1.40 1.34 1.32 1.32 1.22 1.19 1.17 1.14 1.50 1.15 1.17 1.15 1.14 1.16 1.09 1.12 1.10 1.20 1.06 1.11 1.17 1.04 1.04 1.03 1.15

Conclusion Mortgage lenders today must balance strategic, operating and compliance management decisions as they seek to maximize profits. Nearly every lender's operational decision will have potential associated fair lending implications. Some of these implications can be ascertained by disaggregating the HMDA data into meaningful segments and using performance metrics as a basis for comparison. Implicit in this article is the notion of fair lending as a business endeavor to be managed like other aspects of the business with measured attention to production efficiency, rates of return and risk. This approach eschews the idea of fair lending as a social objective or commitment like affirmative action. In examining fair lending compliance management as a business function the focus is on 1) selecting appropriate fair lending performance measures, 2) identifying and obtaining data performance data through technology and other methods, 3) using appropriate methodologies to assess current and past performance, and 4) developing and implementing new strategies to tap and retain business from racially diverse segments. Racial lending disparities in various segments should be analyzed in ways that make the most sense for a particular institution. It is important for each lender to try to construct its own Fair lending Value Chain by identifying aspect or components of a business strategy that may help or hinder fair lending performance. This analysis can also be useful as a due diligence tool, prior to making a strategic investment (e.g., expanding wholesale, offering new products, pursuing different marketing strategies, opening branches, or acquiring another firm). At a minimum, a Fair lending Value Chain type of yardstick can be used, in a general way, as a framework for evaluating whether a particular strategy will make the firm better or worse off, from a fair lending perspective. In this way the institution can better create its own in-context corporate narrative of its fair lending performance. In the end, the fair lending consequences should not in themselves determine the ultimate business decision; but those potential consequences should be among the factors considered in determining the viability of a particular strategy.

Table 6: Asian Denial Rate disparity (DDI)

Segment
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 VA 1-4 family Owner Occupied home purchase Apps FHA 1-4 family Owner Occupied home purchase Apps Credit Unions (NCUA) VA 1-4 family Owner Occupied Refi Apps Manufactured Housing Apps State chartered non-member banks (FDIC) Conventional 1-4 family Owner Occupied home purchase Apps Lending to Low / Mod income applicants FHA 1-4 family Owner Occupied Refi Apps For-Profit Financial Institutions (Excludes Credit Unions) Lending to Low / Mod census tracts Bank Regulated Depositories including Credit Unions Mid-size Lenders 10,000-50,000 LAR National banks (OCC) Prime (Spread Frequency <51% Lenders with $10+ billion in assets (CFPB) Significant Wholesale Lenders (2012) Bank Holding Co Affiliate / State member banks (FRS) Lending to Middle / Upper census tracts Small Lenders LAR <=1,000 apps Conventional 1-4 family Owner Occupied refi Apps Lending to Middle / Upper income applicants Retail Dominant Firms Larger lenders 50,000+ LAR applications Independent Mortgage cos. (HUD) Nonprime (Spread Frequency >=51% National for all lenders DDI 1.44 1.36 1.25 1.18 1.13 1.12 1.10 1.08 1.05 1.04 1.02 1.01 1.01 1.00 1.00 0.99 0.99 0.97 0.97 0.97 0.96 0.96 0.96 0.89 0.86 0.58 0.98

Asian FDI 1.32 1.20 1.30 1.04 1.21 1.33 1.24 1.11 1.05 1.17 1.09 1.29 1.05 1.16 1.09 1.12 1.04 1.15 1.07 1.37 1.04 1.05 1.11 1.03 0.91 0.87 1.08

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