Since the release of a Freddie Mac study in September 2021, numerous articles and studies have further explored the issue of appraisal disparities. These reports and articles highlighted significant gaps in property valuations by tract majority race and applicant race.
How to Use HMDA Data to Determine Denial Risk Based on Insufficient Collateral
In light of this ongoing concern, examining how the Home Mortgage Disclosure Act (HMDA) data can help identify denial risks related to insufficient collateral is crucial. While HMDA does not provide a detailed breakdown of the reported property value field (e.g., appraised value or purchase price), it allows us to analyze Collateral Denial Disparities for applicants by prohibited basis characteristics, specifically by examining the Reason(s) for Denial field Code 4: collateral.
It’s important to note that while this code covers various reasons for denial, such as zoning issues, environmental concerns, and physical deficiencies, it serves as a useful proxy for evaluating collateral-related disparities within the HMDA dataset.
Three Approaches to Assess Your Risk:
- Investigate the share of differences between denial rates based on insufficient collateral for applications located in MMTs (majority-minority tracts) and those from White majority tracts. Test the proportional share difference for statistical significance using a z-test. Results with a p-value less than .05% should be investigated to determine if appraisers are properly and impartially developing property estimates.
- Determine if there is a substantially higher proportion of collateral denial applications from prohibited basis group applicants than other applicants, especially by race/ethnicity and within income categories.
- Track the variance between the appraised value and contract price by the appraiser to identify potential appraiser bias. By analyzing the consistency and accuracy of appraisals across different appraisers, lenders can gain insights into any discrepancies that may indicate discriminatory practices.
These testing methods allow lenders to identify appraisers who may exhibit reluctance or biased attitudes towards appraising properties in MMTs or minority homeowners. They help protect lenders from potential risks associated with inaccurate or unfair appraisals.
Keep in mind that federal government agencies and state bank examiners, including the Department of Justice, can access and analyze HMDA data to identify potential biases. You can get ahead of investigations by assessing your risk and lowering any appearance of bias.
How We Can Help You
ComplianceTech provides a range of software and consulting options that lenders can use to ensure they comply with federal and state fair lending guidelines. Our popular fair lending software products include:
- LendingPatterns – — An easy-to-use HMDA analysis solution that can identify risks related to issues like underwriting, redlining, and steering.
- Fair Lending Magic – — Take a deeper dive into data to monitor fair lending practices.
- CRA Check – Prepare for your upcoming CRA exam and mirror regulatory reporting.
- Small Business 1071 – — A tool specifically built for lenders that need to report Small Business Lending/1071 data.
- HMDA Ready – Build your HMDA LAR with accuracy and compare performance to national benchmarks prior to submsisison.
- Fair Servicing – — An automated cloud solution developed to uncover potential fair servicing risks.
- Fair Lending Consulting – — Individualized consulting services to assess your data collection processes, reporting requirements, potential risks, and other areas critical to fair lending.
If you’re not sure which fair lending software suits your organization’s needs best — or whether you need more than one solution — request a demo to experience the features of each option.
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