Remarks for Randy Lively
President/CEO
American Financial Services Association
National Association of Attorneys General
Spring Meeting, March 15, 2005

Thank you, General. AFSA appreciates the opportunity to be here today.

On March 1, as they do every year, lenders who are subject to the Home Mortgage Disclosure Act (HMDA) provided federal financial regulators with data on mortgage applications, originations and purchases from the previous year.

It's a little different this time around, however. As you've just heard from Glenn Canner and Mike Staten, new information is being collected—and it's generating considerable interest.

I think everyone wants to know two things:

One is whether or not the new HMDA data will show a greater number of sub-prime loans for minority mortgage borrowers. And two, if the answer is yes, is whether discrimination is to blame. Before the results released, it is critical that all of us here today have a complete understanding of what HMDA can and cannot do.

While HMDA can assist regulators in several ways, such as helping to detect possible redlining, the data does not present a complete picture for the home loan process.

In particular, the HMDA data does not contain any information used by lenders to evaluate the credit risk of the borrower. This includes information like the borrower's credit score, the property type, the down payment, the borrower's income, the property value, the borrower's debt-to-income ratio or the loan-to-value ratio.

Without all of this information, it is extremely difficult to draw any accurate conclusions about why a loan was refused or if made, how the rate was determined.

It's possible the new HMDA data could identify a greater incidence of higher rate or sub-prime mortgage loans among members of minority groups—but if it does, it cannot tell us why they received these loans because of the missing underwriting information.

By looking at these data, we don't know if these borrowers were victims of discrimination, or victims of their own poor financial management. We don't know if they received "predatory" loans, or were delinquent in their payments for legitimate ones.

In a sense, HMDA is like the smoke detector in your home. It may go off because there really is a fire in the kitchen or living room. Or it may go off because a fire was lit in the fireplace and someone forgot to open the flue in the chimney. We're alerted to a possible problem. But without further investigation, we don't know if a serious problem actually exists.

Despite the data's limitations, the mortgage lending industry should—and does—see the collection of the new HMDA data as a useful process and as an opportunity to renew its commitment to fair lending practices.

The good news is that, thanks to automated underwriting systems and tools such as credit scoring, credit approval has become a non-subjective process that applies risked-based pricing to facilitate getting the consumer into the ranks of home ownership.

This process, in turn, has expanded access to credit, contributed to the country's highest ever level of home ownership, and narrowed the homeownership gap between Caucasians and minority groups. While this is progress, we recognize that more needs to be done to close that gap completely.

I think the industry's point of view can be summed up this way: Pricing disparities between borrowers with different risk profiles are understandable. However, pricing disparities between borrowers who have different racial or ethnic backgrounds—but identical personal and property risk profiles—are completely unacceptable.

As a way to wrap up, let me offer four possible action steps:

First, if there's a disparity, we need to determine why. You've already heard me say this a few times today, but it's important enough that it deserves the extra emphasis. We have to see if there IS a problem, and define it, before we can go about solving it.

Second, the mortgage industry should work with other national groups committed to affordable housing to understand why any such disparities might exist, so we can take any additional actions that are necessary to eliminate them.

Third, we also ought to explore partnerships with local community organizations in any regions of the country where the disparities might be more pronounced.

And finally, financial education needs to be part of the equation. Borrowers who are financially literate are able to make informed choices that are beneficial. Plus, they are more likely to be satisfied with their mortgage (and their lender) if they understand what it is they are getting. The mortgage industry wants consumers to understand the lending process and is working hard to make that happen.

Again, I appreciate the opportunity to be here today and look forward to answering any questions.