How Data Disclosure Will Help Prevent the Next Financial Crisis
Posted by Josh Silver on February 23, 2017
It seems like an overstatement, but data disclosure can help prevent the next financial crisis.
In the run-up to the Great Recession, subprime and other abusive lenders made loans beyond borrowers' abilities to repay. They got away with this because sellers, particularly in the lending marketplace, know exponentially more than buyers about the terms and conditions of contracts. When and if data is available, it can expose and unlock the traps sometimes present in these contracts.
The National Community Reinvestment Coalition operates a housing counseling program that, in the years before the financial crisis, was focused on helping people hold onto their homes and refinance their loans. One example from NCRC congressional testimony in 2006 makes plain the imbalance in knowledge between the lender and borrower. NCRC assisted an elderly woman in Chester, Pennsylvania. In 2000, she responded to a mail solicitation and sought a refinance loan. The mortgage company financed single premium credit insurance and disability insurance into her loan amount, contributing to total fees of over 14 percent on her loan.
Despite developing a serious health condition that rendered her unable to work, the borrower did not receive regular payments from her disability insurance. In spite of her reduced income, she remained in her home, but finally sought help from NCRC. She lived in a predominantly lower-income neighborhood of color, which are often targets of predatory lenders who calculate that residents of these neighborhoods will be less familiar with deceptive and complicated loan terms and conditions.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in order to prevent widespread abusive lending, which was the leading cause of the worst recession since the Great Depression. Part of the law required lenders to make loans that borrowers could actually afford to repay. This would have helped our elderly client because had Dodd-Frank been the law of the land in 2000, fewer abusive loans would have been peddled in traditionally underserved neighborhoods.
Another part of Dodd-Frank would have also helped NCRC’s client by enabling federal agencies and community organizations to better monitor lending trends. Dodd-Frank enhanced the publicly available Home Mortgage Disclosure Act (HMDA) data to include loan terms and conditions. The enhanced data would have aided stakeholders in detecting abusive lending earlier and would have enabled stakeholders to either persuade lenders to change their practices and/or support legal or regulatory changes in lending rules. In other words, data would address the seller/buyer knowledge imbalance through more transparency in the marketplace, which would then promote more policing of the marketplace.
The Consumer Financial Protection Bureau (CFPB) has finalized changes to HMDA data. The new data will be public in a few years, and includes information on points and fees, the price of the loan (expressed as a difference between the loan’s annual percentage rate and the average loan rates), the loan-to-value ratio, and debt-to-income ratio. The data also includes more information on borrower characteristics such as age, which would have been very helpful in documenting the targeting of senior citizens.
In addition to improvements in the HMDA data, Dodd-Frank also required the collection and public dissemination of data on the race and gender of small-business borrowers. There is currently limited data focused on the census tract location of the business that is publicly disclosed by banks. The race and gender information will be instrumental in identifying banks that are possibly discriminating against women- and minority-owned businesses. In addition, the CFPB is authorized to collect data from non-banks, including the financial technology companies (fintechs) that make high volumes of loans over the internet. The CFPB is further authorized to collect loan pricing too, which will enable stakeholders to monitor whether fintechs or banks are targeting certain businesses for high-cost loans.
Unfortunately, there are proposals by industry trade associations and some members of Congress to significantly roll back both the HMDA and small-business data improvements. They cite the cost of data collection and disclosure, but ultimately, the cost of not collecting this data is much greater. A secret and opaque lending marketplace simply fails to protect borrowers and imperils the economy, which is what we discovered during the Great Recession.
The problem of knowledge imbalances is highlighted by neo-classical economics, a conservative economic approach that I was familiar with as an economics major in college. Data is key for a more just and fairer marketplace, and conservatives should therefore support more data, which improves the transparency, equity, fairness, and efficiency of marketplaces. A fairer marketplace ultimately promotes capitalism by making the American dream of homeownership and small-business ownership available to more people. A fairer marketplace also guards against financial crises through greater protections for borrowers.
Stay tuned for updates regarding bills moving through Congress. In particular, Rep. Jeb Hensarling, a Republican from Texas, will soon re-introduce his so-called Financial Choice Act, which took shots against data disclosure when it was originally introduced last year.
Image: By Heat13her, via flickr, CC BY-NC-ND 2.0)
About the author more »
Josh B. Silver is a senior advisor at NCRC, where he produces white papers on the Community Reinvestment Act and fair lending policy and issues. He also serves as an expert on affordable housing and community reinvestment. He returned to NCRC after serving as a development manager engaged in fundraising and research at Manna, Inc., a housing nonprofit developer and counseling agency serving the District of Columbia. He also previously served as Vice President of Research and Policy at NCRC for 19 years. In that capacity, Mr. Silver developed NCRC’s policy positions, produced various research studies, engaged in proposal writing and fundraising, and supervised a staff of research and policy analysts. He has written NCRC testimony submitted to Congress on topics including financial modernization, predatory lending, and the effectiveness of the Community Reinvestment Act (CRA) as well as numerous comment letters to federal banking agencies on subjects ranging from the merger application process and the content and accuracy of home and small business data. Prior to NCRC, Mr. Silver worked at the Urban Institute for five years, where he specialized in housing market analysis and program evaluation. He holds a Master’s degree in public affairs from the Lyndon Johnson School of Public Affairs at the University of Texas in Austin.