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Does mandatory disclosure affect subprime lending to minority neighborhoods?

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We examine changes in lending behavior in response to the Federal Reserve’s requirement for disclosure of loan pricing information implemented in 2004 for two broad types of lenders, depository and nondepository institutions. We find that although subprime approval rates generally increased after 2004 as the housing market boomed, there was nonetheless a reduction in subprime approval rates to minority neighborhoods following implementation of the pricing disclosure requirement. We also find that the effect of the pricing disclosure requirement on subprime approval rates was stronger for depository institutions than for nondepository institutions. Moreover, depository institutions with good reviews from regulators for effectively serving the financing needs of local communities are less likely to issue higher-priced subprime loans.

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  1. See the Federal Financial Institutions Examination Council (FFIEC) website:

  2. HOEPA, enacted in 1994 as an amendment to the Truth in Lending Act (TILA), requires lenders to disclose pricing information when the APR on a newly issued loan exceeds the yield on comparable maturity Treasury securities by more than 8 percentage points for first-lien loans or 10 percentage points for subordinate-lien loans, or if the total points and fees payable due on or before the loan closing will exceed the greater of 8% of the loan amount or a dollar amount that is adjusted annually. Lenders have been careful to structure most of their loans, avoiding HOEPA loans (Federal Reserve 2007), since not only these loans needed to be reported but also certain restrictions were applied to provide borrowers added protections.

  3. Based on the HMDA data, the number of subprime loan approvals to minorities steadily increased from 2001 to 2006. The number of subprime loan approvals to minorities steadily increased from 357,960, in 2001, to 1,478,959 by 2006, which implies a 313% increase.

  4. For a review of the recent legislative history of HMDA see McCoy (2007). For an examination of some major issues with HMDA reporting, see Avery et al. (2005, 2007); Do and Paley (2007); and LaCour-Little (2007).

  5. The Herfindahl-Hirschman Index (HHI), a widely accepted market concentration and competition measure (Rhodes 1993), is calculated as the sum of squared market shares of lenders in the census tract. The higher the HHI, the lower the competition because lending is dominated by a small number of lenders.

  6. The HUD list identifies a lender as subprime lender if more than 50% of the loans made by the lender are subprime loans.

  7. For details of the methodology and findings, see Appendix C of Gerardi et al. (2008).

  8. Adopted from Calem et al. (2004), the capitalization rate in this context is the ratio of the tract’s annualized median rent divided by the median house value. Larger capitalization rates imply lower price appreciation and/or greater uncertainty about future price appreciation.

  9. For details, see the FFIEC website

  10. For details, see New York Times, Oct 15, 2007; and Gramlich (2004).

  11. Depository institutions are subject to regulatory capital requirements and are more closely monitored by regulators than nondepository institutions. For example, depository institutions are rated by FDIC based on the CAMELS criteria (capital, asset quality, earnings, management, liquidity, and sensitivity to market risk). Depository institutions are also subject to the reporting and review requirements of the Community Reinvestment Act (CRA), whereas nondepository institutions are not.

  12. An argument might be made that nondepository lenders must be concerned with their reputation in the secondary market since they need to sell the mortgages they originate in order to obtain funding for new loans. Prior to 2007, however, high investor demand for mortgage-related securities, the profitability of securitization, and the confidence that the capital markets had in financial engineering and the rating agencies generally implied that lenders could easily sell the loans they originated.

  13. In this study, we focus on lender approval rates and not on volume of loan issuance because this better enables us to measure changes in lender behavior as the result of a change in the regulatory environment.

  14. For details, see Wall Street Journal (Eastern edition), March 12, 2007, page R.1.

  15. With the data available to us, we are not able to identify those subprime loan applications that were previously rejected as prime loan applications.

  16. In the original loan-level sample, the number of prime loans and the number of subprime loans add up to the number of all loan applications. Here, however, the samples are aggregated census tract samples. Therefore, the number of observations from the prime and the subprime loan samples do not add up to the number of observations in the combined all loan sample.

  17. Conventional loans are loans that are not government insured or guaranteed, i.e., loans other than FHA, VA, FSA or RHS loans.

  18. The average approval rate for subprime loans is 52.90% for the whole sample period (2001–2006) in Table 2. The average approval rate for subprime loans before 2004 is 52.23%.

  19. The Community Reinvestment Act (CRA), enacted in 1977, requires depository institutions to be examined periodically by the relevant federal supervisory agencies and to be assigned ratings based on how well they meet the credit needs of low- and moderate-income neighborhoods.

  20. The results are available upon request.


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Correspondence to Wei Yu.

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Huszár, Z.R., Lentz, G.H. & Yu, W. Does mandatory disclosure affect subprime lending to minority neighborhoods?. J Econ Finan 36, 900–924 (2012).

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