The Federal Reserve Board Seeks Comment on Proposed Amendments to Reporting Requirements Under Home Mortgage Disclosure ActSuzanne F. Garwood and Thomas J. NotoHome Mortgage Disclosure Act, HMDA, Federal Reserve Board, Community Reinvestment Act, Amendments
The Board of Governors of the Federal Reserve System (the Board)
has issued, for public comment, a proposed rule that would
significantly revise the reporting requirements for covered
institutions under Regulation C (12 C.F.R. §§ 203.1 et
seq.), the implementing regulation for the Home Mortgage Disclosure
Act of 1975 (12 U.S.C. §§ 2801 et. seq. [HMDA]). Two
years ago, the Board requested comments on ways to streamline and
update Regulation C. The Board is renewing its focus on this effort
in light of issues raised in the Board's recent joint report to
Congress with the Department of Housing and Urban Development (HUD)
entitled Curbing Predatory Home Lending.
Primarily, the proposal would revise Regulation C in three
distinct areas:
1. Expanding Required Data--In addition to the
13 items of information that are currently being reported, the
revised Regulation C would require lenders to report on four
additional items, including the loan's annual percentage rate (APR)
and whether the loan is subject to the Home Ownership and Equity
Protection Act of 1994 (15 U.S.C. § 1639 [HOEPA]).
2. Expanding Transaction Coverage--The proposal
contemplates a four-pronged approach to expanding the types of
transactions that would trigger reporting under HMDA: (i) revising
the definition of "refinancing;" (ii) revising the definition of
"home improvement loan;" (iii) requiring reporting for
pre-approvals; and (iv) requiring reporting for home equity lines
of credit; and
3. Expanding Institutional Coverage--As
proposed, non-depository institutions that are not otherwise
exempt, including mortgage companies, that originated $50 million
dollars in purchase-money loans or refinancings of purchase-money
loans (home-purchase loans) would be covered by Regulation C. This
would effectively eliminate the exemption for those institutions
whose covered loan originations do not exceed 10 percent of their
loan originating volume.
Certain proposed changes--particularly a requirement to report
APRs and HOEPA status--are extremely significant. HMDA data is
widely publicized and many are quick to draw conclusions from
them--frequently unwarranted. As noted by the Boston Federal
Reserve Bank and many other researchers, HMDA data simply does not
contain sufficient information to draw meaningful conclusions about
approval and denial rates. However, these studies have not
prevented the press and many community groups from arguing that the
HMDA data demonstrate widespread discrimination in marketing and
underwriting practices by the mortgage lending industry.
Disclosure of pricing data presents the same exact risk. There
are a variety of factors that legitimately impact pricing that (i)
are completely unrelated to prohibited factors, and (ii) are not
disclosed in the HMDA data. While regulators now have the ability
to obtain and thoughtfully analyze the impact of such factors, the
public and press cannot. There can be little doubt that HMDA
reporting of pricing data will trigger a new round of
discrimination charges against the industry. Moreover, as the
origination of HOEPA loans is increasingly argued by some to be a
sure indicator of predatory lending practices, disclosure of HOEPA
status will also be likely to result in adverse publicity, or
worse, for some lenders.
I. Background
Currently, Regulation C requires that "covered institutions"
record and report certain information contained in loans and loan
applications to their appropriate supervisory agency. This
information is reported on a form called a loan application report
(LAR), a sample of which is contained in Appendix A to Regulation
C. Mortgage companies that are not subsidiaries of state- or
federally-chartered banks or savings associations report to
HUD.
Once the LARs have been submitted, the Federal Financial
Institutions Examination Council1 (FFIEC) aggregates the data into
HMDA disclosure statements in a manner designed to demonstrate
lending patterns by location, age of housing, income level, sex and
racial characteristics. These HMDA statements are distributed by
the FFIEC to the reporting lenders on behalf of the FFIEC's member
agencies--the Federal Deposit Insurance Corporation, Federal
Reserve, National Credit Union Administration, Office of the
Comptroller of the Currency, Office of Thrift Supervision and HUD.
Lenders are required to make the disclosure statements available at
their home offices within three business days of receiving the
statements. Also, for other metropolitan statistical areas (MSAs)
in which they have offices, lenders must either make a copy of the
statements available at one branch per MSA or provide a copy upon
written request. Disclosure statements must be available for review
by the public for up to five years. Moreover, the FFIEC makes
disaggregated data available to the public in electronic form. This
data can be manipulated using commonly available software tools to
produce analyses of things such as geographic lending patterns and
relative approval and denial rates.
II. Proposed Revisions
A. Expanding Required Data
The proposal would supplement existing data collections by
requiring the reporting of: (i) the annual percentage rate on the
loan; (ii) whether the loan is subject to the HOEPA; and (iii)
whether the loan or application involves a manufactured home. The
proposal would also revise certain existing categories and provide
more options for race or national origin status.
In recommending that these additional categories be added to the
LAR, the Board was motivated primarily by two factors. First, the
recommendations are being made out of a desire to enhance
enforcement of the HOEPA and fair lending laws. Second, the Board
believes that the information collected as a result of the new data
items will be helpful in monitoring and understanding mortgage
market developments and the sub-prime market in particular.
With respect to the addition of the APR disclosure requirement,
the Board hopes that the collection of such information will
enhance fair lending enforcement by helping examiners evaluate the
pricing activities of lending institutions. The APR also is
believed to provide a good benchmark for determining whether a loan
should be classified as a prime or sub-prime loan. The ability to
distinguish between sub-prime and prime loans is important,
according to the Board, for interpreting trends observed in the
HMDA data with respect to denial rate patterns and lending
practices to various sub-populations.
Similar incentives are cited as the motivators for including the
HOEPA information. The Board hopes that disclosure of HOEPA status
will assist regulators in identifying lenders that are active in
that segment of the lending market so that increased scrutiny can
be conducted on those lenders that warrant such heightened
attention.
The Board also is soliciting comment on whether institutions
should be required to report the loans-to-value ratio, the reasons
why a loan application was denied, and the identities of their
parent companies, if any.
Lastly, the Board is seeking to amend the reporting of
manufactured homes. Presently, manufactured home loans are reported
together with loans secured by other "site-built" housing. As many
commenters to the 1998 advance notice of proposed rule-making felt
that the differing underwriting standards and denial rates for
manufactured home loans call for the two to be reported as separate
categories, the Board is proposing that loans secured by
manufactured housing be separately reported. The Board proposes
using the definition of manufactured housing used by HUD, which
establishes construction and safety standards for manufactured
homes, as the definition of such term for purposes of reporting
requirements under Regulation C.
Obviously, these changes would be extremely significant. As
noted at the outset, HMDA data are often used to draw conclusions
that simply are not warranted by the data. Regulators are aware of
the shortcomings of the data and, in the examination and
enforcement context, review additional unreported factors in
determining whether or not they believe prohibited pricing
discrimination has occurred. One would hope the Board would
carefully consider whether providing an incomplete picture of
pricing might not, in fact, be worse than providing no picture at
all, particularly when regulators and enforcement agencies do have
access to the more complete data that are necessary to any
meaningful conclusion.
B. Expanding Transaction Coverage
Presently, covered institutions are required to collect data
regarding applications for, and originations and purchases of,
home-purchase and home improvement loans and refinancings of both
kinds of loans. The proposed amendments would eliminate much of the
discretion enjoyed by reporting institutions with respect to the
reporting of refinancings and home improvement loans, as well as
adding reporting requirements for preapprovals and home equity
lines of credit.
1. Definition of Refinancing
Defining covered refinancings has proven to be a continuing
issue under Regulation C and the rules have undergone several
changes over the years. The Official Staff Commentary to Regulation
C indicates that a refinancing of a loan is the satisfaction and
replacement of an existing obligation by a new obligation by the
same borrower. An institution is permitted, however, to report a
transaction as a refinancing if:
(i) the existing obligation was a home-purchase or home
improvement loan, as determined by the lender;
(ii) the applicant states that the existing obligation was a
home-purchase or home improvement loan;
(iii) the existing obligation was secured by a lien on a
dwelling; or
(iv) the new obligation will be secured by a lien on a
dwelling.
The Board is concerned that such discretion results in
inconsistent data. In order to eliminate the potential for
confusion of the data reported, the Board is proposing to define
"refinancing" as a new obligation satisfying and replacing an
existing obligation by the same borrower, where both the existing
obligation and the new obligation are secured by a lien on a
dwelling. The Board believes that this new definition would reduce
potentially inconsistent data as all lenders would utilize the same
definition for reporting purposes.
2. Definition of Home Improvement Loan
A home improvement loan is currently defined as any loan that is
for the purpose, in whole or in part, of repairing, rehabilitating,
remodeling or improving a dwelling or the real property on which it
is located and is classified by the institution as
a home improvement loan. The Board is proposing to remove the
latter half of the definition, thereby stripping covered
institutions of their discretionary power to classify loans as home
improvement loans based on the institution's internal
classification systems. For example, under the current language
provided in the regulation, if a covered institution classifies all
installment loans as installment loans without a further breakdown
as to the purpose of the loan, it is not required to report
any such loans even if the proceeds of a loan are
used for home improvement purposes. As the Board believes this
practice has resulted in data that is of limited usefulness to the
regulators and the public, it therefore is proposing to drop the
"classification test" from the definition. As such, covered lenders
would be required to report a loan as a home improvement loan if
any part of the proceeds is to be used for home
improvement regardless of the institution's internal classification
of the loan.
The Board understands that the ability of the institution to
meet the requirements of this proposed amendment relies heavily on
the ability of the lender to accurately identify consumers' actual
use of loan proceeds. Notwithstanding, the existence of some doubt
that lenders will always be able to identify the use to which the
proceeds of the loan are put. The Board believes that, by
eliminating the discretion that lenders have to classify the loan,
the result will necessarily be an increase in the number of home
improvement loans that are reported.
3. Pre-Approvals
In addition to expanding the definitions of "refinancing" and
"home improvement loan," the Board is proposing to add a new
category to its list of reported transactions--pre-approvals. Such
transactions are not now reported. The agency's recommendation to
add pre-approvals to the list of reported transactions tracks an
earlier, separate rule-making to expand the definition of
"application" under Regulation B, the implementing regulation to
the Equal Credit Opportunity Act.
For purposes of the amendment, a "pre-approval" is defined as
the preliminary approval of a borrower that does not comprise all
of the underwriting necessary to finally approve the borrower for
the loan, but which provides a written commitment for a loan of
money of up to a certain amount and expiring at a specified period
of time. Primarily, the agency is concerned that the definition
used for pre-approval not be so overly broad as to
include pre-qualifications. With this in mind, the Board is
proposing to require the reporting of pre-approvals that are made
under procedures in which a creditor issues creditworthy persons a
written commitment to extend credit that may be limited in three
ways: (i) the lender specifies the maximum amount of credit that it
commits to extend; (ii) the lender specifies the period of time
during which the commitment remains valid; and (iii) the commitment
may be subject to conditions.
The Board believes that a relatively large number of
institutions could be affected by this change since, in recent
years, many depository and for-profit mortgage lending institutions
have put in place pre-approval programs that qualify potential
customers prior to the selection of the property that will secure
the loan. By placing a reporting requirement on pre-approval
programs, the Board hopes that it will have an opportunity to
better evaluate lenders' compliance with fair lending laws.
4. Home Equity Lines of Credit
Reporting information with respect to home equity lines of
credit (HELOC) that are used for home improvement purposes is
currently permissible, but not mandatory, under Regulation C. The
Board's proposed amendments would make this option a requirement by
mandating the disclosure of information relating to lines of credit
secured by the borrower's home. Although it is true that some
HELOCs are being reported as home improvement loans under the
current version of Regulation C, there is some question that this
optional reporting conveys a representative picture of HELOC
lending practices. Based on consumer survey information from 1997,
the Board estimates that, by expanding the scope of Regulation C to
include home equity loans, in excess of two million additional
transactions could be reported.
For reporting purposes, under the proposed regulation, a HELOC
would be defined as an open-end credit plan, as defined by
Regulation Z, which is secured by a dwelling. In order to simplify
the reporting process, covered lenders would report the full amount
of the credit line rather than attempt to ascertain the amount of
the loan, if any that would be used for home improvement
purposes.
C. Expanding Institutional Coverage
Institutions "covered" by Regulation C fall into two
categories--depository and for-profit mortgage lending
institutions. Generally, depository institutions that are covered
by Regulation C are banks, savings associations or credit unions
that originated, in the preceding calendar year, one home-purchase
loan secured by a first-lien loan on a one- to four-family dwelling
and either the institution is federally insured or regulated or the
loan is insured, guaranteed or supplemented by any federal agency
or the institution intended to sell the loan to Fannie Mae or
Freddie Mac. However, depository institutions meeting this general
definition are exempt from complying with Regulation C if, on the
preceding Dec. 31, (i) the depository institution had neither a
home office nor a branch office in an MSA; or (ii) the depository
institution had assets of $30 million or less. No changes are being
suggested by the Board that would expand the number of depository
institutions that would be covered by Regulation C.
At present, for-profit mortgage lending institutions are covered
by Regulation C if their home-purchase loan originations equaled or
exceeded 10 percent of their loan originating volume in the
preceding calendar year. However, an institution is exempt if: (i)
the institution had neither a home office nor a branch office in an
MSA; (ii) or the institution's total assets combined with those of
any parent company's were $10 million or less on the preceding Dec.
31 and the institution originated fewer than 100 home-purchase
loans.
The Board is proposing to amend the test for determining whether
a for-profit mortgage lending institution is covered under
Regulation C by adding a dollar-volume threshold. Under the
proposed regulation, lenders would be required to report HMDA data
if their prior-year home-purchase originations equaled or exceeded
$50 million, even if this amount does not exceed 10 percent of
total originations. Although the Board cannot predict the number of
additional mortgage lenders that will be covered by Regulation C if
the proposal were to be adopted, the rule-making notes that in
1999, of the for-profit mortgage lenders that reported HMDA data,
nearly 50 percent originated less than $50 million in home-purchase
loans. The Board hopes that by changing the test for coverage, it
will broaden the scope of Regulation C to include those lenders
that are originating a significant number of mortgage loans, but
are not currently reporting such originations because of the size
of their non-real estate secured lending practices.
III. Other Changes
In addition to the substantive changes described above, the
Board is proposing to make several technical changes with respect
to the format of the regulation. The agency is proposing to
streamline the guidance provided for compliance with Regulation C
through consolidation and the elimination of redundant information.
Informal guidance will continue to be provided in the FFIEC's
publication, A Guide to HMDA Reporting: Getting it Right!
which reflects those changes finalized by the Board. A copy of this
guide is available for downloading at
www.ffiec.gov/hmda/guide.pdf.
The new format of the regulation would reflect recent amendments
made by the Office of Management and Budget (OMB) to prescribe the
standards for racial designations for use in federal reporting. As
revised, the racial designations that will be utilized in HMDA
reporting will be: (i) American Indian or Alaskan Native; (ii)
Asian; (iii) Black or African American; (iv) Native Hawaiian or
other Pacific Islander; or (v) White. Consumers are permitted to
choose one or more designations. Note that since existing reporting
systems are designed around the current race/national origin
designators, an expansion of race/national origin codes could
result in significant programming changes.
The proposed rule also seeks comment on an alternative approach
to categorizing the loans for reporting purposes. Under the current
regulation, the categories of loans reported are: (i) home-purchase
loans; (ii) home improvement loans; and (iii) refinancings. The
alternative approach would eliminate refinancings and home
improvement loans (except for unsecured home improvement loans) as
distinct categories. Instead, the categories reported would be: (i)
home-purchase loans (subdivided into first- and subordinate-lien
loans); (ii) other mortgage loans (similarly subdivided); (iii)
HELOCs; and (iv) unsecured home improvement loans.
The Board believes that this alternative approach would require
the reporting of more loans--which could enhance some depository
institutions' performance under the Community Reinvestment
Act--while potentially limiting the additional burden for
depository institutions because of its similarity to categories
familiar to them from the Call Report or the Thrift Financial
Report.2
IV. Conclusion
The proposed amendments are intended to enhance regulatory
efforts to enforce fair lending laws and compliance with the
Community Reinvestment Act. Nevertheless, despite the importance of
these efforts, the proposal could well result in a large amount of
inflammatory--yet fundamentally incomplete--data being disclosed by
covered institutions. Moreover, the proposal would require
significant changes to software systems, internal classifications
and training programs. Accordingly, this proposal represents the
most significant change to HMDA in the last 10 years, and
institutions would be well-advised to make their views known
through the public comment process.
Suzanne F. Garwood is an associate in the Washington, D.C.
office of Kirkpatrick and Lockhart LLP. She may be reached at (202)
778-9892 or e-mail
[email protected]. Thomas J. Noto is a partner in
the Washington, D.C. office of Kirkpatrick and Lockhart LLP. He may
be reached at (202) 778-9114 or e-mail
[email protected].
Footnotes
1The FFIEC was established on Mar. 10, 1979, pursuant to Title X
of the Financial Institutions Regulatory and Interest Rate Control
Act of 1978 (FIRA), Public Law No. 95-630. The FFIEC is a formal
interagency body empowered to prescribe uniform principles,
standards and report forms for the federal examination of financial
institutions by the Federal Reserve, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, the Office
of the Comptroller of the Currency and the Office of Thrift
Supervision, and to make recommendations to promote uniformity in
the supervision of financial institutions.
The FFIEC was given additional statutory responsibilities by
Section 340 of the Housing and Community Development Act of 1980 to
facilitate public access to data that depository institutions must
disclose under HMDA and the aggregation of annual HMDA data, by
census tract, for each metropolitan statistical area.
2 The Call Report categories include first-lien, closed-end
mortgage loans, junior-lien closed-end mortgage loans, open-end
mortgage loans (home-equity lines of credit) and unsecured consumer
loans, subdivided into open-end and closed-end loans. The Thrift
Financial Report is similar, but does not subdivide closed-end
mortgage loans into first and junior liens, and shows unsecured
home improvement loans as a subdivision of unsecured closed-end
consumer loans. Refinancings are not treated as a separate category
in the Call Report or Thrift Financial Report.
This article was reprinted with permission from Kirkpatrick
& Lockhart LLP's Mortgage Banking Commentary, Dec. 8,
2000 edition.
