FRB Issues Proposal to Expand HMDA Reporting

The FRB has published a proposal to amend Regulation C, Home Mortgage Disclosure. The proposal would affect Regulation C in several principal ways. First, it would increase the amount of information that institutions report on the Loan Application Register ("LAR"). The number of items reported would increase from 13 to17 items. Board staff believes that the additional information is necessary to track significant ongoing developments in the mortgage market.

Second, the proposal would expand the number and types of loans subject to reporting by including pre-approvals, home equity lines of credit, and all home improvement loans regardless of the portion or amount dedicated to home improvement.

Third, the proposal would expand the reporting coverage of non-depository institutions by including a new measurement to trigger reporting.

In developing this proposal, the FRB staff has attempted to find the optimal balance between costs of reporting and improvements to the data itself. One question to consider as a theme for commenting is whether the additions to the LAR will provide sufficient quality to justify the significant increase in cost.

New Data Elements
The FRB's rationale for expanding data reporting is to provide more robust information about sub-prime and predatory lending. The proposed new LAR would include information on the terms of the loan by requiring lenders to report the APR (Annual Percentage Rate) for the loan and to indicate whether the loan is subject to the Home Ownership and Equity Protection Act ("HOEPA") rate. If the loan was denied, the entry would not indicate an APR. The LAR would have a yes/no entry to show whether the loan was subject to the special HOEPA rules because of the APR or the finance charges.

The APR and HOEPA indication would serve as proxies for sub-prime loans and would also be useful in fair lending examinations. Staff expects that the new reports would enable examiners to analyze approval and denial rates by HOEPA status to take a closer look at sub-prime lending practices.

The proposed LAR would also indicate whether the dwelling securing the loan is a manufactured home. FRB staff believes that it would be useful to know whether the property is a manufactured home because the terms of the loan may differ from other mortgage loans. In addition, mobile home loans comprise a larger share of the sub-prime market. FRB staff believes that identifying which loans are mobile home loans will provide valuable information for analyses of sub-prime lending.

Finally, the LAR would contain the new categories for reporting race and ethnicity. Both Regulations B and C use the categories set by OMB for purposes of collecting monitoring data. OMB has changed the categories to: American Indian or Alaska Native, Asian, Black or African American, Native Hawaiian or Other Pacific Islander, White, Hispanic or Latino. The LAR would have two additional categories: "Information not provided by applicant in mail or telephone application" and "Not Applicable." The "Other" category would be eliminated. Although expanded, these categories still do not easily accommodate people from the Middle East or the Indian sub-continent.

On the new LAR, an applicant would not be limited to one racial or ethnic category but could check more than one. All categories checked by the applicant would be reported. What remains unclear is how loan officers should complete the information in a face-to-face interview when the applicant refuses.

Loans subject to reporting
The proposal also broadens the number and types of loans that would be reported. Several reporting categories would be redefined to curtail lender discretion over what gets reported.

The proposal would require reporting of open-end home equity lines of credit. The present rule provides that lenders may chose whether to report home equity lines of credit. The proposed rule would make reporting mandatory, regardless of the purpose of the loan.

The current permissive reporting of home equity lines of credit produces data that does not offer a clear picture of home equity lending. Mandatory reporting should, the FRB staff expects, provide more useful data while also giving banks a clearer standard for determining reportable loans.

The proposal would also require reporting of all home improvement loans, without regard to how the institution >
Reportable loans, based on loan purpose, would rely on the purpose statement made by the borrower at application. In order to >
In addition, the definition of refinancing would be broadened to include virtually all loans secured by the borrower's home. This would include reporting of loans for non-purchase related activities such as funding costs of education.

The proposal to broaden the category of refinancings that would be reported actually brings Regulation C closer to the initial goal of measuring redlining. The original purpose of HMDA was to produce information about the willingness lenders to lend in certain census tracts and to provide a measurement of the extent of any such lending. Taking real estate as security is arguably the reporting trigger that is most consistent with the original purpose of HMDA.

Pre-approvals
The proposal would also make the significant change of including pre-approvals as reportable. These applications have been exempt from HMDA reporting unless and until a property is involved. Historically, HMDA has been property/address driven. The FRB now proposes amend HMDA to capture pre-approvals which are considered potentially important for fair lending examinations. These would be reported by indicating n/a for the property location. Staff stated that this is a "technical" change to the regulation.

Burden?
The FRB staff has designed a new HMDA regulation and LAR that they believe will strike a reasonable balance between regulatory burden and the need for and usefulness of the additional data. Industry comments will be critical in enabling the FRB to evaluate whether the balance is correct or unduly burdensome.

From the questions asked, it is clear that at least several governors have concerns about the cost of this proposal. They asked cost-related questions such as what would be the primary component of additional costs, and what the cost of the additional reporting items would be in terms of additional work to complete the LAR. The Board also asked whether there were any "latent time bombs" in the proposal.

The FRB is requesting comments within 90 days of publication.

ACTION STEPS

Survey your loan originators and branch managers to compile information on pre-approval practices. Test the proposal on them to assess what steps will be necessary to report pre-approvals.
While talking with your loan originators, ask them how they would go about providing responses to the new monitoring data categories - and whether they would check more than one box if the applicant refuses to provide the information.
Find out how many home equity line applications your bank receives each year. Use this number in your comment letter to show the increase in reporting.
Talk with loan originators and loan operations to get information on what steps would be necessary to identify and report home improvement loans.
Write a comment letter! See our website, www.BankersOnline.com, to get you off to a fast start.