Oh, Look! More C: FRB Expands HMDA Coverage

After several years of regulatory review and one year of dealing with special predatory lending considerations, the Board of Governors of the Federal Reserve System has issued changes to HMDA's Regulation C. And the changes are extensive. Coverage is extended to more lenders, more types of loans to report, and more information about loans to report.

The driving concern behind the changes is predatory lending. HMDA is seen as a key tool in identifying and preventing predatory lending. The additions to HMDA are designed to provide data that regulators and consumer groups think will be important in identifying predatory lending practices and in supporting enforcement actions. To this end, the changes encompass both expanded coverage and increased data to be reported.

Coverage
The final rule changes the coverage of non-financial institutions by using a volume test. For financial institutions, the coverage test remains unchanged.

Mortgage bankers that make at least $25 million in mortgages will be subject to HMDA reporting. FRB staff estimates that this involves making approximately 200 mortgage loans per year. Staff concludes that a lender making this volume of mortgage loans is engaged in the business of mortgage lending.

Monitoring Data
One of the more troubling aspects of this new regulation is the change in procedures for applications taken by telephone. Consumer groups have complained that the increase in telephone and electronic applications has reduced the amount of monitoring information (race or ethnicity, and gender) available. They have asked the FRB to take steps to correct this problem.

In response, the FRB has issued a change that is open for comment (see comments, below). The new procedure would require lenders to attempt to collect race/ethnicity and gender information from all telephone applicants. The LAR information would then have to indicate the monitoring information or that the applicant refused to provide it.

Loan pricing
This final rule changes the look of the Loan Application Register by adding a number of information items related to the price or cost of the loan. While this clearly increases the opportunity for mistakes, the Federal Reserve Board believes that the information will be valuable for measuring whether lenders are fulfilling their obligation to serve the housing needs of their communities. The information will also be useful in evaluating fair lending practices.

APRs will be a required data reporting item for all closed loans. It will not be necessary to calculate an APR for a loan that is not closed. (This would clearly be burdensome.) Lenders will have to report the APR for home purchase loans, home improvement loans, and refinancings. Lenders will not have to report the APR for denied, incomplete or withdrawn applications, purchased loans, or unsecured home improvement loans.

In addition to the APR, lenders will be required to report whether the loan is subject to the special rules in Subpart E, Special Rules for Certain Home Mortgage Transactions (HOEPA). This means that lenders will have to accurately identify all loans that trigger the new, lower HOEPA test. Failure to do so will violate HMDA as well as Regulation Z.

The FRB considered whether reporting the APR would be sufficient. They concluded that a significant portion of HOEPA loans would trigger coverage based on finance charges rather than the APR. Rather than miss these loans, the FRB decided to require reporting HOEPA status as well as the APR.

Lien Status
The new rule also requires lenders to report the lien status for property securing the loan. Information about the lien status will be considered together with information about the loan pricing to evaluate whether predatory lending occurs.

According to Board staff, information about the lien status will improve the analytical value of the data. Higher interest rates may be explained, for example, by a secondary lien position.

The new reporting requirement will have three categories: first lien secured by a dwelling, junior lien secured by the dwelling, and not secured by a dwelling.

Refinancing
The existing definition of refinancing in Regulation C allows lenders to choose one of several definitions. This choice was offered in an effort to minimize regulatory burden. The consequence, however, was inconsistent data, making analysis and comparisons difficult or misleading.

The new regulation defines a refinancing as a transaction in which the new obligation and the replaced obligation are secured by a dwelling. There is no requirement that both loans be between the same lender and borrower. This comes closer to the generally understood use of the term.

Home Improvement loans
The new rule cracks down on home improvement loans. The old, flexible you-choose-one definition is gone except for unsecured loans. All dwelling-secured loans will be reported, regardless of whether they are for home improvement. In effect, the purpose of the loan is replaced by the fact that the loan is secured.

Unsecured loans will be reportable if the loan is for the purpose of home improvement and the lender >
Preapprovals
For some time, there has been active concern that pre-approving loan applicants may be a process in which discrimination occurs. Consumer groups lobbied to get consumer protections for and data about the preapproval process. In this revision to Regulation C, the consumer groups have gained a major victory.

Beginning in 2003, lenders will need to collect and report information on preapprovals. The new LAR will include information on all applications for preapproval that were withdrawn or denied. Approved pre-applications, already reported as closed loans, will have an indicator that the loan was a preapproval. This will make it possible to compare the decisions made on applications for preapproval.

Documentation Is Key
Documentation of loans has been a rising concern in fair lending examinations. Lack of documentation makes it difficult to evaluate loan decisions. It also raises questions about consistency and reasoning from lender to lender. This rule dramatically changes the accepted documentation procedures.

Lenders will have to be consistent and persistent in documenting the loan purpose on all applications related to homes. The FRB reviewed the alleged burden of documenting the purpose of loans. The Board concluded that "it should not be unduly burdensome for lenders to ascertain the intended purpose of the loan proceeds."

Home Equity Loans
The big gift here is that the reporting requirements for home equity loans remains unchanged. The FRB had proposed to make home equity line reporting mandatory. However, the FRB has dropped that proposal and the final rule allows lenders to choose whether to obtain data on and report home equity loans. In the face of active consumer lobbying, this is a major concession by the Federal Reserve.

Issues For Comment
The FRB is asking for comment on two issues. Comment will not take these issues off the table (or the LAR) but effective comment can help to shape a more reasonable rule.

The first issue for comment is whether the FRB has chosen appropriate thresholds above comparable Treasury Rates for purposes of reporting. The FRB expects to make a final decision on these thresholds by mid-year so that institutions have adequate time to prepare for reporting.

Second, the FRB aks for comments on lien status and requesting monitoring information (race and gender) in applications taken by telephone. These two issues were not fully raised for comment and the FRB, to comply with the Administrative Procedures Act, is publishing these for comment.

Comments on the open issues are due to the Federal Reserve Board by April 1, 2002. Information about the number of applicants that are uncomfortable or reluctant to provide monitoring data would be useful for the FRB to consider.

Changes To HMDA:

Non-depository lender coverage changed to annual dollar volume threshold of $25 million.
Reporting whether the loan is subject to HOEPA because of the APR or the total finance charge as calculated under HOEPA.
Reporting whether the APR exceeds the rate on Treasury securities with comparable maturity by 3% for first lien loans or by 5% for subordinate lien loans.
Reporting whether the loan/application is secured by a first lien, subordinate lien, or unsecured.
Reporting all loans for which a new obligation satisfies and replaces an existing obligation and both obligations are secured by a lien on a dwelling.
Reporting all dwelling-secured homes, regardless of purpose but reporting unsecured loans only if >
Reporting on pre-approval decisions to include denials and to identify pre-approved closings.
Reporting on loans that are secured by manufactured housing.

ACTION STEPS

Check your loans for HOEPA coverage using the new formulas. If you are making covered loans, decide soon whether to continue and how to identify them for special reporting under HMDA.
Review documentation in your loan files. Identify items that will need documentation in order to complete the new LAR correctly.
Meet with your loan officers to learn how they handle home improvement loans. Develop a uniform method to document and report home improvement loans.
Check your APR calculations. An error in the APR is going to violate two regulations when the new HMDA rules take effect.
If your bank offers pre-approvals, begin working on a procedure to make and document the loan decision.
Review recordkeeping procedures for denials and withdrawals. Make sure that all required information is in fact being retained.