FRB rep clears up Reg C's gray areas - Mary Beth Guard

FRB rep clears up Reg C's gray areas
by Mary Beth Guard, BOL Guru

Guru BIOS

At a recent luncheon meeting of compliance officers and auditors in Oklahoma City, Frank Green from the Federal Reserve Bank of Kansas City gave a great presentation on the Reg C amendments. In the context of his presentation, he addressed several areas on which there had been confusion. Here are some highlights:

Round backwards. The rate spread must be reported if the spread between the APR and Treasury yield equals or exceeds certain thresholds (3 percentage points on first lien loans; 5 percentage points on second lien loans). For purposes of determining when you check the spread and which Treasury security date to compare it to, Frank says you round backwards, and you use the date on which the interest rate was locked. He gave three examples: If your rate is locked on March 18, 2004, you use the Treasury security date of March 15, 2004. If your rate is locked March 14, 2004, you use the Treasury security date of Feb. 15, 2004. If your rate is locked March 15, 2004, you use the March 15, 2004 Treasury security date.

Determining term on a balloon note. To determine what the term is (since you look at the yield on Treasury securities having a comparable maturity), if you're doing a true balloon, use the balloon.

HOEPA timing triggers are different. To determine whether a loan is covered by HOEPA under either the points or the fees test, you look at the H-15 table "Selected Interest Rates" for the 15th of the month before the month in which the application was received, looking for a comparable maturity. Continue to do so.

Using a lock form. If you don't already do so, consider using a lock form to document the rate that was locked in, along with the date the lock took place.

Three types of loans. The rate spread analysis only needs to be done on three types of loans: origination of home purchase loans, secured home improvement loans and refinanced loans. It is not necessary to perform the analysis on purchased loans, nor do you have to do it on non-Reg Z covered loans.

Exercise care. When you are using the rate spread calculator (found on the FFIEC site at www.ffiec.gov), remember the GIGO rule: Garbage In, Garbage Out. If you don't enter the correct information in the correct fields, you won't obtain the right results.

Obtaining necessary data. To do the rate spread calculation, four pieces of data are needed: l) lock date; 2) loan term; 3) APR; and 4) lien status. Since only one of these data elements is actually on the LAR, whoever is doing the rate spread calculation will need to know from where to easily pull the other data elements.

Manufactured housing. There is a new field on the LAR for property type. On it, you report loans secured by manufactured housing. Frank noted that this does not include prefab homes.

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Confusion over refinancing definition. If you look at the definition of ?refinancing? under Regulation C, you may become confused as others have when you see something that says ?coverage test.? For purposes of the coverage test, it is a refinance if the existing loan is a home purchase loan and both the existing loan and the new loan are secured by first liens on dwellings. Ignore that part! That ?coverage test? is only used to determine if you are a HMDA reporter. If you already know you?re subject to HMDA, this part of the definition is of no consequence to you, because it is not used to determine whether a particular loan is reportable as a refinancing. It?s used to determine whether a loan counts as a refinance for purposes of determining whether an entity should be covered by HMDA.

Hierarchy to follow. There?s a hierarchy to follow on multi-purpose loans. If part of the proceeds of a loan are being used for home purchase and part for home improvement, you will be reporting the loan as a home purchase loan. If the proceeds are both for home improvement and refinancing, you will report as a home improvement loan.

Consequences of new refinancing definition. Under the revised definition of refinancing, if you have a commercial loan that is secured by a dwelling and you refinance it, it?s going to be treated as a refinance under HMDA and will be HMDA-reportable. You cannot double count it for CRA purposes. Unfortunately, one of the hardest tests to get through on CRA is the community development test and this new definition of refinancing under HMDA, which will capture commercial loans secured by a dwelling when they are refinanced will impact the community development test.

Only certain types of preapprovals reportable. There?s a new field on the LAR for preapprovals. Keep in mind that the only types of preapproval requests that are reportable are those on home purchase loans. There are two new codes for reporting the disposition of preapproval requests. Code 7 is for preapproval requests denied by the financial institution. Code 8 is for preapproval requests that are approved but not accepted.

Understanding ethnicity. The category of Hispanic or Latino ethnicity would include those who are Cuban, Mexican, Puerto Rican, South or Central American or other Spanish culture or origin. Ethnicity is different from race. A person could be a black Hispanic, white Hispanic, Asian Hispanic, etc. So, when it comes to ethnicity of an individual applicant, they?re either Hispanic or Latino ? or they?re not.

The original version appeared in the April 2004 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 8/9/04