HMDA Transition Guidance

We have been hoping for this ever since the changes to Regulation C were published. Now the Federal Reserve Board has published detailed transition guidance on changing from old Regulation C to new Regulation C. Some hopes have been answered; others have not and there is some hard work to do before the end of 2003.

Fudge Factors Allowed
For certain data reporting elements, the FRB will allow some transitional "fudging" of information. This will apply only to specified data items for applications taken before the end of 2003 but on which decisions were made in 2004. These permissions take into account forms availability and the burden of collecting or compiling the information before 2004.

For example, manufactured home codes and preapproval codes will only be required for applications taken after January 1, 2004. For applications taken in 2003, manufactured homes may be reported as 1-4 family dwellings while all applications for manufactured home loans taken in 2004 must be reported as manufactured homes.

Loans for the purpose of home improvement will also have an interim reporting process. The new rule will require reporting of all secured home improvement loans as home improvement loans, regardless of how the institution classifies the loan. For unsecured home improvement loans, reporting will depend on whether the institution classifies them as home improvement loans. Lenders may choose either method of reporting for applications taken in 2003.

A new definition for refinancing also affects how these loans will be reported. The new definition requires that both the existing obligation and the new loan will be secured by a lien on a dwelling. Refinancings will also be subject to a fudge factor for the transition. You will have the option of reporting using either definition for applications reported in 2004 that were taken in 2003.

These fudge factors will result in some data softness for the 2004 reports but the Board has determined that this is acceptable when compared to the burden of earlier reporting.

Reporting Rate Spread
To lessen the worst burden of all, the rate calculation spreads do not need to be calculated if the rate lock occurs before January 1, 2004. For this purpose, the date of the application will take second place to the date of the rate lock.

Reporting Ethnicity
The Board is not allowing a transition or fudge factor period for reporting ethnicity as well as race. The final transition rule provides instructions for converting the information gathered in 2003 to the 2004 reporting format. Accuracy and completeness of this information overrides the burden of conversion.

The most complicated part of this conversion will be determining the date on which the application was filed. This will require both alertness and care by all financial institution staff in handling new applications - right through the holiday season.

The bad news here is not new: as of January 1, 2004, all systems must be operating to report applications taken under the new rules. There will be no more permitted delays or adjustments. Instead, there are likely to be penalties. The chart on the next page lays out the transition rules for each requirement. Anyone using the chart should be reminded that as of January 1, 2004, all excuses and exceptions are out the window. Compliance with the new rule must be complete. That means using the correct forms, asking the right questions, and documenting the application.

Documentation
However you choose to survive the transition, your success will depend on having good practices for documentation of all applications. You will need documentation of dates of application, dates of decisions such as rate locks and preapprovals, and dates of final disposition of applications. These practices will need to be in place before the end of this year so that you can capture the applications that are received in 2003 but reported in 2004.

Objections?
If you don't like the positions the FRB has taken, you only have the right to complain if you were one of the 40 commenters on the proposal. Given the number of HMDA reporters, 40 comments is a sadly small number. That could also explain why the final rule had so few changes from the proposal.

ACTION STEPS

Review your forms to determine what changes you will need to collect the information reported under the new rules.
Work with your systems personnel to design the most effective ways to capture the new information for reporting.
Review procedures and techniques in use to record the date of application and the date of the rate lock. If your procedures are not consistent (or non-existent) fix this problem fast.
Hold training on the new information collection and reporting procedures. Use new forms and give emphasis to what has changed.