HOME MORTGAGE DISCLOSURE ACT

BACKGROUND: In January 2002 the Federal Reserve Board announced changes in Regulation C, which implements the Home Mortgage Disclosure Act (HMDA). The changes are intended to provide more consistent and comprehensive information about mortgage lending activity, and to aid in fair lending enforcement.

Perhaps the most noteworthy-as well as controversial-of the changes are two that are designed to help track subprime mortgage lending activity, which has grown exponentially in recent years, but is not currently tracked in any systematic way. First of these is a new requirement that lenders designate on their HMDA reports which of the loans they originate are high cost loans, subject to the provisions of the Home Ownership Equity Protection Act (HOEPA).

Second, lenders will be required information about the pricing of some loans. Rejecting an earlier proposal to require reporting of the annual percentage rate (APR), the Fed adopted a more complicated scheme that is based on the difference between the APR on the loan and the yield on a comparable security issued by the Treasury Department. For first lien loans, if that spread is more than 3 percentage points, lenders will have to report how big the spread is. For junior lien loans (second mortgages and the like), lenders will have to report the spread if it is more than 5 percentage points. The Fed estimates that this will require lenders to report on some 98 percent of subprime loans that are first liens, and 95 percent of subprime loans that are junior liens. Virtually all prime loans would be exempt from reporting on pricing.

The Fed also made a change intended to bring more non-depository lenders under the scope of HMDA, especially lenders that do a high volume of consumer lending and are also active in mortgage lending. Currently, these lenders must report if they have assets above $10 million, originated least 100 home purchase or refinance loans in the previous calendar year, and their mortgage lending activity reached 10 percent or more of their total loan volume (measured in dollars). A number of large consumer finance companies that are active in mortgage lending appear to have been exempt from HMDA because they did not reach the 10 percent volume level.

Many commenters, including CCC, recommended that the Fed eliminate the 10 percent requirement in order to capture these lenders. The Fed did not take this step. Rather, it added a requirement that lenders whose mortgage lending activity amounted to $25 million in the previous calendar year report HMDA data, even if this lending is less than 10 percent of the institution's total loan volume. This is down from the $50 million threshold originally proposed. The Board estimates that this will cover lenders that make 200 mortgage loans or more in a given year, and that such lenders likely receive at least 400 mortgage loan applications in a year. It did not provide any estimate of how many additional lenders will be required to report under this new standard.

Another change that will help those using the HMDA data better understand the mortgage market is a requirement that lenders indicate which applications are for manufactured homes. These loans are often significantly smaller than other kinds of mortgages, and are generally underwritten using guidelines more like consumer loans than mortgage loans. Given these differences, it will be helpful to be able to separate manufactured home loans from other types of mortgage loans.

The new rule changes the definition of a refinancing loan that must be reported under HMDA. The new definition covers loans that pay off and replace an existing loan, where both loans are secured by a lien on the dwelling. It also changes the definition of a home improvement loan to include any loan secured by a dwelling that is made in whole or in part for home improvement purposes. The exception to this is a "home equity line of credit", which lenders currently have the option to report or not. The treatment of home equity lines of credit remains unchanged.

Another change the Fed made was to require reporting of denials under "covered" pre-approval programs for home purchase loans. These are defined as programs under which the lender issues a written commitment to lend creditworthy borrowers up to a specific amount for a specific period of time, subject only to limited conditions, such as finding a suitable property. Lenders would also be required to designate which approved loans resulted from a covered pre-approval program, and would have the option to report on pre-approval requests that were approved but not accepted by the applicant.

The Fed also changed the way that race and ethnicity are reported under HMDA to conform with other government standards. The new rule allows borrowers to designate more than one race or ethnicity.

These changes take effect for data collected under HMDA beginning January 1, 2003.

ACTION NEEDED: The Fed is asking for further comment on three specific questions arising from this rule change. One is whether the thresholds for reporting the spread between the APR of the loan and the yield on comparable Treasury notes are appropriate. The second is whether to require lenders to ask people who apply for loans over the telephone to provide information on their race, ethnicity and gender, as is required for applications taken in person, by mail, and over the Internet. Finally, the Fed is seeking comment on whether to require lenders to report the lien status (whether the loan is secured by a first lien on the property, a junior lien, or not secured by any dwelling) for applications taken and loans originated. Comments on these issues are due by April 1, 2002.