Karin Modjeski Bearss - Senior Examiner
Published August 1, 2003 | August 2003 issue
Significant changes to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), take effect in January 2004. These changes, designed primarily to enhance understanding of mortgage markets and assist in fair lending enforcement, will increase the amount and types of public information about residential real estate lending.
HMDA, enacted in 1975, requires certain depository institutions and certain nondepository institutions 1/ to report information annually about applications for and originations of home-purchase and home-improvement loans, including the refinancings of both types of loans. Most significantly, HMDA reporters must provide borrower information, such as income, gender, and race or national origin; and loan information, such as property location and loan amount.
HMDA serves several purposes. First, it provides the public with information on whether institutions are serving a community's housing credit needs. Second, it helps public officials target private investments to areas most in need. Third, it aids in the enforcement of antidiscrimination laws and helps identify discriminatory lending patterns.
Financial institutions meeting certain criteria are required to report HMDA data. The most significant criterion is that the institution must have a home or branch office in a metropolitan statistical area (MSA). 2/ As part of the changes taking effect in 2004, nondepository institutions will be subject to new requirements for determining if they are covered by HMDA.
Currently, such an institution must report HMDA data if it has an office in an MSA and its home-purchase loan originations equal or exceed 10 percent of its dollar volume of originated loans in the previous year. Under the 2004 changes, a mortgage-lending institution will now also be subject to HMDA data reporting if its originated home-purchase loans, including refinances, equaled at least $25 million in the preceding calendar year.
The Board of Governors of the Federal Reserve System (Board) implemented this change because some nondepository institutions, despite originating significant levels of mortgage loans, did not fall within the 10 percent HMDA coverage threshold. The Board believes that more complete mortgage-related information will be made available by adding the $25 million volume threshold.
Starting in 2004, HMDA reporters will need to collect additional data items related to HMDA-reportable applications and loans. These additional items are:
Annual percentage rate. In one of the more significant changes to Regulation C, reporters will need to provide annual percentage rate, or APR, information on certain originated real estate loans. Regulation Z, which implements the Truth in Lending Act, requires lenders to provide an APR disclosure for consumer-purpose loans, including residential real estate loans. The APR describes the loan's cost as an annual rate.
Under the new rules, a lender will need to report the spread between a loan's APR and the yield on Treasury securities with a comparable maturity if this spread equals or exceeds 3 percentage points for first-lien loans or 5 percentage points for subordinate-lien loans. This reporting requirement applies to home-purchase, refinance, and dwelling-secured home-improvement loans subject to Regulation Z. Regulation C and its appendices provide detailed guidance on how a lender should determine and report this rate-spread information.
In making this change, the Board believed it was important to collect some type of loan-pricing-related information through HMDA. Such information will be valuable in evaluating fair lending concerns related to loan pricing. The information will also enable better analysis of mortgage markets—particularly the subprime mortgage market, in which loan pricing practices vary significantly.
Lien status. HMDA reporters will need to identify whether a loan is secured by a first or second lien or not secured by a lien. Given that loan rates often vary based on lien status, the reporting of that status should aid in the analysis of loans for which APR information is reported.
HOEPA status. The Home Ownership Equity Protection Act (HOEPA), adopted in 1994, covers certain high-cost mortgages whose APRs or total costs and fees exceed certain thresholds. HOEPA requires lenders to make disclosures that are designed to provide the borrower with complete information on the loan's costs and terms. HOEPA also prohibits lenders from applying certain terms to or engaging in certain practices related to these types of loans.
The new rules require HMDA reporters to indicate whether a loan is subject to HOEPA. This requirement will enhance regulators' understanding of the subprime mortgage market, given that many loans subject to HOEPA are considered subprime mortgages.
Manufactured home status. HMDA reporters will need to report whether an application or loan involves manufactured housing, as determined by a U.S. Department of Housing and Urban Development regulation that establishes construction and safety standards for manufactured homes.
The availability of manufactured housing information will improve the value of HMDA data, given that most institutions underwrite such loans differently from other types of housing loans. Loans for manufactured housing also tend to have higher denial rates, thus making the information valuable for evaluating an institution's fair lending performance.
Preapproval request information.In some real estate loan transactions, a lender may preapprove or commit to making a mortgage loan to a customer once the customer identifies an acceptable property. Under current HMDA rules, if a preapproval request results in an origination, the origination—not the preapproval—is reported under HMDA.
Under the new rules, lenders will need to report denied preapproval requests if the preapproval is reviewed under a program meeting certain criteria. Lenders will also need to identify whether a loan or application involved a preapproval request for a home-purchase loan. In order for a request to be considered a preapproval under HMDA, the lender must complete the following steps:
To be considered a preapproval, the written commitment may include limited conditions discussed in the regulation. The lender has the option of reporting preapproval requests that are approved but not accepted by the applicant.
The Board's changes to the reporting of preapproval requests stem from its belief that requests reviewed under a highly structured program—such as the one described above—would be considered applications under Regulation C and, thus, should be reported.
Finally, the categories under which HMDA reporters collect information on borrowers will change in 2004. Currently, Regulation C requires that lenders collect and report information on an applicant's race or national origin. Such information aids regulators and others in helping to identify lending practices that might be discriminatory.
The changes taking effect in 2004 will add a new category for ethnicity; race will become a separate category. Designations for "Hispanic or Latino" and "Not Hispanic or Latino" will appear under the ethnicity category. The race category will contain five designations: American Indian or Alaska Native; Asian; Black or African American; Native Hawaiian or Other Pacific Islander; and White. "Other" will no longer be an option under the race category. The changes will make the collection of ethnicity and race information consistent with Office of Management and Budget guidelines titled "Standards for Maintaining, Collecting, and Presenting Federal Data on Race and Ethnicity."
The two final rules that implement these amendments are posted
on the Board's Web site at www.federalreserve.gov/boarddocs/press/bcreg/2002/20020621/
default.htm and www.federalreserve.gov/boarddocs/press/
Two terms are redefined
The definitions of two important terms will change when the Regulation C amendments take effect in 2004.
Refinancing. Under Regulation C, refinancings of home-purchase and home-improvement loans must be reported. The regulation defines a refinancing as a loan that satisfies and replaces an existing obligation by the same borrower.
Currently, HMDA reporters may choose among four scenarios in determining which refinances to report. In order to make the data more consistent, the Board amended this definition. In 2004, a refinancing will be defined as a transaction in which a new obligation satisfies and replaces an existing obligation with the same borrower, where both the existing and the new loans are secured by a dwelling.
Home-improvement loan. Currently, a "home-improvement loan" under Regulation C is a loan that:
Under the new rules, the definition of home-improvement loan will differ depending on whether or not the loan is secured by a dwelling. For those loans not secured by a dwelling, the definition above will still apply. As such, the bank will be required to report only those nondwelling-secured home-improvement loans that it chooses to classify as home-improvement loans in its loan system or elsewhere.
For dwelling-secured home-improvement loans, the bank will need to report any such loans made for the purpose of repairing, rehabilitating, remodeling or improving a dwelling or the real property on which it is located. Regulation C will require the reporting of all such loans, even if the institution does not classify the loan as a home-improvement loan in its loan system or elsewhere. This change should help ensure more consistent reporting of home-improvement data and aid the evaluation of such information.
Karin Modjeski Bearss is a senior examiner in the Consumer Affairs section of the Banking Supervision Department at the Federal Reserve Bank of Minneapolis.