Partners, Volume 15, Number 3, 2005

What to Expect From Recent Changes in the Home Mortgage Disclosure Act

Recent changes in the reporting requirements of the Home Mortgage Disclosure Act (HMDA) have spurred widespread concerns about the public availability of loan pricing information.

Lenders fear that if new loan pricing data suggests correlations between variations in the price of mortgage loans and a borrower’s race, sex or geographic location, the information could prompt significant regulatory oversight, protests from consumer advocacy groups and class action litigation regarding unlawful discrimination. Bankers are also concerned about increased regulatory burden for compliance with the new HMDA changes.

Banking regulatory agencies agree that the new HMDA data cannot conclusively support any meaningful allegations of illegal discrimination; rather they believe that the data will help to focus fair lending examinations by identifying which lenders, products and geographic areas require further scrutiny. In a speech to the Independent Community Bankers of America, Fed Chairman Alan Greenspan stated the changes in HMDA resulted from the Federal Reserve’s intention, in consultation with other agencies, to amend the “HMDA data collection in order to gather information on rates charged to aid [us] in seeing if, in fact, differences in rates are truly driven by differences in risks and costs and not tainted by discrimination.”

History of HMDA
The Home Mortgage Disclosure Act (HMDA), originally enacted by Congress in 1975 and implemented by the Federal Reserve’s Regulation C, requires most lending institutions at a certain asset level with offices in metropolitan statistical areas to disclose publicly available data on mortgage applications they received or purchased during each calendar year. The purpose of HMDA is to provide information about how well financial institutions are serving the housing credit needs of neighborhoods and communities in which they operate.

Since its enactment Congress has amended HMDA several times. The most significant changes were in 1989 when Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which expanded HMDA coverage to mortgage lenders not affiliated with depository institutions or holding companies. The amendments also required lenders to report the disposition of applications and to collect and report information about the race, sex and income of applicants for loans subject to HMDA. It is noteworthy that home mortgage lending is the only type of lending that requires or even permits the gathering of information about race.

The new public data resulting from the 1989 amendments indicated that minorities were denied at significantly higher rates than whites, thus heightening concerns about fair lending in the mortgage market. Lenders responded by adopting more specific credit risk guidelines to ensure fair treatment and to avoid the unintended consequences of unlawful discrimination in their mortgage lending. Lenders have also tried to reach minority borrowers as well as low- and moderate-income borrowers and neighborhoods through community outreach activities.

Recent developments in the home mortgage industry such as the growing significance of risk-based pricing, the expansion of the sub-prime market and increased concern about predatory lending have led to further changes in HMDA. In addition, the Office of Management and Budget (OMB) revised the classification of race and ethnicity, thus necessitating further changes to HMDA. In 2002, the Federal Reserve Board announced a final rule that amended Regulation C.

The recent changes in HMDA
The most recent changes in HMDA, effective in January 2004, expanded coverage to more non-depository lenders that are active mortgage lenders. In 2004, HMDA covered 8,853 lenders. The new changes require HMDA filers to:

  • Report pricing information in the form of a rate spread—the difference between a loan’s annual percentage rate (APR) and the yield on Treasury securities with comparable maturity. For first-lien loans, the rate spread is reported when it is at least 3 percentage points, and for subordinate-lien loans when the rate spread is at least 5 percentage points.
  • Report denials for pre-approval requests. Lenders also have the option to report pre-approvals that were granted but not accepted by the consumer.
  • Identify loans subject to the Home Ownership and Equity Protection Act (HOEPA), which amended the Truth in Lending Act and applies to non-purchase closed-end home loans with an APR or fees in dollars above specified thresholds.
  • Report if a loan or application is for a manufactured home.
  • Characterize loans using the new streamlined definitions of refinancing and home improvement loan.
  • Report whether a home loan is secured by first lien, junior lien or unsecured.
  • Obtain and report an applicant’s race and ethnicity for all applications completed remotely or in person. The OMB revised standards for race by removing “Hispanic” from the race category and placing it into a newly created ethnicity category. Applicants are categorized as one or more of the five racial groups (American Indian or Alaska Native, Asian, Black or African American, Native Hawaiian or Other Pacific Islander, and White) and into whether an applicant’s ethnicity is “Hispanic or Latino” or “Not Hispanic or Latino.”
  • Report loans placed in private securitizations.

Despite the regulators’ judgment that HMDA data alone are inadequate to draw conclusions pertaining to illegal discrimination, negative press reports and litigation regarding provocative lending disparities may nonetheless emerge.

The various additions and revisions to Regulation C are designed to provide stakeholders with more useful information to gauge competition, study market trends, identify potential price and underwriting disparities for closer scrutiny, and to provide a better understanding of the higher-priced segment of the mortgage industry. In addition these HMDA changes allow regulators and other enforcement agencies to evaluate better an institution’s compliance with anti-discrimination laws, namely, the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA) and other consumer protection laws.

The addition of HOEPA status will identify the number of HOEPA loans a lender made thus providing regulators another tool for evaluating fair lending and Regulation Z compliance. The revised definitions of refinancing, home improvement, race and ethnicity aim to reduce inconsistencies in the data as well as align them with changes in OMB definitions. However, changes in the definitions of race and ethnicity will present a challenge in comparing 2004 HMDA data to pre-2004 data.

The reporting requirement that tracks pre-approval requests gives examiners and other stakeholders insight into the pre-approval stage and therefore provides a more complete picture of the mortgage process. Other new data items such as lien status, the identification of manufactured homes and loans placed in private securitizations allow more precise product differentiation to ensure homogeneity in HMDA lending analysis.

How can lenders respond to new HMDA data?
The new HMDA data was first made public on March 31, 2005. In September 2005, the government published the much awaited aggregate HMDA lending data. Despite the regulators’ judgment that HMDA data alone are inadequate to draw conclusions pertaining to illegal discrimination (because factors pertinent to a borrower’s creditworthiness such as credit score, debt-to-income ratio and other risk-based pricing factors are not included), negative press reports and litigation regarding provocative lending disparities may nonetheless emerge. Lenders can respond by being proactive instead of reactive by becoming intimately familiar with their HMDA data and preparing for any consequences that may result from its release.

By undertaking their own analysis of the new HMDA data as a compliance measure, lenders can prepare to allay any issues that may be raised by protest groups and class action lawyers. Lenders should analyze and dissect their data using both cursory and in-depth analysis to see if potential lending disparities exist with regard to race, ethnicity, sex, income bracket or neighborhood.

Large mortgage lenders can employ sophisticated statistical analysis and perform comparative file reviews of similar applicants. Lenders should also understand the implications of the channels they use to obtain mortgage applications as well as analyze discretionary loan pricing. They should be prepared to explain fully their business rationale regarding policies on overages, concessions, commission structure and broker fees. Training and adequate internal controls can forestall discriminatory practices. However, it is not enough to merely tell employees not to discriminate.

Lenders should develop a strong understanding of their HMDA data and prepare to provide credible explanations for any pricing and denial disparities. Community groups and other stakeholders should, at the same time, be aware that HMDA data cannot support definitive conclusions about whether price or denial disparities reflect unlawful discrimination. The new HMDA data should fulfill the intended purpose as an invaluable tool for understanding an institution’s mortgage lending patterns and those of the industry as a whole.

This article was written by Assan Jallow, examiner in the Supervision and Regulation division at the Atlanta Fed.

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