RECOGNIZE, RECORD, REPORT: THE LATEST DEVELOPMENTS IN THE HOME MORTGAGE DISCLOSURE ACT

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1 RECOGNIZE, RECORD, REPORT: THE LATEST DEVELOPMENTS IN THE HOME MORTGAGE DISCLOSURE ACT Module 1 Learning Objectives In Module 1, students will: Explore an overview of the Home Mortgage Disclosure Act, including definitions and who is regulated by the law Take a look at the oversight agencies charged with enforcing compliance with the Home Mortgage Disclosure Act Review institutions and loans subject to the Home Mortgage Disclosure Act Students will also have the opportunity to review a Discussion Scenario pertinent to the information covered in Module 1. Home Mortgage Disclosure Act s History Home Mortgage Disclosure Act Enactment: In 1975, Congress enacted the Home Mortgage Disclosure Act (HMDA) in response to public concern over the deterioration and depopulation of urban centers. Many civic activists argued that lenders, in the form of depository institutions such as banks, credit unions, and thrifts were taking deposits from urban residents, but then using that money to extend loans in other communities. Activists further argued that the lenders were passing over investing in urban centers despite the existence of creditworthy borrowers in those areas. These concerned citizens, however, had a problem. They felt that the lack of transparency in the home lending market prevented them from establishing the full extent of urban disinvestment. They therefore lobbied Congress to enact legislation that would provide the public with access to information about the lending decisions that lenders were making with regard to geographical investment decisions. Congress listened to these concerns and, in 1975, enacted HMDA. Congress intended for this legislation to both create publicly-available information on which communities were receiving home loans and to help public officials to identify those geographic areas in the greatest need for public investment to supplement the private loans. Armed with information provided under HMDA, activists could argue, for example, that a financial 1 Allen Fishbein and Ren Essene, The Home Mortgage Disclosure Act at Thirty-Five: Past History, Current Issues. Harvard University Joint Center for Housing Studies (August 2010): Pages

2 institution was not meeting its reinvestment duties under the Community Reinvestment Act, and therefore should not be permitted to expand its business or obtain approval for a merger. HMDA Reforms: In 1980, Congress amended HMDA to give the Federal Financial Institution Examination Council responsibilities for managing the data submitted by covered institutions. The Council functions as an interagency body for those federal regulatory bodies in charge of the regulation of financial institutions. These include the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB). The Council provides a number of services in order to promote uniformity in the supervision of financial institutions. The Council s website lists the following services that it provides: Developing uniform reporting systems for federally supervised financial institutions, their holding companies, and the nonfinancial institution subsidiaries of those institutions and holding companies Conducting schools for examiners employed by the federal member agencies, and making those schools available to employees of state agencies that supervise financial institutions Most relevant to this training module, the Housing and Community Development Act of 1980 ( 340) gave the Council two key responsibilities with respect to handling HMDAmandated data: o To facilitate public access to the data o To aggregate the data by census tract, for each metropolitan statistical area (MSA) Congress expanded HMDA s coverage in 1988 beyond depository institutions and their majority-owned subsidiaries to include nonmajority-owned savings and loan service corporations, mortgage banking subsidiaries of bank holding companies, and mortgage banking subsidiaries of savings and loan holding companies. The Financial Institutions Reform, Recovery, and Enforcement Act: In the wake of the savings and loan collapse, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). FIRREA overhauled HMDA s reporting requirements. Instead of providing information on home lending activity purely on the aggregate level of MSAs, HMDA now required covered institutions to provide transactional level information about loan activity, including denial rates for loan applications, as well as more detailed information including applicants race, ethnicity, income, and gender. 2 Federal Financial Institutions Examination Council (FFIEC), About the FFIEC, 3 Allen Fishbein and Ren Essene, The Home Mortgage Disclosure Act at Thirty-Five: Past History, Current Issues. Harvard University Joint Center for Housing Studies (August 2010): Page 19. 2

3 Both the Federal Reserve Board and the Boston Federal Reserve conducted studies based on this newly-expanded data set. The Federal Reserve Board s study found denial rates for minority mortgage applicants that were two to three times higher than those for non-minority applicants who had the same income level. The Boston Federal Reserve found that lenders rejected African Americans 56% more frequently than Caucasian applicants. These insights have both provoked controversy and encouraged lenders to reassess their lending practices to ensure fairer treatment of minorities. Expansion of Institutions Covered by HMDA s Reporting Requirements: In the last decade of the twentieth century, a large number of additional lending institutions became covered under HMDA s reporting requirements due to additional Congressional amendments to HMDA and subsequent rule revisions by the Federal Reserve Board. Major examples of this expansion include the following: Covering relatively small non-depository lenders that make at least 100 home purchase or refinance loans annually Implementation of a dollar-volume test to expand coverage to those institutions that might otherwise be exempt since only a small percentage of their total loan volume consists of home loans HMDA and the Subprime Mortgage Market: In 2002, the Federal Reserve Board issued new rules to address growing concerns that minorities were receiving a disproportionate number of subprime loans that were priced higher than more traditional mortgages. Rather than being excluded, many activists and politicians worried that minorities were being sold the wrong kind of mortgages that could harm their financial interests in the long run. In addressing both consumer advocates concerns that new rules identify the extent of discriminatory lending practices and lenders interest in avoiding excessively burdensome reporting requirements, the FRB promulgated rules in 2002 that required institutions that were covered under HMDA to report additional data relevant to subprime loan origination and refinance. This additional data included the rate spread of first-lien mortgages when those mortgages had an APR that was at least three points above a benchmark Treasury bill interest rate, and of junior liens when those liens had an APR that was at least five points above a benchmark Treasury bill rate. Analyses of the expanded subprime-related data indicated that 2% (or 260) institutions covered by HMDA had statistically significant disparities in terms of either the amount of rate spread or incidence of higher-priced lending. 4 Patricia McCoy, The Home Mortgage Disclosure Act: A Synopsis and Recent Legislative History, Journal of Real Estate Research, 29(4) (2007): Pages Allen Fishbein and Ren Essene, The Home Mortgage Disclosure Act at Thirty-Five: Past History, Current Issues. Harvard University Joint Center for Housing Studies (August 2010): Page 22. 3

4 Dodd-Frank and HMDA: 2010 Present In July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The stated purpose of the Act was to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end too big to fail, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes. (Public Law , Preamble) Dodd-Frank transferred rulemaking authority for HMDA from the Federal Reserve Board to the newly-created Consumer Financial Protection Bureau (CFPB). Dodd-Frank also added a list of new reporting requirements in order to enhance the value of HMDA-collected data for the public and government agencies in ensuring that lenders adhere to fair lending practices. Oversight Agencies The Dodd-Frank Act grants the CFPB the authority to determine the procedure for reporting HMDA data. (Public Law (3)(B) amending 12 U.S.C. 2803(h)) The law also grants the CFPB a unique and higher status among enforcement agencies by allowing it the prerogative to exercise principal authority to examine and enforce compliance by any person with the requirements of this chapter. (Public Law (4), adding 12 U.S.C. 2804(d)) Nevertheless, the Dodd-Frank Act assigns HMDA enforcement authority over different types of financial institutions to various federal agencies according to the following criteria (Note: the term financial institution has two very important and specific definitions. Please see the Definitions section below for a full explanation): The CFPB supervises very large financial institutions, which includes those banks, thrifts and credit unions that have assets worth more than $10 billion, as well as their affiliates (Public Law enacting 12 U.S.C. 5515) The Office of the Comptroller of the Currency (OCC) supervises any of the following institutions, not already supervised by the CFPB: o Any national banking association o Any Federal branch or agency of a foreign bank; and o Any Federal savings association The Federal Deposit Insurance Corporation (FDIC) supervises the following institutions, not supervised by the CFPB: o Any bank or State savings association insured by the FDIC (other than a member of the Federal Reserve System) o Any mutual savings bank o Any insured State branch of a foreign bank, and 4

5 o Any other depository institution not supervised by the CFPB or the National Credit Union Administration The Federal Reserve System (FRS) supervises the following institutions, which are not already supervised by the CFPB: o Any member bank of the Federal Reserve System (other than a national bank) o Any branch or agency of a foreign bank (other than a Federal branch, Federal agency, and insured State branch of a foreign bank) o Any commercial lending company owned or controlled by a foreign bank o Any organization operating under section 25 or 25A of the Federal Reserve Act The National Credit Union Administration for those credit unions not supervised by CFPB The Department of Housing and Urban Development (HUD) for any other lending institutions not supervised by another agency (Public Law (4)(A) amending 12 U.S.C. 2804(b); Public Law (c)(1) amending 12 U.S.C. 1813(q)) 6 Definitions In order to understand HMDA, it is important to become familiar with certain definitions outlined under the law. Application: An oral or written request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with procedures used by a financial institution for the type of credit raised. A request for preapproval for a home purchase loan constitutes an application if the request is reviewed under a program in which the financial institution, after a comprehensive analysis of the creditworthiness of the applicant, issues a written commitment to the applicant valid for a designated period of time to extend a home purchase loan up to a specified amount. The written commitment may not be subject to conditions other than: Conditions that require the identification of a suitable property Conditions that require that no material change has occurred in the applicant s financial condition or creditworthiness prior to closing; and Limited conditions that are not related to the financial condition or creditworthiness of the applicant that the lender ordinarily attaches to a traditional home mortgage application (such as certification of a clear termite inspection) (12 C.F.R ) 6 See FFIEC s CRAHMDA Reporter (January 2011), Pages 1 3, for a useful overview of Dodd-Frank s changes to HMDA regulatory agency responsibilities: 5

6 Branch Office: (1) Any office of a bank, savings association, or credit union that is approved as a branch by a federal or state supervisory agency, but excludes free-standing electronic terminals such as automated teller machines; and (2) Any office of a for-profit mortgage lending institution (other than a bank, savings association, or credit union) that takes applications from the public for home purchase loans, home improvement loans, or refinancings. A for-profit mortgage lending institution is also deemed to have a branch office in a metropolitan area if, in the preceding calendar year, it received applications for, originated, or purchased five or more home purchase loans, home improvement loans, or refinancings related to property located in that metropolitan area. (12 C.F.R ) Depository Institution: Any bank, savings association or credit union which makes federally related mortgage loans. (12 U.S.C. 2801(3)) HMDA uses this term quite broadly to also include any person engaged for profit in the business of mortgage lending. (12 U.S.C. 2801(4)) Dwelling: A residential structure (whether or not attached to real property) located in a state of the United States of America, the District of Columbia, or the Commonwealth of Puerto Rico. The term includes an individual condominium unit, cooperative unit, or mobile or manufactured home. (12 C.F.R ) Financial Institution: This term includes both of the following definitions: A bank, savings association, or credit union that: o On the preceding December 31 had assets in excess of the asset threshold established and published annually by the Bureau for coverage by the Act, based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million o On the preceding December 31, had a home or branch office in an MSA o In the preceding calendar year, originated at least one home purchase loan (excluding temporary financing such as a construction loan) or refinancing of a home purchase loan, secured by a first lien on a one-to four-family dwelling; and o Meets one or more of the following three criteria: The institution is Federally-insured or regulated The mortgage loan was insured, guaranteed, or supplemented by a Federal agency The mortgage loan was intended by the institution for sale to Fannie Mae or Freddie Mac A for-profit mortgage lending institution (other than a bank, savings association, or credit union) that: o In the preceding calendar year, either: 6

7 Originated home purchase loans, including refinancings of home purchase loans, that equaled at least 10% of its loan origination volume, measured in dollars; or Originated home purchase loans, including refinancings of home purchase loans, that equaled at least $25 million; and o On the preceding December 31, had a home or branch office in an MSA; and o Either (12 C.F.R ) On the preceding December 31, had total assets of more than $10 million, counting the assets of any parent corporation; or In the preceding calendar year, originated at least 100 home purchase loans, including refinancings of home purchase loans Home Equity Line of Credit: An open-end credit plan secured by a dwelling as defined in Regulation Z (Truth-in-Lending), 12 C.F.R (12 C.F.R ) Home Improvement Loan: (1) A loan secured by a lien on a dwelling that is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located; and (2) a non-dwelling or the real property on which it is located, and that is classified by the financial institution as a home improvement loan. (12 C.F.R ) Home Purchase Loan: A loan secured by and made for the purpose of purchasing a dwelling. (12 C.F.R ) Loan Application Register (HMDA-LAR): A HMDA-LAR is the form used for the reporting of HMDA data. Manufactured Home: Any residential structure as defined under the regulations of the Department of Housing and Urban Development establishing manufactured home construction and safety standards (24 C.F.R ). (12 C.F.R ) Metropolitan Area: Urbanized area with a population of at least 50,000 and identified by the Office of Management and Budget based on census data. Mortgage Loan: A loan which is secured by residential real property or a home improvement loan. (12 U.S.C. 2801(2)) Refinancing: A new obligation that satisfies and replaces an existing obligation by the same borrower, in which: For coverage purposes, the existing obligation is a home purchase loan (for example, as determined by the lender by reference to available documents, or as stated by the 7

8 applicant), and both the existing obligation and the new obligation are secured by first liens on dwellings For reporting purposes, both the existing obligation and the new obligation are secured by liens on dwellings (12 C.F.R ) Institutions Covered by HMDA As explained in the Definitions section, HMDA applies to financial institutions, which themselves fall into two broad categories for the purposes of the statute. Depository Institutions The law applies to depository institutions such as banks, credit unions, and savings associations that meet the following criteria: The institution s assets on December 31 of the previous calendar year exceeded a threshold that the Bureau adjusts each year (the 2013 threshold is $42 million) The institution had a home or branch office in a Metropolitan Statistical Area on December 31 of the previous calendar year The institution originated at least one home purchase loan or refinancing of a home purchase loan, secured by a first lien on a one-to four-family dwelling within the preceding calendar year, and The institution is federally insured or regulated; or the mortgage loans made by the institution were insured, guaranteed, or supplemented by a federal agency; or the loans were intended for sale to Fannie Mae or Freddie Mac (12 C.F.R ) Non-Depository Mortgage Lending Institutions The law also applies to a for-profit mortgage lending institution (other than a bank, savings association, or credit union) that meets the following criteria: Originated home purchase loans, including refinances, that equaled at least 10% of its loan origination volume within the preceding year Had a home or branch office in a Metropolitan Statistical Area on the preceding December 31, and Had total assets as of the preceding December 31 of more than $10 million, counting the assets of any parent corporation; or originated at least 100 home purchase loans, including refinances, within the previous year (12 C.F.R ) 8

9 It is important to remember that HMDA treats subsidiaries of financial institutions as distinct entities. Therefore, HMDA requires subsidiaries to file separate reports with the agency that supervises their parents. (12 C.F.R (a)(2)) 7 In some transactions in which a loan involves the use of a third party, such as a mortgage broker, there may be some confusion regarding whose responsibility it is to complete the HMDA report. The Staff Commentary to Regulation C addresses this confusion, stating, If the broker makes a credit decision, it reports that decision; if it does not make a credit decision, it does not report. 8 Loans Subject to HMDA The loans that are subject to HMDA include applications for and originations and purchases of the following types of loans: Home purchase loans Home improvement loans Refinances (12 U.S.C. 2803(a)(1)) It is important to keep in mind HMDA s specific definitions for these types of loans. Home purchase loans are secured by and made for the purpose of purchasing a dwelling. (12 C.F.R ) HMDA further defines dwelling as a residential structure (whether or not attached to real property) located in a state of the United States of America, the District of Columbia, or the Commonwealth of Puerto Rico. The term includes an individual condominium unit, cooperative unit, or mobile or manufactured home. (12 C.F.R ) Home improvement loans are secured by a lien on a dwelling that is for the purpose (even if only in part) of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located. A home improvement loan, however, does not have to be secured by a dwelling as long as: The purpose of the loan (in whole or in part) is to repair, rehabilitate, remodel, or improve a dwelling or the real property on which the dwelling is located, and The financial institution classifies the loan as a home improvement loan (12 C.F.R ) HMDA defines refinancing as a new obligation that satisfies and replaces an existing obligation by the same borrower, but with additional requirements. 7 See also Consumer Financial Protection Bureau: Consumer Laws and Regulations: Home Mortgage Disclosure Act (HMDA). 8 Federal Financial Institutions Examination Council. A Guide to HMDA Reporting: Getting It Right! 1 Jan Page

10 For purposes of determining whether an institution is covered by HMDA, refinancing means that: The existing obligation is a home purchase loan (as determined by the lender, for example, by reference to available documents; or as stated by the applicant); and Both the existing obligation and the new obligation are secured by first liens on dwellings For purposes of determining whether a covered institution must report the refinancing, both the existing obligation and the new obligation must be secured by liens (first or subordinate) on dwellings. (12 C.F.R ) Applications and Preapproval Requests Institutions must also submit data on loan applications, including those that have been denied, withdrawn, closed for incompleteness, or approved but then turned down by the applicant. 9 Covered institutions must also collect information about requests for loan preapprovals under a preapproval program, but only if either: The lender denied the preapproval request; or The lender granted the preapproval request and then originated a home purchase loan as a result (12 C.F.R (a)) Exemptions from Reporting Requirements The reporting requirements do not apply to: Institutions that do not meet the criteria outlined above State-chartered or state-licensed institutions that are subject to state disclosure laws with reporting requirements that are substantially similar to those of HMDA (12 U.S.C. 2805(b)) Discussion Scenario: Covered Institutions under HMDA Montaigne Mortgage Solutions, Inc. (MMS) is a non-depository for-profit institution with its home office in Chicago, Illinois, which is part of a Metropolitan Statistical Area (MSA). MMS refinances home purchase loans but avoids originating home purchase loans. The previous calendar year, it refinanced 50 such loans, and MMS also originated 200 auto loans. MMS has $4 million in assets, which means that its financial activity constitutes only a small part of the net worth of its parent company, the Reisner National Bank, which is worth over $100 million. 9 Consumer Financial Protection Bureau: Consumer Laws and Regulations: Home Mortgage Disclosure Act (HMDA). 10

11 Discussion Questions Is MMS regulated (i.e., covered ) under HMDA? Yes. MMS, as a for-profit mortgage lending institution other than a bank, savings association, or credit union, is covered under HMDA because it meets all of the law s coverage criteria, including: MMS home purchase loans, including refinances, constitute 20% of its loan origination volume, which far exceeds HMDA s 10% threshold MMS home office is located in a Metropolitan Statistical Area as of the preceding December 31 Although MMS did not originate at least 100 home purchase loans, including refinances, within the previous year, it does have total assets of more than $10 million as of the preceding December 31, counting the assets of its parent corporation May MMS choose to report its mortgage loan activity on its own HMDA-LAR through its parent company? No, MMS must submit its own HMDA-LAR. HMDA treats subsidiaries of financial institutions as distinct entities. Therefore, HMDA requires subsidiaries to file separate reports with the agency that supervises their parents. What is MMS' oversight agency? MMS oversight agency is the Office of the Comptroller of the Currency (OCC). A financial institution subsidiary is supervised by the same agency that regulates its parent company. Because the OCC supervises national banks, including the Reisner National Bank, it will also supervise MMS. Suppose that MMS decides to refinance a mortgage where the original loan was secured by a subordinate lien, but the refinancing loan is secured by a first lien on the borrower s home. Must MMS report this loan under HMDA? Yes, MMS must report the loan. An institution must report the refinancing of a home purchase loan if both the existing obligation and the new obligation were secured by liens (first or subordinate) on dwellings. It is important to remember, however, that MMS would not count this loan when determining whether MMS is covered by HMDA in the first place. For purposes of determining coverage, refinancing means that: The existing obligation is a home purchase loan; and Both the existing obligation and the new obligation are secured by first liens on dwellings 11

12 Hence, this loan would not be counted when determining whether MMS is covered by HMDA, since the original loan was secured by a subordinate lien. Suppose that MMS decides to originate an HMDA-reportable home purchase loan, but the borrower had been referred to MMS by a third party mortgage broker who also helped to negotiate some of the loan s terms. Should MMS report the loan under HMDA, or should the broker? Although the involvement of several parties in the loan negotiations may make it confusing to determine who should report the loan, the current Staff Commentary to Regulation C offers the following guidance: If the broker makes a credit decision, it reports that decision; if it does not make a credit decision, it does not report. In this case, MMS made the final decision to extend the loan. Therefore, MMS should report the loan on its HMDA-LAR. If MMS were licensed by the state of Illinois, would the answer be different as to where to file and with whom? If MMS were state-licensed, the reporting requirements would not change. The applicability of the law and its requirements rests on whether MMS is a financial institution, as defined under HMDA. If MMS was not a financial institution subsidiary, would the answer be different? If MMS was not a financial institution subsidiary, it would not be required to comply with HMDA reporting requirements since it does not meet all the criteria that identify the nondepository institutions that must comply with the law. MMS is in a metropolitan statistical area, and it originates loans that equal 10% of its loan origination volume, but its total assets of $4 million would not meet the $10 million amount that would make it subject to the law. Discussion Scenario: Consumer Protection Goals and Rights of Action Under HMDA Cynthia lives in a Detroit neighborhood that has been ravaged by foreclosures. While reading an analysis by a reporter who was investigating the reason for high foreclosure rates in neighborhoods like hers, Cynthia learned that many of her neighbors were victims of reverse redlining and had received subprime loans that became unaffordable. She also learned that these subprime loans were offered to homeowners in neighborhoods like hers, which were predominantly inhabited by minorities. Furthermore, she learned that mortgage brokers earned extra commissions for originating expensive subprime mortgages. The news article that Cynthia was reading also referenced a law called the Home Mortgage Disclosure Act (HMDA). The article explained that one of the goals of the Act was to prevent discriminatory lending patterns. Cynthia is wondering if she was a victim of discrimination. 12

13 Cynthia has taken an interest in the news article because she is worried that she may not be able to maintain payments on her home loan when her own subprime loan adjusts in two months. Like many of her neighbors, she obtained a refinance from a local mortgage broker that left flyers in her mailbox. The broker left flyers throughout her neighborhood and even sent some representatives to conduct door-to-door solicitations for business. Cynthia wonders if she can bring an action against her mortgage broker for violating the provisions of the HMDA that are intended to protect homeowners from high-cost mortgage products. She finds the contact information for a nonprofit housing counselor and schedules a meeting to discuss her options. She wonders if the new Consumer Financial Protection Bureau has the authority under HMDA to take some action against the mortgage broker for originating unaffordable loans in her neighborhood. Discussion Questions Will Cynthia s non-profit counselor suggest bringing an action under HMDA? Cynthia s counselor will explain that HMDA does not create a private right of action and that she cannot, therefore, file a complaint that is based on violations of this law. The incentive that covered financial institutions have for complying with HMDA is not to avoid liability, but to be able to demonstrate the fulfillment of reinvestment duties under the Community Reinvestment Act. If they are not able to produce the HMDA data that shows that they have met these obligations, they may not be permitted to expand their businesses or obtain approval for a merger. Since the purpose of HMDA is to encourage lending, why would an institution be in trouble for aggressively promoting its services in a minority neighborhood that is likely to be underserved? The underlying purpose of HMDA is to promote fair lending. The specific problem addressed by the law is that of accepting deposits from members of a lower income community, then using that money to extend loans to borrowers in other communities where the lending risk is lower. It would seem, therefore, that by offering loans in an underserved community, a financial institution would be promoting HMDA goals. However, during the lending boom, these communities were targeted with offers for expensive mortgages that could harm their financial interests in the long run. This, of course, proved to be the case. As countless subprime borrowers have moved beyond the first years in a subprime loan, when they were making low monthly payments, and into a point in the loan term when the interest rates rose significantly, they have defaulted on their loans and lost their homes. Did federal regulators take any steps under HMDA to address the practice of targeting underserved communities with excessively expensive loan products? The Federal Reserve Board addressed this problem in 2002 by issuing new rules that required the financial institutions that were covered by the law to report the rate spreads on first-lien and junior-lien mortgages. The data showed that lending disparities existed and that minorities were paying more for mortgages. 13

14 Would Cynthia s mortgage broker be subject to HMDA requirements? Although the facts are not clear, it seems that Cynthia s mortgage broker made loans that were funded by another lender. Regulation C provides that the mortgage broker would have to meet the HMDA reporting requirements if it made the credit decision and did not defer to the lender to decide whether to originate the loan. The broker could also be subject to HMDA reporting requirements if it is located within a metropolitan statistical area, if its home loan originations equaled at least 10% of its loan origination volume, and if it has total assets of more than $10 million or originated at least 100 home loans in the preceding year. Does the Consumer Financial Protection Bureau have regulatory authority over mortgage brokers such as the one that Cynthia used to secure her home loan? If so, can it use its authority under HMDA to help homeowners like Cynthia? The Consumer Financial Protection Bureau has authority over very large financial institutions with assets that exceed $10 billion, so it is unlikely to have authority to enforce the mortgage broker s compliance with HMDA. Even if it had authority, enforcement efforts to address lending disparities would be brought under a law other than the HMDA, with reliance on HMDA data to support claims of discrimination. Module 2 Learning Objectives In Module 2, students will: Review recordkeeping and reporting requirements of the Home Mortgage Disclosure Act Review new reporting requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (pending the revision of Regulation C by the Consumer Financial Protection Bureau) Take a look at disclosures required under the law Examine penalties for violation of the Home Mortgage Disclosure Act Review what to expect during a HMDA compliance examination Students will also have the opportunity to review a Discussion Scenario pertinent to the information covered in Module 2. HMDA Reporting Requirements For a detailed step-by-step compliance checklist, visit the CFPB s website: 14

15 HMDA-LAR (12 C.F.R (a)) Detailed instructions for completing the HMDA-LAR are available in Appendix A of Regulation C, as well as on the FFIEC website (see A Guide to HMDA Reporting: Getting it Right! In addition, the HMDA-LAR itself provides a list of codes that institutions should use when completing the register. Submitting Data Institutions must submit data to their supervisory agencies in an automated, machine-readable form. The format must conform to that of the HMDA-LAR. An institution should contact its federal supervisory agency for information regarding procedures and technical specifications for automated data submission; in some cases, agencies also make software available for automated data submission. The data are edited before submission, using the edits included in the agencysupplied software or equivalent edits in software available from vendors or developed in-house. Submitting Data in Paper Form Institutions that report 25 or fewer entries on their HMDA-LAR may collect and report the data in paper form. An institution that submits its register in non-automated form sends two copies that are typed or computer printed and must use the format of the HMDA-LAR (but does not need to use the form itself). Each page must be numbered along with the total number of pages (for example, Page 1 of 3 ). Procedures for Entering Data The required data are entered in the register for each loan origination, each application acted on, and each loan purchased during the calendar year. The institution should decide on the procedure it wants to follow for example, whether to begin entering the required data when an application is received, or to wait until final action is taken, such as when a loan goes to closing or an application is denied. Options for Collection An institution may collect data on separate registers at different branches or on separate registers for different loan types, such as for home purchase or home improvement loans, or for loans on multifamily dwellings. Entries do not need to be grouped on the register by metropolitan area, or chronologically, or by census tract numbers, or in any other particular order. Change in Supervisory Agency If the supervisory agency for a covered institution changes (as a consequence of a merger or a change in the institution's charter, for example), the institution must report data to its new supervisory agency beginning with the year of the change. Transmittal Sheet When submitting the HMDA-LAR to its supervisory agency, institutions must also include a transmittal sheet (a sample is available in Appendix A of Regulation C). The institution must use this form to record basic information including the total number of line entries (i.e., 15

16 completed transactions) and the signature of an officer at the institution who attests to the accuracy of the data recorded in the HMDA-LAR. If an additional data submission becomes necessary (for example, because the institution discovers that data was omitted from the initial submission or because revisions are required), that submission must be accompanied by a new transmittal sheet. If an institution wishes to revise or delete a previous data submission, it must state on the transmittal sheet the total of all line entries contained in the new submission, including both those representing revisions or deletions of previously submitted entries and those that are being resubmitted unchanged or that are being submitted for the first time. Depository institutions must provide a list of the metropolitan areas in which they have home or branch offices. Data HMDA requires reportable transactions of all covered institutions to be recorded and submitted on the institution s HMDA-LAR within 30 calendar days after the end of the calendar quarter in which final action is taken, such as origination or purchase of a loan, or denial or withdrawal of an application. (12 C.F.R (a)) An institution does not report any loan application still pending at the end of the calendar year; it reports that application on its register for the year in which final action is taken. (Official Staff Commentary on Regulation C, 1 Jan 2004, Paragraph 4(a)(8)) Grouping Data Because entries do not need to be grouped in any particular fashion, institutions have some flexibility in recording data on the HMDA-LAR. The CFPB suggests that an institution may record home purchase loans and home improvement loans on separate HMDA-LARs, or it may consolidate all of the data on one register. Institutions may also keep separate HMDA-LARs at branch offices rather than one for the entire institution. Nevertheless, as the CFPB observes, these separate registers must be combined into one consolidated register when submitted to the relevant supervisory agency. 10 Required Data (12 C.F.R (a)) HMDA requires the lending institutions that are subject to its requirements to report extensive data about each mortgage loan application and origination. Currently, the information reported includes: An identifying number for the loan or loan application and the date the application was received The type of loan or application (i.e., conventional, FHA-insured, VA-guaranteed, and FSA/RHS-guaranteed) The purpose of the loan or application 10 Consumer Financial Protection Bureau: Consumer Laws and Regulations: Home Mortgage Disclosure Act (HMDA). 16

17 Whether the application was a request for preapproval and whether it resulted in a denial or an origination The property type to which the loan or application relates (one-to-four family dwelling, multifamily dwelling, or manufactured housing) The owner-occupant status of the property to which the loan or application relates The amount of the loan or the amount applied for The type of action taken on the loan and the date The location of the property related to the loan, by Metropolitan Statistical Area or by Metropolitan Division, by state, by county, and by census tract, if the institution has a home or branch office in that MSA or Metropolitan Division. Keep in mind, large institutions that are covered by both the CRA (i.e., institutions with assets of $1 billion or more) and HMDA are required to report geographic data on all loans and applications. 11 The applicant or borrower s ethnicity, race, sex, and gross annual income relied on in processing the application. This requirement does not apply to loans that the institution has merely purchased. (12 C.F.R (b)) The CFPB provides the following guidance for collecting this information: o Information regarding the ethnicity, race, and the sex of the borrower or applicant must be requested by the lender, including for applications made entirely by telephone, mail, or Internet. If the information is not provided by the applicant, and if the application is submitted in person, the lender is required to note the information on the basis of visual observation or surname. Regulation C contains a model form that can be used for the collection of data on ethnicity, race, and sex. Alternatively, the form used to obtain monitoring information under 12 C.F.R of Regulation B (Equal Credit Opportunity) may be used. 12 The type of entity purchasing a loan that the institution originates or purchases and then sells within the same calendar year (this information does not need to be included in quarterly updates). The institution does not need to identify the exact purchaser unless that purchaser is a large secondary market buyer such as Fannie Mae or Freddie Mac. For example, according to the CFPB, if an institution sells a loan to a bank, then it needs only to identify the purchaser as a bank and not the bank s actual name. 13 Applicable only to home purchase loans, dwelling-secured home improvement loans, and refinancings that the institution has originated, the difference, or the spread, between the APR for a loan and average prime offer rates if the difference is equal to or greater than 1.5 percentage points for first lien mortgages, or equal to or greater than 3.5 percentage points for subordinate loans. To determine the applicable rate spread, the financial 11 Consumer Financial Protection Bureau: Consumer Laws and Regulations: Home Mortgage Disclosure Act (HMDA) Consumer Financial Protection Bureau: Consumer Laws and Regulations: Home Mortgage Disclosure Act (HMDA) Consumer Financial Protection Bureau: Consumer Laws and Regulations: Home Mortgage Disclosure Act (HMDA). 17

18 institution may use FFIEC s Rate Spread Calculator. 14 The CFPB notes that the following transactions are excluded from the rate spread requirement: o Applications that are incomplete, withdrawn, denied, or approved but not accepted o Purchased loans o Home improvement loans not secured by a dwelling o Assumptions o Home equity lines of credit; and o Loans not subject to Regulation Z (Truth-in-Lending) 15 Whether the loan is subject to the Home Ownership and Equity Protection Act of 1994 (HOEPA), as implemented in Regulation Z (12 C.F.R ) The lien status of the loan or application (first lien, subordinate lien, or not secured by a lien on a dwelling) Optional Data (12 C.F.R (c)) Under HMDA, A financial institution has the option to report the following: The reasons it denied a loan application Requests for preapproval that are approved by the institution but not accepted by the applicant; and Home equity lines of credit made in whole or in part for the purpose of home improvement or home purchase Excluded Data (12 C.F.R (d)) HMDA prohibits a financial institution from reporting the following: Loans originated or purchased by the financial institution acting in a fiduciary capacity (such as a trustee) Loans on unimproved land Temporary financing (such as bridge or construction loans) The purchase of an interest in a pool of loans (such as mortgage-participation certificates, mortgage-backed securities, or real estate mortgage investment conduits) The purchase solely of the right to service loans; or Loans acquired as part of a merger or acquisition, or as part of the acquisition of all of the assets and liabilities of a branch office 14 Federal Financial Institutions Examination Council: New FFIEC Rate Spread Calculator Consumer Financial Protection Bureau: Consumer Laws and Regulations: Home Mortgage Disclosure Act (HMDA). 18

19 Recording and Reporting Deadlines HMDA requires all reportable transactions to be recorded on the institution s HMDA-LAR within 30 calendar days after the end of the calendar quarter in which final action is taken, such as origination or purchase of a loan, or denial or withdrawal of an application. By March 1 following the calendar year for which the loan data are compiled, a financial institution must send its complete HMDA-LAR to the supervising agency. The institution must retain a copy for its records for at least three years. Revised Reporting Requirements under Dodd-Frank Although HMDA helps regulators to determine if there is evidence of discrimination in mortgage lending, its effectiveness has been criticized for failing to produce adequate evidence to prove the existence of discriminatory practices or to provide sufficient evidence to determine whether an enforcement action is merited. There is good reason to require proof other than HMDA data prior to bringing an action for discrimination. HMDA reports do not show other important and legitimate factors that impact lending decisions such as poor credit history, high loan-to-value ratios, or high consumer debt-to-income ratios. Therefore, HMDA data has usually served as a starting point for an investigation to determine if discriminatory practices exist. Dodd-Frank s Title X, or the Consumer Financial Protection Act, includes amendments to HMDA. These amendments are intended to improve the usefulness of HMDA data by requiring the collection of additional information that is relevant to an assessment of fair lending practices. As a result of these amendments, future HMDA reports will include the following additional information: The age of the loan applicant or borrower The number and dollar amount of mortgage loans grouped according to measurements of: o The total points and fees paid at origination o The difference between the annual percentage rate for the loan and a benchmark rate for all loans o The number of months that any prepayment penalty is in force The number and dollar amount of mortgage loans and completed mortgage loan applications, grouped according to: o The value of the real property pledged as collateral o The number of months that an introductory rate is in place before the rate may be subject to change o The presence of terms that allow for payments that are not fully amortizing o The loan term o The type of loan originator (e.g., retail lending institution or mortgage broker) 19

20 For this group of loans, the CFPB has the discretion to also require: A unique identifier that identities the loan originator as required under the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act) A universal loan identifier The parcel number of the real property pledged as collateral The credit scores of borrowers and loan applicants Such other information as the CFPB may require (Public Law (3)(A), amending 12 U.S.C. 2803(b)) Until the CFPB s revision of Regulation C is completed and the new rules that address the new reporting requirements are finalized, lenders are not obligated to include information related to the new data categories on their HMDA reports, and they will continue reporting to the agencies that currently accept their information. The inclusion of this new data on HMDA reports is not mandatory until the first January 1 that occurs after the end of the 9-month period beginning on the date on which the regulations are issued by the Bureau. (Public Law (3)(F), adding 12 U.S.C. 2803(n)) Participants in this HMDA rulemaking will include the CFPB and other appropriate agencies. The other appropriate agencies include: The Appropriate Federal Banking Agencies, which are: o The Office of the Comptroller of the Currency o The Federal Reserve Board o The Federal Deposit Insurance Corporation The National Credit Union Administration Department of Housing and Urban Development HMDA Disclosure Requirements (12 C.F.R ) After the FFIEC has prepared disclosure statements from the data, the institution must make its disclosure statement available to the public at its home office no later than three business days after receiving it from the FFIEC. The FFIEC no longer mails the statements to institutions, but it instead posts them online: An institution must also make its disclosure statement available to the public in at least one branch office in each metropolitan area where the institution has offices within ten business days of receiving it. The disclosure statement need only contain data relating to the metropolitan area where the branch is located. Alternatively, the institution may post the address for sending written requests in the lobby of each branch office in other metropolitan areas where the institution has offices. In that case, the institution must mail or deliver a copy of the disclosure statement within 15 calendar days of receiving a written request. The disclosure statement need 20

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