HMDA Revisions Explained

The FAQ guide released Monday by the Federal Reserve Board comes on the heels of 2004 HMDA data, which contained new data reporting requirements resulting from amendments made to Regulation C two years prior. In 2005, 8,853 lenders reported 2004 HMDA data, which included a total of 33 million reported loans and application.

The amended regulation required lenders to report data for higher-priced loans subject to the Home Ownership and Equity Protection Act. Other items tracked included the type of lien on the property, preapproval information and whether manufactured housing was involved. Additionally, amendments were made to conform to changes in standards for collection of applicant data on race and ethnicity adopted by the Office of Management and Budget.

The guide says price data is reported in the form of the rate spread between and the yield on Treasury securities of comparable maturity if the spread exceeds designated thresholds.

First-lien price information must be reported if the spread between the loan’s annual percentage rate is at least three percentage points above the Treasury security of comparable maturity, and for second-lien loans, if it’s five percentage points above. The board set HMDA’s price thresholds to include the vast majority of subprime-rate mortgages.

Lenders also report price data in the form of a “flag,” indicating whether a loan exceeds the price triggers of the HOEPA. A loan is covered by HOEPA if the APR exceeds the comparable Treasury yield by more than eight percentage points. An alternative test for HOEPA coverage is whether the points and fees exceed 8 percent of the total loan amount. Congress limited HOEPA’s protections and disclosures to the highest-priced subprime home loans, according to the guide.

The board clarifies in the guide that HMDA data alone indicating that minorities pay more for loans than whites on average cannot definitively conclude discrimination but “are a useful screen, previously unavailable, to identify lenders, products, applicants, and geographic markets where price differences among racial or other groups are sufficiently large to warrant further investigation.”

To detect price discrimination, federal banking agencies use HMDA in conjunction with Interagency Fair Lending Examination Procedures, which direct examiners to identify risk factors for discrimination by reviewing a variety of things, including a lender’s records. Such a review analyzes the relationship between the loan price and compensation of loan officers or brokers; the presence of broad pricing discretion; use of a risk-based pricing system that is not empirically based and statistically sound; substantial disparities among prices quoted or charged to applicants who differ in their protected characteristics such as race or ethnicity; and consumer complaints alleging price discrimination, according to the guide.

The board said year-to-year changes in the number or proportion of higher-priced loans “should be interpreted with great care,” as differences could be due to changes in the interest rate environment and other factors.

In “2004, short-term rates were well below long-term rates, by the end of 2005, short-term rates and long-term rates were fairly close,” the board said. “Accordingly, one would expect a higher proportion of loans originated in 2005 than of loans originated in 2004 to be reported under HMDA as higher-priced loans. Changes in other factors, such as the business practices of lenders or the risk profiles or borrowing practices of borrowers, also could have affected the proportion of loans reported as higher-priced loans.”

In addition to helping determine what rate-spread reporting threshold applies to a loan, the requirement to report the type of lien on the property also aids in the interpretation of price data, as lien status differences may explain some price disparities, the guide said.

The Fed also explained that having lenders identify loans or applications involving manufactured homes makes “it easier to identify the sources of differences in denial rates, and will improve understanding of manufactured home financing,” since the credit market to finance manufactured home purchases differs somewhat from that for site-built home purchases.

The guide, available online at www.FederalReserve.gov, covers the background and details on 27 questions, including what HMDA items are, what loans are covered under HMDA, the information available to the public, who reports HMDA data, and how and why it used by the government and federal banking agencies, among other things.