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HMDA: How Did HMDA Happen?
Anyone who has taken a good look at the new HMDA revisions and realized what is involved is probably asking how on earth this happened. Anyone still wondering could get the question answered at the March meeting of the Consumer Advisory Council ("CAC").
HMDA was the first topic of discussion at that meeting. The Council discussed several issues related to the new regulation: the appropriateness of the rate spread threshold, the required reporting of lien status, and the collection of race, ethnicity, and gender information in telephone applications.
System Changes
Consumer advocates, who have lobbied long and hard for the changes (and more), attempted to dispel concerns about the new burden imposed by the new rule by stating that compliance involves a "one-time programming change." They believe that the information produced by this "one-time programming change" will be invaluable in enforcement of fair lending and predatory lending cases.
Financial institutions see the problem very differently. Bankers on the council agreed that the reporting of rate spreads (the difference between the APR of a loan and the rate on treasuries of a comparable maturity) is a significant additional burden. Earl Jarolimek, Vice President and Corporate Compliance Officer for Community First Bankshares in Fargo, ND, pointed out that the new rule imposes a significant systems problem for financial institutions. Institutions run numerous automation systems for a wide variety of purposes. Jarolimek explained that the HMDA data collection systems generally are separate from the loan closing systems that calculate APRs. Programming for this reporting will therefore involve building special programs to transmit data from one system to another.
In response to Governor Gramlich's query as to whether the FRB's free reporting software would reduce this burden, Jarolimek explained that the FRB's software only involves reporting the information. The real complexity involves retrieval of the data, which the FRB's free software does not perform.
Jarolimek also advised the Board that financial institutions are heavily invested in scheduled system conversions during 2002, having postponed such activity during preparation for Y2K and for privacy programs. Financial institutions simply cannot manage a system conversion and develop programs for HMDA compliance at the same time. The system conversion must be completed first.
Dorothy Broadman, Director of Corporate Citizenship for Capital One Financial Corporation and Chair of the CAC, pointed out that many changes need to take place before work on system changes can begin. These pre-system changes include such basic work as changing the FNMA/FHLMC application form to capture the required information, and revising financial institution procedures and documents.
She also predicted problems with compiling data from loan applications that are taken in 2002 but closed and reported in 2003. Many consumers seek prequalification for mortgages, then shop for homes, and only when those steps are complete does the loan close. This process usually involves much more time than an application that occurs after the purchase decision is made.
Rate Spread
Other concerns included the fact that the industry uses common indices for many or all of the mortgage loans, such as 10-year treasuries rather than treasuries of comparable maturities. The new rule would require reporters to use treasuries of comparable maturities to calculate the spread from the APR, without regard to the index actually used by the lender to set the rate. Not only would use of a different index create compliance problems; it could also create confusion about whether a loan is a high-cost loan based on which index is used for the spread calculation.
The second part of the HMDA discussion revolved around the utility and relative burden of reporting lien status. This discussion covered concerns related to paperwork burden, the relationship between lien position and pricing, and questions related to purchased loans.
Jarolimek explained that while the regulation is based on the assumption that the loan rate is driven by the lien status, the rate is in fact more directly affected by the borrower's creditworthiness and the borrower's relationship with the lender.
Theresa Bryce, General Counsel for Nexstar Financial Corporation, observed that pricing is more dependent on the type of lender than on the lien status. She also explained that pricing will vary depending on whether the lender plans to or is able to sell the loan.
Monitoring Data
Consumer advocates spoke out strongly on the subject of collecting monitoring information for telephone applications. Hubert Von Tol, Co-Director of Fairness in Rural Lending, pointed out that HMDA data is "getting seriously compromised" by the drop in reporting of race data. He believes that collection of race data is an important issue and that the regulations must impose additional collection requirements.
Patricia McCoy, Professor of Law at Cleveland State University, stated that if there are concerns (and she believes there are) that telemarketers target customer groups, then there is a "heightened need" for additional race information. She did not explain how telemarketing correlates to the types of lenders and lending that will be subject to this rule. Neither did she explain how telemarketers would collect the information.
Debra Reyes, President of Neighborhood Lending Partners, Inc., in Tampa. FL, supported the new data collection requirement. She said that for sub-prime lending, 99% of the data is not available.
Robert Cheadle, Legislative Counsel for The Chickasaw Tribal Legislature, brought up a different concern, based on his first-hand experience with tribal members. He warned members of the CAC not to assume that a person's ethnicity is identifiable. He gave examples (including himself) of Native Americans whose appearance could be taken for another race or ethnicity. He also warned that the answer may not be accurate if requested before closing.
There was also discussion of the difficulties in collecting the race and ethnicity information. Members representing industry and consumers agreed that collection of the information must be scripted carefully. Frank Torres, III, Legislative Counsel for Consumers Union, supported scripting to prevent what he believes is currently happening. He believes that lenders actively discourage consumers from providing the data by making disparaging statements and that this explains the low response rates in applications that are not taken face-to-face.
There was a missing element to the entire discussion. The discussion was based on the assumption that revising the rule and collecting information from financial institutions will provide answers to existing questions. In fact, few financial institutions offer the types of predatory products that are targeted by these rules. Add to that the likelihood that the real predatory lenders won't bother to comply, and the value of this rule is questionable, while the burden is clear.
Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 4, 5/02
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