THE CHANGES

The revisions:

• Expand coverage for non-depository lenders by adding a dollar volume test to the existing percentage-based coverage test;
• Require lenders to report information related to loan pricing. For loan originations in which the annual percentage rate (APR) exceeds the rate for comparable Treasury securities by a specified amount, lenders must report the rate spread between the APR and the comparable Treasury rate. Lenders also must report whether a loan is subject to the requirements of the Home Ownership and Equity Protection Act (HOEPA);
• Require lenders to report lien status (whether the loan is secured by a first or subordinate lien);
• Require lenders to report whether an application or loan involves a manufactured home;
• Change certain definitions in the regulation. The definition of an application is revised to include a request for preapproval. To promote more consistency in the reported data, the definition of a refinancing, and the definition of a home improvement loan are revised;
• Reorganize the regulation; and
• Make other technical changes, such as revising categories of ethnicity and race.

TWO VEXING ISSUES

The revisions contain several very significant changes. The remainder of this article focuses on two issues – collection of monitoring information and reporting pricing information.

The changes to area of collecting monitoring information are subtle but profound. Compare the new data collection form with the old. Ethnicity is now a separate category. Race/national origin categories have been modified. Asian is now a separate category. Pacific Islander is now combined with the new Native Hawaiian category. Black is coupled with the new African American designation. The "other" category is eliminated. Maybe the most significant change is the sentence highlighted in the narrative that precedes the data collection. Applicants are now permitted to select more than one designation for race. The new HMDA LAR allows up to 5 selections.

The significance of these changes is obvious. A new application form is needed. All employees have to be retrained.

Another issue is less obvious. Previously data collection rules in Regulations B and C were the same. While data collection for Regulation C has changed, the rules for Regulation B are unchanged.

One impact of this disparity is that HMDA reporting institutions will use one real estate loan application while non-HMDA reporting institutions will use another. Another implication is that HMDA reporting institution will have to collect very similar data twice - once under Regulation B and once under Regulation C.

The Federal Reserve Board must resolve this matter. They can back off the Regulation C revision (unlikely), make the same change to Regulation B that they made to Regulation C (preferable), or they can add a comment to Regulation B that data collected under Regulation C is deemed to be compliance with the Regulation B requirements. A phone call to a staff attorney at the Fed indicates they are aware of the dilemma but have not decided how to resolve the problem.

In an effort to root out predatory lending problems, lenders must now report, for loan originations in which the annual percentage rate (APR) exceeds the rate for comparable Treasury securities by a specified amount (3% for first lien transactions and 5% for subordinate lien transactions), the rate spread between the APR and the comparable Treasury rate. Lenders also must report whether a loan is subject to the requirements of the Home Ownership and Equity Protection Act of 1994 (HOEPA).

The provisions of HOEPA apply to closed-end consumer credit transactions secured by the consumer’s principal dwelling in which either of the following requirements have been met:

• The APR at consummation exceeds by more than 8 percentage points for first lien transactions, or by more than 10 percentage points for subordinate lien loans, the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month prior to the month in which the application is received by the creditor; or
• The total of the points and fees payable by the consumer at or before loan closing exceeds the greater of 8 percent of the total loan amount or $400. The $400 figure is adjusted each January 1 to reflect the change in the Consumer Price Index as of the preceding June 1. The current value is $480.

The regulators and trade associations are proclaiming that the final revisions are a vast improvement over the proposed revisions. The proposal required lenders to report the APR for each loan. In the final revisions, lenders are required to calculate the difference between an APR and the yield on a Treasury security and to report the rate spread if it exceeds the established threshold. When compared side by side, the final rule appears to require more work.

THE IMPACT OF THE CHANGES

Covered institutions must update software and forms used for data collection and reporting. All employees involved in the data collection and reporting process will need training on the changes. Policies and procedures will need at least some updating.

The changes cannot be phased in over time. The last loan for which data is collected in 2003 must comply with current rules. The first loan of 2004 must comply fully with the revised rule.

Each covered institution should analyze the impact of the new and revised data. Both the types of loans for which data is collected and the type of data collected are changing. An analysis of collected data should be performed periodically through out the first year under the changes (some lenders plan "shadow" collection in 2003) to detect any adverse trends and to begin immediate corrective action.

Collection of both the monitoring and the pricing information present unique challenges. The Federal Reserve Board must provide relief on the monitoring information problem. Only time, training and well-developed information systems will resolve the problems presented by pricing information.

The regulators took nearly 4 years to complete the changes. The industry originally was given less than 10 months to implement the changes. Although the effective date has been changed to 1/1/04, the planning must start now.