HMDA: Final HMDA Rules for 2004

The Federal Reserve Board has issued final HMDA rules for 2003 and for 2004. The expanded and much more complicated Loan Application Register ("LAR") comes into use at the beginning of 2004. Monitoring data collection for telephone and mail applications begins in January 2003. To be in compliance at the right time, you need to start working now.

Monitoring Data
Collection and reporting of information about the race and gender of applicants and co-applicants is the first big change. This information, called "monitoring information," should be your first priority because the change takes effect in the next calendar year, before the significant changes to the LAR. Under what we will probably come to think of as the old, laid-back HMDA, lenders were not required to ask for monitoring information unless the application was taken in a face-to-face interview. Mail-in, telephone, and electronic applications were thus exempt from collecting the information. The only trick to master was documentation of the fact that the application was not taken face-to-face.

Consumer advocates have complained that not enough information on race and gender is collected and reported. They want more. Some of the more extreme advocates have voiced concern that loan officers are actually coaching applicants to refrain from giving the information.

Beginning in January, anyone taking an application subject to HMDA reporting must ask the applicant to provide monitoring data. Telephone applications and Internet applications must include requests for the information. However, unlike the face-to-face rule, if the applicant refuses to provide the information, the loan officer should not make guesses as to the applicant's identity. We can expect the response rate for monitoring data requests to decline as the non-face-to-face forms of application taking grow. As the information declines, pressure from consumer groups will increase. You will need to be able to show that you are making a reasonable effort to collect the information and training will be important.

APR Spread
Beginning in 2004, HMDA reports must include the spread between the APR and the yield on treasury securities having comparable periods of maturity if the difference is greater than 3 percentage points for first liens and 5 percentage points on subordinate liens.

The index figure used to calculate the spread will be posted on the FFIEC website each month. The spread should be calculated using the index as of the 15th of each month and comparing the APR to the most recent index value on the date the loan's rate was set. All loans subject to both Regulation Z and HMDA fall under this requirement. The index actually used by the lender to set the rate on the loan is irrelevant to the calculation.

The spread is calculated using the date the loan rate was set - not the date the loan was closed. This creates a movable target for procedures. Rates may be set by lock-ins, by closing dates, or by other methods. Your procedure for calculating the spread will need to account for any and all methods used by your institution for setting mortgage loan rates.

Lien Position
Lenders will have to include information about the lien position on future LARs. The new LAR will have codes to indicate whether the lien position is first or subordinate. There will also be codes for not secured by a lien (Code 3) and for not applicable (Code 4). This will become an area for training and quality control as we can expect mistakes, especially with the use of Codes 3 and 4.

Preapprovals
Reporting preapprovals sounds deceptively easy. However, it may prove more complex than calculating and reporting the spread between APRs and treasury securities. No matter what you call them - preapprovals, prequalifications, or something more creative - these decisions are going to be difficult to track and to quantify for reporting.

The reporting codes look straightforward. The LAR will have one of three codes: Code 1 for preapproval requested, Code 2 for preapproval not requested, and Code 3 for not applicable. The problem will be recognizing the difference between the three categories and reporting each application under the correct code.

If the institution is making preapprovals, it should have a program for doing so. At a minimum, you should have documented procedures for taking, processing and making decisions on preapprovals.

Lending procedures should also take into account the definitions of "application" that may cause confusion in lending staff. Definitions in Regulation B and the Fair Credit Reporting Act are different from the preapproval in HMDA. The triggers in Truth in Lending and RESPA are still different. Theoretically it is possible to establish procedures that are consistent for staff and comply with all regulations. This would be a good time to take a hard look at lending procedures in the context of taking applications.

ACTION STEPS

Schedule training with all lending staff on collection of monitoring information. Include practice on explaining why the information is requested.
Review the lending systems to determine where information for the new LAR should be collected. Also consider procedures for collecting the information.
Find out when and how loan rates are set. Work with your operations staff and HMDA staff to develop a procedure for capturing the APR spread.
Review and evaluate procedures for preapproval (prequalification). Make sure they are clear enough to support compliance with the new HMDA LAR reporting.