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High Cost Loans: HMDA v. Truth in Lending

We are about to enter a period of reporting information on high cost loans on the HMDA LAR. The fun begins on January 1, 2004 - actually the first business day after that date. In the process of preparing, there has been a great deal of confusion. There have been lots of questions about what's what and which is which. Let's try to clear the air.

Think of these two regulations as machines having movable parts. The moving parts are the index, the date for selecting the index, the actual rate spread calculation, and the fee calculation based on changes to the consumer price index.

Now that we have the machine image, it is important to realize that some parts go on both machines - HMDA and TIL - and other parts are unique to one of these regulations.

First let's take Truth in Lending. To provide consumers with the information they need to identify unusual loan costs and possible predatory lending, the TILA requires extra disclosures for loans called "high cost" or "section 32" loans. It also adds a three-day waiting period to the front end of things - before you actually close the loan making the consumer legally obligated. (Remember that this pre-closing 3-day waiting period is in addition to, not instead of, the 3-day rescission period which runs after closing.)We use two triggers to determine whether a loan is a high cost loan. Either trigger works. The first trigger is the APR spread. We compare the APR on the loan with treasury securities having a comparable (or the closest thing to comparable) maturity period. We compare the APR with the treasury securities as of the 15th day of the month immediately preceding the month in which the application for credit is received.

The other comparison is a fee comparison. For this, we measure fees in absolute dollars. The fee test compares the total points and fees payable by the consumer at or before closing to 8% of the loan amount and to a fixed figure based on the Consumer Price Index. We use the larger of these two figures to compare points and fees.

For HMDA, our goals are different. Beginning in 2004, HMDA reporting will be used to enable users of the data to identify loans that are high cost within the meaning of Regulation Z and loans that are not-yet-high-cost but are more expensive than usual market rates for prime customers. We've taken to calling these "mid-cost" loans to avoid confusion with TIL's high cost rules in Section 226.32.

HMDA reports will identify high cost loans by a yes/no type of response on the LAR. For loans that actually trigger the high cost disclosures of Truth in Lending, reporters will indicate that the loan is a Section 226.32 loan.

The other loan pricing information is what we call the mid-price information. For this, we use a narrower spread to report the difference between the APR and the treasury securities of the closest comparable maturity. However, for the HMDA calculation we do not use the date of application to determine the treasury index. Instead, we use the date on which the rate was set. This may be the date of a rate lock, or it may actually be as late as settlement. In any event, documenting the date of setting the rate will be essential to support HMDA reporting.

Under HMDA, we will be reporting rate spreads on loans that are not high-cost loans for purposes of Truth in Lending. The rate-spread data will enable regulators (and others) to evaluate lending patterns and identify lending that may be predatory. The pricing will also be used in fair lending analysis. For example, it will be possible to compare loan prices for minorities and look for differences by race, ethnicity, or gender.

  Rate Trigger: First Trust Rate Trigger: Second Trust Fee Trigger TIL/HOEPA 8% 10% Greater of $499 or 8% of loan amount Using Treasury Index as of: Treasury securities having comparable periods of maturity to the loan maturity as of the 15th day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor. Treasury securities having comparable periods of maturity to the loan maturity as of the 15th day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor. 2004 HMDA 3% 5% None Using Treasury Index as of: Yield on Treasury securities as of the 15th day of the preceding month if the rate is set between the 1st and the 14th day of the month and as of the 15th day of the current month if the rate is set on or after the 15th day. Yield on Treasury securities as of the 15th day of the preceding month if the rate is set between the 1st and the 14th day of the month and as of the 15th day of the current month if the rate is set on or after the 15th day.  Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 12, 11/03

First published on 11/01/2003

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