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The ABC's of HMDA

by Stephanie Caputo, community development expert, Community Affairs Department, OCC

Vicci Niebauer of Placerville, CA works on her new home being built in conjunction with USDA's self help program.

Vicci Niebauer of Placerville, CA works on her new home being built in conjunction with USDA’s self help program.

The purpose of HMDA data historically has been multifold: to determine whether financial institutions are meeting the housing credit needs of their communities; to identify possible discriminatory lending patterns and assist in the enforcement of anti-discrimination laws; and to assist public policy-makers in targeting investments to attract and leverage much-needed private capital, especially in urban areas. Through the decades, various refinements to HMDA reporting requirements have contributed to the data’s usefulness in assessing how effectively institutions have addressed community housing needs in their service areas.

In 1989, Congress significantly expanded HMDA to include certain nondepository lenders, and to require reporting on applicant race, national origin, gender, and income. The regulatory community used these additional data to sharpen the focus of their fair lending examinations and compliance enforcement efforts. Additionally, regulators have used HMDA data to assist them in conducting Community Reinvestment Act evaluations.

The latest revisions to HMDA are intended to provide regulators and other stakeholders with more specific information with respect to mortgage markets, especially the booming subprime market, to ensure that lenders are continuing to respond to the need and demand for housing credit in their communities, as well as to assist in the enforcement of fair lending laws.

As of the fall of this year, tables available to the public will display, for each HMDA reporter, pricing information for higher-priced loans by (1) borrower characteristics, i.e. race, ethnicity, gender, and income level, and (2) racial/ethnic composition and income level of the census tract in which the property is located. (Click here for "HMDA Disclosure Requirements: What the Public has the Right to See - and When")

What Is a HOEPA Loan?

The Home Ownership and Equity Protection Act of 1994 (HOEPA), which is part of the Truth in Lending Act, requires additional disclosures and provides substantive protections for certain home-secured loans having rates or fees above specified triggers.

HOEPA covers mortgage loans for which the annual percentage rate (APR) exceeds the yield on Treasury securities with a comparable maturity by the following number of percentage points:

  • 8 percentage points for first-lien loans.
  • 10 percentage points for subordinate-lien loans.

    OR

The total points and fees payable by the consumer at or before loan closing exceed the greater of:

  • $510* or 8 percent of the total loan amount.

*The Federal Reserve Board annually adjusts this limit based on the annual percentage change reflected in the Consumer Price Index in effect as of June 1.

Key revisions to HMDA reporting include the following data elements:

  • Rate-spread loan reporting, which is required only for originations of home purchase loans, secured home improvement loans, and refinancings. Lenders must report the spread between the annual percentage rate (APR) on a loan and the yield on comparable Treasury securities, if the spread is equal to or greater than 3 percentage points for first-lien loans, or equal to or greater than 5 percentage points for subordinate-lien loans. (Click here for “How to Determine Rate Spreads on HMDA Loans”)
  • Home Ownership and Equity Protection Act (HOEPA) loans, which are loans that have points or fees in excess of specific thresholds defined in the Truth in Lending Act and Regulation Z. Lenders must now report whether a loan is subject to HOEPA. (See “What Is a HOEPA Loan?” above)
  • Lien Status. Lenders must report, for originations and applications, whether a loan is (1) secured by a first lien, (2) secured by a subordinate lien, or (3) not secured by a lien. Purchased loans are not covered by this requirement.
  • Ethnicity and Race. Lenders must ask for “government monitoring information,” but cannot require it, whether an application is taken in person, by mail or telephone, or on the Internet. Ethnicity is a new field as of January 1, 2004. Applicants have complete discretion to self-identify their ethnicity and race classifications. If applicants decline to self-identify, lenders must identify race classifications in face-to-face situations with applicants, based on applicant surname and visual observation. (Click here for “Ethnicity and Race Fields: There IS a Difference”)
  • Home improvement loans and refinancings. There have been changes in the definitions of home improvement loans and refinancings to standardize the data reported.
  • Lenders are required (1) to report denials of requests for preapproval and (2) to report, as a separate category of originations, approvals of “requests for preapprovals” that result in originations.
  • Lenders are required to report whether a loan or application involves a manufactured home.

The federal banking regulators, as well as industry trade groups and consultants, have been alerting bankers for the past couple of years about the revisions to HMDA reporting requirements, and the potential implications of those revisions for banks. Specifically, the OCC has been urging banks to validate their data systems, and to understand and be able to explain their data.

The Federal Reserve Board (FRB), on behalf of the interagency Federal Financial Institutions Examination Council (FFIEC), stores the HMDA data, performs edit checks on specific reported data, and maintains the database for all the HMDA reporters. The FRB staff generates various data quality and validity reports, and contacts reporting institutions to resolve outstanding reporting issues. Certain data must be corrected; the most common example is incorrect census tract information. It is critical that lenders ensure that their data are accurate; otherwise, the FFIEC will produce flawed public disclosure statements, thereby hampering the ability of third parties to evaluate the performance of HMDA-covered lenders. (Click here for "Lenders Covered by HMDA Data Reporting Requirements")

Implications of the New HMDA Data for National Banks

These homes in Placerville, CA are being build through USDA's self help program.

These homes in Placerville, CA are being build through USDA’s self help program. (Click here to view "How Banks Can Expand Their Reach With USDA's Rural Housing Programs")

Despite providing a useful body of information, HMDA data may be subject to misinterpretation. The recent interagency questions and answers on HMDA, dated March 31, 2005, point out that, while the enhanced pricing data will serve as an important screening tool for self-monitoring and enforcement efforts, HMDA data alone are insufficient to prove discriminatory practices by financial institutions.

The new HMDA data represent both a challenge and an opportunity to understand lending patterns and pricing decisions. At a minimum, banks certainly should have conducted a preliminary review and analysis of their HMDA data, in order to understand what the data show – and what they do not – and bankers should be prepared to explain and support fully their underwriting and pricing process.

When evaluating data from HMDA-covered institutions, it is important to be mindful of the underlying data not reported, such as borrower creditworthiness, loan-to-value ratios, debt-to-income ratios, borrower assets, and other relevant underwriting factors.

Nonetheless, the new data reporting requirements, which capture salient pricing information regarding higher-cost loans, lien status, manufactured housing, race and ethnicity, and preapprovals, will provide more fertile ground from which to increase the breadth and depth of the analysis. The OCC will use the latest HMDA data to deploy our compliance management and examination resources strategically and determine if there are fair lending concerns that should be investigated further. (Click here for “Pricing Disparities: Do They Necessarily Mean Trouble?”) To that end, the federal banking agencies acknowledge HMDA’s value as a regulatory resource, even though HMDA reporting per se is imperfect as a mechanism to compare pricing decisions, given the full array of underwriting considerations that are not part of the reported data.

Bill Adkisson works on the roof of the Placerville, CA home he's building in conjunction with USDA's self-help program.

Bill Adkisson works on the roof of the Placerville, CA home he’s building in conjunction with USDA’s self-help program.

On their face, HMDA data could well lead the public, especially the media and various interest groups, to conclude that there is disparate treatment based on race, ethnicity or gender, and that certain lenders are engaging in predatory or abusive loan practices. Even if HMDA data show nothing more than concentrations of higher-cost loans in minority neighborhoods, the burden will be on lenders to explain why disparities exist and what they mean.

While there are inherent limitations to the new HMDA data, it will unquestionably contribute to a greater overall understanding of the mortgage industry. The information reported will provide regulators, lenders, and other affected parties with more complete context for evaluating the prime and subprime markets. Additionally, the data will furnish the backdrop for additional compliance risk management activities on the part of banks, particularly with respect to fair lending and predatory lending.