Reporting Issues Under the Home Mortgage Disclosure Act

Reporting Issues Under the Home Mortgage
Disclosure Act
October 24, 2008
Darryl E. Getter
Specialist in Financial Economics
Government and Finance Division

Reporting Issues Under the Home
Mortgage Disclosure Act
Summary
Recent developments in the subprime home loan market have triggered concern
in Congress and the public at large as to whether borrowers were fully informed
about the terms of their mortgage loans. Some observers have suggested that some
borrowers in the subprime market may have been victims of predatory lending
practices or other discriminatory activity. Bills introduced in the 110^th Congress,
such as S. 1299 (Senator Charles Schumer et al.) and S. 2452 (Senator Christopher
Dodd et al.) would seek to remedy perceived abuses particularly with higher-priced
mortgage lending.
This report describes current issues and recent changes to the Home Mortgage
Disclosure Act (HMDA) of 1975. Also included are brief explanations of how recent
reporting revisions may affect the reporting of loans covered by the Home Ownership
and Equity Protection Act of 1994 as well as those insured by the Federal Housing
Administration.

Contents
In troduction ......................................................1
Background on HMDA Reporting....................................2
Reporting Issues Prior to 2008....................................2
Redlining and Frequency of Rejection..........................2
Risk-Based Pricing.........................................3
Reporting Requirements and Coverage.........................3
Difficulties Identifying High-Priced Lending Abuses..................4
Lack of Credit History Information............................4
Reporting Problems with the APR.............................5
Movements in Interest Rates.................................5
Recent Modifications to Regulation C..................................6
Implications for HOEPA Loans...................................6
Implications for FHA-Insured Loans...............................8

Reporting Issues Under the Home Mortgage
Disclosure Act
Introduction
Recent mortgage repayment problems and subsequent increases in foreclosures
have generated concern in Congress as to whether borrowers are taking out high¹
interest loans that they cannot afford. There are at least four possible explanations
why some borrowers receive higher-priced loans. First, borrowers with weak credit
histories may face higher borrowing costs than borrowers with better credit histories
if lenders require more compensation for taking on greater credit or default risks.
Second, the actual costs of the mortgage may have been hidden or simply not
transparent when borrowers entered into the lending transaction. Hidden costs can
surprise a borrower and cause financial distress, which may lead to foreclosure.
Third, borrowers may have entered into high cost loans as a result of discrimination.
According to the Federal Reserve Board, minorities are still more likely to pay rates
above specified pricing thresholds (prior to controlling for some related borrower²
characteristics). Fourth, recent mortgage repayment problems may reflect a rise in
various forms of predatory lending. In short, borrowers may have obtained expensive
mortgage loans for a variety of reasons, which may have resulted in recent repayment
problems.
Various legislation has been enacted to oversee lending practices in the
mortgage market. The Home Mortgage Disclosure Act (HMDA) of 1975 requires
the disclosure of mortgage loan information so regulators can monitor mortgage³
lending activity. In addition, the 1994 Home Ownership Equity Protection Act
(HOEPA), enacted as an amendment to the Truth-In-Lending Act (TILA) of 1968,
requires additional disclosures to consumers for high cost refinance and other non-
purchase loans secured by their principal residences.⁴ The Real Estate Settlement
Procedures Act (RESPA) of 1974 is designed to protect mortgage borrowers from
paying excessive fees related to real estate transactions. RESPA requires

¹ For more detailed information on subprime lending, see CRS Report RL33930 Subprime
Mortgages: Primer on Current Lending and Foreclosure Issues, by Edward Vincent
Murphy.
² See Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, “Higher-Priced Home
Lending and the 2006 HMDA Data,” Federal Reserve Bulletin, September 2006.
³ P.L. 94-200, 12 U.S.C. Sections 2801-2809.
⁴ TILA is contained in Title I of the Consumer Credit Protection Act, P.L. 90-301, 81 Stat.
146, as amended by 15 U.S.C. Section 1601 et seq. TILA requires lenders to disclose the
cost of credit and repayment terms of mortgage loans before borrowers enter into any
transactions. The Federal Reserve Board implements TILA through Regulation Z.

standardized disclosures about the settlement or closing costs of residential
mortgages.
This report briefly describes the role of HMDA reporting for monitoring higher-
priced lending activities, discusses policy issues, and summarizes recent regulatory
decisions made by the Federal Reserve Board, the agency that implements these
statutes.⁵ This report also discusses how HOEPA and federally insured mortgage
loans may be affected by recent regulatory changes.
Background on HMDA Reporting
HMDA was enacted in 1975 to assist government regulators and the private⁶
sector with the monitoring of anti-discriminatory practices. HMDA is implemented
by the Federal Reserve Board via Regulation C (12 CFR Part 203), and the public
loan data set is available at the Federal Financial Institutions Examination Council’s
website.⁷ HMDA data is used to assist with the supervision and enforcement of fair⁸
lending compliance. The Office of the Comptroller of the Currency (OCC), for
example, is a federal agency that uses the HMDA data to assist with its fair lending
and Community Reinvestment Act (CRA) examinations of nationally chartered
banks.⁹
Reporting Issues Prior to 2008
Redlining and Frequency of Rejection. When HMDA was enacted, there
was concern that less affluent and minority neighborhoods did not enjoy the same
access to financial services as do other neighborhoods. Financial institutions
allegedly accepted deposits but did not make mortgage loans in certain

⁵ The Real Estate Settlement Procedures Act (RESPA), which was enacted in 1974 under
P.L. 93-533, 88 Stat. 1724, 12 U.S.C. Sections 2601-2617, is another piece of legislation
designed to protect mortgage borrowers from paying excessive fees related to real estate
transactions. RESPA requires standardized disclosures about the settlement or closing costs
of residential mortgages. See CRS Report RL34442, HUD Proposes Administrative
Modifications to the Real Estate Settlement and Procedures Act, Darryl E. Getter.
⁶ P.L. 94-200, 12 U.S.C. Sections 2801-2809.
⁷ See [http://www.ffiec.gov/hmda/].
⁸ Reference to fair lending laws and regulations typically encompasses enforcement of the
Fair Housing Act, which is Title VIII, Section 800 of the Civil Rights Act of 1968 (P.L. 90-
284, 82 Stat. 73, 81-89). For more information on fair lending examination procedures as
well as definitions of discrimination types, see [http://www.occ.treas.gov/handbook/
fairlep.pdf].
⁹ See [http://www.occ.treas.gov/handbook/hmda.pdf]. The Community Reinvestment Act
of 1977 is Title VII of P.L. 95-128, 12 U.S.C. 2901. Regulated financial institutions are
required by law to demonstrate that their deposit facilities serve the convenience and needs
of the communities where they are chartered to do business. See [http://www.bos.frb.org/
commdev/commaff/cra.pdf] and CRS Report RL34049, Community Reinvestment Act:
Regulation and Legislation, by Walter W. Eubanks.

neighborhoods, and these lending practices were viewed as contributing to further
neighborhood deterioration. HMDA required institutions covered under the law to
report home mortgage originations by geographic area, financial institution type,
borrower race, sex, income, and whether the loans were for home purchase or
refinance.¹⁰ This information would show geographical patterns of mortgage
originations and help regulators determine where further investigation of redlining,
or geographical discrimination, was necessary.
In 1989, Congress expanded HMDA to include the race, sex, and borrower
income of those applicants that were rejected as well as those who were approved.¹¹
This change allowed regulators to monitor the frequency that applicants from certain
groups were denied mortgage loans relative to other groups.¹² The HMDA data could
then be used to track any differences in denial rates by income, race, and gender.
Risk-Based Pricing. Beginning in the 1990s, credit became increasingly
available for less creditworthy borrowers. Instead of turning down loan requests for
borrowers of lower credit quality, lenders began charging these borrowers higher
interest rates to compensate for the additional risk. As a result, regulators monitoring
discrimination began to show greater concern about the mortgage loan rates charged
to different groups of borrowers.
Congress expanded HMDA in 2002 to include rate-spread information. At the
time, the rate-spread was defined as the difference between the annual percentage rate
(APR), which is the annual total cost of a loan, and the rate on U.S. Treasury
securities of comparable maturity. The flat mortgage interest rate was not chosen
because, by definition, it contains only the cost of the principal loan amount
expressed as a percentage. The APR, however, includes the cost of the principal loan
amount, insurance, and other fees — all expressed as a percentage. The law¹³
requiring rate-spread information was implemented in 2004.
Reporting Requirements and Coverage. All home-secured mortgage
loans do not get reported under HMDA, for at least three reasons. First, covered
institutions, or those subject to HMDA reporting requirements, include only those
banks, savings and loans, credit unions, and mortgage and consumer finance
companies that meet thresholds regarding asset size or percentage of business related
to housing-lending activity. Lenders that do not have offices in metropolitan
statistical areas are also not required to report HMDA data. Second, Regulation C
requires lenders to report only loans that meet certain rate-spread thresholds. The
reporting thresholds for first mortgage loans had been those with a spread of 3
percentage points; for the second mortgage loans, the reporting threshold was 5
percentage points. Loans not meeting these rate-spread thresholds would not be
reported. Third, home equity loans taken out for purposes other than home
improvements or other home related purposes are not reported under HMDA. Given

¹⁰ See [http://www.fdic.gov/news/news/press/2005/pr3005a.html].
¹¹ P.L. 101-73, 103 Stat 183. Sections 1211(d) and 1212.
¹² See [http://www.federalreserve.gov/boarddocs/speeches/2005/20050603/default.htm].
¹³ P.L. 107-155, 116 Stat 81.

that only loans meeting statutory requirements are reported, HMDA currently covers
approximately 80% of the national mortgage market.¹⁴
Difficulties Identifying High-Priced Lending Abuses
The HMDA data, like all databases, has its caveats. When using the HMDA
data to identify high-priced lending activity, understanding data limitations is
important to correctly interpret the empirical findings. Key issues are presented
below.
Lack of Credit History Information. The HMDA data has been criticized
for not including more variables that could be used to either verify or rule out
discrimination. An example of a relevant variable is borrower credit history
information. Some borrowers pay more for their loans relative to others because they
exhibit higher levels of credit risk. Having credit history information would be
necessary to determine if observed pricing differentials reflect differences in financial
risk or discrimination. Other useful variables include borrower characteristics, such
as total assets and debts, and loan characteristics, such as the loan-to-value ratio.
Given that HMDA data do not include all relevant information that bears on lender
risk, the basis for individual lending decisions is portrayed incompletely.
Lenders are not required to report every variable used to evaluate applicants
because the HMDA data is released to the public, which could compromise the
privacy of individuals holding reported loans. It is possible that public users of
HMDA data would be able to match collected information with local records and
determine the identity of individuals. Because federal regulator agencies can obtain
loan data from financial institutions they wish to examine more closely, the reporting
of all borrower information to HMDA is not necessary for those agencies that enforce
fair lending and fair housing laws.
Federal agencies also follow Interagency Fair Lending Examination Procedures,
provided by the Federal Financial Institutions Examination Council (FFIEC), to
evaluate unlawful discrimination in the prime market.¹⁵ These procedures include
review of (1) sample bank loan files; (2) loan prices relative to compensation of
brokers; (3) whether the institutions use pricing models that are empirically based¹⁶
and statistically sound; and (4) whether the disparities are substantial. Hence, even
if more variables were collected, HMDA data are intended for use in targeting

¹⁴ See [http://www.federalreserve.gov/BoardDocs/Speeches/2005/20050331/default.htm]
and [http://www.frbatlanta.org/invoke.cfm?objectid=37B810A9-5056-9F12-12E8EB312
FB291A7&me thod=display_body].
¹⁵ See [http://www.dallasfed.org/ca/pubs/fair.html] and [http://www.ffiec.gov/PDF/
fairlend.pdf].
¹⁶ The Department of Justice, which investigates fair lending cases, establishes a pattern and
practice of discrimination before it charges lenders with violating federal discrimination
laws. See [http://www.usdoj.gov/crt/housing/housing_pattern.htm].

institutions for closer examination but not as the sole basis for enforcing anti-
discrimination laws in individual cases.¹⁷
Reporting Problems with the APR. With greater usage of complex non-
traditional mortgage loan products, the APR may become increasingly difficult
indicator to interpret.¹⁸ The APR tells nothing about balloon payments, prepayment¹⁹
options, or the length of term that an adjustable interest rate is locked. In addition,
closing costs vary by state, which means local differences will always persist. Hence,
the APR measure may provide little information about relative pricing, because the
underlying loan products and terms vary substantially.
Movements in Interest Rates. Changes in short-term relative to long-term
rates, also known as yield curve rotations, may affect loan reporting to HMDA.
Given that mortgage loans are often priced on rates that better reflect the expected
life-span of the loan (as opposed to rates that match the entire mortgage term), the
HMDA data can reflect a duration-matching problem rather than a problem of
excessive higher-priced lending.²⁰ For example, borrowers often sell their homes or
refinance into a new mortgage before their existing mortgage expires. Regulation C,
however, had required the rate-spread calculation for 30-year (fixed or adjustable
rate) mortgage loans to use the 30-year Treasury yield as the benchmark rate.
Suppose Treasury market interest rates change so that shorter-term rates rise relative
to longer-term rates. The rate-spreads calculations, which may have even been
negative under a steeper yield curve, will increase and may become positive,
potentially resulting in more loans meeting the HMDA thresholds. Consequently,
such timing or duration mismatches captured by the rate-spread calculations, which
increase when the differences in duration between APR and benchmark rates are
large, could result in more 30-year fixed rate mortgages reported as HMDA rate-
spread loans.
Interest rate changes may also affect the reporting of higher-priced lending in
particular if the proportion of adjustable-rate mortgages (ARMs) relative to fixed-rate
mortgages increases. A flattening of the yield curve is likely to cause the rate-spreads
on both fixed rate mortgages and ARMs to be similar in size. As a result, ARMs
would have higher rate spreads relative to those computed under steeper yield curves,

¹⁷ See [http://www.federalreserve.gov/newsevents/press/bcreg/20070412a.htm].
¹⁸ For more information on non-traditional mortgage products, see CRS Report RL33775,
Alternative Mortgages: Risks to Consumers and Lenders in the Current Housing Cycle, by
Edward Vincent Murphy.
¹⁹ Regulation Z requires lenders to assume the interest rate situation at the time of
origination will continue for the term of the loan when calculating the APR for adjustable-
rate loans.
²⁰ If investors (lenders) are promised returns associated with longer-term loans but receive
returns associated with shorter-term loans, they may be unwilling to make future loans,
especially if yields consistently fail to meet expectations. Hence, mortgage originators price
mortgages using rates that closely match the expected duration or mortgage life. Lenders
may account for prepayment or early termination risk by pricing mortgages using Treasury
rates equal to or less than 10 years.

and there would be an increase in the number of ARMS reported as high-priced
loans.²¹
Recent Modifications to Regulation C
To address some concerns described above, the Federal Reserve has changed²²
the benchmark rate used to calculate the rate-spread for reporting HMDA loans.
The Federal Reserve proposes use of the average mortgage rates found in the Primary
Mortgage Market Survey (PMMS) conducted by Freddie Mac as the benchmark rates
for rate-spread calculations.²³ The reporting thresholds for first mortgage loans will
now be those with a spread equal to or greater than 1.5 percentage points; for the
second mortgage loans, the reporting threshold will be equal to or greater than 3.5
percentage points. The use of an average prime mortgage rate, which the PMMS
reports on a weekly basis, is likely to follow the rates of prime mortgage rates more
closely than Treasury rates. Whenever the yield curve changes, a rate-spread
computed as the difference between a mortgage rate and an average prime mortgage
rate is likely to show less volatility than one computed as the difference between a
mortgage rate and a Treasury rate. As a result of this regulatory change, it may
become easier to attribute an observable increase in rate-spread reported loans to
actual changes in lending practices, which ultimately is the objective for HMDA
reporting.
Implications for HOEPA Loans
The 1994 Home Ownership Equity Protection Act (HOEPA) is an amendment
to the Truth-In-Lending Act (TILA) of 1968. TILA requires lenders to disclose the
cost of credit and repayment terms of all consumer loans before borrowers enter into
any transactions.²⁴ HOEPA imposes additional disclosure requirements for
consumers obtaining high cost refinance and other non-purchase (closed-ended
second) loans secured by their principal residences. A loan is considered to be a
HOEPA loan if either the APR exceeds the rate of a comparable Treasury security
by more than 8 percentage points on a first mortgage, 10 percentage points on a
second mortgage, or if the consumer pays total points and fees exceeding the larger
of $561 or 8% of the total loan amount.²⁵ Should a loan satisfy any of these criteria,

²¹ For a formal analysis concerning the extent to which the increase in HMDA reportable
rate-spread loans between 2004-2006 can be attributed to the flattening of the yield curve,
see Chau Do and Irina Paley, “Explaining the Growth of Higher-Priced Loans in HMDA:
A Decomposition Approach,” Journal of Real Estate Research, Vol. 29, No. 4 (2007) pp.

441- 447.

²² See [http://www.federalreserve.gov/newsevents/press/bcreg/20081020b.htm.pdf].
²³ See [http://www.freddiemac.com/].
²⁴ TILA is contained in Title I of the Consumer Credit Protection Act, P.L. 90-301, 81 Stat.
146, as amended by 15 U.S.C. Section 1601 et seq. The Federal Reserve Board implements
TILA through Regulation Z.
²⁵ The $561 figure is for 2008. The Federal Reserve Board adjusts this number annually
(continued...)

the borrower must be provided with disclosures three days before the loan is closed
in addition to the three-day right of rescission generally required by TILA, which
means a total of six days to decide whether or not to enter into the transaction. In

2002, revisions to Regulation C required lenders to report HOEPA loans in HMDA,

and they must also identify such loans as being subject to HOEPA requirements.²⁶
HOEPA, however, is implemented via Regulation Z (12 CFR Part 226, sections 31,

32, and 34).

HOEPA has been extended to cover more loans.²⁷ Since 2002, coverage has
been extended by lowering the price trigger from 10 to the current 8 percentage
points above a comparable Treasury security. The Federal Reserve Board has also
amended Regulation Z to apply HOEPA rules to all mortgage lenders (and not just
those supervised and examined by the Federal Reserve).²⁸ The amended rule added
four key protections. The first protection prohibits lenders from making loans based
upon the home value without regard for the borrower’s ability to repay the loan from
income and assets. Second, verification of income and assets will be required for
determining repayment ability. Third, higher-cost loans may not have prepayment
penalties that last for more than two years, and prepayment penalties are not allowed
for loans in which the monthly payment can change during the initial four years.
Finally, escrow accounts for property taxes and homeowners’ insurance must be
established for all first lien mortgages. Additional protections covered in the rule are
described in the Federal Reserve announcement.²⁹
HOEPA loans may have been considered a subset of the larger set of HMDA
loans when both rate spread calculations relied upon comparable U.S. Treasury
securities for the benchmark rates. Now that the Federal Reserve has modified the
benchmark rates used to compute HMDA rate spreads, HMDA and HOEPA rate
spreads will be calculated under separate methods. The benchmark rate for
computing HOEPA loans is defined by federal statute, and modification of the
benchmark rate for HOEPA loans would be left for Congress to decide. Loans
meeting the existing HOEPA thresholds may still simultaneously meet the newly
adopted HMDA thresholds. HOEPA rate spreads, however, will now be more
sensitive to Treasury yield curve movements than HMDA rate spreads.

²⁵ (...continued)
based upon changes to the Consumer Price Index. See [http://www.occ.treas.gov/ftp/
bulletin/2007-32a.pdf] and [http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea19.shtm].
The figure for 2009 will be $589. See [http://www.federalreserve.gov/newsevents/press/
bcreg/ 20080805a.htm] .
²⁶ See [http://www.federalreserve.gov/boarddocs/press/bcreg/2002/20020621/default.htm]
and [http://www.bankersonline.com/lending/jh_regc.html].
²⁷ See [http://www.federalreserve.gov/boarddocs/press/boardacts/2001/200112142/
attachment.pdf].
²⁸ See [http://www.federalreserve.gov/newsevents/press/bcreg/20080714a.htm].
²⁹ For more detailed information about HOEPA, see CRS Report RL34259, A Predatory
Lending Primer: The Home Ownership and Equity Protection Act (HOEPA), by David H.
Carpenter.

Implications for FHA-Insured Loans
Mortgage insurance is usually required for borrowers lacking either a
downpayment or home equity of at least 20% of the property value. Prime (or
conventional) as well as subprime homebuyers may purchase private mortgage
insurance. The Federal Housing Administration (FHA) is a federally operated
mortgage insurance program that primarily serves first-time and less creditworthy
borrowers.³⁰ Should the borrower default on a FHA-insured mortgage loan
obligation, the lender will be reimbursed for the loss. The FHA is a self-financing
program under which premiums must be sufficient to cover its costs and expected
losses. FHA fees are collected via an upfront premium charge when the loan is
originated and an annual premium charge thereafter.
After passage of the Housing and Economic Act of 2008, FHA received the
statutory authority to charge up to 3% in its upfront premium and 0.55% annually.³¹
Consequently, the bulk of the total mortgage insurance premium must be collected
upfront, and FHA has little flexibility to collect a larger portion of the insurance fees
via the annual premium mechanism. FHA-insured mortgage loans, therefore, run the
risk of hitting the 1.5% threshold of reportable HMDA rate-spread loans. The FHA
upfront premium charges would likely be calculated in the APR of the mortgage loan,
which would cause the rate-spread to be higher.
The flexibility to shift how the FHA insurance fees are collected or, more
specifically, to make greater use of the annual premium mechanism, arguably has at
least three advantages. First, annual premium collections would reduce the risk of
FHA loans being incorrectly identified as higher-priced loans under HMDA reporting
requirements. Second, computing refunds or premium reductions via the annual
premium may arguably be easier should FHA borrowers become eligible for
rebates.³² Third, under certain circumstances, an annual premium mechanism may
also reduce financial burdens on FHA borrowers. For example, borrowers planning
to reside in their homes for a relatively short period of time would not incur
additional interest costs due to financing large insurance premiums into their
mortgage loans.

³⁰ For an introduction to the FHA program, please see CRS Report RS20530, FHA Loan
Insurance Program: An Overview, by Bruce E. Foote and Meredith Peterson.
³¹ P.L. 110-289, 122 Stat. 2654. For the current FHA premium pricing structure, see
[http://www.hud.gov/offices/adm/ hudclips /letters/mortgagee/files/0822ml.doc].
³² See letter that discusses FHA having to resume payment of distributed shares to customers
when a surplus of reserves had accumulated in the Money Market Insurance Fund at
[ h t t p : / / www.ga o.gov/ a r c hi ve / 2000/ r c 00280r .pdf ] .