CUNA Comment Letter

Docket No. R-1001, Proposed Revisions to Regulation C (Home Mortgage Disclosure Act)

March 9, 2001

Ms. Jennifer J. Johnson
Board of Governors of the
Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Re: Docket No. R-1001, Proposed Revisions to Regulation C (Home Mortgage Disclosure Act)

Dear Ms. Johnson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the proposed revisions to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA). The proposed revisions, which appeared in the Federal Register on December 15, 2000, will require lenders to report requests for loan preapprovals, home-equity lines of credit, the annual percentage rate (APR) of the loan, whether the loan is subject to the Home Ownership and Equity Protection Act (HOEPA), and whether the loan or application involves a manufactured loan. The revisions will also expand the coverage that applies to nondepository lenders and are also intended to simplify the definitions of a reportable home improvement loan and the term “refinancing.--

CUNA represents more than 90 percent of our nation’s 10,700 state and federal credit unions. This letter reflects the views of our member credit unions and of CUNA's Consumer Protection Subcommittee, chaired by Kris Mecham, CEO of Deseret First Credit Union, Salt Lake City, Utah.

Summary of CUNA’s Position

General Comments

The proposed revisions to Regulation C will require expensive changes to data collection systems and staff retraining. This will burden all lenders but will have a disproportionate impact on small financial institutions, such as credit unions. Also, the financial institutions industry is among the most heavily regulated and while not insurmountable alone, this additional regulatory burden will add to the considerable compliance burdens that financial institutions already face.

President Bush, while in office only for a short period of time, has already emphasized the need to remove regulatory burden and has issued an Executive Order that will subject current regulatory actions to further review. Although independent agencies, such as the Board, are not subject to the Executive Order, they are being asked to comply, and we encourage the Board to do so.

We believe that the proposed revisions to Regulation C are an unfortunate example of the kind of regulatory burden that the Administration had in mind when it issued the recent Executive Order because the rule imposes additional burden, which is not required by the underlying HMDA statute or related to safety and soundness issues.

We understand that the goal of the proposed rule is to combat the problem of predatory lending. We applaud that goal. However, we believe that enforcement of the current Regulation C provisions, the recent proposed rule revising the HOEPA provisions of Regulation Z, and the recent guidelines issued by the federal regulators to increase the supervision of banks and thrifts that hold significant levels of subprime loans will help protect borrowers against predatory lenders, as well as provide the Board with the information it needs in order to learn more about the problem.

Any revisions that are ultimately included in the final rule should not apply to credit unions because they are not the sources of the predatory lending problem. This was confirmed by Federal Reserve Board Governor Edward M. Gramlich in a speech that he delivered last month during CUNA’s Governmental Affairs Conference in Washington, D.C. In that speech, Governor Gramlich singled out credit unions for their work against predatory lending. He made it clear that the Board recognizes “that [predatory lending] is not taking place in credit unions, indeed, the ethical standards that [credit unions] have adopted are a model for the rest of the financial services market.--

The ethical standards Governor Gramlich referred to are contained in the CUNA Member Credit Union Mortgage Lending Standards and Ethical Guidelines. In this document, CUNA’s Board of Directors calls on every CUNA member credit union to adopt a series of home lending standards and ethical guidelines that will help emphasize credit unions’ concern for consumers and further distinguish credit unions as institutions that care more about people than money.

Financial Institutions and Nondepository Lenders Should be Subject to the Same HMDA Reporting Thresholds

Under the proposed rule, HMDA reporting requirements will not apply to nondepository lenders that originate less than $50 million in home purchase loans, unless they otherwise meet the current thresholds, such as originating home mortgages in an amount exceeding ten percent of the lender’s total activity. This is in contrast to the threshold for financial institutions in which a small institution is subject to the HMDA reporting requirements even if it has as little as $31 million in assets and originates just one mortgage loan.

If the goal of the proposed rule is to identify predatory lending practices, then the reporting threshold for nondepository lenders should be the same as for other lenders. Having a higher threshold for nondepository lenders than for credit unions makes little sense since credit unions are not the sources of the predatory lending problem and some nondepository lenders have been associated with the problem.

CUNA appreciates that the proposed threshold is intended to cover additional nondepository lenders that are not currently subject to the HMDA requirements. However, we do not believe this is sufficient in helping the Board achieve the goal of receiving more information on predatory lending. There should be much greater emphasis on these nondepository lenders and much less emphasis on institutions, such as credit unions, that are not involved in predatory lending.

In contrast to credit unions and other financial institutions, nondepository lenders are not regulated to the same extent by a federal agency or subject to government examinations. Even with the proposed change in the threshold for nondepository lenders, government regulated financial institutions will still bear a greater reporting burden under HMDA and will, therefore, be the center of the Board’s attention in its efforts to obtain more information about predatory lending. We believe this is not the correct approach. The Board should focus even more attention on these nondepository lenders that are not currently subject to federal regulations or examinations.

CUNA supports a threshold for all lenders based on the volume of mortgages, as opposed to the current threshold for financial institutions, which is based on asset size. An asset test has no bearing on whether an institution’s involvement in mortgage lending is significant enough to warrant attention under HMDA. For example, one of our member credit unions is a financial institution with $33 million in assets, but only originates $3 million in mortgage loans. This credit union is currently subject to the HMDA reporting requirements even though its mortgage lending is only a fraction of the $50 million mortgage loan threshold that would apply to nondepository lenders.

This inequitable result could be resolved by applying the $50 million threshold to all lenders. We realize that this change in the threshold for financial institutions would require Congressional action. We also recognize that Congress has in the past tried to rectify the inequities that are imposed on small financial institutions. This includes the 1989 amendment that for the first time covered nondepository lenders within the scope of HMDA. This was later followed by the provisions of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 that raised the asset threshold for financial institutions from $10 million to $28 million, with annual increases based on inflation, resulting in the current threshold of $31 million for 2001.

Although these changes were helpful in reducing the burden on credit unions and other small financial institutions, we believe that it is time to complete this process by applying the same thresholds for both financial institutions and nondepository lenders. A $50 million mortgage lending threshold will provide the Board with the necessary information it needs to fulfill the underlying goal of HMDA, which is to address redlining and provide information regarding predatory lending. At the same time, credit unions, which are not the source of the predatory lending problem, would receive much needed regulatory relief.

Also, the Board is currently receiving and reviewing a significant amount of HMDA information from credit unions and other small institutions and we question the usefulness to the Board of some of this information. A reduction in the burden for these lenders will reduce the information submitted to the Board, which should help focus the Board’s attention on the information that would be the most useful.

CUNA would welcome the opportunity to assist the Board in an effort to secure the necessary statutory changes. We can provide information on mortgage lending activity by credit unions in order to help the Board analyze and compare the thresholds between small financial institutions and nondepository lenders.

If the threshold for financial institutions is not changed, CUNA urges the Board to apply the $31 million asset threshold to nondepository lenders. Again, for the reasons stated above, nondepository lenders should receive the same, if not more, scrutiny from the Board with regard to HMDA reporting. We understand that the current thresholds were designed to prevent burdensome reporting requirements for lenders that were only peripherally involved in mortgage lending. However, some of the fastest growing subprime lenders are able to avoid HMDA reporting requirements simply by being active in other lines of business, such as consumer lending.

HMDA Should Not Require Lenders to Report Data on Loan Preapprovals

CUNA does not support the Board’s proposal to require lenders to report data on loan preapprovals. Such a requirement would be impractical because preapprovals are typically generated without a specific property in mind and HMDA requirements are primarily geared to property-specific loans. Two of the fundamental HMDA compliance principles, serving the housing needs of the lender’s communities and identifying discriminatory lending practices, are effectively compromised without information about physical property characteristics.

Additional data not related to a specific property to evaluate potentially discriminatory lending practices would be speculative, confusing, and inconclusive. Without justification as to the value of such information, the Board should not require lenders to incur costs to modify systems, train personnel, and perform additional administrative functions in order to report preapproval data.

We appreciate that the proposal regarding loan preapprovals is intended to cover only a limited number of highly-structured preapproval programs, while excluding those informal prequalification programs in which the lender makes no binding, written commitment. However, credit unions still do not agree there is the need for the reporting of loan preapproval information. If such a reporting requirement is ultimately included in the final rule, CUNA urges the Board to include the rationale for requiring such information and to further define and specify exactly which “highly-structured preapproval programs-- will be subject to this new reporting requirement.

The Requirement to Report the Loan APR, Manufactured Homes, Home Equity Lines of Credit, and Whether a Loan is Subject to HOEPA

CUNA understands the Board’s justification for requiring lenders to report home-equity lines of credit and whether the loan would be subject to HOEPA. However, the reporting of this information will still impose a burden on credit unions and small financial institutions. Again, the burden of these additional reporting requirements could be alleviated by changing the threshold for financial institutions so that it is the same as the proposed threshold for nondepository lenders.

As for requiring lenders to disclose the loan APR, we do not believe the Board has adequately justified such a requirement. Although the Board believes that the reporting of APRs will be effective in helping to identify subprime loans, we note that the Board has not at this time adopted a generally accepted definition of a subprime loan. We therefore question the usefulness of the APR information absent such a definition. Until then, the Board should not require lenders to bear the costs associated with providing this information.

Even with a standard definition of a “subprime loan,-- we question whether a requirement to report APR will be adequate to help the Board identify predatory lending practices. The APR only represents the end result of the underwriting process and may not identify factors that may have influenced this end result. For example, the APRs for certain borrowers may be higher simply because the credit scores were lower. This could be a legitimate subprime loan without any predatory characteristics but this could not be determined from the APR itself.

If lenders are required to report the loan APR, the Board should modify the Loan Application Register (LAR) to allow lenders to enter three digits after the decimal. Although it is common for lenders to quote APR’s to the third decimal place, the proposed LAR only provides two spaces for two decimals.

We also do not fully understand the need to report whether a loan involves a manufactured home, as opposed to a “traditional-- home. We would appreciate further justification if such a requirement is included in the final rule.

Reporting of Home Improvement Loans

The proposed rule will require the reporting of home improvement loans if any part of the proceeds is to be used for home improvement. This differs from the current requirement that only requires reporting if the loan is classified as a home improvement loan.

We understand that the Board believes this will result in more consistent and useful information. However, CUNA urges the Board to include language that permits lenders to rely on the borrower’s statement regarding the use of the loan proceeds. Lenders should be able to rely on the borrower’s representations and should not be required to undertake any further investigation regarding the use of the loan proceeds.

If Required, the Reporting of Home-Equity Lines of Credit Should Include the Entire Amount of the Credit Line

Under the current HMDA rules, the reporting of home-equity lines of credit is optional. The proposed HMDA rule will require lenders to report this information and will require the reporting of the full amount of the credit line, rather than the amount that the borrower intends to use. If such reporting is required, CUNA supports the approach of reporting the entire amount of the credit line. Such reporting will be less burdensome than requiring lenders to make the determination regarding the amount the borrower intends to use, which would be difficult to determine and subject to change.

The Need for Reporting Loan Refinancings Should be Analyzed Further

Regulation C requires the reporting of the refinancing of home purchase and home improvement loans. Refinancing is generally defined as a new loan that replaces an existing loan by the same borrower. Currently, Regulation C outlines four scenarios that lenders may select when determining which refinancings to report.

In an attempt to include more accurate and consistent data, the proposed rule will eliminate these scenarios and define a “refinancing-- as a transaction that satisfies the following two-pronged test:

CUNA appreciates the Board’s efforts to achieve more accurate and consistent data in this area. However, we urge the Board to further examine the need for collecting this information and the burden that this imposes on lenders, regardless of whether lenders will be required to follow the current or proposed method for reporting such information.

Loan refinancings are very difficult for credit unions to report and monitor. The Board should carefully review exactly what it needs with regard to such reporting and the reasons that it needs it. One of the primary purposes of HMDA is to provide the Board with information to determine if financial institutions are serving the housing needs of their communities. However, refinancings are transactions conducted after the borrower is already in the home, and the funds are often used by the borrower for consumer transactions. These consumer-type transactions are not related to the primary purpose of serving housing needs.

In the separate proposed rule regarding changes to the HOEPA rules contained in Regulation Z, the Truth in Lending Act, the Board offers proposals regarding loan refinancings that are specifically targeted to address predatory lending practices. Although CUNA offers suggestions for improvement in these proposals, which are addressed in a separate comment letter, we support the targeted approach, as opposed to requiring such reporting within the context of HMDA and Regulation C.

If the requirement to report refinancings is included in the final rule, we urge the Board to consider whether it is necessary to require all lenders to report loan refinancings and to consider targeting this requirement to lenders that are refinancing loans for inappropriate purposes. If the two-pronged test is included in the final rule, we urge the Board to narrow the scope of the second “prong-- so that it only refers to the “primary-- dwelling.

The Effective Date of the Proposed HMDA Changes Should Be Delayed

Any changes to Regulation C should not be effective until lenders have at least two years to implement changes to their internal collection and reporting procedures, including software changes, and to provide the necessary staff training. Such changes should also not become effective in the middle of a calendar year. CUNA therefore suggests that the proposed changes should not be effective until January 1st following the two-year period immediately following the issuance of the final rule. For example, if the final rule is issued in September of this year, the changes in the rule should not be effective until January 1, 2004.

CUNA Opposes Certain Changes Regarding the Reporting of Multiple Category Loans

The proposed changes to Regulation C include official staff commentary to address multiple-category loans. Specifically, the commentary will state that if a home improvement loan, refinance, or home equity line of credit can also be categorized as a home purchase loan, it should be reported as a home purchase loan.

The Board did not provide an explanation or evidence to substantiate that such a requirement is necessary or beneficial. CUNA believes that a requirement to reclassify and report multiple category loans would be burdensome and impractical. It will require lenders to monitor the uses or intended uses of loan proceeds to determine whether a loan could also be classified as a home purchase loan. This will result in additional programming, training, and administration costs. Absent evidence of significant benefits, CUNA believes this proposed change to the official staff commentary is unwarranted and would impose significant burdens on financial institutions.

Appendix A of Regulation C currently permits lenders to classify home improvement loans secured by first liens as home purchase loans “at their option,-- depending on how they normally classify such loans. We urge the Board to retain this flexibility for multiple-category loans.

The Proposed Alternate System for Categorizing Loans Would be Burdensome

As an alternative to the current requirements and the proposed rule, the Board has offered an alternative system for categorizing loans. Under this system, the categories would be: 1) home purchase loans (subdivided into first and junior liens); 2) other mortgage loans (also subdivided into first and junior liens; 3) home-equity lines of credit; and 4) unsecured home improvement loans.

The additional cost to implement this alternative system would outweigh any potential benefits. Specifically, this system includes categories for home purchase loans and other mortgage loans that would be subdivided into first and junior liens. Collecting and recording first and junior lien data would be burdensome in terms of system changes and employee training.

The Board has noted that the burden of this alternative system would be mitigated because the categories would be similar to those in the call report. However, each regulatory agency has its own call report format, and the proposed categories do not match the format that is required by the National Credit Union Administration for credit unions. Certain lenders that are covered under HMDA do not even have regulatory agencies that require the submission of call reports.

Also, under this alternative system, it appears that home improvement loans that are secured by items that are not homes, such as deposits or automobiles, may not fit under any of the proposed categories. These loans are not home purchase loans or home-equity lines of credit, are not “other mortgage loans-- because they are not secured by dwellings, and are not unsecured home improvement loans because they are, in fact, secured.

Under the current system, such loans would simply be categorized as “home improvement loans,-- encompassing both secured and unsecured loans. Such loans should continue to be categorized in the same manner under the current system, both because financial institutions are familiar with the current system and because it seems simpler to not segregate secured and unsecured home improvement loans. If the alternate system is adopted, we would appreciate clarification as to how such loans should be categorized.

Additional Clarification Needed Regarding Secondary Market Lenders

CUNA would appreciate more guidance regarding loans that are sold to a secondary market lender. Specifically, credit unions need guidance as to which lender is required to provide the HMDA reporting on such loans.

Thank you for the opportunity to comment on the proposed revisions to Regulation C. If you or other Board staff have questions about our comments, please give Associate General Counsel Mary Dunn or me a call at (202) 682-4200.


Jeffrey Bloch
Assistant General Counsel