CUNA Comment Letter

Regulation C Revisions

April 12, 2002

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-1120, 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 will require lenders to report the spread between the annual percentage rate (APR) of the loan and the rate on comparable Treasury securities if the spread exceeds three percentage points for first lien loans and five percentage points for subordinate lien loans. These revisions will also require the reporting of the lien status for applications and originated loans and will require lenders to ask telephone loan applicants for information on their race, ethnicity, and gender.

CUNA represents more than 90 percent of our nation’s 10,500 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.

Credit unions strongly oppose the practice of predatory lending and have been adopting ethical standards that can serve as a model for the rest of the financial services industry. These standards are outlined 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.

We understand that the goal of the proposed rule is to combat the growing problem of predatory lending. We applaud this goal. However, we believe that enforcement of the current HMDA rules, the recent revisions to the Home Ownership and Equity Protection Act provisions of Regulation Z (HOEPA), and other recent regulatory initiatives have been sufficient in response to requests from Congress and consumers for more regulatory action to respond to these egregious lending practices.

Credit unions generally supported the recent changes to the HOEPA provisions of Regulation Z because they are intended to combat abusive predatory lending practices and are directed primarily at high-priced mortgage loans. The advantage to addressing predatory lending issues through HOEPA is that this is a targeted approach. This contrasts with the proposed changes to HMDA, that are also intended to address predatory lending practices but apply to all lenders, including credit unions, which have not been involved in these abusive practices. Credit unions, which have been at the forefront of adopting voluntary ethical lending guidelines, should not be further burdened by the requirements under the proposed rule, which the Federal Reserve Board (Board) has not demonstrated would provide any additional meaningful information to address this problem.

Summary of CUNA’s Position

Reporting the Spread between the Loan APR and Comparable Treasury Securities

On February 7, 2002, the Board issued this proposed rule, as well a final rule that also included a number of other changes to the HMDA reporting requirements. Among other changes, the final rule will require lenders to report the spread between the APR of the loan and the rate on comparable Treasury securities if the APR exceeds the Treasury rate by a specific amount. The Board has now proposed a spread of three percentage points for first lien loans and five percentage points for subordinate lien loans. The proposed rule requests comments on whether this should be the appropriate spread or whether another spread would be more appropriate.

Credit unions are very concerned about this new requirement, which will impose upon lenders the burden of both calculating and reporting the APR spread information. This will add to the considerable increase in reporting burden that has recently been imposed on financial institutions. This not only includes the new HMDA requirements outlined in the Board’s recent final rule, but also includes additional burdens, such as the new rules that will be issued this year as a result of the enactment of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot) Act of 2001.

The recent final rule modifies the original requirement that was in the proposed rule that was issued on December 15, 2000. That proposed rule would have required the reporting of the loan APR itself, as opposed to the spread over comparable Treasury securities. In our comment letter to the Board in response to that proposal, dated March 9, 2001, CUNA outlined its concerns with regard to the requirement to report the loan APR.

In the final rule that was issued on February 7, 2002, the Board intended to address these concerns by changing the requirement from reporting the loan APR to reporting the APR spread when it exceeds a certain threshold. However, we are just as concerned about this new requirement, which raises as many concerns, if not more concerns than a requirement to report the loan APR.

Although the Board believes that the reporting of the APR or spread information 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 this information absent such a definition.

Even with a standard definition of a “subprime loan,-- we question whether a requirement to report the APR spread will be adequate to help the Board identify predatory lending practices. The spread information may not identify other factors that may have influenced this end result. For example, the spread may reflect an APR that may be higher simply because the borrower had a low credit score or reflect other legitimate risk factors and costs of granting the loan. This would be a legitimate subprime loan without any predatory characteristics but this could not be determined from the APR spread information itself. For these reasons, we have grave reservations as to whether the APR spread information will provide meaningful information that will further the purpose of HMDA.

Furthermore, some lenders who make legitimate subprime loans may choose to terminate such lending in order to avoid this burdensome reporting requirement. This may actually impair a borrower’s ability to obtain such a loan, a result that would be inconsistent with the goal of ending predatory lending.

The reporting of the spread information may actually be more burdensome than reporting the APR itself. Reporting the spread information will require lenders to research Treasury rates and make calculations to determine the spread, which would not be required when reporting the loan APR. This will not only be costly and time consuming, but also there may be a risk that the wrong comparison rate would be used. If the Board retains the reporting requirement, we request that lenders have the option of reporting the loan APR instead of the spread, as outlined in the December 15, 2000 proposed rule.

There are other concerns that should also be addressed before the Board finalizes the formula for calculating the APR spread. The proposed formula would not be appropriate because it fails to recognize lending scenarios in which borrowers elect not to lock in interest rates at the time of application. Instead, these borrowers choose to “float-- their interest rate, sometimes until the day of closing. In a period of rising mortgage loan rates, a borrower who chooses to float his or her interest rate could receive an APR that is substantially higher than the yield listed for a comparable Treasury security on the 15th day of the month before the application was submitted. As a result, the APR spread information on these loans with “floated-- interest rates would be misleading.

While we do not generally support the spread reporting, we recommend that if it is adopted, the Board should permit lenders to calculate the APR spread using the Treasury note yield available on the 15th day of the month that precedes the month the interest rate was locked, as opposed to the month that the application was submitted. This change would reflect more accurate loan pricing data.

We are also concerned that the proposal will require lenders to use an inappropriate benchmark for calculating the APR spread on first lien 30-year mortgage loans. For purposes of calculating the APR spread, the official staff commentary to the recent final rule is intended to clarify how a lender determines which Treasury security has a maturity period that is comparable to a particular loan. The commentary generally requires using the yield on the Treasury security with the maturity date that most closely matches the maturity date of the loan.

We believe this approach does not recognize the current pricing strategies for 30-year mortgage loans. Recently, the United States Treasury discontinued the sale of the 30-year Treasury note. The 10-year Treasury note is now considered by many lenders to be the “comparable-- Treasury security for these 30-year mortgage loans. Because the 10-year Treasury note yield is typically about ten to fifty basis points lower than the historical yields of 30-year Treasury notes, the APR spread will be larger than if a 30-year Treasury note was used.

We believe that the Board’s proposal does not consider this difference between the 10-year and 30-year Treasury note yields. To reflect the realities of the mortgage lending market, the Board should clarify that the 10-year Treasury note yield should be used to determine the APR spread for loans with maturities that exceed ten years. Also, to reflect the lower yields on 10-year notes as compared to the historical yield on 30-year notes, the Board should increase the APR spread for first lien loans from 3 percentage points to 3.5 percentage points.

The Board has requested information as to the number of loans that may exceed the APR spread threshold and would, therefore, be reported under the HMDA requirements outlined in the proposed rule. For credit unions, this number would vary from a few loans up to about one-half of the loans that are made by credit unions that are significantly involved in risk-based lending. Regardless of the number, we believe none of these loans would be predatory. Credit unions are member-owned, not-for-profit cooperatives with a mission to provide financial services at the lowest possible cost. Making predatory loans would be anathema to this long- standing mission.

Requiring Lenders to Ask Telephone Loan Applicants for Information on Race, Ethnicity, and Gender

CUNA strongly opposes the Board’s proposal to require lenders to ask telephone applicants for information about their race, ethnicity, and gender. Although this requirement is already in effect for applications taken by mail and the Internet, we believe that the situation with regard to telephone applications involves different dynamics that would argue against this proposed requirement.

Requesting an applicant to provide information about their race, ethnicity, and gender would likely place both the lender and the applicant in an awkward situation when this is requested by telephone, particularly since the loan process is suppose to avoid decisions based on such factors. This is in contrast to situations in which this information is requested in applications taken by mail and the Internet. In these situations, it is our members’ experience that the applicant is likely to feel less intimidated when the request for this information is in writing, as opposed to being requested during a telephone conversation.

Applicants are uncomfortable and reluctant to provide this information because they are concerned that this may be a factor in the credit decision. Such concerns will be heightened if the loan is ultimately denied. We believe applicants will continue to be suspicious and concerned about how this information will be used even if the lender explains that the government requires that this information be collected.

Requiring lenders to request this information during a telephone application will also delay the application process because it will require additional time to ask these questions, explain the purpose of these questions, and to document the responses. Also, credit unions will incur significant costs to train employees to ask these questions and to explain the reasons for asking them, as well as to monitor the employees to ensure the request is made in a courteous and professional manner. Credit unions state that the costs will be quite high because very careful training and monitoring will be essential so that applicants are not offended by these requests.

Currently, a number of credit union members who submit mail or Internet applications decline to provide the information on race, ethnicity, and gender, despite assurances that the information will not be used in the credit decision. Some applicants may be inclined to provide inaccurate information because they believe this will increase the likelihood that the loan will be approved. There is no reason to believe that this will be any different if this information is requested during a telephone application.

Not only do the costs to collect information on race, ethnicity, and gender outweigh any benefits, but we believe such a requirement subverts the purpose of equal credit protections. Indeed, discrimination may actually be minimized by not collecting this information. If the applicant’s race, ethnicity, and gender were unknown, it would be impossible for a lender to discriminate on one or more of these factors. If this information is requested, the applicant may reasonably feel that there was discriminatory intent or practice during the lending process.

If the Board believes that monitoring of race, ethnicity, and gender is necessary, it would be preferable to collect this information by mail or electronically after the closing of the loan. This would eliminate the need to train staff on how to ask these questions in a discreet and nonoffensive manner. Also, borrowers would have less incentive to provide inaccurate responses if the loan is already approved and should not feel they were discriminated against if the loan is not approved.

Requiring Lenders to Report the Lien Status for Applications and Originated Loans

The reporting of lien status information will be very burdensome and costly in terms of system changes and personnel training because not all current loan applications include this information, such as loans that are not sold to the secondary market. Therefore, we do not support this provision. At the very least, the Board should only require lenders to report the lien status for loans in which the APR spread is reported.

The Board is also proposing to require the reporting of the lien status on home improvement loans. We do not believe that the Board has provided sufficient justification for requiring this information. Furthermore, the final rule excludes the reporting of the APR spread for unsecured home improvement loans and lenders should not, therefore, be required to report the lien status for these types of loans.

For the same reasons, we support the Board’s decision to refrain from requiring lenders to report the lien status on purchased loans. This would also be costly and time consuming. Such loans should have already been reported when they were first made. Reporting the same loan more than once would result in inaccurate information. Also, the Board has already excluded the reporting of the APR spread on purchased loans so it would serve no useful purpose to request the lien status information on these types of loans.

We appreciate the Board’s desire to address predatory lending in a thorough manner. Nonetheless, we do not believe any of these changes will be useful to consumers and will be unnecessarily burdensome for financial institutions. For these reasons, we urge the Board to rethink these changes. However, consistent with credit unions’ long-standing policies and practices to prohibit predatory lending, we would welcome the opportunity to work with the Board and other groups to develop further approaches to eliminate predatory lending that will be meaningful.

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) 638-5777.


Jeffrey Bloch
Assistant General Counsel