0. HMDA Amendments

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What’s New

SUMMARY

The Home Mortgage Disclosure Act (HMDA), as implemented by the Federal Reserve Board's Regulation C, has been revised to provide pricing data on higher-priced mortgage loans reported under Regulation C that are more consistent with prevailing mortgage market pricing over time. These changes will facilitate regulatory compliance by conforming the test for rate spread reporting under Regulation C to the definition of higher-priced mortgage loans under Regulation Z. The changes are effective October 1, 2009. The amendments to Regulation C were finalized after a comprehensive review by the Federal Reserve Board.

Initially, when the Board adopted Regulation C's rate spread reporting requirement, the objective was to cover substantially all of the subprime mortgage market while generally avoiding coverage of prime loans. To do this, Regulation C stipulated that rate spread be calculated using a Treasury yield benchmark. The advantages of using the Treasury yield table as the benchmark were that Treasuries are traded in a highly liquid market, Treasury yield data are published for many different maturities and can easily be calculated for other maturities, and the integrity of published yields is not subject to question. Since the calculation of the rate spread became a requirement of HMDA reporting in 2004, HMDA reporters and others have identified shortcomings of the Treasury yield benchmark. The two major disadvantages to using Treasury yields to set the HMDA rate spread include:

  1. The spread between Treasuries and mortgage rates change in the short term and in the long term making it difficult to determine a truly comparable Treasury security for a given mortgage loan.

  2. The current method of matching a contract term to a "comparable" Treasury security does not account for the fact that very few loans reach their full maturity, and causes significant distortions in the yield curve shape. These distortions can be misleading and might influence the preferences of lenders to offer certain type loan products in certain environments.

In July of 2008, the Board proposed changing the rate spread reporting benchmark. The proposed new benchmark will use a survey-based estimate of market Annual Percentage Rates (APRs) for the lowest-risk prime mortgages, referred to as the "Average Prime Offer Rate," for comparable types of transactions. The new tables “Average Prime Offer Rate-Fixed” and “Average Prime Offer Rate-Adjustable” will be updated weekly to provide more timely information on comparable products. Lenders will now report the spread between the loan’s APR and the Average Prime Offer Rate of a comparable type if the spread is equal to or greater than 1.5 percentage points for a first lien loan (or 3.5 percentage points for a subordinate lien loan).

These changes on how the rate spread is calculated will provide pricing data on higher-priced mortgage loans reported under Regulation C that are more consistent with prevailing mortgage market pricing over time. This will make data reporting more predictable. The changes will also facilitate regulatory compliance by conforming the test for rate spread reporting under Regulation C to the definition of higher-priced mortgage loans under Regulation Z.

REGULATORY CHANGES

As indicated in the above summary, requirements for reporting of rate spread has changed. Beginning October 1, 2009, lenders must report the spread between the Annual Percentage Rate (APR) and a survey-based estimate of APRs currently offered on prime mortgage loans of a comparable type. Lenders may determine the new rate spread utilizing the “Average Prime Offer Rate-Fixed” table for fixed rate loans and the “Average Prime Offer Rate-Adjustable” table for adjustable rate loans.

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