New information reported under HMDA and its application in fair lending enforcement

Federal Reserve Bulletin, Summer, 2005 by Robert B. Avery, Glenn B. Canner, Robert E. Cook, Shannon C. Mok, Caitlin G. Coslett, Patricia J. Dykes, Sylvia A. Freeland

In a given year, various factors may influence the proportion of loans that have prices placing them above or below the pricing thresholds. A change in interest rates can influence the volume and types of loans that exceed the pricing thresholds. With generally rising interest rates, for example, refinancing activity will be reduced, and consequently a larger proportion of loans reported above the thresholds will involve home purchases. Moreover, borrowers who refinance during a period of rising interest rates are likely to differ from those who borrow when rates are falling. When rates are rising, borrowers seeking to refinance their outstanding loans are likely to have more-urgent needs for additional funds that can be raised by a cash-out refinancing or are seeking to lower their total monthly payment obligations by lengthening the terms of their outstanding debt.

Changing interest rates also may affect the proportion of adjustable-rate versus fixed-rate loans originated over the course of a year and thus the mix of loans reported with rates above the threshold. To compensate borrowers for bearing the additional interest rate risk associated with adjustable-rate loans, such loans typically have lower initial APRs than do fixed-rate loans with the same term to maturity. If market participants expect interest rates to rise, these expectations tend to be built into the term structure of interest rates (the "yield curve") and to widen the difference between the initial rates on adjustable-rate and fixed-rate loans. This widening can increase the proportion of fixed-rate loans with APRs above the threshold because the APRs for longer-term adjustable-rate loans will not rise as much in such a market as will those for fixed-rate longer-term loans.

HOEPA Status

Long-standing concerns about predatory lending led the Congress to enact the Home Ownership and Equity Protection Act of 1994, the first federal statute to explicitly target such lending practices. HOEPA, which amends the Truth in Lending Act, applies to closed-end home loans (excluding home-purchase loans) bearing an APR or dollar-amount fees above specified thresholds. (17) The act imposes restrictions on certain loan features, including balloon payments and prepayment penalties, and requires improved disclosures for consumers. HOEPA, like most other federal consumer protection statutes, overrides weaker state laws but permits states to enact stricter rules.

The Federal Reserve Board, which has authority to modify some of the requirements of HOEPA (implemented by the Board's Regulation Z), made such a modification in 2001. The 2001 revisions to the regulation lowered the APR trigger for coverage of first-lien loans from 10 percentage points above the comparable-maturity Treasury security to 8 percentage points (the threshold for junior liens was left at 10 percentage points), adjusted the calculation of the dollar-amount trigger for fees to include amounts paid at closing for optional credit insurance products, prohibited or restricted certain practices, and required improved disclosures. (18) Although these amendments addressed some concerns, predatory lending continues to some degree. Since 1999, about thirty states and numerous local governments have enacted laws regarding predatory lending to address certain practices and contract terms. The Congress has also considered amendments to HOEPA to broaden its scope and to preempt state laws, but to date, no final action has been taken.