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Letters to Regulators

Home Mortgage Disclosure

March 31, 2003

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

Re: Docket No. R-1145, Home Mortgage Disclosure

Dear Ms. Johnson:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on the proposed revisions to the official staff commentary for Regulation C, the Home Mortgage Disclosure Act (HMDA). Last year, the Federal Reserve adopted extensive changes to the data required to be collected and reported under Regulation C. To address concerns raised by the ICBA and others about the extensive changes that banks must make, especially changes to data processing systems, the effective date for all but two of the changes2 was deferred until January 1, 2004, a step the ICBA appreciates and welcomes.

Recognizing that loan applications may be received before January 1 but still be pending when the new rule takes effect, the Federal Reserve is proposing a set of transition rules for certain HMDA data. Generally, the transition rules are designed to avoid the burden of "looking back" to collect information that might not be available at loan closing for loans where the information will be reported under the new rule but the loan application was received under the old rule, i.e., prior to January 1.

The ICBA believes it is fully appropriate for the Federal Reserve to offer this guidance. Offering this transition for loans in process when the new requirements take effect should help alleviate burden for banks. Following are more specific comments on particular aspects of the proposed revisions to the commentary. The ICBA also encourages the Federal Reserve to offer additional guidance for the transition, possibly in the form of an informal question-and-answer format, as questions arise when banks begin applying the revisions.

Manufactured Housing. Under the new rule, lenders must report whether a loan involves manufactured housing. For a loan application received before January 1, 2004, the transition rule would not require lenders to make this assessment, but instead allow them to report the loan as secured by a 1- to 4-family dwelling.

The ICBA believes this step is helpful. It will allow bank staff to transition into the new rules and avoid requiring banks to research data that may not be readily available at closing. It will also allow banks additional time to reformat application forms to ensure the necessary data is collected.

Home Improvement Loans. Currently, a home improvement loan is defined as any loan used in whole or in part for home improvement purposes, but only if the lender classifies it as a home improvement loan. Under the revisions, a home improvement loan is any loan secured by a dwelling and used in whole or in part for home improvement purposes, regardless of how the lender classifies the loan.3 The transition would allow a lender to use either definition for applications taken before January 1, 2004.

The ICBA supports this step. Absent this transition provision, banks would have to go back and research all applications that were in process but that close after January 1 to obtain the needed data. This transition rule will alleviate burden, and allow banks additional time to modify checklists and train staff.

Refinancings. Currently, a refinancing is defined as a transaction where the new loan replaces an existing obligation that was a home purchase or home improvement loan, the applicant states that it was a home purchase or home improvement loan, and either the existing obligation was secured by a lien on a dwelling or the new obligation will be secured by a lien on a dwelling. The revisions define a refinancing as any in which both the existing and new obligation are secured by a lien on a dwelling. The transition rule would provide that a lender could use either definition for applications taken before January 1, 2004 that do not close until after that date.

As with the previous two items, the ICBA believes this will be helpful for banks. It will alleviate the need to go back to research files and will allow additional time to adapt to the changed requirements.

Preapprovals. Prior to January 1, lenders do not need to report preapprovals that do not result in a closed loan. After January 1, preapprovals that do not result in an originated loan will be reported under a separate category.4 The transition proposal would allow lenders to omit including applications for preapprovals received before January 1 that do not end in a closed loan.

The ICBA supports this step. Since preapprovals do not need to be tracked prior to January 1, this will avoid confusion and burden.

Applicant Information. A number of the codes for race and ethnicity will change effective January 1, 2004. The transition provides information on how to enter that data on the HMDA-LAR for loan applications received before that date but not closed until after January 1.

The ICBA encourages the Federal Reserve to develop a chart of the different codes that compares the current codes with those in effect after January 1. Such a chart should be easily accessible, such as on the Federal Reserve's Web site, and should be distributed to all banks and thrifts. A regulatory guide for handling different race and ethnicity codes before and after the transition would be very beneficial, and having an easily referenced chart will help reduce potential errors.

Rules Effective January 1 with NO Transition. After assessing the impact of the new HMDA data collection and reporting requirements, the Federal Reserve has determined that certain changes do not require a transition, inasmuch as the information is available at loan closing, regardless of when the application is received. Therefore, collection of this information goes into full effect on January 1: (a) purchaser type (for loans sold); (b) rate spread over comparable Treasury securities for those loans that exceed a certain threshold; (c) whether the loan is subject to HOEPA, and (d) lien status of the loan.

Although the ICBA does not object to the Federal Reserve's decision not to offer transition rules for these items, we suggest the Board be prepared to offer additional guidance for these issues. As with any major change in data collection and reporting, questions may arise once the rule takes effect. Perhaps an informal list of questions-and-answers might be posted on the Federal Reserve's Web site, easily accessible by all banks and thrifts, to help banks through the transition.

Reference to Treasury Yields. Certain information that will have to be reported under the revised Regulation C requires reference to Treasury yields, such as the rate spread for certain loans and whether a loan is subject to HOEPA. To assist banks, the Federal Reserve will begin posting historical information on Treasury yields on its Web site beginning in May 2003.

The ICBA commends the Federal Reserve for posting this information and making it easily accessible. Moreover, having the Federal Reserve provide the information will eliminate guesswork and ensure the proper rate is applied. Since many banks use automated systems, it would also be useful if the Federal Reserve made this information available in a format that could easily be downloaded by banks or their vendors.

To assess rate spreads, lenders will use the rate as of the date the loan interest rate is locked by the borrower. Currently, there is no transition proposed for this part of the rule, even though a lender may not currently be tracking the date an interest late becomes locked by the borrower.5 To offer a transition, the Federal Reserve is considering either allowing lenders to use information from the date of application or the date of closing for making these calculations, since that could be done without requiring the lender to "look back." The ICBA encourages the Federal Reserve to implement a transition rule for these assessments. Ideally, each bank or thrift should be able to choose either the application date or the closing date, whichever is most convenient for that particular institution.6 While the ICBA believes that the choice should be left to each individual institution, if the Federal Reserve decides that all banks should use only one or the other, the ICBA recommends the date of closing be used for comparison purposes.7

Conclusion. The ICBA applauds the Federal Reserve for instituting transition rules that will help banks handle loans in process on the date the new data collection and reporting requirements take effect. Generally, these transition rules will alleviate burden, although we also encourage the Federal Reserve to continue to work with banks and offer additional guidance as the new requirements take effect.

Thank you for the opportunity to comment. If you have any questions or need any additional information, please contact ICBA's regulatory counsel, Rob Rowe, at 202-659-8111 or robert.rowe@icba.org.


C. R. Cloutier

1 ICBA is the primary voice for the nation's community banks, representing 5,000 institutions at more than 17,000 locations nationwide. Community banks are independently owned and operated and are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. ICBA's members hold more than $511 billion in insured deposits, $624 billion in assets and more than $391 billion in loans for consumers, small businesses and farms. They employ nearly 231,000 citizens in the communities they serve.

2 Effective January 1, 2003, lenders must ask telephone applicants for information on gender, race and other personal characteristics and revised census tract data must be used.

3 Note: if a loan is not secured by a dwelling, the lender would still have the option of only reporting those it classifies as home improvement loans on the HMDA-LAR.

4 The information for the HMDA-LAR on a preapproval that results in a closed loan would be reported as an originated loan. The change is designed to capture data on loans that do not close.

5 The date a rate is locked determines which Treasury security yield is used for comparison.

6 As has been done with other regulations, the Federal Reserve could require a bank to select one option and then apply it consistently to all loans, but still allow the bank the option.

7 While it is not always clear what date an application is complete, there is little question about the date a loan closes.

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