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Home Mortgage Disclosure (Regulation C)

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AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Final rule; official interpretations.

SUMMARY:

The Bureau of Consumer Financial Protection is amending Regulation C to implement amendments to the Home Mortgage Disclosure Act made by section 1094 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Consistent with section 1094 of the Dodd-Frank Act, the Bureau is adding several new reporting requirements and clarifying several existing requirements. The Bureau is also modifying the institutional and transactional coverage of Regulation C. The final rule also provides extensive guidance regarding compliance with both the existing and new requirements.

DATES:

This rule is effective on January 1, 2018, except that the amendment to § 1003.2 in amendatory instruction 3 is effective on January 1, 2017; the amendments to § 1003.5 in amendatory instruction 8, the amendments to § 1003.6 in amendatory instruction 10, the amendments to appendix A to part 1003 in amendatory instruction 12, and the amendments to supplement I to part 1003 in amendatory instruction 16 are effective on January 1, 2019; and the amendments to § 1003.5 in amendatory instruction 9 are effective on January 1, 2020. See part VI for more information.

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FOR FURTHER INFORMATION CONTACT:

Jaydee DiGiovanni, David Jacobs, Terry J. Randall, or James Wylie, Counsels; or Elena Grigera Babinecz, Courtney Jean, Joan Kayagil, Thomas J. Kearney, or Laura Stack, Senior Counsels, Office of Regulations, at (202) 435-7700.

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SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

Regulation C implements the Home Mortgage Disclosure Act (HMDA), which was amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). On July 24, 2014, the Bureau issued a proposed rule to amend Regulation C, which was published in the Federal Register on August 29, 2014 (the 2014 HMDA Proposal or the proposal).[1] The Bureau is publishing final amendments to Regulation C modifying the types of institutions and transactions subject to the regulation, the types of data that institutions are required to collect, and the processes for reporting and disclosing the required data.

A. Modifications to Institutional and Transactional Coverage

The Bureau is modifying Regulation C's institutional and transactional coverage to better achieve HMDA's purposes in light of current market conditions and to reduce unnecessary burden on financial institutions. The Bureau is adopting uniform loan-volume thresholds for depository and nondepository institutions. The loan-volume thresholds require an institution that originated at least 25 closed-end mortgage loans or at least 100 open-end lines of credit in each of the two preceding calendar years to report HMDA data, provided that the institution meets all of the other criteria for institutional coverage. The final rule also includes a separate test to ensure that covered institutions that meet only the 25 closed-end mortgage loan threshold are not required to report their open-end lending, and that covered institutions that meet only the 100 open-end line of credit threshold are not required to report their closed-end lending.

In addition, the final rule retains the current institutional coverage criteria for depository institutions, which require reporting by depository institutions that satisfy an asset-size threshold, have a branch or home office in an Metropolitan Statistical Area (MSA) on the preceding December 31, satisfy the current federally related test, and originated at least one first-lien home purchase loan or refinancing secured by a one- to four-unit dwelling in the previous calendar year. For nondepository institutions, the final rule replaces the current loan-volume or -amount test with the loan-volume thresholds discussed above, and removes the current asset-size or loan-volume threshold, but retains the current criterion that the institution have a branch or home office in an MSA on the preceding December 31.

The Bureau also is modifying the types of transactions subject to Regulation C. The final rule adopts a dwelling-secured standard for all loans or lines of credit that are for personal, family, or household purposes. Thus, most consumer-purpose transactions, including closed-end home-equity loans, home-equity lines of credit, and reverse mortgages, are subject to the regulation. Most commercial-purpose transactions (i.e., loans or lines of credit not for personal, family, or household purposes) are subject to the regulation only if they are for the purpose of home purchase, home improvement, or refinancing. The final rule excludes from coverage home improvement loans that are not secured by a dwelling (i.e., home improvement loans that are unsecured or that are secured by some other type of collateral) and all agricultural-purpose loans and lines of credit.

B. Modifications to Reportable Data Requirements

The final rule amends several of Regulation C's currently required data points to clarify the requirements and make the data more useful. To streamline the regulation, the final rule removes appendix A; all of the substantive requirements contained in appendix A have been moved, with some modifications, to the regulation text or commentary. The final rule also adopts several new data points, many of which were added by the Dodd-Frank Act, and some of which were added pursuant to the Bureau's discretionary authority to carry out the purposes of HMDA. The final rule does not adopt some of the new or amended data points set forth in the 2014 HMDA Proposal, such as the proposed requirements to report qualified mortgage status or the initial draw on an open-end line of credit. The data points required to be reported under the final rule can be grouped into four broad categories:

  • Information about applicants, borrowers, and the underwriting process, such as age, credit score, debt-to-income ratio, and automated underwriting system results.
  • Information about the property securing the loan, such as construction method, property value, and additional information about manufactured and multifamily housing.
  • Information about the features of the loan, such as additional pricing information, loan term, interest rate, introductory rate period, non-amortizing features, and the type of loan.
  • Certain unique identifiers, such as a universal loan identifier, property address, loan originator identifier, and a Start Printed Page 66129legal entity identifier for the financial institution.[2]

The final rule also amends the current requirements related to the collection of ethnicity, race, and sex of applicants and borrowers. The final rule requires financial institutions to report whether ethnicity, race, or sex information was collected on the basis of visual observation or surname when an application is taken in person and the applicant does not provide the information. For transactions where ethnicity and race information is provided by the applicant or borrower, the final rule requires financial institutions to permit applicants and borrowers to self-identify using disaggregated ethnic and racial categories. However, when race and ethnicity data is completed by the financial institution, the final rule retains the current requirements, requiring financial institutions to provide only aggregated ethnic or racial data.

C. Modifications to Disclosure and Reporting Requirements

The final rule retains the current requirement that financial institutions submit their HMDA data to the appropriate Federal agency by March 1 following the calendar year for which the data are collected. The final rule imposes a new requirement that financial institutions that report large volumes of HMDA data for a calendar year also submit their data for the first three quarters of the following calendar year to the appropriate Federal agency on a quarterly basis. However, the final rule removes the current requirements that a financial institution provide to the public its disclosure statement and its loan/application register, modified to protect applicant and borrower privacy, and instead requires financial institutions to provide a notice to members of the public seeking these data that the information is available on the Bureau's Web site.

II. Background

A. HMDA and Regulation C

For nearly 40 years, HMDA has provided the public with information about mortgage lending activity within communities throughout the nation. Public officials use the information available through HMDA to develop and allocate housing and community development investments, to respond to market failures when necessary, and to monitor whether financial institutions may be engaging in discriminatory lending practices. The data are used by the mortgage industry to inform business practices, and by local communities to ensure that lenders are serving the needs of individual neighborhoods. To maintain the data's usefulness, HMDA and Regulation C have been updated and expanded over time in response to the changing needs of homeowners and evolution in the mortgage market. This part II.A provides an abbreviated discussion of the detailed background information presented in the proposal, which the Bureau considered and relied on in preparing this final rule.[3]

The Statute and Current Regulation

The Home Mortgage Disclosure Act (HMDA), 12 U.S.C. 2801 et seq., requires certain depository institutions and for-profit nondepository institutions to collect, report, and disclose data about originations and purchases of mortgage loans, as well as mortgage loan applications that do not result in originations (for example, applications that are denied or withdrawn). As originally adopted, HMDA identifies its purposes as providing the public and public officials with information to help determine whether financial institutions are serving the housing needs of the communities in which they are located, and to assist public officials in their determination of the distribution of public sector investments in a manner designed to improve the private investment environment.[4] Congress later expanded HMDA to, among other things, require financial institutions to report racial characteristics, gender, and income information on applicants and borrowers.[5] In light of these amendments, the Board of Governors of the Federal Reserve System (Board) subsequently recognized a third HMDA purpose of identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes, which now appears with HMDA's other purposes in Regulation C.[6]

In 2010, Congress enacted the Dodd-Frank Act, which amended HMDA and also transferred HMDA rulemaking authority and other functions from the Board to the Bureau.[7] Among other changes, the Dodd-Frank Act expands the scope of information relating to mortgage applications and loans that must be compiled, maintained, and reported under HMDA. New data points include the age of loan applicants and mortgagors, information relating to the points and fees payable at origination, the difference between the annual percentage rate (APR) associated with the loan and a benchmark rate or rates for all loans, the term of any prepayment penalty, the value of real property to be pledged as collateral, the term of the loan and of any introductory interest rate for the loan, the presence of contract terms allowing non-amortizing payments, the origination channel, and the credit scores of applicants and mortgagors.[8] The Dodd-Frank Act also authorizes the Bureau to require, “as [it] may determine to be appropriate,” a unique identifier that identifies the loan originator, a universal loan identifier, and the parcel number that corresponds to the real property pledged or proposed to be pledged as collateral for the mortgage loan.[9] The Dodd-Frank Act also provides the Bureau with the authority to require “such other information as the Bureau may require.” [10]

The Bureau's Regulation C, 12 CFR part 1003, implements HMDA. Regulation C currently requires depository institutions (i.e., banks, savings associations, and credit unions) and for-profit nondepository mortgage lending institutions to submit and publicly disclose certain HMDA data if they meet criteria set forth in the rule. Whether a depository institution is required to report and publicly disclose data depends on its asset size, the location of its home and branch offices, the extent to which it engages in residential mortgage lending, and the extent to which the institution or its loans are federally related. Whether a for-profit nondepository mortgage lending institution is required to report and publicly disclose data depends on its size, the location of its home and branch offices, including the extent of its business in MSAs, and the extent to which it engages in residential mortgage lending.

Covered financial institutions are required to report originations and purchases of mortgage loans (home purchase and refinancing) and home improvement loans, as well as loan Start Printed Page 66130applications that do not result in originations. The information reported under Regulation C currently includes, among other items: application date; loan or application type, purpose, and amount; property location and type; race, ethnicity, sex, and annual income of the loan applicant; action taken on the loan application (approved, denied, withdrawn, etc.), and date of that action; whether the loan is subject to the Home Ownership and Equity Protection Act of 1994 (HOEPA); lien status (first lien, subordinate lien, or unsecured); and certain loan price information.

Depository financial institutions report HMDA data to their supervisory agencies, while nondepository financial institutions report HMDA data to the U.S. Department of Housing and Urban Development (HUD). Financial institutions report their data on an application-by-application basis using a register format referred to as the loan/application register. Institutions must make their loan/application registers available to the public, with certain fields redacted to preserve applicants' and borrowers' privacy. At present, the Federal Financial Institutions Examination Council (FFIEC),[11] on behalf of the supervisory agencies, compiles the reported data and prepares an individual disclosure statement for each institution and aggregate reports for all covered institutions in each metropolitan area. These disclosure statements and reports are available to the public. On behalf of the agencies, the FFIEC also annually releases a loan-level dataset containing all reported HMDA data for the preceding calendar year with certain fields redacted to protect the privacy of applicants and borrowers.

Overview of HMDA's Purposes and Evolution

In the decades that followed World War II, the standard of living declined sharply in many U.S. cities as people migrated to the suburbs. A significant cause of this decline was the gradual deterioration of the urban housing supply. Although Congress took several steps to address this problem, by the 1970s it was clear that inadequate private investment and a lack of access to credit was contributing to an ongoing cycle of decline in urban neighborhoods. However, Congress lacked adequate data to determine the extent and severity of these market failures. To create transparency in the mortgage market Congress enacted HMDA in 1975, which the Board implemented by promulgating Regulation C in 1976. As originally enacted, HMDA applied to certain depository institutions that were located in standard metropolitan statistical areas, and required the disclosure of a limited amount of data regarding home improvement and residential mortgage loans.[12]

HMDA substantially improved the public's ability to determine whether financial institutions were serving the needs of their communities, but during the 1980s several events occurred that illustrated the need to improve and expand the HMDA data. A series of investigative reports and studies revealed that discrimination against certain applicants and borrowers was common during the mortgage lending process. Concerns over this discrimination, coupled with the need to respond to the savings and loan crisis of the late 1980s, led Congress to amend HMDA significantly in 1988 and 1989. These amendments, among other things, expanded the coverage of depository and nondepository institutions, required transaction-level disclosure of applications and loans, and added new reporting requirements regarding the applicant's or borrower's race, gender, and income. These amendments dramatically improved the public's understanding of how mortgage lending decisions affected both communities and individual applicants and borrowers.[13]

The mortgage market evolved and became more complex during the 1990s, particularly with respect to the expansion of the secondary market and the growth of the subprime market. Faced with concerns about potential predatory and discriminatory practices in the subprime market, community groups and others began to call for new amendments to HMDA to provide increased visibility into market practices. The Board addressed some of these concerns by amending Regulation C in 2002. However, as delinquencies, foreclosures, and other harmful effects of subprime lending unfolded, it became apparent that communities throughout the nation lacked sufficient information to understand the magnitude of the risk to which they were exposed. Community groups, local, State, and Federal officials relied on the HMDA data to identify at-risk neighborhoods and to develop foreclosure relief and homeownership stabilization programs. However, the limited data provided presented several challenges for those who attempted to create effective and responsive relief programs. As discussed above, Congress added several new reporting requirements, but left the Bureau to determine which additional information is necessary. Many argue that more publicly available information is needed to help inform communities of lending practices that affect local economies and may endanger neighborhood stability. The Bureau believes that the HMDA data must be updated to address the informational shortcomings exposed by the financial crisis and to meet the needs of homeowners, potential homeowners, and neighborhoods throughout the nation.[14]

B. Applicant and Borrower Privacy

In its proposal, the Bureau set forth the approach it proposed to take to protect applicant and borrower privacy in light of HMDA's purposes. It proposed the use of a balancing test to determine whether and how HMDA data should be modified prior to its disclosure to the public in order to protect applicant and borrower privacy while also fulfilling the disclosure purposes of the statute.[15] For the reasons described below, the Bureau is adopting the balancing test described in the proposal. The Bureau will provide at a later date a process for the public to provide input on the application of the balancing test to determine the HMDA data to be publicly disclosed.

HMDA's purposes are to provide the public and public officials with sufficient information to enable them to determine whether institutions are serving the housing needs of the communities and neighborhoods in which they are located, to assist public officials in distributing public sector investments in a manner designed to improve the private investment environment, and to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes. Today, HMDA data are the primary source of information for regulators, researchers, economists, industry, and advocates analyzing the mortgage market both for HMDA's purposes and for general market monitoring. Developing appropriate protections for applicant and borrower Start Printed Page 66131privacy in light of HMDA's purposes is a significant priority for the Bureau. The Bureau is mindful that privacy concerns may arise both when financial institutions compile and report HMDA data to their regulators and when the data are disclosed to the public.

Compiling and Reporting of HMDA Data

Financial institutions collect various types of information from consumers in the course of processing loan applications. To promote HMDA's goals, HMDA and Regulation C require financial institutions to compile and report to regulators some of this information and other information obtained or generated concerning the application or loan. As discussed above, the Dodd-Frank Act both expanded the scope of information that financial institutions must compile and report and authorized the Bureau to require financial institutions to compile and report additional data. The Bureau carefully considered the potential risks to applicant and borrower privacy associated with compiling and reporting data in developing the proposal and adopting this final rule.

Neither consumer advocate commenters nor the privacy advocate that submitted a comment identified concerns about applicant and borrower privacy associated with the compilation and reporting of data to regulators under the proposal. However, the Bureau received many comments from industry arguing that the compilation and reporting of certain data under the proposal created significant and unjustified risks to applicant and borrower privacy. These comments focused on concerns relating to the potential identifiability and sensitivity of the data to be compiled and reported. Most commenters expressed concerns about potential harms to applicants and borrowers if the data compiled and reported under the proposal were subject to unauthorized access. A few commenters also expressed concerns about potential legal liability and costs to financial institutions associated with the compilation and reporting of the proposed data.

Many industry commenters argued that the proposed requirement to report the postal address of the property securing the covered loan or, in the case of an application, proposed to secure the covered loan [16] would allow data users to easily link all reported data to an individual applicant or borrower. Some commenters also suggested that proposed data fields other than postal address could allow individual applicants and borrowers to be identified in the reported HMDA data. Many industry commenters asserted that some of the proposed data fields, if tied to an individual, would reveal sensitive information about the applicant or borrower.[17]

Some industry commenters expressed general concern about government collection of information that may be linkable to individuals, but most commenters expressed specific concerns about potential harms to applicants and borrowers in the event of unauthorized access to the HMDA data maintained by the agencies. Commenters asserted that the proposal increased both the potential harm a breach of the HMDA data at the Bureau or another agency could cause affected applicants and borrowers as well as the risk that such a data breach would occur. Many comments stated that the proposed HMDA data could be used to target applicants and borrowers with marketing for harmful financial products and to commit identity theft and other fraud. Several commenters stated that data breaches at corporations and government agencies have become common and suggested that the proposed HMDA data are sufficiently valuable to identity thieves and others that agency systems maintaining the data would be subject to hacks and other attacks aiming to access the data. A few commenters expressed concern that the HMDA data would be vulnerable to unauthorized access during transmission from financial institutions to their regulators. Several industry commenters expressed particular concern with the Bureau's information security practices and suggested that HMDA data held by the Bureau would be at heightened risk of breach. A few of these commenters urged the Bureau to publish the details of its information security practices and procedures in order to address these concerns. Some industry commenters questioned the benefit of some of the proposed data in light of HMDA's purposes. Several commenters argued that, in light of the potential risks to applicant and borrower privacy presented by the compilation and reporting of the some of the proposed data, any benefits of such compilation and reporting were not justified.

In addition, a few commenters expressed concern that compiling and reporting the proposed data would create legal risks for financial institutions and would impose related costs. A few comments suggested that a financial institution would face regulatory or legal liability if an agency suffered a breach that compromised the financial institution's HMDA data. One comment suggested that reporting the proposed data would expose financial institutions to liability under the Right to Financial Privacy Act (RFPA) [18] and a few other commenters suggested that doing so would violate the Gramm-Leach-Bliley Act (GLBA)[19] . Several national trade associations argued that compiling and reporting the proposed data would require financial institutions to strengthen significantly their information security programs and would also increase costs associated with compensating customers in the event of a financial institution's data breach.

The Bureau has analyzed these industry comments carefully and has determined that any risks to applicant and borrower privacy created by the compilation and reporting of the data required under the final rule are justified by the benefits of the data in light of HMDA's purposes.[20] The Bureau takes seriously the concerns raised about the security of reported HMDA data maintained at the agencies. The Bureau has addressed or is actively addressing each of the recommendations made in the Government Accountability Office (GAO) report cited by some industry commenters as a basis for concern that the Bureau's information security practices are insufficient to protect HMDA data.[21] The GAO report Start Printed Page 66132recognized the many steps that the Bureau has taken to ensure the privacy and security of the data it collects; indeed, the report's recommendations focused primarily on formalizing and documenting the privacy and information security practices the Bureau already had in place at the time the report was issued. The Bureau takes strong measures to mitigate and address any risks to the security of sensitive data it receives, consistent with the guidance and standards set for Federal information security programs,[22] and is committed to protecting the privacy and information security of the HMDA data it receives from financial institutions. As discussed in its proposal,[23] the Bureau is developing improvements to the HMDA data submission process, including, for example, further advancing encryption if necessary to protect data reported under the final rule.

The Bureau does not believe a financial institution could be held legally liable for the exposure of data due to a breach at a government agency or for reporting data to a government agency if the institution was legally required to provide the data to the agency and did so in accordance with other applicable law. The comments raising this concern provided no evidence or analysis concerning how such liability might be created. Contrary to a few commenters' suggestions, reporting data as required under the final rule would not create liability for a financial institution under the RFPA or cause the financial institution to violate the GLBA, as both of these laws permit financial institutions to disclose information as required by Federal law or regulation.[24] Finally, in light of the significant amounts of highly sensitive, personally identifiable information concerning customers that financial institutions collect and maintain in the course of conducting their business regardless of HMDA and Regulation C, the Bureau does not believe the requirement to compile and report some of these data pursuant to the final rule will meaningfully increase financial institutions' information security needs or the amounts required for victim compensation in the event of a financial institution's security breach. The industry commenters that made these arguments offered no detail or evidence of such needs or costs. It is the Bureau's understanding that substantially all of the new data to be compiled under the final rule are either data that HMDA reporters compile for reasons other than HMDA or Regulation C or are calculations that derive from such data, and must be retained by a financial institution to comply with other applicable laws.

Disclosures of HMDA Data

As discussed in part II.A above, HMDA is a disclosure statute. To fulfill HMDA's purposes, the types of data a financial institution is required to compile and report under HMDA and Regulation C have been expanded since the statute's enactment in 1975, and the formats in which HMDA data have been disclosed to the public also have evolved. At present, HMDA and Regulation C require data to be made available to the public in both aggregate and loan-level formats. First, each financial institution must make its “modified” loan/application register available to the public, with three fields deleted to protect applicant and borrower privacy.[25] Each financial institution must also make available to the public a disclosure statement prepared by the FFIEC that shows the financial institution's HMDA data in aggregate form.[26] In addition, the FFIEC makes available to the public disclosure statements for each financial institution [27] as well as aggregate reports for each MSA and metropolitan division (MD) showing lending patterns by certain property and applicant characteristics.[28] Since 1991, on behalf of the agencies receiving HMDA data, the FFIEC also has released annually a loan-level dataset containing all reported HMDA data for the preceding calendar year (the agencies' release). To reduce the possibility that data users could identify particular applicants or borrowers in these data, the same three fields that are deleted from the modified loan/application register are deleted from the agencies' release.[29]

Changes to financial institutions' disclosure obligations under the final rule. The Bureau's proposal addressed both of the disclosures financial institutions must make to the public under current Regulation C. First, the Bureau proposed to allow a financial institution to meet its obligation to make its disclosure statement available to the public by making available a notice that clearly conveys that the disclosure statement may be obtained on the FFIEC Web site and that includes the FFIEC's Web site address.[30] Second, it proposed to require that the modified loan/application register a financial institution must make available show only the data fields that currently are released on the modified loan/application register.[31] The Bureau explained that the new data points adopted under the final rule would be disclosed in the agencies' release, modified as appropriate to protect applicant and borrower privacy.[32] These proposals aimed to reduce burden on financial institutions associated with their disclosure of HMDA data and allow for the appropriate protection of applicant and borrower privacy in HMDA data disclosed by shifting much of the responsibility for making HMDA data available to the public to the agencies.

The Bureau received several comments on the proposed provisions relating to financial institutions' disclosure obligations. As discussed below in the applicable section-by-section analysis, after consideration of Start Printed Page 66133these comments and further analysis, the Bureau has decided to finalize proposed § 1003.5(b)(2) concerning the disclosure statement with minor modifications. The Bureau is not finalizing § 1003.5(c) concerning the modified loan/application register as proposed and instead is aligning § 1003.5(c) with § 1003.5(b)(2) by adopting a requirement that a financial institution make available to the public a notice that clearly conveys that the institution's modified loan/application register may be obtained on the Bureau's Web site. Thus, under the final rule, the disclosure of HMDA data is shifted entirely to the agencies; financial institutions will no longer be required to provide their HMDA data directly to the public, but only a notice advising members of the public seeking their data of where it may be obtained online.

Use of a balancing test to determine data to be publicly disclosed. The Dodd-Frank Act amendments to HMDA added new section 304(h)(1)(E), which directs the Bureau to develop regulations, in consultation with the other agencies, that “modify or require modification of itemized information, for the purpose of protecting the privacy interests of the mortgage applicants or mortgagors, that is or will be available to the public.” Section 304(h)(3)(B), also added by the Dodd-Frank Act, directs the Bureau to “prescribe standards for any modification under paragraph (1)(E) to effectuate the purposes of [HMDA], in light of the privacy interests of mortgage applicants or mortgagors. Where necessary to protect the privacy interests of mortgage applicants or mortgagors, the Bureau shall provide for the disclosure of information . . . in aggregate or other reasonably modified form, in order to effectuate the purposes of [HMDA].” [33]

The Bureau explained in its proposal that it interprets HMDA, as amended by the Dodd-Frank Act, to call for the use of a balancing test to determine whether and how HMDA data should be modified prior to its disclosure to the public in order to protect applicant and borrower privacy while also fulfilling HMDA's public disclosure purposes.[34] Using the balancing test to evaluate particular HMDA data points, individually and in combination, and various options for providing access to HMDA data, the Bureau proposed to balance the importance of releasing the data to accomplish HMDA's public disclosure purposes against the potential harm to an applicant or borrower's privacy interest that may result from the release of the data without modification. The proposal explained that modifications the Bureau may consider where warranted include various disclosure limitation techniques, such as techniques aimed at masking the precise value of data points,[35] aggregation, redaction, use restrictions, and query-based systems. HMDA's public disclosure purposes might also be furthered by implementing a restricted access program.[36] The Bureau explained that it interpreted HMDA, as amended by the Dodd-Frank Act, to require that public HMDA data be modified when the release of the unmodified data creates risks to applicant and borrower privacy interests that are not justified by the benefits of such release to the public in light of the statutory purposes. The Bureau also sought comment on its view that, considering the public disclosure of HMDA data as a whole, applicant and borrower privacy interests arise under the balancing test only where the disclosure of HMDA data may both substantially facilitate the identification of an applicant or borrower in the data and disclose information about the applicant or borrower that is not otherwise public and may be harmful or sensitive. The proposal explained that the Bureau's analysis of the proposed HMDA data under the balancing test was ongoing and included data fields currently disclosed on the modified loan/application register and in the agencies' release. The Bureau stated that it would provide at a later date a process for the public to provide input on the application of the balancing test to determine the HMDA data to be publicly disclosed.

The Bureau received very few comments concerning the proposed balancing test itself, most of which supported the balancing test. One industry commenter stated that the balancing test was too narrow, but its comment concerned the types of available information the Bureau should consider in analyzing the potential risks of re-identification and harm to applicants and borrowers presented by the public disclosure of HMDA data, and the types of potential harmful uses of HMDA data, rather than the balancing test itself.

The Bureau received many comments from consumer advocates, researchers, industry, and a privacy advocate concerning the application of the balancing test to the current and proposed HMDA data. These comments concerned (i) the benefits of public disclosure of the data, (ii) the potential risks to applicant and borrower privacy created by such disclosure, and (iii) modifications and data access and use restrictions the Bureau might consider to protect applicant and borrower privacy where warranted.

Many comments, especially from consumer advocates and researchers, identified the benefits of public disclosure of the current and proposed HMDA data. These commenters noted that public disclosure is the fundamental purpose of the Act and argued that public availability of HMDA data: Allows the public to supplement limited government resources to enforce fair lending and other laws and otherwise accomplish the goals of the Act; mitigates the impact of regulator capture or inattention to illegal practices and troublesome trends; and reduces information asymmetry between industry and the public concerning the residential mortgage market.

Several comments raised concerns about potential risks to applicant and borrower privacy created by the disclosure of HMDA data. Similar to comments received concerning such potential risks associated with the compilation and reporting of HMDA data, these comments addressed sources of data that could be combined with HMDA data to identify applicants and borrowers in the HMDA data. Several comments also suggested that the Bureau consider how HMDA data may be combined with other available data to harm consumers. Many comments, especially from industry, raised concerns about a variety of specific proposed data points as well as potential harmful uses to which data disclosed to the public may be put, including fraud, identity theft, and Start Printed Page 66134targeted marketing of harmful financial products.

Finally, several comments concerned data access and use restrictions that the Bureau could consider. Some consumer advocate and researcher comments offered suggestions and recommendations concerning a restricted access program. Several industry comments expressed concerns about the implementation of a restricted access program, however, including concerns that it may create opportunities for data leakage and unauthorized access to the HMDA data. A privacy advocate commenter urged the Bureau to restrict the uses of HMDA data to certain defined purposes, similar to the approach taken with respect to consumer reports under the Fair Credit Reporting Act.[37]

The Bureau has determined that its interpretation of HMDA to call for the use of the balancing test described above is reasonable and best effectuates the purposes of the statute. The Bureau interprets HMDA, as amended by the Dodd-Frank Act, to require that public HMDA data be modified when the release of the unmodified data creates risks to applicant and borrower privacy interests that are not justified by the benefits of such release to the public in light of the statutory purposes. In such circumstances, the need to protect the privacy interests of mortgage applicants or mortgagors requires that the itemized information be modified. Considering the public disclosure of HMDA data as a whole, applicant and borrower privacy interests arise under the balancing test only where the disclosure of HMDA data may both substantially facilitate the identification of an applicant or borrower in the data and disclose information about the applicant or borrower that is not otherwise public and may be harmful or sensitive. Thus, disclosure of an unmodified individual data point or field may create a risk to applicant or borrower privacy interests if such disclosure would either substantially facilitate the identification of an applicant or borrower or disclose information about an applicant or borrower that is not otherwise public and that may be harmful or sensitive. This interpretation implements HMDA sections 304(h)(1)(E) and 304(h)(3)(B) because it prescribes standards for requiring modification of itemized information, for the purpose of protecting the privacy interests of mortgage applicants and borrowers, that is or will be available to the public.

In applying the balancing test, the Bureau will carefully consider all comments received concerning the benefits of disclosure of HMDA data, the risks to applicant and borrower privacy created by such disclosure, and options for data use and access restrictions. However, the Bureau believes that it will be most helpful in applying the balancing test to provide an additional process through which all stakeholders can provide additional comment now that the data to be compiled and reported are finalized. Accordingly, the Bureau intends to provide a process for the public to provide input on the application of the balancing test to determine the HMDA data to be publicly disclosed.

The Bureau received some comments suggesting that disclosure of certain HMDA data could reveal confidential business information. As these comments do not concern applicant and borrower privacy, they are addressed in the appropriate section-by-section analyses below.

III. Summary of the Rulemaking Process

This final rule is the product of several years of research and analysis. In 2010, when the Board had rulemaking authority over HMDA, the Board conducted a series of public hearings that elicited feedback on improvements to Regulation C. After the rulemaking authority for HMDA was transferred to the Bureau, the Bureau conducted additional outreach by soliciting feedback in Federal Register notices, by meeting with community groups, financial institutions, trade associations, and other Federal agencies, and by convening a Small Business Review Panel. To prepare this final rule, the Bureau considered, among other things, the comments presented to the Board during its public hearings, feedback provided to the Bureau prior to the issuance of its proposal, including information provided during the Small Business Review Panel, interagency consultations, and feedback provided in response to the proposed rule.

A. Pre-Proposal Outreach

In 2010, the Board convened public hearings on potential revisions to Regulation C (the Board's 2010 Hearings).[38] The Board began the reassessment of HMDA in the aftermath of the financial crisis, as Congress was considering the legislation that later became the Dodd-Frank Act. Participants addressed whether the Board should require reporting from additional types of institutions, whether certain types of institutions should be exempt from reporting, and whether any other changes should be made to the rules for determining which types of institutions must report data. For example, representatives from Federal agencies, lenders, and consumer advocates urged the Board to adopt a consistent minimum loan threshold across all types of institutions, including banks, savings associations, credit unions, and nondepository institutions.[39] In particular, industry representatives noted the limited value derived from data reported by lower-volume depository institutions.[40] Industry and community advocate representatives also asserted that loan volume, rather than asset size, should trigger reporting, particularly for nondepository lenders because they tend to have a different capital structure than banks, savings associations, and credit unions.[41] Participants also urged the Board to expand coverage of nondepository institutions.[42] In addition, participants commented that the coverage scheme for nondepository institutions was too complex and should be simplified.[43]

The Board solicited feedback on ways to improve the quality and usefulness of HMDA data, including whether any data elements should be added, modified, or deleted. Participants provided Start Printed Page 66135suggestions about ways to improve the utility of HMDA data. Participants discussed modifications to the data fields currently collected in Regulation C that may clarify reporting requirements and improve the usefulness of HMDA data. For example, participants urged the Board to augment the information collected concerning multifamily properties[44] and manufactured housing [45] and to expand the reporting of rate spread to all originations.[46] Participants also urged the Board to clarify specific reporting requirements, such as how to report modular homes [47] and conditional approvals.[48] Participants discussed the reluctance of applicants to provide demographic information, such as race and ethnicity, and the challenges financial institutions face in collecting the information.[49]

In addition, participants commented on data fields that could be added to the data collected under HMDA to improve its utility. For example, participants suggested collecting information regarding points and fees, including prepayment penalties,[50] information concerning the relationship of the loan amount to the value of the property securing the loan,[51] and information concerning whether an application was submitted through a mortgage broker.[52]

In developing the proposal to amend Regulation C, the Bureau, through outreach and meetings with stakeholders, built on the feedback received during the Board's 2010 HMDA hearings. The Bureau conducted meetings in-person and through conference calls. In addition, the Bureau solicited feedback through correspondence and Federal Register notices.[53]

In 2011, the Bureau issued a proposed rule seeking feedback on regulations inherited from other agencies (2011 Streamlining Proposal).[54] While the Bureau sought general feedback on opportunities to streamline inherited regulations, the Bureau also solicited specific feedback on whether a small number of refinancings should not trigger Regulation C coverage.[55] The Bureau received comments from consumer advocates, fair housing advocates, financial institutions, State bank supervisory organizations, and national industry trade associations. Comments addressed issues ranging from reporting thresholds and data reporting exemptions to clarifying certain definitions and reporting issues.[56]

On December 19, 2011, the Bureau published an interim final rule establishing Regulation C in 12 CFR part 1003, implementing the assumption of HMDA authority from the Board (the Bureau's 2011 Regulation C Restatement).[57] The Bureau's 2011 Regulation C Restatement substantially duplicated the Board's Regulation C and made only non-substantive, technical, formatting, and stylistic changes. As part of the Bureau's 2011 Regulation C Restatement, the Bureau solicited comment on any outdated, unduly burdensome, or unnecessary technical issues and provisions.[58] Commenters generally suggested aligning Regulation C definitions with other regulations, providing a tolerance for enforcement actions based on low error rates, and establishing a loan-volume threshold. Commenters also raised other issues, some of which the Bureau discussed in the proposal and which are also discussed in the section-by-section analysis below.

The Bureau met with a few groups to better understand existing and emerging data standards and whether Regulation C could be aligned with those standards. The Bureau met with staff from Mortgage Industry Standards Maintenance Organization (MISMO) [59] and the GSEs [60] regarding the MISMO dataset and the ULDD [61] , respectively. The Bureau also met with community, regional, and national banks to understand their HMDA compliance processes and obtain feedback on areas for improvement, and with consumer and fair housing advocates as well as industry trade associations to understand their concerns with the HMDA data and Regulation C.

B. Small Business Review Panel

In February 2014, the Bureau convened a Small Business Review Panel (Panel) with the Chief Counsel for Advocacy of the Small Business Administration (SBA) and the Administrator of the Office of Information and Regulatory Affairs with the Office of Management and Budget (OMB).[62] As part of this process, the Bureau prepared an outline of the proposals then under consideration and the alternatives considered (Small Business Review Panel Outline), which the Bureau posted on its Web site for review by the small financial institutions participating in the panel process, as well as the general public.[63]

Prior to formally convening, the Panel participated in teleconferences with small groups of the small entity representatives to introduce the materials and to obtain feedback. The Panel conducted a full-day outreach meeting with the small entity representatives in March 2014 in Washington, DC. The Panel gathered information from the small entity representatives and made findings and recommendations regarding the potential compliance costs and other impacts of the proposed rule on those entities. Those findings and Start Printed Page 66136recommendations are set forth in the Panel's report (Small Business Review Panel Report), which will be made part of the administrative record in this rulemaking.[64] The Bureau carefully considered the findings and recommendations in preparing the proposal and this final rule.

C. The Bureau's Proposal

In July 2014, the Bureau published on its Web site for public comment a proposed rule regarding Regulation C to implement section 1094 of the Dodd-Frank Act, which amended HMDA to improve the utility of the HMDA data and revise Federal agency rulemaking and enforcement authorities. The proposal was published in the Federal Register in August 2014.[65] The Bureau proposed modifications to the institutional coverage and transactional coverage in light of market conditions, to reduce burden on financial institutions, and to address gaps in the HMDA data regarding certain segments of the housing market. The proposed modification to institutional coverage would have simplified the coverage criteria for depository and nondepository institutions with a uniform threshold of 25 loans. Under the proposal, depository and nondepository institutions that originated 25 covered loans, excluding open-end lines of credit, in the previous calendar year would be required to report HMDA data so long as all the other reporting criteria were met. The proposed modification to transactional coverage would have expanded the types of transactions subject to Regulation C. Under the proposal, financial institutions would be required to report all closed-end loans, open-end lines of credit, and reverse mortgages secured by dwellings, which would have relieved financial institutions from the requirement to ascertain an applicant's intended purpose for a dwelling-secured loan to determine if the loan was reportable under HMDA.

The Bureau also proposed modifications to reportable data requirements. First, the Bureau proposed to align many HMDA data requirements with the MISMO data standards for residential mortgages. Second, the Bureau proposed to modify existing data points already established under Regulation C as well as add new data points to the reporting requirements. Some of these data points were specifically identified by the Dodd-Frank Act and others were proposed pursuant to the Bureau's discretionary rulemaking authority to carry out the purposes of HMDA by addressing data gaps. The following four categories of new or modified data points were proposed by the Bureau:

  • Information about applicants, borrowers, and the underwriting process, such as age, credit score, debt-to-income ratio, reasons for denial if the application was denied, the application channel, and automated underwriting system results.
  • Information about the property securing the loan, such as construction method, property value, lien priority, the number of individual dwelling units in the property, and additional information about manufactured and multifamily housing.
  • Information about the features of the loan, such as additional pricing information, loan term, interest rate, introductory rate period, non-amortizing features, and the type of loan.
  • Certain unique identifiers, such as a universal loan identifier, property address, loan originator identifier, and a legal entity identifier for the financial institution.

In addition, the Bureau proposed modifications to the disclosure and reporting requirements and clarifications to the regulation. Under the proposal, financial institutions that report large volumes of HMDA data would be required to submit their data to the appropriate agency on a quarterly basis rather than an annual basis. The Bureau noted its belief that quarterly reporting would reduce reporting errors and improve the quality of HMDA data, allow regulators to use the data in a more timely and effective manner, and could facilitate an earlier release of annual HMDA data to the public. The Bureau also proposed to allow HMDA reporters to make their disclosure statements available by referring members of the public that request a disclosure statement to a publicly available Web site, which would facilitate public access to the HMDA data and minimize the burden on HMDA reporters.

The Bureau also proposed clarifications to Regulation C to address issues that are unclear or confusing. These proposed clarifications included guidance on types of residential structures that are considered dwellings; the treatment of manufactured and modular homes and multiple properties; preapproval programs and temporary financing; how to report a transaction that involved multiple financial institutions; reporting the action taken on an application; and reporting the type of purchaser for a covered loan.

D. Feedback Provided to the Bureau

The Bureau received approximately 400 comments on the HMDA proposal during the comment period from, among others, consumer advocacy groups; national, State, and regional industry trade associations; banks, community banks, credit unions, software providers, housing counselors; Federal agencies, including the Office of Advocacy of the Small Business Administration (SBA); and individual consumers and academics. In addition, the Bureau also considered other information, including ex parte communications.[66] Materials on the record are publicly available at http://www.regulations.gov. This information is discussed below in the section-by-section analysis and subsequent parts of the notice, as applicable. The Bureau considered the comments and ex parte communications, modified the proposal in certain respects, and adopts the final rule as described below in the section-by-section analysis.

IV. Legal Authority

The Bureau is issuing this final rule pursuant to its authority under the Dodd-Frank Act and HMDA. Section 1061 of the Dodd-Frank Act transferred to the Bureau the “consumer financial protection functions” previously vested in certain other Federal agencies, including the Board.[67] The term “consumer financial protection function” is defined to include “all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law, including performing appropriate functions to promulgate and review such rules, orders, and guidelines.” [68] Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau's Director to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” [69] Both HMDA and title X of the Dodd-Frank Act are Federal Start Printed Page 66137consumer financial laws.[70] Accordingly, the Bureau has authority to issue regulations to administer HMDA.

HMDA section 305(a) broadly authorizes the Bureau to prescribe such regulations as may be necessary to carry out HMDA's purposes.[71] These regulations can include “classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Bureau are necessary and proper to effectuate the purposes of [HMDA], and prevent circumvention or evasion thereof, or to facilitate compliance therewith.” [72]

A number of HMDA provisions specify that covered institutions must compile and make their HMDA data publicly available “in accordance with regulations of the Bureau” and “in such formats as the Bureau may require.” [73] HMDA section 304(j)(1) authorizes the Bureau to issue regulations to define the loan application register information that HMDA reporters must make available to the public upon request and to specify the form required for such disclosures.[74] HMDA section 304(j)(2)(B) provides that “[t]he Bureau shall require, by regulation, such deletions as the Bureau may determine to be appropriate to protect—(i) any privacy interest of any applicant . . .; and (ii) a depository institution from liability under any Federal or State privacy law.” [75] HMDA section 304(j)(7) also directs the Bureau to make every effort in prescribing regulations under the subsection to minimize the costs incurred by a depository institution in complying with the subsection and regulations.[76]

HMDA section 304(e) directs the Bureau to prescribe a standard format for HMDA disclosures required under HMDA section 304.[77] As amended by the Dodd-Frank Act, HMDA section 304(h)(1) requires HMDA data to be submitted to the Bureau or to the appropriate agency for the reporting financial institution “in accordance with rules prescribed by the Bureau.” [78] HMDA section 304(h)(1) also directs the Bureau, in consultation with other appropriate agencies, to develop regulations after notice and comment that:

(A) Prescribe the format for such disclosures, the method for submission of the data to the appropriate agency, and the procedures for disclosing the information to the public;

(B) require the collection of data required to be disclosed under [HMDA section 304(b)] with respect to loans sold by each institution reporting under this title;

(C) require disclosure of the class of the purchaser of such loans;

(D) permit any reporting institution to submit in writing to the Bureau or to the appropriate agency such additional data or explanations as it deems relevant to the decision to originate or purchase mortgage loans; and

(E) modify or require modification of itemized information, for the purpose of protecting the privacy interests of the mortgage applicants or mortgagors, that is or will be available to the public.[79]

HMDA also authorizes the Bureau to issue regulations relating to the timing of HMDA disclosures.[80]

As amended by the Dodd-Frank Act, HMDA section 304 requires itemization of specified categories of information and “such other information as the Bureau may require.” [81] Specifically, HMDA section 304(b)(5)(D) requires reporting of “such other information as the Bureau may require” for mortgage loans, and section 304(b)(6)(J) requires reporting of “such other information as the Bureau may require” for mortgage loans and applications. HMDA section 304 also identifies certain data points that are to be included in the itemization “as the Bureau may determine to be appropriate.” [82] It provides that age and other categories of data shall be modified prior to release “as the Bureau determines to be necessary” to satisfy the statutory purpose of protecting the privacy interests of the mortgage applicants or mortgagors.[83]

The Dodd-Frank Act amendments to HMDA also authorize the Bureau's Director to develop or assist in the improvement of methods of matching addresses and census tracts to facilitate HMDA compliance by depository institutions in as economical a manner as possible.[84] The Bureau, in consultation with the Secretary of HUD, may also exempt for-profit mortgage-lending institutions that are comparable within their respective industries to a bank, savings association, or credit union that has total assets of $10,000,000 or less.[85]

In preparing this final rule, the Bureau has considered the changes below in light of its legal authority under HMDA and the Dodd-Frank Act. The Bureau has determined that each of the changes addressed below is consistent with the purposes of HMDA and is authorized by one or more of the sources of statutory authority identified in this part.

V. Section-by-Section Analysis

Section 1003.1 Authority, Purpose, and Scope

1(c) Scope

As summarized in part I, the Bureau proposed to revise the provisions of Regulation C that determine which financial institutions and transactions are covered by the regulation. The Bureau also proposed to reorganize the regulation to reduce burden. The Bureau proposed to revise § 1003.1(c) and its accompanying commentary to reflect both the proposed substantive changes to Regulation C's institutional and transactional coverage and the proposed reorganization of the regulation. The Bureau did not receive any comments addressing proposed § 1003.1(c).[86] As Start Printed Page 66138discussed in the section-by-section analyses of § 1003.2(d), (e), (g), and (o) and of § 1003.3, the final rule in some cases revises the Bureau's proposed changes to institutional and transactional coverage. However, none of those changes affect the technical revisions that the Bureau proposed for § 1003.1(c). The Bureau thus is finalizing § 1003.1(c) largely as proposed, with several non-substantive revisions for clarity.

Section 1003.2 Definitions

Section 1003.2 of Regulation C sets forth definitions that are used in the regulation. As discussed below, the Bureau proposed both substantive revisions to several definitions and technical revisions to § 1003.2 to enumerate the terms defined therein. The Bureau addresses comments concerning its proposed substantive revisions below. The Bureau received no comments opposing its proposal to enumerate the terms in § 1003.2, and the final rule sets forth enumerations for all such terms. The Bureau believes that this technical revision will facilitate compliance with Regulation C by making defined terms easier to locate and cross-reference in the regulation, commentary, and the procedures published by the Bureau.

2(a) Act

Section 1003.2 of Regulation C sets forth a definition for the term “act.” The Bureau is adopting a technical amendment to add a paragraph designation for this definition. No substantive change is intended.

2(b) Application

2(b)(1) In General

Section 1003.2 currently defines an application as an oral or written request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with the procedures used by a financial institution for the type of credit requested. The Bureau proposed to make technical corrections and minor wording changes to conform the definition of application to the proposed changes in transactional coverage. In addition, the Bureau proposed to make technical and minor wording changes to the applicable commentary. For the reasons discussed below, the Bureau is adopting § 1003.2(b)(1) and the associated commentary as proposed.

Commenters generally addressed aspects of the definition of application that differ from other regulations or challenges in applying the definition in multifamily and commercial lending. The Bureau received several comments urging that the Regulation C definition of application should be aligned with the definition used in Regulation Z § 1026.2(a)(3)(ii) to simplify compliance across regulations. As the Bureau noted in the proposed rule, the Bureau did not propose to align the definitions because they serve different purposes.[87] The definition of application in Regulation Z § 1026.2(a)(3)(ii) establishes a clear rule for triggering when disclosures must be provided. In contrast, the definition for Regulation C is closely related to Regulation B and serves HMDA's fair lending purposes by requiring information about the disposition of credit requests received by financial institutions that do not lead to originations.[88] Therefore it is important for the Regulation C definition of application to be based on the procedures used by the financial institution for the type of credit requested rather than the defined elements of the definition in Regulation Z § 1026.2(a)(3)(ii) under which creditors may be sequencing and structuring their information collection processes in various different ways.[89]

Some comments argued that the definition of application would be difficult to comply with for multifamily loans, which generally involve a more fluid application process. They also argued that the Bureau should exclude “pitch book requests” from the definition of application. Pitch book requests are preliminary investment packages related to multifamily residential structures requesting specific loans terms. The Bureau has considered the comments but believes that changes to the proposed definition of application related to multifamily loans are not warranted. Because the definition of application in Regulation C is closely related to the Regulation B definition of application and Regulation B applies to business credit, including multifamily lending,[90] the Bureau believes that the flexible definition of application as proposed and the commentary in Regulation B and Regulation C provide adequate guidance for multifamily lending. The Bureau is also concerned that an exception for pitch book requests may be difficult to adopt because financial institutions may have different definitions of pitch book request or procedures for handlings them. The Bureau is not adopting an exclusion specific to pitch book requests, and believes that the existing commentary regarding the definition of application and prequalifications is appropriate.[91] Whether pitch book requests would be considered applications under Regulation C would depend on how the specific financial institution treated such requests under its application process for covered loans secured by multifamily residential structures under the definition of application in Regulation C. As discussed below, the Bureau is also excluding covered loans secured by multifamily dwellings from the definition of a preapproval program, which may address some of the commenters' concerns. After considering the comments, the Bureau is finalizing § 1003.2(b)(1) and comments 2(b)-1 and 2(b)-2 as proposed.

2(b)(2) Preapproval Programs

Regulation C incorporates certain requests under preapproval programs into the definition of application under § 1003.2. Such programs are only covered if they involve a comprehensive analysis of the creditworthiness of the applicant and include a written commitment for up to a specific amount, subject only to certain limited conditions. The Bureau proposed to make technical and clarifying wording changes to the definition of a preapproval program under § 1003.2(b)(2) and the applicable commentary to add language adapted from additional FAQs regarding preapproval programs that had been provided by the FFIEC.[92] For the reasons discussed below, the Bureau is finalizing § 1003.2(b)(2) with modifications to exclude certain types of covered loans from the definition.

Several commenters addressed the Bureau's proposed definition of preapproval programs. Some commenters questioned the value of preapproval reporting or argued that preapproval reporting discourages financial institutions from offering preapproval programs. However, the Bureau is not excluding preapproval requests from Regulation C in this final rule because this information is valuable for fair lending purposes, as it provides visibility into how applicants are treated in an early stage of the lending Start Printed Page 66139process.[93] The statute requires lenders to report action taken on applications,[94] and the Bureau believes that requests for preapproval as defined in the proposal and final rule represent credit applications. The Bureau does not believe that Regulation C's coverage of preapproval programs has discouraged offering of preapproval programs, and it concludes that any discouragement would be justified by the benefits of reporting. The reporting requirement is limited only to preapproval programs that meet certain conditions. Additionally, the Bureau is finalizing changes to comment 2(b)-3 that specify that programs described as preapproval programs that do not meet the definition in § 1003.2(b)(2) are not preapproval programs for purposes of HMDA reporting.

Some commenters requested clarification about occasional preapprovals and some argued for a broader and more flexible definition of preapproval programs. The Bureau is not adopting a broader or more flexible definition of preapproval programs because it believes that limiting the scope of the definition allows for comparison of similar programs across institutions, where a broader definition could expand reportable transactions, lead to new compliance issues, and make preapproval data less comparable across institutions. The Bureau continues to believe that a financial institution that does not have a preapproval program and only occasionally considers preapproval requests on an ad hoc basis need not report those transactions and believes that proposed comment 2(b)-3 addresses the commenters' concerns. It provides, in part, that a financial institution need not treat ad hoc requests as part of a preapproval program for purposes of Regulation C. The Bureau is therefore finalizing comment 2(b)-3 as proposed.

After considering the comments and conducting additional analysis, the Bureau is finalizing § 1003.2(b)(2) generally as proposed, with minor revisions to exclude home purchase loans that will be open-end lines of credit, reverse mortgages, or secured by multifamily dwellings. Some loans secured by multifamily dwellings have been previously reported in HMDA under preapproval programs. The definition of a home purchase loan could include these types of loans. The definition of preapproval programs in current Regulation C and adopted by the final rule is primarily focused on programs associated with closed-end home purchase loans for one- to four-unit dwellings. The Bureau believes it is appropriate to categorically exclude loans secured by multifamily dwellings, open-end lines of credit, and reverse mortgages from the definition of preapproval programs in order to facilitate consistent reporting and analysis of preapprovals by limiting the definition to closed-end home purchase loans for one- to four-unit dwellings.

2(c) Branch Office

Section 1003.2 currently provides a definition of branch office, which includes separate definitions for branches of (1) banks, savings associations, and credit unions and (2) for-profit mortgage-lending institutions (other than banks, savings associations, and credit unions). The Bureau proposed technical and nonsubstantive modifications to the definition of branch office. The Bureau received no comments on proposed § 1003.2(c) or proposed comments 2(c)-2 and -3. The Bureau is adopting § 1003.2(c) and comments 2(c)-2 and -3, renumbered as comment 2(c)(1)-2 and comment 2(c)(2)-1, with technical modifications. The Bureau is also republishing comment (Branch Office)-1, renumbered as comment 2(c)(1)-1.

2(d) Closed-End Mortgage Loan

Under existing Regulation C, financial institutions must report information about applications for, and originations of, closed-end loans made for one of three purposes: Home improvement, home purchase, or refinancing.[95] Closed-end home purchase loans and refinancings must be reported if they are dwelling-secured.[96] Closed-end home improvement loans must be reported whether or not they are dwelling-secured.

As discussed in the section-by-section analysis of § 1003.2(e) (“covered loan”), the Bureau proposed to adjust Regulation C's transactional coverage to require financial institutions to report all dwelling-secured loans (and applications), instead of reporting only those loans and applications for the purpose of home improvement, home purchase, or refinancing.[97] To facilitate this shift in transactional coverage, the Bureau proposed to define the term “closed-end mortgage loan” in Regulation C. Proposed § 1003.2(d) provided that a closed-end mortgage loan was a dwelling-secured debt obligation that was not an open-end line of credit under § 1003.2(o), a reverse mortgage under § 1003.2(q), or an excluded transaction under § 1003.3(c). The Bureau did not propose commentary to accompany proposed § 1003.2(d) but solicited feedback about whether commentary would be helpful.

The proposal to remove Regulation C's current purpose-based reporting approach for closed-end mortgage loans in some cases broadened, and in some cases limited, the closed-end loans that would be reported under the regulation. For example, the proposal provided for reporting of all closed-end home-equity loans and all closed-end, dwelling-secured commercial-purpose loans. At the same time, the proposal eliminated the requirement to report home improvement loans not secured by a dwelling.

As discussed in the section-by-section analysis of § 1003.2(e), the Bureau is finalizing the proposed shift to dwelling-secured transactional coverage for consumer-purpose transactions and is retaining Regulation C's traditional purpose test for commercial-purpose transactions. The Bureau believes that the shift serves HMDA's purposes, will improve HMDA data, and will simplify transactional reporting requirements. Accordingly, the Bureau is finalizing § 1003.2(d) largely as proposed, but with technical revisions for clarity, to define the universe of closed-end mortgage loans that must be reported under Regulation C unless otherwise excluded under § 1003.3(c). The Bureau also is finalizing commentary to § 1003.2(d) to address questions that commenters raised about the scope of the closed-end mortgage loan definition.

Relatively few commenters specifically addressed the benefits and burdens of reporting all dwelling-secured, consumer-purpose, closed-end mortgage loans.[98] Consumer advocacy Start Printed Page 66140group commenters supported the proposal to cover all such loans, and industry stakeholders expressed mixed views. A number of consumer advocacy group commenters also requested that the Bureau clarify in the final rule whether particular categories of transactions are included under the closed-end mortgage loan definition.

Coverage of Dwelling-Secured, Consumer-Purpose, Closed-End Mortgage Loans

A large number of consumer advocacy group and community development commenters supported having information about all closed-end home-equity loans. They stated that having information about all such loans would be valuable in assessing whether neighborhoods that the consumer groups serve, especially those that are low- and moderate-income, are receiving the full range of credit that they need and would be appropriate to ensure an adequate understanding of the mortgage market.

A small group of industry commenters supported the proposed shift to dwelling-secured coverage to the extent that it meant reporting all dwelling-secured, closed-end, consumer-purpose loans. Some of these commenters argued that reporting all such loans would be less burdensome than discerning whether each loan was for a reportable purpose.[99] Others asserted that dwelling-secured coverage would eliminate the possibility that exists under current Regulation C of erroneously gathering race, gender, and ethnicity data for consumer-purpose loans that later are determined not to be reportable. One industry commenter supported dwelling-secured coverage only for closed-end, consumer-purpose loans secured by one- to four-unit dwellings, arguing that these transactions are the most common, are similar in their underwriting and in their risks to consumers, and have hit the economy hardest when they default en masse. Other industry commenters agreed that the shift to dwelling-secured coverage for closed-end, consumer-purpose loans was appropriate and would serve HMDA's purposes, would simplify reporting, would improve data for HMDA users, and would better align Regulation C's coverage with Regulations X and Z.[100]

As discussed in the section-by-section analysis of § 1003.2(e), a majority of industry commenters opposed the proposed shift to dwelling-secured coverage, and some of those commenters specifically objected to reporting data about all closed-end home-equity loans. Some argued that the Bureau should maintain current coverage; a few argued that closed-end home-equity loans should be excluded from coverage altogether. The commenters argued that funds obtained through home-equity loans could be used for any purpose. If a transaction's funds were not used for home purchase, home improvement, or refinancing purposes, commenters asserted, then having data about that transaction would not serve HMDA's purpose of ensuring that financial institutions are meeting the housing needs of their communities. One commenter argued that concerns about home-equity lending's role in the financial crisis no longer justified covering all home-equity loans, because the Bureau's ability-to-repay and qualified mortgage rules have addressed any issues with such lending.[101] A few commenters also objected that such reporting would increase loan volume or argued that compiling data about all closed-end home-equity loans would be onerous, would require costly systems upgrades, or would distort HMDA data because loans would be reported even if their funds were not used for housing-related purposes.

As discussed in the proposal, the Bureau believes that covering all dwelling-secured, consumer-purpose, closed-end mortgage loans will provide useful data that will serve HMDA's purposes by providing additional information about closed-end home-equity loans, which research indicates were a significant factor leading up to the financial crisis,[102] and which impeded some borrowers' ability to receive assistance through foreclosure relief programs during and after the crisis.[103] The Bureau also believes, as some industry commenters observed, that covering all such transactions will simplify the regulation and ease compliance burden. The Bureau thus is adopting proposed § 1003.2(d) largely as proposed, but with several revisions for clarity, as discussed below.

Clarifications to the Closed-End Mortgage Loan Definition

General. The Bureau is making two clarifying changes to § 1003.2(d) and is adding comment 2(d)-1 to provide general guidance about the definition of closed-end mortgage loan. First, proposed § 1003.2(d) provided that a closed-end mortgage loan was a dwelling-secured debt obligation that was not an open-end line of credit under § 1003.2(o), a reverse mortgage under § 1003.2(q), or an excluded transaction under § 1003.3(c). To align with lending practices, to streamline the definitions of closed-end mortgage loan and open-end line of credit, and to streamline the reverse mortgage flag in final § 1003.4(a)(36), the final rule eliminates the mutual exclusivity between closed-end mortgage loans and reverse mortgages.[104] Second, the final rule eliminates the proposed language that provided that an excluded transaction under § 1003.3(c) was not a closed-end mortgage loan. The Bureau is making this change to avoid circularity with final § 1003.3(c), which incorporates for clarity the defined terms “closed-end mortgage loan” and “open-end line of credit” into the descriptions of excluded transactions. Final § 1003.2(d) thus provides that a closed-end mortgage loan is a dwelling-secured extension of credit that is not an open-end line of credit under § 1003.2(o). Comment 2(d)-1 provides an example of a loan that is not a closed-end mortgage loan because it is not dwelling-secured.

Extension of credit and loan modifications. As proposed, § 1003.2(d) Start Printed Page 66141generally provided that a closed-end mortgage loan was a dwelling-secured “debt obligation.” Many consumer advocacy group commenters asked the Bureau to clarify the scope of transactions covered under the term “debt obligation.” In particular, a large number of consumer advocacy group commenters asked the Bureau to require reporting of all loan modifications.[105] The commenters argued that financial institutions' performance in modifying loans is and will continue to be a major factor in determining whether they are meeting local housing needs, particularly the needs of communities that have been devastated by the mortgage crisis. The commenters also argued that financial institutions' loan modification performance will be a major factor in determining whether they are complying with fair housing and fair lending laws. Specifically, commenters cited several studies showing that, since the mortgage crisis, borrowers of color, or borrowers who live in communities of color or in low-to-moderate income communities, have received less favorable loss mitigation outcomes than white borrowers. Commenters stated that many millions of loan modifications have been made since the mortgage crisis, and millions more will be made in the coming years. Commenters argued that the need for data about loan modifications is compelling given the volume of transactions, the identified fair lending concerns, and the lack of other publicly available data about them.

As several of these commenters noted, however, loan modifications currently are not reported because they are not “originations” under existing Regulation C. Indeed, since its adoption, Regulation C has required reporting only of applications, originations, and purchases, and the proposal did not seek to change this. While there is a need for publicly available data about loan modifications, the final rule does not require reporting of loan modifications. Covering all loan modifications would be a complex undertaking and would constitute a major revision of Regulation C. However, the Bureau has no information about the burdens to financial institutions of reporting loan modifications under Regulation C, and the Bureau neither has proposed, nor has received feedback about, how existing data points would need to be modified, or whether additional data points would be required, to accommodate reporting of loan modifications.

After considering the comments, the Bureau is adopting § 1003.2(d) to provide that a “closed-end mortgage loan” is a dwelling-secured “extension of credit” that is not an open-end line of credit under § 1003.2(o). Comment 2(d)-2 provides guidance about “extension of credit.” First, comment 2(d)-2 provides an example of a transaction that is not a closed-end mortgage loan because no credit is extended. Comment 2(d)-2 also explains that, for purposes of Regulation C, an “extension of credit” refers to the granting of credit pursuant to a new debt obligation. If a transaction modifies, renews, extends, or amends the terms of an existing debt obligation without satisfying and replacing the original debt obligation with a new debt obligation, the transaction generally is not an extension of credit under Regulation C.

The Bureau understands that it is interpreting the phrase “extension of credit” differently in § 1003.2(d) than in Regulation B, 12 CFR part 1002, which implements the Equal Credit Opportunity Act (ECOA).[106] Regulation B defines “extension of credit” under § 1002.2(q) to include the granting of credit in any form, including the renewal of credit and the continuance of existing credit in some circumstances. As discussed above, the Bureau generally is interpreting the phrase “extension of credit” in § 1003.2(d) to refer at this time only to the granting of credit pursuant to a new debt obligation. The Bureau may in the future revisit whether it is appropriate to require loan modifications to be reported under Regulation C.

Exceptions to “extension of credit” rule. As discussed below, comments 2(d)-2.i and .ii provide two narrow exceptions to the general rule that an “extension of credit” under the final rule occurs only when a new debt obligation is created. One exception addresses assumptions, which Regulation C historically has covered. The second addresses transactions completed pursuant to New York consolidation, extension, and modification agreements (New York CEMAs). As discussed below, the Bureau believes that both assumptions and transactions completed pursuant to New York CEMAs represent situations where a new debt obligation is created in substance, if not in form, and that the benefits of requiring such transactions to be reported justify the burdens.

Assumptions. The final rule adds new comment 2(d)-2.i to address Regulation C's coverage of assumptions. Under existing comment 1(c)-9, assumptions are reportable transactions. Existing comment 1(c)-9 provides that assumptions occur when an institution enters into a written agreement accepting a new borrower as the obligor on an existing obligation. Existing comment 1(c)-9 also provides that assumptions are reportable as home purchase loans. The Bureau proposed to move existing comment 1(c)-9 to the commentary to the definition of home purchase loan, and the Bureau is finalizing that comment, with certain modifications, as comment 2(j)-5. See the section-by-section analysis of § 1003.2(j).

Consistent with the final rule's continued coverage of assumptions, the Bureau is adding comment 2(d)-2.i to the definition of closed-end mortgage loan to clarify that an assumption is an “extension of credit” under Regulation C even though the new borrower assumes an existing debt obligation. When the Board first clarified Regulation C's application to assumptions, it stated that, when an institution expressly agrees in writing with a new party to accept that party as the obligor on an existing home purchase loan, the transaction should be treated as a new home purchase loan.[107] The Bureau agrees and final comment 2(d)-2.i thus provides that assumptions are considered “extensions of credit” even if the new borrower assumes an existing debt obligation.

Comment 2(d)-2.i also addresses successor-in-interest transactions. A successor-in-interest transaction is a transaction in which an individual first succeeds the prior owner as the property owner and afterward seeks to take on the debt secured by the property. One industry association recommended that the Bureau exclude successor-in-interest transactions from Regulation C's definition of assumption. The comment noted that the Bureau recently published interpretive guidance under Regulation Z stating that successor-in-interest transactions are not assumptions under that regulation because the successor already owns the property when the debt is assumed.[108] The comment argued that successor-in-interest transactions should be treated the same under Regulations C and Z.

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The Bureau is clarifying in comment 2(d)-2.i that successor-in-interest transactions are assumptions under Regulation C. The Bureau's interpretive guidance providing that successor-in-interest transactions are not assumptions under Regulation Z relies on Regulation Z's existing definition of assumption in § 1026.2(a)(24), which provides that the new transaction must be a residential mortgage transaction, i.e., a transaction to finance the acquisition or initial construction of the dwelling being financed. Successor-in-interest transactions do not fit Regulation Z's definition because no dwelling is being acquired or constructed.[109] In contrast, Regulation C's definition of assumption requires only that a new borrower be accepted as the obligor on an existing obligation. Successor-in-interest transactions fit Regulation C's definition.[110]

Moreover, when the Bureau issued its Regulation Z interpretive guidance, it was concerned that subjecting successor-in-interest transactions to an ability-to-repay analysis could decrease the frequency of such transactions, which could harm successors inheriting homes after, for example, a family member's death. The Bureau does not believe that similar concerns apply to requiring such transactions to be reported under Regulation C. On the contrary, the Bureau believes that collecting information about successor-in-interest transactions under Regulation C will help to monitor for discrimination in such transactions. Comment 2(d)-2.i thus specifies that successor-in-interest transactions are assumptions under Regulation C. Like assumptions generally, successor-in-interest transactions represent an exception to the general rule that an “extension of credit” requires a new debt obligation. As noted, the Bureau believes that assumptions, including successor-in-interest transactions, represent new debt obligations in substance, if not in form, and should be reported as such.

Consolidation, Extension, and Modification Agreements

Several consumer advocacy group commenters stated that it was unclear whether the proposal covered transactions completed pursuant to modification, extension, and consolidation agreements (MECAs) or consolidation, extension, and modification agreements (CEMAs). They asked the Bureau to specify that MECAs/CEMAs are reportable transactions. As noted below, Regulation C's commentary at one time specified that MECAs/CEMAs were not reportable as refinancings, and this guidance currently exists in an FFIEC FAQ. Some uncertainty has remained, however, about the reportability of MECAs/CEMAs used for home purchase or home improvement purposes. For the reasons discussed below, the final rule clarifies that CEMAs completed pursuant to section 255 of the New York Tax Law are covered loans. Other MECA/CEMA transactions are not covered loans under the final rule.

New York CEMAs are loans secured by dwellings located in New York State. They generally are used in place of traditional refinancings, either to amend a transaction's interest rate or loan term, or to permit a borrower to take cash out. However, unlike in traditional refinancings, the existing debt obligation is not “satisfied and replaced.” Instead, the existing obligation is consolidated into a new loan, either by the same or a different lender, and either with or without new funds being added to the existing loan balance. Under New York State law, if no new money is added during the transaction, there is no “new” mortgage, and the borrower avoids paying the mortgage recording taxes that would have been imposed if a traditional refinancing had been used and the original obligation had been satisfied and replaced. If new money is part of the consolidated loan, the borrower pays mortgage recording taxes only on the new money.[111] While generally used in place of traditional refinancings, New York CEMAs also can be used for home purchases (i.e., to complete an assumption), where the seller and buyer agree that the buyer will assume the seller's outstanding principal balance, and that balance is consolidated with a new loan to the borrower for the remainder of the purchase price.

A number of consumer advocacy group commenters stated that the Bureau should include MECAs/CEMAs, particularly New York CEMAs, as reportable transactions under the dwelling-secured coverage scheme. These commenters stated that New York CEMAs very often are used in lieu of traditional refinance loans, especially for larger-dollar, multifamily apartment building loans, which are central to maintaining the stock of private affordable housing complexes. The commenters argued that, without New York CEMA data, it is difficult or impossible to know where and how much credit banks are extending for such residential buildings, and whether the credit is extended on equitable terms. The commenters noted that CEMAs optionally are reported under the Community Reinvestment Act (CRA) but that CRA reporting provides less data to the public or to policymakers than if the transactions were HMDA-reportable.

These commenters also stated that HMDA reporters historically have experienced confusion about whether to report MECAs/CEMAs. Under Regulation C's traditional loan-purpose coverage scheme, the Board declined to extend coverage to MECAs/CEMAs, because the Board found that the transactions did not meet the definition of a refinancing (because the existing debt obligation was not satisfied and replaced). The Board determined that maintaining a bright-line “satisfies and replaces” rule for refinancings was preferable to revising the definition to a “functional equivalent” test that would cover MECAs/CEMAs but that also would introduce uncertainty about whether other types of transactions should be reported as refinancings.[112] Because the Board's guidance concerning MECAs/CEMAs was limited to refinancings, however, it appears that at least some financial institutions have reported MECAs/CEMAs as home improvement loans when the transactions involved new money for home improvement purposes, or as home purchase loans when the transactions were the functional equivalent of traditional assumptions.

The various consumer advocacy group commenters that addressed MECAs/CEMAs asserted that the proposal did not resolve the uncertainty that has existed about whether to report these transactions. Proposed § 1003.2(d) provided that all closed-end, dwelling-secured “debt obligations” were reportable transactions, and “debt obligations” arguably would include MECAs/CEMAs. At the same time, however, the proposal retained Regulation C's existing definition of “refinancing,” which arguably would continue to exclude MECAs/CEMAs from coverage or would make it unclear Start Printed Page 66143how such transactions should be reported.

The Bureau concludes that having data about New York CEMAs, in particular, will improve HMDA data. These transactions are used regularly in New York in place of traditional refinancings and sometimes in place of traditional home purchase loans. New York CEMAs are used not only for multifamily dwellings, but also for single-family transactions in high-cost areas like New York City. While it is difficult to identify precisely how often New York CEMAs are used, industry professionals familiar with the New York CEMA market believe that the transactions are used on a daily basis in New York State and represent a significant percentage of the refinancings that occur in the State. Requiring reporting of New York CEMAs will improve HMDA data and also will resolve lingering confusion about how Regulation C applies to them. Finally, the change is consistent with the shift to dwelling-secured coverage for most transactions.[113]

Like assumptions, New York CEMAs represent an exception to the general rule that an “extension of credit” requires a new debt obligation. However, the Bureau believes that New York CEMAs represent new debt obligations in substance, if not in form, and should be reported as such. The Bureau acknowledges that, by requiring reporting of New York CEMAs, it is departing from the Board's historical guidance that such transactions need not be reported. The Bureau believes that the benefits of this departure justify the burdens both for the reasons discussed above and because the Bureau is defining the scope of transactions to be reported narrowly to encompass only those transactions that fall within the scope of New York Tax Law section 255.[114] The Bureau believes that limiting the scope of reportable MECAs/CEMAs to those covered by New York Tax Law section 255 will permit New York CEMAs to be reported while avoiding the confusion that, as the Board worried, could result from departing from a bright-line “satisfies and replaces” rule for the definition of refinancings generally.

After considering the comments received, the Bureau is adopting new comment 2(d)-2.ii, specifying that a transaction completed pursuant to a New York CEMA and classified as a supplemental mortgage under N.Y. Tax Law § 255, such that the borrower owed reduced or no mortgage recording taxes, is an extension of credit under § 1003.2(d). To avoid any implication that other types of loan modifications or extensions must be reported, the commentary language is narrowly tailored to require reporting only of transactions completed pursuant to this specific provision of New York law. See the section-by-section analysis of § 1003.2(i), (j), and (p) for details about whether a New York CEMA is a home improvement loan, a home purchase loan, or a refinancing.

2(e) Covered Loan

HMDA requires financial institutions to collect and report information about “mortgage loans,” which HMDA section 303(2) defines as loans secured by residential real property or home improvement loans. When the Board adopted Regulation C, it implemented this requirement by mandating that financial institutions report information about applications and closed-end loans made for one of three purposes: Home improvement, home purchase, or refinancing.[115] As noted, under existing Regulation C, closed-end home purchase loans and refinancings must be reported if they are dwelling-secured, and closed-end home improvement loans must be reported whether or not they are dwelling-secured.[116] For transactions that meet one of the three purposes, reporting of closed-end loans is mandatory and reporting of home-equity lines of credit is optional.[117] Under existing Regulation C, reverse mortgages are subject to these same criteria for reporting: A closed-end reverse mortgage must be reported if it is for one of the three purposes; a reverse mortgage that is an open-end line of credit is optionally reported.

To simplify Regulation C's transactional coverage test and to expand the types of transactions reported, the Bureau proposed to require financial institutions to report applications for, and originations and purchases of, all dwelling-secured loans and lines of credit. The Bureau also proposed to add the defined term “covered loan” in § 1003.2(e). The term referred to all transactions reportable under the proposed dwelling-secured coverage scheme: Closed-end mortgage loans under proposed § 1003.2(d), open-end lines of credit under proposed § 1003.2(o), and reverse mortgages under proposed § 1003.2(q). The term provided a shorthand phrase that HMDA reporters and data users could use to refer to any transaction reportable under Regulation C. For the reasons discussed below, the Bureau is finalizing in § 1003.2(e) the defined term “covered loan” and the shift to dwelling-secured coverage largely as proposed for consumer-purpose loans and lines of credit. The Bureau is retaining Regulation C's existing purpose-based test for commercial-purpose loans and lines of credit.

Only a few commenters specifically addressed the Bureau's proposal to add the defined term “covered loan” to Regulation C to refer to all covered transactions, and the commenters generally favored the proposal. They believed that having a standard shorthand for all covered transactions would facilitate compliance. The Bureau is finalizing § 1003.2(e) “covered loan” to define the universe of transactions covered under Regulation C.

A large number of commenters addressed the proposed shift from purpose-based to collateral-based transactional coverage, with consumer advocacy group commenters supporting the shift and industry commenters expressing mixed views.[118] Some consumer advocacy groups stated that having information about all loans secured by residential property would Start Printed Page 66144improve the usefulness and quality of HMDA data. Others stated that having data about all such loans would be valuable in assessing whether financial institutions are providing the neighborhoods that the consumer advocacy groups serve with the full range of credit the neighborhoods need. One consumer advocacy commenter asserted that financial institutions should report any transaction that could result in a borrower losing his or her home. Another stated that removing the subjectivity from determining whether to report a loan would ease burden for financial institutions, and that having information about more loans would improve HMDA's usefulness. The commenter noted that consumer mortgage lending products evolve rapidly, and there is no principled reason to require reporting of some but not others.

Industry commenters and a group of State regulators expressed mixed views about the proposed shift to dwelling-secured coverage. A small number of industry commenters supported the proposal unconditionally because they believed that it would ease burden. These commenters, who generally were smaller financial institutions and compliance consultants, stated that deciding which loans meet the current purpose test is confusing. They stated that a simplified transactional coverage test would stop the erroneous over-reporting of loans that has occurred despite financial institutions' best efforts,[119] and that the benefits of a streamlined test justified the burdens of more reporting. One industry commenter appreciated the fact that HMDA would provide a more comprehensive view of mortgage transactions across the country. A group of State regulators supported dwelling-secured coverage for consumer-purpose transactions only.

The majority of industry commenters that addressed transactional coverage opposed the proposed shift to dwelling-secured coverage, supported it only for consumer-purpose transactions or for closed-end mortgage loans, or supported it only to the extent that it would eliminate reporting of home improvement loans not secured by a dwelling. Numerous industry commenters generally objected to the overall compliance burdens and costs of reporting additional transactions, particularly in light of the Bureau's proposal simultaneously to expand the data reported about each transaction and to lower (for some institutions) the institutional coverage threshold.[120] One government agency commenter expressed concern that the revisions to transactional coverage would burden small financial institutions and urged the Bureau not to adopt the proposed changes. Some industry commenters generally asserted that their reportable transaction volume would increase significantly,[121] that they would not be able to comply without hiring additional staff, and that compliance costs would be passed to consumers. Others generally argued that the Bureau should keep Regulation C's existing purpose-based coverage because it serves HMDA's purposes better than a collateral-based scheme. Most industry commenters that opposed the proposed shift, however, specifically objected to the burdens of reporting all home-equity lines of credit and all dwelling-secured commercial-purpose loans and lines of credit.

As explained in the section-by-section analyses of § 1003.2(d) and (o), the Bureau is finalizing the shift to dwelling-secured coverage for closed- and open-end consumer-purpose transactions, with some modifications to ease burden for open-end reporting. After considering the comments received, and as discussed fully in the section-by-section analyses of those sections, the Bureau believes that the benefits of expanded reporting justify the burdens. As discussed in the section-by-section of § 1003.3(c)(10), however, the Bureau is maintaining Regulation C's existing purpose-based coverage test for commercial-purpose transactions.

2(f) Dwelling

The Bureau proposed to revise the definition of dwelling in § 1003.2 by moving the geographic location requirement currently in the definition of dwelling to § 1003.1(c), to add additional examples of dwellings to the definition and commentary, and to revise the commentary to exclude certain structures from the definition of dwelling. A few commenters supported the proposed changes to the definition of dwelling, while others argued that certain types of structures should be included or excluded from the definition. For the reasons discussed below, the Bureau is finalizing § 1003.2(f) with minor technical revisions to the definition and with additional revisions to the commentary discussed in detail below. The definition is revised to clarify that multifamily residential structures include complexes and manufactured home communities.

Some commenters argued that second homes and investment properties should no longer be covered by Regulation C and that only primary residences should be reported because second homes and investment properties do not relate to housing needs in the same way that primary residences do. HMDA section 303(2) defines a mortgage loan, in part, as one secured by “residential real property” and HMDA section 304(b)(2) requires collection of information regarding “mortgagors who did not, at the time of execution of the mortgage, intend to reside in the property securing the mortgage loan.” The Bureau believes that second homes as well as investment properties are within the scope of information required by HMDA and should continue to be covered by Regulation C. The Bureau is therefore finalizing comment 2(f)-1 generally as proposed, with certain material from proposed comment 2(f)-1 incorporated into comment 2(f)-2 as discussed below.

Some commenters argued that all multifamily properties should be excluded from Regulation C. The Bureau believes that multifamily residential structures should continue to be included within Regulation C because they provide for housing needs and because, as the Bureau noted in the proposal, HMDA data highlight the importance of multifamily lending to the recovering housing finance market and to consumers.[122]

Many commenters addressed multifamily loan reporting in more specific ways. Some commenters supported the proposal's coverage of manufactured home community loans and other aspects related to multifamily lending. Others requested guidance on reporting multifamily transactions. Some commenters argued that certain types of multifamily lending should be excluded from Regulation C. The Bureau is adopting new comment 2(f)-2 dealing specifically with multifamily residential structures and communities, Start Printed Page 66145which incorporates certain material from proposed comment 2(f)-1 and additional material in response to comments. The Bureau believes that providing a specific comment relating to multifamily residential structures will facilitate compliance by providing guidance on when loans related to multifamily dwellings would be considered loans secured by a dwelling for purposes of Regulation C. The comment provides that a manufactured home community is a dwelling for purposes of Regulation C regardless of whether any individual manufactured homes also secure the loan. The comment also provides examples of loans related to certain multifamily structures that would nevertheless not be secured by a dwelling for purposes of Regulation C, and would therefore not be reportable, such as loans secured only by an assignment of rents or dues or only by common areas and not individual dwelling units.

The Bureau is adopting new comment 2(f)-3 relating to exclusions from the definition of dwelling (incorporating material from proposed comment 2(f)-2) and clarifying that recreational vehicle parks are excluded from the definition of dwelling for purposes of Regulation C. Several commenters agreed with the proposed exclusions for recreational vehicles, houseboats, mobile homes constructed prior to June 15, 1976 (pre-1976 mobile homes),[123] and other types of structures.

Regarding the exclusion of recreational vehicles, the Bureau agrees with the commenters that supported the proposed clarification that recreational vehicles are not dwellings for purposes of Regulation C, regardless of whether they are used as residences. As noted in the proposal, the Bureau believes that making this exclusion explicit will provide more clarity on what structures qualify as dwellings and reduce burden on financial institutions. The Bureau also believes it will improve the consistency of reported HMDA data. Clarifying that recreational vehicle parks are excluded from the definition of dwelling for purposes of Regulation C is consistent with the exclusion of recreational vehicles. The Bureau believes that, as discussed above, while manufactured home communities should be included in the definition of dwelling for purposes of Regulation C, including recreational vehicle parks would not be appropriate given that they are not frequently intended as long-term housing.

Some commenters stated that the proposed exclusion of pre-1976 mobile homes would create compliance problems because the financial institution could mistakenly collect race, ethnicity, and sex information before knowing whether the home was a manufactured home and therefore violate Regulation B. The Bureau believes that this concern is unlikely to result in ECOA violations because Regulation B would still require collection of demographic information on some pre-1976 mobile home lending.[124] Other commenters argued that pre-1976 mobile home lending should be reported under Regulation C because of consumer protection and housing needs concerns related to this type of housing. The Bureau does not believe this concern justifies the additional burden of requiring financial institutions to report these loans and identify them distinctly from manufactured home loans, especially given that the amount of lending secured by this type of collateral will continue to decrease as time passes. Therefore, the Bureau is finalizing the exclusion of pre-1976 mobile homes as part of comment 2(f)-3. Clarifying that recreational vehicle parks are excluded from the definition of dwelling for purposes of Regulation C is consistent with the exclusion of recreational vehicles.[125] The Bureau believes that, as discussed above, while manufactured home communities should be included in the definition of dwelling for purposes of Regulation C, including recreational vehicle parks would not be appropriate given that they are not frequently intended as long term housing.

The Bureau proposed a special rule for mixed-use properties that contained five or more individual dwelling units. The Bureau proposed that such a property always be considered to have a primary residential use and therefore report a covered loan secured by it. A few commenters supported the proposal to report all residential structures with five or more individual dwelling units, but most commenters who addressed mixed-use property argued that this was overbroad and that the current primary use rules should apply to multifamily residential structures as well. The Bureau is revising comment 2(f)-3 relating to mixed-use properties and finalizing it as comment 2(f)-4 by removing the sentence requiring that financial institutions always treat residential structures with five or more individual dwelling units as having a primary residential purpose. Requiring financial institutions to report mixed-use multifamily properties in all circumstances would result in reporting of multifamily properties with relatively small housing components and large commercial components. Data users could not differentiate between those properties and multifamily properties with larger housing components, which would decrease the data's usefulness. Thus retaining the existing discretion for financial institutions to determine the primary use for multifamily properties is appropriate.

The Bureau is adopting new comment 2(f)-5 relating to properties with medical and service components. Some commenters requested guidance on when properties such as retirement homes, assisted living, and nursing homes should be reported under Regulation C. Other commenters requested exclusions for all properties that provide any service or medical care component. The Bureau does not believe it is appropriate to exclude all such properties. Information about loans secured by properties that provide long-term housing and that are not transitory or primarily medical in nature provides valuable information on how financial institutions are serving the housing needs of their communities. The comment provides that properties that provide long-term housing with related services are reportable under Regulation C, while properties that provide medical care are not, consistent with the exclusion of hospitals in comment 2(f)-3. The comment also clarifies that such properties are reportable when they combine long-term housing and related services with a medical care component. The comment will facilitate compliance by expanding on earlier guidance provided by the Board.[126] Section 1003.2(f) is being adopted to implement, in part, the definition of “mortgage loan” in HMDA section 303(2). That term would be implemented through other terms in Regulation C as well, including the definitions of “closed-end mortgage loan” and “covered loan.” In combination with other relevant provisions in Regulation C, the Bureau Start Printed Page 66146believes that the proposed definition of “dwelling” is a reasonable interpretation of the definition in that provision. Section 1003.2(f) is also adopted pursuant to the Bureau's authority under section 305(a) of HMDA. Pursuant to section 305(a) of HMDA, the Bureau believes that this proposed definition is necessary and proper to effectuate the purposes of HMDA. The definition will serve HMDA's purpose of providing information to help determine whether financial institutions are serving the housing needs of their communities by providing information about various types of housing that are financed by financial institutions. The definition will facilitate compliance with HMDA requirements by providing clarity regarding what transactions must be reported for purposes of Regulation C.

2(g) Financial Institution

Regulation C requires institutions that meet the definition of financial institution to collect and report HMDA data. HMDA and current Regulation C establish different coverage criteria for depository institutions (banks, savings associations, and credit unions) than for nondepository institutions (for-profit mortgage-lending institutions other than banks, savings associations, or credit unions).[127] Under the current definition, depository institutions that originate one first-lien home purchase loan or refinancing secured by a one- to four-unit dwelling and that meet other criteria for “financial institution” must collect and report HMDA data, while certain nondepository institutions that originate many more mortgage loans annually do not have to collect and report HMDA data.

The Bureau proposed to adjust Regulation C's institutional coverage to adopt a uniform loan-volume threshold of 25 loans applicable to all financial institutions. Under the proposal, depository institutions and nondepository institutions that meet all of the other criteria for a “financial institution” would be required to report HMDA data if they originated at least 25 covered loans, excluding open-end lines of credit, in the preceding calendar year.

For the reasons discussed below, the Bureau is finalizing changes to Regulation C's institutional coverage and adopting uniform loan-volume thresholds for depository and nondepository institutions. The loan-volume thresholds require an institution that originated at least 25 closed-end mortgage loans or at least 100 open-end lines of credit in each of the two preceding calendar years to report HMDA data, provided that the institution meets all of the other criteria for institutional coverage.

The final rule's changes to institutional coverage will provide several important benefits. First, the coverage test will improve the availability of data concerning the practices of nondepository institutions. The expanded coverage of nondepository institutions will ensure more equal visibility into the practices of nondepository institutions and depository institutions. With expanded HMDA data about nondepository lending, the public and public officials will be better able to protect consumers because historically, some riskier lending practices, such as those that led to the financial crisis, have emerged from the nondepository market sector.[128]

Second, a significant number of lower-volume depository institutions will no longer be required to report HMDA data under the revised coverage test, which will eliminate those institutions' compliance costs. At the same time, the coverage test will preserve sufficient data for analyzing mortgage lending at the national, local, and institutional levels.

Third, the coverage test, by considering both an institution's closed-end and open-end origination volumes, will support the goal of increasing visibility into open-end dwelling-secured lending. This change to institutional coverage, along with the change to transactional coverage discussed in the section-by-section analysis of § 1003.2(o), will improve the public and public officials' ability to understand whether, and how, financial institutions are using open-end lines of credit to serve the housing needs of their communities. Incorporating open-end lending into the institutional coverage test will not require financial institutions that originate a small number of closed-end mortgage loans or open-end lines of credit to report those loans. As discussed below in the section-by-section analysis of § 1003.3(c)(11) and (12), the final rule also includes transactional thresholds. The transactional thresholds ensure that financial institutions that meet only the 25 closed-end mortgage loan threshold are not required to report their open-end lending, and that financial institutions that meet only the 100 open-end line of credit threshold are not required to report their closed-end lending.

Finally, by considering two years of lending for coverage, the final rule will provide stability in reporting obligations for institutions. Accordingly, a financial institution that does not meet the loan-volume thresholds established in the final rule and that has an unexpected and unusually high loan-origination volume in one year will not be required to report HMDA data unless it maintains that level of lending for two consecutive years. The specific changes to the definition of financial institution applicable to nondepository institutions and depository institutions are discussed below separately.

The Bureau also proposed technical modifications to the commentary to the definition of financial institution. The Bureau received no comments on the proposed comments 2(g)-1 or -3 through -6, and is finalizing the commentary as proposed and with technical modifications to conform to definition of financial institution included in the final rule. The Bureau is also renumbering proposed comments 2(g)-3 through -6 as comments 2(g)-4 through -7. The Bureau is also adopting new comment 2(g)-3 to address how to determine whether an institution satisfies the definition of financial institution after a merger or acquisition.

For ease of publication, the Bureau is reserving comment 2(g)-2, which sets forth the asset-size adjustment for depository financial institutions for each calendar year. The Bureau updates comment 2(g)-2 annually to make the adjustments to the level of the asset-size exemption for depository financial institutions required by HMDA section 309(b). The reserved comment will be replaced when the asset-size adjustment for the 2018 calendar year is published.

2(g)(1) Depository Financial Institutions

HMDA extends reporting responsibilities to depository institutions (banks, savings associations, and credit unions) that satisfy certain location, asset-size, and federally related requirements.[129] Regulation C implements HMDA's coverage criteria in the definition of financial institution in § 1003.2. Under the current definition of financial institution in § 1003.2, a bank, savings association, or credit union meets the definition of financial institution if it satisfies all of the following criteria: (1) On the preceding December 31, it had assets of at least $44 million; [130] (2) on the preceding December 31, it had a home or branch office in a Metropolitan Statistical Area (MSA); (3) during the previous calendar Start Printed Page 66147year, it originated at least one home purchase loan or refinancing of a home purchase loan secured by a first-lien on a one- to four-unit dwelling; and (4) the institution is federally insured or regulated, or the mortgage loan referred to in item (3) was insured, guaranteed, or supplemented by a Federal agency or intended for sale to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.[131]

Proposed § 1003.2(g)(1) modified the definition of financial institution by defining a new term, depository financial institution, and adding a loan-volume threshold to the coverage criteria for depository institutions. The proposed loan-volume threshold would require reporting only by depository institutions that met the current criteria in § 1003.2 and that originated at least 25 covered loans, excluding open-end lines of credit, in the preceding calendar year.

The Bureau received a large number of comments on proposed § 1003.2(g)(1). Industry commenters generally supported eliminating the requirement to report from low-volume depository institutions, but urged the Bureau to exclude more institutions from the requirement to report HMDA data. Consumer advocate commenters generally opposed decreasing Regulation C's depository institution coverage.

The Bureau is adopting § 1003.2(g)(1), which defines depository financial institution, to include banks, savings associations, and credit unions, that meet the current criteria to be considered a financial institution,[132] and originated at least 25 closed-end mortgage loans or 100 open-end lines of credit in each of the two preceding calendar years. The Bureau is finalizing the proposed exclusion of depository institutions that originate fewer than 25 closed-end mortgage loans. In addition, the final rule also requires lenders that meet the other criteria and that originate at least 100 open-end lines of credit to report HMDA data, even if those institutions did not originate at least 25 closed-end mortgage loans. The final rule includes a two-year look-back period for the loan-volume threshold. Each of these aspects of the final rule is discussed below separately.

Loan-Volume Threshold for Closed-End Mortgage Loans

The Bureau received many comments on proposed § 1003.2(g)(1). Industry commenters generally supported adopting a loan-volume threshold that would eliminate reporting by low-volume depository institutions,[133] but urged the Bureau to adopt a much higher loan-volume threshold that would exempt more depository institutions from reporting. Industry commenters stated that low-volume depository institutions lack resources and sophistication and that their data have limited value. Industry commenters argued that a higher loan-volume threshold would not impact the availability of data for analysis at the national level or the ability to analyze lending at an institutional level. The commenters also advocated a consistent approach between the loan-volume threshold in Regulation C and the small creditor and small servicer definitions in the Bureau's title XIV Rules.[134]

On the other hand, several community advocate commenters expressed strong opposition to decreasing Regulation C's coverage of depository institutions. Most noted that the depository institutions that would be excluded are currently reporting, and therefore are accustomed to reporting. Many also highlighted the importance of the data reported by the depository institutions that would be excluded at the community level, especially in rural and underserved areas or to low- and moderate-income (LMI) individuals and minorities. Commenters provided examples of reports and programs that rely on HMDA data at the census tract level.

Other community advocate commenters expressed support for the proposed loan-volume threshold, but noted concerns about the loss of data that may result if the Bureau adopted a loan-volume threshold greater than 25 loans. They highlighted concerns about the loss of data on particular types of transactions, such as applications submitted by African Americans, loans related to multifamily properties, and loans related to manufactured housing.

The Bureau believes that Regulation C's institutional coverage criteria should balance the burden on financial institutions with the value of the data reported. Depository institutions that are currently reporting should not bear the burden of reporting under Regulation C if their data are of limited value in the HMDA data set. At the same time, Regulation C's institutional coverage criteria should not impair HMDA's ability to achieve its purposes.

Higher closed-end mortgage loan-volume thresholds, as suggested by industry, might not significantly impact the value of HMDA data for analysis at the national level. For example, it is possible to maintain reporting of a significant percentage of the national mortgage market with a closed-end mortgage loan-volume threshold higher than 25 loans annually. In addition, it may also be true that data reported by some institutions that satisfy the proposed 25-loan-volume threshold may not be as useful for statistical analysis as data reported by institutions with much higher loan volumes.

However, the higher closed-end mortgage loan-volume thresholds suggested by industry commenters would have a material negative impact on the availability of data about patterns and trends at the local level. Data about local communities is essential to achieve HMDA's three purposes, which are to provide the public and public officials with sufficient information: (1) To determine whether institutions are meeting their obligations to serve the housing needs of the communities in which they are located; (2) to identify communities in need of targeted public and private investment; and (3) to assist in identifying discriminatory lending patterns and enforcing antidiscrimination statutes.[135] Public officials, community advocates, and researchers rely on HMDA data to analyze access to credit at the neighborhood level and to target programs to assist underserved communities and consumers.

Local and State officials have used HMDA data to identify and target relief to localities impacted by high-cost lending or discrimination. For example, policy makers in Lowell, Massachusetts identified a need for homebuyer counseling and education in Lowell, based on HMDA data, which showed a high percentage of high-cost loans Start Printed Page 66148compared to surrounding communities.[136] Similarly, in 2008 the City of Albuquerque used HMDA data to characterize neighborhoods as “stable,” “prone to gentrification,” or “prone to disinvestment” for purposes of determining the most effective use of housing grants.[137] As another example, Antioch, California, monitors HMDA data, reviews it when selecting financial institutions for contracts and participation in local programs, and supports home purchase programs targeted to households purchasing homes in census tracts with low origination rates.[138] In addition, the City of Flint Michigan, in collaboration with the Center for Community Progress, used HMDA data to identify neighborhoods in Flint to target for a blight eradication program.[139] Similarly, HMDA data helped bring to light discriminatory lending patterns in Chicago neighborhoods, resulting in a large discriminatory lending settlement.[140] Researchers and consumer advocates also analyze HMDA data at the census tract level to identify patterns of discrimination at the national level.[141]

Any loan-volume threshold will affect individual markets differently, depending on the extent to which individual markets are served by smaller creditors and the market share of those creditors. The Bureau believes that a 25-closed-end mortgage loan-volume threshold would impact the robustness of the data that would remain available only in a relatively small number of markets. For example, only about 45 census tracts would lose over 20 percent of currently reported data if a 25 closed-end mortgage loan-volume threshold is used to trigger reporting.[142] In contrast, the higher closed-end mortgage loan-volume thresholds requested by industry commenters would have a negative impact on data about more communities and consumers. For example, at a closed-end mortgage loan-volume threshold set at 100, the number of census tracts that would lose 20 percent of reported data would increase from about 45 tracts to about 385 tracts, almost eight times more than the number with a threshold set at 25 closed-end mortgage loans.[143] The number of affected lower-middle income tracts would increase from about 20 tracts to about 145 tracts, an increase of over six times over the number at the 25-loan level.[144] The Bureau believes that the loss of data in communities at closed-end mortgage loan-volume thresholds higher than 25 would substantially impede the public's and public officials' ability to understand access to credit in their communities.

In addition, the Bureau does not believe that it should set the closed-end mortgage loan-volume threshold at the levels in the small creditor and small servicer definitions in the Bureau's title XIV rules.[145] While the Bureau's title XIV rules and Regulation C may apply to some of the same institutions and transactions, Regulation C and the Bureau's title XIV rules have different objectives. HMDA aims to provide specific data to the public and public officials. For example, HMDA aims to provide sufficient information to the public and public officials to identify whether the housing needs of their communities are being served by the existing financial institutions. In contrast, the title XIV rule thresholds are designed to balance consumer protection and compliance burden in the context of very specific lending practices. As discussed above, an institutional coverage threshold at the levels of the small creditor and small servicer thresholds, which include thresholds of 2,000 and 5,000 loans, respectively,[146] would undermine both the utility of HMDA data for analysis at the local level and the benefits that HMDA provides to communities.

Finally, the Bureau believes that eliminating the requirement to report by institutions that originated fewer than 25 closed-end mortgage loans annually would meaningfully reduce burden. As discussed in part VII below, the proposed loan-volume threshold would relieve about 22 percent of depository institutions that are currently reporting of the obligation to report HMDA data on closed-end mortgage loans.

For the reasons discussed above, the Bureau is adopting a loan-volume threshold for depository institutions that will require reporting by depository institutions that originate at least 25 closed-end mortgage loans annually and meet the other applicable criteria in § 1003.2(g)(1).

The Bureau, as discussed below in part VI, believes that the 25 closed-end loan-volume threshold for depository institutions should go into effect on January 1, 2017, one year earlier than the effective date for most of the remaining rule. To effectuate this earlier effective date, the Bureau is amending the definition of “financial institution” in § 1003.2.

Loan-Volume Threshold for Open-End Lines of Credit

The loan-volume threshold provided in proposed § 1003.2(g)(1)(v) excluded open-end lines of credit from the loans that would count toward the threshold.[147] The Bureau solicited feedback on what types of loans should count toward the proposed loan-volume threshold and, in particular, whether open-end lines of credit should count toward the proposed loan-volume threshold. The final rule incorporates an institution's origination of open-end lines of credit into HMDA's institutional coverage criteria. Under the final rule, a financial institution will be required to Start Printed Page 66149report HMDA data on open-end lines of credit if it meets the other applicable criteria and originated at least 100 open-end lines of credit in each of the two preceding calendar years.[148]

Relatively few commenters provided feedback on this issue. Some industry commenters stated that they supported the proposed exclusion of open-end lines of credit from the loans that count toward the loan-volume threshold. These commenters also suggested excluding other types of loans from the loans that count toward the threshold, including commercial loans, home-equity loans, and reverse mortgages. On the other hand, some industry commenters and a community advocate commenter stated that open-end lines of credit should count toward the loan-volume threshold. They explained that this would prevent institutions from steering consumers to open-end lines of credit to avoid being required to report HMDA data.

The Bureau is not finalizing the proposed exclusion of open-end lines of credit from Regulation C's institutional coverage criteria for the reasons discussed below. As noted above, the Bureau believes that Regulation C's institutional coverage criteria should balance the burden on financial institutions with the value of the data reported. Depository institutions that are currently reporting should not bear the burden of reporting under Regulation C if their data are of limited value in the HMDA data set. At the same time, Regulation C's institutional coverage criteria should support HMDA's purposes. The Bureau has determined that the exclusion of open-end lines of credit from Regulation C's institutional coverage criteria would not appropriately balance those considerations.

As discussed in the section-by-section analysis of § 1003.2(o), the Bureau is finalizing the proposed expansion of the transactions reported in HMDA to include dwelling-secured, consumer-purpose open-end lines of credit, unless an exclusion applies.[149] Data about such transactions are not currently publicly available and, as discussed in the section-by-analysis of § 1003.2(o), the Bureau believes that having data about them will improve the understanding of how financial institutions are serving the housing needs of their communities and assist in the distribution of public sector investments. Like closed-end home-equity loans and refinancings, both of which are subject to broad coverage under the final rule, dwelling-secured credit lines may be used for home purchase, home improvement, and other purposes. Regardless of how they are used, they liquefy equity that borrowers have built up in their homes, which often are their most important assets. Borrowers who take out dwelling-secured credit lines increase their risk of losing their homes to foreclosure when property values decline, and in fact, the expansion of open-end line of credit originations in the mid-2000s contributed to the foreclosure crises that many communities experienced in the late 2000s.[150] Had open-end line of credit data been reported in HMDA, the public and public officials could have had a much earlier warning and a better understanding of potential risks, and public and private mortgage relief programs could have better assisted distressed borrowers in the aftermath of the crisis. As discussed in the section-by-section analysis of § 1003.2(o), dwelling-secured open-end lending is again on the rise now that the mortgage market has begun to recover from the crisis. The Bureau believes that it is important to improve visibility into this key segment of the mortgage market for all of the reasons discussed here and in the section-by-section analysis of § 1003.2(o).

By excluding open-end lines of credit from the loan-volume threshold, the proposed coverage test would not support that goal. Under the proposed institutional coverage test, institutions that originate large numbers of open-end lines of credit, but fewer than 25 closed-end mortgage loans, would not be required to report HMDA data on any of their loans. The proposed test may, therefore, exclude institutions with significant open-end lending, whose data may provide valuable insights into the open-end dwelling-secured market. The proposed test may also create an incentive for institutions to change their business practices to avoid reporting open-end data (e.g., by transferring all open-end lending to a separate subsidiary). This result would undermine the goals articulated in the section-by-section analysis of § 1003.2(o) to increase visibility into open-end dwelling-secured lending.

In addition to possibly excluding high volume open-end lenders, the proposed test may also burden some institutions with low open-end origination volumes with the requirement to report data concerning their open-end lending. The proposed institutional coverage test would require institutions with sufficient closed-end—but very little open-end—mortgage lending to incur costs to begin open-end reporting. As discussed in the section-by-section analysis of § 1003.2(o) below, commencing reporting of open-end lines of credit, unlike continuing to report closed-end mortgage loans, represents a new, and in some cases significant, compliance burden. The proposal would have imposed these costs on small institutions with limited open-end lending, where the benefits of reporting the data do not justify the costs of reporting.

In light of these considerations and those discussed in the section-by-section analysis of § 1003.2(o), the Bureau concludes that only institutions that originate at least 100 open-end lines of credit in each of the two preceding calendar years should report HMDA data concerning open-end lines of credit. Accordingly, the Bureau is adopting a separate, open-end loan-volume threshold to determine whether an institution satisfies the definition of financial institution. The Bureau is also adopting transactional coverage thresholds, discussed below in the section-by-section analysis of § 1003.3(c)(11) and (12). The institutional and transactional coverage thresholds are designed to operate in tandem. Under these thresholds, a financial institution will report closed-end mortgage loans only if it satisfies the closed-end mortgage threshold and will report open-end lines of credit only if it satisfies the separate open-end line credit threshold.

The Bureau believes that adopting a 100-open-end line of credit threshold will avoid imposing the burden of establishing open-end reporting on many small institutions with low open-end lending volumes. Specifically, the Bureau estimates that almost 3,400 predominately smaller-sized institutions, that would have been required to begin open-end reporting under the proposal will not be required to report open-end data under the final rule.[151] At the same time, the final rule Start Printed Page 66150will improve the availability of data concerning open-end dwelling-secured lending by collecting data from a sufficient array of institutions and about a sufficient array of transactions. The Bureau estimates that nearly 90 percent of all open-end line of credit originations will be reported under the final rule.[152] This change to institutional coverage, along with the finalization of mandatory reporting of all consumer-purpose open-end lines of credit, will improve the public and public officials' ability to monitor and understand all sources of dwelling-secured lending and the risks posed to consumers and communities by those loans.

For those reasons, the Bureau is modifying Regulation C's definition of depository financial institution by adopting an open-end loan-volume threshold. Under the revised definition, an institution satisfies the definition of a depository financial institution if it meets the other applicable criteria and either originated at least 25 closed-end mortgage loans or 100 open-end lines of credit in each of the two preceding calendar years.

Two-Year Look-Back Period

The proposed loan-volume threshold provided in proposed § 1003.2(g)(1)(v) considered only a financial institution's lending activity during the previous calendar year. The Bureau solicited feedback on whether to structure the loan-volume threshold over a multiyear period to provide greater certainty about the reporting requirements. Many industry commenters, including small entity representatives, urged the Bureau to include a multiyear look-back period in the loan-volume threshold.

The Bureau believes that a two-year look-back period is advisable to eliminate uncertainty surrounding reporting responsibilities. Under the final rule, a financial institution that does not meet the loan-volume thresholds established in the final rule and that experiences an unusual and unexpected high origination-volume in one year will not be required to begin HMDA reporting unless and until the higher origination-volume continues for a second year in a row. A first-time HMDA reporter must undertake significant one-time costs that include operational changes, such as staff training, information technology changes, and document retention policies. Therefore, the Bureau believes that it is appropriate to develop a two-year look-back period for HMDA reporting to provide more stability around reporting responsibilities. Regulations that implement the Community Reinvestment Act provide similar look-back periods to determine coverage.[153]

Therefore, the Bureau is finalizing the loan-volume threshold included in § 1003.2(g)(1)(v) and (2)(ii) with modifications to include a two-year look-back period. Sections 1003.2(g)(1)(v) and (2)(ii) provide that, assuming the other criteria are satisfied, an institution qualifies as a depository financial institution or a nondepository financial institution if the institution meets the applicable loan-volume threshold in each of the two preceding calendar years.

Multifamily-Only Depository Institutions

Under Regulation C, loans related to multifamily dwellings (multifamily mortgage loans) do not factor into the coverage criteria applicable to depository institutions. A depository institution that does not originate at least one home purchase loan or refinancing of a home purchase loan, secured by a first lien on a one- to four-unit dwelling in the preceding calendar year is not required to report HMDA data.[154] The Bureau did not propose to eliminate the current loan activity test included in the coverage criteria for depository institutions. The proposal also did not solicit feedback on this aspect of the current coverage criteria or on other aspects of depository institutions' current coverage criteria.

Many community advocate commenters nonetheless urged the Bureau to expand depository institution coverage to require reporting by depository institutions that originate multifamily mortgage loans, but do not originate first-lien one- to four-unit home purchase loans or refinancings, and that meet the other coverage criteria. They argued that the current formulation makes it more difficult to understand availability of credit for multifamily dwellings. No industry commenters addressed this issue.

The Bureau is not adopting the commenters' suggestion at this time. The Bureau recognizes that this prong of HMDA's depository institution coverage test may exclude certain depository institutions and their loans from HMDA data. However, the Bureau estimates that this provision excludes a very small number of depository institutions and loans, fewer than 20 institutions and about 200 covered loans under the final rule.[155]

The Bureau adopts § 1003.2(g)(1) pursuant to its authority under section 305(a) of HMDA to provide for such adjustments and exceptions for any class of transactions that the Bureau judges are necessary and proper to effectuate the purposes of HMDA. Pursuant to section 305(a) of HMDA, for the reasons given above, the Bureau finds that this proposed exception is necessary and proper to effectuate the purposes of HMDA. By reducing burden on financial institutions and establishing a consistent loan-volume test applicable to all financial institutions, the Bureau finds that the proposed provision will facilitate compliance with HMDA's requirements.

2(g)(2) Nondepository Financial Institutions

HMDA extends reporting responsibilities to certain nondepository institutions, defined as any person engaged for profit in the business of mortgage lending other than a bank, savings association, or credit union.[156] HMDA section 309(a) also authorizes the Bureau to adopt an exemption for covered nondepository institutions that are comparable within their respective industries to banks, savings associations, and credit unions with $10 million or less in assets in the previous fiscal year.[157]

Under the current definition of financial institution in § 1003.2, a nondepository institution is a financial institution if it meets three criteria. First, the institution satisfies the following loan-volume or amount test: In the preceding calendar year, the Start Printed Page 66151institution originated home purchase loans, including refinancings of home purchase loans, that equaled either at least 10 percent of its loan-origination volume, measured in dollars, or at least $25 million.[158] Second, on the preceding December 31, the institution had a home or branch office in an MSA.[159] Third, the institution meets one of the following two criteria: (a) On the preceding December 31, the institution had total assets of more than $10 million, counting the assets of any parent corporation; or (b) in the preceding calendar year, the institution originated at least 100 home purchase loans, including refinancings of home purchase loans.[160]

The Bureau proposed to modify the coverage criteria for nondepository institutions by replacing the current loan-volume or amount test with the same loan-volume threshold that the Bureau proposed for depository institutions. Proposed § 1003.2(g)(2) defined a new term, nondepository financial institution, and provided that an institution that is not a bank, saving association, or credit union is required to report HMDA data if it had a home or branch office in an MSA on the preceding December 31 and it originated at least 25 covered loans, excluding open-end lines of credit, in the preceding calendar year. For the reasons discussed below, the Bureau is adopting § 1003.2(g)(2), which revises the coverage criteria applicable to nondepository institutions. Under the final rule, a nondepository institution is a nondepository financial institution and required to report HMDA data if it has a home or a branch office in an MSA and if it originated at least 25 closed-end mortgage loans in each of the two preceding calendar years or 100 open-end lines of credit in each of the two preceding calendar years.

Loan-Volume Threshold

Most of the industry comments on this issue opposed the proposed expansion of nondepository institution coverage. These commenters explained that the proposed expansion would add only a small amount of additional data. Commenters also raised concerns about the burden on the nondepository institutions that would be newly covered. Some commenters suggested excluding more nondepository institutions from HMDA's institutional coverage, rather than expanding coverage of nondepository institutions, by adopting a loan-volume threshold higher than 100 closed-end mortgage loans annually, such as one set at origination of 250 closed-end mortgage loans annually. On the other hand, several consumer advocate commenters and a few industry commenters expressed support for the proposed expansion of nondepository institution coverage, arguing that nondepository institutions, like depository institutions, should be held accountable for their lending practices.

The Bureau believes, as stated in the proposal, that it is important to increase visibility into nondepository institutions' practices due to their history of riskier lending practices, including their role in the financial crisis, and the lack of available data about lower-volume nondepository institutions' mortgage lending practices. Therefore, the Bureau is adopting § 1003.2(g)(2), which requires reporting if the institution meets the location test and originated at least 25 closed-end mortgage loans in each of the two preceding calendar years or 100 open-end lines of credit in each of the two preceding calendar years. The Bureau estimates that the final rule will require HMDA reporting by as much as 40 percent more nondepository institutions than are currently reporting.[161]

The expansion of nondepository institution reporting will address the longstanding need for additional monitoring of the mortgage lending practices of nondepository institutions. During the years leading up to the financial crisis, many stakeholders called for increased monitoring of nondepository institution activity in the mortgage market. Concerns about nondepository institution involvement in the subprime market motivated the Board to expand nondepository institution coverage in 2002.[162] In 2007, the GAO also identified risks associated with the lending practices of nondepository institutions, which were not subject to regular Federal examination at the time.[163] GAO found that 21 of the 25 largest originators of subprime and Alt-A loans in 2006 were nondepository institutions and that those 21 nondepository institutions had originated over 80 percent in dollar volume of the subprime and Alt-A loans originated in 2006.[164] GAO concluded that nondepository institutions “may tend to originate lower-quality loans.” [165] In 2009, GAO found that nondepository institutions that reported HMDA data had a higher incidence of potential fair lending problems than depository institutions that reported HMDA data.[166] GAO also suggested that the loan products and marketing practices of those nondepository institutions may have presented greater risks for applicants and borrowers.[167]

In the aftermath of the financial crisis, Congress also expressed concerns about the lending practices of nondepository institutions generally and called for greater oversight of those institutions.[168] In the Dodd-Frank Act, Congress granted Federal supervisory authority to the Bureau over a broad range of mortgage-related nondepository Start Printed Page 66152institutions because it was concerned about nondepository institutions' practices generally and believed that the lack of Federal supervision of those institutions had contributed to the financial crisis.[169] In addition, officials that participated in the Financial Crisis Inquiry Commission hearings in 2010 noted that practices that originated in the nondepository institution mortgage sector, such as lax underwriting standards and loan products with potential payment shock, created competitive pressures on depository institutions to follow the same practices, which may have contributed to the broader financial crisis.[170] During the Board's 2010 Hearings, community advocates and Federal agencies specifically urged expansion of HMDA's institutional coverage to include lower-volume nondepository institutions. They stated that Regulation C's existing institutional coverage framework prevented them from effectively monitoring the practices of nondepository institutions.[171]

Despite these calls for increased monitoring of nondepository institutions, currently there are less publicly available data about nondepository institutions' mortgage lending practices than about those of depository institutions. Currently, under Regulation C, lower-volume depository institutions may be required to report even if they originated only one mortgage loan in the preceding calendar year, but lower-volume nondepository institutions may not be required to report unless they originated 100 applicable loans in the preceding calendar year.[172] In addition, outside of HMDA, there are less publicly available data about nondepository institutions than about depository institutions. Depository institutions, even those that do not report HMDA data, report detailed financial information at the bank level to the Federal Deposit Insurance Corporation (FDIC) or to the National Credit Union Association (NCUA), much of which is publicly available.[173] Nondepository institutions, on the other hand, report some data to the Nationwide Mortgage Licensing System and Registry (NMLSR), but detailed financial information and data on mortgage applications and originations are not publicly available.[174]

The final rule addresses this information gap by including the same loan-volume threshold for nondepository institutions as for depository institutions. The expanded coverage of nondepository institutions will provide more data to the public and public officials for analyzing whether lower-volume nondepository institutions are serving the housing needs of their communities. In addition, with the expanded coverage, the public and public officials will be better able to understand access to and sources of credit in particular communities, such as a higher concentration of risky loan products in a given community, and to identify the emergence of new loan products or underwriting practices. In addition, the final rule will provide more data to help the public and public officials in understanding whether a lower-volume nondepository institution's practices pose potential fair lending risks.

The final rule also considers origination of open-end lines of credit in the institutional coverage test for nondepository institutions. The Bureau believes that this revision is necessary to achieve greater visibility into all extensions of credit secured by a dwelling, as discussed above in the section-by-section analysis of § 1003.2(g)(1). In addition, for the reasons discussed above in the section-by-section analysis of § 1003.2(g)(1), the final rule also incorporates a two-year look-back period for nondepository institution coverage.

Asset-Size or Loan-Volume Threshold

The current coverage criteria for nondepository institutions include an asset-size or loan-volume threshold.[175] This test is satisfied both by institutions that meet a certain asset-size threshold and by those with smaller asset sizes that have a higher loan-volume.[176] The Bureau proposed to eliminate the asset-size or loan-volume threshold for nondepository institutions currently included in Regulation C because, for the reasons discussed above, the Bureau believes it is important to increase visibility into the practices of nondepository institutions. A few industry commenters objected to the proposal's elimination of the asset-size portion of the asset-size or loan-volume threshold for nondepository institutions. The Bureau believes that the current asset-size or loan-volume threshold is no longer necessary, because the Bureau is adopting the 25 closed-end mortgage loan-volume threshold and 100 open-end line of credit threshold discussed in this section. Under the final rule, nondepository institutions will be required to report if they originated 25 closed-end mortgage loans or 100 open-end lines of credit in each of the two preceding calendar years. An institution's asset-size will no longer trigger reporting (i.e., nondepository institutions with assets greater than $10 million that originated fewer than 25 closed-end mortgage loans or fewer than 100 open-end lines of credit in each of the two preceding calendar years will not be required to report HMDA data). In addition, at this time and in light of the coverage criteria being finalized, the Bureau does not believe the asset-size exemption is necessary. The Bureau believes that it is appropriate to exercise its discretion under HMDA section 309(a) to eliminate the exemption of certain nondepository institutions based on their asset-size.[177]

Start Printed Page 66153

Loan-Amount or Loan-Volume Threshold

No commenters discussed the proposed new implementation of HMDA sections 303(3)(B) and 303(5), which require persons other than banks, savings associations, and credit unions that are “engaged for profit in the business of mortgage lending” to report HMDA data. As the Bureau stated in the proposal, the Bureau interprets these provisions, as the Board also did, to evince the intent to exclude from coverage institutions that make a relatively small volume of mortgage loans.[178] In light of more recent activities of nondepository institutions discussed above, the Bureau believes that Regulation C's current coverage test for nondepository institutions inappropriately excludes certain persons that are engaged for profit in the business of mortgage lending. The Bureau estimates that financial institutions that reported 25 loans in HMDA for the 2012 calendar year originated an average of approximately $5,359,000 in covered loans annually. Given this level of mortgage activity, and consistent with the policy reasons discussed above, the Bureau interprets “engaged for profit in the business of mortgage lending” to include nondepository institutions that originated at least 25 closed-end mortgage loans or 100 open-end lines of credit in each of the two preceding calendar years. Due to the questions raised about potential risks posed to applicants and borrowers by nondepository institutions and the lack of other publicly available data sources about nondepository institutions, the Bureau believes that requiring additional nondepository institutions to report HMDA data will better effectuate HMDA's purposes.

2(h) Home-Equity Line of Credit

Regulation C currently defines “home-equity line of credit” as an open-end credit plan secured by a dwelling as defined in Regulation Z (Truth in Lending), 12 CFR part 1026. The Bureau did not propose to change this definition. Existing § 1003.4(c)(3), in turn, provides that financial institutions optionally may report home-equity lines of credit made in whole or in part for home improvement or home purchase purposes. As discussed in the section-by-section analysis of § 1003.2(e) and (o), the Bureau proposed to expand Regulation C's transactional coverage to require reporting of all home-equity lines of credit.

As part of the shift to dwelling-secured coverage, the Bureau proposed a separate definition for “open-end lines of credit” in § 1003.2(o), to reflect the proposed coverage of both consumer- and commercial-purpose lines of credit. As proposed, § 1003.2(o) generally defined an open-end line of credit as a dwelling-secured transaction that was an open-end credit plan under Regulation Z § 1026.2(a)(20), but without regard to whether the transaction: (1) Was for personal, family, or household purposes; (2) was extended by a creditor; or (3) was extended to a consumer. In other words, the proposal defined “open-end line of credit” broadly to include any dwelling-secured open-end credit transaction, whether for consumer or commercial purposes, and regardless of who was extending or receiving the credit. In general, then, the proposed definition of open-end line of credit included all transactions covered by the existing definition of home-equity line of credit in § 1003.2. For the reasons discussed below, the final rule removes the term “home-equity line of credit” from the regulation, reserves § 1003.2(h), and retains the term “open-end line of credit.”

As discussed in the section-by-section analysis of § 1003.2(o), the Bureau received a large number of comments about its proposal to require reporting of all dwelling-secured open-end lines of credit, and those comments are addressed in that section. One commenter specifically addressed the Bureau's proposal to define both “home-equity line of credit” and “open-end line of credit.” The commenter supported adding a definition for “open-end line of credit” but believed that distinguishing between open-end lines of credit and home-equity lines of credit was confusing. The commenter suggested that the Bureau streamline the types of covered transactions into dwelling-secured closed-end mortgage loans, dwelling-secured open-end lines of credit, and reverse mortgages (whether closed- or open-end).

As discussed in the section-by-section analysis of § 1003.2(o), the final rule adopts the proposed definition of open-end line of credit largely as proposed. For simplicity, the final rule removes the defined term “home-equity line of credit” and retains the defined term “open-end line of credit” to refer to all open-end credit transactions covered by the regulation.

The final rule requires financial institutions to report whether a transaction is an open-end line of credit (§ 1003.4(a)(37)), a commercial- or business-purpose transaction (§ 1003.4(a)(38)), or a reverse mortgage (§ 1003.4(a)(36)). Using this information, it will be possible to determine whether a given open-end line of credit primarily is for consumer purposes (i.e., a home-equity line of credit) or primarily is for commercial or business purposes, and also whether it is a reverse mortgage. The Bureau thus believes that it is unnecessary to retain the defined term “home-equity line of credit.”

2(i) Home Improvement Loan

Proposed § 1003.2(i) provided that a home improvement loan was any covered loan made for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling, or the real property on which the dwelling is located. Pursuant to the Bureau's authority under HMDA section 305(a), the proposal revised § 1003.2(i) and its accompanying commentary to conform to the proposal to remove non-dwelling-secured home improvement loans from coverage, and to clarify when to report dwelling-secured home improvement loans. For the reasons discussed below, the Bureau is finalizing § 1003.2(i) largely as proposed, with certain technical revisions to the regulation text,[179] and with revisions to the commentary to streamline it and to add examples or details requested by commenters.

The Bureau received numerous comments from consumer advocacy groups, financial institutions, trade associations, and other industry participants concerning proposed § 1003.2(i). Most of the comments focused on the proposal to exclude non-dwelling-secured home improvement loans from reporting, with nearly all industry participants supporting the proposal and consumer advocacy groups generally opposing it. A few commenters requested that the Bureau clarify certain aspects of the commentary to the home improvement loan definition.

Non-Dwelling-Secured Home Improvement Lending

Consumer advocacy groups uniformly stated that the Bureau should maintain reporting of home improvement lending, because such lending has been particularly important to low- and Start Printed Page 66154moderate-income borrowers and borrowers of color as a way to finance home repairs. Most of these commenters did not specifically distinguish between dwelling-secured and non-dwelling-secured home improvement lending or specify how they use non-dwelling-secured home improvement lending data, in particular, to achieve HMDA's purposes.

One financial institution urged the Bureau to retain reporting of non-dwelling-secured home improvement lending, at least on an optional basis. This commenter stated that non-dwelling-secured home improvement lending can be critical in revitalizing low-to-moderate income communities, including in rural areas, and for financing manufactured home improvements. The commenter expressed concern that financial institutions might stop offering non-dwelling-secured home improvement loans if they were no longer HMDA-reportable. The commenter believed that borrowers would be steered toward home-equity lines of credit, which might be unavailable to low- and moderate-income borrowers with inadequate home equity. The commenter argued that optional reporting would relieve burden for institutions that choose not to report, while allowing institutions that do report to receive credit for serving the housing needs of their communities.

All other industry commenters that addressed proposed § 1003.2(i) supported excluding non-dwelling-secured home improvement loans from coverage.[180] Many of these commenters stated that reporting such loans is burdensome and costly because it is difficult to determine whether the loan will be used for a housing-related purpose, because reporting errors occur frequently, and because examiners have not treated non-dwelling-secured home improvement lending consistently. Other commenters noted that the value of non-dwelling-secured home improvement loan data is limited. Interest rates and terms can vary dramatically depending on the loan and non-dwelling collateral used, and consumers now often use home-equity lines of credit. One commenter stated that the burdens of reporting can outweigh the benefits of making the loans, because non-dwelling-secured home improvement loan amounts tend to be small.

The Bureau is finalizing § 1003.2(i) as proposed, without a requirement to report non-dwelling-secured home improvement loans. At this time, the Bureau does not believe that the benefits of requiring reporting of such loans justify the burdens. For example, many consumer advocacy group commenters urged the Bureau to retain reporting of all home improvement loans because such loans are important to low-to-moderate income communities. These commenters, however, did not state that they or others have used HMDA data about non-dwelling-secured home improvement loans to further HMDA's purposes. Moreover, as discussed in the proposal, non-dwelling-secured home improvement loans may have been common when HMDA was enacted. However, such loans now comprise only a small fraction of transactions reported,[181] and borrowers have other non-dwelling-secured credit options, such as credit cards, to fund home improvement projects.[182] Data about credit card usage for home improvement purposes, however, is not reported under HMDA. Without such data, it is not clear that HMDA users can evaluate fairly the non-dwelling-secured home improvement loan data that is reported.

On the other hand, the burdens of reporting such transactions appear to be significant. As discussed in the proposal, these loans are processed, underwritten, and originated through different loan origination systems than are used for dwelling-secured lending.[183] As noted above, many industry commenters confirmed and elaborated on the burdens of reporting non-dwelling-secured home improvement loans discussed in the Bureau's proposal.

On balance, the Bureau concluded that the compliance burden that will be eliminated by streamlining the regulation to require reporting only of dwelling-secured loans justifies the relatively small data loss that will accompany the change. The Bureau considered, as one commenter suggested, maintaining optional reporting of non-dwelling-secured home improvement loans. However, one of the proposal's goals was to simplify Regulation C's transactional coverage. Maintaining optional reporting of non-dwelling-secured home improvement loans would inhibit the Bureau's ability to reduce regulatory complexity by focusing on dwelling-secured lending for an apparently small benefit.[184] Thus, the final rule requires financial institutions to report only dwelling-secured loans. Unsecured home improvement loans and home improvement loans secured by collateral other than a dwelling (e.g., a vehicle or savings account), are not reportable.

One commenter objected that the Bureau's proposal to eliminate reporting of non-dwelling-secured home improvement loans did not address the fact that the HMDA statute still requires reporting of home improvement loans. The Bureau believes, however, that requiring financial institutions to report dwelling-secured home improvement loans satisfies the statutory requirement. As the proposal noted, HMDA does not expressly define “home improvement loan.” Although non-dwelling-secured home improvement loans traditionally have been reported, the Bureau believes that it is reasonable to interpret HMDA section 303(2) to include only loans that are secured by liens on dwellings, as that interpretation aligns with common definitions of the term mortgage loan, and such loans will include home improvement loans.[185]

The Bureau also is eliminating reporting of non-dwelling-secured home improvement loans pursuant to its authority under section 305(a) of HMDA, as the Bureau believes that this adjustment and exception is necessary and proper to effectuate HMDA's purposes and to facilitate compliance. Specifically, the Bureau believes that non-dwelling-secured home improvement loan data may distort the overall quality of the HMDA dataset for the reasons described above. The Bureau believes that eliminating reporting of non-dwelling-secured home improvement loans will improve the Start Printed Page 66155quality of HMDA data, which will provide citizens and public officials of the United States with sufficient information to enable them to determine whether financial institutions are meeting the housing needs of their communities and to assist public officials in determining how to distribute public sector investments in a manner designed to improve the private investment environment. The Bureau further believes that eliminating these loans will facilitate compliance by removing a significant reporting burden.

Home Improvement Loan Definition

A few commenters asked the Bureau to clarify certain aspects of home improvement loan reporting as addressed in the commentary. The final rule adopts the commentary generally as proposed, but with several revisions and additions to address commenters' questions, as well as certain other modifications for clarity, as discussed below.

Proposed comment 2(i)-1, which provided general guidance about home improvement loans, is adopted as proposed, but with several non-substantive revisions for clarity and with an additional example of a transaction that meets the home improvement loan definition. Consistent with the final rule's requirement under § 1003.2(d) to report loans completed pursuant to a New York CEMA, final comment 2(i)-1 explains that, where all or a portion of the funds from a CEMA transaction will be used for home improvement purposes, the loan is a home improvement loan under § 1003.2(i). One commenter asked whether loans that are not “classified” by an institution as home improvement loans nonetheless should be reported as home improvement loans if the supporting documents show that they were for home improvement purposes. The classification test in existing Regulation C applies only to non-dwelling-secured home improvement loans. As discussed, the final rule eliminates such loans from coverage. Under the final rule, there no longer is any requirement that a loan be “classified” by a financial institution as a home improvement loan to be a home improvement loan under § 1003.2(i).

The Bureau did not propose to revise existing comment Home improvement loan-3. The final rule adopts this comment as comment 2(i)-3 with minor revisions to reflect the fact that the final rule requires reporting of both closed- and open-end transactions.

Proposed comment 2(i)-4 concerning mixed-use properties is adopted largely as proposed. The comment is revised for clarity and to eliminate the statement that a home improvement loan for a mixed-use property is reported as such only if the property itself is primarily residential in nature. Under § 1003.2(e) and (f), a transaction is a covered loan and subject to Regulation C only if it is secured by a dwelling, which by definition is property that is primarily residential in nature. Thus, financial institutions need not separately consider whether a dwelling primarily is residential in nature when determining whether a loan is a home improvement loan under § 1003.2(i).

The proposal would have removed existing comment Home improvement loan-5, which discusses how to report a home improvement loan that also is a home purchase loan or a refinancing, because the proposal consolidated all such reporting instructions in § 1003.4. The final rule retains existing comment Home improvement loan-5 and adopts it as comment 2(i)-5 to explain that a transaction with multiple purposes may meet multiple loan-type definitions. The comment provides an example to illustrate that a transaction that meets the definition of a home improvement loan under § 1003.2(i) may also meet the definition of a refinancing under § 1003.2(p). Comment 2(i)-5 also specifies that instructions for reporting a multiple-purpose covered loan are in the commentary to § 1003.4(a)(3).

A few commenters asked the Bureau to clarify further how a financial institution determines whether a loan is a home improvement loan. For example, one commenter asked whether a cash-out refinance also is a home improvement loan if the borrower states that some of the cash may be used for home improvement. Another asked whether a loan is a home improvement loan when a consumer states that a loan is for home improvement purposes but it is in fact for purchasing a household item. This commenter also requested that “small-dollar” home improvement loans be exempt from reporting.

In response to these comments, the final rule includes comment 2(i)-6, which provides that a financial institution relies on the borrower's stated purpose for the loan when the application is received or the credit decision is made, and need not confirm that the borrower actually uses any of the funds for home improvement purposes. If the borrower does not state that any of the funds will be used for home improvement purposes, or does not state any purpose for the funds, the loan is not a home improvement loan. Section 1003.4(a)(3) and related commentary provide instructions about how to report such loans. See the section-by-section analysis of § 1003.4(a)(3). The final rule does not specifically exempt small-dollar home improvement loans, because the Bureau believes that information about such loans is valuable, but the final rule retains in § 1003.3(c)(7) the current exclusion from coverage for transactions for less than $500.

2(j) Home Purchase Loan

Regulation C currently provides that a home purchase loan is a loan secured by and made for the purpose of purchasing a dwelling. Proposed § 1003.2(j) revised the definition to provide that a home purchase loan is a “covered loan” extended for the purpose of purchasing a dwelling. The proposal also revised the commentary to proposed § 1003.2(j) in several ways, primarily to conform the commentary to the proposal's overall shift to covering only dwelling-secured transactions. Only a handful of commenters addressed proposed § 1003.2(j) or its accompanying commentary, and none of them specifically commented on the proposed regulation text. The Bureau is finalizing § 1003.2(j) largely as proposed, with technical revisions for clarity.[186] The Bureau is finalizing the commentary to § 1003.2(j) with revisions to address questions that commenters raised regarding assumptions, to clarify how Regulation C applies to multiple-purpose transactions, and to remove certain comments as unnecessary.

First, the Bureau is not adopting proposed comment 2(j)-1 in the final rule. Proposed comment 2(j)-1 provided general guidance about the definition of home purchase loan, including an illustrative example stating that a home purchase loan includes a closed-end mortgage loan but does not include a home purchase completed through an installment contract. No commenters addressed proposed comment 2(j)-1. The final rule incorporates the terms “closed-end mortgage loan” and “open-end credit plan” in § 1003.2(j). Thus, there is no need to restate in commentary that a closed-end mortgage loan used to purchase a dwelling is a home purchase loan. The Bureau is finalizing the illustrative example discussing installment contracts in commentary to § 1003.2(d), which Start Printed Page 66156provides guidance about the term closed-end mortgage loan. See the section-by-section analysis of § 1003.2(d).

The proposal renumbered as proposed comment 2(j)-2 existing comment Home purchase loan-1, which provides that a home purchase loan includes a loan secured by one dwelling and used to purchase another dwelling. Two industry commenters stated that “home purchase loan” should not include these loan types and recommended that they be defined instead as “home-equity loans.” The commenters stated that, under Regulation Z, a loan is not a home purchase loan (i.e., a “residential mortgage transaction” under Regulation Z § 1026.2(a)(24)) unless its funds are used to purchase the property securing the dwelling. The commenters stated that industry stakeholders generally view loans secured by one dwelling but used to purchase a different dwelling as home-equity loans, not as purchase loans.

Revising § 1003.2(j) in the way that commenters suggested would better align Regulations C and Z. In general, regulatory consistency is desirable; however, HMDA's purposes are different from Regulation Z's purposes. To understand how financial institutions are meeting the housing needs of their communities, it is important to understand the total volume of loans made to purchase dwellings, even if those loans are secured by dwellings other than the ones being purchased. The suggested revision also would require adding a new defined term, home-equity loan, to Regulation C. This term necessarily would lump together loans secured by one dwelling, but used to purchase, improve, or refinance loans on other dwellings; reporting the loans in this way would obscure the valuable information described above. Thus, the Bureau is finalizing proposed comment 2(j)-2 largely as proposed, with certain non-substantive revisions for clarity, and renumbered as comment 2(j)-1.

The Bureau received no comments addressing proposed comment 2(j)-3, which made only minor revisions to existing comment Home purchase loan-2 addressing whether a transaction to purchase a mixed-use property is a home purchase loan. However, the final rule eliminates this comment as unnecessary. As proposed, the comment stated that a transaction to purchase a mixed-use property is a home purchase loan if the property primarily is used for residential purposes, and it provided guidance about how to determine the primary use of the property. Under the final rule, a transaction is not covered by Regulation C unless it is secured by a dwelling, which is defined under § 1003.2(f) to include only mixed-use properties that primarily are used for residential purposes. Because financial institutions will have determined under § 1003.2(f) whether a mixed-used property is a dwelling, there is no need to reevaluate that decision when determining whether a transaction is a home purchase loan.

Consistent with the proposal's consolidation of excluded transactions into § 1003.3(c), the proposal moved existing comment Home purchase loan-3, which discusses agricultural-purpose loans, to proposed comment 3(c)(9)-1. No commenters addressed this reorganization, and the Bureau is finalizing proposed comment 3(c)(9)-1, with revisions, as discussed in the section-by-section analysis of § 1003.3(c)(9).

The proposal did not propose to revise existing comments Home purchase loan-4, -5, or -6, and the Bureau received no comments addressing them. These comments are adopted in the final rule as comments 2(j)-2 through -4, respectively, with minor revisions for clarity.

As discussed in the section-by-section analysis of § 1003.1(c) regarding Regulation C's scope, the proposal reorganized the commentary to § 1003.1(c). Consistent with that reorganization, the proposal incorporated a revised version of existing comment 1(c)-9, which discusses coverage of assumptions, as comment 2(j)-7 to the definition of home purchase loan. One industry commenter addressed this comment. The commenter argued that proposed comment 2(j)-7 should specify, consistent with Regulation Z, that a successor-in-interest transaction is not an assumption.

The final rule adopts proposed comment 2(j)-7 as comment 2(j)-5, with revisions to address the comment received, and with other clarifying revisions, as follows. First, comment 2(j)-5 states that an assumption is a home purchase loan only if the transaction is to finance the new borrower's acquisition of the property (and not, e.g., if the borrower has succeeded in interest to ownership).[187] Also, consistent with § 1003.2(d) and comment 2(d)-2.ii, which provide that transactions documented pursuant to New York consolidation, extension and modification agreements are extensions of credit, comment 2(j)-5 clarifies that a transaction in which borrower B finances the purchase of borrower A's dwelling by assuming borrower A's existing debt obligation is a home purchase loan even if the transaction is documented pursuant to a New York consolidation, extension, and modification agreement.

The Bureau proposed to remove existing comment Home purchase loan-7, which described how to report multiple-purpose home-purchase loans, because the proposal consolidated all such reporting instructions in § 1003.4. The final rule retains as comment 2(j)-6 a variation of existing comment Home purchase loan-7 to explain that a transaction with multiple purposes may meet multiple loan-type definitions. The comment provides an illustrative example and specifies that instructions for reporting a multiple-purpose loan are in the commentary to § 1003.4(a)(3).

Two commenters requested additional guidance about the definition of home purchase loan. One commenter stated that additional guidance is necessary because there are several ways to transfer property ownership to third parties, not all of which are called a “purchase.” The commenter did not specify the other methods it was referencing. As discussed, comment 2(j)-5 provides guidance about two additional methods of title transfer. The Bureau can address additional scenarios in the future, if necessary. Another commenter requested guidance about whether a loan to one sibling to purchase half of another sibling's home, which the other sibling owns outright, is a reportable home purchase loan or a refinancing when the loan is secured by the portion of the home being purchased. Based on the details provided, such a transaction is reportable, because it is a dwelling-secured loan and is not excluded under § 1003.3(c). Because it is for the purpose of purchasing a dwelling, and it does not satisfy and replace an existing, dwelling-secured debt obligation, it is a home purchase loan but it is not a refinancing. See the section-by-section analysis of § 1003.2(p).

2(k) Loan/Application Register

Regulation C requires financial institutions to collect and record reportable data in a format prescribed by the regulation. The Bureau proposed to refer to this format as the “loan application register” to improve the readability of the regulation and proposed to define it as a register in the format prescribed in appendix A. The Bureau did not receive any comments on this proposed definition. As Start Printed Page 66157explained in part I.B above, in order to streamline the regulation, the final rule removes appendix A. Therefore, the Bureau is revising proposed § 1003.2(k) to remove references to appendix A and defining loan/application register to mean both the record of information required to be collected pursuant to § 1003.4 and the record submitted annually or quarterly, as applicable, pursuant to § 1003.5(a). In addition, the Bureau is adding “/” to maintain consistency with the term as currently used and to clarify that the data recorded represents applications as well as loan originations. Accordingly, the Bureau is adopting § 1003.2(k) with revisions.

2(l) Manufactured Home

The Bureau proposed to make technical corrections and minor wording changes to the definition of manufactured home. Commenters generally supported aligning the definition of manufactured home with the HUD standards and clarifying that other factory-built homes and recreational vehicles are excluded. Other comments related to coverage and reporting of manufactured homes and similar residential structures are discussed in the section-by-section analysis of § 1003.2(f) and § 1003.4(a)(5). The Bureau is finalizing § 1003.2(l) generally as proposed, with minor revisions. The definition is revised to clarify that, for purposes of the construction method reporting requirement under § 1003.4(a)(5), a manufactured home community should be reported as manufactured home. The Bureau received no specific feedback on proposed comments 2(l)-1 and -2, which are adopted as proposed.

2(m) Metropolitan Statistical Area (MSA) and Metropolitan Division (MD)

Section 1003.2 of Regulation C sets forth a definition for the terms “metropolitan statistical area or MSA” and “Metropolitan Division or MD.” The Bureau is adopting a technical amendment to this definition and its commentary. No substantive change is intended.

2(n) Multifamily Dwelling

The Bureau proposed to add a new definition of multifamily dwelling as § 1003.2(n). Commenters supported the Bureau's proposal to define a multifamily dwelling as one that includes five or more individual dwelling units. A few commenters also supported the inclusion of manufactured home parks, as discussed in the proposal.[188] Some commenters requested clarification on the reporting requirements for multifamily dwellings. Other comments related to multifamily residential structures are addressed in the section-by-section analysis of § 1003.2(f). The Bureau is finalizing § 1003.2(n) as proposed. In response to the requests for clarification, the Bureau is also adding two comments related to the definition of multifamily dwelling. Comment 2(n)-1 clarifies how the definition interacts with the definition of dwelling and its reference to multifamily residential structures. Comment 2(n)-2 clarifies the special reporting requirements applicable to multifamily dwellings.

2(o) Open-End Line of Credit

HMDA section 303(2) defines “mortgage loan” as a residential real property-secured loan or a home improvement loan but does not specifically address coverage of open-end lines of credit secured by dwellings. Regulation C also currently does not define the term “open-end line of credit.” However, as discussed in the section-by-section analysis of § 1003.2(h), Regulation C currently defines the term “home-equity line of credit” as an open-end credit plan secured by a dwelling as defined in Regulation Z. Under existing Regulation C § 1003.4(c)(3), financial institutions may, but are not required to, report home-equity lines of credit made in whole or in part for home purchase or home improvement purposes.[189] Commercial-purpose lines of credit secured by a dwelling fall outside of Regulation Z's definition of open-end credit plan and thus are not optionally reported as home-equity lines of credit under existing Regulation C.

In 2000, in response to the increasing importance of open-end lending in the housing market, the Board proposed to revise Regulation C to require mandatory reporting of all home-equity lines of credit.[190] The Board's proposal was based on research showing that about 70 percent of all home-equity lines of credit were being used at least in part for home improvement purposes. The Board believed that requiring reporting of all home-equity lines of credit would provide more complete information about the home improvement market, one of HMDA's original purposes.[191] The Board's 2002 final rule concluded that, while collecting data on home-equity lines of credit would give a more complete picture of the home mortgage market, the benefits of mandatory reporting relative to other proposed changes (such as collecting information about higher-priced loans) did not justify the increased burden.[192] The Board thus decided to retain optional reporting.

Open-end mortgage lending continued to increase in the years following the Board's 2002 final rule, and the Board continued to receive feedback urging such lending to be reported in HMDA.[193] The Bureau received similar feedback after it assumed rulemaking authority for HMDA from the Board in 2011.[194] The feedback suggested that home-equity lines of credit have become increasingly important to the housing market and that requiring such lending to be reported under Regulation C would help to understand how financial institutions are meeting the housing needs of communities. The Bureau thus proposed to require financial institutions to report all home-equity lines of credit, as well as all commercial-purpose lines of credit secured by a dwelling.

Specifically, the Bureau proposed new § 1003.2(o) to define the term “open-end line of credit,” which included any dwelling-secured open-end credit plan, as described under Regulation Z § 1026.2(a)(20), even if the credit was issued by someone other than a creditor (as defined in Regulation Z § 1026.2(a)(17)), to someone other than a consumer (as defined in Regulation Z § 1026.2(a)(11)) and for business rather than consumer purposes (as defined in Start Printed Page 66158Regulation Z § 1026.2(a)(12)). Together with proposed § 1003.2(e), which provided that all open-end lines of credit were “covered loans,” proposed § 1003.2(o) provided that financial institutions must report: (1) all consumer-purpose home-equity lines of credit, which currently are optionally reported, and (2) all dwelling-secured commercial-purpose lines of credit, which currently are not reported. In short, the proposal provided for reporting of all dwelling-secured open-end lines of credit.[195]

As discussed below and in the section-by-section analyses of § 1003.2(e) and (g) and of § 1003.3(c)(10) and (12), the Bureau is finalizing mandatory reporting of open-end lines of credit, but with certain modifications from the proposal to: (1) Limit the number of institutions that will report; (2) limit the number of transactions that will be reported; (3) clarify certain reporting requirements for open-end lines of credit; and (4) clarify the definition of “open-end line of credit.” As discussed below, the Bureau believes that finalizing mandatory reporting of open-end lines of credit will provide information critical to HMDA's purposes. The Bureau understands that, notwithstanding the modifications described above, financial institutions may incur significant costs as a result of open-end line of credit reporting. However, the Bureau believes that the benefits of reporting justify the burdens.

The Bureau received a large number of comments about proposed § 1003.2(o). The vast majority of the comments discussed whether reporting of dwelling-secured open-end lines of credit should be mandatory and, if so, the scope of transactions that should be reported. A few commenters raised specific questions about the proposed definition of open-end line of credit. Consumer advocacy group commenters and researchers favored mandatory reporting, while the majority of industry commenters strongly opposed it. Among industry commenters that addressed mandatory reporting, most objected to reporting any open-end lines of credit. Some, however, specifically objected to mandatory reporting of commercial-purpose lines of credit. For organizational purposes, the Bureau addresses in this section-by-section analysis comments about: (1) Open-end line of credit coverage generally; (2) consumer-purpose line of credit coverage specifically; and (3) the definition of “open-end line of credit” in proposed § 1003.2(o).[196] Comments specific to commercial-purpose lines of credit are addressed in the section-by-section analysis of § 1003.3(c)(10) concerning commercial-purpose transactions.

Consumer advocacy group commenters and researchers favored mandatory reporting of all consumer-purpose open-end lines of credit. A large number of these commenters stated that data about open-end lines of credit would be valuable in assessing whether neighborhoods are receiving the full range of credit that they need on nondiscriminatory terms. The commenters stated that open-end lines of credit are much more widely used today than when HMDA was enacted, that problematic practices were associated with these products during the 2000s, that defaults on open-end credit lines contributed significantly to the foreclosure crises in many neighborhoods, and that open-end credit lines are important sources of home improvement financing, particularly in minority and immigrant communities. The commenters stated that fully understanding the mortgage market, including problems relating to overextension of credit in minority and immigrant neighborhoods, requires more detailed information about such transactions. They stated that information about home-equity products, for example, is important for understanding the total amount of debt and, in turn, default risk on a property.

A few consumer advocacy group commenters noted that open-end lines of credit, especially when fully drawn at account opening, can be interchangeable with closed-end products such as closed-end, subordinate-lien loans and cash-out refinancings. All such products provide borrowers with cash to do something, borrowers face the same risks of discrimination, and borrowers put their homes on the line in exchange for the funds. Commenters argued that requiring reporting of all dwelling-secured closed-end mortgage loans while continuing optional reporting of open-end lines of credit only would encourage more open-end lending, which in turn would decrease visibility into home-secured lending. Finally, one commenter noted that there is a lack of other publicly available information about dwelling-secured open-end lines of credit.

A minority of industry commenters either supported (or stated that they did not oppose) reporting consumer-purpose open-end lines of credit.[197] A few of these commenters argued that eliminating optional open-end line of credit reporting for consumer-purpose credit lines would reduce confusion and compliance costs by streamlining reporting obligations, or would improve data for HMDA users. Some industry commenters believed that data about consumer-purpose open-end lines of credit would serve HMDA's purposes. For example, one industry commenter acknowledged that, even though reporting open-end lines of credit would be burdensome, the data reported would provide additional information for fair lending use.

A large number of industry commenters objected to mandatory reporting of consumer-purpose open-end lines of credit; a few of these commenters suggested that only credit lines for home purchase, home improvement or refinancing should be reported. Commenters generally asserted that mandatory reporting would impose significant burdens for little benefit. Some argued that the burdens are what have kept most financial institutions from voluntarily reporting home-equity line of credit data under current Regulation C. Financial institutions of various types and sizes objected to mandatory reporting, but smaller- or medium-sized banks and their industry associations, and credit unions and their industry associations, generally expressed the greatest concerns, with some stating that open-end coverage was their primary concern with the proposal.

A primary concern among many financial institutions and industry associations, and particularly among many credit unions and credit union associations, was the operational costs and burdens of collecting and reporting data about open-end lines of credit. The most commonly cited operational difficulty was that financial institutions treat open-end lines of credit more like consumer loans than mortgage loans. Thus, financial institutions frequently originate and maintain data about open-end lines of credit on different computer systems than traditional mortgages, or use different software vendors. Commenters asserted that upgrading, replacing, or programming their systems Start Printed Page 66159to enable open-end reporting would be difficult, expensive, and time-consuming. For example, financial institutions could use their mortgage loan origination systems for open-end reporting, but those systems are more expensive than the consumer systems typically used for credit lines. Commenters noted that, if financial institutions decided to keep separate systems for open- and closed-end credit, they would incur costs from programming and adding data fields in multiple systems, as well as from compiling and aggregating the data. For some (smaller) institutions, aggregating the data would mean manually entering data from two different systems.

Some commenters similarly observed that financial institutions use different departments, staff, and processes to originate open-end lines of credit and traditional mortgages. Commenters argued that open-end reporting would require financial institutions to incur costs to change their operations. For example, consumer lending staff either would need to be trained on HMDA reporting, or credit line originations would need to be moved from the consumer- to the mortgage-lending divisions of financial institutions. Some commenters also argued that reporting open-end lines of credit would require institutions to spend even more time and money on quality control and pre-submission auditing and would increase the risk of errors.

A number of commenters perceived other types of operational burdens. For example, a few commenters emphasized that the reporting burden would be particularly great because it would be entirely new even for most current HMDA reporters, so infrastructure would need to be built from the ground up. A few commenters similarly worried that some institutions that focus on open-end lending would become HMDA reporters for the first time and would incur significant start-up expenses to begin reporting. Finally, some commenters noted that aligning open-end lending with the MISMO data standards would be burdensome.

Many industry commenters argued that reporting all open-end line of credit applications and originations would increase institutions' ongoing HMDA reporting costs because their volume of reportable transactions would increase significantly. Some commenters asserted that the proposal underestimated the increase. Only a handful of commenters specifically estimated how many additional applications and originations they would be required to report. Estimated increases ranged from 20 percent to 200 percent per institution, or from hundreds to thousands of transactions, depending on the institution's size and volume of open-end mortgage lending. Many commenters, particularly smaller institutions, stated that they would need to hire additional staff, or that they would need to allocate more money to technology and staff, to handle the volume increase. A few commenters estimated that collecting data about all dwelling-secured open-end lines of credit would double or triple their ongoing compliance costs.

Several commenters also argued that reporting open-end lines of credit would be burdensome because gathering and accurately reporting information about credit lines would be difficult. For example, several industry associations stated that fewer data are gathered from consumers for small-dollar, open-end credit lines than for traditional mortgages, so lenders would need to create systems and procedures to collect the data. One commenter further noted that lines of credit are consumer loan products with different offerings by different institutions and are less standardized than traditional mortgages. Another commenter pointed out that open-end lines of credit are exempt from other regulations because they are different than closed-end loans. Some commenters stated that it would be burdensome to determine whether, and if so how, data points apply to open-end lines of credit. These commenters asserted that reporting open-end lines of credit thus could increase reporting errors. A few of these commenters were particularly concerned about the Bureau's proposal to require information about the first draw on a home-equity line of credit.

Many commenters argued that, in addition to being burdensome, reporting open-end lines of credit would have few benefits. First, many commenters asserted that mandatory reporting would exceed HMDA's mission and that the data reported would not serve HMDA's purposes. They argued that the data would not show whether financial institutions were meeting the housing needs of their communities because open-end lines of credit often are used for personal, non-housing-related, purposes (e.g., vacations, education, and bill consolidation). Some commenters argued that data about credit lines used for non-housing-related purposes would produce misleading information about mortgage markets and that reporting should be limited, at most, to credit lines for home purchase, home improvement, or refinancing purposes. Others asserted that, even if a consumer intended to use a line of credit for a housing-related purpose, such as home improvement, financial institutions could not know at account opening whether the borrower ever actually drew on the account or, if so, whether the funds were used for housing or other purposes. The commenters thus asserted that the data reported would not be useful.

Some commenters argued that data about open-end lines of credit would not serve HMDA's fair lending purpose, because borrowers taking out open-end credit lines borrow against the equity in their homes and are not fully assessed as new borrowers. A few commenters asserted that it was inappropriate for the Bureau to require open-end reporting for market monitoring and research purposes or to address safety and soundness concerns. One commenter argued that open-end lines of credit are less risky for consumers than closed-end loans, because they often are smaller, with smaller payments that are easier to make. Another argued that the change was not required by the Dodd-Frank Act.

Many commenters also argued that mandating reporting of open-end lines of credit would be of little benefit, because certain current and proposed data points (e.g., results from automated underwriting systems, some pricing data, and whether a transaction has non-amortizing features) would not apply to open-end credit. In addition, many commenters stated that mixing data about open-end, “consumer-purpose” transactions with traditional, closed-end mortgage loans will skew HMDA data and impair its integrity for HMDA users. Finally, a few commenters noted that the Board previously had considered and rejected mandatory reporting of open-end lines of credit; these commenters asserted that the Board had found that open-end reporting would not serve HMDA's purposes.

A few smaller financial institutions, credit unions, and credit union leagues predicted that they or other small institutions could be forced to stop offering open-end lines of credit. Others argued that adding open-end line of credit reporting would strain the limited resources of smaller banks and credit unions already struggling with burdensome compliance requirements, would inhibit such institutions from serving their customers, would increase costs to consumers and credit union members, or could force such institutions to exit the market for home-equity lines of credit, thereby reducing consumers' low-cost credit options.

Commenters suggested various alternatives to mandatory reporting of open-end lines of credit. Some urged the Start Printed Page 66160Bureau to maintain optional reporting, while others asserted that open-end lines of credit should be excluded from reporting altogether. Some argued that smaller- or medium-sized banks and credit unions should be exempt from reporting, because small institutions did not cause the financial crisis and reporting would burden them unfairly. As noted, a few commenters urged the Bureau to require reporting only of open-end lines of credit for home purchase, home improvement, or refinancing purposes.

The Bureau has considered the comments concerning mandatory reporting of open-end lines of credit, and the Bureau is finalizing § 1003.2(o) largely as proposed, but without covering certain commercial-purpose lines of credit.[198] The Bureau is finalizing separate open-end line of credit coverage thresholds under § 1003.2(g) and § 1003.3(c)(12) to ensure that only financial institutions with a minimum level of open-end line of credit originations will be required to report.[199] The Bureau acknowledges that, even with these modifications, many financial institutions may incur significant costs to report their open-end lines of credit, and that one-time costs may be particularly large. However, the Bureau believes that the benefits of mandatory reporting justify those costs.

As discussed in the proposal, the Bureau believes that including dwelling-secured lines of credit within the scope of Regulation C is a reasonable interpretation of HMDA section 303(2), which defines “mortgage loan” as a loan secured by residential real property or a home improvement loan. The Bureau interprets “mortgage loan” to include dwelling-secured lines of credit, as they are secured by residential real property and they may be used for home improvement purposes.[200] Moreover, pursuant to section 305(a) of HMDA, the Bureau believes that requiring reporting of all dwelling-secured, consumer-purpose open-end lines of credit is necessary and proper to effectuate the purposes of HMDA and to prevent circumvention of evasion thereof.[201] HMDA and Regulation C are designed to provide citizens and public officials sufficient information about mortgage lending to ensure that financial institutions are serving the housing needs of their communities, to assist public officials in distributing public sector investments, and to identify possible discriminatory lending patterns. The Bureau believes that collecting information about all dwelling-secured, consumer-purpose open-end lines of credit serves these purposes.[202]

First, financial institutions will know, and the data will show, when an open-end line of credit is being taken out for the purpose of purchasing a home. This data alone will serve HMDA's purposes by providing information about how often, on what terms, and to which borrowers' institutions are originating open-end lines of credit to finance home purchases. Although many commenters argued that dwelling-secured lines of credit are used for purposes unrelated to housing, in the years leading up to the financial crisis, they often were made and fully drawn more or less simultaneously with first-lien home-purchase loans (i.e., as piggybacks), essentially creating high loan-to-value ratio home-purchase transactions that were not visible in the HMDA dataset.[203] Some evidence suggests that piggyback lending may be on the rise again now that the market has begun to recover from the crisis.[204]

Second, the data will help to understand how often, on what terms, and to which borrowers institutions are originating open-end lines of credit for home improvement purposes. It is true, as many commenters argued, that funds from lines of credit may be used for many purposes, and that lenders cannot track how funds ultimately are used. However, the same is true of funds obtained through cash-out refinancings, which currently are reported under Regulation C, and through closed-end home-equity loans and reverse mortgages, some of which are reportable today and all of which will be reportable under the final rule (unless an exception applies).[205] Funds from all of these products may be used for personal purposes, but they may also be used for home improvement (and home purchase) purposes. Citizens and public officials long have analyzed data about such products to understand how financial institutions are satisfying borrowers' needs for home improvement lending.[206]

The Bureau believes that financial institutions serve the housing needs of their communities not only by providing fair and adequate financing to purchase and improve homes, but also by ensuring that neither individual borrowers nor particular communities are excessively overleveraged through open-end home-equity borrowing. The Bureau thus declines to limit reporting of open-end mortgage lending to transactions for home purchase, home improvement, or refinancing purposes, as some commenters suggested. Open-end home-equity lending, regardless of how the funds are used, liquefies equity that borrowers have built up in their homes, which often are their most important assets. Borrowers who take out dwelling-secured credit lines increase their risk of losing their homes to foreclosure when property values decline.

Indeed, as discussed in the proposal, open-end line of credit originations expanded significantly during the mid-2000s, particularly in areas with high home-price appreciation, and research indicates that speculative real estate investors used open-end lines of credit to purchase non-owner-occupied investment properties, which correlated with higher first mortgage defaults and home-price depreciation.[207] In short, overleverage due to open-end mortgage lending and defaults on dwelling-secured open-end lines of credit contributed to the foreclosure crises that many communities experienced in the late 2000s. Communities' housing needs would have been better served if these crises could have been avoided (or remedied more quickly).[208] Had open-Start Printed Page 66161end line of credit data been reported in HMDA, the public and public officials could have had a much earlier warning of potential risks. The Bureau believes that obtaining data about open-end mortgage lending remains critical, with open-end lending on the rise once again as home prices have begun to recover from the financial crisis.[209]

Finally, mandatory reporting of open-end lines of credit will help to understand whether all dwelling-secured credit is extended on equitable terms. It may be true, as some commenters asserted, that borrowers are not necessarily evaluated for open-end credit in the same manner as for traditional mortgage loans and that adequate home equity is the key consideration. Lending practices during the financial crisis demonstrated, however, that during prolonged periods of home-price appreciation, lenders became increasingly comfortable originating home-equity products to borrowers with less and less equity to spare. The more leveraged the borrower, the more at risk the borrower is of losing his or her home. Obtaining data about open-end mortgage lending could show, during future housing booms, whether such risky lending practices are concentrated among certain borrowers or communities and permit the public and public officials to respond appropriately. In this and other ways, data about open-end lines of credit will help to assist in identifying possible discriminatory lending patterns.

Certain commenters pointed out that several data points will not apply to open-end lines of credit. However, the Bureau believes that the public and public officials will receive valuable information from all of the data points that do apply. With applicable data points, HMDA users will have, for the first time, good information about which financial institutions are originating open-end lines of credit, how frequently, on what terms, and to which borrowers. HMDA users will be able to evaluate whether, and how, financial institutions are using open-end lines of credit to serve the housing needs of their communities. Moreover, as discussed below, the final rule adopts several measures to minimize the burdens to financial institutions of determining whether and how data points apply to open-end lines of credit.[210] The final rule also requires financial institutions to flag whether a transaction is for closed- or open-end credit. See § 1003.4(a)(37). This flag addresses commenters' concerns about commingling information about closed-end mortgage loans and open-end lines of credit.[211]

Not only will data about open-end lines of credit help to serve HMDA's purposes, but the Bureau believes that expanding the scope of Regulation C to include dwelling-secured, consumer-purpose lines of credit is necessary to prevent evasion of HMDA. As discussed in the proposal, consumer-purpose open-end lines of credit may be interchangeable with consumer-purpose closed-end home-equity products, many of which currently are reported, and all of which will be reported, under final § 1003.2(d) and (e). The Bureau believes that, if open- and closed-end consumer-purpose home-equity products are treated differently under the final rule, there is a heightened risk that financial institutions could steer borrowers to open-end products to avoid HMDA reporting.[212] The Bureau believes that steering could be particularly attractive (and risky for borrowers) given that open-end lines of credit are not subject to the Bureau's 2013 ATR Final Rule and currently are subject to less complete disclosure requirements than closed-end products under Regulation Z. The Bureau believes that some financial institutions likely would attempt to evade Regulation C if mandatory reporting were not adopted for open-end lines of credit. The Bureau thus has determined that, in addition to being a reasonable interpretation of the statute, requiring reporting of dwelling-secured, consumer-purpose open-end lines of credit also is authorized as an adjustment that is necessary and proper to prevent evasion of HMDA.

The Bureau acknowledges that reporting open-end lines of credit will impose one-time and ongoing operational costs on reporting institutions. The proposal estimated that the one-time costs of modifying processes and systems and training staff to begin open-end line of credit reporting likely would impose significant costs on some institutions, and that institutions' ongoing reporting costs would increase as a function of their open-end lending volume.[213] As discussed above, many commenters emphasized both these one-time and ongoing costs.[214] The Bureau acknowledges these costs and understands that many institutions' reportable transaction volume many increase significantly.

As discussed in the proposal, in the section-by-section analysis of § 1003.2(g), and in part VII below, the Bureau has faced challenges developing accurate estimates of the likely impact on institutional and transactional coverage of mandatory reporting of open-end lines of credit due to the lack of available data concerning open-end lending. These challenges affect the Bureau's ability to develop reliable one-time and ongoing cost estimates, as well, because such costs are a function of both the number of institutions reporting open-end data and the number of transactions each of those institutions reports.[215] After careful analysis, the Start Printed Page 66162Bureau has developed estimates of open-end line of credit origination volumes by institutions and, as discussed in part VII, has used those estimates to estimate both the overall one-time and overall ongoing costs to institutions of open-end reporting.[216] The Bureau expects that both one-time and ongoing costs will be larger for more complex financial institutions that have higher open-end lending volume and that will need to integrate separate business lines, data platforms, and systems, to begin reporting open-end lending. Precisely because no good source of publicly available data exists concerning dwelling-secured open-end lines of credit, it is difficult to predict the accuracy of the Bureau's cost estimates, but the Bureau believes that they are reasonably reliable and acknowledges that, for many lenders, the costs of open-end reporting may be significant. As discussed further below, the final rule revises the proposal in several ways to reduce open-end reporting costs for certain financial institutions.[217]

A few commenters argued that reporting open-end lines of credit will be difficult because financial institutions collect less information from consumers when originating open-end products than when originating traditional, closed-end mortgage loans. In part, this may be because open-end lines of credit are not subject to the Bureau's 2013 ATR Final Rule. However, the Bureau believes that this lack of substantive regulation only strengthens the need for open-end line of credit reporting in HMDA so that the public and policymakers have sufficient data about the dwelling-secured open-end credit market to understand whether lenders offering open-end products are serving the housing needs of their communities.

Methods To Reduce the Burden of Open-End Line of Credit Reporting

The Bureau is finalizing mandatory reporting of dwelling-secured consumer-purpose open-end lines of credit because of the many benefits discussed above. The Bureau is adopting several measures to address commenters' concerns about the burdens of implementing open-end reporting and their concerns about ongoing open-end reporting costs.

Institutional coverage threshold. As discussed in the section-by-section analysis of § 1003.2(g), the Bureau is finalizing a separate, open-end institutional coverage threshold to determine whether an institution is a HMDA reporter. As discussed in that section, the Bureau concluded that its proposed institutional coverage test achieved appropriate market coverage of closed-end mortgage lending. However, in light of the costs associated with open-end reporting, the Bureau was concerned that finalizing the proposed institutional coverage test would have required institutions with sufficient closed-end—but very little open-end—mortgage lending to incur costs to begin open-end reporting. The Bureau thus is adopting an institutional coverage test that covers a financial institution only if (in addition to meeting the other criteria under § 1003.2(g)) it originated either (1) 25 or more closed-end mortgage loans or (2) 100 or more open-end lines of credit in each of the two preceding calendar years. As discussed in the section-by-section analysis of § 1003.2(g), the Bureau believes that the 25 closed-end and 100 open-end loan-volume origination tests appropriately balance the benefits and burdens of covering institutions based on their closed- and open-end mortgage lending, respectively. Specifically, as discussed further in the section-by-section analysis of § 1003.2(g) and in part VII, the Bureau estimates that adopting a 100-open-end line of credit threshold will avoid imposing the burden of establishing open-end reporting on approximately 3,000 predominantly smaller-sized institutions with low open-end lending compared to the proposal, while still requiring reporting of a significant majority of dwelling-secured, open-end line of credit originations. As discussed in those sections, the Bureau also believes that all institutions that will be required to report open-end line of credit data are current HMDA reporters.

Transactional coverage threshold. The final rule also adds in § 1003.3(c)(12) a transactional coverage threshold for open-end mortgage lending. The transactional coverage threshold is designed to work in tandem with the open-end institutional coverage threshold in § 1003.2(g). Specifically, § 1003.3(c)(12) provides that a financial institution that originated fewer than 100 open-end lines of credit in each of the preceding two calendar years is not required to report data about its open-end lines of credit, even if the financial institution otherwise is a financial institution under § 1003.2(g) because of its closed-end lending (i.e., even if the institution will be reporting data about closed-end mortgage loans).[218]

Effective date. The Bureau is mindful that most financial institutions have never reported open-end mortgage lending data, that collecting and reporting such data for the first time will be time-consuming and complex, and that implementation costs may be sensitive to the time permitted to complete the required changes. The Bureau thus is providing financial institutions approximately two years to complete the changes necessary to begin collecting the data required under the final rule, including data about open-end lines of credit. As noted in part VI, financial institutions will report the data required under the final rule for actions taken on covered loans on or after January 1, 2018.

Other efforts to mitigate burden. Some of the anticipated burdens of reporting open-end lines of credit also likely will be mitigated by the operational Start Printed Page 66163enhancements and modifications that the Bureau is exploring for HMDA reporting generally. For example, as discussed elsewhere in the final rule, the Bureau is improving the edit and submission process, which should reduce reporting burden for all covered loans. While these improvements will not reduce the costs that financial institutions will incur to adapt their systems and processes to report open-end lines of credit, they should reduce ongoing costs to institutions by reducing the amount of time financial institutions may spend submitting and editing this data.

Clarifying which data points apply to open-end lines of credit, and how they apply, also will alleviate compliance burden. For example, commenters expressed concern about reporting information about initial draws under open-end lines of credit. As discussed in the section-by-section analysis of § 1003.4(a)(39), the Bureau is not finalizing that data point, in part in response to commenters' concerns. The final rule also provides that several other data points do not apply to open-end lines of credit.[219] Finally, the final rule provides guidance about how several data points apply to open-end lines of credit.[220]

Open-End Line of Credit Definition

The Bureau is adopting a few technical revisions to streamline § 1003.2(o) and to align it with revisions made elsewhere in the final rule. Proposed § 1003.2(o) provided that an open-end line of credit was a dwelling-secured transaction that was neither a closed-end mortgage loan under proposed § 1003.2(d) nor a reverse mortgage under proposed § 1003.2(q). To align with lending practices, to streamline the definitions of closed-end mortgage loan and open-end line of credit, and to streamline § 1003.4(a)(36) (which requires financial institutions to identify reverse mortgages), the final rule eliminates the mutual exclusivity between open-end lines of credit and reverse mortgages. Final § 1003.2(o) thus provides that an open-end line of credit is an extension of credit that (1) is secured by a lien on a dwelling; and (2) is an open-end credit plan as defined in Regulation Z, 12 CFR 1026.2(a)(20), but without regard to whether the credit is consumer credit, as defined in § 1026.2(a)(12), is extended by a creditor, as defined in § 1026.2(a)(17), or is extended to a consumer, as defined in § 1026.2(a)(11).

Consistent with § 1003.2(d), final § 1003.2(o) provides that an open-end line of credit is a dwelling-secured “extension of credit.” New comment 2(o)-2 clarifies the meaning of the term “extension of credit” for open-end transactions for purposes of § 1003.2(o). It states that financial institutions may cross-reference the guidance concerning “extension of credit” under § 1003.2(d) and comment 2(d)-2, and it provides an example of an open-end transaction that is not an extension of credit and thus not covered under the final rule. It further clarifies that, for purposes of § 1003.2(o), each draw on an open-end line of credit is not an extension of credit. Thus, financial institutions report covered open-end lines of credit only once, at account opening.

2(p) Refinancing

Prior to the proposal, the Bureau received feedback that Regulation C's definition of refinancing was confusing. To address those concerns, the Bureau proposed § 1003.2(p) and related commentary. Proposed § 1003.2(p) streamlined the existing definition of refinancing by moving the portion of the definition that addresses institutional coverage to proposed § 1003.2(g), the definition of “financial institution.” For the reasons discussed below, the Bureau is adopting § 1003.2(p) largely as proposed, and is adopting revised commentary to § 1003.2(p) to provide additional guidance about the types of transactions that are refinancings under Regulation C.[221]

The Bureau received a number of comments on proposed § 1003.2(p) and its accompanying commentary from financial institutions, industry trade associations, and other industry participants. The comments generally supported the Bureau's proposed revisions, but several commenters suggested different definitions or additional clarifications.

The Bureau received only a few comments addressing proposed § 1003.2(p)'s regulation text, all from industry participants. One commenter specifically supported the Bureau's proposal to move the “coverage prong” of § 1003.2(p) to the definition of financial institution in § 1003.2(g) and stated that the move would reduce confusion. Another commenter suggested that the Bureau could reduce compliance costs by aligning the definition of refinancing in proposed § 1003.2(p) with Regulation Z § 1026.37(a)(9), so that a refinancing is any transaction that is not a home purchase loan and that satisfies and replaces an existing obligation secured by the same property. For the reasons set forth in the section-by-section analysis of § 1003.4(a)(3), the final rule does not include this modification.

The Bureau is finalizing comment 2(p)-1 generally as proposed, but with several non-substantive revisions for clarity. In addition, final comment 2(p)-1 is modified to provide that a refinancing occurs only when the original debt obligation has been satisfied and replaced by a new debt obligation, based on the parties' contract and applicable law. This is consistent with the definition of refinancing in Regulation Z § 1026.20(a) and comment 20(a)-1. The comment further specifies that satisfaction of the original lien, as distinct from the debt obligation, is irrelevant in determining whether a refinancing has occurred. A few commenters requested that the Bureau provide additional guidance concerning loan modifications and renewals, stating that examiners provide inconsistent guidance about whether to report renewal transactions when there is no new note. Accordingly, final comment 2(p)-1 specifies that a new debt obligation that renews or modifies the terms of, but does not satisfy and replace, an existing debt obligation is not a refinancing under § 1003.2(p).[222]

As discussed in the section-by-section analysis of § 1003.2(d), the final rule considers a transaction completed pursuant to a New York State consolidation, extension, and modification agreement and classified as a supplemental mortgage under N.Y. Tax Law § 255 such that the borrower owes reduced or no mortgage recording taxes to be an “extension of credit” and therefore reportable. The final rule adds new comment 2(p)-2 to provide that a transaction is considered a refinancing under § 1003.2(p) where: (1) The Start Printed Page 66164transaction is completed pursuant to a New York State consolidation, extension, and modification agreement and is classified as a supplemental mortgage under N.Y. Tax Law § 255 such that the borrower owes reduced or no mortgage recording taxes, and (2) but for the agreement the transaction would have met the definition of a refinancing under § 1003.2(p).

The Bureau received one comment addressing proposed comment 2(p)-2. The comment requested that the Bureau eliminate from the definition of refinancing the requirement that both the existing and the new debt obligations be dwelling-secured, because it is burdensome to confirm whether the new transaction pays off an existing mortgage. This requirement, however, is consistent with Regulation Z's definition of refinancing. The Bureau notes that, under the final rule, whether a consumer-purpose transaction meets this test (or, for that matter, whether such a transaction otherwise is a refinancing) no longer determines whether the transaction is a covered loan.[223] Thus, for consumer-purpose transactions, when a financial institution originates a dwelling-secured debt obligation that satisfies and replaces an existing debt obligation, the financial institution no longer needs to determine whether the existing debt obligation was dwelling-secured to know that the transaction is HMDA-reportable. The financial institution will, however, need to determine whether the existing debt obligation was dwelling-secured to determine whether to report the transaction as a refinancing or an “other purpose” transaction. See § 1003.4(a)(3).

The Bureau is finalizing proposed comment 2(p)-3 generally as proposed, with minor modifications for clarity, and renumbered as comment 2(p)-4. The Bureau received a few comments addressing proposed comment 2(p)-3. One financial institution specifically supported the proposed commentary, but another asked for additional guidance for situations, such as a divorce, where only one of the original borrowers is obligated on the new loan. As proposed, comment 2(p)-3 addressed this scenario. It specified that, if one debt obligation to two borrowers was satisfied and replaced by a new debt obligation to either one of the original borrowers, then the new obligation was a refinancing, assuming the other requirements of proposed § 1003.2(p) were met. Proposed comment 2(p)-3 also specified that, if two spouses were divorcing, and a debt obligation of only one spouse was satisfied and replaced by a new debt obligation of only the other spouse, then the transaction was not a refinancing under proposed § 1002.3(p). Final comment 2(p)-4 retains these examples but revises and expands them for clarity.

Several commenters asked whether two or more new loans that are originated to satisfy and replace one existing loan are refinancings. The final rule adopts new comment 2(p)-5 to clarify that each of the two new obligations is a refinancing if, taken together, they satisfy and replace the existing obligation. Comment 2(p)-5 also specifies that the same rule applies when one new loan satisfies and replaces two or more existing debt obligations.

The final rule adds new comment 2(p)-6 to clarify that a transaction that meets the definition of a refinancing may also be used for other purposes. The comment provides an illustrative example and specifies that instructions for reporting a multiple-purpose covered loan are in the commentary to § 1003.4(a)(3).

2(q) Reverse Mortgage

Proposed § 1003.2(q) added a “reverse mortgage” definition to Regulation C. Regulation C currently requires financial institutions to report a reverse mortgage if it otherwise is reportable as a home purchase loan, a home improvement loan, or a refinancing. The current regulation, however, does not define “reverse mortgage” or require financial institutions to identify which applications or loans are for reverse mortgages. The proposed definition generally provided that a reverse mortgage is a reverse mortgage transaction as defined under Regulation Z § 1026.33(a). Taken together with proposed § 1003.2(e) (definition of “covered loan”), proposed § 1003.2(q) effectively provided that all reverse mortgage transactions, regardless of their purpose, were covered loans and HMDA-reportable.

The Bureau received a number of comments about proposed § 1003.2(q) and coverage of reverse mortgages. While consumer advocacy group commenters generally supported the proposal, industry participants that discussed proposed § 1003.2(q) generally opposed expanding coverage of reverse mortgages. For the reasons discussed below, the Bureau is finalizing § 1003.2(q) substantially as proposed, with minor technical revisions.

A number of consumer advocacy groups supported the Bureau's proposed reverse mortgage definition. They stated that having data about all reverse mortgages would be valuable in assessing whether the neighborhoods that they serve are receiving the full range of credit that the neighborhoods need and would be appropriate to ensure an adequate understanding of the mortgage market. These commenters stated that publicly available data about all reverse mortgages will be essential in the coming years as the country's population ages and older consumers, many of whom are cash-poor but own their homes outright, may increasingly use home equity for living expenses and other purposes. The commenters noted that reverse mortgages often are not reported under current Regulation C because they often are not for the purpose of home purchase, home improvement, or refinancing.

The commenters further noted that Regulation C's reverse mortgage data lack information about open-end, reverse mortgage transactions. Having data about “other purpose” reverse mortgages, as well as open-end reverse mortgages, will help to determine how the housing needs of seniors are being met. This is particularly true because poorly structured or higher-priced reverse mortgages can result in financial hardship to seniors. The commenters also noted the general importance of having data about housing-related transactions to older consumers, who may be particularly vulnerable to predatory or discriminatory lending practices. Several of these commenters urged the Bureau to adopt a flag to identify reverse mortgages. One industry commenter generally supported proposed § 1003.2(q). The commenter agreed that the proposed definition of reverse mortgage was appropriate because it aligned with Regulation Z.

A number of industry commenters, including trade associations, several financial institutions, and a compliance professional, disagreed with the Bureau's proposal to require reporting of all reverse mortgages. Some of these commenters asserted that Regulation C should not apply to reverse mortgages at all, or that reverse mortgages are outside the scope of HMDA. Others argued that the Bureau should maintain current coverage of reverse mortgages and require them to be reported only if they are for home purchase, home improvement, or refinancing. The commenters generally argued that reporting all reverse mortgages would create new costs for financial Start Printed Page 66165institutions and that the burdens did not justify the benefits.

Regarding burden, commenters stated that reverse mortgage lenders already are exiting the market because of regulatory demands and uncertainties with reverse mortgages, and that requiring reporting of all reverse mortgages under HMDA would continue that trend. A few commenters argued that data for reverse mortgages is kept on separate systems from traditional mortgage loans and that it would be costly and time-consuming to upgrade systems for reporting. Some commenters stated that the burden would be particularly great for reverse mortgage lenders that make fewer than 100 mortgages in a year.

These commenters argued that the benefits of reporting all reverse mortgages would be small. They stated that financial institutions already report the necessary data about reverse mortgages (i.e., data about closed-end reverse mortgages for home purchase, home improvement, or refinancing). They stated that HMDA does not require data about other types of reverse mortgages, which are used for purposes unrelated to housing finance. They also stated that many of HMDA's data points (e.g., points and fees and debt-to-income ratio) do not apply, or apply differently, to reverse mortgages than to traditional mortgages. The commenters asserted that the data reported thus would have large gaps and would not clarify whether financial institutions are meeting the housing needs of their communities. Some commenters noted that the reverse mortgage market currently is small and that many financial institutions do not offer reverse mortgages, so the value of the data reported would be low.

Some commenters stated that comparing reverse mortgage data with data for traditional mortgage loans or lines of credit would lead only to inaccurate conclusions about reverse mortgage originations because, for example, reverse mortgages are underwritten and priced differently than other mortgages and are for different purposes. Other commenters noted that the Bureau has exempted reverse mortgages from other rulemakings, such as the 2013 ATR Final Rule and the Bureau's Integrated Mortgage Disclosures rule (2013 TILA-RESPA Final Rule),[224] given their differences from traditional mortgages. Finally, one commenter noted that there would be no harm in the Bureau delaying reverse mortgage reporting until after the Bureau has reviewed and considered other reverse mortgage rulemakings.

The Bureau is finalizing § 1003.2(q) generally as proposed, with minor technical revisions. The Bureau acknowledges that requiring reporting of data on additional transactions will impose burden on financial institutions, but the Bureau believes that the benefits of reporting justify the burdens. As discussed in the proposal and in comments from consumer advocacy groups, the reverse mortgage market currently may be small, but it may become increasingly important as the country's population ages.[225] While reverse mortgages may provide important benefits to homeowners, they also pose several risks to borrowers, including that they may be confusing, may have high costs and fees, and may result in elderly borrowers or their heirs or non-borrowing spouses losing their homes to foreclosure.[226] As discussed in the proposal, communities have faced risks due to reverse mortgage lending, particularly communities with sizable populations of borrowers eligible for reverse mortgages programs,[227] and many State officials have focused on harmful practices associated with reverse mortgage lending.[228]

Information on all reverse mortgages, regardless of purpose, would help communities understand the risks posed to local housing markets, thereby providing the citizens and public officials of the United States with sufficient information to enable them to determine whether financial institutions are filling their obligations to serve the housing needs of the communities and neighborhoods in which they are located. Furthermore, private institutions and nonprofit organizations, as well as local, State, and Federal programs, traditionally have facilitated or engaged in reverse mortgage lending. However, the proprietary market for reverse mortgages has substantially declined in recent years. Thus, requiring improved information regarding all reverse mortgages would assist public officials in their determination of the distribution of public sector investments in a manner designed to improve the private investment environment.

Indeed, it is particularly important to obtain better information about the reverse mortgage market because it serves older consumers, a traditionally vulnerable population. State officials provided feedback during the Board's 2010 Hearings that expanding the transactional coverage of Regulation C to include all reverse mortgages would assist in the identification of discriminatory and other potentially harmful practices against this protected class.[229] In this regard, the Bureau notes that requiring reporting of all reverse mortgages dovetails with the Dodd-Frank Act's requirement to report age for all covered loans. The Bureau believes that the currently small size of the market, and the fact that the Bureau may address reverse mortgages in future, substantive rulemakings, further support the decision to require reverse mortgage reporting as soon as possible. The flow of information to the public and policymakers will better position them to identify housing needs and market developments as they occur.

The Bureau acknowledges that, as commenters observed, reverse mortgages are underwritten and priced differently than other mortgages, some data points apply differently to reverse mortgages, and some do not apply at all. However, this is just as true for the reverse mortgages that currently are reported (and that most commenters agree should be reported) as for the reverse mortgages that will be added under the final rule. Where possible, the Start Printed Page 66166Bureau has provided additional guidance to instruct financial institutions how particular data points apply to reverse mortgages. Finally, the Bureau is adopting a flag to ensure that data reported for reverse mortgages will not be commingled unknowingly with data reported for other covered loans. See the section-by-section analysis of § 1003.4(a)(36).

The final rule modifies proposed § 1003.2(q) to specify that a reverse mortgage is a reverse mortgage transaction as defined in Regulation Z, 12 CFR 1026.33(a), but without regard to whether the security interest is created in a principal dwelling. Thus, under Regulation C, a transaction that otherwise meets the definition of a reverse mortgage must be reported even if the security interest is taken in, for example, the borrower's second residence.

Section 1003.2(q) also contains one revision to align the definition with other changes being adopted in the final rule. As discussed in the section-by-section analysis of § 1003.2(d) and (o), the proposal provided that closed-end mortgage loans and open-end lines of credit were mutually exclusive of reverse mortgages, and thus a covered loan under proposed § 1003.2(e) was a closed-end mortgage loan, an open-end line of credit, or a reverse mortgage that was not otherwise excluded under proposed § 1003.3(c). The final rule eliminates the mutual exclusivity between: (1) Closed-end mortgage loans and open-end lines of credit and (2) reverse mortgages. Thus, the final rule both eliminates reverse mortgages as a category of covered loans under § 1003.2(e) and eliminates the cross-reference to § 1003.2(e) from the reverse mortgage definition.

Final § 1003.2(q) is adopted pursuant to the Bureau's authority under section 305(a) of HMDA. For the reasons given above, the Bureau believes that including reverse mortgages within the scope of the regulation is a reasonable interpretation of HMDA section 303(2), which defines “mortgage loan” to mean a loan which is secured by residential real property or a home improvement loan. The Bureau interprets that term to include reverse mortgages, as those transactions are secured by residential real property, and they may be used for home improvement. In addition, pursuant to its authority under section 305(a) of HMDA, the Bureau believes that this proposed adjustment is necessary and proper to effectuate the purposes of HMDA, to prevent circumvention or evasion thereof, and to facilitate compliance therewith. For the reasons given above, by requiring all financial institutions to report information regarding reverse mortgages, this proposed modification would ensure that the citizens and public officials of the United States are provided with sufficient information to enable them to determine whether depository institutions are filling their obligations to serve the housing needs of the communities and neighborhoods in which they are located. Furthermore, as reverse mortgages are a common method of obtaining credit, this proposed modification would assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.

Section 1003.3 Exempt Institutions and Excluded Transactions

3(c) Excluded Transactions

Regulation C currently excludes several categories of transactions from coverage, but the exclusions are scattered throughout the regulation text, appendix A, and commentary. To streamline the regulation, the Bureau proposed to consolidate all existing exclusions in new § 1003.3(c). The Bureau also proposed guidance concerning two categories of excluded transactions: Loans secured by liens on unimproved land and temporary financing.

The Bureau received no comments opposing, and one comment supporting, the consolidation of excluded transactions into § 1003.3(c) and is finalizing the reorganization as proposed. The Bureau received a number of comments addressing specific categories of excluded transactions and suggesting additional categories of transactions that should be excluded. For the reasons discussed below, the Bureau is finalizing § 1003.3 to clarify that certain categories of transactions, including all agricultural-purpose transactions and commercial-purpose transactions not for home purchase, home improvement, or refinancing purposes, are excluded from reporting. The final rule also revises § 1003.3 and its accompanying commentary for clarity and to address questions raised by commenters.

Suggested Exclusions Not Adopted

A few commenters suggested specifically excluding loans made by financial institutions to their employees. The commenters stated that it is and will continue to be difficult to report such loans and that, because such loans typically are offered on better terms than loans to non-employees, their inclusion in HMDA data will skew the dataset and will serve no purpose for fair lending testing. The final rule does not specifically exclude loans made to financial institutions' employees. It is not clear why such loans are more difficult to report than other loans, and commenters did not provide any details to explain the difficulty. Loans to employees may be made on more favorable terms than other loans, but the Bureau doubts that employee loans are originated in sufficient quantities to skew the overall HMDA data. Finally, as always, HMDA data are used only as the first step in conducting a fair lending analysis. Examiners conducting fair lending examinations will be able to identify by looking at loan files when differences in loan pricing, for example, are attributable to an applicant's or borrower's status as a financial institution's employee.

Commenters suggested excluding a number of other types of transactions from coverage. The section-by-section analysis of § 1003.2(f) (definition of dwelling) discusses coverage of transactions secured by other than a single-family, primary residence; the section-by-section analysis of § 1003.3(c)(10) discusses coverage of loans made to trusts; and the section-by-section analysis of § 1003.4(a) (reporting of purchases) discusses coverage of repurchased loans.

3(c)(1)

Proposed § 1003.3(c)(1) and comment 3(c)(1)-1 retained Regulation C's existing exclusion for loans originated or purchased by a financial institution acting in a fiduciary capacity, which currently is located in § 1003.4(d)(1). The Bureau received no comments concerning proposed § 1003.3(c)(1) or comment 3(c)(1)-1 and finalizes them as proposed, with several technical revisions for clarity.

3(c)(2)

Proposed § 1003.3(c)(2) retained Regulation C's existing exclusion for loans secured by liens on unimproved land, which currently is located in § 1003.4(d)(2). The Bureau proposed new comment 3(c)(2)-1 to clarify that the exclusion: (1) Aligns with the exclusion from RESPA coverage of loans secured by vacant land under Regulation X § 1024.5(b)(4), and (2) does not apply if the financial institution “knows or reasonably believes” that within two years after the loan closes, a dwelling will be constructed or placed on the land using the loan proceeds. For the reasons discussed below, the Bureau is finalizing § 1003.3(c)(2) as proposed but is finalizing comment 3(c)(2)-1 with certain changes in response to comments received.Start Printed Page 66167

The Bureau received a number of comments from financial institutions, trade associations, and other industry participants about proposed comment 3(c)(2)-1. Commenters agreed that loans secured by unimproved land should be excluded, but they stated that the proposed comment was inappropriate and that the Bureau either should remove it entirely or should clarify it. A few commenters stated that aligning with Regulation X was unnecessary and advocated a simple rule that would exclude all loans secured only by land when made. Other commenters stated that, if retained, the exemption should be based on the financial institution's actual knowledge, rather than on a “knows or reasonably believes” standard that would require lenders to speculate about whether a dwelling would be constructed. Commenters argued that examiners later could second-guess such speculative decisions. Some commenters stated that, as written, the proposed comment would make almost all consumer lot loans reportable, because they generally are built on within two years.

The Bureau believes that providing guidance about the types of transactions covered by the exclusion for loans secured by liens on unimproved land is preferable to eliminating the proposed comment, and that aligning with Regulation X helps to achieve regulatory consistency. Moreover, where a loan's funds will be used to construct a dwelling in the immediate future, having information about that loan serves HMDA's purposes of understanding how financial institutions are meeting the housing needs of their communities. On the other hand, the Bureau acknowledges that the Regulation X standard does not provide sufficient specificity for purposes of HMDA reporting, because it does not state how and when a financial institution must know that a dwelling will be constructed on the land.

The final rule adopts comment 3(c)(2)-1 without the cross-reference to Regulation X but with a statement, consistent with the spirit of Regulation X, that a loan is secured by a lien on unimproved land if the loan is secured by vacant or unimproved property at the time that is originated, unless the financial institution knows, based on information that it receives from the applicant or borrower at the time the application is received or the credit decision is made, that the loan's proceeds will be used within two years after closing or account opening to construct a dwelling on the land or to purchase a dwelling to be placed on the land. If the applicant or borrower does not provide the financial institution this information at the time the application is received or the credit decision is made, then the exclusion applies. Financial institutions should note that, even if a loan is not exempt under § 1003.3(c)(2), it may be exempt under another § 1003.3(c) exclusion, such as the temporary financing exclusion under § 1003.3(c)(3).

3(c)(3)

Proposed § 1003.3(c)(3) retained Regulation C's existing exclusion for temporary financing, which currently is located in § 1003.4(d)(3). Comments 3(c)(3)-1 and -2 were proposed to clarify the scope of the exclusion. For the reasons discussed below, the Bureau is adopting § 1003.3(c)(3) as proposed but is finalizing the commentary to § 1003.3(c)(3) with revisions to address questions and concerns that commenters raised.

Consumer advocacy group commenters generally argued that construction loans should not be excluded as temporary financing. Financial institutions, trade associations, and other industry participants generally argued that temporary financing should be excluded from coverage. Several of these commenters argued that all construction loans should be excluded as temporary financing. Most such commenters agreed that guidance about the scope of the temporary financing exclusion would be helpful, but many found the guidance in proposed comments 3(c)(3)-1 and -2 confusing or objected that it relied on a subjective standard. Commenters suggested several methods to clarify the proposed guidance.

Regarding proposed comment 3(c)(3)-1, which provided general guidance about the temporary financing exclusion, a few commenters objected to the cross-reference to Regulation X. They stated that the Regulation X standard is unclear and ambiguous and that cross-referencing it would create confusion about which construction loans qualify for Regulation C's exclusion. Some construction loans would be reported (e.g., construction loans involving title transfer) and others would not (e.g., construction-only loans). Similarly, one commenter suggested that long-term construction loans should be excluded regardless of whether they were made to “bona fide builders.” Another commenter argued that all construction loans should be exempt, except for construction loans with one-time closings, where the construction loan automatically rolls into permanent financing after a predetermined time. On the other hand, at least one commenter stated that aligning with Regulation X was helpful. Still others suggested that Regulation C should align with Regulation Z and that the Bureau either should adopt a bright-line test (similar to Regulation Z's) to define any loan with a term shorter than a prescribed period of time (e.g., one or two years) as temporary financing, or should adopt a bright-line test to exclude all short-term construction loans. One commenter requested that the Bureau specifically define the term “bridge loan,” which is listed as an example of temporary financing in both existing § 1003.4(d)(3) and proposed comment 3(c)(3)-1.

Several commenters also argued that proposed comment 3(c)(3)-2 was confusing. Comment 3(c)(3)-2 explained that loans designed to convert to (i.e., rather than designed to be replaced by) permanent financing were not temporary financing and thus were reportable. Consistent with Regulation X, the comment provided that loans issued with a commitment for permanent financing, with or without conditions, were considered loans that would “convert” to permanent financing and thus were not excluded transactions. Some commenters urged the Bureau to remove this statement or to clarify further the difference between a loan “replaced by” permanent financing and a loan “converted” to permanent financing. One commenter observed that a loan issued with a commitment for permanent financing could encompass a situation covered under proposed comment 3(c)(3)-1's first sentence (i.e., a loan designed to be replaced by permanent financing at a later time). The commenter argued that such transactions would be excluded as temporary financing under proposed comment 3(c)(3)-1 but would lose the exemption under proposed comment 3(c)(3)-2. Other commenters questioned the meaning of the term “designed” and asked the Bureau to clarify whether construction-only loans that eventually are refinanced into longer-term financing must be reported. Some commenters stated that proposed comment 3(c)(3)-1's first sentence provided clear and sufficient guidance and that proposed comment 3(c)(3)-2 should be removed altogether.

The Bureau is finalizing the commentary to § 1003.3(c)(3) with revisions to address the foregoing concerns. Final comment 3(c)(3)-1 provides that temporary financing is excluded from coverage and provides that a loan or line of credit is temporary financing if it is designed to be replaced by permanent financing at a later time. The comment provides several Start Printed Page 66168illustrative examples designed to clarify whether a loan or line of credit is designed to be replaced by permanent financing. The final rule does not provide for reporting of all construction loans, as some consumer advocacy group commenters recommended. The Bureau believes that the benefits of requiring all construction loans to be reported do not justify the burdens given that the permanent financing that replaces such loans will be reported.

The Bureau believes that comment 3(c)(3)-1 achieves HMDA's purposes while providing better guidance to financial institutions than existing Regulation C. Specifically, the comments should help to ensure that transactions involving temporary financing are not reported more than once; instead, such transactions will be captured by the separate reporting of the longer-term financing, if it otherwise is covered by Regulation C. At the same time, the comments will help to ensure reporting of short-term transactions that function as permanent financing (e.g., a loan with a nine-month term to enable an investor to purchase a home, renovate, and re-sell it before the term expires).[230]

After considering the comments received, the Bureau believes that neither aligning with Regulation X or Z, nor creating a new, bright-line rule centered around a loan's term, would serve HMDA's purposes as well as the guidance provided in final comment 3(c)(3)-1. Regulation Z generally excludes loans with terms of less than one year from, for example, the regulation's ability-to-repay rules. Conducting a full ability-to-repay analysis may not be critical for such short-term financing. However, it is important for HMDA purposes to know how often and under what circumstances such financing is granted, for example, to investors to purchase property and then to sell it for occupancy before the term expires. Similarly, the Bureau believes that it is important for HMDA purposes to ensure that construction loans are not double-counted when they are replaced by permanent financing. Thus, the Bureau has not aligned with Regulation X's guidance concerning construction loans, which would have required, for example, some longer-term construction loans to be reported.

Two commenters requested that the Bureau clarify whether a loan's purpose is “construction” or “home improvement” when improvements to an existing dwelling are so extensive that they fundamentally change the nature of the dwelling. The commenters suggested that, if a loan's purpose was “construction,” then the loan would be excluded from coverage, whereas if its purpose was “home improvement,” it would be included. Under the final rule, the temporary financing exclusion depends on whether the loan is or is not designed to be replaced by longer-term financing at a later time. Thus, for example, if a financial institution originates a short-term loan to a borrower to add a second floor to a dwelling or to complete extensive renovations, the loan is temporary financing if it is designed to be replaced by longer-term financing at a later time (e.g., financing completed through a separate closing that will pay off the short-term loan). If the loan is, for example, a traditional home-equity loan that is not designed to be replaced by longer-term financing, or if it is a construction-to-permanent loan that automatically will convert to permanent financing without a separate closing, then it is not temporary financing and is not excluded under § 1003.3(c).

3(c)(4)

Proposed § 1003.3(c)(4) and comment 3(c)(4)-1 retained Regulation C's existing exclusion for the purchase of an interest in a pool of loans, which currently is located in § 1003.4(d)(4). The Bureau received no comments concerning proposed § 1003.3(c)(4) or comment 3(c)(4)-1 and finalizes them as proposed, with technical revisions for clarity.

3(c)(5)

Proposed § 1003.3(c)(5) retained Regulation C's existing exclusion for the purchase solely of the right to service loans, which currently is located in § 1003.4(d)(5). The Bureau received no comments concerning proposed § 1003.3(c)(5) and finalizes it as proposed, with technical revisions for clarity.

3(c)(6)

Proposed § 1003.3(c)(6) and comment 3(c)(6)-1 retained Regulation C's existing exclusion for loans acquired as part of a merger or acquisition, or as part of the acquisition of all of the assets and liabilities of a branch office, which currently is located in § 1003.4(d)(6) and comment 4(d)-1. The Bureau received no comments concerning proposed § 1003.3(c)(6) or comment 3(c)(6)-1 and finalizes them generally as proposed, with technical revisions for clarity.

3(c)(7)

Proposed § 1003.3(c)(7) retained Regulation C's existing exclusion for loans and applications for less than $500, which currently is located in paragraph I.A.7 of appendix A. The Bureau received no comments concerning proposed § 1003.3(c)(7) and finalizes it as proposed, with technical revisions for clarity.

3(c)(8)

Proposed § 1003.3(c)(8) retained Regulation C's existing exclusion for the purchase of a partial interest in a loan, which currently is located in comment 1(c)-8. The Bureau received no comments concerning proposed § 1003.3(c)(8) and finalizes it generally as proposed, with technical revisions for clarity.

3(c)(9)

As proposed, § 1003.3(c)(9) stated that a loan used primarily for agricultural purposes was an excluded transaction. Proposed comment 3(c)(9)-1, in turn, retained the existing exclusion of home purchase loans secured by property primarily for agricultural purposes, which currently is located in comment Home purchase loan-3. For the reasons discussed below, the Bureau is adopting § 1003.3(c)(9) with technical revisions for clarity and is adopting comment 3(c)(9)-1 with revisions to clarify that all agricultural-purpose loans are excluded transactions.

The Bureau received a number of comments from financial institutions, industry associations, and other industry participants about proposed § 1003.3(c)(9) and comment 3(c)(9)-1. Some commenters stated that the proposed regulation text appeared to exclude all agricultural loans, while the commentary appeared to exclude only home-purchase agricultural loans. These commenters stated that all agricultural loans should be excluded, because they are not comparable to other loans reported under HMDA, and reporting them does not serve HMDA's purposes. Other commenters noted that proposed comment 3(c)(9)-1 retained a cross-reference to Regulation X § 1024.5(b)(1), which had exempted loans on property of 25 acres or more from coverage, even though that provision since had been removed from Regulation X. A few of these commenters argued that the Start Printed Page 66169Bureau should retain an independent 25-acre test in Regulation C, while others stated that the 25-acre test should be removed altogether because smaller properties can be primarily agricultural and thus should be excluded from coverage, while larger properties can be primarily consumer-purpose and thus should be included in coverage.

The Bureau is finalizing § 1003.3(c)(9) and comment 3(c)(9)-1 with revisions to address commenters' concerns. First, final comment 3(c)(9)-1 clarifies that all primarily agricultural-purpose transactions are excluded transactions, whether they are for home purchase, home improvement, refinancing, or another purpose. The comment also clarifies that an agricultural-purpose transaction is a transaction that is secured by a dwelling located on real property used primarily for agricultural purposes or that is secured by a dwelling and whose funds will be used primarily for agricultural purposes. The final rule eliminates from the comment both the proposed cross-reference to Regulation X and the 25-acre test. The comment instead provides that financial institutions may consult Regulation Z comment 3(a)-8 for guidance about what is an agricultural purpose. Comment 3(c)(9)-1 provides that a financial institution may use any reasonable standard to determine whether a transaction primarily is for an agricultural purpose and that a financial institution may change the standard used on a case-by-case basis. This flexible standard should provide sufficient latitude for a financial institution to justify its determination that a property was, or that a loan's funds were, intended to be used primarily for agricultural purposes.

3(c)(10)

Unlike certain other consumer protection statutes such as TILA and RESPA, HMDA does not exempt business- or commercial-purpose transactions from coverage. Thus, Regulation C currently covers closed-end, commercial-purpose loans made to purchase, refinance, or improve a dwelling. Examples of commercial-purpose loans that currently are reported are: (1) A loan to an entity to purchase or improve an apartment building (or to refinance a loan secured thereby); and (2) a loan to an individual to purchase or improve a single-family home to be used either as a professional office or as a rental property (or to refinance a loan secured thereby). Dwelling-secured, commercial-purpose lines of credit currently are not required to be reported. Regulation C currently does not provide a mechanism, such as a commercial-purpose flag, to distinguish commercial-purpose loans from other loans in the HMDA dataset, but it appears that commercial-purpose loans currently represent a small percentage of HMDA-reportable loans.[231]

As discussed in the section-by-section analysis of § 1003.2(d), (e) and (o), the proposal provided for dwelling-secured transactional coverage and for mandatory reporting of open-end lines of credit. Under the proposal, financial institutions would have reported applications for, and originations of, all dwelling-secured, commercial-purpose closed-end mortgage loans and open-end lines of credit. For example, a financial institution would have reported all closed-end mortgage loans or open-end lines of credit to a business or sole proprietor secured by a lien on the business owner's dwelling, even if only out of an abundance of caution (i.e., in addition to other collateral such as a storefront, inventory, or equipment) and regardless of how the funds would be used (e.g., to purchase the storefront, inventory, or equipment). A financial institution also would have been required to report any transaction secured by a multifamily dwelling, such as an apartment building, even if the loan or line of credit was for non-housing-related business expansion. The proposal thus would have expanded Regulation C's coverage of commercial-purpose transactions. For the reasons discussed below, the Bureau is maintaining Regulation C's existing purpose-based transactional coverage scheme for commercial-purpose transactions.

A large number of comments addressed the proposal's coverage of dwelling-secured commercial-purpose transactions. Consumer advocacy groups favored covering all such transactions, while a significant number of industry commenters, a government agency commenter, and a group of State regulators, urged the Bureau to exclude some or all of these transactions.

Numerous consumer advocacy groups generally asserted that having information about dwelling-secured commercial transactions would help them to understand whether neighborhoods are receiving the full range of credit they need. Some consumer advocacy groups specifically urged the Bureau to collect data about all transactions secured by multifamily properties, to understand whether financial institutions are supporting the development of affordable rental housing. Others argued that dwelling-secured commercial-purpose reporting would help to understand the full range of liens against single-family properties. Some of these commenters asserted that, during the mortgage crisis, dwelling-secured commercial lending contributed to overleveraging and foreclosures in many communities, and that HMDA data about such loans could have warned policymakers and advocates of potential concerns.

Some consumer advocacy group commenters specified that dwelling-secured commercial lending is an important source of small business financing, particularly in minority and immigrant communities, and that having information about the availability and pricing of such transactions would help to understand those communities' economies, including the total amount of debt and default risk on properties and potential problems related to overextension of credit. A few consumer advocacy commenters noted that information about all dwelling-secured commercial lending also would provide insight into the demand for, and use of, credit for expansion of small businesses.[232]

A significant number of industry commenters addressed the proposal's expanded coverage of commercial-purpose transactions, and they all opposed the change. Indeed, many commenters who objected to dwelling-secured transactional coverage cited expanded reporting of commercial-purpose transactions as their main concern. Industry commenters argued that implementing reporting of all dwelling-secured, commercial-purpose transactions would be burdensome, that the data reported would be of little value, and that requiring such reporting would exceed the Bureau's authority under HMDA.[233]

Regarding burden, industry commenters stated that removing the purpose test for commercial-purpose Start Printed Page 66170applications and originations would increase significantly financial institutions' reportable transactions. A subset of commenters specifically estimated the increase, which varied widely (i.e., from 10 percent to over 900 percent) depending on institution type and the extent of an institution's engagement in dwelling-secured, small-business lending. Some institutions argued that many community banks focus on small-business lending, so expanded commercial coverage particularly could burden smaller institutions. A number of commenters worried about ongoing costs from collecting, quality checking, and reporting information for such a large number of transactions, and some worried about incurring penalties for errors that likely would occur in the commercial data.[234]

Industry commenters also argued that reporting all dwelling-secured commercial transactions would be difficult operationally. Different staff and systems typically handle commercial and residential mortgage loans, and lenders may have relied on manual processes for reporting and assembling data for the limited set of commercial-purpose transactions traditionally reported. Commenters argued that expanded coverage, particularly when combined with new data points, would require updating systems or software, implementing new policies and procedures, and training or hiring new staff. These would be expensive and time-consuming processes, with costs passed to consumers.

Industry commenters asserted that the benefits of reporting all commercial-purpose transactions would not justify the burdens. A significant number of commenters argued that reporting data about all commercial-purpose transactions would not serve HMDA's purposes. Some industry commenters asserted that commercial-purpose transactions often are provided to non-natural persons. In such cases, no race, ethnicity, and sex data would be collected and no fair lending analysis could be done (except of the demographics of the dwelling's census tract). Commenters argued that reporting data about such transactions would not help to uncover discriminatory lending practices.

Many commenters focused on what they referred to as “abundance of caution” transactions and asserted that such transactions would not help to determine whether financial institutions are serving community housing needs. Commenters argued that, in abundance of caution transactions, the home is added to an already adequately secured transaction (to over-collateralize the loan), is secondary to business collateral, and is an insignificant piece of the overall loan structure.[235] In contrast, commenters argued, consumer-purpose loans typically are fully collateralized by the home. Commenters also argued that there is only a tangential relationship between the loan and housing because the loan's funds are used for business, not housing, purposes.[236]

Regarding data collection, some commenters argued that the application, documentation, and underwriting processes are different for commercial- and consumer-purpose transactions, so data for many of the Bureau's proposed data points are not gathered in a systematic way for commercial-purpose transactions. Some commenters similarly asserted that reporting data for all dwelling-secured commercial transactions would be challenging because Regulation C's existing and the Bureau's newly proposed data points focus on consumer lending. Commenters argued that many data points would not apply to, or would be difficult to define for, commercial transactions.[237]

Other commenters worried that even correctly reported data would be of little value in understanding commercial-purpose transactions. For example, some commenters observed that numerous data points would be reported “not applicable” for commercial-purpose transactions and argued that the limited number of reportable data points would not further HMDA's purposes or assist policymakers in preventing or responding to future mortgage crises. Others observed that much information that would be relevant to understanding the economics of commercial-purpose loans, such as the debt service coverage ratio, leasing requirements and expirations, zoning restrictions, environmental regulations, and cash flow, would not be reported. Some commenters also asserted that there would be little value in comparing all dwelling-secured commercial- and consumer-purpose transactions, because they are underwritten and priced differently (e.g., based on cash flow rather than income), and they have different loan terms and features (e.g., rate and fee structures, balloon, interest-only and prepayment penalty terms). Finally, some industry commenters worried that mixing data about all dwelling-secured, commercial-purpose transactions with traditional mortgage loans would distort or skew the HMDA dataset and impair its integrity for HMDA users.

Numerous industry commenters argued that HMDA does not authorize the Bureau to require reporting of all dwelling-secured commercial-purpose transactions. They argued that HMDA itself focuses on home mortgage lending and that Congress understood, but opted not to revise, Regulation C's current coverage when it passed the Dodd-Frank Act.[238] Some commenters similarly argued that, when Congress intended to grant the Bureau authority to collect business lending data, it did so explicitly.[239] Other commenters argued Start Printed Page 66171that HMDA reporting of all commercial-purpose transactions would duplicate CRA reporting or would negatively affect CRA performance.

Finally, some commenters expressed concerns that reporting all dwelling-secured commercial-purpose transactions could be particularly burdensome for smaller institutions, because small-business loans may represent a large portion of their lending activity. A few commenters asserted that some small institutions exited consumer mortgage lending to focus on small-business lending specifically to avoid the costs of complying with Dodd-Frank Act regulations and that the proposal unfairly would burden such institutions with HMDA reporting. Others expressed concern that financial institutions would stop taking small-business borrowers' homes as collateral to avoid reporting, or would increase borrowers' fees to cover reporting costs, in turn decreasing small businesses' access to credit and harming local and national economies.

Industry commenters provided a number of alternatives for coverage of commercial-purpose transactions. A significant number of commenters urged the Bureau specifically to exclude all dwelling-secured commercial-purpose transactions. These commenters cited the benefits and burdens already discussed, asserted that such an exclusion would reduce burden significantly, and argued that it would align coverage across Regulations C, X, and Z. A number of commenters urged the Bureau specifically to exclude transactions for multifamily housing (or alternatively to non-natural persons), emphasizing the differences in underwriting between multifamily and other lending, and asserting that multifamily loan data is particularly ill-suited to serving HMDA's purposes because multifamily loans typically are made to corporate borrowers rather than to consumers.[240] A few commenters expressed concern about the privacy of multifamily borrowers, fearing that multifamily loans easily could be identified in the dataset because relatively few are made each year and they have unique characteristics.

Other commenters variously urged that reporting of commercial applications and originations should be required only for: (1) Multifamily transactions; (2) closed-end mortgage loans; (3) first-lien transactions; or (4) transactions for home purchase, home improvement, or refinancing.[241] Commenters who recommended retaining Regulation C's home purchase, home improvement, and refinancing test for commercial-purpose transactions argued that: (1) The purpose test reasonably limits the scope of reportable commercial transactions and better serves HMDA's purposes; and (2) financial institutions easily can identify their dwelling-secured commercial- and consumer-purpose transactions, because they are accustomed to making a similar determination for coverage under Regulations X and Z.

As discussed in the proposal, the Bureau believes that HMDA's scope is broad enough to cover all dwelling-secured commercial-purpose transactions and that collecting information about all such transactions would serve HMDA's purposes. HMDA section 303(2) defines “mortgage loan” as a loan secured by residential real property or a home improvement loan. While the Board historically interpreted HMDA section 303(2) to refer to loans for home purchase, home improvement, or refinancing purposes, the Bureau believes that the definition is broad enough to include all dwelling-secured mortgage loans and lines of credit, even if their funds are used in whole or in part for commercial (or for other, non-housing-related) purposes.[242]

Moreover, the Bureau believes that collecting data about all such transactions would serve HMDA's purposes by showing not only the availability and condition of multifamily housing units, but also the full extent of leverage on single-family homes, particularly in communities that may rely heavily on dwelling-secured loans to finance small-business expenditures. The Bureau believes that financial institutions serve the housing needs of their communities not only by providing fair and adequate financing to purchase and improve homes, but also by ensuring that neither individual borrowers nor particular communities are excessively overleveraged through business-related home-equity borrowing, and that all such credit is extended on equitable terms.[243]

The Bureau nevertheless has determined at this time to require reporting only of applications for, and originations of, dwelling-secured commercial-purpose loans and lines of credit for home purchase, home improvement, or refinancing purposes. After considering the comments, the Bureau concluded that it is unclear whether the benefits of reporting all dwelling-secured commercial-purpose transactions justify the burdens, particularly in light of the many other changes required under the final rule. While the Bureau has no data with which to estimate specifically how many additional transactions would have been reported under the proposal, it seems clear that some financial institutions' HMDA reports would have expanded dramatically. The Bureau is concerned that the impact could be greatest for smaller institutions that specialize in small-business lending. The Bureau considered other burdens, as well, including the unique burdens of collecting and reporting information about commercial-purpose transactions (relative to consumer-purpose transactions) and the burdens of addressing loans subject to cross-collateralization agreements. Against these burdens, the Bureau weighed commenters' arguments that abundance of caution transactions likely would pose less risk to borrowers' homes than consumer-purpose equity lending and that data reporting for commercial-purpose lending could be addressed in a future Bureau rulemaking to implement section 1071 of the Dodd-Frank Act.

The Bureau concluded that, at this time, maintaining purpose-based reporting of dwelling-secured commercial-purpose transactions appropriately balances reporting benefits and burdens. The final rule thus adds to Regulation C new § 1003.3(c)(10), which provides that loans and lines of credit made primarily for a commercial or business purpose are excluded transactions unless they are for the purpose of home purchase under § 1003.2(j), home improvement under § 1003.2(i), or refinancing under § 1003.2(p).

New comment 3(c)(10)-1 explains the general rule and clarifies that § 1003.3(c)(10) does not exclude all dwelling-secured business- or commercial-purpose loans or credit lines from coverage. New comment 3(c)(10)-2 explains how financial Start Printed Page 66172institutions should determine whether a transaction primarily is for a commercial or business purpose. Specifically, comment 3(c)(10)-2 provides that a loan or line of credit that is business, commercial, or organizational credit under Regulation Z § 1026.3(a) and related commentary also is business or commercial credit under Regulation C and subject to special reporting under § 1003.3(c)(10).[244] Comments 3(c)(10)-3 and -4 provide illustrative examples of business- or commercial-purpose loans and credit lines that are covered loans under the final rule, or that are excluded transactions under § 1003.3(c)(10).

The Bureau intends § 1003.3(c)(10) to maintain coverage of commercial-purpose transactions generally at its existing level. Section 1003.3(c)(10) does expand coverage of dwelling-secured commercial-purpose lines of credit, which are not currently required to be reported, by requiring them to be reported if they primarily are for home purchase, home improvement, or refinancing purposes.[245] For the reasons discussed in the section-by-section analysis of § 1003.2(o), the final rule equalizes reporting of closed-end loans and open-end credit lines. Section 1003.3(c)(10) thus treats all dwelling-secured, commercial-purpose transactions the same, whether closed- or open-end. The Bureau believes that relatively few dwelling-secured, commercial-purpose open-end lines of credit are used for home purchase, home improvement, or refinancing purposes.[246] The Bureau thus expects that reporting them will impose a relatively small burden on financial institutions. And, for the reasons given, the Bureau concludes that coverage of dwelling-secured, commercial-purpose credit lines for home improvement, home purchase, or refinancing purposes, as finalized in this rule, is necessary to further HMDA's purposes, especially because this is a segment of the mortgage market for which the public and public officials lack significant data.

Section 1003.3(c)(10) also expands coverage of applications by, or originations to, certain trusts. For simplicity and regulatory consistency, final comment 3(c)(10)-2 aligns the definition of business or commercial credit under Regulation C with that definition under Regulation Z § 1026.3(a). In the 2013 TILA-RESPA Final Rule, the Bureau revised comments 3(a)-9 and -10 to § 1026.3(a) to provide that certain trusts made primarily for personal, family, or household purposes are transactions to natural persons in substance if not in form. Thus, transactions involving trusts as described in Regulation Z comment 3(a)-10 are subject to general dwelling-secured reporting under Regulation C.[247] The Bureau believes that the benefits of aligning the § 1003.3(c)(10) test with Regulation Z justify the burdens of reporting these transactions.[248]

Maintaining commercial reporting roughly at its existing level will burden financial institutions more than eliminating reporting of all commercial-purpose transactions, as many commenters suggested. Financial institutions will continue to report transactions for home purchase, home improvement or refinancing purposes, and they will incur some burden distinguishing commercial-purpose transactions subject to § 1003.3(c)(10) from non-commercial-purpose transactions subject to the general dwelling-secured coverage test. Like the commercial-purpose test under Regulation Z § 1026.3(a), the § 1003.3(c)(10) test requires financial institutions to determine the primary purpose of the transaction by looking at a variety of factors (and not, for example, by applying a bright-line rule). In some cases, for transactions that have multiple purposes, this approach will require financial institutions to exercise their judgment about the transaction's primary purpose.

The Bureau believes that the benefits of maintaining purpose-based reporting of commercial transactions, however, justify these burdens. As noted at the beginning of this section-by-section analysis, HMDA, unlike TILA and RESPA, does not exempt business- or commercial-purpose transactions from coverage. Rather, HMDA, like ECOA, as implemented by the Bureau's Regulation B, and the CRA, provides authority to cover commercial-purpose transactions. HMDA's scope reflects that HMDA has a somewhat broader-based, community-level focus than certain other consumer financial laws.

Specifically, while HMDA endeavors to ensure that applicants and borrowers are not discriminated against in particular transactions, it also seeks to ensure that financial institutions are meeting the housing needs of their communities and that public-sector funds are distributed to improve private investments in areas where they are needed. HMDA's broader purposes are served by gathering data both about individual transactions to applicants or borrowers and, for example, about the available stock of multifamily rental housing in particular communities.[249] The final rule achieves these goals without requiring institutions to report all dwelling-secured commercial-purpose transactions. The final rule also addresses commenters' concerns about commingling consumer- and commercial-purpose data by adding a commercial-purpose flag in § 1003.4(a)(38).[250] Finally, the final rule clarifies whether and how certain data points apply to commercial-purpose transactions.[251]

Start Printed Page 66173

3(c)(11)

As discussed in the section-by-section analysis of § 1003.2(g), the final rule provides that a financial institution is covered under Regulation C and must report data about covered loans if, among other things, the financial institution originated more than 100 open-end lines of credit in the preceding two years. The Bureau recognizes that some financial institutions may be covered financial institutions because they meet the open-end line of credit threshold in § 1003.2(g)(1)(v)(B) or (2)(ii)(B), but that these institutions may have closed-end mortgage lending volume that falls below the 25-loan coverage threshold in § 1003.2(g)(1)(v)(A) or (2)(ii)(A). Section 1003.3(c)(11) provides that such institutions' closed-end mortgage loans are excluded transactions. The Bureau does not believe that it is useful to burden such institutions with reporting closed-end mortgage data merely because their open-end lending exceeded the separate, open-end loan-volume threshold in § 1003.2(g). Comment 3(c)(11)-1 provides an illustrative example of the rule.

3(c)(12)

As discussed in the section-by-section analysis of § 1003.2(g), the final rule provides that a financial institution is covered under Regulation C and must report data about covered loans if, among other things, the financial institution originated more than 25 closed-end mortgage loans in the preceding two years. The Bureau recognizes that some financial institutions may be covered financial institutions because they meet the closed-end mortgage loan threshold in § 1003.2(g)(1)(v)(A) or (2)(ii)(A), but that these institutions may have open-end line of credit volume that falls below the 100-line of credit coverage threshold in § 1003.2(g)(1)(v)(B) or (2)(ii)(B). Section 1003.3(c)(12) provides that such institutions' open-end lines of credit are excluded transactions. The Bureau does not believe that it is useful to burden such institutions with reporting data about open-end lines of credit merely because their closed-end lending exceeded the separate, closed-end loan-volume threshold in § 1003.2(g). Comment 3(c)(12)-1 provides an illustrative example of the rule.

Section 1003.4 Compilation of Reportable Data

4(a) Data Format and Itemization

Section 1003.4(a) requires financial institutions to collect and record specific information about covered loans, applications for covered loans, and purchases of covered loans. As discussed in detail below, the Bureau proposed several changes to § 1003.4(a) to implement the Dodd-Frank Act amendments to HMDA and to exercise its discretionary authority under the Dodd-Frank Act to require collection of certain additional information. In addition, the Bureau proposed modifications to Regulation C to reduce redundancy, provide greater clarity, and make the data more useful.

The Bureau proposed modifications to § 1003.4(a) and comments 4(a)-1 and 4(a)-4 through -6. These revisions addressed reporting transactions involving more than one institution, reporting repurchased loans, and other technical modifications. In addition, the proposal solicited feedback on the number and type of data proposed to be collected. These issues are discussed below separately.

Reporting Transactions Involving More Than One Institution

Currently, commentary to § 1003.1(c) describes the “broker rule,” which explains a financial institution's reporting responsibilities when a single transaction involves more than one institution. Proposed comments 4(a)-4 and -5 modified and consolidated current comments 1(c)-2 through -7 and 4(a)-1.iii and.iv. Proposed comment 4(a)-4 described which financial institution reports a covered loan or application when more than one institution is involved in reviewing a single application and provided illustrative examples. Proposed comment 4(a)-5 discussed reporting responsibilities when a financial institution makes a credit decision through the actions of an agent. The Bureau is adopting comment 4(a)-4, renumbered as comments 4(a)-2 and -3, with changes to address certain industry comments, discussed below. The Bureau received no comments on proposed comment 4(a)-5 and is adopting it as proposed, renumbered as comment 4(a)-4.

Two industry commenters stated that they supported proposed comment 4(a)-4. Other industry commenters expressed concerns with proposed comment 4(a)-4. One industry commenter pointed out that loans originated as part of a State housing finance agency (HFA) program may not be reported under the proposed commentary because under those programs the State HFA, which the commenter asserted may not be required to report HMDA data, usually makes the credit decision. Another industry commenter urged the Bureau to allow more than one institution to report the same origination.

The Bureau recognizes that some applications and loans will not be reported under proposed comment 4(a)-4, finalized as comments 4(a)-2 and -3, if the institution making the credit decision is not a financial institution required to report HMDA data. However, the Bureau believes that it is appropriate to limit reporting responsibilities to the financial institution that makes the credit decision. Requiring that only one institution report the origination of a covered loan eliminates duplicate data. For example, if more than one financial institution reported the same origination, the total origination volume for a particular census tract would appear higher than the actual number of loans originated in that tract. On balance, the Bureau concludes that only the financial institution that makes the credit decision should report an origination.

Other industry commenters asked for examples of how to report a loan or application involving more than two institutions. The Bureau has added an example to proposed comment 4(a)-4, finalized as comment 4(a)-3, to illustrate financial institutions' reporting responsibilities when multiple institutions are involved. The example demonstrates that more than one financial institution will report the action taken on the same application if the same application is forwarded to multiple institutions. However, only one financial institution will report the loan as an origination.

An industry commenter sought clarification about what is meant by application for the purposes of the proposed comment. Section 1003.2(b) defines application for purposes of Regulation C and, accordingly, for purposes of § 1003.4(a) and its commentary. The Bureau is modifying proposed comment 4(a)-4, finalized as comments 4(a)-2 and -3, to clarify that § 1003.4(a) requires a financial institution to report data on applications that it receives even if the financial institution received an application from another financial institution rather than directly from an applicant.

In addition, a trade association asked the Bureau to clarify the reporting responsibilities when a credit union contracts a credit union service organization (CUSO) to perform loan origination services. The commentary to the final rule addresses these situations. Comment 4(a)-2 explains that the institution that makes the credit decision prior to closing or account opening reports that decision. Start Printed Page 66174Accordingly, if a credit union makes a credit decision prior to closing or account opening, then the credit union reports that decision. In addition, comment 4(a)-3.v addresses situations when a financial institution (in this case the CUSO) makes a credit decision using the underwriting criteria of a third party (in this case the credit union). In that case, if the CUSO makes a credit decision without the credit union's review before closing, the CUSO reports the credit decision. However, if the CUSO approves the application acting as the credit union's agent under State law, comment 4(a)-4 clarifies that the credit union is required to report the actions taken through its agent.

Purchased Loans

In 2010, the FFIEC issued a publication in which it noted that repurchases qualify as purchases for Regulation C, and provided guidance on how and when to report such purchases.[252] The Bureau proposed to incorporate this guidance into Regulation C by adding new comment 4(a)-5 to clarify that covered loans that had been originated by a financial institution, sold to another entity, and subsequently repurchased by the originating institution should be reported under Regulation C unless the sale, purchase, and repurchase occurred within the same calendar year. When the FFIEC publication was issued, data users could not reliably identify repurchased loans within HMDA data because each loan was reported with a unique application or loan number, even if it was a loan being repurchased. Thus loans repurchased and reported multiple times within the same calendar year would distort the annual HMDA data, because the characteristics of those loans would be represented multiple times within the data. For the reasons discussed below, the Bureau is not adopting comment 4(a)-5 as proposed and, instead, is revising it to require the reporting of most repurchases as purchased loans regardless of when the repurchase occurs.

Most commenters opposed the Bureau's proposal. Some industry commenters argued that repurchases should never be reported, even outside of the calendar year in which the loan was originated. Some industry commenters argued that the calendar year exception would negatively affect CRA ratings for some financial institutions that temporarily purchase CRA-eligible loans under certain lending arrangements. Other industry commenters argued that any reporting of repurchases would inflate CRA ratings by allowing the loans to appear in a financial institution's HMDA data more than once. However, a few commenters supported the Bureau's proposal and argued that repurchases should be considered purchases for purposes of HMDA except for when the repurchase occurs within the same calendar year as the loans were originated.

The Bureau recognizes that the one-calendar-year reporting exception in the FFIEC guidance has led to inconsistent reporting of repurchased loans, because loans originated late in a calendar year and repurchased early in the succeeding calendar year are reported as loan purchases, while loans originated early in a calendar year and repurchased within the same calendar year are not reported. The Bureau also understands that there have been questions concerning the scope of the guidance and whether various scenarios constitute a repurchase or are addressed by the guidance.

The Bureau has determined that repurchases of covered loans should be reported as loan purchases, with only a narrow exception discussed below. The Bureau believes that the one-calendar-year reporting exception, which was based on guidance originally published by the FFIEC, will no longer be needed in light of other elements of the final rule.[253] The universal loan identifier (ULI), as adopted in § 1003.4(a)(1)(i), will enable a loan to be identified in the HMDA dataset through multiple HMDA reporting events and the repurchase reporting event could be identified and not included in an analysis or compilation of HMDA data focused on originated loans or annual market volume. Repurchases after the origination and sale of a covered loan to a secondary market investor still effect a transfer of legal title to the covered loan, which then could be held in portfolio by the originating institution or sold to another secondary market investor later. Information about these transfers should be reflected in HMDA as purchases, just as the original purchase is, so that the information may be included in the HMDA dataset to further the purposes of HMDA, and so that the ULI may be used effectively to monitor covered loans through their lifecycle.

In addition, if repurchase data are not included, there could be gaps in the history of a covered loan. The Dodd-Frank Act also requires the U.S. Securities and Exchange Commission to prescribe regulations that require securitizers to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by the securitizer.[254] The Bureau believes that the usefulness of the HMDA data would be enhanced by having repurchases included so that information could be available through multiple HMDA reporting events.

For the reasons discussed above, the Bureau is adopting comment 4(a)-5 with modifications. However, the Bureau is creating an exception for certain assignments of legal ownership of covered loans through interim funding arrangements that operate as the functional equivalent of warehouse lines of credit because they may not truly reflect sales and purchases of covered loans. These interim funding agreements are used as functional equivalents of warehouse lines of credit where legal title to the covered loan is acquired by the party providing interim funding, subject to an obligation of the originating institution to repurchase at a future date, rather than taking a security interest in the covered loan as under the terms of a more conventional warehouse line of credit. The Bureau does not believe that these arrangements should require reporting under Regulation C given the temporary nature of the transfer and the intent of the arrangement. Therefore, pursuant to HMDA section 305(a) the Bureau is incorporating an exception into comment 4(a)-5 for such agreements so that such activity will not be reported under Regulation C. This exception is necessary and proper to effectuate HMDA's purposes, because reporting of these transfers in addition to reporting of the underlying originations, subsequent purchases, and any repurchase at a later date may distort HMDA data without providing meaningful information that furthers HMDA's purposes. This exception will also facilitate compliance for financial institutions.

Other Technical Modifications

The Bureau also proposed technical modifications to 4(a) and proposed comment 4(a)-1. The Bureau received no comments on the proposed changes to 4(a) and proposed comment 4(a)-1 and is adopting them as proposed, with minor modifications. The Bureau is also moving comments 4(a)-1.iv, -2, and -3 to the commentary to § 1003.4(f) to clarify a financial institution's Start Printed Page 66175obligation to record data on a quarterly basis.

Number of Data Points

As detailed in the section 1022 discussion below, currently Regulation C requires reporting of approximately 35 separate pieces of information, and allows for optional reporting of three denial reasons. The Dodd-Frank Act amended HMDA by enhancing two existing data points (rate spread and application ID) and identifying 11 new data points, which the Bureau proposed to implement with 22 data fields. The Bureau also proposed to require financial institutions to report 13 additional data points not identified in the Dodd-Frank Act, implemented with 28 data fields, and to modify and expand some of the existing Regulation C data fields. Also detailed in the section 1022 discussion below, while the Bureau estimates that the incremental cost of each additional data point and associated data fields is small, the Bureau acknowledges that there are variable costs, one-time costs, and ongoing costs associated with the additional data points when considered collectively. The Bureau considered this in developing the proposal and proposed only those additional data points that the Bureau believes have sufficient value to justify the costs. As discussed below, the Bureau is not dramatically changing the number of the proposed data points, either by not adopting a substantial number of those that were proposed or by adopting substantially more than the number that were proposed. The number of data fields implementing some of the data points has increased based on changes the Bureau has adopted for the final rule.

Some industry commenters stated that the Bureau should only require data points that were specifically defined in the Dodd-Frank Act. Some industry commenters also suggested removing data points currently required under Regulation C. Some industry commenters stated that the Bureau should only require certain financial institutions to report data points not specifically defined in the Dodd-Frank Act, such as institutions that had been found to be in violation of fair lending laws, HMDA, or the CRA, or institutions that exceed certain asset-size or loan-volume thresholds. Some industry commenters stated that the Bureau should conduct additional analysis on the value of the proposed data points before deciding whether to adopt them. Many consumer advocate commenters argued that the Bureau's proposal did not require enough information to be reported, and that additional information would be required to fulfill HMDA's purposes. Some industry and other commenters also suggested additional data points. Collectively these commenters suggested more than 45 additional data points. Some industry commenters and consumer advocate commenters stated that the Bureau's proposal was reasonable and measured in terms of the number of data points and made sense given the current mortgage market.

The Bureau has analyzed the proposed data points carefully in light of the comments received and other considerations and believes that the data points adopted in this final rule each significantly advance the purposes of HMDA and are warranted in light of collection burdens. Each such data point is discussed below in the section-by-section analysis. The Bureau has authority to expand the data points collected to include such other information as it may require under HMDA section 304(b)(5)(D) and (b)(6)(J). As discussed below throughout the section-by-section analysis, the Bureau is adopting many of the data points proposed, modifying certain data points based on feedback received from commenters, and not finalizing certain proposed data points.

Regarding the comments suggesting criteria or thresholds for reporting additional data points, the Bureau does not believe that it would be appropriate to condition the reporting of such data points on such criteria. The Bureau believes that the data points proposed to be reported fulfill HMDA's purposes and that limiting reporting of them to only some financial institutions would limit the usefulness of the data. Limiting reporting of certain information to financial institutions that had a history of violating certain laws would compromise the usefulness of the HMDA data because that information would not be available from other financial institutions, precluding the generating of a representative (presumptively non-violative) sample of the market for statistical comparison. Limiting reporting of certain information by asset size or loan volume would also undermine the utility of the HMDA data, because financial institutions that would fall under any threshold may have different characteristics and lending practices that would then not be visible through HMDA data. Financial institutions have different business models and underwriting practices which can, in part, be based on their asset size or loan volume. Excluding certain financial institutions would potentially exclude information about covered loans with different characteristics or information related to differences in underwriting practices and would create data that is not uniform. This would not only undermine HMDA's purposes, but limit information available to policymakers in considering how legal requirements should apply to different business models and underwriting practices.

The Bureau also considered the additional data points suggested by commenters. As discussed below throughout the section-by-section analysis, certain data points have been modified to take into account some of these suggestions. The Bureau is not adopting many of these data points because it does not believe it has sufficient information at this time to determine whether adding them would serve HMDA's purposes and be warranted in light of collection burdens. Others the Bureau believes would be duplicative of, or would provide information only marginally different than, data points adopted in the final rule. Because many of these comments proposed data points similar to ones proposed by the Bureau, the responses to many of these comments are discussed below in the section-by-section analysis for the data point being finalized most relevant to those suggestions.

4(a)(1)

4(a)(1)(i)

HMDA section 304(b)(6)(G), as amended by Dodd-Frank Act section 1094(3)(A)(iv), authorizes the Bureau to require a universal loan identifier, as it may determine to be appropriate.[255] Existing § 1003.4(a)(1) requires financial institutions to report an identifying number for each loan or loan application reported. The current commentary to § 1003.4(a)(1) strongly discourages institutions from using the applicant's or borrower's name or Social Security number in the application or loan number. The current commentary also requires the number to be unique within the institution, but does not provide guidance on how institutions should select “unique” identifiers. The Bureau proposed to implement HMDA section 304(b)(6)(G) by replacing the current HMDA loan identifier with a new self-assigned loan or application identifier that would be unique throughout the industry rather than just within the reporting financial institution, would be used by all financial institutions that report the loan or application for HMDA purposes, Start Printed Page 66176and could not be used to directly identify the applicant or borrower. The Bureau believes a reasonable interpretation of “universal loan identifier” in HMDA section 304(b)(6)(G) is that the identifier would be unique within the industry. For the reasons discussed below, the Bureau is adopting § 1003.4(a)(1)(i) generally as proposed requiring entities to provide a universal loan identifier (ULI) for each covered loan or application. The Bureau is adding separate paragraphs to address purchased covered loans and applications that are reconsidered or reinstated during the same calendar year. In addition, as discussed below, the Bureau is adding a paragraph requiring a check digit as part of the ULI.

The Bureau solicited comment on whether the proposed changes to the loan or application identifiers used for HMDA reporting are appropriate. Most industry commenters expressed concern that the proposed ULI would introduce unnecessary complexities in the HMDA reporting process. Several industry commenters stated that requiring institutions to reinvent current loan numbering procedures would result in significant implementation costs because it would require a programming change to current operation systems, such as an institution's loan origination software. Industry commenters pointed out that most institutions assign loan numbers based on a certain order, such as the order the application was received, and furthermore that creditors may include information within the loan number that is pertinent to the institution's operations. For example, an industry commenter stated that its loan origination software assigns numbers randomly but uses a unique identifier for originations and a unique identifier for all other loans not originated. The Bureau acknowledges that the proposed ULI may pose operational challenges for financial institutions. However, the Bureau believes that the benefits that can be gained from the use of a ULI, including the potential ability to track an application or loan over its life and to help in accurately identifying lending patterns across various markets justify the burden associated with implementing a ULI. Additionally, the Bureau understands that financial institutions need flexibility for organizational purposes, such as the flexibility to assign loan numbers that include numbers that would represent product type. With this in mind, the Bureau proposed that the ULI would consist of up to an additional 25 characters that follow the Legal Entity Identifier (LEI) to identify the covered loan or application. The Bureau believes that this approach provides financial institutions with the flexibility to accommodate organizational purposes when assigning loan numbers, except that the additional 25 characters must not include any information that could be used to directly identify the applicant or borrower.

Currently, institutions assign alphanumeric identifiers, with up to 25 characters, to identify a covered loan or application. The Bureau proposed a maximum 45-character ULI. The first 20 characters would be comprised of the LEI followed by up to 25 characters, which would represent the unique sequence of characters to identify the covered loan or application, and may be letters, numerals, symbols, or a combination of letters, numerals, and symbols. A trade association recommended that the ULI be lengthened to 65 characters, as opposed to the proposed 45. An industry commenter stated that an institution could run out of identifiers quickly with the proposed maximum. The Bureau believes that lengthening the proposed ULI may benefit some institutions with large loan volumes that may use certain characters in the ULI to represent business lines or branches, but, at the same time, a ULI longer than 45 characters may be burdensome for other financial institutions. The Bureau believes the right balance between flexibility and usability is a maximum of 45 characters in the ULI, with the first 20 characters representing the LEI.

A few commenters expressed concerns regarding the potential errors that could arise in a loan identifier as long as 45 characters. One commenter stated that manual input of a 45-digit loan identifier will likely result in typos while another commenter suggested that manual input would need to take place to ensure accurate information because there is potential room for error with a 45-character loan identifier. To address the potential errors that could arise, an industry commenter recommended that the Bureau consider adding a check-digit requirement to the ULI. A check digit is used to validate or verify that a sequence of numbers or characters, or numbers and characters, are correct. A mathematical function is applied to the sequence of numbers or characters, or numbers and characters, to generate the check digit. This mathematical methodology could then be performed at a point in the HMDA process to ensure that the check digit resulting from performing the mathematical methodology on the sequence of letters or numerals, or letters and numerals, matches the check digit in the ULI. Implementation of a check digit can help ensure that the sequence of characters assigned to identify the covered loan or application are persistent throughout the HMDA process. For example, at the application stage, a financial institution assigns the ULI, which consists of the financial institution's LEI, a 23-character unique sequence of letters and numerals that identify the application, and a 2-character check digit. Once the application is complete, the file is transferred to another division of the financial institution where it will be handled by other staff. To ensure that the ULI was transferred correctly, the mathematical function could be performed to obtain the check digit and ensure that it matches the check digit in the ULI. This would ensure that the ULI does not contain an error due to typos or transposition of characters as a result of manual entry or file transfer errors. If the check digit resulting from the performed mathematical function does not match the check digit in the ULI, then it would be an indication to staff that an error in the ULI exists. Adding a check digit requirement in the ULI also benefits the file transfer process between financial institutions. For example, a file transfer process could be initiated because the loans are sold to another financial institution. The financial institution that originated the loans electronically transmits to the financial institution that purchases the loans the applicable information, including the ULI, related to the loans. Although an electronic transmission reduces the incidence of errors, it is not guaranteed because of the likelihood that the institutions use different systems to capture the data and therefore, the financial institution that purchased the loans may need to implement specific software to intake the data. In addition, unlike other information related to the loan that can undergo a quality control process through the implementation of business logic and statistical analyses, the ULI does not contain information that would make it possible to ensure that the ULI transferred is valid through the application of business logic or statistical analyses. Therefore, implementation of a check digit can help ensure that the ULI was transferred correctly.

The check-digit requirement would enable financial institutions to quickly identify and correct errors in the ULI, which would ensure a valid ULI, and therefore enhance data quality. Check digits are currently implemented in Start Printed Page 66177certain identifiers, such as vehicle identification numbers, which function as a check against transcription errors.[256] The national unique health plan identifier implemented by the U.S. Department of Health and Human Services also incorporates a check digit.[257] The Bureau believes that the benefits of a check digit in the ULI justifies the additional burden associated with implementing a check digit.

The Bureau is publishing in this final rule new appendix C that includes the methodology for generating a check digit and instructions on how to validate a ULI using the check digit. The methodology is adapted from Mod 97-10 [258] in the international standard ISO/IEC 7064, which is published by the International Organization for Standardization (ISO).[259] ISO/IEC 7064 specifies check character systems that can detect errors in a string of characters that are the result of data entry or copy errors.[260] Specifically, ISO/IEC 7064 check character systems can detect errors caused by substitution or transposition of characters. For example, the check digit can detect a transposition error such as when two adjacent numbers are transposed or when a single character is substituted for another. The Bureau believes that the identification of these types of errors will enhance data quality and reduce burden in the long run for institutions because the errors can be identified early in the process. To reduce burden, the Bureau plans to develop a tool that financial institutions may use, at their option, to assist with check digit generation.

For the reasons stated above, the Bureau adopts as final the requirement to include a check digit to the ULI. In order to maintain the maximum 45-character ULI, the Bureau is also modifying the maximum number of additional characters to identify the covered loan or application and reducing it from the proposed 25 to 23.

Several industry commenters suggested that the Bureau should consider using the MERS Mortgage Identification Number (MIN) as the core of the ULI.[261] The MIN is an 18-digit number registered on the MERS System. The first seven digits of the 18-digit MIN number would be the financial institution's identification number assigned by MERS. The next 10 digits would be assigned by the financial institution and the last digit serves as a check digit. One commenter stated that uniqueness is important in a loan number and that the MIN could guarantee uniqueness because it is registered with the MERS System. The MIN is usually issued at origination but may be issued at application. For the reasons discussed below, the Bureau is not adopting a ULI that uses the MIN as the core.

First, a rule that prescribes the MIN as the core would require all financial institutions reporting HMDA data to register with MERSCORP and obtain an organization number assigned by MERSCORP. This organization number would not be able to serve the same function as the LEI described in the section-by-section analysis of § 1003.5(a)(3) below because there would not be a way to link HMDA-reporting institutions with their corporate families using the MERS identification number. Second, the 10-digit number assigned by the institution that would serve as the identification number that can be used to identify and retrieve the loan application would not provide the same flexibility as the maximum 23-character that the ULI provides. Some financial institutions may need more than 10 digits to identify and retrieve a loan application because certain characters in the loan number may represent branches or business lines. For these reasons, the Bureau is not adopting a ULI that uses the MERS MIN as the core.

Some industry commenters suggested that the ULI should be identical to the loan identification number prescribed by the 2013 TILA-RESPA Final Rule. That rule provides that the loan identification number is a number that may be used by the creditor, consumer, and other parties to identify the transaction.[262] See Regulation Z § 1026.37(a)(12). Although the burden on industry would be mitigated if the Bureau required that financial institutions use the same loan identification number for HMDA reporting as the loan identification number in the TILA-RESPA disclosures, the Bureau believes that an application number that may meet the TILA-RESPA standards may not be appropriate for HMDA reporting. Section 1026.37(a)(12) does not limit the number of characters in the loan application number. The lack of limitation enables creditors to assign as many characters in the loan application number as they want, which could result in compliance challenges for users of the ULI. For example, if an institution purchases a loan with a 60-character application number assigned by the institution that originated the loan pursuant to § 1026.37(a)(12), the institution that purchased the loan would need to make updates to their system to accommodate a 60-character ULI in order to report the purchased loan under HMDA if the purchasing institution's system was programmed to handle ULIs with a maximum number of 45 characters pursuant to Regulation C. For these reasons, the Bureau is not adopting a rule that would enable institutions to use the TILA-RESPA loan application number for the ULI. The Bureau notes, however, that the loan application number requirements in the TILA-RESPA rule are not necessarily incompatible with the ULI. Therefore, a financial institution may generate a ULI for both HMDA and TILA-RESPA.

The Bureau also proposed that the ULI may consist of letters, numbers, symbols, or a combination of letters, numbers, and symbols. While the Bureau did not receive any comments regarding the use of letters or numbers, the Bureau received a comment from industry stating that symbols may contain embedded special characters that could potentially result in interference with applications or programs that use the ULI. In addition, certain symbols may not be recognized by certain programs that use HMDA data. The commenter suggested that the Bureau should provide a list of symbols that are permissible in the ULI or provide a list of symbols that are not permissible in the ULI. After considering the comment, the Bureau concluded that symbols in the ULI can potentially present challenges for financial institutions and data when reporting or analyzing HMDA data. Therefore, the final rule does not permit the use of symbols, as in proposed § 1003.4(a)(1)(i)(B)(1). The Bureau is adopting a final rule that provides that Start Printed Page 66178the maximum number of characters in the ULI must be 45, with the first 20 characters representing the LEI followed by up to 23 additional characters that may be letters, numerals, or a combination of both, and a 2-character check digit.

The Bureau explained in the proposal that the current identifier requirement makes it difficult to track an application or loan over its life. Commenters, including industry, consumer advocates, and trade associations, supported the proposed ULI because it would require a financial institution that reports HMDA data and that reports a purchased loan to report the same ULI that was previously reported under HMDA by the financial institution that originated the loan. One commenter stated that the ULI will enable a much better understanding of how the market works and how loans perform. Another commenter pointed out that the ULI is the single most useful addition for regulators to assess what happens after a loan is originated, from servicer changes to secondary mortgage market activity. Another commenter supporting the proposed ULI argued that a ULI that follows a loan through various permutations may help shed light into which racial and ethnic minority homeowners may be disproportionately subjected to predatory lending, foreclosure, fraud, and underwater mortgages.

A commenter that supported the ULI stated that issues regarding the ULI could arise in a transaction that involves a purchased covered loan. Specifically, the commenter noted that the proposal did not specify which entity assigns the ULI at the initial reporting of the covered loan, particularly if a quarterly reporter purchased the loan and reports it prior to the annual reporter that originated the loan. The Bureau recognizes that the proposal may have created confusion regarding the ULI on purchased covered loans. To eliminate the confusion, the Bureau is adding § 1003.4(a)(1)(i)(D) to address purchased covered loans. Section 1003.4(a)(1)(i)(D) provides that a financial institution that reports a purchased covered loan must use the ULI that was assigned or previously reported for the covered loan. For example, if a quarterly reporter pursuant to § 1003.5(a)(1)(ii) purchases a covered loan from a financial institution that is an annual reporter and that submits data annually pursuant to § 1003.5(a)(1)(i), the quarterly reporter that purchased the covered loan must use the ULI that the financial institution that is an annual reporter assigned to the covered loan. Additionally, the Bureau is adding § 1003.4(a)(1)(i)(E) to address the option for using the same ULI for an original and reinstated or reconsidered application that occur during the same calendar year. For example, assume a quarterly reporter pursuant to § 1003.5(a)(1)(ii) takes final action on an application in the first quarter and submits it with its first quarter information. If in the second quarter during the same calendar year, the financial institution reconsiders the application and takes final action in the second quarter that is different from that in the first quarter, the financial institution may use the same ULI that was reported in its first quarter data. The Bureau believes that providing this option for financial institutions will reduce burden associated with assigning a new ULI for a later transaction that a financial institution considers as a continuation of an earlier transaction.

The Bureau proposed § 1003.5(a)(3) to require a financial institution to provide an LEI when the financial institution reports its data. Section 1003.5(a)(3) also describes the issuance of the LEI. The Bureau is adopting the requirement in § 1003.5(a)(3) to require a financial institution to provide its LEI when reporting its data, as discussed in detail below in the section-by-section analysis of § 1003.5(a)(3). However, the Bureau is making a technical change and moving the description of the issuance of the LEI to § 1003.4(a)(1)(i)(A) for ease of reference. See the section-by-section analysis of § 1003.5(a)(3) below for more information.

For these reasons and those above, the Bureau is adopting § 1003.4(a)(1)(i) generally as proposed, with modifications related to symbols and the number of characters, the issuance of the LEI, additional clarification related to purchased covered loans and previously reported applications, and the addition of the check digit requirement.

The Bureau solicited feedback regarding hashing as an encryption method for the ULI. The Bureau also solicited feedback on salting in addition to hashing to enhance the encryption. One industry commenter recommended that the Bureau finalize hashing and salting while most other industry commenters opposed such a requirement arguing that it would not provide any benefit but would entail an additional cost, including expertise and resources. After considering the comments, the Bureau has concluded that the benefits of hashing and salting would not be sufficient to justify the costs of such requirements. Accordingly, the Bureau is not adopting a requirement that the ULI must be encrypted using a hash algorithm.

Proposed comment 4(a)(1)(i)-1 clarified the uniqueness requirement of the ULI. The Bureau did not receive any comments on proposed comment 4(a)(1)(i)-1, which is adopted generally as proposed, but with technical modifications. The Bureau did not receive feedback on comment 4(a)(1)(i)-2, which provided guidance on the ULI's privacy requirements, and is adopted as proposed. The Bureau is also adopting new comments 4(a)(1)(i)-3 through -5 to provide guidance and illustrative examples for the ULI on purchased covered loans and reinstated or reconsidered applications, and guidance on the check digit.

4(a)(1)(ii)

The Bureau proposed § 1003.4(a)(1)(ii) to provide for reporting of the date the application was received or the date shown on the application form. For the reasons discussed below, the Bureau is finalizing § 1003.4(a)(1)(ii) as proposed with minor revisions to the associated commentary.

Some commenters requested additional guidance on reporting application date. Many of these comments stated that application date is difficult to report for commercial loans, because the application process is much more fluid than in consumer lending and an application form may not be formally completed until the end of the application process for some commercial loans. These concerns will be reduced by the Bureau's decision to generally maintain reporting of dwelling-secured, commercial-purpose transactions at its current level as discussed above in the section-by-section analysis of § 1003.3(c)(10). For those commercial loans that will be required to be reported, the definition of application, combined with the ability to rely on the date shown on the application form, permits sufficient flexibility for financial institutions to report application date for commercial loans.

A commenter suggested that instead of reporting application date financial institutions should report only the month of application to ease compliance. The Bureau believes such a change would reduce the data's utility. Because interest rates can change more rapidly than monthly, and policies or criteria that affect the action taken on applications can change during a calendar month, it is important to have a more complete application date reporting requirement so that loans can be grouped appropriately for analysis.Start Printed Page 66179

Therefore, the Bureau is finalizing § 1003.4(a)(1)(ii) as proposed, and finalizing comment 4(a)(1)(ii)-1 as proposed with minor revisions to provide additional guidance on reporting application date when multiple application forms are processed. The Bureau received no specific feedback on comment 4(a)(1)(ii)-2 and is finalizing it as proposed. The Bureau is adding additional language to comment 4(a)(1)(ii)-3 for clarity. The Bureau is deleting comment 4(a)(ii)-4, because it is duplicative of comment 4(a)(8)(i)-14.

4(a)(2)

HMDA section 304(b)(1) requires financial institutions to report the number and dollar amount of mortgage loans which are insured under Title II of the National Housing Act or under Title V of the Housing Act of 1949 or which are guaranteed under chapter 37 of Title 38. The Bureau proposed to retain the current reporting requirement, but incorporate the text of the statutory provision, with conforming modifications, directly into Regulation C. For the reasons discussed below, the Bureau is finalizing § 1003.4(a)(2) with modifications to maintain consistency with the current reporting requirement.

Commenters suggested various changes to the requirement, including aligning it with similar categories in other regulations, including new categories, or exempting certain types of covered loans from the requirement. A few commenters suggested adding an additional enumeration for State housing agency loans. Because many loans that State housing agencies are involved with are also insured or guaranteed by FHA or another government entity, the Bureau does not believe that adding an additional enumeration would accurately capture State housing agency loans without requiring financial institutions to select multiple categories, which would add additional burden and complexity.

Other commenters suggested aligning to the Regulation Z § 1026.37(a)(10)(iv) loan type categories, which would remove the category for USDA Rural Housing Service and Farm Service Agency loans and combine it with State housing agency loans under an “other” category. The Bureau believes that the less burdensome approach is to maintain the current category for USDA Rural Housing Service and Farm Service Agency loans and not adopt a new category incorporating multiple types of covered loans.

Some commenters also argued that commercial loans should be exempted from this requirement, or that a Small Business Administration enumeration should be added. The Bureau is adopting a reporting requirement to identify covered loans primarily for a business or commercial purpose as discussed in the section-by-section analysis of § 1003.4(a)(38) below and therefore believes it would be largely duplicative to add a reporting requirement specifically for Small Business Administration loans, especially considering that such loans are not specifically identified by HMDA section 304(b)(1).

After considering the comments and conducting additional analysis, the Bureau is finalizing § 1003.4(a)(2) with modifications. The Bureau is specifying the name of the government insurer or guarantor instead of the chapter or title of the United States Code or statute under which the loan is insured or guaranteed as specified in the statutory text to maintain consistency with current reporting requirements provided in appendix A to Regulation C. Federal Housing Administration Title I loans would be reported as FHA loans in addition to Title II loans. Because Title I loans include many manufactured housing loans, the Bureau is concerned that if the proposal were finalized as proposed, Title I manufactured housing loans would have been reported as conventional loans which would not clearly distinguish them from home-only manufactured home loans not insured by FHA.

4(a)(3)

Current § 1003.4(a)(3) requires financial institutions to report the purpose of a loan or application using the categories home purchase, home improvement, or refinancing. The Bureau proposed only technical modifications to § 1003.4(a)(3) to conform to proposed changes in transactional coverage and to add an “other” category, but sought comment regarding whether the loan purpose reporting requirement should be modified with respect to home improvement loans and cash-out refinancings. For the reasons discussed below, the Bureau is adopting § 1003.4(a)(3) with modifications to include a cash-out refinancing category and to make changes to the commentary to implement this additional category and provide instructions for reporting covered loans with multiple purposes.

Some commenters addressed the home improvement loan purpose reporting requirement. One commenter suggested that the loan purpose be simplified to track only whether a loan was for purchase of a dwelling or not, as discerning a borrower's intent can be difficult. Other commenters also stated that determining home improvement purpose can be difficult for cash-out refinancings and other loans, and various commenters recommended eliminating the home improvement purpose category. However, some commenters supported requiring financial institutions to identify loans and applications with a home improvement purpose. The Bureau believes that the home improvement purpose continues to be an important indicator of home financing available for home improvements, and therefore is preserving that loan purpose category in this final rule.

The Bureau solicited comment on the utility and feasibility of requiring a cash-out refinancing purpose, as distinct from refinancings generally. Many commenters stated that cash-out refinancings do not have a standardized definition in the industry and can vary by loan program or financial institution. Some commenters argued that definitional problems would make any reporting requirement difficult. A few commenters argued that the most the Bureau should require would be to report whether the financial institution considered the loan or application to be a cash-out refinancing rather than trying to establish a specific definition for HMDA purposes alone.

Other commenters stated that reporting of cash-out refinancings would enhance the HMDA data by shedding light on borrowers taking equity out of their homes and differentiate these refinancings from rate-and-term refinancings in the data. Some commenters also noted that there is often a pricing difference between cash-out refinancings and other refinancings and that differentiating them in the data would be helpful.

One commenter stated that the Bureau should adopt an additional data point for Regulation C indicating the amount of cash received by the consumer at closing. The Bureau does not believe it would be appropriate to adopt a specific additional data point for cash received by the consumer at closing at this time. The amount of cash received might not be a true indicator of whether the loan was considered or priced as a cash-out refinancing, because some financial institutions and loan programs allow for a limited amount of cash to be received in rate-and-term refinancings. However, the Bureau believes that differentiating cash-out refinancings in HMDA data will be valuable because there are often significant differences in rates or fees between cash-out refinancings and rate-Start Printed Page 66180and-term refinancings.[263] These differences might not otherwise be distinguishable in the HMDA data and could appear to be a result of discrimination in a fair lending analysis if the distinction could not be controlled for.

Therefore, pursuant to HMDA sections 305(a) and 304(b)(6), the Bureau is finalizing § 1003.4(a)(3) with the addition of a cash-out refinancing loan purpose. The Bureau believes this addition will carry out HMDA's purposes, by, for example, assisting in enforcing antidiscrimination statutes. The Bureau is adopting new comment 4(a)(3)-2 to provide guidance on reporting cash-out refinancings. This comment provides that a financial institution reports a covered loan or an application as a cash-out refinancing if it is a refinancing as defined by § 1003.2(p) and the institution considered it to be a cash-out refinancing in processing the application or setting the terms under its guidelines or an investor's guidelines. This comment also provides illustrative examples.

Some commenters stated that the Regulation C loan purpose categories should be aligned with the loan purpose categories in Regulation Z § 1026.37(a)(9). HMDA section 304(b) requires the disclosure of home improvement loans, which is not a loan purpose under Regulation Z § 1026.37(a)(9). Further, the Bureau is adopting a cash-out refinancing loan purpose category for Regulation C as discussed above, whereas Regulation Z § 1026.37(a)(9) contains only a refinancing purpose. Because these differences are important for the purposes of Regulation C, the Bureau does not believe that aligning § 1003.4(a)(3) with Regulation Z § 1026.37(a)(9) would be appropriate.

After considering the comments and conducting additional analysis, the Bureau is finalizing § 1003.4(a)(3) with modifications to include cash-out refinancings. Comment 4(a)(3)-1, which is part of current Regulation C but was not included in the proposal, is adopted with changes to provide additional guidance for reporting the “other” category. Comment 4(a)(3)-2 is generally adopted as proposed, with conforming changes related to the addition of the cash-out refinancing purpose and renumbered as 4(a)(3)-3. Comment 4(a)(3)-3 provides guidance on reporting covered loans that would qualify under multiple categories under the § 1003.4(a)(3) reporting requirement. The revised comment would provide that a covered loan that is both a cash-out refinancing or a refinancing and a home improvement loan should be reported as a cash-out refinancing or refinancing. The Bureau believes that this will make the cash-out refinancing and refinancing reporting categories more valuable by clearly identifying loans that are considered cash-out refinancings or refinancings whether or not they are for home improvement. Proposed comment 4(a)(3)-3 is adopted with modifications related to the addition of the cash-out refinancing purpose and is renumbered as 4(a)(3)-4. The Bureau is adopting new comment 4(a)(3)-5 to provide guidance on reporting loan purpose under Regulation C for loans with a business or commercial purpose when such loans are not excluded from coverage.

4(a)(4)

Current § 1003.4(a)(4) requires financial institutions to identify whether the application is a request for a covered preapproval. The Bureau proposed to continue this requirement and proposed minor technical revisions to the instructions in appendix A. Comments related to preapprovals are discussed in the section-by-section analysis of § 1003.2(b)(2) and § 1003.4(a). The Bureau is finalizing § 1003.4(a)(4) with modifications to clarify the requirement.

Based on additional analysis, the Bureau is also finalizing new comment 4(a)(4)-1 to provide guidance on the requirement and to simplify the current reporting requirement. Currently appendix A provides three codes for reporting this requirement: Preapproval requested, preapproval not requested, and not applicable. The instructions provide that preapproval not requested should be used when an institution has a preapproval program but the applicant did not request a preapproval through that program and that not applicable should be used when the institution does not have a preapproval program and for other types of loans and applications that are not part of the definition of a preapproval program under Regulation C. The Bureau has found that it is a common error for financial institutions to incorrectly report not applicable instead of preapproval not requested. The information provided by distinguishing these situations is of limited value, and the Bureau believes that it will reduce compliance burden to no longer have separate reporting options based on this distinction. Comment 4(a)(4)-1 provides that an institution complies with the reporting requirement by reporting that a preapproval was not requested regardless of whether the institution has such a program and the applicant did not apply through that program or if the institution does not have a preapproval program as defined by Regulation C. The Bureau is also finalizing new comment 4(a)(4)-2 to provide guidance on the scope of the reporting requirement.

4(a)(5)

Regulation C currently requires reporting of the property type to which the loan or application relates as one- to four-family dwelling (other than manufactured housing), manufactured housing, or multifamily dwelling. The Bureau proposed to replace the requirement to report property type under § 1003.4(a)(5) with the requirement to report the construction method for the dwelling related to the property identified in § 1003.4(a)(9). For the reasons discussed below, the Bureau is adopting § 1003.4(a)(5) with modifications to remove the “other” reporting category and finalizing a new comment providing guidance on reporting construction method for manufactured home communities.

Some commenters supported the proposed changes and the treatment of modular housing. Other commenters argued that the current property type reporting requirement should be retained. A few commenters argued that the construction method and property type reporting requirement should be removed entirely. The Bureau does not agree that combining construction method and number of units as the current § 1003.4(a)(5) property requirement does is appropriate, and believes separating these concepts into two distinct requirements will provide data that better reflects how financial institutions are serving the housing needs of their communities.

The Bureau is therefore, pursuant to HMDA sections 305(a) and 304(b)(6)(J), finalizing § 1003.4(a)(5) generally as proposed, but with modifications. The Bureau believes that the modifications will carry out HMDA's purposes and facilitate compliance therewith by providing more detail regarding whether institutions are serving the housing needs of their communities and by better aligning reporting to industry standards. The Bureau is removing the “other” option for reporting of construction method, because, as discussed in the section-by-section analysis of § 1003.2(f), the Bureau is Start Printed Page 66181finalizing the exclusion for many types of structures (such as recreational vehicles, houseboats, and pre-1976 mobile homes) that do not meet the definition of a manufactured home under § 1003.2(l). In light of this change, the Bureau believes that an “other” category is unnecessary. Proposed comment 4(a)(5)-1 is being adopted generally as proposed, with minor revisions for clarity. Proposed comment 4(a)(5)-2 is being adopted as proposed, renumbered as comment 4(a)(5)-3. The Bureau is also adopting new comment 4(a)(5)-2 to provide guidance on reporting the construction method for manufactured home communities. As discussed in the supplementary information to the proposed rule, the FFIEC had previously provided guidance to report the property type for manufactured home communities as manufactured housing.[264] Based on a review of recent HMDA data, the Bureau believes that, while some financial institutions are following this prior guidance, some financial institutions may not be. The Bureau therefore believes it will facilitate compliance to include a comment specifically on the topic of reporting construction method for covered loans secured by manufactured home communities.

A few commenters argued that additional information related to the construction of the dwelling should be reported. One trade association argued that the age of the dwelling should be reported in order to provide public data about housing finance as the housing stock ages, which would be helpful for understanding housing demand. Another commenter argued that individual condominium or cooperative units should be identified as such in HMDA data, which would facilitate housing research in large metropolitan areas. While both suggested modifications would improve the data, the Bureau does not believe that the benefits of these data would justify the burden at this time. However, the Bureau believes that with the requirement to report property address under § 1003.4(a)(9), it may be possible to derive a proxy for condominium and cooperative units from the fact that unit numbers generally are included as part of the property address for such units. The Bureau may explore whether it would be possible to include such data in the release of HMDA data.

4(a)(6)

HMDA section 304(b)(2) requires the disclosure of the number and dollar amount of mortgage loans made to mortgagors who did not, at the time of execution of the mortgage, intend to reside in the property securing the mortgage loan. Current § 1003.4(a)(6) requires reporting the owner occupancy status of the property as owner-occupied as a principal dwelling, not owner-occupied as a principal dwelling, or not applicable. The Bureau proposed to require financial institutions to report whether a property will be used as a principal residence, as a second residence, as an investment property with rental income, or as an investment property without rental income. The Bureau proposed changes to appendix A to require distinguishing between investment properties with rental income and investment properties without rental income. For the reasons discussed below, the Bureau is finalizing § 1003.4(a)(6) with modifications to require reporting of whether the property is a principal residence, second residence, or investment property.

Some commenters generally supported reporting based on borrower occupancy rather than owner occupancy. Some commenters supported the additional category for second residences. Many commenters addressed the proposed investment property reporting requirement. Some commenters argued that the distinction between rental income and other investment properties would be burdensome and unnecessary. Some commenters also believed the example provided in comment 4(a)(6)-4 was inconsistent with the general exclusion for transitory residences in proposed comment 2(f)-2 (final comment 2(f)-3). Other commenters believed that the distinction would be helpful for research. Some commenters stated that investment properties with rental income would not be sufficient, that in addition it would be important for research to identify multi-unit dwellings where the borrower occupies one unit and rents the remaining units. The Bureau believes that multi-unit owner-occupied rental properties would be identifiable under the proposed reporting requirement as principal residences with more than one unit reported under the requirements of § 1003.4(a)(31).

The Bureau recognizes that the proposal's investment property distinction may pose compliance challenges and is inconsistent with some industry standards for categorizing occupancy. The Bureau is therefore finalizing § 1003.4(a)(6) with modifications. The Bureau is combining investment properties into a single category. The Bureau is also finalizing comment 4(a)(6)-4 with modifications to clarify that the example refers to a long-term residential property and to replace the proposed term “owner” with “borrower or applicant” for consistency with § 1003.4(a)(6) and comments 4(a)(6)-2 and -3.

The Bureau is finalizing proposed comment 4(a)(6)-5 regarding multiple properties as final comment 4(a)(6)-1. Current comment 4(a)(6)-1 also deals with multiple properties and the Bureau believes that the comments should be consolidated into final comment 4(a)(6)-1.

For the reasons stated in the preamble to the proposed rule, the Bureau believes that the finalized reporting requirement will provide valuable information about owner-occupancy for determining how financial institutions are serving the housing needs of their communities and the requirement as adopted will further understanding of how second homes and investment properties affect housing affordability and affect local communities.[265] The Bureau is therefore finalizing § 1003.4(a)(6) with modifications as discussed above to implement section 304(b)(2) of HMDA and pursuant to its authority under sections 305(a) and 304(b)(6)(J) of HMDA. The Bureau believes requiring this level of detail about residency status is a reasonable interpretation of HMDA section 304(b)(2). Furthermore, for the reasons Start Printed Page 66182given above and in the preamble to the proposed rule, the Bureau believes this change is necessary and proper to effectuate HMDA's purposes, because this information will help determine whether financial institutions are serving the housing needs of their communities and will assist in decisions regarding the distribution of public sector investments.

4(a)(7)

Section 304(a) and (b) of HMDA requires the disclosure of the dollar amount of covered loans and applications.[266] Section 1003.4(a)(7) of Regulation C requires financial institutions to report the amount of the loan or the amount applied for. Paragraph I.A.7 in appendix A instructs financial institutions to report loan amount to the nearest thousand, among other things. The Bureau proposed § 1003.4(a)(7), which provided that financial institutions shall report the amount of the covered loan or the amount applied for and clarified how to determine and report loan amount with respect to various types of transactions. In addition, the Bureau proposed to delete the requirement to round the loan amount to the nearest thousand, and also proposed several technical, conforming, and clarifying modifications to § 1003.4(a)(7) and its corresponding comments.

Proposed § 1003.4(a)(7)(i) provided that for a closed-end mortgage loan, other than a purchased loan or an assumption, a financial institution shall report the amount to be repaid as disclosed on the legal obligation. The Bureau received a few comments regarding reporting the exact dollar amount, rather than the loan amount rounded to the nearest thousand. Some industry commenters suggested that the Bureau maintain the current rounding requirement, explaining that the change to reporting the exact loan amount in dollars will have limited value and will present an increased opportunity for clerical errors. Other industry commenters recommended that loan amount be reported in ranges rather than an exact loan amount in order to eliminate potential reporting errors and to better protect the privacy of applicants.

On the other hand, a few commenters supported the proposal to report the exact loan amount, agreeing with the Bureau's proposed rationale that this would allow for a more precise calculation of loan-to-value ratio. One industry commenter indicated that reporting loan amount in dollars would also eliminate the potential for errors associated with incorrect rounding. Another industry commenter stated that while rounding has been the standard for reporting loan amount, it has been known to cause problems with data integrity.

The Bureau has considered this feedback and determined that requiring reporting of the exact dollar amount is the more appropriate approach. Reporting of the exact dollar amount will facilitate HMDA compliance because such information is evident on the face of the loan documents and financial institutions will no longer need to make an additional calculation required for rounding. In addition, when coupled with § 1003.4(a)(28), which requires a financial institution to report the value of the property relied on in making the credit decision, a requirement to report the exact dollar amount under § 1003.4(a)(7) will allow for the calculation of loan-to-value ratio, an important underwriting variable. A rounded loan amount would render these calculations less precise, undermining their utility for data analysis.

Proposed § 1003.4(a)(7)(i) further provides that, for a purchased closed-end mortgage loan or an assumption of a closed-end mortgage loan, the financial institution shall report the unpaid principal balance at the time of purchase or assumption. An industry commenter indicated that reporting the unpaid principal balance at the time of purchase for a purchased closed-end mortgage loan would present operational difficulties since payments may sometimes be in process and reconciliation may be required and such reconciliation would be complicated with quarterly reporting. The Bureau does not believe that requiring a financial institution to report the unpaid principal balance of a purchased closed-end mortgage loan at the time of purchase would result in significant difficulties. Moreover, the Bureau simply moved this existing reporting requirement into the text of proposed § 1003.4(a)(7)(i), which prior to the proposal, was found in an instruction and comment. With respect to quarterly reporting, those requirements are described further below in the section-by-section analysis of § 1003.5(a)(1). The Bureau received no other feedback regarding this proposed requirement. Consequently, the Bureau is adopting § 1003.4(a)(7)(i) generally as proposed, with technical and clarifying modifications. In addition, the Bureau is adopting new comment 4(a)(7)-5, which clarifies the loan amount that a financial institution reports for a closed-end mortgage loan as set forth in § 1003.4(a)(7)(i).

Proposed § 1003.4(a)(7)(ii) provides that for an open-end line of credit, including a purchased open-end line of credit or an assumption of an open-end line of credit, a financial institution shall report the amount of credit available to the borrower under the terms of the plan. With respect to open-end lines of credit, the Bureau proposed to collect the full line, rather than only the portion intended for home purchase or improvement, as is currently required. One commenter supported this modification, indicating that it would reduce burdens on financial institutions associated with determining the purposes of open-end lines of credit. Another industry commenter asked the Bureau to expressly clarify that the requirement to report loan amount for a home-equity line of credit is the amount of the line of credit, regardless of any amounts drawn. No clarification is necessary because the commentary provides that the loan amount that must be reported for an open-end line of credit is the entire amount of credit available to the borrower under the terms of the plan. The Bureau is adopting § 1003.4(a)(7)(ii) generally as proposed, with one modification to clarify that reverse mortgage open-end lines of credit are subject to § 1003.4(a)(7)(iii), discussed below. The Bureau is also adopting new comment 4(a)(7)-6, which clarifies that for a purchased open-end line of credit and an assumption of an open-end line of credit, a financial institution reports the entire amount of credit available to the borrower under the terms of the plan.

Regulation C is currently silent as to how loan amount should be determined for a reverse mortgage. Proposed § 1003.4(a)(7)(iii) provides that, for a reverse mortgage, the amount of the covered loan is the initial principal limit, as determined pursuant to section 255 of the National Housing Act (12 U.S.C. 1715z-20) and implementing regulations and mortgagee letters prescribed by HUD. The Bureau specifically solicited feedback on how to determine loan amount for non-federally insured reverse mortgages but received no comments. One industry commenter requested that the Bureau clarify upon which basis financial institutions should report non-federally insured reverse mortgages. The Bureau believes that industry is familiar with HUD's Home Equity Conversion Mortgage Insurance Program and its implementing regulations and mortgagee letters. Applying this well-known calculation to both federally insured and non-federally insured Start Printed Page 66183reverse mortgages will produce more consistent and reliable data on reverse mortgages. Consequently, the Bureau is adopting § 1003.4(a)(7)(iii) generally as proposed, but with technical modifications for clarity. In addition, the Bureau is adopting new comment 4(a)(7)-9, which clarifies that a financial institution reports the initial principal limit of a non-federally insured reverse mortgage as set forth in § 1003.4(a)(7)(iii).

The Bureau also proposed comments 4(a)(7)-2, -5, and -6. The Bureau received no specific feedback regarding these comments. Accordingly, the Bureau is adopting these comments generally as proposed, with several technical amendments for clarity and renumbered as 4(a)(7)-3, -7, and -8. The Bureau is adopting proposed comment 4(a)(7)-3 generally as proposed and renumbered as 4(a)(7)-4, but clarifies that for a multiple-purpose loan, a financial institution reports the entire amount of the covered loan, even if only a part of the proceeds is intended for home purchase, home improvement, or refinancing. In addition, the Bureau is adopting new comment 4(a)(7)-2, which clarifies the loan amount that a financial institution reports for an application or preapproval request approved but not accepted under § 1003.4(a)(7).

4(a)(8)

4(a)(8)(i)

Current § 1003.4(a)(8) requires reporting of the action taken on the covered loan or application and the date of action taken. The Bureau proposed to revise the commentary under § 1003.4(a)(8) with respect to rescinded loans, conditional approvals, and applications received by third parties. The Bureau proposed to require that rescinded loans be reported as loans approved but not accepted. In addition, the Bureau proposed guidance on reporting action taken for loans involving conditional approvals and on reporting action taken for applications received by third parties. Comments regarding reporting for applications involving multiple parties are discussed in the section-by-section analysis of § 1003.4(a). For the reasons discussed below, the Bureau is adopting § 1003.4(a)(8) with modifications by providing separate paragraphs for the requirements to report action taken and date of action taken and to incorporate material from current appendix A into § 1003.4(a)(8)(i) and the associated commentary.

The Bureau did not propose changes to § 1003.4(a)(8). To clarify and streamline the regulation, and to provide separate paragraph citations for the action taken reporting requirement and the action taken date reporting requirement, the Bureau is incorporating material from current appendix A into new § 1003.4(a)(8)(i) and new § 1003.4(a)(8)(ii). The Bureau is also adopting several comments which incorporate material previously contained in appendix A into the commentary in order to facilitate compliance. These comments 4(a)(8)(i)-1 through -8 primarily incorporate existing appendix A material, but contain some modifications to align with other changes and new comments discussed below. Because the material was previously contained in appendix A, no substantive change is made.

Few commenters addressed the proposal regarding rescinded loans. One commenter supported the proposal because it provided a consistent reporting rule. Another commenter stated that the proposal would provide consistency, but argued that the number of rescinded loans is so small that the change would not be worth the regulatory compliance cost. The Bureau believes that approved but not accepted most accurately reflects the outcome of a rescinded transaction, and that a consistent reporting rule for rescinded loans is appropriate and justifies any compliance burden. Therefore, it is finalizing comment 4(a)(8)-2 generally as proposed, but with minor technical revisions, renumbered as comment 4(a)(8)(i)-10.

Some commenters addressed the proposal to clarify conditional approvals in comment 4(a)(8)-5. The proposal amended the commentary to clarify the types of conditions that are considered credit conditions and those that are customary commitment or closing conditions, and to clarify which action taken categories should be reported in certain circumstances involving conditional approvals. One industry commenter stated that the revised commentary was helpful. A few commenters stated that the conditional approval rules were generally confusing and did not reflect a financial institution's true credit decision in all circumstances. The Bureau believes that the general framework established by the conditional approvals commentary serves HMDA's purposes and provides a reasonable way for reflecting financial institutions' actions on covered loans and applications. While some financial institutions may view any type of approval, even one with many outstanding conditions, as an approved loan and wish to report it as such under Regulation C, the Bureau believes this would be an inappropriate result for applications that ultimately did not result in originations and were conditioned on underwriting or creditworthiness conditions. The Bureau is finalizing comment 4(a)(8)-5 as proposed, renumbered as comment 4(a)(8)(i)-13.

One commenter argued that financial institutions should not report purchased loans under Regulation C and cited legislative history the commenter believed demonstrated that Congress intended to exclude loans purchased. HMDA section 304(a)(1)(B) has included a requirement to compile and make available information about loans “purchased by that institution” since HMDA was enacted in 1975.[267] The legislative history referred to by the commenter does not address whether purchased loans should be reported, but rather, whether secondary market entities that only purchase loans but do not also originate loans should be required to report under HMDA; Congress ultimately enacted a requirement for financial institutions to report the class of purchaser of loans.[268] The Bureau believes that HMDA section 304(a)(1)(B) clearly authorizes reporting of loans purchased by financial institutions covered by HMDA. The Bureau is finalizing comment 4(a)(8)-3 related to purchased loan as proposed, renumbered as comment 4(a)(8)(i)-11.

The Bureau is finalizing comment 4(a)(8)-1 with modifications for clarity, renumbered as comment 4(a)(8)(i)-9. The Bureau is finalizing comment 4(a)(8)-4 as proposed, renumbered as comment 4(a)(8)(i)-12. The Bureau is also adopting new comments 4(a)(8)(i)-1 through 4(a)(8)(i)-8 which incorporate material in existing appendix A with some modifications for clarity. The Bureau is also adding new comment 4(a)(8)(i)-15 to provide guidance on reporting action taken when a financial institution has provided a notice of incompleteness followed by an adverse action notice on the basis of incompleteness under Regulation B.[269] The comment provides that an institution may report the action taken as either file closed for incompleteness or application denied in such a circumstance.

4(a)(8)(ii)

The Bureau proposed only technical changes and modifications to the Start Printed Page 66184current Regulation C requirement to report the date of action taken by a financial institution on a covered loan or application. The Bureau did not receive many comments related to the requirement to report action taken date. Comments related generally to the definition of application or reporting of applications are discussed in the section-by-section analysis of § 1003.2(b). The Bureau is finalizing the requirement to report the date of action taken as new § 1003.4(a)(8)(ii) to provide a separate paragraph for the requirement. The Bureau is adopting comments 4(a)(8)-7, -8, and -9 as proposed, renumbered as comments 4(a)(8)(ii)-4, -5, and -6. The Bureau is also adopting new comments 4(a)(8)(ii)-1, -2, and -3, which incorporate existing requirements in appendix A related to reporting of action taken date.

4(a)(9)

The Bureau proposed to require financial institutions to report the address of the property securing the covered loan, discussed below in the section-by-section analysis of § 1003.4(a)(9)(i), and to continue to require financial institutions to report the State, MSA or MD, county, and census tract of most reported covered loans, discussed below in the section-by-section analysis of § 1003.4(a)(9)(ii). The Bureau is adopting proposed § 1003.4(a)(9) with the modifications discussed below.

Covered Loans Related to Multiple Properties

The Bureau proposed to revise existing comments 4(a)(9)-1 and -2 to provide a single framework clarifying how to report a covered loan related to multiple properties. Proposed comment 4(a)(9)-1 discussed reporting when a covered loan relates to more than one property but only one property secures or would secure the loan. Proposed comment 4(a)(9)-2 provided that if more than one property secures or would secure the covered loan, a financial institution may report one of the properties using one entry on its loan/application register or the financial institution may report all of the properties using multiple entries on its loan/application register. Proposed comment 4(a)(9)-3 discussed reporting multifamily properties with more than one address.

A few commenters provided feedback on proposed comment 4(a)(9)-2. One consumer advocate suggested that the Bureau should require financial institutions to report information concerning all of the properties securing the loan. A few industry commenters took the opposite position and urged the Bureau to require financial institutions to report information about only one of the properties.

After considering the comments, the Bureau concludes that optional reporting is not advisable because HMDA data would provide inconsistent information about these types of transactions. At the same time, requiring financial institutions to report information about all of the properties securing the loan is also problematic because it would present additional burden for financial institutions. In addition, defining what constitutes multiple properties may present challenges for some multifamily complexes, which may sit on one parcel but have multiple addresses. For those reasons, the final rule requires financial institutions to report information about only one of the properties securing the loan.

Accordingly, the Bureau is finalizing proposed comments 4(a)(9)-1 through -3 with modifications to require reporting of one property when a covered loan is secured by more than one property. The Bureau also proposed technical modifications to existing comments 4(a)(9)-4 and -5. The Bureau received no comments on comments 4(a)(9)-4 and -5 and is finalizing them as proposed.

4(a)(9)(i)

The Dodd-Frank Act amended HMDA to authorize the Bureau to collect “as [it] may determine to be appropriate, the parcel number that corresponds to the real property pledged or proposed to be pledged as collateral.” [270] The Bureau proposed to implement this authorization with proposed § 1003.4(a)(9)(i), which provided that financial institutions were required to report the postal address of the physical location of the property securing the covered loan or, in the case of an application, proposed to secure the covered loan. The proposal indicated that the Bureau anticipated that postal address information would not be publicly released if proposed § 1003.4(a)(9)(i) were finalized. The Bureau solicited feedback on whether collecting postal address was an effective way to implement the Dodd-Frank amendment.

For the reasons discussed below, the Bureau is adopting § 1003.4(a)(9)(i) as proposed with the technical modifications discussed below. The Bureau is also adopting new comments 4(a)(9)(i)-1 through -3 to clarify the reporting requirements.

The Bureau received several comments on proposed § 1003.4(a)(9)(i). Several consumer advocate commenters supported reporting postal address.[271] These commenters highlighted that postal addresses would improve the ability to detect localized discrimination, noting that discrimination can occur in areas smaller than census tracts or other geographic boundaries. In addition, some explained that relying on census tracts for geographic analysis creates challenges for longitudinal analysis of the data because census tracts change over time. They also noted that collecting address in HMDA would enable tracking of multiple liens on the same property and thereby identifying risks for borrowers who may be over-leveraged.

Several industry commenters raised objections to reporting postal address. Some of these commenters suggested that postal address would not provide any valuable information because census tract information provides sufficient information to conduct fair lending or other statistical analysis of the property location. Other commenters asserted that reporting postal address would not support HMDA's purposes. Some industry commenters also expressed concerns about the burden of reporting postal address.

In addition, many industry commenters raised concerns about the privacy implications of including postal address in the HMDA data set. Commenters expressed concerns both about collecting the information and about disclosing the information. Commenters explained that address can be used to link the financially sensitive information included in the HMDA data with an individual borrower. Commenters suggested that the Bureau's data security systems would not adequately protect the information from accidental disclosure during the transmission of the information to the Bureau and while the information is stored on the Bureau's systems. Some industry commenters noted that information on census tract was preferable to postal address because it protects privacy. Most commenters urged the Bureau not to release the reported postal address information if Start Printed Page 66185collected. A consumer advocate also urged the Bureau to consider protections for specific populations, such as victims of domestic violence, when considering whether to release address information. A few consumer advocate commenters, on the other hand, urged the Bureau to release address, or point-specific information, to trusted researchers.

The Bureau is finalizing the proposal to collect the postal address, changed to property address for the reasons discussed below, of the property securing or proposed to secure a covered loan. Collecting property address will enrich the HMDA data and will support achieving HMDA's purposes. With these data, Federal officials will be able to track multiple liens on the same property. In addition, property address will help officials better understand access to credit and risks to borrowers in particular communities and better target programs to reach vulnerable borrowers and communities. Using these data, Federal officials may be able to detect patterns of geographic discrimination not evident from census tract data, which will assist in identifying violations of fair lending laws. In addition, as census tracts change over time, collecting property address will facilitate better longitudinal analysis of geographic lending trends.

However, the Bureau recognizes that collecting property address presents some challenges. As noted in the proposal, including property address in the HMDA data raises privacy concerns because property address can easily be used to identify a borrower. The Bureau is sensitive to the privacy implications of including property address in the HMDA data and has considered these implications carefully. Although the Bureau's privacy analysis is ongoing, as discussed in part II.B above, the Bureau anticipates that property address will not be included in the publicly released HMDA data. Due to the significant benefits of collecting this information, the Bureau believes it is appropriate to collect property address in spite of the privacy concerns and other concerns raised by commenters about collecting this information.

Parcel Number

Many commenters discussed whether postal address was an appropriate way to implement the Dodd-Frank authorization to collect a parcel number. Most of these commenters, including both industry and consumer advocate commenters, expressed support for using postal address to implement the authorization to collect a parcel number. Commenters noted that collecting postal address, while imperfect, is the best available option, because it is less burdensome to report than reporting a local parcel number and uniquely identifies most properties. A few commenters specifically stated that other alternatives discussed in the proposal, such as geospatial coordinates or local parcel number, present greater reporting burdens than postal address. Commenters also noted the current absence of a national universal parcel numbering system. One commenter stated that local parcel numbers are not used by lenders and are used solely by professionals that manage property records. Another commenter described the burden associated with reporting a local parcel number, stating that address, unlike a local parcel number, is stored in the same system as the other HMDA data. Other commenters stated that postal address would provide more complete information than a local parcel number for loans related to manufactured housing because manufactured homes located in mobile home parks may be placed on the same parcel but have unique property addresses.

Some consumer advocate commenters stated that postal address was currently an appropriate way to collect a parcel number, but asked the Bureau to consider replacing postal address with a universal parcel identifier if one is developed in the future. In addition, one commenter urged the collection of local parcel numbers because of their value for analysis at the local level. A few commenters that represented geospatial vendors recommended collecting both postal address and local parcel information. They explained that this would allow the Bureau, using both the reported address and local parcel information, to establish a national parcel database with mapping capabilities. Some of these commenters noted that collecting this information would also facilitate the creation of a national parcel numbering system.

The Bureau concludes that collecting property address is an appropriate way to implement the Dodd-Frank authorization to collect a parcel number. As noted by commenters, address is the least burdensome way to collect information that will uniquely identify a property. Financial institutions currently collect property address during the mortgage origination and application process if the address is available, and store that information with the other application and loan data that is reported in HDMA. In addition, most properties, including manufactured homes, have property addresses. In a small number of cases, a property address may not be available at the time of origination for some properties. Nonetheless, property address is an efficient and effective way to implement the authorization to collect a parcel number.

Currently, no universal standard exists for identifying a property so that it can be linked to related mortgage data. Parcel data are collected and maintained by individual local governments with limited State or Federal involvement. Local jurisdictions do not use a standard way to identify properties. In addition, local parcel data are not easily linked to the location of the property, which, as discussed above, substantially amplifies the usefulness of a parcel identifier. Local parcel information would provide some value for local analysis, but property address also provides valuable information at the local level. Therefore, compared with collecting property address, collecting a local parcel number would substantially increase the burden associated with reporting a parcel identifier and would substantially decrease the utility of the data.

The Bureau is not at this time pursuing commenters' suggestions for using Regulation C to develop a national parcel database. The Bureau may consider in the future whether and how it could work with other regulators and public officials to explore a national parcel identification system or other similar systems. The final rule does not require financial institutions to collect a local parcel number in addition to property address. The Bureau concludes that collecting property address strikes the appropriate balance between improving the data's utility and minimizing undue burden on data reporters.

For the reasons discussed above, the Bureau is implementing the Dodd-Frank authorization to collect the “parcel number that corresponds to the real property pledged or proposed to be pledged as collateral” by requiring financial institutions to report the property address of the property securing the covered loan or, in the case of an application, proposed to secure the covered loan.[272] As discussed above, there is no universal parcel number system; therefore, the Bureau believes it is reasonable to interpret the Dodd-Frank Act amendment to refer to information that uniquely identifies a dwelling pledged or proposed to be Start Printed Page 66186pledged as collateral. The Bureau is also adopting § 1003.4(a)(9)(i) pursuant to the Bureau's HMDA section 305(a) authority to provide for adjustments because, for the reasons given above, the Bureau believes the provision is necessary and proper to effectuate HMDA's purposes and facilitate compliance therewith.

Reporting Issues

Some industry commenters discussed situations when reporting a postal address is not possible or should not be required. A few of these commenters asked what to report if the property does not have an address. Others urged the Bureau not to require reporting of postal address information for purchases or for applications withdrawn or denied. The Bureau recognizes that in some cases address information will not be known. Consequently, address information will not be reported for all HMDA entries, as indicated in new comment 4(a)(9)-3. As discussed above, however, because property address greatly enriches the utility of HMDA data, financial institutions must report property address if the information is available. Therefore, the Bureau is not adopting commenters' suggestions to exclude certain types of entries from the requirement to report property address.

Some commenters suggested that Regulation C require reporting of the physical location of the property, instead of the mailing address, which may be different from the physical location of the property in some cases. Proposed § 1003.4(a)(9) and proposed instruction 4(a)(9)-1 directed financial institutions to report the postal address that corresponds to the physical location of the property, not the mailing address. To eliminate the confusion about whether to report the mailing address or the physical location of the property, the Bureau is modifying § 1003.4(a)(9)(i) to replace the term postal address, which may have been misunderstood to mean mailing address, with the term property address, which is understood to refer to the physical location of the property. In addition, the Bureau is adopting new comment 4(a)(9)(i)-1 to clarify that the financial institution reports the property address of the physical location of the property.

One commenter urged revising the requirement to include primary street address points, sub-address points, and geographic coordinates. The commenter also urged the Bureau to partner with States as they build addresses to meet the requirements of Next Generation 9-1-1 systems. The Bureau recognizes that in some cases, addresses may not convey full information about a property's location. These enhanced addressing standards would enrich the quality of the geographic information reported in HMDA data in those cases where address does not precisely identify a property's location, such as for dwellings located on rural routes. However, importing these standards for HMDA reporting seems likely to result in new burden for financial institutions that currently collect address during the application process but may not be collecting the information required by these standards. At the same time, any benefit from using these standards in HMDA would be limited only to a subset of HMDA reportable transactions. The Bureau's judgment is that reporting property address is less burdensome for institutions than enhanced standards, and will provide benefits sufficient to justify any burden that might be imposed on financial institutions.

Some industry commenters noted the challenges of reporting postal address in a standard format. To resolve those challenges, one commenter suggested requiring reporting the information in the same format as the closing disclosure. Another commenter noted that reporting postal address would have risks of input errors and suggested that the Bureau allow good faith errors for the address information. Other commenters sought clarification about how to report and whether abbreviations were allowed.

In response to these comments, the final rule clarifies institutions' reporting obligations to help minimize the risk of inadvertent reporting errors. Accordingly, new comment 4(a)(9)(i)-2 provides guidance on how to report the property address. In addition, § 1003.6, discussed below, addresses bona fide errors.

Final Rule

Having considered the comments received and for the reasons discussed above, the Bureau is finalizing § 1003.4(a)(9)(i) as proposed with the modifications discussed above. In addition, for the reasons discussed above, the Bureau is adopting new comments 4(a)(9)(i)-1 through -3 to provide illustrative examples and to incorporate information included in proposed instruction 4(a)(9).

4(a)(9)(ii)

Under HMDA and current Regulation C, a financial institution is required to report the location of the property to which the covered loan or application relates by MSA or MD, State, county, and census tract if the loan is related to a property located in an MSA or MD in which the financial institution has a home or branch office and a county with a population of more than 30,000.[273] In addition, § 1003.4(e) requires banks and savings associations that are required to report data on small business, small farm, and community development lending under regulations that implement the CRA to collect the location of property located outside MSAs and MDs in which the institution has a home or branch office or outside of any MSA. The Bureau proposed to renumber existing § 1003.4(a)(9) as § 1003.4(a)(9)(ii) and to make certain nonsubstantive technical modifications for clarification. The Bureau did not propose any changes to § 1003.4(e).

The Bureau explained in the proposal that it was exploring ways to reduce the burden associated with reporting the State, county, MSA, and census tract of a property, such as operational changes that may enable the Bureau to perform geocoding (i.e., identifying the State, county, MSA, and census tract of a property) for financial institutions. The Bureau suggested that it might create a system where a financial institution reports only the address and the Bureau provides the financial institution with the census tract, county, MSA or MD, and State. The Bureau solicited feedback on the potential operational improvements.

For the reasons discussed below, the Bureau is adopting § 1003.4(a)(9)(ii), which requires financial institutions to report the State, county, and census tract of the property securing or proposed to secure a covered loan if the property is located in an MSA in which the institution has a home or branch office or if § 1003.4(e) applies. The final rule eliminates the requirement to report the MSA or MD of the property securing or proposed to secure a covered loan. The Bureau is also adopting new comments 4(a)(9)(ii)(B)-1 and 4(a)(9)(ii)(C)-1 to provide guidance on how to report county and census tract information, respectively.

Many commenters provided feedback on whether the Bureau should assume geocoding responsibilities for reporters. Some commenters, including a few industry commenters and many consumer advocate commenters, expressed support for the Bureau Start Printed Page 66187assuming geocoding responsibilities. Many of those commenters noted that such a change would improve the accuracy of geocoding information. Most industry commenters, however, raised concerns with the Bureau assuming geocoding responsibilities for reporters. Some asserted that such an operational change would not reduce their burden because financial institutions already have geocoding systems in place and would continue to use those systems even if the Bureau assumed geocoding responsibilities. Some of these commenters explained that financial institutions would not want to wait until they submit their HMDA data to obtain the geocoding information because they need on demand geocoding for business purposes such as evaluating their lending penetration.

In addition, some commenters raised some practical issues with the Bureau assuming geocoding, such as developing a system for the Bureau and financial institutions to communicate back-and-forth about geocoding results. Commenters also stated that geocoding would be more accurate if performed by the financial institution because the institution is probably more familiar with the particular geographic area and likely could identify errors in geocoding more readily than the Bureau could. In addition, industry commenters raised concerns about whether financial institutions would be held responsible for the accuracy of the Bureau's geocoding and about whether the Bureau would assume responsibility for identifying the census tracts of properties that return an error in the Bureau's geocoding database. A few industry commenters asked the Bureau to allow them to report their geocoded information even if the Bureau decides to take the geocoding on itself. A few other industry commenters suggested that instead of geocoding for financial institutions, that the Bureau develop a free geocoding database or tool for financial institutions.

The Bureau has concluded that it should not geocode for financial institutions and instead should focus on the best way to achieve accuracy in the property location information reported in HMDA. Property location data is more likely to be accurate if the financial institution reporting the covered loan or application also geocodes the property. In addition, based on comments from financial institutions, it appears that assuming geocoding responsibilities for financial institutions might not achieve the burden reduction that the Bureau hoped to achieve when it issued the proposal. Therefore, the Bureau does not plan to pursue assuming geocoding responsibilities in the manner discussed in the proposal. Instead, the Bureau is exploring other ways that it can assist reporters with geocoding, such as developing an improved geocoding tool for financial institutions.

Consumer advocate commenters also discussed the value of the currently reported property location information and urged the Bureau to continue to require reporting of information by census tract and to continue to make that information available in the publicly disclosed data. The Bureau is generally retaining reporting of the currently required property location information because it provides valuable information.

The Bureau believes that it can reduce the burden of reporting by eliminating the requirement to report the MSA or MD in which the property is located. If a financial institution reports the county, the regulators can identify the MSA or MD because MSAs and MDs are defined at the county level. The MSA or MD can be inserted into the publicly available data so that the data's utility is preserved.

Finally, it appears that financial institutions do not report MSA or MD information when they have incomplete property location information. In the past five years, no financial institutions have reported the MSA or MD of a property without other property location information.[274] Therefore, retaining this field only for cases when the financial institution does not know the county in which the property securing, or proposed to secure, the covered loan is located would also not provide valuable information. Therefore, the final rule eliminates the burden of reporting this information to facilitate compliance.

For the reasons discussed above, the Bureau is finalizing proposed § 1003.4(a)(9)(ii), with modifications to eliminate the requirement included in proposed § 1003.4(a)(9)(ii)(C) as discussed above.

4(a)(10)

4(a)(10)(i)

HMDA section 304(b)(4) requires the reporting of racial characteristics and gender for borrowers and applicants.[275] Section 1003.4(a)(10) of Regulation C requires a financial institution to collect the ethnicity, race, and sex of the applicant or borrower for applications and loan originations for each calendar year. The Bureau proposed to renumber this requirement as § 1003.4(a)(10)(i), and also proposed several technical and clarifying amendments to the instructions in appendix A and the associated commentary.

The Bureau's proposal solicited feedback regarding the challenges faced by both applicants and financial institutions by the data collection instructions prescribed in appendix B and specifically solicited comment on ways to improve the data collection of the ethnicity, race, and sex of applicants and borrowers. The Bureau also conducted a voluntary, small-scale survey to solicit suggestions from financial institutions on ways to improve the process of collecting the ethnicity, race, and sex of applicants that may potentially relieve burden and help increase the response rates by applicants, in particular, for applications received by mail, internet, or telephone. The Bureau selected nine financial institutions for participation in the survey which, according to recent HMDA data, generally exhibited relatively high incidences of applicants providing ethnicity, race, and sex in applications made by mail, internet, or telephone. The Bureau was interested to learn what factors may have contributed to these higher response rates and also to identify potential improvements to appendix B. Five financial institutions chose to participate in the survey and the Bureau considered their responses as part of the HMDA rulemaking.

In response to the proposal's solicitation for feedback, a few industry commenters recommended that the Bureau remove the proposed requirement, which currently exists under the rule, that financial institutions collect an applicant's ethnicity, race, and sex on the basis of visual observation and surname when an application is taken in person and the applicant does not provide the information. In general, these industry commenters did not support this collection requirement for the following reasons. First, commenters expressed the belief that loan originators should Start Printed Page 66188not have to guess, on the basis of visual observation or surname, as to what is an applicant's ethnicity, race, and sex. Second, commenters expressed the belief that such guessing results in inaccurate and unreliable data. Lastly, commenters expressed the belief that an applicant's decision not to provide his or her demographic information should be respected and that a loan originator should not override that decision by being required to collect the information on the basis of visual observation or surname.

On the other hand, several consumer advocate commenters provided feedback emphasizing that data on an applicant's ethnicity, race, and sex is vital to HMDA's utility. A few of these commenters also emphasized the need for HMDA data to reflect whether such demographic information was self-reported by applicants or the result of a loan originator collecting the information on the basis of visual observation or surname. For example, one commenter stated that information on ethnicity and race is crucial for discovering potential patterns of discrimination and recommended that the loan/application register include a flag indicating whether ethnicity and race information was provided by the applicant, allowing independent researchers and community advocates to undertake important fair lending analyses. Another commenter stated that in order for the Bureau to better understand whether the visual observation or surname requirement is producing useful information, it urged the Bureau to require financial institutions to report whether the borrowers have furnished the race, ethnicity, and sex data. Lastly, another commenter stated that information regarding how often borrowers refuse to voluntarily report demographic data or how often lenders report such information on the basis of visual observation or surname is not easily found and therefore, at the very least, the Bureau should flag applicant or borrower versus financial institution reporting of demographic information.

The Bureau has considered this feedback and determined that the appropriate approach to further HMDA's purposes is to continue to require that financial institutions collect the ethnicity, race, and sex of applicants on the basis of visual observation and surname when an application is taken in person and the applicant does not provide the information. The Bureau agrees with both industry and consumer advocate commenters that recognized the importance of data on an applicant's or borrower's ethnicity, race, and sex to the purposes of HMDA. The Bureau has determined that removing the visual observation or surname requirement from the final rule would diminish the utility of the HMDA data to further HMDA's purposes. The Bureau has also determined that requiring financial institutions to report whether the applicant's ethnicity, race, and sex was collected on the basis of visual observation or surname improves the utility of HMDA data. Accordingly, the Bureau is maintaining the current requirement in appendix B that when an applicant does not provide the requested information for an application taken in person, a financial institution is required to collect the demographic information on the basis of visual observation or surname. In addition, the Bureau is adopting a new requirement in § 1003.4(a)(10)(i) of the final rule that requires financial institutions to report whether the applicant's ethnicity, race, or sex was collected on the basis of visual observation or surname. The Bureau is adopting new instructions and modifications to the sample data collection form in appendix B to capture this new reporting requirement.

In response to the proposal's solicitation for feedback on ways to improve the data collection of an applicant's ethnicity, race, and sex, and in response to the Bureau's survey which sought, among other things, suggestions on ways to help increase the response rates by applicants, the Bureau received feedback urging the Bureau to disaggregate the ethnicity category as well as two race categories the Asian category and the Native Hawaiian and Other Pacific Islander category. Before discussing this feedback, it is important to first describe the data standards on ethnicity and race issued by the Office of Management and Budget (OMB).

The OMB has issued the standards for the classification of Federal data on ethnicity and race.[276] OMB's current government-wide standards provide “a minimum standard for maintaining, collecting, and presenting data on race and ethnicity for all Federal reporting purposes. . . . The standards have been developed to provide a common language for uniformity and comparability in the collection and use of data on race and ethnicity by Federal agencies.” [277] The OMB standards provide the following minimum categories for data on ethnicity and race: Two minimum ethnicity categories (Hispanic or Latino; Not Hispanic or Latino) and five minimum race categories (American Indian or Alaska Native; Asian; Black or African American; Native Hawaiian or Other Pacific Islander; and White). The categories for ethnicity and race in existing Regulation C conform to the OMB standards.

In addition to the minimum data categories for ethnicity and race, the OMB Federal Data Standards on Race and Ethnicity provide additional key principles. First, self-identification is the preferred means of obtaining information about an individual's ethnicity and race, except in instances where observer identification is more practical.[278] Second, the collection of greater detail is encouraged as long as any collection that uses more detail is organized in such a way that the additional detail can be aggregated into the minimum categories for data on ethnicity and race. More detailed reporting, which can be aggregated to the minimum categories, may be used at the agencies' discretion. Lastly, Federal agencies must produce as much detailed information on ethnicity and race as possible; however, Federal agencies shall not present data on detailed categories if doing so would compromise data quality or confidentiality standards.[279]

In addition to the OMB standards, it is also important to describe the data standards used in the 2000 and 2010 Decennial Census. The U.S. Census Bureau (Census Bureau) collects Hispanic origin and race information following the OMB standards and guidance discussed above.[280] Responses to the Hispanic origin question and race question in the 2000 and 2010 Decennial Census were based on self-identification.[281]

The OMB definition of Hispanic or Latino origin used in the 2010 Census refers to a person of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin regardless of race.[282] Hispanic or Latino origin can be viewed as the heritage, nationality group, lineage, or country of birth of the person or the person's parents or ancestors before their arrival in the United States.[283] The Start Printed Page 661892010 Census disaggregated ethnicity into four categories (Mexican, Puerto Rican, Cuban, Other Hispanic or Latino) and included one area where respondents could write-in a specific Hispanic or Latino origin group.[284] As required by the OMB, the response categories and the write-in answers for the Census Bureau's ethnicity question can be combined to create the two minimum OMB categories for ethnicity, discussed above.

The OMB definitions of the race categories used in the 2010 Census, plus the Census Bureau's definition of Some Other Race, are discussed in footnote 285 below.[285] For respondents who are unable to identify with any of the five minimum OMB race categories, OMB approved the Census Bureau's inclusion of a sixth race category Some Other Race on the 2000 and 2010 Census questionnaires. The 2010 Census disaggregated the Asian race into seven categories (Asian Indian, Chinese, Filipino, Japanese, Korean, Vietnamese, Other Asian), the Native Hawaiian and Other Pacific Islander race into four categories (Native Hawaiian, Guamanian or Chamorro, Samoan, Other Pacific Islander) and included three areas where respondents could write-in a specific Asian race, a specific Pacific Islander race, and the name of his or her enrolled or principal tribe in the American Indian or Alaska Native category.[286] As required, the response categories and the write-in answers for the Census Bureau's race question can be combined to create the five minimum OMB categories for race, discussed above, plus Some Other Race.

Another Federal agency has already begun to require more detailed data collection on ethnicity and race as is encouraged by the OMB and as has been used by the Census Bureau for 15 years. On October 31, 2011, the U.S. Department of Health and Human Services (HHS) published data standards for ethnicity and race that it now uses in its national population health surveys undertaken pursuant to the Affordable Care Act. These data standards are based on the disaggregation of the OMB standard and the 2000 and 2010 Decennial Census discussed above. Many of the commenters that provided feedback on the Bureau's proposal, discussed below, urged the Bureau to follow the data collection standards being used by the HHS and require financial institutions to collect and report more detailed ethnicity and race information.

In addition, the American Housing Survey, which is a comprehensive national housing survey sponsored by HUD and conducted biennially by the Census Bureau, will similarly provide more detailed country of origin information for the first time ever in 2015.[287] According to HUD's “Priority Program Goals for the Asian American and Pacific Islander Community,” one of the agency's five program goals is to improve the data collected on Asian American and Pacific Islander (AAPI) communities and it is working to disaggregate data for all major programs, including homeownership, tenant based rental assistance, and public housing. HUD's goal to disaggregate data extends not only to the AAPI community, but also to the Hispanic or Latino community.[288]

The Bureau received many comments in response to its solicitation regarding the challenges faced by both applicants and financial institutions by the HMDA data collection instructions regarding an applicant's ethnicity, race, and sex, and on ways to improve that data collection. The comment letters of many consumer advocacy groups—reinforced in subsequent communications and outreach—recommended disaggregation of the Asian and Native Hawaiian or Other Pacific Islander categories. A handful of these organizations also recommended disaggregation of data on the ethnicity category. These recommendations generally align with the 2000 and 2010 Decennial Census, the approach that HHS has been using since 2011 in its national population health surveys, and the approach HUD will be taking in all of its major programs.

In general, these commenters urged the Bureau to disaggregate the ethnicity and race categories under HMDA for the following reasons. First, commenters stated that disaggregated data will more accurately reflect the borrowing experiences of various AAPI and Hispanic or Latino communities across the country. For example, some commenters stated that newer immigrants are likely to have different experiences in the mortgage market than earlier immigrants. In addition, since many subpopulation groups include limited-English proficient communities, commenters supported disaggregated data as a vehicle to better understanding of lending to these vulnerable groups and perhaps improved access to homeownership.

Second, commenters expressed the belief that the aggregate OMB categories for ethnicity and race may mask discriminatory practices that are occurring against subpopulation groups that fall within these aggregate categories. For example, one consumer advocate commenter described the efforts made by one of its member organizations to manually disaggregate the HMDA data using borrowers' last name, census tract information in Queens, New York, and public court records to determine that more than 50 percent of defaults were among South Asians in many neighborhoods. In response, the organization assessed the needs of this particular Asian subpopulation group and prioritized building a foreclosure prevention program, which helped stabilize these minority neighborhoods. Overall, many commenters stated that expanding the Start Printed Page 66190aggregate ethnicity and race categories to include specific subpopulations will assist regulators and the public in determining whether discrimination against certain subpopulations is occurring in minority communities.

Lastly, commenters stated that the importance of ethnicity and race data to HMDA's purposes is critical and as such, the Bureau should do what it can to encourage applicants to provide their demographic information. These commenters expressed the belief that the aggregate OMB categories for ethnicity and race are often too broad and do not provide applicants within subpopulation groups with the opportunity of self-identification. One industry participant in the Bureau's survey expressed a similar perspective after speaking to several of its originators indicating that applicants opt to skip the ethnicity and race questions altogether when the options do not accurately describe their ethnic or racial identity.

As discussed above, the OMB encourages the collection of greater detail beyond the two minimum categories for ethnicity and the five minimum categories for race, and as such, agencies may use more detailed reporting at their discretion so long as any collection that uses more detail is organized in such a way that the additional detail can be aggregated into the minimum categories for data on ethnicity and race. The Bureau has considered the feedback it received in response to its solicitation on ways to improve the data collection of an applicant's ethnicity, race, and sex under appendix B and determined, as discussed below, that the appropriate approach to further HMDA's purposes is to build upon the OMB standards by adding the type of granularity for subpopulations that was used in the 2000 and 2010 Decennial Census, with the exception that the Bureau is not adopting the sixth race category used by Census—Some Other Race—which cannot be aggregated to the five minimum OMB categories for race.

First, the Bureau believes that disaggregated data on applicants' ethnicity and race will provide meaningful data, which will further HMDA's purposes—in determining whether financial institutions within a particular market are serving the housing needs of specific communities; in distributing public-sector investments so as to attract private investment to areas or communities where it is needed; and in identifying possible discriminatory lending patterns. Consumer advocates have been urging the Bureau for years to gather disaggregated information, which will enable them to determine whether institutions are filling their obligations to serve the housing needs of the communities and neighborhoods in which they are located. Data on subpopulation groups in the residential mortgage market will substantially advance the ability to better understand the market for particular subgroups and monitor access to credit.

The Bureau recognizes that disaggregated data may not be useful in analyzing potential discrimination where financial institutions do not have a sufficient number of applicants or borrowers within particular subgroups to permit reliable assessments of whether unlawful discrimination may have occurred. However, in situations in which the numbers are sufficient to permit such fair lending assessments, disaggregated data on ethnicity and race will help identify potentially discriminatory lending patterns. Improved data will not only assist in identifying potentially discriminatory practices, but will also contribute to a better understanding of the experiences that members within subpopulations may share in the mortgage market.

Second, as a 21st century, data-driven agency, the Bureau believes that its rules should recognize the nation's changing ethnic and racial diversity. By aligning the ethnicity and race categories in HMDA with the questions on Hispanic origin and race used by the Census Bureau during the last 15 years, the Bureau is taking a step forward in updating its data collection requirements. Lastly, as pointed out by commenters, disaggregation will also encourage self-reporting by applicants by offering, as the Census does, categories which promote self-identification.

The Bureau recognizes that financial institutions may have concerns about this change to the collection and reporting of ethnicity and race under HMDA. This change may increase the burden of collection and reporting HMDA data. Disaggregation, as described here, may also result in financial institutions having to expand their data systems, update their application forms and processes, and provide additional training to loan originators to ensure compliance with the new requirements. There may also be questions as to what the Bureau expects of financial institutions with respect to their compliance management systems and challenges they may face in conducting fair lending analyses with the new data on ethnicity and race.

The Bureau has considered these potential concerns, among others, and nonetheless believes that the utility of disaggregated HMDA data on applicants' ethnicity and race justifies the potential burdens and costs. Accordingly, the Bureau is adopting new data standards for the collection and reporting of ethnicity and race by modifying the instructions in appendix B and the sample data collection form. As such, the final rule requires financial institutions to use the following data standards for the collection and reporting of an applicant's ethnicity and race.

Start Printed Page 66191

As discussed above, with regard to the current requirement in appendix B that a financial institution collect an applicant's ethnicity, race, and sex on the basis of visual observation or surname when the applicant does not provide the requested information for an application taken in person, the Bureau has determined that it will maintain this requirement as is. However, the concerns with the visual observation and surname requirement expressed by commenters discussed above, would arguably be magnified due to the difficulties loan originators would potentially encounter in determining an applicant's ethnicity and race with the expanded categories the Bureau is finalizing. Thus, to reduce the potential burden of this change on financial institutions, the Bureau has determined that, at this point in time, the appropriate approach is to only permit self-identification of the disaggregated categories. That is, only an applicant may use the disaggregated categories to identify his or her ethnicity or race. When an application is taken in person and the applicant does not provide the information, the final rule will continue to require loan originators to collect, on the basis of visual observation or surname, the minimum OMB categories of ethnicity and race. The Bureau believes that this approach balances the value of disaggregated data on ethnicity and race to further HMDA's purposes with the potential burdens on financial institutions.

Accordingly, the Bureau is modifying appendix B by adding a new instruction to require a financial institution to collect an applicant's ethnicity, race, and sex on the basis of visual observation or surname when the applicant does not provide the requested information for an application taken in person, by selecting from the following OMB minimum categories: Ethnicity (Hispanic or Latino; not Hispanic or Latino); race (American Indian or Alaska Native; Asian; Black or African American; Native Hawaiian or Other Pacific Islander; White). The Bureau is also modifying appendix B by adding a new instruction to provide that only an applicant may self-identify as being of a particular Hispanic or Latino subcategory (Mexican, Puerto Rican, Cuban, Other Hispanic or Latino) or of a particular Asian subcategory (Asian Indian, Chinese, Filipino, Japanese, Korean, Vietnamese, Other Asian) or of a particular Native Hawaiian or Other Pacific Islander subcategory (Native Hawaiian, Guamanian or Chamorro, Samoan, Other Pacific Islander) or of a particular American Indian or Alaska Native enrolled or principal tribe. The Start Printed Page 66192Bureau recognizes the change to the collection and reporting of ethnicity and race under HMDA may raise concerns regarding applicant and borrower privacy. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of HMDA data.

Similar to the Census questionnaire and as outlined above in the new data standards the Bureau is adopting for the collection and reporting of an applicant's ethnicity and race, the Bureau is modifying the sample data collection form in appendix B to allow an applicant to provide a particular Hispanic or Latino origin when “Other Hispanic or Latino” is selected by the applicant, a particular Asian race when “Other Asian” is selected by the applicant, a particular Other Pacific Islander race when “Other Pacific Islander” is selected by the applicant, and lastly, the name of the enrolled or principal tribe when the applicant selects American Indian or Alaska Native race. The Bureau believes that this may encourage self-reporting by applicants by offering, as the Census does, an option for applicants to provide a specific Hispanic/Latino origin and race, which promotes self-identification and will improve the HMDA data's usefulness.

In addition, in order to facilitate compliance, the Bureau has determined that it will limit the number of particular racial designations of applicants that are required to be reported by financial institutions. The Bureau reviewed recent Census data to consider the occurrence of respondents that self-identify as being of more than one particular race. For example, the 2010 Census data shows that of the Asian population where only Asian was reported as the respondents' race, only 0.11 percent of those self-identified as being of three particular Asian races, while only 0.02 percent self-identified as being of seven particular Asian races. Regulation C currently requires financial institutions to report up to five racial designations of an applicant. The Bureau believes that the likelihood of applicants self-identifying as being of more than five particular racial designations is low. Accordingly, the Bureau is adopting a new instruction 9 in appendix B, which provides that a financial institution must offer the applicant the option of selecting more than one particular ethnicity or race. The new instruction provides that if an applicant selects more than one particular ethnicity or race, a financial institution must report each selected designation, subject to the limits described in the instruction.

With respect to ethnicity, the instruction requires a financial institution to report each aggregate ethnicity category and each ethnicity subcategory selected by the applicant. In addition, the instruction explains that if an applicant selects the Other Hispanic or Latino ethnicity subcategory, the applicant may also provide a particular Hispanic or Latino ethnicity not listed in the standard subcategories. In such a case, the instruction requires a financial institution to report both the selection of Other Hispanic or Latino and the additional information provided by the applicant.

With respect to race, the instruction requires a financial institution to report every aggregate race category selected by the applicant. If the applicant also selects one or more race subcategories, the instruction requires the financial institution to report each race subcategory selected by the applicant, except that the financial institution must not report more than a total of five aggregate race categories and race subcategories combined. The instruction provides illustrative examples to facilitate HMDA compliance. In addition, the instruction explains that if an applicant selects the Other Asian race subcategory or the Other Pacific Islander race subcategory, the applicant may also provide a particular Other Asian or Other Pacific Islander race not listed in the standard subcategories. In either such case, the instruction requires a financial institution to report both the selection of Other Asian or Other Pacific Islander, as applicable, and the additional information provided by the applicant, subject to the five-race maximum. In all such cases where the applicant has selected an Other race subcategory and also provided additional information, for purposes of the five-race maximum, the Other race subcategory and additional information provided by the applicant together constitute only one selection. The instruction provides an illustrative example to facilitate compliance.

The Bureau is also modifying the introductory paragraph in the sample data collection form in appendix B in an effort to improve the explanation provided to applicants by financial institutions as to why their demographic information is being collected. In response to the Bureau's solicitation for feedback on ways to improve the data collection on ethnicity, race, and sex, a few commenters stated that applicants may be reluctant to provide their demographic information because they do not understand why it is being collected or for what purposes. For example, an industry commenter suggested that the language explaining to the applicant why the information is being requested should be in plain language and contain less legalese in order for an applicant to feel more comfortable in responding to the request. Another industry commenter suggested that applicants who choose not to provide their demographic information may be concerned that by doing so, such information may negatively influence the credit decision made by a financial institution. The Bureau believes that the explanation provided to applicants by financial institutions should clearly state why their demographic information is being collected and for what purposes such information is requested by the Federal government. Accordingly, the Bureau is modifying the introductory paragraph in the sample data collection form in appendix B to include the following sentences: “The purpose of collecting this information is to help ensure that all applicants are treated fairly and that the housing needs of communities and neighborhoods are being fulfilled. For residential mortgage lending, Federal law requires that we ask applicants for their demographic information (ethnicity, race, and sex) in order to monitor our compliance with equal credit opportunity, fair housing, and home mortgage disclosure laws.” The Bureau is adopting other changes to the introductory paragraph in the sample data collection form to align with the new data standards on collection and reporting of ethnicity and race.

In order to align with the modified introductory paragraph in the sample data collection form, the Bureau is also adopting new instruction 2, which clarifies that a financial institution must inform applicants that Federal law requires collection of their demographic information in order to protect consumers and to monitor compliance with Federal statutes that prohibit discrimination against applicants on the basis of ethnicity, race, and sex. The Bureau is also modifying the title of the sample data collection form. A few commenters stated that “Information for Government Monitoring Purposes” may discourage applicants from providing their demographic information. For example, by using the words “government monitoring,” a few industry commenters suggested that applicants may view the collection of this information as intrusive or intimidating, as opposed to ensuring that they are protected from discrimination. Another industry Start Printed Page 66193commenter stated that some applicants are not aware that Federal statutes and regulations protect them from discrimination and that “government monitoring information” promotes a sense among applicants that the financial institution's credit decision is based, at least in part, on their demographic information. The Bureau has considered this feedback and determined that the title of the sample data collection form should be modified in order to address the concern that the current title may discourage applicants from providing their demographic information. Accordingly, the Bureau is modifying the title of the sample data collection form to “Demographic Information of Applicant and Co-Applicant.”

The Bureau has determined that modifying the introductory paragraph in the sample data collection form and its title, as well as adopting new instruction 2 in appendix B, will assist financial institutions in explaining to applicants the purposes of collecting their demographic information and how the information is used. The Bureau believes that these changes may improve the HMDA data's usefulness by encouraging applicants to provide their demographic information.

The Bureau is also modifying instruction 1 in appendix B, which currently provides that for applications taken by telephone, the information in the collection form must be stated orally by the lender, except for that information which pertains uniquely to applications taken in writing. The Bureau has received questions regarding the meaning of the phrase “except for that information which pertains uniquely to applications taken in writing.” The Bureau has modified this instruction in the final rule and provides an illustrative example, which will address confusion regarding this phrase.

The Bureau is also modifying the sample data collection form by allowing applicants to select “I do not wish to provide this information” separately for ethnicity, race, and sex. Previously, the sample data collection form provided a “I do not wish to furnish this information” box at the top of the form, which applied to ethnicity, race, and sex as a group. The Bureau believes that modifying the selection to include a “I do not wish to provide this information” box following the request for the applicant's ethnicity, race, and sex will allow an applicant to more clearly articulate a decision to decline to provide certain information but not other information. Additional guidance on this topic had been published in the FFIEC FAQs.[289] The Bureau believes it is appropriate to modify the sample data collection form in appendix B, adapted from the FFIEC FAQs, to improve the collection of this information and assist financial institutions with HMDA compliance.

The Bureau is also proposing to add four new instructions to appendix B to provide additional guidance regarding the reporting requirement under § 1003.4(a)(10)(i). First, the Bureau received feedback requesting that it clarify whether a financial institution must report the demographic information of a guarantor. To help facilitate HMDA compliance, the Bureau is adopting new instruction 4 in appendix B, which clarifies that for purposes of § 1003.4(a)(10)(i), if a covered loan or application includes a guarantor, a financial institution does not report the guarantor's ethnicity, race, and sex. While the terms “applicant” and “borrower” may include guarantors in other regulations,[290] the Bureau believes the inclusion of information regarding the ethnicity, race, and sex of guarantors in the HMDA data would be unnecessarily burdensome and potentially lead to inconsistencies in the data.

Second, an industry commenter pointed out that the Bureau's proposed instruction 4(a)(10)-2.a provides “You need not collect or report this information for covered loans purchased. If you choose not to report this information for covered loans that you purchase, use the Codes for not applicable.” However, the Bureau's proposed instructions 4(a)(10)(i)-2.c, 4(a)(10)(i)-3.b, 4(a)(10)(i)-4.a, and 4(a)(10)(ii)-1.d instructed financial institutions to report the corresponding code for “not applicable” for ethnicity, race, sex, age, and income “when the applicant or co-applicant information is unavailable because the covered loan has been purchased by your institution.” The Bureau agrees that these instructions do not align and has determined that a clarification will facilitate HMDA compliance. Consequently, the Bureau is adopting new instruction 6 in appendix B, which requires that when a financial institution purchases a covered loan and chooses not to report the applicant's or co-applicant's ethnicity, race, and sex, the financial institution reports that the requirement is not applicable.

Third, prior to the Bureau's proposal, financial institutions had expressed uncertainty as to whether a trust is a non-natural person for purposes of HMDA. In response, the Bureau proposed to add “trust” to the list of examples in the technical instructions in appendix A, which direct financial institutions to report the code for “not applicable” if the borrower or applicant is not a natural person. A few commenters supported the proposed clarification. The Bureau has determined that the proposed clarification will facilitate HMDA compliance. Consequently, the Bureau is adopting new instruction 7, which provides, in part, a financial institution reports that the requirement to report the applicant's or co-applicant's ethnicity, race, and sex is not applicable when the applicant or co-applicant is not a natural person (for example, a corporation, partnership, or trust). The new instruction clarifies that for a transaction involving a trust, a financial institution reports that the requirement is not applicable if the trust is the applicant. On the other hand, if the applicant is a natural person, and is the beneficiary of a trust, a financial institution reports the applicant's ethnicity, race, and sex.

Lastly, the Bureau is adopting new instruction 13 in appendix B, which clarifies how a financial institution should report partial demographic information provided by an applicant. Additional guidance on this topic had been published in the FFIEC FAQs.[291] The Bureau believes it is appropriate to include an instruction in appendix B, adapted from the FFIEC FAQs, to assist financial institutions with HMDA compliance.

For the reasons discussed above, the Bureau is adopting proposed § 1003.4(a)(10)(i), with the following substantive change. The Bureau is requiring financial institutions to report whether the applicant's or co-applicant's ethnicity, race, and sex was collected on the basis of visual observation or surname. Consequently, § 1003.4(a)(10)(i) and appendix B of the final rule require a financial institution to collect and report the applicant's or co-applicant's ethnicity, race, and sex, and whether this information was collected on the basis of visual observation or surname.

In addition, for the reasons discussed above, the Bureau is adding new instructions, as well as modifying a few of the current instructions, in appendix B and the sample data collection form Start Printed Page 66194in order to facilitate compliance with the new collection and reporting requirements relating to an applicant's ethnicity, race, and sex. The Bureau is adopting proposed comments 4(a)(10)(i)-1, -2, -3, -4, and -5 as new instructions 8, 10, 12, 5, and 3, respectively, in appendix B, modified to conform to the changes the Bureau is finalizing in § 1003.4(a)(10)(i) and to provide additional clarity as to the data collection requirements. In addition, as discussed above, the Bureau is adopting new instructions 4, 6, 7, 9, 11, and 13 in appendix B. The Bureau has modified proposed comment 4(a)(10)(i)-1, which directs financial institutions to refer to appendix B for instructions on collection of an applicant's ethnicity, race, and sex. By placing all of the data collection instructions with respect to an applicant's ethnicity, race, and sex in one location—appendix B—the Bureau has streamlined the regulatory requirements in an effort to reduce compliance burden. The Bureau has determined that these data collection instructions in appendix B and the revised sample data collection form, discussed above, will help facilitate HMDA compliance by providing additional guidance regarding the reporting requirements under § 1003.4(a)(10)(i).

Lastly, in order to facilitate compliance with the new collection and reporting requirements in § 1003.4(a)(10)(i) and appendix B relating to an applicant's ethnicity, race, and sex, the Bureau added new comment 4(a)(10)(i)-2 in the final rule and provides an illustrative example. Comment 4(a)(10)(i)-2 provides that if a financial institution receives an application prior to January 1, 2018, but final action is taken on or after January 1, 2018, the financial institution complies with § 1003.4(a)(10)(i) and (b) if it collects the information in accordance with the requirements in effect at the time the information was collected. For example, if a financial institution receives an application on November 15, 2017, collects the applicant's ethnicity, race, and sex in accordance with the instructions in effect on that date, and takes final action on the application on January 5, 2018, the financial institution has complied with the requirements of § 1003.4(a)(10)(i) and (b), even though those instructions changed after the information was collected but before the date of final action. However, if, in this example, the financial institution collected the applicant's ethnicity, race, and sex on or after January 1, 2018, § 1003.4(a)(10)(i) and (b) requires the financial institution to collect the information in accordance with the amended instructions.

4(a)(10)(ii)

Section 1094(3)(A)(i) of the Dodd-Frank Act amended HMDA section 304(b)(4) to require financial institutions to report an applicant's or borrower's age.[292] The Bureau proposed to implement the requirement to collect and report age by adding this characteristic to the information listed in proposed § 1003.4(a)(10)(i). In light of potential applicant and borrower privacy concerns related to reporting date of birth, the Bureau proposed that financial institutions enter the age of the applicant or borrower, as of the date of application, in number of years as derived from the date of birth as shown on the application form.

The Bureau solicited feedback regarding whether this was an appropriate manner of collecting the age of applicants. Many commenters expressed concern about potential privacy implications if the Bureau requires financial institutions to report an applicant's age or if the Bureau were to release such data to the public. As with other proposed data points like credit score, commenters were concerned that if information regarding an applicant's or borrower's age is made available to the public, such information could be coupled with other publicly available information, such as the security instrument and other local records, in a way that compromises an applicant's or borrower's privacy. A national trade association commented that by increasing the scope of HMDA reporting, the Bureau would increase potential privacy risks of consumers. The commenter argued that expansive new data elements, like age, result in an unjustifiable privacy intrusion by providing information that allows someone to identify applicants and borrowers along with a detailed picture of their financial state. Similarly, an industry commenter suggested that in addition to the potential for criminal misuse of a borrower's financial information, the availability of the expanded data released under HMDA will very likely permit marketers to access the information which will result in aggressive marketing that is “personalized” to unsophisticated and vulnerable consumers for potentially harmful financial products and services. Another State trade association recommended that the Bureau strengthen its data protection as it relates to the selective disclosure of HMDA data to third parties and specifically recommended that the Bureau convert actual values to ranges or normalize values before sharing the data with a third party. The Bureau has considered this feedback. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of HMDA data.

In contrast, many consumer advocate commenters stated that requiring financial institutions to report an applicant's age is vital information that allows the public to evaluate age biases in lending, especially in conjunction with reverse mortgages. These commenters stated that the public needs to know the extent of reverse mortgage lending for various categories of older adults to ensure that various age cohorts are being served and are not being abused. Another commenter stated that an applicant's age is an important element for understanding patterns of mortgage lending and noted that mortgage underwriting standards may contribute to disparate outcomes in homeownership among different age cohorts. Another commenter stated that requiring financial institutions to report a borrower's age is important to ensure that borrowers in any particular age category are not experiencing undue barriers to mortgage credit.

Many commenters also provided feedback regarding the Bureau's request as to whether there was a less burdensome way for financial institutions to collect such information for purposes of HMDA. For example, many industry commenters recommended that the Bureau require financial institutions to report age as a “range of values” rather than an applicant's or borrower's actual age. The commenters suggested that reporting an applicant's age as a range of values will eliminate a substantial number of potential errors on financial institutions' loan/application registers, would better protect the privacy of applicants, and would not compromise the integrity of the HMDA data. Another industry commenter generally agreed that applicants' age information would be useful to users of the HMDA data when analyzing housing trends and a financial institution's fair lending performance, but recommended that the Bureau require reporting of an applicant's date of birth and not the actual age of the applicant. Another industry commenter explained that it only requires date of birth on its applications and not age specifically. If the Bureau implements the requirement to report the applicant's age in years, the commenter stated that the consequence would be that Start Printed Page 66195customized loan application forms would need to be amended to include this additional information or institutions would need to manually calculate an applicant's age, which will significantly increase both the burden of this reporting requirement and errors. A few industry commenters stated that the costs of the proposed requirement would not be justified. Other industry commenters stated that calculating an applicant's actual age will be an unnecessary burden and an area of potentially high error rate, and as such, the Bureau should require reporting of the applicant's year of birth.

The Bureau has considered this feedback and determined that requiring financial institutions to report the applicant's actual age—and not the applicant's date of birth, year of birth, or a range within which an applicant's age falls—is the appropriate method of implementing HMDA section 304(b)(4) and carrying out HMDA's purposes. In light of potential applicant and borrower privacy concerns related to reporting date of birth or year of birth, the Bureau has determined that requiring financial institutions to report the applicant's actual age is the proper approach. The Bureau has also determined that requiring financial institutions to report age as a range of values would diminish the utility of the data to further HMDA's purposes. By requiring financial institutions to report the applicant's actual age, this information will assist in identifying whether financial institutions are serving the housing needs of their communities, identifying possible discriminatory lending patterns, and enforcing antidiscrimination statutes. The Bureau recognizes that a requirement to collect and report the applicant's age may impose some burden on financial institutions and that requiring financial institutions to calculate the age of an applicant in number of years by referring to the date of birth as shown on the application form may result in potential calculation errors. However, the Bureau has determined that the benefits of this reporting requirement justify any burdens and financial institutions will have to manage the risk of an error in calculating an applicant's age to ensure HMDA compliance.

The final rule renumbers proposed § 1003.4(a)(10)(i) and moves the requirement to collect the age of the applicant or borrower to § 1003.4(a)(10)(ii). The new numbering is intended only for ease of reference and is not a substantive change. In addition, in order to help facilitate HMDA compliance, the Bureau is moving the proposed commentary regarding the reporting requirements for an applicant's and borrower's age into new comments. The Bureau is adopting new comments 4(a)(10)(ii)-1, -2, -3, -4, and -5.

The Bureau is adopting new comment 4(a)(10)(ii)-1, which explains that a financial institution complies with § 1003.4(a)(10)(ii) by reporting the applicant's age, as of the application date under § 1003.4(a)(1)(ii), as the number of whole years derived from the date of birth as shown on the application form, and provides an illustrative example. This requirement aligns with the definition of age under Regulation B.[293]

Similar to the requirement applicable to an applicant's ethnicity, race, and sex, the Bureau is adopting new comment 4(a)(10)(ii)-2, which clarifies that if there are no co-applicants, a financial institution reports that there is no co-applicant. On the other hand, if there is more than one co-applicant, the financial institution reports the age only for the first co-applicant listed on the application form. The comment also explains that a co-applicant may provide the absent co-applicant's age on behalf of the absent co-applicant.

The Bureau is adopting new comment 4(a)(10)(ii)-3, which clarifies when a financial institution reports that the requirement is not applicable. Similar to the requirement applicable to an applicant's ethnicity, race, and sex, comment 4(a)(10)(ii)-3 explains that for a covered loan that the financial institution purchases and for which the institution chooses not to report the applicant's or co-applicant's age, the financial institution reports that the requirement is not applicable. In addition, comment 4(a)(10)(ii)-4 explains that a financial institution reports that the requirement to report the applicant's or co-applicant's age is not applicable when the applicant or co-applicant is not a natural person (for example, a corporation, partnership, or trust), and provides an illustrative example.

Lastly, the Bureau received feedback requesting that it clarify whether a financial institution must report the demographic information of a guarantor. Similar to the requirement applicable to an applicant's ethnicity, race, and sex, the Bureau is adopting new comment 4(a)(10)(ii)-5, which clarifies that for purposes of § 1003.4(a)(10)(ii), if a covered loan or application includes a guarantor, a financial institution does not report the guarantor's age. These five new comments will help facilitate HMDA compliance by providing guidance on the reporting requirements regarding an applicant's or borrower's age.

4(a)(10)(iii)

HMDA section 304(b)(4) requires the reporting of income level for borrowers and applicants. Section 1003.4(a)(10) of Regulation C implements this requirement by requiring collection and reporting of the applicant's gross annual income relied on in processing the application. Proposed § 1003.4(a)(10)(ii) revised the current rule to require the reporting of gross annual income relied on in making the credit decision requiring consideration of income or, if a credit decision requiring consideration of income was not made, the gross annual income collected as part of the application process. The Bureau also proposed amendments to the commentary and two new illustrative comments. The Bureau is adopting § 1003.4(a)(10)(iii), renumbered from proposed § 1003.4(a)(10)(ii), and comments 4(a)(10)(iii)-1 through -10.

The Bureau received feedback on proposed § 1003.4(a)(10)(ii) and its commentary from a small number of commenters. A handful of commenters, including consumer advocates and industry commenters, expressed support for proposed § 1003.4(a)(10)(ii). As information about an applicant's or borrower's income provides information about underwriting decisions and access to credit, the Bureau believes that collecting it is important for achieving HMDA's purposes: to identify possible fair lending violations, to understand whether financial institutions are meeting the housing needs of their communities, and to help policymakers allocate public investments so as to attract private capital. Therefore, it is appropriate to continue to require financial institutions to report information about an applicant's or borrower's gross annual income.

A few industry commenters addressed challenges associated with reporting the gross annual income relied on in making the credit decision. One commenter suggested requiring Start Printed Page 66196reporting of the income obtained from a readily verifiable source instead of the gross annual income relied on in making the credit decision. Others asked for clarification about what is meant by gross annual income, including whether gross annual income requires reporting of the income that the financial institution has verified. It is not necessary to modify proposed § 1003.4(a)(10)(ii) to allow financial institutions that rely on the verified gross annual income to report the verified gross annual income. Proposed § 1003.4(a)(10)(ii) provided flexibility for the financial institution to report the gross annual income that the financial institution relied on in making the credit decision for the loan or application that the institution is reporting. Under the proposal, if a financial institution relied on the verified gross annual income, then the institution would report the verified gross annual income. In addition, in circumstances when a financial institution did not rely on the verified gross annual income, the financial institution would report the gross annual income that it relied on in making the credit decision. The Bureau believes that it is important to maintain this flexibility in the final rule and accordingly is not adopting commenters' suggestions to change the requirement. However, in response to the comments, the Bureau is modifying proposed comment 4(a)(10)(ii)-1, renumbered as comment 4(a)(10)(iii)-1, to clarify that a financial institution reports the verified gross annual income when the financial institution relied on the verified gross annual income in making the credit decision.

Some industry commenters also raised concerns about public disclosure of this information. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of the data.

Other industry commenters urged the Bureau to consider excluding certain types of loans, such as multifamily loans, business purpose loans, and purchased loans, from the requirement to report income in proposed § 1003.4(a)(10)(ii). The final rule effectively excludes these loans from income reporting. New comment 4(a)(10)(iii)-7 excludes loans to non-natural persons and new comment 4(a)(10)(iii)-8 excludes those related to multifamily dwellings from the requirement to report income information. New comment 4(a)(10)(iii)-9 provides that reporting income information is optional for purchased loans. However, as discussed in comments 4(a)-3 and -4, a financial institution that reviews an application for a covered loan, makes a credit decision on that application prior to closing, and purchases the covered loan after closing will report the covered loan that it purchases as an origination, not a purchase. Accordingly, in those circumstances, the final rule requires the financial institution to report the gross annual income that it relied on in making the credit decision.

Other industry commenters expressed concerns about the proposed requirement to report the gross annual income collected as part of the application process. One commenter urged the Bureau to only require reporting of income information if it is relied on in making a credit decision. Another commenter urged the Bureau to require reporting of the most recent verified income, instead of the income stated by the borrower, because institutions update income throughout the application process to take into account new information. Another commenter suggested that collecting income information that is not verified is inconsistent with the Bureau's 2013 ATR Final Rule, which the commenter stated requires income to be verified.

Information concerning income on applications when no credit decision was made provides valuable data to understand access to credit and underwriting decisions. The Bureau recognizes, however, as suggested by commenters, that the proposal's description of the requirement to report income in those circumstances created confusion about what income information to report. To respond to the concerns raised by the commenters, the Bureau is not adopting the language in proposed § 1003.4(a)(10)(ii) that describes reporting income on applications when no credit decision was made. Instead, the Bureau is retaining the language currently used in § 1003.4(a)(10) to describe what to report in that circumstance. The final rule provides that if a credit decision is not made, a financial institution reports the gross annual income relied on in processing the application for a covered loan that requires consideration of income. In that case, the financial institution should report whatever income information it was relying on when the application was withdrawn or closed for incompleteness, which could include the income information provided by the applicant initially, any additional income information provided by the applicant during the application process, and any adjustments to that information during the application process due to the institution's policies and procedures. These adjustments may include, for example, reducing the income amount to reflect verified income or to eliminate types of income not considered by the financial institution. In addition, proposed comment 4(a)(10)(ii)-5, finalized as comment 4(a)(10)(iii)-5, is revised to clarify that a financial institution is not necessarily required to report the income information initially provided on the application. Rather, the financial institution may update the income information initially provided by the applicant with additional information collected from the applicant if it relies on that additional information in processing the application.

Another industry commenter expressed concerns about proposed comment 4(a)(10)(ii)-4, which explained that an institution should not include as income, amounts considered in making a credit decision based on factors that an institution relies on in addition to income. For example, the proposal directed financial institutions not to include as income any amounts derived from annuitization or depletion of an applicant's remaining assets. The commenter noted that proposed comment 4(a)(10)(ii)-4 would be difficult to implement because lenders would have to create new data fields to identify and exclude annuitized income. In addition, the commenter stated that adopting the proposed comment would create a distorted picture of an applicant's cash flow. The Bureau is finalizing proposed comment 4(a)(10)(ii)-4, renumbered as comment 4(a)(10)(iii)-4, to focus on applicant income as distinct from an applicant's assets or other resources. Although financial institutions may rely on assets or other resources in underwriting a loan, including amounts other than income, such as assets, would result in data that is less useful and less accurate. Therefore, it would not be appropriate to report that information as income.

For the reasons discussed above, the Bureau is finalizing proposed § 1003.4(a)(10)(ii), renumbered as § 1003.4(a)(10)(iii), with technical modifications for clarification. The Bureau is also finalizing proposed comments 4(a)(10)(ii)-1 through -6, renumbered as comments 4(a)(10)(iii)-1 through -6, with clarifying modifications to provide illustrative examples. The Bureau is also moving proposed instruction 4(a)(10)-2.a into new comment 4(a)(10)(iii)-9 and proposed instruction 4(a)(10)(ii)-1 into new comments 4(a)(10)(iii)-7, -8, and -10.Start Printed Page 66197

4(a)(11)

Current § 1003.4(a)(11) requires financial institutions to report the type of entity purchasing a loan that the financial institution originates or purchases and then sells within the same calendar year, and provides that this information need not be included in quarterly updates.[294] In conjunction with the Bureau's proposal to require quarterly data reporting by certain financial institutions as described further below in the section-by-section analysis of § 1003.5(a)(1)(ii), the Bureau proposed to modify § 1003.4(a)(11) by deleting the statement that the information about the type of purchaser need not be included in quarterly updates. In addition, the Bureau proposed technical modifications to current comments 4(a)(11)-1 and -2 and also proposed to add six new comments to provide additional guidance regarding the type of purchaser reporting requirement.

The Bureau solicited feedback regarding whether the proposed comments were appropriate and specifically solicited feedback regarding whether additional clarifications would assist financial institutions in complying with proposed § 1003.4(a)(11). The Bureau received a few comments.

With respect to the Bureau's proposal that the type of purchaser data be included in quarterly reporting by certain financial institutions, one industry commenter stated that the proposal did not specify how a quarterly reporter would report a loan it originated in one quarter and sold in another quarter during the same year. The Bureau proposed an instruction, which it is adopting as new comment 4(a)(11)-9 with the following clarifications: A financial institution records that the requirement is not applicable if the institution originated or purchased a covered loan and did not sell it during the calendar quarter for which the institution is recording the data; if the financial institution sells the covered loan in a subsequent quarter of the same calendar year, the financial institution records the type of purchaser on its loan/application register for the quarter in which the covered loan was sold; if the financial institution sells the covered loan in a succeeding year, the institution should not record the sale. For clarity, the Bureau also adopts new comment 4(a)(11)-10, which provides that a financial institution reports that the requirement is not applicable for applications that were denied, withdrawn, closed for incompleteness or approved but not accepted by the applicant; and for preapproval requests that were denied or approved but not accepted by the applicant. The new comment also provides that a financial institution reports that the requirement is not applicable if the institution originated or purchased a covered loan and did not sell it during that same calendar year.

The Bureau proposed comment 4(a)(11)-3, which clarifies when a financial institution shall report the code for “affiliate institution” by providing a definition of the term “affiliate” and clarifying that for purposes of proposed § 1003.4(a)(11), the term “affiliate” means any company that controls, is controlled by, or is under common control with, another company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.). One industry commenter stated that it is difficult for a financial institution to determine the correct code to report for the type of purchaser, especially when mergers, acquisitions, and affiliates are involved in the transaction, and recommended that financial institutions simply report “sold” or “kept in portfolio” for this requirement. Another industry commenter stated that the proposed definition of “affiliate” remains unclear and urged the Bureau to align the definition with existing regulations, including the Secure and Fair Enforcement of Mortgage Licensing Act of 2008 (SAFE Act).

The Bureau considered the recommendation to require reporting of whether a particular loan has been “sold” within the same calendar year or “kept in portfolio,” but has determined that requiring reporting of the type of purchaser is the more appropriate approach. The type of purchaser information reported under HMDA provides valuable information, for example, by helping data users understand the secondary mortgage market. A requirement to simply report whether a particular loan was “sold” or “kept in portfolio” would greatly diminish the utility of this HMDA data. In addition, the Bureau has determined that the proposed definition of “affiliate” is appropriate and provides clarity as to when a financial institution should report that the type of purchaser is an affiliate institution. The Bureau considered other definitions of “affiliate” across various laws and regulations and has concluded that for purposes of reporting the type of purchaser under HMDA, the definition of “affiliate” established in the Bank Holding Company Act is appropriate.

Appendix A to § 1003.4(a)(11) groups “life insurance company, credit union, mortgage bank, or finance company” into one category when reporting type of purchaser. The Bureau did not propose to change this grouping. However, one commenter recommended that “insurance companies” be separated from “life insurance company, credit union, mortgage bank, or finance company.” The commenter argued that separating insurance companies from other types of purchasers would result in improved data with respect to both information about the ultimate source of financing in the multifamily market and information about secondary-market financing provided by credit unions, mortgage banks, and finance companies. In response, the Bureau is adopting a new modification that will permit reporting that the purchaser type is a life insurance company separately from other purchaser types.

The Bureau is also modifying proposed comment 4(a)(11)-5 by replacing “mortgage bank” with “mortgage company” and clarifying that for purposes of § 1003.4(a)(11), a mortgage company means a nondepository institution that purchases mortgage loans and typically originates such loans. Additional guidance on this topic had been published in the FFIEC FAQs.[295] The Bureau believes this clarification, adapted from the FFIEC FAQs, will facilitate compliance with the type of purchaser reporting requirement.

The Bureau is adopting § 1003.4(a)(11) as proposed. The Bureau is also adopting comments 4(a)(11)-1 through -8, with several technical and clarifying modifications, and new comments 4(a)(11)-9 and -10 to help facilitate HMDA compliance by providing additional guidance regarding the type of purchaser reporting requirement.

4(a)(12)

HMDA section 304(b)(5)(B) requires financial institutions to report mortgage loan information, grouped according to measurements of “the difference between the annual percentage rate associated with the loan and a benchmark rate or rates for all loans.” [296] Currently, Regulation C requires financial institutions to report the difference between a loan's annual Start Printed Page 66198percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction, as of the date the interest rate is set, if the difference equals or exceeds 1.5 percentage points for first-lien loans, or 3.5 percentage points for subordinate-lien loans. The Bureau proposed to implement HMDA section 304(b)(5)(B) in § 1003.4(a)(12), by requiring financial institutions to report, for covered loans subject to Regulation Z, 12 CFR part 1026, other than purchased loans and reverse mortgage transactions, the difference between the covered loan's annual percentage rate and the average prime offer rate for a comparable transaction as of the date the interest rate is set. For the reasons discussed below, the Bureau is adopting § 1003.4(a)(12) generally as proposed, but with a modification to exclude assumptions.

The Bureau solicited comment on the general utility of the revised rate spread data and on the costs associated with collecting and reporting. Several industry commenters and a few trade associations opposed the Bureau's proposal requiring rate spread information. One commenter stated that certain financial institutions should be exempted from the rate spread reporting requirement on covered loans and applications. Industry commenters were generally concerned about the burden associated with reporting rate spread data for more transactions than what is currently collected and reported. In particular, commenters pointed to the expense or additional work required to calculate the rate spread, such as the need to update software. One industry commenter stated that current systems determine rate spread and provide a numerical difference if the difference exceeds a predetermined trigger. The Bureau's proposal that the rate spread should be reported for all loans and not just the ones whose rate spread exceeds a certain threshold will require systems updates or a manual updates, according to the commenter. One commenter stated that rate spread information would not provide any meaningful data regarding access to credit on fair terms and another commenter stated that the additional regulatory burden would not be beneficial to consumers or for the purposes of antidiscriminatory monitoring.

As noted in the proposal, Congress found that improved pricing information would bring greater transparency to the market and facilitate enforcement of fair lending laws.[297] Feedback from the Board's 2010 Hearings suggested that requiring rate spread information for all loans, not just certain loans considered higher-priced, would provide a more complete understanding of the mortgage market and also improve loan analyses across various markets and communities.[298] Furthermore, the proposal noted that recent enforcement actions pursued by the U.S. Department of Justice indicated that price discrimination can occur even at levels that fall below the current higher-priced thresholds. Based on the findings of Congress, feedback from the Board's 2010 Hearings, and enforcement actions, the Bureau concluded that requiring the rate spread for most loans or applications by all financial institutions will enhance the HMDA data by providing the information that could improve loan analyses and therefore enable a better understanding of the mortgage market. The Bureau believes that such benefits will justify any additional burden imposed by the final rule.

Several industry commenters asked for clarification on whether the rate spread field will be required to be completed on loans subject to Regulation Z but exempted from the higher-priced loan category in Regulation Z § 1026.35, such as a home-equity lines of credit. The Bureau believes that the rate spread data on most transactions, including open-end lines of credit, would be beneficial by providing data to contribute to a more complete understanding of the mortgage market.

One industry commenter questioned whether reporting a covered loan's or application's APR would be a better alternative than reporting rate spread data. This commenter pointed out that reporting APR is much less burdensome than calculating the rate spread and therefore less prone to errors, such as the use of the wrong date on which to compare APR to the APOR. In addition to the risk of errors, the commenter stated that requiring the financial institution to report the rate spread information will increase the cost of preparing the report. A trade association questioned why it would not be sufficient for the APR to be reported, which would then allow the data user to select a benchmark of their choice for comparison. Although reporting the APR on the covered loan or application would reduce the burden on financial institutions reporting the rate spread data, based on the language in the Dodd-Frank Act, the Bureau believes a reasonable interpretation of HMDA section 304(b)(5)(B) is that financial institutions should report the difference between the APR and APOR. In addition, the rate spread provides a more accurate picture of a loan's price relative to the rate environment at the time of the lender's pricing decision because the date the loan's interest rate was set is not publicly available.

A few commenters warned that rate spread data could be misleading if viewed out of context. For example, a trade association commented that some loans may have higher rate spreads but offer special features, such as lower down payment requirements or waiver of an institution's private mortgage insurance requirement. Another commenter suggested that users need to be aware of the issues regarding rate spread data and pointed out that lender credits do not impact the APR and therefore the rate spread will look higher in comparison to similar loans without lender credits. Although there may be issues regarding rate spread data, the Bureau believes that it would be less burdensome on financial institutions to calculate the difference between APR, which is already a calculation performed by the financial institutions for TILA-RESPA purposes, and APOR. The Bureau does not believe that the additional burden of requiring financial institutions to take into account other factors, such as lender credits, when calculating the APR for the purposes of the rate spread would outweigh any benefit provided by this adjusted method of calculation. In addition, the Bureau believes that a reasonable interpretation of HMDA section 304(b)(5)(B) is that financial institutions should report the difference between the APR on the loan and the APOR for a comparable transaction.

The Bureau also solicited comment on the scope of the rate spread reporting requirement, including whether the requirement should be expanded to cover purchased loans. One trade association agreed with the Bureau's proposal that reverse mortgages should be exempted from rate spread reporting. A few trade associations agreed with the Bureau and commented that the rate spread reporting requirement should not be expanded to include purchased loans. One trade association reasoned this this would require a manual retroactive process to determine the APOR for the financial institution reporting the purchased loan. The Bureau recognizes the burden that Start Printed Page 66199would be imposed on the financial institution reporting the purchased loan to also report the rate spread and therefore is excluding purchased covered loans from the rate spread reporting requirement as proposed.

One industry commenter asked the Bureau to clarify whether rate spread should be reported on commercial loans that do not have an APR. The Bureau did not propose to, and the final rule does not, require a financial institution to report the rate spread for commercial loans because these loans are not covered by Regulation Z, and therefore creditors are not required to calculate and disclose an APR to borrowers.

Many commenters noted that the Bureau's proposal contained inconsistent rounding methodologies across various data points, including the rate spread, and recommended that the Bureau provide a consistent rounding method. The technical instructions in current appendix A provides that the rate spread should be reported to two decimal places. If the rate spread figure is more than two decimal places, the figure should be rounded or truncated to two decimal places. The Bureau proposed that the rate spread should be rounded to three decimal places. One commenter questioned the Bureau's proposal to report the rate spread to three decimal places and stated that APR is typically disclosed to two decimal places. The Bureau acknowledges that the proposed instruction may pose some challenges for financial institutions. After considering the feedback, the Bureau has determined that the proposed instruction may be unduly burdensome on financial institutions. Consequently, the Bureau is not adopting the proposed instruction in the final rule.

The Bureau proposed comment 4(a)(12)-4.iii to provide guidance on the rounding method for calculating the rate spread for a covered loan with a term to maturity that is not in whole years. The proposed comment specifically provided that when the actual loan term is exactly halfway between two whole years, the shorter loan term should be used. This proposed comment was based on guidance published in an FFIEC FAQ.[299] One commenter pointed out that this rounding method does not follow the typical method of rounding up when a number is exactly halfway in between two others. This commenter suggested that unnecessary errors can occur as a result of this rounding method. The Bureau considered this feedback and believes that the benefit of adopting a rounding method inconsistent with the guidance published in the FFIEC FAQ for this specific calculation does not outweigh the burden because it would require a change in a financial institution's systems or processes for calculating the rate spread for the specific scenario that the proposed comment addresses. For example, financial institutions may have already instituted processes for rounding down when a loan term is exactly halfway between two years based on current FFIEC guidance. Accordingly, the Bureau is adopting comment 4(a)(12)-4.iii as proposed.

The Bureau proposed comment 4(a)(12)-5.i to illustrate the relevant date to use to determine the APOR if the interest rate in the transaction is set pursuant to a “lock-in” agreement between the financial institution and the borrower. The proposed comment also explained that the relevant date to use if no lock-in agreement is executed. Several industry commenters asked the Bureau to clarify the rate spread lock-in date where the transaction did not include an option to lock the loan's rate. The guidance provided in comment 4(a)(12)-5.i clarifies that, in a transaction where no lock-in agreement is executed, the relevant date to use to determine the applicable APOR is the date on which the financial institution sets the rate for the final time before closing.

Except for technical amendments to comments 4(a)(12)-3, -4.i and .ii, and -5.iii, the Bureau is adopting the commentary to § 1003.4(a)(12) substantially as proposed. In addition, the Bureau is adopting two comments that incorporate material contained in proposed appendix A into the commentary to § 1003.4(a)(12). Comments 4(a)(12)-7 and -8 primarily incorporate proposed appendix A instructions and do not contain any substantive changes.

The Bureau is making a technical change and incorporating the exclusion of assumptions from rate spread reporting in § 1003.4(a)(12), which was included in proposed appendix A and was based on FFIEC guidance. The Bureau believes that the utility that the rate spread would provide on assumptions does not justify the burden in collecting the information. Therefore, the Bureau is adopting § 1003.4(a)(12) generally to require financial institutions to report the difference between a loan's APR and APOR for a comparable transaction as of the date the interest rate is set, except for purchased loans, reverse mortgages, and loans that are not subject to Regulation Z, 12 CFR part 1026, with a modification that excludes assumptions from the scope of the rate spread reporting requirement. The Bureau believes that rate spread information on loans that are both below and above the threshold for higher-priced mortgage loans will reveal greater detail about the extent of the availability of prime lending in all communities. Pursuant to HMDA section 305(a), the Bureau is excluding purchased loans, reverse mortgages, assumptions, and loans that are not subject to Regulation Z, 12 CFR part 1026 from rate spread reporting to facilitate compliance and because information about the rate spread for such transactions could be potentially misleading.

4(a)(13)

Regulation C § 1003.4(a)(13) currently requires financial institutions to report whether a loan is subject to HOEPA, as implemented by Regulation Z § 1026.32. Prior to the proposal, the Bureau received feedback suggesting that information regarding the reason for a loan's HOEPA status might improve the usefulness of the HMDA data. Pursuant to HMDA sections 305(a) and 304(b)(5)(D), the Bureau proposed to require financial institutions to report for covered loans subject to HOEPA, whether the covered loan is a high-cost mortgage under Regulation Z § 1026.32(a), and the reason that the covered loan qualifies as a high-cost mortgage, if applicable. For the reasons discussed below, the Bureau is adopting § 1003.4(a)(13) with modifications to remove the requirement to report information concerning the reasons for a loan's HOEPA status.

The Bureau solicited feedback on the general utility of the modified data and on the costs associated with reporting the data. A few commenters stated that the expanded HOEPA flag would create an unnecessary burden. Several industry commenters suggested removing the HOEPA status field from HMDA reporting. They argued that the Bureau's 2013 ATR Final Rule eliminated the origination of HOEPA loans. One financial institution stated that the proposed HOEPA flag is either not applicable to it or would offer little benefit. Another commenter stated that the HOEPA status field is unnecessary because a user should be able to determine using the rate spread whether the loan's APR meets the HOEPA trigger. Another industry commenter stated that the proposal would require financial institutions to report points and fees, final rate, and origination charges as well as the rate spread. Data users could use these data points to determine whether a loan is higher-cost.Start Printed Page 66200

A few commenters supported the HOEPA flag but suggested that the Bureau should not collect the additional information regarding the reason(s) for whether the loan is subject to HOEPA. They pointed to the burden associated with reporting the information and the Bureau's proposal to collect other information about loan pricing, such as points and fees.

An expanded HOEPA reporting requirement would have the potential to provide greater insight into which specific triggers are most prevalent among high-cost mortgages. However, the Bureau acknowledges the compliance burden associated with reporting information concerning the reasons for a loan's HOEPA status. As commenters pointed out, pricing information is available in other data fields, such as the rate spread, total points and fees, and interest rate. The benefits that would be provided by an expanded HOEPA reporting requirement does not justify the burden associated with reporting the information, particularly because other HMDA data fields capture pricing information that could be used to determine the reason for a loan's HOEPA status. In response to concerns raised by commenters regarding burden, the Bureau will only require financial institutions to report whether a loan is subject to HOEPA, as implemented by Regulation Z § 1026.32. The Bureau believes that requiring financial institutions to report whether a loan is subject to HOEPA is necessary to carry out the purposes of HMDA because an indication of a loan's HOEPA status will help determine whether financial institutions are serving the housing needs of their communities. Accordingly, pursuant to HMDA sections 305(a) and 304(b)(5)(D), the Bureau is adopting § 1003.4(a)(13) with modifications to remove the requirement to report information concerning the reasons for a loan's HOEPA status.

In addition, the Bureau is adopting new comment 4(a)(13)-1 to clarify when a financial institution reports that the HOEPA status reporting requirement is not applicable. Comment 4(a)(13)-1 explains that a financial institution reports that the requirement to report the HOEPA status is not applicable if the covered loan is not subject to the Home Ownership and Equity Protection Act of 1994, as implemented in Regulation Z, 12 CFR 1026.32. Comment 4(a)(13)-1 also explains that, if an application did not result in an origination, a financial institution complies with § 1003.4(a)(13) by reporting that the requirement is not applicable.

4(a)(14)

Current § 1003.4(a)(14) requires financial institutions to report the lien status of the loan or application (first lien, subordinate lien, or not secured by a lien on a dwelling). The technical instructions in current appendix A provide that, for loans that a financial institution originates and for applications that do not result in an origination, a financial institution shall report the lien status as one of the following: Secured by a first lien, secured by a subordinate lien, not secured by a lien, or not applicable (purchased loan). The Bureau proposed to modify § 1003.4(a)(14) to require reporting of the priority of the lien against the subject property that secures or would secure the loan in order to conform to the MISMO industry data standard, which provides the following enumerations: First lien, second lien, third lien, fourth lien, or other. The proposal also removed the current exclusion of reporting lien status on purchased loans.

The Bureau proposed technical modifications to the instruction in appendix A regarding how to enter lien status on the loan/application register. In addition, in order to provide clarity on proposed § 1003.4(a)(14), the Bureau proposed technical modifications to comment 4(a)(14)-1 and proposed new comment 4(a)(14)-2.

The Bureau solicited feedback regarding whether the Bureau should maintain the current reporting requirement (secured by a first lien or subordinate lien) modified to conform to the proposed removal of unsecured home improvement loans, or whether financial institutions prefer to report the actual priority of the lien against the property (secured by a first lien, second lien, third lien, fourth lien, or other). In response, a consumer advocate commenter supported the proposal to require reporting of the priority of the lien against the subject property and a few industry commenters stated that alignment with the MISMO industry data standard would help ensure consistency.

However, most of the commenters that responded to this solicitation of feedback opposed the proposal to require reporting of the priority of the lien against the subject property and recommended that the Bureau continue to require reporting the lien status of the loan or application as either first lien or subordinate lien. In general, industry commenters stated that very few loans are secured by liens beyond a second lien and that as a result, the additional burden of reporting the actual lien priority would outweigh the potential utility of the data. For example, an industry commenter argued that a lien status beyond a second lien is rare and that reporting the actual lien status will not add much value to the HMDA data. A State trade association suggested that requiring financial institutions to specify the exact lien priority of the mortgage would result in little useful data and yet the burden would be excessive and unnecessary.

In addition, with respect to potential privacy implications, a few commenters were concerned that if information regarding lien priority is made available to the public, such information could be coupled with other publicly available information on property sales and ownership records to compromise a borrower's privacy. The Bureau has considered this feedback. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of HMDA data.

While HMDA compliance and data submission can be made easier by aligning the requirements of Regulation C, to the extent practicable, to existing industry standards for collecting and transmitting mortgage data, the Bureau has determined that requiring reporting of the lien status of the loan or application as either first lien or subordinate lien is the appropriate approach. Based on the comments the Bureau received, it appears that the burdens associated with reporting the various enumerations (first lien, second lien, third lien, fourth lien, and other) may not outweigh the benefits discussed in the Bureau's proposal namely, enhanced data collected under Regulation C and facilitating compliance by better aligning the data collected with industry practice. Accordingly, the Bureau does not adopt § 1003.4(a)(14) as proposed but instead maintains the current reporting requirement (secured by a first lien or subordinate lien) modified to conform to the removal of non-dwelling-secured home improvement loans, and adopts corresponding modifications to the proposed commentary.

The Bureau also solicited feedback on the general utility of lien status data on purchased loans and on the unique costs and burdens associated with collecting and reporting the data that financial institutions may face as a result of the proposal. A few industry commenters did not support the Bureau's proposal to remove the current exclusion of reporting lien status on purchased loans. For example, one Start Printed Page 66201industry commenter suggested that such data is not an indicator of discriminatory lending and also that such information is better examined on a loan-by-loan basis by bank examiners. Another industry commenter did not support the proposed reporting requirement because it would be a regulatory burden with no particular benefit.

While requiring financial institutions to report the lien status of purchased loans would add some burden on financial institutions, the Bureau has determined that such data will further enhance the utility of HMDA data overall. Given that loan terms, including loan pricing, vary based on lien status, and in light of the Bureau's determination to require reporting of certain pricing data for purchased loans, such as the interest rate, lender credits, total origination charges, and total discount points, the Bureau has determined that requiring financial institutions to report the lien status of purchased loans will improve the HMDA data's usefulness overall. In addition, as described in the Bureau's proposal, the liquidity provided by the secondary market is a critical component of the modern mortgage market, and information about the types of loans being purchased in a particular area, and the pricing terms associated with those purchased loans, is needed to understand whether the housing needs of communities are being fulfilled. Furthermore, local and State housing finance agency programs facilitate the mortgage market for low- to moderate-income borrowers, often by offering programs to purchase or insure loans originated by a private institution. Since the HMDA data reported by financial institutions does not include the lien status of purchased loans, it is difficult to determine the pricing characteristics of the private secondary market. Lien status information on purchased loans may help public entities, such as local and State housing finance agencies, understand how to complement the liquidity provided by the secondary market in certain communities, thereby maximizing the effectiveness of such public programs. Requiring that such data be reported may assist public officials in their determination of the distribution of public sector investments in a manner designed to improve the private investment environment. Additionally, providing lien status information to purchasers is standard industry practice.

For these reasons, the Bureau has determined that data on the lien status of purchased loans will further the purposes of HMDA in determining whether financial institutions are serving the housing needs of their communities; in distributing public-sector investments so as to attract private investment to areas or communities where it is needed; and in identifying possible discriminatory lending patterns. Pursuant to the Bureau's authority under sections 305(a) and 304(b)(6)(J) of HMDA, the Bureau is adopting the modification to § 1003.4(a)(14) to require reporting of lien status information—whether the covered loan is a first or subordinate lien—for purchased loans.

Lastly, in order to facilitate HMDA compliance, the Bureau is modifying comment 4(a)(14)-1.i to clarify that financial institutions are required to report lien status for covered loans they originate and purchase and applications that do not result in originations, which include preapproval requests that are approved but not accepted, preapproval requests that are denied, applications that are approved but not accepted, denied, withdrawn, or closed for incompleteness. The Bureau is also adopting proposed comment 4(a)(14)-2, which directs financial institutions to comment 4(a)(9)-2 regarding transactions involving multiple properties with more than one property taken as security.

4(a)(15)

Neither HMDA nor Regulation C historically has required reporting of information relating to an applicant's or borrower's credit score. Section 1094(3)(A)(iv) of the Dodd-Frank Act amended section 304(b) of HMDA to require financial institutions to report “the credit score of mortgage applicants and mortgagors, in such form as the Bureau may prescribe.” [300] The Bureau proposed § 1003.4(a)(15) to implement this requirement.[301] Except for purchased covered loans, proposed § 1003.4(a)(15)(i) requires financial institutions to report the credit score or scores relied on in making the credit decision and the name and version of the scoring model used to generate each credit score. In addition, the Dodd-Frank Act amendments to HMDA do not provide a definition of “credit score.” Therefore, the Bureau proposed in § 1003.4(a)(15)(ii) to interpret “credit score” to have the same meaning as in section 609(f)(2)(A) of the Fair Credit Reporting Act (FCRA), 15 U.S.C. 1681g(f)(2)(A).

The Bureau also proposed instruction 4(a)(15)-1, which directed financial institutions to enter the credit scores relied on in making the credit decision and proposed instruction 4(a)(15)-2, which provided the codes that financial institutions would use for each credit score reported to indicate the name and version of the scoring model used to generate the credit score relied on in making the credit decision.

In addition, the Bureau proposed four comments to provide clarification on the reporting requirement under proposed § 1003.4(a)(15). The Bureau proposed comment 4(a)(15)-1, which explained that a financial institution relies on a credit score in making the credit decision if the credit score was a factor in the credit decision even if it was not a dispositive factor, and provided an illustrative example. Proposed comment 4(a)(15)-2 addressed circumstances where a financial institution obtains or creates multiple credit scores for a single applicant or borrower, as well as circumstances in which a financial institution relies on multiple scores for the applicant or borrower in making the credit decision, and provided illustrative examples. Proposed comment 4(a)(15)-3 addressed situations involving credit scores for multiple applicants or borrowers and provided illustrative examples. Finally, proposed comment 4(a)(15)-4 clarified that a financial institution complies with proposed § 1003.4(a)(15) by reporting “not applicable” when a credit decision is not made, for example, if a file was closed for incompleteness or the application was withdrawn before a credit decision was made. Proposed comment 4(a)(15)-4 also clarified that a financial institution complies with proposed § 1003.4(a)(15) by reporting “not applicable” if it makes a credit decision without relying on a credit score for the applicant or borrower.

In order to facilitate HMDA compliance and address concerns that it could be burdensome to identify credit score information for purchased covered loans, the Bureau excluded purchased covered loans from the requirements of proposed § 1003.4(a)(15)(i). The Bureau solicited feedback on whether this exclusion was appropriate and received a few comments. A national trade association supported the Bureau's proposal to exclude purchased covered Start Printed Page 66202loans from the proposed reporting requirement under § 1003.4(a)(15)(i) without providing further explanation. One consumer advocate commenter did not oppose the proposal so long as the ULI is included in the final rule, because it can be used to link origination data to purchased loans. Similarly, another consumer advocate commenter recommended that until the ULI is successfully implemented, purchased loans should not be excluded from the credit score data reporting requirement. Finally, two other consumer advocate commenters argued that credit score should be reported for purchased loans. One of these commenters stated that the Bureau's proposed exclusion of purchased loans from § 1003.4(a)(15)(i) will have the negative effect of not requiring financial institutions to report credit score information even when the applicant or borrower's credit score is in its possession or the institution could easily obtain it. The commenter suggested that any exception for purchased loans under proposed § 1003.4(a)(15)(i) should be limited only to instances where the financial institution does not have and cannot reasonably obtain the credit score. The other commenter recommended that purchasers of covered loans should use the ULI to look up credit score information from the HMDA data associated with the loan's origination, or should request the information from the originator if the loan was not made by a financial institution required to report under HMDA.

The Bureau has considered this feedback and has determined that it would be unduly burdensome for financial institutions that purchase loans to identify the credit score or scores relied on in making the underlying credit decision and the name and version of the scoring model used to generate each credit score. Consequently, the Bureau is adopting the exclusion of purchased covered loans proposed under § 1003.4(a)(15)(i). The Bureau is also adopting new comment 4(a)(15)&6 which explains that a financial institution complies with § 1003.4(a)(15) by reporting that the requirement is not applicable when the covered loan is a purchased covered loan.

The Bureau solicited feedback on whether the Bureau should require any other related information to assist in interpreting credit score data, such as the date on which the credit score was created. In response, a few consumer advocate commenters specifically recommended that the Bureau require disclosure of the date on which the credit score was created. One commenter pointed out that this additional information will provide for richer data for purposes of statistical analysis. Other commenters stated that credit scores are essentially analyses of risk at a given point in time and thus the meaning of the score is relative to the date on which it was created, and that the date on which the credit score was created would allow the Bureau to ensure that financial institutions are treating borrowers equally when using credit score information.

In contrast, a few industry commenters did not support requiring the date on which the credit score was created arguing that such additional data is not necessary. For example, one industry commenter stated that while credit scores can change, they usually do not significantly change in a short period of time. A national trade association stated that additional data related to credit score, such as the date, should not be required because it is superfluous information and would be burdensome to report for financial institutions.

The Bureau has considered the feedback received and has determined that requiring financial institutions to report the date on which the credit score was created would not add sufficient value to the credit score information that will be required to be reported to warrant the additional burden placed on financial institutions. Accordingly, a financial institution will not be required to report the date on which the credit score was created under § 1003.4(a)(15).

In response to the Bureau's solicitation for feedback on whether it should require any other related information to assist in interpreting credit score data, a few consumer advocate commenters recommended that the Bureau also require financial institutions to report the name of the credit reporting agency that provided the underlying data to create the credit score (i.e., Equifax, Experian, or TransUnion). One commenter stated that in some cases, the proposed required disclosure of the “name and version” of the credit scoring model by a financial institution will indicate which credit reporting agency's data was used. For example, the disclosure will reveal not only that a “FICO” score was used, but that a “Beacon” score (the FICO 04 score based on Equifax data) was used. However, in other cases, such as VantageScore, the commenter stated that the name or the version of the credit scoring model will not indicate which credit reporting agency's data was used. In order to address the latter scenario, the commenter recommended that the Bureau require financial institutions to report the credit reporting agency whose data was used to generate the credit score that is reported.

The Bureau has considered this feedback and has determined that it will not require financial institutions to report the name of the credit reporting agency that provided the underlying credit score data that institutions report under § 1003.4(a)(15). Requiring that this additional information be reported would add burden on financial institutions, which the Bureau has determined is not justified by the value of the data.

In response to the Bureau's general solicitation for feedback, several industry commenters recommended that the Bureau require financial institutions to report credit score as a “range of values” rather than an applicant's or borrower's actual credit score. The commenters suggested that reporting credit score as a range of values will eliminate a substantial number of potential errors on financial institutions' loan/application registers, would better protect the privacy of applicants, and would not compromise the integrity of the HMDA data. In contrast, one consumer advocate commenter argued that an applicant's or borrower's precise credit score is important because financial institutions may use different cutoff points in their underwriting processes which may not align with the provided ranges. The Bureau has considered this feedback and determined that requiring financial institutions to report credit score as a range of values would diminish the utility of the data to further HMDA's purposes. The Bureau has determined that requiring financial institutions to report the applicant's or borrower's actual credit score or scores relied on in making the credit decision is the appropriate approach and will assist in identifying whether financial institutions are serving the housing needs of their communities, identifying possible discriminatory lending patterns, and enforcing antidiscrimination statutes.

The Bureau solicited feedback on whether the proposed codes that financial institutions would use for each credit score reported to indicate the name and version of the scoring model used to generate the credit score relied on in making the credit decision are appropriate for reporting credit score data, including using a free-form text field to indicate the name and version of the scoring model when the code for “Other credit scoring model” is reported by financial institutions. The Bureau also invited comment on any alternative Start Printed Page 66203approaches that might be used for reporting this information.

In response, a few commenters did not support the Bureau's proposed instruction 4(a)(15)-2.b, which instructs financial institutions to provide the name and version of the scoring model used in a free-form text field if the credit scoring model is one that is not listed. One commenter recommended that the Bureau not require a free-form text field for credit score because the data would be impossible to aggregate and would cause significant confusion. As an alternative, the commenter recommended that the Bureau maintain its proposal that financial institutions report the code for “Other credit scoring model” when appropriate but not require institutions to indicate the name and version of the scoring model in a free-form text field. Another industry commenter stated that free-form text fields are illogical because they lack the ability of being sorted and reported accurately. This commenter also opined that the additional staff and/or programming that will be needed on a government level to analyze these free text fields is costly and not justified when looking at the minimal impact these fields have on the overall data collection under HMDA.

The Bureau has considered the concerns expressed by industry commenters with respect to the proposed requirement that a financial institution enter the name and version of the scoring model in a free-form text field when “Other credit scoring model” is reported but has determined that the utility of this data justifies the potential burden that may be imposed by the reporting requirement. As to the commenters' concern that credit scoring model data reported in the free-form text field would be impossible to aggregate due to the variety of potential names and versions of scoring model reported, the Bureau has determined that the data reported in the free-form text field will be useful even if the data cannot be aggregated.

Lastly, with respect to the commenters' recommendation that requiring a financial institution to report the corresponding code for “Other credit scoring model” is sufficient and that the Bureau should not also require an institution to enter the name and version of the scoring model in a free-form text field in these circumstances, the Bureau has determined that such an approach would hinder the utility of the credit score data for purposes of HMDA. When a financial institution reports “Other credit scoring model” in the loan/application register without further explanation as to what the other credit scoring model is, it would be difficult to perform accurate analyses of such data since different models are associated with different scoring ranges and some models may even have different ranges depending on the version used. Moreover, the free-form text field will provide key information on credit scoring models that are used by financial institutions to underwrite a loan but are not currently listed. For example, the data reported in the free-form text field for “Other credit scoring model” can be used to monitor those credit scoring models or to add commonly used, but previously unlisted, credit scoring models to the list. As such, the Bureau has determined that the HMDA data's usefulness will be improved by requiring financial institutions to report in a free-form text field the name and version of the scoring model when the institution reports “Other credit scoring model” on its loan/application register.

The Bureau invited comment on whether it was appropriate to request the name and version of the scoring model under proposed § 1003.4(a)(15)(i). For a variety of reasons, several industry commenters did not support the Bureau's proposal to include the name and version of the credit scoring model used to generate the credit score relied on in making the credit decision. In general, the commenters stated that while they support requiring financial institutions to report the credit score relied on in making the credit decision, reporting the name and version of the credit scoring model used to generate that score would impose significant regulatory and operational burden on industry. Commenters also stated that the Bureau had failed to provide compelling reasons for how the collection and reporting of this additional credit score data ensures fair access to credit in the residential mortgage market. In addition, commenters did not support the Bureau's proposal requiring financial institutions to report the credit scoring model used to generate the credit score on the grounds that the Dodd-Frank Act mandated that an applicant's or borrower's credit score be reported, but not additional data on the credit scoring model.

In contrast, the vast majority of commenters supported the Bureau's proposal to require financial institutions to report not only the credit score or scores relied on in making the credit decision, but also the name and version of the scoring model used to generate each credit score. Several consumer advocate commenters pointed out that the name and version of the scoring model used to generate the credit score relied on in making the credit decision is needed to accurately interpret the credit score field. These commenters stated that requiring financial institutions to report this information is vital because each credit scoring model may generate different credit scores which may confound simple comparisons. Some industry commenters also supported the Bureau's proposal. One industry commenter stated that for purposes of fair lending analysis, credit score information is vital to understanding a financial institution's credit and pricing decision and that without such information, inaccurate conclusions may be reached by users of HMDA data.

The Bureau has considered this feedback and determined that its proposal to require financial institutions to report the credit score or scores relied on in making the credit decision is the appropriate approach and is a reasonable interpretation of HMDA section 304(b)(6)(I). The Bureau has also determined that its interpretation of HMDA section 304(b)(6)(I) to require the name and version of the scoring model is reasonable because, as discussed above, this information is necessary to understand any credit scores that will be reported, as different models are associated with different scoring ranges and some models may even have different ranges depending on the version used.[302] In addition, the Bureau's implementation is authorized by HMDA sections 305(a) and 304(b)(6)(J), and is necessary and proper to effectuate the purposes of HMDA, because, among other reasons, the name and version of the credit scoring model facilitates accurate analyses of whether financial institutions are serving the housing needs of their communities by providing adequate home financing to qualified applicants. Accordingly, the Bureau is adopting § 1003.4(a)(15)(i) as proposed.

As discussed above, the Bureau proposed § 1003.4(a)(15)(ii), which provides that “credit score” has the meaning set forth in 15 U.S.C. 1681g(f)(2)(A). The Bureau's proposal interpreted “credit score” to have the same meaning as in section 609(f)(2)(A) of the Fair Credit Reporting Act (FCRA), 15 U.S.C. 1681g(f)(2)(A). However, the Bureau solicited feedback on whether Regulation C should instead use a different definition of “credit score.” Start Printed Page 66204For example, the Bureau suggested that it could define “credit score” based on the Regulation B definitions of “credit scoring system” or “empirically derived, demonstrably and statistically sound, credit scoring system.” [303] Another alternative would be to interpret credit score to mean the probability of default, using a concept similar to the probability of default metric that the FDIC uses in determining assessment rates for large and highly complex insured depository institutions.[304]

The commenters that provided feedback on the proposed definition of “credit score” supported the Bureau's proposal to use the FCRA section 609(f)(2)(A) definition of credit score. For example, one consumer advocate commenter stated that it supports the Bureau's proposal to use the definition of “credit score” set forth in the FCRA because the definition is familiar to industry, regulators, and other stakeholders. Similarly, another consumer advocate commenter stated that it supports the definition because it would facilitate compliance. The Bureau has considered this feedback and determined that the FCRA section 609(f)(2)(A) definition of “credit score” is the most appropriate because it provides a general purpose definition that is familiar to financial institutions that are already subject to FCRA and Regulation V requirements. Consequently, the Bureau is adopting § 1003.4(a)(15)(ii) generally as proposed, but with technical modifications for clarity.

Lastly, many commenters expressed concern about potential privacy implications if the Bureau collects credit score data or if it were to release credit score data to the public. As with other proposed data points like property value, commenters were concerned that if information regarding credit score data is made available to the public, such information could be coupled with other publicly available information, such as property sales and ownership records, in a way that compromises a borrower's privacy. A State trade association commented that public disclosure of credit score data creates the ability for unscrupulous third parties to specifically identify borrowers and directly market to those borrowers. The commenter suggested that these third parties would have access to a sufficient amount of information disclosed through HMDA and coupled with other information, such as public recordation information, to give the appearance through their marketing that they have some connection to the original lender. Similarly, an industry commenter suggested that in addition to the potential for criminal misuse of a borrower's financial information, the availability of the expanded data released under HMDA will very likely permit marketers to access the information which will result in aggressive marketing that is “personalized” to unsophisticated and vulnerable consumers for potentially harmful financial products and services. Another State trade association stated that credit score data should not be released to the public because collecting and releasing credit score data could lead to fraudsters, neighbors, marketers, and others learning very private pieces of information about the applicant or borrower. Another State trade association recommended that the Bureau strengthen its data protection as it relates to the selective disclosure of HMDA data to third parties and specifically recommended that the Bureau convert actual values to ranges or normalize values before sharing the data with a third party. The Bureau has considered this feedback. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of HMDA data.

As discussed above, the Bureau is adopting § 1003.4(a)(15)(i) as proposed and § 1003.4(a)(15)(ii) generally as proposed, but with technical modifications for clarity. The Bureau is adopting comments 4(a)(15)-1 and -2, as proposed. The Bureau is also adopting comment 4(a)(15)-3 as proposed with a clarification that in a transaction involving two or more applicants or borrowers for which the financial institution obtains or creates a single credit score, and relies on that credit score in making the credit decision for the transaction, the institution complies with § 1003.4(a)(15) by reporting that credit score for either the applicant or first co-applicant.

With regard to a financial institution reporting that the requirement is not applicable, the Bureau is modifying comment 4(a)(15)-4 by maintaining in that comment the guidance with respect to transactions for which no credit decision was made and moves the guidance with respect to transactions for which credit score was not relied on to new comment 4(a)(15)-5. The Bureau clarifies in comment 4(a)(15)-4 that if a file was closed for incompleteness or the application was withdrawn before a credit decision was made, the financial institution complies with § 1003.4(a)(15) by reporting that the requirement is not applicable, even if the financial institution had obtained or created a credit score for the applicant or co-applicant. As discussed above, the Bureau is also adopting new comment 4(a)(15)-6, which clarifies that a financial institution complies with § 1003.4(a)(15) by reporting that the requirement is not applicable when the covered loan is a purchased covered loan. The Bureau is also adopting new comment 4(a)(15)-7, which clarifies that when the applicant and co-applicant, if applicable, are not natural persons, a financial institution complies with § 1003.4(a)(15) by reporting that the requirement is not applicable.

4(a)(16)

Section 1003.4(c)(1) currently permits optional reporting of the reasons for denial of a loan application. However, certain financial institutions supervised by the OCC and the FDIC are required by those agencies to report denial reasons on their HMDA loan/application registers.[305] The Bureau proposed § 1003.4(a)(16), which requires mandatory reporting of denial reasons by all financial institutions.

The Bureau proposed instruction 4(a)(16) in appendix A, which modified the current instruction and provided technical instructions regarding how to enter the denial reason data on the loan/application register. First, proposed instruction 4(a)(16)-1 provided that a financial institution must indicate the principal reason(s) for denial, indicating up to three reasons. Second, the Bureau explained in proposed instruction 4(a)(16)-2 that, when a financial institution denies an application for a principal reason not included on the list of denial reasons in appendix A, the institution should enter the corresponding code for “Other” and also enter the principal denial reason(s) in a free-form text field. Third, the Bureau added a code for “not applicable” and explained in proposed instruction 4(a)(16)-3 that this code should be used by a financial institution if the action taken on the application was not a denial pursuant to § 1003.4(a)(8), such as if the application Start Printed Page 66205was withdrawn before a credit decision was made or the file was closed for incompleteness. Lastly, the Bureau also proposed to renumber current instruction I.F.2 of appendix A as proposed instruction 4(a)(16)-4, which explains how a financial institution that uses the model form for adverse action contained in appendix C to Regulation B (Form C-1, Sample Notice of Action Taken and Statement of Reasons) should report the denial reasons for purposes of HMDA, including entering the principal denial reason(s) in a free-form text field when the financial institution enters the corresponding code for “Other.”

In addition, the Bureau proposed comment 4(a)(16)-1 to provide clarity as to what the Bureau requires with respect to a financial institution reporting the principal reason(s) for denial. The Bureau also proposed comment 4(a)(16)-2 to align with proposed instructions 4(a)(16)-2 and -4.

A few industry commenters did not support the Bureau's proposal and recommended that reporting of denial reasons remain optional under Regulation C. The main reason offered by commenters was that a mandatory requirement to report denial reasons would increase regulatory burden on financial institutions. In contrast, most consumer advocate commenters supported the Bureau's proposed § 1003.4(a)(16). For example, several consumer advocate commenters pointed out that different types of housing counseling and intervention is needed depending on the most frequent reasons for denial. These commenters stated that denial reason data is important to housing counseling agencies because it helps identify the most significant impediments to homeownership and provide more effective counseling. A government commenter noted that denial reasons will be particularly effective for fair lending analyses. Another consumer advocate commenter pointed out that denial reason data will be helpful for understanding why a particular loan application was denied and identifying potential barriers in access to credit.

The Bureau has determined that maintaining the current requirement of optional reporting of denial reasons is not the appropriate approach given the value of the data in furthering HMDA's purposes. The reasons an application is denied are critical to understanding a financial institution's credit decision and to screen for potential violations of antidiscrimination laws, such as ECOA and the Fair Housing Act.[306] Denial reasons are important for a variety of purposes including, for example, assisting examiners in their reviews of denial disparities and underwriting exceptions. The Bureau has determined that requiring the collection of the reasons for denial will facilitate more efficient, and less burdensome, fair lending examinations by the Bureau and other financial regulatory agencies, thereby furthering HMDA's purpose of assisting in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.

The Bureau acknowledges that mandatory reporting of denial reasons will contribute to certain financial institutions' compliance burden. However, the statistical value of optionally reported data is lessened because of the lack of standardization across all HMDA reporters. Moreover, as discussed above, certain financial institutions supervised by the OCC and the FDIC are already required by those agencies to report denial reasons.[307] A requirement that all financial institutions report reasons for denial of an application is the proper approach for purposes of HMDA. For these reasons, pursuant to its authority under HMDA sections 305(a) and 304(b)(6)(J), the Bureau is finalizing the requirement that all financial institutions report reasons for denial of an application. This information is necessary to carry out HMDA's purposes, because it will provide more consistent and meaningful data, which will assist in identifying whether financial institutions are serving the housing needs of their communities, as well as assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.

The Bureau solicited feedback on the proposed requirement that a financial institution enter the principal denial reason(s) in a free-form text field when “Other” is entered in the loan/application register. Several commenters did not support the proposed requirement for a variety of reasons, including, for example, concerns about having sufficient space to accurately or adequately capture the denial reason with the limited space available for reporting on the loan/application register, concerns that denial reason data reported in the free-form text field would be impossible to aggregate due to the variety of potential denial reasons reported, and concerns that such reporting would cause significant confusion and regulatory burden. A few industry commenters suggested that requiring a financial institution to report the corresponding code for “Other” would be sufficient when the institution denies an application for a principal reason not included on the list of denial reasons in appendix A or on the model form for adverse action contained in appendix C to Regulation B. The commenters suggested that the Bureau should not also require an institution to enter the principal denial reason(s) in a free-form text field in these circumstances for the reasons listed above.

The Bureau has considered the concerns expressed by industry commenters with respect to the proposed requirement that a financial institution enter the principal denial reason(s) in a free-form text field when a financial institution reports the denial reason as “Other” in the loan/application register but has determined that the utility of this data justifies the potential burden that may be imposed by the reporting requirement. In addition, with respect to the concern that financial institutions will not have sufficient space in the loan/application register to accurately or adequately capture the denial reasons, the Bureau believes that the free-form text field will provide institutions with sufficient space to comply with proposed § 1003.4(a)(16). As explained in proposed comment 4(a)(16)-1, the denial reasons reported by a financial institution must be specific and accurately describe the principal reason or reasons an institution denied the application. The free-form text field will not limit a financial institution's ability to comply with proposed § 1003.4(a)(16). As to the commenters' concern that denial reason data reported in the free-form text field would be impossible to aggregate due to the variety of potential denial reasons reported, the Bureau has determined that the data reported in the free-form text field will be useful even if the data cannot be aggregated. The Bureau also proposed comment 4(a)(16)-2, which provides clarification as to the proposed requirement that a financial institution enter the principal denial reason(s) in a free-form text field when “Other” is entered in the loan/application register. The Bureau is finalizing this comment, modified for additional clarity, to address any potential confusion.

Lastly, with respect to the commenters' recommendation that it be sufficient to require a financial institution to report “Other” as the denial reason and that the Bureau Start Printed Page 66206should not also require an institution to enter the principal denial reason(s) in a free-form text field in these circumstances, the Bureau has determined that such an approach would hinder the utility of the denial reason data for purposes of HMDA. Many consumer advocate commenters pointed out that transparency about denial reasons provides the public as well as regulators with the information needed to better understand challenges to access to credit. One commenter specifically pointed out the reporting accuracy of denial reasons will be improved in two ways if financial institutions are required to explain the denial reason in the free-form text field when the institution indicates “Other” as a reason for denial. First, the commenter suggested that this reporting requirement will prevent the misuse of the “Other” category when financial institutions report the denial reason as “Other” when in fact the denial reason may more appropriately fall into one or more of the listed denial reasons. Without further explanation as to what the “Other” denial reason actually is, the commenter stated that it has been impossible to tell if the financial institution accurately reported the denial reason. Second, the commenter stated that the free-form text field will provide key information on denial reasons that are not currently listed. For example, the denial reason data can be used to monitor other denial reasons or to add common, but previously unlisted, denial reasons to the list. The Bureau has determined that the HMDA data's usefulness will be improved by requiring financial institutions to report the principal reason(s) it denied the application in a free-form text field when the institution reports the denial reason as “Other” in the loan/application register.

The Bureau solicited feedback regarding whether additional clarifications would assist financial institutions in complying with the proposed requirement. A few industry commenters pointed out that while the proposal requires a financial institution to report up to three principal reasons for denial, the commenters read Regulation B as providing that a creditor may provide up to four principal reasons for denial and such inconsistency between regulations adds to the compliance burden imposed by the Bureau's new mandatory reporting requirement under proposed § 1003.4(a)(16). The adverse action notification provisions of Regulation B do not mandate that a specific number of reasons be disclosed when a creditor denies an application but instead provides that disclosure of more than four reasons is not likely to be helpful to the applicant.[308] In light of the feedback on the proposal and in an effort to help facilitate compliance and consistency between regulations, the Bureau is modifying proposed comment 4(a)(16)-1 to provide that a financial institution complies with § 1003.4(a)(16) by reporting the principal reason or reasons it denied the application, indicating up to four reasons.

In order to help facilitate compliance with proposed § 1003.4(a)(16), the Bureau also adopts two new comments. The Bureau is adopting new comment 4(a)(16)-2, which clarifies that a request for a preapproval under a preapproval program as defined by § 1003.2(b)(2) is an application and therefore, if a financial institution denies a preapproval request, the financial institution complies with § 1003.4(a)(16) by reporting the reason or reasons it denied the preapproval request. The Bureau also adopts new comment 4(a)(16)-4, which clarifies that a financial institution complies with § 1003.4(a)(16) by reporting that the requirement is not applicable if the action taken on the application, pursuant to § 1003.4(a)(8), is not a denial. For example, a financial institution complies with § 1003.4(a)(16) by reporting that the requirement is not applicable if the loan is originated or purchased by the financial institution, or the application or preapproval request was approved but not accepted, or the application was withdrawn before a credit decision was made, or the file was closed for incompleteness.

Several commenters were also concerned that if information regarding denial reasons were made available to the public, such information could be coupled with other publicly available information, which would result in not only compromising a borrower's privacy but also potentially place consumers at greater risk of financial harm through unlawful marketing to consumers by unscrupulous parties, such as identify thieves, other scammers, or criminals. For example, one industry commenter suggested that “unsophisticated consumers could be vulnerable to aggressive marketing techniques, which may appear even more `personalized' to their situation because of the availability of their specific financial picture through the LAR data.” The Bureau has considered this feedback. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of HMDA data.

The Bureau is adopting § 1003.4(a)(16) as proposed, with minor technical modifications. The Bureau is adopting proposed comments 4(a)(16)-1 and 4(a)(16)-2, with several technical and clarifying modifications, and renumbers proposed comment 4(a)(16)-2 as 4(a)(16)-3. In addition, as discussed above, the Bureau is adopting new comments 4(a)(16)-2 and -4, which will help facilitate HMDA compliance by providing additional guidance regarding the denial reason reporting requirement.

4(a)(17)

Section 304(b)(5)(A) of HMDA [309] provides for reporting of “the total points and fees payable at origination in connection with the mortgage as determined by the Bureau, taking into account 15 U.S.C. 1602(aa)(4).” [310] The Bureau proposed to implement this provision through proposed § 1003.4(a)(17), which required financial institutions to report the total points and fees charged in connection with certain mortgage loans or applications. Proposed § 1003.4(a)(17) defined total points and fees by reference to TILA, as implemented by Regulation Z § 1026.32(b)(1) or (2). Section 1026.32(b)(1) defines “points and fees” for closed-end credit transactions, while § 1026.32(b)(2) defines “points and fees” for open-end credit transactions. Proposed § 1003.4(a)(17) would have applied to applications for and originations of certain closed-end mortgage loans and open-end lines of credit, but not to reverse mortgages or commercial-purpose loans or lines of credit.

The Bureau also solicited comment on the costs and benefits of the proposed Start Printed Page 66207definition of total points and fees and on the specific charges that should be included or excluded. Additionally, in discussing proposed § 1003.4(a)(18), the Bureau sought feedback on the merits of a more inclusive measure of the cost of a loan.

For the reasons provided below, the Bureau is requiring financial institutions to report the total loan costs for any covered loan that is both subject to the ability-to-repay section of the Bureau's 2013 ATR Final Rule and for which a Closing Disclosure is required under the Bureau's 2013 TILA-RESPA Final Rule. Total loan costs are disclosed pursuant to Regulation Z § 1026.38(f)(4). For a covered loan that is subject to the ability-to-repay section of the Bureau's 2013 ATR Final Rule but for which a Closing Disclosure is not required under the Bureau's 2013 TILA-RESPA Final Rule, financial institutions must report the total points and fees, unless the covered loan is a purchased covered loan. This reporting requirement does not apply to applications or to covered loans not subject to the ability-to-repay requirements in the 2013 ATR Final Rule, such as open-end lines of credit, reverse mortgages, or loans or lines of credit made primarily for business or commercial purposes.

Commenters were divided on whether financial institutions should be required to report points-and-fees data. Most consumer advocates generally supported the proposed pricing data points, including total points and fees. These commenters explained that more detailed pricing information will improve their ability to identify potential price discrimination and to understand the terms on which consumers in their communities are being offered credit. One consumer advocate stated that certain groups, such as women, minorities, and borrowers of manufactured housing loans may be unfairly charged higher amounts of points and fees than other borrowers. This commenter also stated that the total amount of points and fees was important for determining a loan's status under HOEPA and the ability-to-repay and qualified mortgage requirements of Regulation Z, and that data about points and fees would clarify any need for further regulation.

Industry commenters, on the other hand, generally opposed collection of points-and-fees data. Many commenters stated that reporting the data would be unduly burdensome because of uncertainty regarding the definition of points and fees or because the total is not required to be calculated by other regulations. Other commenters believed that points-and-fees data would mislead users or duplicate data reported pursuant to other provisions of the proposal. Finally, a few commenters claimed that the data would not be valuable for HMDA purposes.

Specifically, several industry commenters stated that variance among the fees and charges included in points and fees may result in unclear data. One commenter noted that the points-and-fees calculation adjusts based on factors unrelated to the total loan cost, such as whether a particular charge was paid to an affiliate of the creditor. Similarly, other industry commenters stated that the total amount of points and fees was subject to factors that would prevent effective comparison among borrowers, such as daily market fluctuations, differences in location, and borrower decisionmaking.

The Bureau believes that total points-and-fees data, as defined in proposed § 1003.4(a)(17), would have some value in helping HMDA data users to understand certain fees and charges imposed on borrowers. However, after considering the comments, the Bureau concludes that other measures of loan cost, such as total loan costs, as defined in final § 1003.4(a)(17)(i), will be more valuable and nuanced than points and fees, as defined in proposed § 1003.4(a)(17), and will better capture the type of information that HMDA section 304(b)(5)(A) is intended to cover. Total loan costs are the total upfront costs involved in obtaining a mortgage loan. Specifically, for covered loans subject to the disclosure requirements of Regulation Z § 1026.19(f), total loan costs are the sum of the amounts disclosed as borrower-paid at or before closing found on Line D of the Closing Cost Details page of the current Closing Disclosure, as provided for in Regulation Z § 1026.38(f)(4). Final § 1002.4(a)(17)(i) requires financial institutions to report total loan costs because they are a more comprehensive measure than total points and fees, as defined in proposed § 1003.4(a)(17), and because they better facilitate comparisons among borrowers.

Total loan costs include all amounts paid by the consumer to the creditor and loan originator for originating and extending credit, all points paid to reduce the interest rate, all amounts paid for third-party settlement services for which the consumer cannot shop, and all amounts paid for third-party settlement services for which the consumer can shop. However, total loan costs omits other closing costs, such as amounts paid to State and local governments for taxes and government fees, prepaids such as homeowner's insurance premiums, initial escrow payments at closing, and other services that are required or obtained in the real estate closing by the consumer, the seller, or another party. In other words, this total generally represents the costs that the financial institution imposes in connection with the mortgage loan, and omits costs controlled by other entities, such as government jurisdictions.

Unlike total points and fees as defined in proposed § 1003.4(a)(17), total loan costs may be more easily compared across borrowers because third-party charges are not included or excluded depending on various factors, such as whether they were paid to an affiliate of the creditor. This consistency enables users to better compare loan costs among borrowers and to understand the total upfront costs that borrowers face when obtaining mortgage loans. The amount of total loan costs may also be analyzed in combination with the other pricing data points more readily than the total points and fees. For example, the difference between the total loan costs and total origination charges provides the total amount the borrower paid for third-party services.[311] Because of the improved utility of total loan costs, for covered loans subject to final § 1003.4(a)(17) for which total loan costs are available, the final rule requires financial institutions to report total loan costs.

The Bureau acknowledges that total loan costs do not include all closing costs. For example, total loan costs omit amounts paid to State and local governments for taxes and government fees, prepaids such as homeowner's insurance premiums, initial escrow payments at closing, and other services that are required or obtained in the real estate closing by the consumer, the seller, or another party. Many excluded closing costs, however, are unrelated to the cost of extending credit by the financial institution. Because HMDA focuses on the lending activity of financial institutions, the Bureau has determined that the exclusion of these costs is proper. Total loan costs, as provided for in the final rule, also exclude upfront charges paid by sellers or other third parties if these parties were legally obligated to pay for such costs.[312] This omission would understate the total loan costs charged by a financial institution for covered loans with seller-paid or other-paid closing costs in certain situations. However, including such costs would require financial institutions to perform Start Printed Page 66208a calculation that they are not otherwise performing for purposes of the Closing Disclosure. The Bureau has determined that avoiding requiring such calculations by relying on the description of total loan costs found in Regulation Z reduces burden and facilitates compliance.

Total loan costs are not currently required to be calculated for certain loans. The Bureau's 2013 TILA-RESPA Final Rule exempted certain loans from the requirement to provide a Closing Disclosure. For example, manufactured housing loans secured by personal property are exempt from the requirements of the Bureau's 2013 TILA-RESPA Final Rule. But such loans are subject to the ability-to-repay provision of the Bureau's 2013 ATR Final Rule. For these loans, final § 1003.4(a)(17) requires financial institutions to report the total points and fees, calculated pursuant to Regulation Z § 1026.32(b)(1). Although total points and fees as defined in final § 1003.4(a)(17)(ii) are a less comprehensive and less comparable measure of cost than total loan costs, requiring financial institutions to calculate the total loan costs for loans outside of the scope of the 2013 TILA-RESPA Final Rule would be overly burdensome because financial institutions would have no regulatory definition or experience on which to rely. Moreover, the Bureau believes that total points and fees as defined in final § 1003.4(a)(17)(ii) will provide valuable information about the upfront cost of a loan that would otherwise be lacking from the data. Total points and fees as defined in final § 1003.4(a)(17)(ii) include many of the same charges that comprise total loan costs, albeit in a less consistent fashion. Moreover, in some cases loans not subject to the Closing Disclosure requirement may be made to vulnerable consumers. For example, the Bureau's research suggests that manufactured-housing borrowers of chattel loans are more likely to be older, to have lower incomes, and to pay higher prices for their loans.[313] Without points-and-fees data, users would have no insight into the upfront costs associated with such loans.

Regarding the commenters' concerns about misleading data, the final rule includes a number of factors that will help users put the data in their proper context. Regarding total loan costs and total points and fees, many of the factors identified by commenters are reflected in the final rule, such as location and product type.[314] More importantly, however, the HMDA data need not reflect all conceivable determinants of loan pricing to be beneficial to users. The final rule's pricing data will provide important benefits that would be lost if the Bureau were to eliminate it entirely. For example, regulators are able to use pricing data to efficiently prioritize fair lending examinations. Prioritizing examinations based on insufficient data would result in some financial institutions facing unnecessary examination burden while others whose practices warrant closer review would not receive sufficient scrutiny. Overall, the pricing data included in the final rule represent a marked improvement over the current regulation.

One trade association stated that points-and-fees data would lead to reduced price competition. However, the Bureau believes, consistent with standard economic theory, that increased transparency regarding price generally increases competition and ultimately benefits consumers. Therefore, the Bureau is not persuaded that the commenter's price competition concern is a basis for not capturing information regarding total loan costs and points and fees, as defined in § 1003.4(a)(17). A more detailed discussion of the benefits, costs, and impacts can be found in the section 1022 discussion below.

Other industry commenters expressed concern over the burden associated with proposed § 1003.4(a)(17). For example, several industry commenters pointed out that although financial institutions face limits on points and fees if they wish to avoid coverage under the 2013 HOEPA Final Rule, and if they wish to make a qualified mortgage under the 2013 ATR Final Rule, neither rule expressly requires financial institutions to calculate that total. One industry commenter explained that the total amount of points and fees was not currently recorded electronically. Many industry commenters cited concerns over the uncertainty or complexity of the definition of points and fees. Similarly, some commenters requested guidance on what charges to include within the total points and fees or called on the Bureau to supply a “standard” definition of the term. Some industry commenters believed that the reporting the total points and fees would expose them to citations under Regulation C for small errors.

In comparison to the proposed rule, final § 1003.4(a)(17) substantially reduces burden while still ensuring that valuable data are reported. Commenters generally stated that the calculation of total points and fees was not completed for all loans subject to HOEPA or the Bureau's 2013 ATR Final Rule, and that, if the calculation was completed, it involved substantial uncertainty and complexity. For the vast majority of covered loans subject to final § 1003.4(a)(17), financial institutions will report the total loan costs. These institutions would have already calculated the total loan costs in order to disclose the total to borrowers pursuant to the 2013 TILA-RESPA Final Rule. Therefore, the burden of reporting for § 1003.4(a)(17) is generally limited to loans for which financial institutions would already have to calculate the total loan costs. Using the same definition across regulations was supported by several commenters with respect to total points and fees, and final § 1003.4(a)(17) does so by using the existing definition of total loan costs found in Regulation Z.

For the narrow class of loans subject to the ability-to-repay provision of the Bureau's 2013 ATR Final Rule but which are exempt from the 2013 TILA-RESPA Final Rule, financial institutions must report the total points and fees as defined in final § 1003.4(a)(17)(ii). These loans are generally manufactured housing loans secured by personal property. Because such loans run a greater risk of crossing the high-cost mortgage thresholds than site-built home loans, the Bureau believes that most financial institutions would calculate the total points and fees for these loans for compliance with HOEPA and other laws.[315] Additionally, the final rule does not increase burden on these same institutions because it uses the existing definition of “total points and fees” found in Regulation Z.

The final rule also avoids increased burden by limiting § 1003.4(a)(17) to covered loans that are subject to the ability-to-repay provision of the 2013 ATR Final Rule, rather than loans subject to either the 2013 ATR Final Rule or HOEPA. The primary effect of this change from the proposal is to exclude open-end lines of credit from the scope of the reporting requirement. The Bureau believes that such loans typically have lower upfront charges than comparable closed-end loans. Additionally, many open-end lines of Start Printed Page 66209credit feature bona fide third-party charges that are waived on the condition that the consumer not terminate the line of credit sooner than 36 months after account opening, which are excluded from the total points and fees.[316] At the same time, such loans are less likely to trigger high-cost mortgage status, which makes financial institutions less likely to complete the points-and-fees calculation for such loans. Therefore, the Bureau believes that on balance, § 1003.4(a)(17) should be limited to covered loans that are subject to the ability-to-repay provision of the 2013 ATR Final Rule.

Final § 1003.4(a)(17) will provide a more consistent measure of upfront loan costs than total points and fees as defined in proposed § 1003.4(a)(17). Total loan costs, combined with total origination charges, discount points, and lender credits, will also enable a more detailed understanding of the upfront costs that borrowers pay for their loans. Accordingly, these data will provide significant utility for fair lending analysis and for understanding the terms of credit being offered. With respect to loans made to lower-income consumers, such as some borrowers in manufactured housing communities, final § 1003.4(a)(17) provides information about upfront loan costs by adopting reporting of points and fees. Finally, by substituting total loan costs for most loans and limiting the reporting of points and fees as described above, final § 1003.4(a)(17) represents a substantial decrease in burden from the proposed rule. Therefore, the Bureau is adopting final § 1003.4(a)(17), which requires financial institutions to report, for covered loans subject to the ability-to-repay provision of the 2013 ATR Final Rule, the total loan costs if the loan is subject to the disclosure requirements in § 1026.19(f), or the total points and fees if the loan is not subject to the disclosure requirements in § 1026.19(f) and is not a purchased covered loan.

The Bureau believes that final § 1003.4(a)(17) also addresses many of the specific issues or questions that commenters raised regarding the proposed points-and-fees data point. For example, several commenters asked the Bureau for clarification or modification of the scope of the reporting requirement. Two industry commenters asked the Bureau to exclude commercial loans from the scope of proposed § 1003.4(a)(17), or to confirm that commercial loans are excluded. The final rule limits § 1003.4(a)(17) to covered loans subject to Regulation Z § 1026.43(c), which is inapplicable to commercial loans. Therefore, financial institutions are not required to report the total loan costs or the total points and fees for commercial-purpose transactions. The Bureau is adopting final comment 4(a)(17)(i)-1 to clarify that the total loan costs reporting requirement is not applicable to covered loans not subject to Regulation Z § 1026.19(f), and final comment 4(a)(17)(ii)-1 to clarify that the reporting requirement is not applicable to covered loans not subject to Regulation Z § 1026.43(c).

One industry commenter recommended that no points and fees be required to be reported for applications that are not approved. This commenter also recommended that, for applications that have been approved by the financial institution but not accepted by the consumer, the total points and fees should be considered accurate if the amount is no less than the amount on which the financial institution relied. Regarding total loan costs, the Closing Disclosure required by Regulation Z § 1026.19(f) is generally not provided for applications that do not result in a closed loan. Regarding total points and fees, elements of points and fees have the highest degree of uncertainty during the application stage, which limits their utility but increases the reporting burden. Therefore, final § 1003.4(a)(17) excludes applications from the scope of the reporting requirement. Final comments 4(a)(17)(i)-1 and 4(a)(17)(ii)-1 explain that applications are not subject to the requirement to report either total loan costs or total points and fees.

A few industry commenters suggested that proposed § 1003.4(a)(17) be limited to HOEPA loans and qualified mortgages because the total points and fees would be most readily available for those loans. However, another industry commenter stated that the total points and fees were more likely to be available for loans that exceeded the qualified-mortgage thresholds. Finally, one industry commenter urged the Bureau to restrict the scope of proposed § 1003.4(a)(17) to loans secured by principal dwellings to better fulfill the purposes of HMDA.

These comments are largely addressed by the changes the Bureau has made in the final rule. The vast majority of covered loans subject to the requirement in § 1003.4(a)(17) are governed by the scope of Regulation Z § 1026.19(f). For these loans, final § 1003.4(a)(17) requires no calculations that would not otherwise be performed for purposes of the Closing Disclosure. Accordingly, there is no reason to exclude a particular subset of covered loans for which the total loan costs are reported. For the narrow remainder of manufactured home loans for which total points and fees are reported, the risk to consumers warrants maintaining coverage of these loans, and points and fees are a less burdensome requirement than applying regulatory definitions that would not otherwise apply to these loans. Finally, the final rule does not exclude loans secured by secondary dwellings from § 1003.4(a)(17) because HMDA's coverage is not limited to loans secured by the borrower's primary residence and includes loans secured by second homes as well as non-owner-occupied properties. Pricing data about such dwelling-secured homes will provide information necessary to better understand potentially speculative purchases of housing units similar to those that contributed to the recent financial crisis.

One industry commenter recommended that the Bureau exclude community banks from the points-and-fees reporting requirement because the calculation is burdensome and may not be completed in all cases, and because community banks avoided the irresponsible lending practices that contributed to the financial crisis.[317] Another industry commenter suggested that the Bureau require financial institutions to report either the loan's annual percentage rate or the finance charge instead of the total points and fees. This commenter stated that total points and fees require a manual calculation. As explained above, final § 1003.4(a)(17) generally does not require financial institutions to calculate an amount that would not otherwise be calculated for other regulatory requirements or purposes. The Bureau acknowledges that a financial institution may have to report points and fees for a limited set of loans for which the institution does not otherwise calculate the total points and fees, such as for manufactured housing loans secured by personal property. However, as discussed above, the Bureau believes that the burden of performing such a calculation is justified by the benefit of having some measure of fees charged to borrowers. Moreover, the APR and finance charge combine both interest and fees and do not allow users to identify the amount of fees imposed on a borrower in connection with a transaction. Therefore, the final rule does not adopt Start Printed Page 66210the changes recommended by these commenters.

Several industry commenters supported the exclusion for purchased covered loans found in proposed § 1003.4(a)(17). In fact, one industry commenter recommended excluding all data points, including pricing data, from purchased covered loans. This commenter explained that the ULI would enable tracking of purchased covered loans and believed that the exclusion of the government-sponsored enterprises, which purchase most of the covered loans, would distort the data. Conversely, a consumer advocate recommended that the Bureau require reporting of data for purchased covered loans unless the purchasing entity is unable to reasonably obtain the relevant information from the original financial institution. This commenter noted that a blanket exception for purchased covered loans would create gaps in the HMDA data, especially if the original financial institution was not subject to HMDA.

The Bureau proposed to exclude purchased loans from § 1003.4(a)(17) because the total points and fees are not readily available from the information obtained from the selling entity. Therefore, purchasing entities would be required to calculate the total points and fees, and might lack the information necessary to do so. If the purchasing financial institution required the selling entity to calculate the total points and fees, and the seller was not a HMDA reporter, then the seller would face a difficult and uncertain calculation without the benefit of having to otherwise report the data under HMDA. For these reasons, the Bureau adopts this exclusion with respect to total points and fees, as required by final § 1003.4(a)(17)(ii). However, the same reasoning does not support providing a similar exclusion from purchased loans with respect to total loan costs, as required by final § 1003.4(a)(17)(i). Unlike total points and fees, the total loan costs are calculated for all covered loans subject to the reporting requirement, and are present on the Closing Disclosure. Therefore, the Bureau is including purchased covered loans in the scope of final § 1003.4(a)(17)(ii). Final comments 4(a)(17)(i)-2 and 4(a)(17)(ii)-1 provide guidance on the scope of the total-loan-costs and total-points-and-fees reporting requirements with respect to purchased covered loans. One consumer advocate asked the Bureau to clarify the scope of proposed § 1003.4(a)(17) with respect to covered loans “subject to” HOEPA or the Bureau's 2013 ATR Final Rule. This commenter also urged the Bureau to expand § 1003.4(a)(17) to include home-equity lines of credit and reverse mortgages because both types of loans have been subject to abusive pricing. Proposed § 1003.4(a)(17) would have applied to open-end lines of credit secured by the borrower's principal dwelling, but would have excluded other open-end lines of credit and all reverse mortgages. The Bureau believes that the benefit of points-and-fees data on such loans does not justify the burden of reporting for the reasons discussed above. Reverse mortgages are exempt from the ability-to-repay provisions of the 2013 ATR Final Rule and the 2013 TILA-RESPA Final Rule. Therefore, extending final § 1003.4(a)(17) to reverse mortgages would require a calculation using a regulatory definition that would likely require certain modifications. The Bureau believes that this burden does not justify extending coverage to reverse mortgages or open-end lines of credit. However, the final rule will vastly improve upon the current regulation regarding the pricing information for these loans, by requiring reporting of data points such as rate spread,[318] interest rate, prepayment penalty, and nonamortizing features. Final comments 4(a)(17)(i)-1 and 4(a)(17)(ii)-1 clarify that open-end lines of credit and reverse mortgages are excluded from the scope of the total-loan-costs and total-points-and-fees reporting requirements.

Finally, many industry commenters and consumer advocates made comments that were broadly applicable to the proposed pricing data points. For example, both industry and consumer advocate commenters urged the Bureau to adopt alternative or additional pricing data points. Several industry commenters suggested that rate spread be reported instead of the other proposed pricing data points. These commenters noted that financial institutions were currently reporting the rate spread under existing Regulation C and believed that it made the other data points unnecessary. Similarly, one industry commenter proposed replacing the pricing data points with the annual percentage rate. The final rule does not adopt these suggestions because neither the rate spread nor the APR allows users to identify and compare fees imposed on borrowers.

Two commenters recommended that “legitimate discount points” be distinguished from other disguised charges intended to compensate the lender or mortgage broker. One of these commenters recommended different data points for direct fees, yield-spread premiums, and points that are fees. Similarly, one consumer advocate recommended that the Bureau require reporting of loan originator compensation. This commenter explained that loan originator compensation was a factor in disparate pricing, is related to abusive lending practices, and that compensation data is necessary to monitor the appropriateness of the Bureau's loan originator compensation rules.

The Bureau believes that the final pricing data points will enable HMDA data users to distinguish many of the costs about which these commenters were concerned. To the extent that additional data points would be necessary to perfectly address these commenters' concerns, the final rule does not adopt them. The final rule includes numerous data points related to loan pricing that will vastly improve the ability of users to understand and evaluate the costs associated with mortgage loans. More pricing data could increase the utility of the data, but not without imposing substantial burden on financial institutions. For example, many of the data points needed to represent various fees and charges or loan originator compensation would not be aligned with an existing regulation or appear consistently on any disclosure.

Another commenter urged the Bureau to substantially expand the pricing data required by the final rule by including upfront costs to the lender or originator, less fees for title and settlement services; discount points; lender credits; interest rate; APR; upfront fees for settlement services; and a flag to indicate whether a lender or real estate agent possess an ownership interest in the title company. This commenter explained that the data described above were necessary to examine numerous issues related to loan pricing and cost, including the existence of high title service fees and the use of discount points. The Bureau agrees that including such data would provide value to users and notes that it has adopted many of the recommended data points in the final rule, such as discount points, lender credits, and interest rate. Further expansion at this time, however, would impose an unjustified burden on financial institutions. For example, the recommendations regarding the financial institution's ownership interest in the title company and the exclusion of title and settlement service costs from the total loan costs are absent from existing regulatory definitions, Federal disclosure forms, and standard industry data formats.Start Printed Page 66211

One industry commenter noted that certain pricing data points were not applicable to open-end lines of credit, such as total origination charges and total discount points. This commenter believed that this exclusion suggested that such data are not valuable. In fact, the exclusion of open-end lines of credit is a consequence of the Bureau's decision to align the data point to the Closing Disclosure and Regulation Z § 1026.38(f)(1) in order to reduce burden. As explained in greater detail below, these data points provide important price information to users. Therefore, the Bureau believes that the scope of these data points balances the benefit of the data with the burden of reporting.

For the reasons provided above, the Bureau is adopting new § 1003.4(a)(17), which requires financial institutions to report, for covered loans subject to Regulation Z § 1026.43(c), one of the following measures of loan cost: (i) If a disclosure is provided for the covered loan pursuant to Regulation Z, 12 CFR 1026.19(f), the amount of total loan costs, as disclosed pursuant to Regulation Z, 12 CFR 1026.38(f)(4), or, (ii) if the covered loan is not subject to the disclosure requirements in Regulation Z, 12 CFR 1026.19(f), and is not a purchased covered loan, the total points and fees charged in connection with the covered loan, expressed in dollars and calculated in accordance with Regulation Z, 12 CFR 1026.32(b)(1). This reporting requirement does not apply to applications or to covered loans not subject to the ability-to-repay requirements in the 2013 ATR Final Rule, such as open-end lines of credit, reverse mortgages, or loans or lines of credit made primarily for business or commercial purposes.

The Bureau is also adopting several new comments. Final comments 4(a)(17)(i)-1 and 4(a)(17)(ii)-1 clarify the scope of the reporting requirement. Final comment 4(a)(17)(i)-2 explains that purchased covered loans are not subject to this reporting requirement if the application was received by the selling entity prior to the effective date of Regulation Z § 1026.19(f). Final comment 4(a)(17)(ii)-2 provides guidance in situations where a financial institution has cured a points-and-fees overage. Final comment 4(a)(17)(i)-3 provides guidance in situations where a financial institution has issued a revised Closing Disclosure with a new amount of total loan costs.

The Bureau believes that final § 1003.4(a)(17) satisfies Congress's direction to provide for reporting total points and fees “as determined by the Bureau, taking into account” the definition of total points and fees provided by TILA and implemented in Regulation Z § 1026.32(b).[319] In requiring reporting of a covered loan's total points and fees, Congress intended to increase transparency regarding mortgage lending and improve fair lending screening.[320] As defined in proposed § 1003.4(a)(17), total points and fees would provide information about some of the upfront costs paid by borrowers. Similarly, total loan costs, as defined in final § 1003.4(a)(17), also provide information about upfront costs paid by borrowers. Congress recognized the importance of the Bureau's expertise in deciding how to implement this measure by expressing that it should be defined “as determined by the Bureau.” The Bureau's implementation is consistent with that broad delegation of discretion. The Bureau has carefully considered the merits of both total points and fees, as defined in Regulation Z § 1026.32(b), and total loan costs, as defined in Regulation Z § 1026.38(f)(4). In proposing to require reporting of the total points and fees, as defined in Regulation Z § 1026.32(b), the Bureau believed that such information would enable users to gain deeper insight into the terms on which different communities are offered mortgage loans. As explained above, after reviewing public comments, the Bureau has determined that total loan costs provide greater analytical value for comparing borrowers and understanding the cost of loans than total points and fees as defined in the proposal, while reducing the burden of reporting for financial institutions. Therefore, for certain loans, total loan costs are more consistent with Congress's goals in amending HMDA than proposed § 1003.4(a)(17). For the reasons given above, final § 1003.4(a)(17) implements HMDA section 304(b)(5)(A), and is also authorized by the Bureau's authority pursuant to HMDA section 304(b)(5)(D) to require such other information as the Bureau may require, and by the Bureau's authority pursuant to HMDA section 305(a) to provide for adjustments and exceptions. For the reasons given above, final § 1003.4(a)(17) is necessary and proper to effectuate the purposes of and facilitate compliance with HMDA, because it will help identify possible discriminatory lending patterns and help determine whether financial institutions are serving the housing needs of their communities, and because it will significantly reduce burden for reporting financial institutions. Accordingly, where total loan costs are available, final § 1003.4(a)(17) requires financial institutions to report them. However, as explained above, where total loan costs are not available, total points and fees, as defined in § 1003.4(a)(17)(ii), will provide useful information that would not otherwise be available.

4(a)(18)

Section 304(b) of HMDA permits the disclosure of such other information as the Bureau may require.[321] Pursuant to HMDA sections 305(a) and 304(b)(5)(D), the Bureau proposed to require financial institutions to report, for covered loans subject to the disclosure requirements in Regulation Z § 1026.19(f), the total origination charges associated with the covered loan. Origination charges are those costs designated “borrower-paid” on Line A of the Closing Cost Details page of the current Closing Disclosure, as provided for in Regulation Z § 1026.38(f)(1). Proposed § 1003.4(a)(18) would have applied to closed-end covered loans and purchases of such loans, but not to applications, open-end lines of credit, reverse mortgages, or commercial-purpose loans. For the reasons provided below, the Bureau is adopting § 1003.4(a)(18) as proposed, with additional clarifying commentary.

Industry commenters generally opposed the adoption of total origination charges. Several industry commenters believed that the total amount of borrower-paid origination charges provided little value, for various reasons. Two industry commenters asserted that the value of origination charges was minimal because they were influenced by factors outside of the financial institution's control, such as the borrower's decisionmaking. Many industry commenters raised similar objections to the proposed pricing data in general. For example, one industry commenter pointed out that the pricing data were incomplete because it omitted additional information about the borrower's overall relationship with the financial institution, such as the borrower's loan payment history or deposit balances. Therefore, these commenters argued, the pricing data points, including borrower-paid origination charges, would mislead users.Start Printed Page 66212

Despite the presence of other variables that influence loan pricing, information about origination charges offers analytical value. First, the final rule will capture several factors about which commenters were concerned, such as a borrower's decision to trade a higher interest rate for lower closing costs. To the extent that financial institutions lack the ability to unilaterally determine every item of borrower-paid origination charges, the control they exercise is high relative to many of the other elements of the Closing Disclosure, such as taxes and other government fees, prepaids, or the initial escrow payment at closing. Moreover, as stated above, the Bureau believes that the final rule need not provide an exhaustive representation of every factor that might conceivably affect loan pricing in order to benefit users. The final rule's pricing data represents a marked improvement over the existing regulation, and these benefits would be lost if the Bureau were to eliminate any data point that might be influenced by the complexity of the pricing process.

Other industry commenters pointed out that proposed § 1003.4(a)(18) omitted certain charges, such as appraisal fees and items paid by the seller. However, § 1003.4(a)(18) is intended to capture the origination charges paid to the financial institution by the borrower; it is not intended to measure the total cost of the transaction. The Bureau is also providing for reporting of total loan costs in final § 1003.4(a)(17), which will provide some of the information about the upfront cost of credit that commenters believed was missing from § 1003.4(a)(18), such as costs associated with appraisal and settlement services. Regarding origination charges paid by the seller, as with total loan costs, seller-paid origination charges would appear on the Closing Disclosure if the seller were legally obligated to pay for such costs.[322] However, only the sum of borrower-paid origination charges are disclosed on the current Closing Disclosure. Incorporating seller-paid origination charges would increase burden because financial institutions could no longer simply report the amount calculated under Regulation Z.

Several industry commenters argued that proposed § 1003.4(a)(18) was duplicative because the Bureau had also proposed to require reporting of the total points and fees in § 1003.4(a)(17). These commenters stated that origination charges were included in total points and fees, and that, in many cases, the origination charges would be identical to the total points and fees. Although final § 1003.4(a)(17) requires reporting of the total loan costs rather than the total points and fees, as defined in proposed § 1003.4(a)(17), the two data points overlap somewhat. However, total loan costs and borrower-paid origination charges differ in important respects. Total loan costs include many additional costs that are excluded from borrower-paid origination charges, such as charges for third-party settlement services. In contrast, total origination charges represent the costs that financial institutions themselves are directly imposing on borrowers. Furthermore, a user could take the difference between total loan costs and total origination charges as an approximate measure of total third-party charges. Therefore, final § 1003.4(a)(17) and final § 1003.4(a)(18) are necessary to enable users to gain a more precise understanding of the costs associated with a mortgage loan.

Several other industry commenters argued that the total amount of borrower-paid origination charges was too burdensome to report. As mentioned above, the Bureau has aligned § 1003.4(a)(18) to Regulation Z and to the Closing Disclosure in order to reduce burden. As with all pricing data points aligned to the Closing Disclosure, the calculation of origination charges will be required only for covered loans for which a Closing Disclosure is required pursuant to Regulation Z § 1026.19(f). Loans excluded from Regulation Z § 1026.19(f), such as open-end lines of credit, reverse mortgages, and commercial loans, are not subject to this provision. Therefore, the burden of reporting under § 1003.4(a)(18) is limited to loans for which financial institutions would already have to calculate the total loan costs in order to disclose them to consumers. This alignment was supported by two industry commenters. Because using the definition of origination charges found in Regulation Z reduces burden while preserving the utility of the data, the Bureau is adopting this definition in the final rule. These exclusions are stated in final comment 4(a)(18)-1, which clarifies the scope of the reporting requirement.

As stated in the proposal, the total amount of borrower-paid origination charges provides a relatively focused measure of the charges imposed on the borrower by the financial institution for originating and extending credit. Furthermore, separate identification of borrower-paid origination charges in addition to total discount points and lender credits facilitates understanding of loan pricing because charges are often interchangeable and may be spread across different elements of loan pricing. The proposed pricing data points, including total origination charges, will help users of HMDA data determine whether different borrowers are receiving fair pricing and develop a better understanding of the ability of borrowers in certain communities to access credit. Therefore, the Bureau is adopting § 1003.4(a)(18) generally as proposed.

In response to the Bureau's solicitation of feedback, one consumer advocate urged the Bureau to require the amount listed as the “total closing costs” on Line J of the current Closing Disclosure in addition to or instead of the total origination charges. The commenter stated that origination charges represent a small part of total costs and that financial institutions exert some control over other costs through affiliated business arrangements. In contrast, one industry commenter opposed requiring total closing costs because the commenter believed that the number of factors incorporated into the total closing costs made meaningful comparisons among borrowers impossible. The Bureau acknowledges that total closing costs would provide important information about the costs required for consumers to close on a loan, but is not adopting a new data point for total closing costs. As described above, the Bureau is adopting § 1003.4(a)(17), which requires reporting the total loan costs associated with the covered loan. Final § 1003.4(a)(17) addresses many of the concerns this commenter raised regarding a more inclusive, consistent measure of loan costs, and also includes the upfront cost associated with many third-party settlement services. Furthermore, total closing costs, as disclosed pursuant to Regulation Z § 1026.38(h)(1), include many costs unrelated to the charges imposed by financial institutions for extending credit, such as taxes and other government fees. The Bureau believes that many of these costs can be more accurately estimated by users than the total loan costs, because they will be largely determined by the jurisdiction in which the loan was originated. Total origination charges and total loan costs also bear a closer relationship to the lending practices of financial institutions than total closing costs, and therefore better advance the purposes of HMDA.

For the reasons provided above, pursuant to HMDA sections 305(a) and 304(b)(5)(D), the Bureau is adopting Start Printed Page 66213§ 1003.4(a)(18) as proposed. For the reasons given above, data about total origination charges will assist public officials and members of the public in determining whether financial institutions are serving the housing needs of their communities and in identifying potentially discriminatory lending patterns. Final § 1003.4(a)(18) requires financial institutions to report, for covered loans subject to the disclosure requirements in Regulation Z § 1026.19(f), the total of all itemized amounts that are designated borrower-paid at or before closing, as disclosed pursuant to § 1026.38(f)(1). These charges are the total costs designated “borrower-paid” on Line A of the Closing Cost Details page of the current Closing Disclosure.

The Bureau is also adopting several new comments. Final comment 4(a)(18)-1 clarifies the scope of the reporting requirement. Final comment 4(a)(18)-2 explains that purchased covered loans are not subject to this reporting requirement if the application was received by the selling entity prior to the effective date of Regulation Z § 1026.19(f). Final comment 4(a)(18)-3 provides guidance in situations where a financial institution has issued a revised Closing Disclosure with a new amount of total origination charges.

4(a)(19)

Section 304(b) of HMDA permits the disclosure of such other information as the Bureau may require.[323] Pursuant to HMDA sections 305(a) and 304(b)(5)(D), the Bureau proposed to require financial institutions to report, for covered loans subject to the disclosure requirements in Regulation Z § 1026.19(f), the total discount points paid by the borrower. Discount points are points paid to the creditor to reduce the interest rate, and are listed on Line A.01 of the Closing Cost Details page of the current Closing Disclosure, as described in Regulation Z § 1026.37(f)(1)(i). Proposed § 1003.4(a)(19) would have applied to closed-end covered loans and purchases of such loans, but not to applications, open-end lines of credit, reverse mortgages, or commercial-purpose loans. For the reasons provided below, the Bureau is adopting § 1003.4(a)(19) generally as proposed, with minor technical modifications and new commentary for increased clarity.

Industry commenters generally opposed the requirement to report discount points. Some industry commenters believed that reporting the total discount points was unnecessary or duplicative. Several of these commenters pointed out that the proposal also required financial institutions to report the total points and fees, while other commenters stated that discount points were only applicable to a limited class of loans sold into the secondary market. One industry commenter believed that rate spread and total points and fees could be used to reveal potential unlawful discrimination.

Although discount points are included in both total loan costs and total origination charges, these data points are not substitutes for each other. As explained above, total loan costs and total origination charges represent different elements of loan cost. Discount points are also different than the other loan costs because they represent charges directly related to reductions in the interest rate and are necessary to understand the tradeoffs between rates and points. Other measures of pricing, such as rate spread and total loan costs, can be useful for comparing borrowers, but separate reporting of discount points will improve analysis of the value borrowers are receiving for paying discount points. Finally, even if discount points are not present in every loan, studies of loan costs and public comments received before and after the proposal suggest that discount points are an important element of loan pricing.[324]

Other industry commenters opposed reporting discount points because they believed that doing so would distort the data or potentially mislead users. One industry commenter noted that the absence of information about lender credits would make comparisons between loans with and without lender credits misleading. Other industry commenters argued that comparisons between borrowers were difficult or impossible because of market fluctuations, differences in product type, and borrower decisionmaking.

In response to these comments, the Bureau is adding a requirement for financial institutions to report lender credits. As explained above, however, even though HMDA data are not exhaustive, the data still provide extremely valuable information for the public and public officials that fulfills HMDA's purposes. Regarding the influence of other variables, the final rule includes several data points that will allow users to control for several of the factors mentioned by commenters, including location and product type. Indeed, not requiring reporting of discount points might also mislead users by limiting their ability to explain the lower rates received by borrowers who paid discount points.

Several industry commenters argued that the benefit of proposed § 1003.4(a)(19) was unclear and questioned whether there was any evidence of discrimination against borrowers through discount points. As stated in the proposal, reporting discount points benefits users of HMDA data by enabling them to develop a more detailed understanding of loan pricing. This improved information allows for better analyses regarding the value that borrowers receive in exchange for discount points, and determinations of whether similarly situated borrowers are receiving similar value. Existing studies of loan costs and feedback received prior to the proposal suggested that discount points were a sufficiently important element of loan pricing to justify their inclusion in HMDA.[325]

Finally, one industry commenter believed that reporting discount points was too burdensome because the definition was uncertain. To minimize any burden associated with reporting discount points, the Bureau is adopting a definition of discount points that aligns to Regulation Z. Loans excluded from Regulation Z § 1026.19(f), such as open-end lines of credit, reverse mortgages, and commercial loans, are not subject to final § 1003.4(a)(19). Therefore, the burden of reporting is limited to loans for which financial institutions would already have to know the amount of discount points in order to disclose it to consumers. These exclusions are stated in final comment 4(a)(19)-1, which clarifies the scope of the reporting requirement. This alignment was supported by one industry commenter. The TILA-RESPA integrated disclosure forms, including the Closing Disclosure, are the subject of considerable outreach and guidance from the Bureau during the implementation process. As financial institutions become familiar with these Start Printed Page 66214forms, the burden of reporting should decrease.

For the reasons provided above, pursuant to HMDA sections 305(a) and 304(b)(5)(D), the Bureau is adopting § 1003.4(a)(19) generally as proposed, with minor technical modifications. These technical modifications clarify that, although discount points are described more clearly in Regulation Z § 1026.37(f)(1)(i), financial institutions should report the amount found on the Closing Disclosure, as disclosed pursuant to Regulation Z § 1026.38(f)(1). For the reasons given above, data about discount points will assist public officials and members of the public in determining whether financial institutions are serving the housing needs of their communities and in identifying potentially discriminatory lending patterns. Final § 1003.4(a)(19) requires financial institutions to report, for covered loans subject to the disclosure requirements in Regulation Z, 12 CFR 1026.19(f), the points paid to the creditor to reduce the interest rate, expressed in dollars, as described in Regulation Z, 12 CFR 1026.37(f)(1)(i), and disclosed pursuant to Regulation Z, 12 CFR 1026.38(f)(1). For covered loans subject to the disclosure requirements in Regulation Z § 1026.19(f), the discount points that financial institutions would report are those listed on Line A.01 of the Closing Cost Details page of the current Closing Disclosure.

The Bureau is also adopting several new comments. Final comment 4(a)(19)-1 clarifies the scope of the reporting requirement. Final comment 4(a)(19)-2 explains that purchased covered loans are not subject to this reporting requirement if the application was received by the selling entity prior to the effective date of Regulation Z § 1026.19(f). Final comment 4(a)(19)-3 provides guidance in situations where a financial institution has issued a revised Closing Disclosure with a new amount of discount points.

4(a)(20)

Proposed 4(a)(20)

Section 304(b) of HMDA authorizes the disclosure of such other information as the Bureau may require.[326] Pursuant to HMDA sections 305(a) and 304(b)(5)(D), the Bureau proposed to require financial institutions to report, for covered loans subject to the disclosure requirements in Regulation Z § 1026.19(f), other than purchased covered loans, the risk-adjusted, pre-discounted interest rate associated with a covered loan. The risk-adjusted, pre-discounted interest rate (RPIR) is the rate that the borrower would have received in the absence of any discount points or rebates and is the same base rate from which a financial institution would exclude “bona fide discount points” from the points-and-fees total used to determine qualified mortgage and high-cost mortgage status under Regulation Z. Proposed § 1003.4(a)(20) would have applied to closed-end covered loans, but not to applications or purchased covered loans, or open-end lines of credit, reverse mortgages, or commercial-purpose loans. For the reasons provided below, the Bureau is not finalizing proposed § 1003.4(a)(20).

Most consumer advocates expressed support for the proposed pricing data points collectively, but few commented specifically on the RPIR. One commenter generally stated that the RPIR would be helpful for fair lending analysis. Another consumer advocate believed that, combined with the other proposed data points, the RPIR would better enable users to understand pricing disparities among groups of consumers. This consumer advocate further urged the Bureau to expand § 1003.4(a)(20) to cover home-equity lines of credit because doing so would improve the ability of users to compare pricing across loan types.

The Bureau agrees with commenters that the concept of a risk-adjusted, pre-discounted interest rate would have value for fair lending purposes, provided that such a rate was consistently calculated. However, public comments and additional outreach have revealed that the rate proposed to be reported under § 1003.4(a)(20) is less valuable and more unclear than the Bureau initially believed. Several industry commenters cited definitional issues surrounding proposed § 1003.4(a)(20). For example, one commenter noted that a single loan may have multiple rates available to the consumer that would satisfy the description of the RPIR. Another commenter stated that the concept of an RPIR existed only in the realm of informal guidance provided by the Bureau under Regulation Z. Similar feedback was provided by many of the vendors and financial institutions that participated in additional outreach conducted by the Bureau after the proposal's comment period closed. These participants expressed different understandings of the rate that would be required by proposed § 1003.4(a)(20). For example, two participants noted that multiple rates could potentially satisfy the requirements of the RPIR, and that the discretion of a financial institution was required to select a rate that would actually function as the pre-discounted rate, if applicable, for Regulation Z purposes. Other participants cited lack of definitional clarity as a factor that would add significant burden to the proposed reporting requirement.

Additionally, several industry commenters questioned the benefit that the RPIR would provide for fair lending purposes. For example, one commenter doubted that the RPIR would produce any fair lending insights beyond those made possible by the current pricing data. As stated in the proposal, the potential value of the RPIR comes from its explanatory power. Pricing outcomes are determined by many factors, including rate-sheet inputs, loan-level pricing adjustments, other discretionary pricing adjustments, and consumer decisionmaking. The RPIR would reflect many of the pricing adjustments for which users would have to control in order to determine whether pricing disparities were explained by legitimate business considerations. Therefore, analyzing the changes to loan pricing that occur after a financial institution has determined the RPIR may provide strong evidence of potential impermissible discrimination with a reduced need to control for multiple legitimate factors that influence loan pricing.

However, the Bureau now believes that the RPIR may not provide sufficient value to justify the burden associated with collecting and reporting it. The rate described in proposed § 1003.4(a)(20) is the base rate to which a financial institution would apply any reduction obtained by the payment of discount points in determining whether those points may be excluded as “bona fide discount points” from points and fees pursuant to Regulation Z § 1026.32(b). This rate was originally designed to ensure that discount points excluded from the points-and-fees coverage tests actually produced an appropriate reduction in the borrower's interest rate. The rate was not intended to isolate pricing adjustments necessary to facilitate fair lending analysis. Therefore, the Bureau believes that the rate is less beneficial for fair lending purposes than it initially thought. After considering the function of the rate and the burden associated with reporting it, the Bureau has decided not to finalize proposed § 1003.4(a)(20).

As part of the additional outreach, the Bureau also sought information about two other measures of loan pricing that might have greater fair lending benefit than the proposed RPIR. These measures are the “post-LLPA rate” and the “discretionary adjustment.” The Start Printed Page 66215post-LLPA rate is the interest rate that reflects all the transaction-specific, nondiscretionary pricing adjustments dictated by the financial institution's standard loan pricing policy. The discretionary adjustment is any alteration by the financial institution of the interest rate or points made for any reason other than the application of the standard loan pricing policy. However, feedback received through the additional outreach process suggested that these measures would be more burdensome to report. For example, they may be calculated and stored less commonly than the RPIR, and neither currently possesses a definition in either existing regulation or industry custom. Therefore, at this time, the Bureau has not identified a suitable alternative base rate that it could substitute for the RPIR proposed in § 1003.4(a)(20).

For the reasons provided above, the Bureau is not finalizing proposed § 1003.4(a)(20).

Final 4(a)(20)

Section 304(b) of HMDA permits the disclosure of such other information as the Bureau may require.[327] In using its discretionary authority to propose to require financial institutions to report the total discount points paid by the consumer, the Bureau also invited comment on “whether to include any lender credits, premiums, or rebates in the measure of discount points.” [328] For the reasons provided below, the Bureau is adopting new § 1003.4(a)(20), which requires financial institutions to report, for covered loans subject to the disclosure requirements in Regulation Z § 1026.19(f), the total amount of lender credits, as disclosed pursuant to Regulation Z § 1026.38(h)(3). Lender credits are amounts provided to the borrower to offset closing costs and are disclosed under Line J of the Closing Cost Details page of the current Closing Disclosure. Final § 1003.4(a)(20) applies to closed-end covered loans and purchases of such loans, but not to applications, open-end lines of credit, reverse mortgages, or commercial-purpose loans.

The Bureau received several comments in response to its solicitation for feedback regarding lender credits. Some industry commenters requested clarification regarding whether such credits would be included within any of the proposed data points. For example, two commenters asked how offsetting credits associated with an interest rate would be reported, if at all. One industry commenter believed that information regarding lender credits would provide no value to HMDA users. However, other comments suggested that data on lender credits would be valuable even though the commenters did not advocate for reporting of these data. For example, one commenter explained that without some representation of lender credits, the prices of loans with such offsetting credits would appear artificially high.

The Bureau believes that lender credits are a basic element of the cost of the loan that should be represented in the HMDA data. Financial institutions often offer borrowers a credit or rebate to offset some or all of the closing costs associated with a loan in return for accepting a higher interest rate. These credits reflect trade-offs similar to those that borrowers make between discount points and the interest rate, and are generally displayed as negative points on the rate sheet. As commenters have pointed out, without accounting for these credits, users of HMDA data would be unable to determine that loans with credits or rebates were not higher priced than similar loans without such credits. As noted above, the final rule cannot provide for reporting of every factor that might conceivably influence loan pricing. However, the Bureau finds that lender credits should be included because they are sufficiently important to understanding the price of a loan. Although the amount of lender credits disclosed under Regulation Z § 1026.38(h)(3) may also include any refunds provided for amounts that exceed the limitations on increases in closing costs, the Bureau believes that an imperfect measure of lender credits is substantially better than no measure at all.[329] Furthermore, removing such refunds to obtain a pure measure of lender credits would increase burden by forcing lenders to perform a new calculation that they would not otherwise perform under any existing regulation.

Two industry commenters opposed reporting lender credits because they would be burdensome to report. However, the Bureau is adopting a definition of lender credits that aligns to Regulation Z § 1026.38(h)(3) and is applying the final reporting requirement only to covered loans for which a Closing Disclosure is required. Loans excluded from Regulation Z § 1026.19(f), such as open-end lines of credit, reverse mortgages, and commercial loans, are not subject to final § 1003.4(a)(20). Therefore, the burden of reporting is limited to loans for which financial institutions would already have to disclose the total amount of lender credits. These exclusions are stated in final comment 4(a)(20)-1, which clarifies the scope of the reporting requirement.

For the reasons provided above, pursuant to HMDA sections 305(a) and 304(b)(5)(D), the Bureau is adopting new § 1003.4(a)(20), which requires financial institutions to report, for covered loans subject to the disclosure requirements in Regulation Z § 1026.19(f), the total amount of lender credits, as disclosed pursuant to Regulation Z § 1026.38(h)(3). The total amount of lender credits appears under Line J of the Closing Cost Details page of the current Closing Disclosure. For the reasons given above, data about lender credits will assist public officials and members of the public in determining whether financial institutions are serving the housing needs of their communities and in identifying potentially discriminatory lending patterns.

The Bureau is also adopting several comments. Final comment 4(a)(20)-1 clarifies the scope of the reporting requirement. Final comment 4(a)(20)-2 explains that purchased covered loans are not subject to this reporting requirement if the application was received by the selling entity prior to the effective date of Regulation Z § 1026.19(f). Final comment 4(a)(20)-3 provides guidance in situations where a financial institution has issued a revised Closing Disclosure with a new amount of lender credits.

4(a)(21)

Section 304(b) of HMDA permits the disclosure of such other information as the Bureau may require.[330] Pursuant to HMDA sections 305(a) and 304(b)(6)(J), the Bureau proposed to require financial institutions to report the interest rate that is or would be applicable to the covered loan or application at closing or account opening. Proposed comment 4(a)(21)-1 explained the interest rate that financial institutions should report for covered loans subject to certain disclosure requirements in Regulation Z. For the reasons provided below, the Bureau is generally adopting § 1003.4(a)(21) as proposed, with minor modifications and the addition of commentary clarifying the reporting obligations for applications and for adjustable-rate transactions for which Start Printed Page 66216the interest rate is unknown at the time final action is taken.

Consumer groups supported the proposed pricing data points, including the interest rate. These commenters stated that such information would help identify potentially unlawful price discrimination and better understand the type and terms of credit offered to different communities. For example, one commenter noted that the interest rate would be particularly valuable for analyzing the impact of discount points. Another commenter stated that the interest rate was necessary to study the terms of the loan. Finally, other consumer advocate commenters noted that the interest rate, when combined with the other pricing variables, would enable a more precise understanding of the elements of loan pricing.

Industry commenters generally opposed requiring financial institutions to report the interest rate. Some industry commenters argued that the interest rate had little value or relevance, and one industry commenter disagreed that facilitating comparisons among borrowers was sufficient to justify the reporting requirement. The value of information regarding the interest rate, however, comes not only from comparing the interest rates received by borrowers but from the ability to better understand the relationship between the interest rate and discount points, origination charges, and lender credits. This more detailed understanding will better facilitate identification of potentially discriminatory lending patterns and provide a more complete picture of the credit available to particular communities.

Several other industry commenters argued that the interest rate was an unnecessary data point. Most of these commenters pointed out that the rate spread was already reported and would enable some analysis of loan pricing. One industry commenter suggested that the annual percentage rate be reported instead of the interest rate. However, one commenter believed that the APR was often calculated inaccurately and therefore supported reporting of the interest rate.

Although the rate spread and the interest rate are related, they are not equivalent measures of loan pricing. As explained in the proposal, the APR is a measure of the cost of credit, including both interest and certain fees, expressed as a yearly rate, while the interest rate is the cost of the loan expressed as a percentage rate. The interest rate enables users to understand the relationship between the interest rate and discount points, origination charges, and lender credits more directly than the rate spread, because the rate spread does not isolate the interest rate. Second, the rate spread and interest rate data points have substantially different scopes. Unlike rate spread, final § 1003.4(a)(21) applies to both reverse mortgages and commercial loans. Indeed, § 1003.4(a)(21) is one of few pricing data points that applies to such loans.

Other industry commenters stated that information about the interest rate would be misleading. One industry commenter noted that the interest rate was influenced by factors outside of a financial institution's control, such as market fluctuations and borrower decisionmaking. Two industry commenters believed that proposed § 1003.4(a)(21) would encourage financial institutions to provide “teaser rates” to create the illusion of lower-priced loans in their HMDA data. Although financial institutions set interest rates based in part on market factors that they may not control, interest rate data are still valuable, along with other data elements, to help further HMDA's purposes, including as a screen for potential fair lending concerns. For example, the final rule provides for reporting information about the date, product type, location, and certain consumer decisions, such as the choice to pay discount points for a lower rate or receive lender credits in exchange for a higher rate. Moreover, eliminating the interest rate might also undermine the utility of other data points. Users would experience more difficulty understanding the discount points and lender credits among borrowers or groups of borrowers. Finally, the final rule will also provide for reporting of the introductory rate period, which should discourage the type of rate manipulation about which commenters were concerned.

One industry commenter believed that reporting the interest rate might allow competitors to gain insight into confidential business information, such as underwriting criteria. This commenter did not explain how a competitor would derive proprietary information regarding its underwriting criteria from the interest rate, and the Bureau is aware of no reliable means of doing so.

Several industry commenters raised concerns over the burden of reporting the interest rate. These commenters pointed out that interest rates fluctuate frequently and may be unavailable for loans that are not originated. Similarly, several commenters requested that the Bureau not require financial institutions to report the interest rate for applications because the rate might be unknown. One commenter asked what rate should be reported for an application for which the rate has not been locked. The Bureau notes that, for many applications, a financial institution may not know the interest rate applicable to the covered loan. However, for applications approved by the financial institution but not accepted by the applicant, the interest rate would typically be available. Accordingly, the Bureau is clarifying that § 1003.4(a)(21) requires a financial institution to report the interest rate only if the application has been approved by the financial institution but not accepted by the borrower, or if the financial institution reports the loan as originated. For all other applications or preapprovals, such as applications that have been denied or withdrawn, or files closed for incompleteness, a financial institution reports that no interest rate was applicable. The Bureau is adopting final comment 4(a)(21)-2 to clarify the reporting obligations in the case of applications. This comment removes the burden of attempting to determine the interest rate where the rate is truly unavailable while preserving data utility regarding applications by providing for reporting of the rate where the rate is available. For applications that have been approved but not accepted for which the rate has not been locked, financial institutions would report the rate applicable at the time the application was approved. The Bureau is also adopting comment 4(a)(21)-3, which states that, for adjustable-rate covered loans or applications, if the interest rate is unknown at the time that the application was approved, or at closing or account opening, a financial institution reports the fully-indexed rate. For purposes of § 1003.4(a)(21), the fully-indexed rate is the index value and margin at the time that the application was approved, or, for covered loans, at closing or account opening. This comment mirrors the approach taken by comment 4(a)(21)-1, which clarifies the interest rate to be reported for loans subject to the Bureau's TILA-RESPA Integrated Disclosure Rule.

Several industry commenters also requested that the Bureau exclude commercial loans, including multifamily mortgage loans, from the scope of § 1003.4(a)(21). Commercial loans, these commenters explained, typically have interest rates that are variable and based on different indices than consumer loans. Similarly, one industry commenter noted that the interest rates for multifamily mortgage loans were based on a variety of factors that differed among multifamily loans. Start Printed Page 66217Regarding variable interest rates, as explained above, the Bureau is adopting comment 4(a)(21)-3, which provides that, for adjustable-rate covered loans or applications, if the interest rate is unknown at the time that the application was approved, or at closing or account opening, a financial institution reports the fully-indexed rate based on the index applicable to the covered loan or application.

Regarding loan comparisons, the adoption of a commercial-purpose flag in the final rule will enable HMDA data users to identify these loans and avoid potentially misleading comparisons. Information about multifamily housing continues to be an important component of the HMDA data. Information about the conditions of financing for multifamily dwellings may help public officials in distributing public-sector investment so as to attract private investment to areas where it is needed. Therefore, the Bureau is not excluding such loans from § 1003.4(a)(21).

For the reasons provided above, pursuant to HMDA sections 305(a) and 304(b)(6)(J), the Bureau is adopting § 1003.4(a)(21) generally as proposed, with minor modifications and additional clarifying commentary. For the reasons given above, data about the interest rate will assist public officials and members of the public in determining whether financial institutions are serving the housing needs of their communities and in identifying potentially discriminatory lending patterns. The Bureau is adopting commentary identifying the interest rate that should be reported for covered loans subject to the disclosure requirements of Regulation Z § 1026.19(e) or (f). The commentary also explains that, for applications, final § 1003.4(a)(21) requires a financial institution to report the interest rate only for applications that have been approved by the financial institution but not accepted by the borrower. Finally, the Bureau is adopting commentary clarifying the interest rate to be reported for adjustable-rate covered loans or applications for which the initial interest rate is unknown. Final § 1003.4(a)(21) applies to closed-end covered loans, open-end lines of credit, reverse mortgages, and commercial-purpose loans, as well as to purchases of such loans, and applications that have been approved by the lender but not accepted by the borrower.

4(a)(22)

Section 304(b) of HMDA [331] requires reporting of the term in months of any prepayment penalty or other fee or charge payable upon repayment of some portion of principal or the entire principal in advance of scheduled payments.[332] The Bureau proposed to implement this provision through proposed § 1003.4(a)(22), which required financial institutions to report the term in months of any prepayment penalty, as defined in Regulation Z § 1026.32(b)(6)(i) or (ii), as applicable. Prepayment penalties are charges imposed on borrowers for paying all or part of the transaction's principal before the date on which the principal is due. Proposed § 1003.4(a)(22) would have applied to applications for, and originations of, closed-end loans, open-end lines of credit, reverse mortgages, and commercial-purpose loans, but not to purchases of such loans. For the reasons provided below, the Bureau is adopting § 1003.4(a)(22) generally as proposed, with clarifying commentary, but is limiting its scope to certain covered loans or applications subject to Regulation Z, 12 CFR part 1026. The revised scope of the reporting requirement excludes purchased covered loans, as well as reverse mortgages and loans or lines of credit made primarily for business or commercial purposes.

The Bureau received few comments supporting or opposing proposed § 1003.4(a)(22). Two industry commenters asserted that reporting information about prepayment penalties was unnecessary because regulatory scrutiny and the requirements of secondary market programs have diminished their prevalence. On the other hand, several consumer advocates supported the improved pricing data, including reporting of the prepayment penalty. One consumer advocate was particularly supportive of proposed § 1003.4(a)(22) because of the importance of understanding whether certain communities were receiving loans with problematic features.

The final rule retains the requirement to report data about prepayment penalties, consistent with the Dodd-Frank Act amendments to HMDA. In the lead-up to the financial crisis, prepayment penalties were frequently cited as a risky feature for consumers with subprime loans. Although prepayment penalties may be less prevalent than they were in the years preceding the financial crisis, their use may increase in the future. Prepayment penalty data will allow for the identification of any potential increase in prepayment penalties when considering how institutions are meeting the housing needs of their communities, and when looking for any potentially discriminatory lending practices.

Most industry commenters requested certain clarifications or revisions to the scope of the reporting requirement. One industry commenter requested that the final rule not require reporting of the prepayment penalty for applications that do not result in originations. The Bureau is not adopting this suggestion. Both loans and applications for loans with prepayment penalties will provide valuable data for HMDA's purposes, and commenters have not suggested that the prepayment penalty term is more burdensome to determine for an application than for an originated loan. If the loan for which a consumer applied featured a prepayment penalty, the financial institution would report the term of that prepayment penalty. Similarly, if the loan for which the consumer applied featured no prepayment penalty, the financial institution would report that the reporting requirement was not applicable to the transaction. The Bureau has reflected these requirements in final comment 4(a)(22)-2. Two other industry commenters requested clarification regarding certain conditionally-waived charges. Final § 1003.4(a)(22) defines prepayment penalty with reference to Regulation Z § 1026.32(b)(6)(i) or (ii), as applicable. The commentary to § 1026.32(b)(6) discusses waived, bona fide third-party charges imposed under certain conditions and, as explained in final comment 4(a)(22)-2, may be relied on for purposes of § 1003.4(a)(22).

Two industry commenters asked the Bureau to exclude commercial loans, including multifamily loans, from the prepayment penalty reporting requirement. These commenters pointed out that prepayment penalties serve different purposes in commercial lending. One commenter explained that multifamily mortgage loans featured various forms of prepayment protection, such as lock-out features, yield maintenance, or prepayment premiums that were not contemplated in the definition of prepayment penalty found in Regulation Z § 1026.32(b)(6)(i) and (ii). This commenter urged the Bureau to either limit § 1003.4(a)(22) to consumer loans or to adopt a new definition that was relevant to the commercial and multifamily lending context.Start Printed Page 66218

The Bureau understands that commercial loans, particularly multifamily mortgage loans, include forms of prepayment protection which have no analog in the consumer-purpose mortgage context. For example, these loans may feature defeasance, in which the borrower of a multifamily mortgage loan substitutes a new form of collateral, such as bonds or other securities, designed to generate sufficient cash flow to cover future loan payments. In order to capture these complex arrangements, the final rule would have to include a new definition of prepayment penalty. A new definition that is not part of any other existing regulation would likely impose burden on financial institutions. Moreover, consumer mortgage loans with prepayment penalties were most frequently cited as a concern in the lead up to the financial crisis and the Dodd-Frank Act. The Bureau is not aware of similar concerns about commercial loans covered by HMDA. At this time, the Bureau does not believe that applying § 1003.4(a)(22) to commercial loans would provide sufficient benefits to justify the additional burden on financial institutions. Therefore, the Bureau is limiting the scope of final § 1003.4(a)(22) to covered loans or applications subject to Regulation Z, 12 CFR part 1026.

For the reasons provided above, to implement HMDA section 304(b)(5)(C), and pursuant to HMDA section 305(a), the Bureau is adopting § 1003.4(a)(22) generally as proposed, but is modifying the scope of the provision to apply to certain covered loans and applications subject to Regulation Z, 12 CFR part 1026. Final § 1003.4(a)(22) applies to applications for, and originations of, closed-end covered loans and open-end lines of credit, but not reverse mortgages and commercial-purpose loans. To facilitate compliance, the Bureau is excepting covered loans that have been purchased by a financial institution. As the Bureau explained in the proposal, it does not believe that the term of a prepayment penalty would be readily available from the information obtained from the selling entity.[333] The Bureau is also excepting reverse mortgages and commercial-purpose loans, which, as explained above, will facilitate compliance.

Final § 1003.4(a)(22) includes commentary clarifying the reporting obligations of financial institutions in certain situations. Final comment 4(a)(22)-1 clarifies the scope of the reporting requirement. Final comment 4(a)(22)-2 provides guidance for reporting the prepayment penalty for applications and allows financial institutions to rely on the commentary to the relevant sections of Regulation Z.

4(a)(23)

Proposed § 1003.4(a)(23) provided that a financial institution must report the ratio of the applicant's or borrower's total monthly debt to the total monthly income relied on in making the credit decision (debt-to-income ratio). Proposed § 1003.4(a)(23) applied to covered loans and applications, except for reverse mortgages. The Bureau also proposed new comments 4(a)(23)-1 through -4. Many commenters addressed including the debt-to-income ratio in the HMDA data. Many community advocate commenters expressed support for its inclusion, while many industry commenters raised concerns about reporting the data. For the reasons discussed below, the Bureau is finalizing § 1003.4(a)(23) and comments 4(a)(23)-1 through -4 as proposed with technical modifications discussed below. In addition, the Bureau is adopting new comments 4(a)(23)-5 through -7.

Comments

Several consumer advocate commenters expressed strong support for proposed § 1003.4(a)(23). Many noted that the debt-to-income ratio will help identify problematic loans where there may be a need for intervention. One commenter stated that higher ratios correspond with higher default rates and suggested that lenders' acceptance of higher debt-to-income ratios in loans originated in the mid-2000s contributed to the high foreclosure rates after 2005. In addition, commenters stated that the debt-to-income ratio will enable users to identify whether the debt-to-income ratio is a barrier to credit and, if so, which consumers are affected.

A consumer advocate commenter expressed support for collecting the debt-to-income ratio, but noted limitations to its utility because it can be easily manipulated. The commenter explained that the debt-to-income ratio may overstate a borrower's repayment ability because a borrower may repay an open-end line of credit to reduce their debt in order to qualify, but then immediately re-draw the line. In addition, the debt-to-income ratio may understate a borrower's ability to repay because a financial institution may only consider the minimum income to qualify.

Many industry commenters expressed concerns about proposed § 1003.4(a)(23). Many commenters questioned the value of reporting this information. Some noted that the data would be difficult to analyze because the debt-to-income ratio is calculated and weighted differently depending on the loan product, financial institution, and applicant's circumstances. Others stated that the data would not be valuable for different reasons, including that the debt-to-income ratio is not calculated for all loans and that the debt-to-income ratio only factors into denial, and not into pricing decisions. Commenters also expressed concern that the information may be misunderstood because the debt-to-income ratio is one of many factors in an underwriting decision and conveys complex information. Other commenters objected to including this requirement because it is not expressly required by the Dodd-Frank amendments to HMDA. A few commenters asserted that collecting the debt-to-income ratio would not support HMDA's purposes. Others suggested that collecting the debt-to-income ratio was duplicative of other information included in the proposal, including denial reasons.

In addition to general concerns about the proposed requirement, some commenters stated that reporting the debt-to-income ratio would be too burdensome for financial institutions. On the other hand, some industry commenters noted that the burden for reporting proposed § 1003.4(a)(23) would be low because it requires reporting of the debt-to-income ratio relied on by the financial institution in making the credit decision instead of prescribing a specific calculation.

A few industry commenters stated that they supported reporting the debt-to-income ratio relied on in making the credit decision, rather than requiring financial institutions to report a calculation prescribed by the Bureau. Other commenters urged the Bureau to require reporting of a specific debt-to-income ratio to increase the utility of the data.

The Bureau concludes that including the debt-to-income ratio in the HMDA data will provide many benefits and further HMDA's purposes. The debt-to-income ratio will help identify potential patterns of discrimination. The Bureau understands that the debt-to-income ratio is only one factor in underwriting. Nonetheless, the debt-to-income ratio provides important information about the likelihood of default and about access to credit. Reporting debt-to-income information supplements the denial reason field in which financial institutions may indicate whether an application was denied due to the debt-to-income ratio. In addition to information about whether a loan was Start Printed Page 66219denied due to the debt-to-income ratio, reporting the debt-to-income ratio will illuminate potential disparate treatment of similarly situated applicants. This information will help to better identify discriminatory practices, better understand whether lenders are meeting their obligations to serve the needs of the communities in which they operate, and, potentially, better target programs and investments to vulnerable borrowers.

Requiring the financial institution to report the debt-to-income ratio relied on in making the credit decision would provide these benefits even though, as noted by industry commenters, the debt-to-income ratio is calculated differently depending on the loan product and lender. A prescribed debt-to-income calculation for HMDA purposes may allow for better comparison of debt-to-income information across the data. However, a prescribed calculation would significantly increase the burden associated with reporting the debt-to-income ratio. Therefore, the final rule, like the proposal, does not require a prescribed debt-to-income ratio calculation for HMDA purposes, and, instead, requires financial institutions to report the debt-to-income ratio relied on in making the credit decision.

Some consumer advocate commenters urged the Bureau to collect additional information related to the mortgage payment-to-income ratio (front-end debt-to-income ratio). The front-end debt-to-income ratio differs from the information requested by proposed § 1003.4(a)(23), which is commonly referred to as the back-end debt-to-income ratio, in that it, unlike the back-end debt-to-income ratio, does not include debts other than the mortgage debt in the debt-to-income ratio. As a result, the front-end debt-to-income ratio is a less complete measure of a borrower's ability to repay a loan and, accordingly, is a less important factor in underwriting decisions. In addition, using the reported income, discussed above in the section-by-section analysis of § 1003.4(a)(10)(iii), and loan amount, discussed above in the section-by-section analysis of § 1003.4(a)(7), it will be possible to calculate that ratio, if desired. For these reasons, the final rule does not require financial institutions to report the front-end debt-to-income ratio.

Several industry commenters also raised concerns about the privacy implications of collecting and disclosing the applicant or borrower's debt-to-income ratio. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of the data. Due to the significant benefits of collecting this information, the Bureau believes it is appropriate to collect the debt-to-income ratio despite the concerns raised by commenters about collecting this information.

Some industry commenters urged the Bureau to exclude certain types of transactions (e.g., applications) or types of financial institutions (e.g., community banks) from the requirement to report the information required by proposed § 1003.4(a)(23). In addition, some commenters believed that the proposal would require a financial institution to calculate a debt-to-income ratio for HMDA reporting purposes even if the financial institution did not calculate or use debt-to-income information in its credit decisions.

Proposed § 1003.4(a)(23) does not require reporting the debt-to-income ratio unless the financial institution has calculated and relied upon a debt-to-income ratio in evaluating an application. As discussed above, the debt-to-income ratio is an important aspect in underwriting and reporting this information will provide an important insight into an institution's credit decision. This information is particularly important when a financial institution denies an application due to the debt-to-income ratio. In addition, as discussed above, a financial institution is not required to report a debt-to-income ratio if it has not calculated the debt-to-income ratio for a particular application. The final rule does not require financial institutions to calculate debt-to-income ratios solely for HMDA reporting purposes. Therefore, the debt-to-income ratio should be reported for applications and originations if the ratio is calculated and relied on by the financial institution in making the credit decision.

Other commenters explained that the debt-to-income information should not be reported for loans related to multifamily properties or loans to a trust because financial institutions do not calculate the debt-to-income ratio in making a credit decision on applications for those types of loans. Commenters explained that financial institutions usually consider the cash flow of the property, such as the debt service coverage ratio, rather than the income of the applicant when evaluating a multifamily loan or loan to a non-natural person. The Bureau understands that this cash flow analysis is different from the debt-to-income ratio. However, some commenters expressed uncertainty about whether financial institutions would be required to report the debt service coverage ratio or other cash flow analysis for loans to non-natural persons or for multifamily properties. To eliminate the confusion, the final rule will not require the financial institution to report the debt-to-income ratio for such loans. New comments 4(a)(23)-5 and -6 explain that a financial institution may report that the requirement does not apply if the applicant and co-applicant, if applicable, are not natural persons and for loans secured by, or proposed to be secured by, multifamily dwellings.

In addition, the Bureau has excluded purchased covered loans from the requirements of § 1003.4(a)(23). The Bureau does not believe that the debt-to-income ratio information is as valuable for purchased covered loans as for applications and originations. The debt-to-income ratio that the originating financial institution relied on in making the credit decision may no longer be accurate because a borrower's debts and incomes may have changed since origination. In addition, the Bureau believes that purchasing financial institutions may face practical challenges in ascertaining the debt-to-income ratio that the originating financial institution relied on in making the credit decision because it may not be evident on the face of the loan documents. In light of the limited value of the data and these practical challenges, the Bureau is excluding purchased covered loans from the requirements in § 1003.4(a)(23). However, as discussed in comments 4(a)-2 through -4, a financial institution that reviews an application for a covered loan, makes a credit decision on that application prior to closing, and purchases the covered loan after closing will report the covered loan as an origination, not a purchase. In that case, the final rule requires the financial institution to report the debt-to-income ratio that it relied on in making the credit decision.

Finally, an industry commenter also asked the Bureau to explain what a financial institution should report if it calculates more than one ratio in making the credit decision. The Bureau is finalizing proposed comment 4(a)(23)-1, which addresses the situation in which more than one ratio is used. If a financial institution calculated an applicant's or borrower's ratio more than one time, the financial institution reports the debt-to-income ratio relied on in making the credit decision.

Final Rule

Having considered the comments received and for the reasons discussed above, pursuant to its authority under Start Printed Page 66220sections 305(a) and 304(b)(6)(J) of HMDA, the Bureau is finalizing § 1003.4(a)(23) as proposed with technical modifications. In addition, the Bureau is finalizing proposed comments 4(a)(23)-1 through -4, as proposed, with the clarifying modifications discussed above and other technical modifications. Finally, the Bureau is finalizing new comments 4(a)(23)-5 through -7 to clarify when a financial institution is not required to report the applicant's or borrower's debt-to-income ratio.

In addition, proposed § 1003.4(a)(23) excluded reverse mortgages from the requirement to report the debt-to-income ratio. The Bureau is removing that exclusion from the final rule. The Bureau included that exclusion because it understood that financial institutions historically did not consider income or debt-to-income information when evaluating applications for reverse mortgages. HUD recently changed its guidelines for evaluating reverse mortgages for participation in the Home Equity Conversion Mortgage (HECM) program, which currently accounts for the majority of the reverse mortgage market.[334] These revised guidelines include consideration of some income information.[335] Currently, the revised standards do not contemplate calculation of a debt-to-income ratio. However, it is possible that in the future these guidelines or other underwriting standards applicable to reverse mortgages may include the consideration of a debt-to-income ratio. Therefore, the final rule removes the exclusion for reverse mortgages from § 1003.4(a)(23). The Bureau anticipates that this information will not be reported for most reverse mortgages because an institution is only required to report the debt-to-income ratio if it relies on it in making a credit decision and institutions do not typically rely on a debt-to-income ratio in making a credit decision on a reverse mortgage.

4(a)(24)

Currently, neither HMDA nor Regulation C contains requirements regarding loan-to-value ratio. Section 304(b) of HMDA permits the disclosure of such other information as the Bureau may require.[336] The Bureau proposed § 1003.4(a)(24), which requires financial institutions to report the ratio of the total amount of debt secured by the property to the value of the property. The ratio of total amount of secured debt to the value of the property securing the debt is generally referred to as the combined loan-to-value (CLTV) ratio.

The Bureau proposed two different calculations for CLTV—one calculation for a covered loan that is a home-equity line of credit and another calculation for a covered loan that is not a home-equity line of credit. Specifically, the Bureau proposed § 1003.4(a)(24)(i), which provides that, for a covered loan that is a home-equity line of credit, the CLTV ratio shall be determined by dividing the sum of the unpaid principal balance of the first mortgage, the full amount of any home-equity line of credit (whether drawn or undrawn), and the balance of any other subordinate financing by the property value identified in proposed § 1003.4(a)(28). As to a covered loan that is not a home-equity line of credit, the Bureau proposed § 1003.4(a)(24)(ii), which provides that the CLTV ratio shall be determined by dividing the combined unpaid principal balance amounts of the first and all subordinate mortgages, excluding undrawn home-equity lines of credit amounts, by the property value identified in proposed § 1003.4(a)(28).

In addition, the Bureau proposed instruction 4(a)(24)-1, which directs financial institutions to enter the CLTV ratio applicable to the property to two decimal places, and if the CLTV ratio is a figure with more than two decimal places, directs institutions to truncate the digits beyond two decimal places. The Bureau also proposed instruction 4(a)(24)-2, which provides technical instructions for covered loans in which no combined loan-to-value ratio is calculated.

The Bureau also proposed three comments to clarify this reporting requirement. Proposed comment 4(a)(24)-1 clarifies that, if a financial institution makes a credit decision without calculating the combined loan-to-value ratio, the financial institution complies with § 1003.4(a)(24) by reporting that no combined loan-to-value ratio was calculated in connection with the credit decision. Proposed comment 4(a)(24)-2 describes the CLTV calculation for home-equity lines of credit proposed in § 1003.4(a)(24)(i) and provides illustrative examples. Proposed comment 4(a)(24)-3 describes the CLTV calculation for transactions that are not home-equity lines of credit proposed in § 1003.4(a)(24)(ii) and provides illustrative examples.

The Bureau solicited feedback regarding whether proposed § 1003.4(a)(24) is appropriate generally. Most commenters that provided feedback on proposed § 1003.4(a)(24) supported the Bureau's proposal. For example, one consumer advocate commenter stated that the CLTV ratio provides the most accurate calculation of borrower equity and is therefore most relevant to assess the credit risk of the loan. Another consumer advocate commenter pointed out that CLTV ratio data provides important information regarding both an individual property's leverage and the general level of leverage in specific geographic locations, and noted that areas in which many properties are highly leveraged are especially vulnerable to changes in economic conditions. Another consumer advocate commenter suggested that CLTV ratio data is vital to determining whether particular financial institutions are making loans with high CLTV ratios on a census tract level. Some industry commenters also supported the Bureau's proposal. For example, as with credit score data, one industry commenter stated that for purposes of fair lending analysis, CLTV is crucial to understanding a financial institution's credit and pricing decision and that without such information, inaccurate conclusions may be reached by users of HMDA data.

In contrast, several industry commenters opposed the Bureau's proposal to require reporting of CLTV. For example, some industry commenters stated that the proposed requirement is an unnecessary burden on financial institutions since loan-to-value ratio may be calculated using the Bureau's proposed property value data and the loan amount data that the regulation already requires. These commenters explained that while the proposed CLTV requirement would provide the ratio of the total amount of debt secured by the property to the value of the property, they believe the additional burden placed on financial institutions by this new reporting requirement outweighs any added value to data users.

The Bureau has considered this feedback and determined that CLTV ratio data would improve the HMDA data's usefulness. CLTV ratio is a standard underwriting factor regularly calculated by financial institutions, both for a financial institution's own underwriting purposes and to satisfy investor requirements. For a particular transaction in which a CLTV ratio is not calculated or considered during the underwriting process, the Bureau is adopting a new comment, discussed further below, which permits financial institutions to report that the requirement is not applicable if the Start Printed Page 66221financial institution did not rely on the CLTV ratio in making the credit decision. The Bureau believes that the CLTV ratio is an important factor both in the determination of whether to extend credit and for the pricing terms upon which credit would be extended. Consequently, the Bureau is adopting proposed § 1003.4(a)(24), modified as discussed further below.

The Bureau has determined to exclude purchased covered loans from the requirements of § 1003.4(a)(24). The Bureau does not believe that the combined-loan-to-value ratio information is as valuable for purchased covered loans as for applications and originations. The combined-loan-to-value ratio that the originating financial institution relied on in making the credit decision may no longer be accurate, because the total amount of debt secured by the property to the value of the property likely has changed since origination. In addition, the Bureau believes that purchasing financial institutions may face practical challenges in ascertaining the combined-loan-to-value ratio that the originating financial institution relied on in making the credit decision because it may not be evident on the face of the loan documents. In light of the limited value of the data and these practical challenges, the Bureau is excluding purchased covered loans from the requirements in § 1003.4(a)(24). However, as discussed in comment 4(a)-3, a financial institution that reviews an application for a covered loan, makes a credit decision on that application prior to closing, and purchases the covered loan after closing will report the covered loan that it purchases as an origination, not a purchase. In that case, the final rule requires the financial institution to report the combined-loan-to-value ratio that it relied on in making the credit decision.

The Bureau solicited feedback regarding whether the proposed alignment to the MISMO data standards for CLTV is appropriate and whether the text of this proposed requirement should be clarified. Consistent with the Small Business Review Panel's recommendation, the Bureau also solicited feedback regarding whether it would be less burdensome for small financial institutions to report the combined loan-to-value relied on in making the credit decision, or if it would be less burdensome to small financial institutions for the Bureau to adopt a specific combined loan-to-value ratio calculation as proposed under § 1003.4(a)(24).

Several commenters did not support the Bureau's proposal to align with the MISMO data standards and require two different CLTV calculations depending on whether or not the transaction is a home-equity line of credit. Both consumer advocates and industry were concerned with the proposed requirement to calculate CLTV ratio one way for home-equity lines of credit but another way for non-home-equity lines of credit. Several commenters did not support the Bureau's proposed CLTV calculations under proposed § 1003.4(a)(24), which requires that the full amount of a home-equity line of credit be included in the CLTV calculation for a covered loan that is a home-equity line of credit, whether it is drawn or not, but that for transactions that are not home-equity lines of credit, only the outstanding amount of any home-equity line of credit should be included. One industry commenter noted that it calculates the CLTV ratio for a covered loan that is not a home-equity line of credit by including the total amount of home-equity lines of credit (and does not exclude “undrawn” home-equity lines of credit as required under the Bureau's proposal).

One consumer advocate commenter recommended that the transactions should be treated identically by requiring the full amount be included in the CLTV calculation since the entire amount of a home-equity line of credit available to the borrower constitutes potential leverage of the property in either situation. Similarly, another consumer advocate commenter suggested that loan-to-value calculations involving home-equity lines of credit should always use the full amount of credit available to the borrower because the borrower has access to the full line of credit without any additional underwriting by the financial institution and thus a loan-to-value calculation that ignores the undrawn amount will be unreliable for purposes of analysis. This same commenter stated that the Bureau's desire to align with the MISMO data standards does not justify the adoption of inferior CLTV measurements. Lastly, in order to address the burden that results from requiring different CLTV ratio calculations based on the type of transaction, industry commenters also recommended that the Bureau allow for consistent treatment of outstanding lines of credit, regardless of the loan type being originated.

The Bureau has considered this feedback and acknowledges that CLTV ratio calculations on home-equity lines of credit may vary between financial institutions. The Bureau has determined that having two different methods of calculating CLTV—one calculation for a covered loan that is a home-equity line of credit and another calculation for a covered loan that is not a home-equity line of credit—is unduly burdensome on financial institutions. The Bureau has also determined that it would be less burdensome for financial institutions to report the CLTV relied on in making the credit decision. Consequently, the Bureau will not adopt § 1003.4(a)(28) as proposed. Instead, the Bureau is adopting a modified § 1003.4(a)(28), which requires a financial institution to report the ratio of the total amount of debt secured by the property to the value of the property relied on in making the credit decision.

As discussed in the proposal, the Bureau is generally concerned about the potential burden associated with reporting calculated data fields, such as the CLTV ratio. Some commenters noted that consistency in the rounding method for all relevant HMDA data will lead to more accurate reporting. A few industry commenters stated that the proposal presented a confusing rounding process that is not intuitive and differs depending on the data point being reported. For example, one commenter suggested that rather than the requirement to truncate any digits beyond the first two decimal places, proposed instruction 4(a)(24)-1 should be adjusted to read that a CLTV ratio be rounded up if the third digit behind the decimal is 5 or larger, and rounded down if the digit is 4 or smaller. The commenter stated that current underwriting systems such as Fannie Mae's Desktop Underwriter use this method and that unnecessary errors can be expected if the CLTV instructions are finalized as proposed.

The Bureau acknowledges that the CLTV reporting requirement in proposed instruction 4(a)(24)-1 may have posed some challenges for financial institutions. The Bureau has considered the feedback and believes that the proposed CLTV reporting requirement may be unduly burdensome on financial institutions. Consequently, the Bureau is not adopting the proposed CLTV reporting requirement in the final rule.

The Bureau is adopting a modified § 1003.4(a)(24), which requires reporting of the CLTV that a financial institution relied on in making the credit decision and excludes reporting of CLTV for purchased covered loans. In order to align with the new reporting requirement, the Bureau will not adopt comments 4(a)(24)-1, -2, and -3 as proposed, and adopts new comments 4(a)(24)-1, -2, -3, -4, and -5.Start Printed Page 66222

The Bureau is adopting new comment 4(a)(24)-1, which explains that § 1003.4(a)(24) requires a financial institution to report the CLTV ratio relied on in making the credit decision and provides an illustrative example. The example provides that if a financial institution calculated a CLTV ratio twice—once according to the financial institution's own requirements and once according to the requirements of a secondary market investor—and the financial institution relied on the CLTV ratio calculated according to the secondary market investor's requirements in making the credit decision, § 1003.4(a)(24) requires the financial institution to report the CLTV ratio calculated according to the requirements of the secondary market investor.

The Bureau is adopting new comment 4(a)(24)-2, which explains that a financial institution relies on the total amount of debt secured by the property to the value of the property (CLTV ratio) in making the credit decision if the CLTV ratio was a factor in the credit decision even if it was not a dispositive factor. For example, if the CLTV ratio is one of multiple factors in a financial institution's credit decision, the financial institution has relied on the CLTV ratio and complies with § 1003.4(a)(24) by reporting the CLTV ratio, even if the financial institution denies the application because one or more underwriting requirements other than the CLTV ratio are not satisfied.

The Bureau is adopting new comment 4(a)(24)-3, which explains that a financial institution should report that the requirement is not applicable for transactions in which a credit decision was not made and provides illustrative examples. The comment provides that if a file was closed for incompleteness, or if an application was withdrawn before a credit decision was made, a financial institution complies with § 1003.4(a)(24) by reporting that the requirement is not applicable, even if the financial institution had calculated the CLTV ratio.

The Bureau is adopting new comment 4(a)(24)-4, which explains that a financial institution should report that the requirement is not applicable for transactions in which no CLTV ratio was relied on in making the credit decision. The comment provides that § 1003.4(a)(24) does not require a financial institution to calculate the CLTV ratio, nor does it require a financial institution to rely on a CLTV ratio in making a credit decision. The comment clarifies that if a financial institution makes a credit decision without relying on a CLTV ratio, the financial institution complies with § 1003.4(a)(24) by reporting that the requirement is not applicable since no CLTV ratio was relied on in connection with the credit decision.

Lastly, the Bureau is adopting new comment 4(a)(24)-5, which explains that a financial institution complies with § 1003.4(a)(24) by reporting that the reporting requirement is not applicable when the covered loan is a purchased covered loan. The Bureau believes that comments 4(a)(24)-1, -2, -3, -4, and -5 will provide clarity regarding the new reporting requirement adopted in § 1003.4(a)(24) and will facilitate HMDA compliance.

The Bureau believes that requiring financial institutions to collect information regarding CLTV ratios is necessary to carry out HMDA's purposes, such as helping to ensure that the citizens and public officials of the United States are provided with sufficient information to enable them to determine whether depository institutions are filling their obligations to serve the housing needs of the communities and neighborhoods in which they are located and assist public officials in their determination of the distribution of public sector investments in a manner designed to improve the private investment environment. CLTV ratios are a significant factor in the underwriting process and provide valuable insight into both the stability of community homeownership and the functioning of the mortgage market. Accordingly, pursuant to its authority under sections 305(a) and 304(b)(6)(J) of HMDA, the Bureau is adopting § 1003.4(a)(24), which requires, except for purchased covered loans, reporting of the CLTV that a financial institution relied on in making the credit decision.

4(a)(25)

HMDA section 304(b)(6)(D) requires, for loans and completed applications, that financial institutions report the actual or proposed term in months of the mortgage loan.[337] Currently, Regulation C does not require financial institutions to report information regarding the loan's term. The Bureau proposed to implement HMDA section 304(b)(6)(D) by requiring in § 1003.4(a)(25) that financial institutions collect and report data on the number of months until the legal obligation matures for a covered loan or application. For the reasons discussed below, the Bureau is finalizing § 1003.4(a)(25) substantially as proposed.

The Bureau solicited feedback on what method of reporting loan term would minimize the burden on small institutions while still meeting the Dodd-Frank Act reporting requirements and purposes of HMDA. Several commenters opposed the Bureau's proposal and suggested that reporting the loan term, along with other proposed data points specific to applicant or borrower and property characteristics, could create privacy risks. One commenter stated that it would be difficult to retain borrower and lender privacy in transactions that involve multifamily loans because there are a limited number of transactions in a geographic area. The Bureau has considered this feedback. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of the HMDA data.

One commenter stated that collecting data on the loan term is appropriate for closed-end loans but would create burdensome programming demands if it became a requirement for open-end credit. As the Bureau explained in the proposal, the length of time a borrower has to repay a loan is an important feature for borrowers and creditors. With this information, borrowers are able to determine the amount due with each payment, which could significantly influence their ability to afford the loan. Creditors, on the other hand, can use loan term as a factor in assessing interest rate risk, which in turns, affects loan pricing. The Bureau believes that the benefit of the information that the loan term could provide, including loan terms on open-end lines of credit, justifies the burden because this information could help explain pricing or any other differences that are indiscernible with current HMDA data.

A few commenters suggested that the loan term should be reported consistent with the loan term disclosed under TILA-RESPA, which provides under Regulation Z § 1026.37(a)(8) that the term to maturity should be disclosed in years or months or both.[338] Although consistency with TILA-RESPA might mitigate burden if the creditor disclosing the loan term under TILA-RESPA elects to disclose term to maturity in months instead of years or years plus the remaining months, the Bureau believes that a reasonable interpretation of HMDA section 304(b)(6)(D) is that financial institutions Start Printed Page 66223should report the actual or proposed term for a loan or application in months. Another commenter stated that reporting loan term can be confusing on loans with unusual terms, such as those with terms that are not in whole months. Proposed comment 4(a)(25)-2 clarified that for covered loans with non-monthly repayment schedules, the loan term should be in months and not include any fractional months remaining. This guidance, for which the Bureau did not receive any comments, should facilitate compliance for loans with repayment schedules that are measured in units of time other than months.

Several other commenters supported the Bureau's proposal to include the loan term. One commenter that supported the Bureau's proposal stated that it is very useful, particularly given the risk maturity premium for longer term loans. Moreover, researchers would be able to examine whether a concentration of shorter term loans can lead to a more stable housing market.

The Bureau concludes that the information that could be provided by loan terms will help determine whether financial institutions are serving the housing needs of their communities and assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes by allowing information about similar loans to be compared and analyzed appropriately. Accordingly, to implement HMDA section 304(b)(6)(D), the Bureau is adopting § 1003.4(a)(25) substantially as proposed with minor wording changes and is also adopting as proposed comments 4(a)(25)-1 and -2. In addition, the Bureau is adopting a few comments that incorporate material contained in proposed appendix A into the commentary to § 1003.4(a)(25) because of the removal of appendix A as discussed in the section-by-section analysis of appendix A below. These comments 4(a)(25)-3 through 4(a)(25)-5 primarily incorporate proposed appendix A instructions that do not contain any substantive changes from the proposed reporting requirements.

4(a)(26)

HMDA section 304(b)(6)(B) requires the reporting of the actual or proposed term in months of any introductory period after which the rate of interest may change.[339] Currently, Regulation C does not require financial institutions to report information regarding the numbers of months until the first interest rate adjustment. The Bureau proposed to implement HMDA section 304(b)(6)(B) by requiring in § 1003.4(a)(26) that financial institutions collect and report data on the number of months until the first date the interest rate may change after loan origination. The Bureau also proposed that § 1003.4(a)(26) would apply regardless of how the interest rate adjustment is characterized by product type, such as adjustable rate, step rate, or another type of product with a “teaser” rate. For the reasons discussed below, the Bureau is adopting § 1003.4(a)(26) generally as proposed.

The Bureau solicited feedback on what method of reporting initial interest rate period would minimize burden on small financial institutions while still meeting the Dodd-Frank Act reporting requirements and purposes of HMDA. Several commenters supported the Bureau's proposal to collect data about introductory terms. One commenter stated that along with other data points, the introductory rate period will enable accurate analyses and a full understanding of the extent of the terms to which residents have access to credit. The Bureau finds these reasons compelling in finalizing § 1003.4(a)(26). As the Bureau explained in the proposal, interest rate variability can be an important feature in affordability. In addition, having information about introductory rates will enable better analyses of loans and applications, which could be used to identify possible discriminatory lending patterns.

One commenter pointed out that the Bureau's proposal to report the number of months until the first date the interest rate may change after origination is a measure different from Regulation Z § 1026.43(e)(2)(iv)(A), which measures the interest rate change from the date the first regular periodic payment is due. This commenter suggested that the measure for the introductory term for HMDA reporting should be consistent with the measure prescribed by Regulation Z § 1026.43(e)(2)(iv)(A), which relates to the underwriting of a qualified mortgage adopted under the Bureau's 2013 ATR Final Rule. Section 1026.43(e)(2)(iv)(A) provides that a qualified mortgage under § 1026.43(e)(2) must be underwritten, taking into account any mortgage-related obligations, using the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due. As stated in the Bureau's 2013 ATR Final Rule, the Bureau believes that the approach of requiring creditors to underwrite a loan based on the maximum interest rate that applies during the first five years after the first regular periodic payment due date provides greater protections to consumers and is also consistent with Regulation Z disclosure requirements for interest rates on adjustable-rate amortizing loans.[340] The Bureau, however, believes that a reasonable interpretation of HMDA section 304(b)(6)(B) requires the reporting of the number of months after a loan origination until the first instance of an interest rate changes or for a loan application, the proposed number of months until the first instance of an interest rate change. Accordingly, the Bureau is adopting § 1003.4(a)(26) generally as proposed but is modifying the scope of the provision to include applications. The Bureau is also adopting comments 4(a)(26)-1 and -2 generally as proposed, but with minor modifications for clarification. In addition, because appendix A will be deleted as discussed in the section-by-section analysis of appendix A below, the Bureau is adopting new comments 4(a)(26)-3 and -4 to incorporate instructions in proposed appendix A. New comments 4(a)(26)-3 and -4 to incorporate proposed instructions in appendix A. New comment 4(a)(26)-3 specifies that a financial institution reports that the requirement to report the introductory rate period is not applicable when the transaction involves a fixed rate covered loan or an application for a fixed rate covered loan. Similarly, new comment 4(a)(26)-4 specifies that a financial institution reports that the requirement to report the introductory rate period is not applicable if the transaction involves a purchased fixed rate covered loan.

4(a)(27)

HMDA section 304(b)(6)(C) requires reporting of the presence of contractual terms or proposed contractual terms that would allow the mortgagor or applicant to make payments other than fully amortizing payments during any portion of the loan term.[341] Current Regulation C does not require financial institutions to report whether a loan allows or would have allowed the borrower to make payments other than fully amortizing payments. The Bureau believes it is reasonable to interpret HMDA section 304(b)(6)(C) to require reporting non-amortizing features by identifying specific, well-defined non-amortizing loan features. Thus, the Bureau proposed to implement HMDA section 304(b)(6)(C) by requiring the reporting non-amortizing features, including balloon payments, interest only payments, and negative Start Printed Page 66224amortizations. Proposed § 1003.4(a)(27) requires reporting balloon payments, as defined by 12 CFR 1026.18(s)(5)(i); interest only payments, as defined by 12 CFR 1026.18(s)(7)(iv); a contractual term that could cause the loan to be a negative amortization loan, as defined by 12 CFR 1026.18(s)(7)(v); or any other contractual term that would allow for payments other than fully amortizing payments, as defined by 12 CFR 1026.43(b)(2). For the reasons discussed below, the Bureau is finalizing § 1003.4(a)(27) as proposed.

The Bureau solicited feedback on what method of report non-amortizing features would minimize the burden on small financial institutions but still meet the reporting requirements of the Dodd-Frank Act and the purposes of HMDA. Most commenters, however, supported the proposal to collect non-amortizing features without modification. They stated that the data will indicate whether a high incidence of these features, particularly in loans to vulnerable and underserved populations, is a cause for concern that requires intervention. For the same reason, the Bureau believes that the reporting of non-amortizing features is helpful and can provide insight into lending activity that features these loans. It will provide data about the types of loans that are being made and assist in identifying possible discriminatory lending patterns and enforce antidiscrimination statutes.

A few commenters did not support the Bureau's proposal to require the reporting of non-amortizing features. A financial institution commenter stated that it does not originate loans with risky features and opined that most small institutions probably do not originate such loans either. The Bureau recognizes that loans with non-amortizing features may be rare today. However, such features that may not be present in certain markets today may arise at a later time. Given the risk of payment shock with such products, the Bureau proposed § 1003.4(a)(27)(iv) to ensure the data includes information about non-amortizing products. Furthermore, during the SBREFA process, small entity representatives informed the Bureau that information regarding non-amortizing features of a loan is currently collected by financial institutions. Based on this information, the Bureau concludes that at least some small institutions originate loans that contain non-amortizing features.

Additionally, commenters that opposed the reporting of non-amortizing features reasoned that such information is not helpful and may not even be pertinent to most underwriting and pricing decisions. The Bureau explained in the proposal that non-amortizing features were a rarity but then became more common in the lead-up to the mortgage crisis. These features could be pertinent to underwriting and pricing decisions because of the nature of the risk they pose on the borrower. One commenter stated that HMDA reporters will experience confusion when multiple loan features apply and create difficulties in developing new products. The proposal and the final rule address this concern by aligning the definitions of non-amortizing features for HMDA purposes with existing definitions in Regulation Z. This alignment will facilitate compliance and reduce potential implementation and compliance difficulties.

Accordingly, to implement HMDA section 304(b)(6)(C), the Bureau is finalizing § 1003.4(a)(27) as proposed and is making minor technical amendments and wording changes to the commentary to § 1003.4(a)(27). Data about non-amortizing features will help determine whether financial institutions are serving the housing needs of their communities and assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes by allowing information about similar loans to be compared and analyzed appropriately.

4(a)(28)

Regulation C does not require financial institutions to report information regarding the value of the property that secures or will secure the loan. HMDA section 304(b)(6)(A) requires the reporting of the value of the real property pledged or proposed to be pledged as collateral.[342] The Bureau proposed § 1003.4(a)(28), which implements this requirement by requiring financial institutions to report the value of the property securing the covered loan or, in the case of an application, proposed to secure the covered loan relied on in making the credit decision. The Bureau proposed a new technical instruction in appendix A for reporting the property value relied on in dollars. In addition, in order to provide clarity on proposed § 1003.4(a)(28), the Bureau proposed new illustrative comments 4(a)(28)-1 and -2.

The Bureau solicited feedback on which property value should be reported. Several commenters, including both industry and consumer advocates, supported the Bureau's proposal to implement the Dodd-Frank Act requirement regarding property value by requiring reporting of the value of the property relied on in making the credit decision in dollars. Other commenters suggested different approaches to collecting property value. One consumer advocate commenter suggested that the Bureau require financial institutions to report the purchase price of the property in all circumstances. Another industry commenter suggested that financial institutions be required to report the final property value determined by the loan underwriter and used in the investment decision.

The Bureau believes that financial institutions should report the value relied on in making the credit decision. Thus, if the financial institution relied upon the purchase price in making the credit decision, the financial institution would report that value. If the final property value determined by a loan underwriter and used in the financial institution's investment decision is the property value that the institution relied on in making the credit decision, then reporting that property valuation will comply with § 1003.4(a)(28). To this end, comment 4(a)(28)-1 explains, if a financial institution relies on an appraisal or other valuation for the property in calculating the loan-to-value ratio, it reports that value; if the institution relies on the purchase price of the property in calculating the loan-to-value ratio, it reports that value.

A national trade association commenter requested that the Bureau clarify that if an application is withdrawn or is closed for incompleteness, a financial institution may report that the requirement is not applicable since there was no reliance on property value in making the credit decision. In order to help facilitate HMDA compliance by providing additional guidance regarding the property value reporting requirement, the Bureau is adopting new comment 4(a)(28)-3, which clarifies how a financial institution complies with § 1003.4(a)(28) by reporting that the requirement is not applicable for transactions for which no credit decision was made. New comment 4(a)(28)-3 clarifies that if a file was closed for incompleteness or the application was withdrawn before a credit decision was made, the financial institution complies with § 1003.4(a)(28) by reporting that the requirement is not applicable, even if the financial institution had obtained a property value.

Two State trade association commenters expressed concern that proposed § 1003.4(a)(28) compels a Start Printed Page 66225financial institution to obtain an appraisal even when a property valuation is not in fact required for the underwriting process of a particular transaction or is not required per regulations. In order to address this concern, the Bureau is adopting new comment 4(a)(28)-4, which clarifies that § 1003.4(a)(28) does not require a financial institution to obtain a property valuation, nor does it require a financial institution to rely on a property value in making a credit decision. Comment 4(a)(28)-4 explains that if a financial institution makes a credit decision without relying on a property value, the financial institution complies with § 1003.4(a)(28) by reporting that the requirement is not applicable since no property value was relied on in connection with the credit decision.

A consumer advocate commenter suggested that the Bureau require reporting of property value if a valuation was performed and even if the property valuation was not relied on in making the credit decision. The Bureau is not adopting this recommendation in the final rule. The Bureau believes that the property value relied on will be more useful in understanding a financial institution's credit decision and other HMDA data, such as pricing information. The proposed standard in § 1003.4(a)(28) requires a financial institution to report the property value relied on in making the credit decision. As explained in new comments 4(a)(28)-3 and -4, if a financial institution has not made a credit decision or has not relied on property value in making the credit decision, the financial institution complies with § 1003.4(a)(28) by reporting that the requirement is not applicable. The Bureau has determined that this is the appropriate approach for purposes of HMDA compliance.

One State trade association commenter recommended that property value be reported in ranges rather than the actual value to better protect the privacy of applicants. While reporting property value in ranges may address some of the privacy concerns raised by commenters, the Bureau has determined that requiring reporting of the value of the property relied on in making the credit decision in dollars is the more appropriate approach. When coupled with § 1003.4(a)(7), which requires a financial institution to report the exact loan amount, a requirement to report the property value relied on in dollars under § 1003.4(a)(28) will allow the calculation of loan-to-value ratio, an important underwriting variable. Reporting property value in ranges would render these calculations less precise, undermining their utility for data analysis.

A few commenters were concerned that if information regarding property value is made available to the public, such information could be coupled with other publicly available information on property sales and ownership records to compromise a borrower's privacy. The Bureau has considered this feedback. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of HMDA data.

Several commenters, including both industry and consumer advocates, supported the Bureau's proposal to implement the Dodd-Frank Act requirement regarding property value by requiring reporting of the value of the property relied on in making the credit decision in dollars. As discussed above, knowing the property value in addition to loan amount allows HMDA users to estimate the loan-to-value ratio, which measures a borrower's equity in the property and is a key underwriting and pricing criterion. In addition, requiring financial institutions to report information about property value will enhance the utility of HMDA data. Property value data will further HMDA's purposes by providing the public and public officials with data to help determine whether financial institutions are serving the housing needs of their communities by providing information about the values of properties that are being financed; it will also assist public officials in distributing public-sector investment so as to attract private investment by providing information about property values; and it will assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes by allowing information about similar loans to be compared and analyzed appropriately. Moreover, for the reasons given in the section-by-section analysis of § 1003.4(a)(29), the Bureau believes that implementing HMDA through Regulation C to treat mortgage loans secured by all manufactured homes consistently, regardless of legal classification under State law, is reasonable, and is necessary and proper to effectuate HMDA's purposes and facilitate compliance therewith.

Accordingly, pursuant to its authority under HMDA sections 305(a) and 304(b)(6)(A), the Bureau is adopting § 1003.4(a)(28) as proposed, with several technical and clarifying modifications to proposed comments 4(a)(28)-1 and -2. In addition, as discussed above, the Bureau is adopting new comments 4(a)(28)-3 and -4, which will help facilitate HMDA compliance by providing additional guidance regarding the property value reporting requirement.

4(a)(29)

Section 304(b) of HMDA permits disclosure of such other information as the Bureau may require. The Bureau proposed § 1003.4(a)(29), which required that financial institutions report whether a manufactured home is legally classified as real property or as personal property. For the reasons discussed below, the Bureau is adopting § 1003.4(a)(29) with modifications, to require financial institutions to report whether a covered loan or application is or would have been secured by a manufactured home and land or a manufactured home and not land.

Since 1988, Regulation C has required reporting of home purchase and home improvement loans and refinancings related to manufactured homes, whether or not the homes are considered real property under State law.[343] Manufactured homes serve vital housing needs in communities and neighborhoods throughout the United States. For example, manufactured housing is the largest unsubsidized source of affordable homeownership in the United States.[344] Manufactured homes also often share certain essential financing features with non-manufactured homes. But classifications of manufactured homes as real or personal property vary significantly among States and can be ambiguous.[345]

Regulation C's consistent treatment of manufactured housing in HMDA data has proven important to furthering HMDA's purposes and provided communities and public officials with important information about manufactured housing lending.[346] The Start Printed Page 66226Bureau believes that the unique nature of the manufactured home financing market warrants additional information reporting. Although in many respects manufactured and site built housing are similar, manufactured home financing reflects certain key differences as compared to site built home financing. State laws treat site built homes as real property, with financing secured by a mortgage or deed of trust. On the other hand State law may treat manufactured homes as personal property or real property depending on the circumstances.[347] Manufactured home owners may own or rent the underlying land, which is an additional factor in manufactured home owners' total housing cost and can be relevant to financing.[348]

Many consumer advocate commenters supported the proposed requirement. Some argued, however, that additional information about whether the covered loan was secured by both the manufactured home and land or the manufactured home alone would be valuable in addition to the manufactured home's classification under State law, to distinguish covered loans in States where manufactured homes may be classified as real property even if the home is sited on leased land. Many industry commenters opposed the proposed requirement as burdensome. However, one industry commenter supported the requirement and stated that it had been subject to a fair lending review that would have been unnecessary if the HMDA data had differentiated between land-and-home and home-only manufactured home loans. A few industry commenters stated that in some circumstances financial institutions secure loans using multiple methods to perfect a lien under both State real property and personal property law because of secondary market standards or prudence.

Other commenters argued that State law can be difficult to understand and that the proposed requirement would therefore be difficult to comply with and create the risk that the financial institution would be cited for incorrectly stating the legal classification. Some commenters noted that the legal classification may change after the closing date of the loan. Some industry commenters argued that the proposed requirement did not accurately reflect pricing distinctions made by manufactured housing lenders because pricing is based primarily on whether the security interest will cover both the land and home or the home only, regardless of State law classification. One commenter stated that the proposed requirement is relevant only to individual manufactured home loans, and not loans secured by manufactured home communities.

The Bureau understands that the proposed requirement may pose reporting challenges because of multiple methods of lien perfection and the complexity of and differences among State laws. However, information about manufactured home loan classification is valuable because there are material differences in types of manufactured home financing related to rate, term, origination costs, legal requirements, and consumer protections. These differences are discussed in the Bureau's white paper on Manufactured Housing Consumer Finance in the United States.[349] Furthermore, capturing the pricing distinction between types of manufactured home loans is important to facilitate fair lending analyses. Section 1003.4(a)(29) will provide necessary insight into this loan data and allow it to be used to help determine whether financial institutions are serving the housing needs of their communities, assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes, and, potentially, assist public officials in public-sector investment determinations.[350]

After considering the comments, pursuant to its authority under HMDA section 305(a) and 304(b)(6)(J), the Bureau is adopting § 1003.4(a)(29) with modifications. Pursuant to its authority under HMDA section 305(a) to provide for adjustments for any class of transactions, the Bureau believes that interpreting HMDA to treat mortgage loans secured by all manufactured homes consistently is necessary and proper to effectuate HMDA's purposes and facilitate compliance therewith.[351] Final § 1003.4(a)(29) requires financial institutions to report whether the covered loan is secured by a manufactured home and land or a manufactured home and not land instead of whether the manufactured home is legally classified as real or personal property. The Bureau believes that the final rule will facilitate fair lending analyses, and will help to explain pricing data. At the same time, the final rule will avoid the issues associated with reporting classification under State law such as using multiple methods of lien perfection. As adopted, the requirement will also not apply to multifamily dwellings to make clear that covered loans secured by a manufactured home community are not subject to this reporting requirement.

The Bureau is adopting new comment 4(a)(29)-1 to specify that even covered loans secured by a manufactured home classified as real property under State law should be reported as secured by a manufactured home and not land if the covered loan is also not secured by land. The Bureau is adopting new comment 4(a)(29)-2 to specify that this reporting requirement does not apply to loans secured by a multifamily dwelling that is a manufactured home community. Proposed comment 4(a)(29)-1 is adopted as comment 4(a)(29)-3. The Bureau is also adopting new comment 4(a)(29)-4 to provide guidance on the scope of the reporting requirement.

4(a)(30)

Section 304(b) of HMDA permits disclosure of such other information as the Bureau may require. The Bureau proposed to require financial institutions to collect and report whether the applicant or borrower owns the land on which a manufactured home is or will be located through a direct or indirect ownership interest or leases the land through a paid or unpaid leasehold interest. For the reasons discussed below, the Bureau is finalizing § 1003.4(a)(30) generally as proposed with technical modifications for clarity and to specify that multifamily dwellings are not subject to the reporting requirement.

Many consumer advocate commenters supported the proposed requirement and stated that the information would be valuable. In contrast, many industry commenters opposed the proposed requirement for several reasons. Some industry commenters stated that the proposed requirement is information Start Printed Page 66227that they currently do not verify for loans secured by a manufactured home and not land. Other industry commenters stated that they do collect some information about the land interest of the borrower for loans secured by a manufactured home and not land, but that the information reported by the applicant is often unreliable. Other industry commenters stated that the information is not a factor in loan pricing and questioned the value of the information. Some industry commenters stated that the proposed requirement would relate only to individual manufactured home loans and not loans secured by manufactured home communities.

The Bureau believes that the proposed requirement will provide valuable information about the land interest of manufactured home loan borrowers. The information could aid in determining whether borrowers are obtaining loans secured by a manufactured home and not land when they could qualify for a loan secured by a manufactured home and land. This information could aid policymakers at the local, State, and Federal level and financial institutions in determining how the housing needs of manufactured home borrowers could best be served by loan products relating to manufactured homes and legal requirements relating to such financing or the classification and treatment of manufactured homes under State law.[352]

After considering the comments, the Bureau is finalizing § 1003.4(a)(30) with technical modifications for clarity and to specify that multifamily dwellings are not subject to the reporting requirement. The Bureau is finalizing comments 4(a)(30)-1, -2, and -3 generally as proposed, with technical modifications for clarity. The Bureau is adopting new comment 4(a)(30)-4 to clarify that a loan secured by a multifamily dwelling that is a manufactured home community is not subject to the reporting requirement. The Bureau is adopting new comment 4(a)(30)-5 to provide guidance on direct ownership consistent with proposed appendix A. The Bureau is also adopting new comment 4(a)(30)-6 to provide guidance on the scope of the reporting requirement. The Bureau is adopting § 1003.4(a)(30) pursuant to its authority under section 305(a) and 304(b)(6)(J) of HMDA. The Bureau finds that § 1003.4(a)(30) is necessary to carry out HMDA's purposes, because it will provide necessary insight into loan data and allow it to be used to help determine whether financial institutions are serving the housing needs of their communities, since this information can have important implications for the financing, long-term affordability, and appreciation of the housing at issue.

4(a)(31)

Current Regulation C requires financial institutions to identify multifamily dwellings as a property type. The Bureau proposed to add § 1003.4(a)(31), which requires a financial institution to report the number of individual dwelling units related to the property securing the covered loan or, in the case of an application, proposed to secure the covered loan. As discussed above, the Bureau proposed to replace the current property type reporting requirement with construction method and to separate the concept of the number of units from that reporting requirement. For the reasons discussed below, the Bureau is adopting § 1003.4(a)(31) generally as proposed with additional commentary to provide clarity.

Some commenters supported the proposed requirement and stated that it would provide valuable information about covered loans related to multifamily housing and covered loans related to one- to four-unit dwellings. Other commenters argued that the number of units should be reported in ranges, such 1, 2-4, and 5 or more. Some commenters stated that ranges would be insufficient as they would not permit distinguishing between small and large multifamily dwellings or among one- to four-unit dwellings. Other commenters argued that no requirement to report number of units should be adopted and the current property type requirement should be retained. Some commenters stated that they currently collect an exact total number of units and the data would therefore be easy to obtain, while other commenters stated that they use ranges and the proposed requirement would be burdensome. Some commenters stated that there would be compliance difficulties in reporting total units for certain types of properties, such as manufactured home communities, condominium developments, and cooperative housing developments.

The Bureau believes that reporting the precise number of individual dwelling units would be preferable to ranges. The precise number would permit better comparison among loans related to dwellings with a single dwelling unit, two- to four-unit dwellings, and multifamily dwellings with similar numbers of dwelling units, thus facilitating the analysis of the housing needs served by both small and large multifamily dwellings. Reporting the precise number of units will also facilitate matching HMDA data to other publically available data about multifamily dwellings.

After considering the comments, the Bureau is finalizing § 1003.4(a)(31) as proposed pursuant to its authority under sections 305(a) and 304(b)(6)(J) of HMDA. Multifamily housing has always been an essential component of the nation's housing stock. In the wake of the housing crisis, multifamily housing has taken on an increasingly important role in communities, as families have turned to rental housing for a variety of reasons.[353] The Bureau finds that § 1003.4(a)(31) will further HMDA's purposes by assisting in determinations about whether financial institutions are serving the housing needs of their communities, and it may assist public officials in targeting public investments.

The Bureau received no specific feedback on comment 4(a)(31)-1, which is adopted with modifications for consistency with final comment 4(a)(9)-2. In response to the requests for clarification, the Bureau is adopting three new comments. New comments 4(a)(31)-2, -3, and -4 provide guidance on: Reporting the total units for a manufactured home community; reporting the total units for condominium and cooperative properties; and the information that a financial institution may rely on in complying with the requirement to report total units.

4(a)(32)

The Bureau proposed to add § 1003.4(a)(32), which requires financial institutions to collect and report information on the number of individual dwelling units in multifamily dwellings that are income-restricted pursuant to Federal, State, or local affordable housing programs. The Bureau also solicited comment on whether additional information about the program or type of affordable housing would be valuable and serve HMDA's purposes, and about the Start Printed Page 66228burdens associated with collecting such information compared with the burdens of the proposal. In addition to soliciting feedback generally about this requirement, the Bureau specifically solicited comment on the following points:

  • Whether the Bureau should require reporting of information concerning programs targeted at specific groups (such as seniors or persons with disabilities);
  • Whether income restrictions above a certain threshold should be excluded for reporting purposes (such as income restrictions above the area median income);
  • Whether it would be appropriate to simplify the requirement and report only whether a multifamily dwelling contains a number of income-restricted units above a certain percentage threshold;
  • Whether financial institutions should be required to report the specific affordable housing program or programs;
  • Whether financial institutions should be required to report the area median income level at which units in the multifamily dwelling are considered affordable; and
  • Whether the burden on financial institutions may be reduced by providing instructions or guidance specifying that institutions only report income-restricted dwelling units that they considered or were aware of in originating, purchasing, or servicing the loan.

Many industry commenters opposed the proposed income-restricted units reporting requirement and stated that it would impose new burden on many financial institutions that do not regularly collect this information currently. Many consumer advocate commenters supported the proposed reporting requirement and stated that it would provide valuable information on how financial institutions are serving the housing needs of their communities. However, most consumer advocate commenters argued that the proposed requirement would not provide enough information, and that the Bureau should add additional reporting requirements to gather information about the affordability level of the income-restricted units. Some commenters proposed additional reporting requirements related to multifamily dwellings including the number of bedrooms for the individual dwellings units, whether the housing is targeted at specific populations, the presence and number of commercial tenants, the debt service coverage ratio at the time of origination, and whether the developer or owner of the housing is a mission-driven nonprofit organization.

Regarding whether housing is targeted at specific populations, the Bureau notes that it is providing commentary to the definition of dwelling as discussed above in the section-by-section analysis of § 1003.2(f) regarding when housing associated with related services or medical care should be reported. However, the Bureau does not believe it would be appropriate to adopt a reporting requirement regarding housing targeted at specific populations, at this time.

The Bureau does not have sufficient information on the costs and benefits associated with such a reporting requirement and the challenges in developing an appropriate reporting scheme given the wide variety of housing designated for specific populations including persons with disabilities and seniors. Similarly, the Bureau is not finalizing reporting requirements on the other specific suggestions for multifamily dwellings at this time because it does not have sufficient information on the costs and benefits associated with such reporting requirements and the Bureau believes it may be likely that the burdens of such reporting would outweigh the benefits.

Consumer advocate commenters generally stated that the Bureau should adopt additional data points similar to the data reporting requirements for the GSEs' affordable housing goals.[354] One commenter stated that income-restricted units at 80, 100, or 120 percent of area median income should not be considered affordable and not reported. Other commenters stated that financial institutions should be permitted to rely on information provided by the applicant or considered during the underwriting process to fulfill this reporting requirement.

The Bureau believes that additional information about income-restricted multifamily dwellings would be valuable, but believes any benefits would not justify the burdens for collecting detailed information about the level of affordability for individual dwelling units. The suggestion to align HMDA reporting with the GSE affordable housing goals would require financial institutions to report five data points.[355] The Bureau believes that the GSE affordable housing goal reporting requirements are sufficiently distinct from HMDA that they should not be adopted for HMDA purposes. For example, the HMDA reporting requirement proposed concerns only income-restricted dwelling units, which would generally be identifiable from information about the property and not require tenant income or rent determinations for HMDA reporting, whereas dwelling units may qualify for the GSE affordable housing goals based on tenant income information compared to area median income or on rent levels and adopting a similar reporting requirement for HMDA would therefore require information related to tenant income or rent levels that a financial institution may not consider in all instances when not required to do so by GSE requirements.[356] This would be significantly more burdensome than the requirement proposed. Furthermore, for the GSE affordable housing goals the GSEs themselves participate in analyzing the data and making the determinations, and may estimate in the case of missing information.[357] The Bureau did not propose to participate in making the determinations on affordable housing in a similar way.

Some commenters stated that the burden of imposing the GSE affordable housing goal requirements would not be significant because many HMDA reporters would already be following them for covered loans secured by multifamily dwellings sold to the GSEs. However, according to the 2013 HMDA data, of the 39,861 originated loans secured by multifamily dwellings, only 2,388 were sold to the GSEs within the calendar year of origination. The Bureau is concerned that many financial institutions would not be using the GSE affordable housing goal standards for the majority of their HMDA-reportable loans secured by multifamily dwellings. Therefore, the Bureau is not adopting the suggested reporting requirement aligned with the GSE affordable housing goals.

The Bureau believes that information about the number of income-restricted units in multifamily dwellings is valuable and will further HMDA's purposes, in part by providing more useful information about these vital public resources, and thereby assisting public officials in distributing public-sector investment so as to attract private investment to areas where it is needed. Presently the need for affordable Start Printed Page 66229housing is much greater than the supply.[358] Although the requirement entails additional burden for some financial institutions, other financial institutions that specialize in lending related to income-restricted multifamily housing may have lesser initial burden associated with this requirement. By limiting the requirement to income-restricted units and excluding some other forms of affordable housing policies and programs, the rule provides a well-defined scope of reporting that should generally be verifiable through property records and other sources.

After considering the comments and conducting additional analysis, pursuant to HMDA sections 305(a) and 304(b)(6)(J), the Bureau is finalizing § 1003.4(a)(32) as proposed. The Bureau is adopting new comment 4(a)(32)-5 to provide guidance on information that a financial institution may rely on in complying with the requirement to report the number of income-restricted units. The Bureau is adopting new comment 4(a)(32)-6 to provide guidance on the scope of the reporting requirement. The Bureau is also finalizing comments 4(a)(32)-1, -2, -3, and -4 generally as proposed, with modifications for clarity.

4(a)(33)

The Bureau proposed § 1003.4(a)(33) to implement the Dodd-Frank Act amendment that requires financial institutions to disclose “the channel through which application was made, including retail, broker, and other relevant categories” for each covered loan and application.[359] Proposed § 1003.4(a)(33) provided that, except for purchased covered loans, a financial institution was required to report the following information about the application channel of the covered loan or application: whether the applicant or borrower submitted the application for the covered loan directly to the financial institution; and whether the obligation arising from the covered loan was or would have been initially payable to the financial institution. The Bureau also proposed illustrative commentary. The Bureau is finalizing § 1003.4(a)(33) as proposed and proposed comments 4(a)(33)-1 through -3 with the modifications discussed below.

Comments

Several consumer advocate commenters expressed support for the proposed requirement, noting the importance of this information in identifying risks to consumers. On the other hand, some industry commenters expressed concerns about proposed § 1003.4(a)(33). One industry commenter explained that collecting this information would be burdensome because financial institutions do not routinely capture it in the proposed format. Another industry commenter asked the Bureau to exempt multifamily loans from this requirement. In addition, a commenter asked the Bureau to exempt community banks because all of their originations come through the same application channel.

Information about the application channel of covered loans and applications will enhance the HMDA data. The loan terms and rates that a financial institution offers an applicant may depend on how the applicant submits the application (i.e., whether through the retail, wholesale, or correspondent channel).[360] Thus, identifying transactions by channel may help users to interpret loan pricing and other information in the HMDA data. In addition, these data will aid in understanding whether certain channels present particular risks for consumers.

While there is some burden associated with collecting this information, the Bureau understands that the burden is minimal because the information is readily available and easily reported in two true-false fields. For the same reasons, the Bureau does not believe that it is appropriate to exclude certain types of institutions or types of loans from the requirement, except the exclusion for purchased loans discussed below.

Some commenters suggested different approaches to collect application channel information. One consumer advocate commenter asked the Bureau to collect the loan channel information as defined by the Secure and Fair Enforcement of Mortgage Licensing Act (SAFE Act), Public Law 110-289, to identify the retail, wholesale, and correspondent channels. However, neither the SAFE Act nor its implementing regulations define loan channels, so it is not possible to align with loan channel definitions in that statute.[361]

In addition, the final rule will collect sufficient information to identify the various loan channels. The application channels in the mortgage market can be identified with three pieces of information: (1) Which institution received the application directly from the applicant, (2) which institution made the credit decision, and (3) the institution to which the obligation initially was payable. For example, the term “retail channel” generally refers to situations where the applicant submits the application directly to the financial institution that makes the credit decision on the application and to which the obligation is initially payable. The term “wholesale channel,” which is also referred to as the “broker channel,” generally refers to situations where the applicant submits the application to a mortgage broker and the broker sends the application to a financial institution that makes the credit decision on the application and to which the obligation is initially payable. The correspondent channel includes correspondent arrangements between two financial institutions. A correspondent with delegated underwriting authority processes an application much like the retail channel described above. The correspondent receives the application directly from the applicant, makes the credit decision, closes the loan in its name, and immediately or within a short period of time sells the loan to another institution. Correspondents with nondelegated authority operate somewhat more like a mortgage broker in the wholesale channel. These correspondents receive the application from the applicant, but prior to closing involve a third-party institution that makes the credit decision. The transaction generally closes in the name of the correspondent, which immediately or within a short period of time sells the loan to the third-party institution that made the credit decision.[362]

Regulation C requires the institution that makes the credit decision to report the action taken on the application, as discussed above in the section-by-section analysis of § 1003.4(a). Therefore, the application channels described above can be identified with the information required by proposed § 1003.4(a)(33), which included whether Start Printed Page 66230the applicant or borrower submitted the application directly to the financial institution that is reporting the loan and whether the obligation was, or would have been, initially payable to the financial institution that is reporting the loan.

An industry commenter suggested that the Bureau implement the Dodd-Frank Act amendment by requiring financial institutions to report whether a broker was involved. The Bureau believes the proposal would be less burdensome than the suggested approach, which would require the final rule to define the term “broker” solely for the purpose of HMDA reporting. A broker is generally understood to refer applicants to lenders, but a broker may play a different role in a given transaction depending on the business arrangement it has with a lender or investor. In addition, as discussed above, the commenter's suggested approach would not identify other channels, such as the correspondent channel. Therefore, proposed § 1003.4(a)(33) is the preferable approach.

An industry commenter also opposed the exclusion of purchase loans from the requirement to report the information required by proposed § 1003.4(a)(33). The commenter reasoned that it is more efficient to collect information from investors than from the originating organization. The commenter also did not believe that the information required by § 1003.4(a)(33) would be the same for all purchased loans reported by a financial institution. The Bureau continues to believe that collecting application channel information for purchased loans is unnecessary. Under Regulation C, if the financial institution reports a loan as a purchase, the reporting institution did not make a credit decision on the loan. See the section-by-section analysis of § 1003.4(a) and comments 4(a)-2 through -4. Thus data users could assume that most, if not all, entries reported as purchases did not involve an application submitted to the purchaser and that the loan did not close in the institution's name.

A consumer advocate commenter urged the Bureau to collect a unique identifier for each loan channel in addition to the information required by proposed § 1003.4(a)(33). The final rule will require financial institutions to report the NMLS ID of the loan originator for covered loans and applications. See the section-by-section analysis of § 1003.4(a)(34). The NMLS ID will further help to identify the loan channel.

Direct submission of an application. Some commenters sought clarification about proposed § 1003.4(a)(33)(i), which required financial institutions to indicate whether a financial institution submitted an application directly to the financial institution. A commenter suggested referencing the language used in the SAFE Act about loan origination activities to clarify what proposed § 1003.4(a)(33)(i) required. The Bureau's Regulations G and H, which implement the SAFE Act, provide detailed examples of activities that are conducted by loan originators.[363] If the loan originator that performed loan origination services for the application or loan that the financial institution is reporting was an employee of the reporting financial institution, the applicant likely submitted the application directly to the financial institution. Section 1003.4(a)(34), discussed below, references the definition of loan originator in the SAFE Act, and directs financial institutions to report the NMLS ID of the loan originator that performed origination activities on the covered loan or application. Therefore, the Bureau is modifying proposed comment 4(a)(33)-1, renumbered as comment 4(a)(33)(i)-1 to clarify that an application was submitted directly to the financial institution that is reporting the covered loan or application if the loan originator identified pursuant to § 1003.4(a)(34) was employed by the financial institution when the loan originator performed loan origination activities for the loan or application that the financial institution is reporting.

Another commenter suggested clarifying whether an application is submitted directly to the financial institution if the application is submitted to a credit union service organization (CUSO) hired by the credit union that is reporting the entry to receive applications for covered loans on behalf of a credit union. The Bureau is also modifying proposed comment 4(a)(33)-1, renumbered as comment 4(a)(33)(i)-1, to illustrate how to report whether the application was submitted directly to the financial institution when a CUSO or other similar agent is involved.

Another industry commenter raised privacy concerns about releasing to the public the application channel information. The Bureau appreciates this feedback and is carefully considering the privacy implications of the publicly released data. See part II.B above for a discussion of the Bureau's approach to protecting applicant and borrower privacy with respect to the public disclosure of the data. Due to the significant benefits of collecting this information, the Bureau believes it is appropriate to collect application channel information despite the concerns raised by commenters about collecting this information. The Bureau received no comments on proposed comments 4(a)(33)-2 and -3.

Final Rule

For the reasons discussed above and pursuant to its authority under HMDA sections 304(b)(6)(E) and 305(a), the Bureau is adopting § 1003.4(a)(33) as proposed. This requirement is an appropriate method of implementing HMDA section 304(b)(6)(E) in a manner that carries out HMDA's purposes. To facilitate compliance, pursuant to HMDA 305(a), the Bureau is excepting purchased covered loans from this requirement. The Bureau is also finalizing proposed comments 4(a)(33)-1, -2, and -3, renumbered as comments 4(a)(33)(i)-1, 4(a)(33)(ii)-1, and 4(a)(33)-1, with the modifications discussed above. The Bureau is also adopting new comment 4(a)(33)(ii)-2 to clarify that a financial institution may report that § 1003.4(a)(33)(ii) is not applicable when the institution had not determined whether the covered loan would have been initially payable to the institution reporting the application when the application was withdrawn, denied, or closed for incompleteness.

4(a)(34)

Regulation C does not require financial institutions to report information regarding a loan originator identifier. HMDA section 304(b)(6)(F) requires the reporting of, “as the Bureau may determine to be appropriate, a unique identifier that identifies the loan originator as set forth in section 1503 of the [Secure and Fair Enforcement for] Mortgage Licensing Act of 2008” (S.A.F.E. Act).[364] The Bureau proposed § 1003.4(a)(34), which implements this requirement by requiring financial institutions to report, for a covered loan or application, the unique identifier assigned by the Nationwide Mortgage Licensing System and Registry (NMLSR ID) for the mortgage loan originator, as defined in Regulation G § 1007.102 or Regulation H § 1008.23, as applicable.

In addition, the Bureau proposed three comments. Proposed comment 4(a)(34)-1 discusses the requirement that a financial institution report the NMLSR ID for the mortgage loan Start Printed Page 66231originator and describes the NMLSR ID. Proposed comment 4(a)(34)-2, clarifies that, in the event that the mortgage loan originator is not required to obtain and has not been assigned an NMLSR ID, a financial institution complies with § 1003.4(a)(34) by reporting “NA” for not applicable. Proposed comment 4(a)(34)-2 also provides an illustrative example to clarify that if a mortgage loan originator has been assigned an NMLSR ID, a financial institution complies with § 1003.4(a)(34) by reporting the mortgage loan originator's NMLSR ID regardless of whether the mortgage loan originator is required to obtain an NMLSR ID for the particular transaction being reported by the financial institution. Lastly, the Bureau proposed comment 4(a)(34)-3, which clarifies that if more than one individual meets the definition of a mortgage loan originator, as defined in Regulation G, 12 CFR 1007.102, or Regulation H, 12 CFR 1008.23, for a covered loan or application, a financial institution complies with § 1003.4(a)(34) by reporting the NMLSR ID of the individual mortgage loan originator with primary responsibility for the transaction. The proposed comment explains that a financial institution that establishes and follows a reasonable, written policy for determining which individual mortgage loan originator has primary responsibility for the reported transaction complies with § 1003.4(a)(34).

The vast majority of commenters supported the Bureau's proposed § 1003.4(a)(34). Many consumer advocate commenters supported the Bureau's proposal to include a unique identifier for a mortgage loan originator because this information may help regulatory agencies and the public identify financial institutions and loan originators that are engaged in problematic loan practices. Commenters also supported the Bureau's proposed § 1003.4(a)(34) because they believe the information is critical to understanding the residential mortgage market.

Consistent with the Small Business Review Panel's recommendation, the Bureau specifically solicited comment on whether the mortgage loan originator unique identifier should be required for all entries on the loan/application register, including applications that do not result in originations, or only for loan originations and purchases. One industry commenter stated without explanation that the reporting requirement should only apply to originations and purchases. Another national trade association stated, without further explanation, that reporting of the mortgage loan originator unique identifier should not be required on applications that do not result in originations because such data will not provide any value and will impose burden on industry. In contrast, another industry commenter stated that in order for the NMLSR ID to be useful, such data should only be collected and reported if the loan officer has the authority to decide whether to approve or deny the application. This commenter stated that in such cases, the NMLSR ID would need to be collected for both originated and non-originated applications.

The Bureau has considered this feedback and determined it will adopt proposed § 1003.4(a)(34), which applies to applications, originations, and purchased loans. The Bureau believes the HMDA data's usefulness will be improved by being able to identify individual mortgage loan originators with primary responsibility over applications, originations, and purchased loans. While the Bureau acknowledged in its proposal that a requirement to collect and report a mortgage loan originator unique identifier may impose some burden on financial institutions, the Bureau did not receive feedback specifically addressing the potential burden. In fact, a State trade association commented that reporting the mortgage loan originator's NMLS ID would not pose an additional burden for its members because it already collects and reports this information for the mortgage Call Report. A government commenter also stated that this data should be readily accessible by HMDA reporters since it will be provided on the TILA-RESPA integrated disclosure form.

The Bureau has determined that the benefits gained by the information reported under proposed § 1003.4(a)(34) justify any potential burdens on financial institutions. As discussed in the Bureau's proposal, this information is provided on certain loan documents pursuant to the loan originator compensation requirements under TILA.[365] As noted by a commenter, this information will also be provided on the TILA-RESPA integrated disclosure form.[366] As a result, the Bureau has determined that the NMLSR ID for the mortgage loan originator will be readily available to HMDA reporters at little to no ongoing cost.

Several commenters did not support the Bureau's proposed § 1003.4(a)(34) for two main reasons. This opposition is based on concerns related to disclosure of this information by the Bureau. First, one State trade association and a few industry commenters suggested that review of a mortgage loan originator's performance should be left up to the individual financial institution and not be subject to public scrutiny. Second, a few commenters stated that requiring financial institutions to report the NMLSR ID of the individual mortgage loan originator would raise concerns regarding the privacy of those mortgage loan originators. For example, a State trade association and another industry commenter opposed the Bureau's proposed § 1003.4(a)(34) because it believes disclosing an NMLSR ID in connection with specific loan transactions has the potential to violate the financial privacy of individual employees of a financial institution. The commenter suggested that making this information publicly available would create privacy concerns for a financial institution's loan originator employees by opening the door to identification of the loan originator by name and address. In addition, the commenter argued that this information, combined with other transaction specific public information, could enable someone to calculate an individual loan originator employee's commission income, sales volume and other private financial information. Another industry commenter suggested that if a mortgage loan originator can be identified in the HMDA data, and the loan originator originated a large volume of loans at a financial institution that subsequently fails for reasons unrelated to underwriting, the loan originator may be unable to find employment.

The Bureau has considered this feedback. The Bureau has concluded that it will not withhold from public release the NMLSR ID of mortgage loan originators for the reasons expressed by commenters. As summarized above, the commenters were concerned that the public disclosure of this information may implicate the privacy interests of mortgage loan originators. As discussed in part II.B above, HMDA directs the Bureau to “modify or require modification of itemized information, for the purpose of protecting the privacy interests of the mortgage applicants or mortgagors, that is or will be available to the public.” [367] The Bureau is applying a balancing test to determine whether and how HMDA data should be modified prior to its disclosure to the public in order to protect applicant and borrower privacy while also fulfilling HMDA's public disclosure purposes. The Bureau will consider NMLSR ID Start Printed Page 66232under this applicant and borrower privacy balancing test. The Bureau is implementing, in § 1003.4(a)(34), the Dodd-Frank Act amendment to HMDA requiring a unique identifier for mortgage loan originators. Because the Dodd-Frank Act explicitly amended HMDA to add a loan originator identifier, while at the same time directing the Bureau to modify or require modification of itemized information “for the purpose of protecting the privacy interests of the mortgage applicants or mortgagors,” the Bureau believes it is reasonable to interpret HMDA as not requiring modifications of itemized information to protect the privacy interests of mortgage loan originators, and that that interpretation best effectuates the purposes of HMDA.

The Bureau is finalizing the Dodd-Frank Act requirement for the collection and reporting of a mortg