The August 31, 2018 HMDA rule helped clarify the 2018 reporting requirements for banks and credit unions that are minor players in the mortgage market. However, this rule could adversely affect the rate spread data used in fair lending pricing analysis.
Rate spread is the difference on a consumer loan between the APR and the Average Prime Offer Rate. LendingPatterns™ reports analyze whether the magnitude of spread or the frequency of high-cost lending varies by either applicant race/ethnicity or tract majority race. Many lenders analyzing their own LARs will find disparities along these lines by prohibited basis, and so comparing lender data to peers is an important way to contextualize these disparities.
Most institutions using LendingPatterns™ will not benefit from the small bank and credit union exemptions because of their higher loan volume, but they will find it harder, given the missing data, to conduct peer comparisons of spread, which is unfortunate.
In implementing S.2155, the August 31, 2018 rule indicates that banks and credit unions that originated between 25 and 500 closed-end mortgage loans during each of the two prior years are eligible to report “exempt” in the rate spread field (among other fields), in their submission of 2018 closed-end mortgage data to the government.
Note that any institution that wants to report the actual data rather than “exempt” in the affected fields is allowed to do that.
Prior to 2018 HMDA, as a result of Fed rulemaking, all HMDA-reporting mortgage lenders were reporting spreads that exceeded 150 basis points on a first-lien loan and 350 basis points on a second lien loan.
As the CFPB wrote in the rule, the reason that the Fed required this information was because, in the Fed’s view, it was “necessary to fulfill the statutory purposes of HMDA and to ensure the continued utility of the HMDA data.”
In S.2155, I believe it was Congress’s intent to give small banks and credit unions the freedom not to report spreads that did not exceed these thresholds, not to wipe out these institutions’ spread reporting requirements. But the CFPB, in its rule, said that these small institutions were not obliged to report any rate spread data.
The projected effect of this change is that spread reporting will be exempt on about 50,000 loans where spread would have been reported previously. That is roughly 11% of the loans with a reported rate spread.
This is a ballpark estimate looking at 2016 data in LendingPatterns™. Those who qualify for the exemption account for 7% of the applications in HMDA. Lenders who qualify have a roughly 70% origination rate, and 9% of the loans closed by these lenders meet the old spread thresholds. (It is hard to get a precise estimate for a number of reasons due to optional reporting of exempt fields, fluctuating volume levels, and the loss of exemptions for banks with “needs to improve” Community Revitalization Act ratings.)
The top ten markets where these 50,000 loans are distributed are shown below.
In one case, Houston, there could be more than 800 loans where a rate spread will not be reported that exceeds the old threshold. In another case, Kansas City, the loans where rate spread is not reported may account for more than 16% share of the high-price market in that MSA. These numbers are not trivial.
The silver lining is that the CFPB did note in its rule that this change is not final:
“The CFPB may propose in a future notice-and-comment rulemaking to use its HMDA authority other than [in Dodd-Frank] reinstate the Fed’s requirement to report rate spread for higher-priced mortgage loans covered by the partial exemptions so the Bureau can receive data and views bearing on the costs and benefits of such a proposal.”