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By Karin Modjeski Bearss
Significant changes to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), take effect in January 2004. These changes, designed primarily to enhance understanding of mortgage markets and assist in fair lending enforcement, will increase the amount and types of public information about residential real estate lending.
HMDA, enacted in 1975, requires certain depository institutions and certain nondepository institutions 1/ to report information annually about applications for and originations of home-purchase and home-improvement loans, including the refinancings of both types of loans. Most significantly, HMDA reporters must provide borrower information, such as income, gender, and race or national origin; and loan information, such as property location and loan amount.
HMDA serves several purposes. First, it provides the public with information on whether institutions are serving a community�s housing credit needs. Second, it helps public officials target private investments to areas most in need. Third, it aids in the enforcement of antidiscrimination laws and helps identify discriminatory lending patterns.
Financial institutions meeting certain criteria are required to report HMDA data. The most significant criterion is that the institution must have a home or branch office in a metropolitan statistical area (MSA). 2/ As part of the changes taking effect in 2004, nondepository institutions will be subject to new requirements for determining if they are covered by HMDA.
Currently, such an institution must report HMDA data if it has an office in an MSA and its home-purchase loan originations equal or exceed 10 percent of its dollar volume of originated loans in the previous year. Under the 2004 changes, a mortgage-lending institution will now also be subject to HMDA data reporting if its originated home-purchase loans, including refinances, equaled at least $25 million in the preceding calendar year.
The Board of Governors of the Federal Reserve System (Board) implemented this change because some nondepository institutions, despite originating significant levels of mortgage loans, did not fall within the 10 percent HMDA coverage threshold. The Board believes that more complete mortgage-related information will be made available by adding the $25 million volume threshold.
Starting in 2004, HMDA reporters will need to collect additional data items related to HMDA-reportable applications and loans. These additional items are:
Annual percentage rate. In one of the more significant changes to Regulation C, reporters will need to provide annual percentage rate, or APR, information on certain originated real estate loans. Regulation Z, which implements the Truth in Lending Act, requires lenders to provide an APR disclosure for consumer-purpose loans, including residential real estate loans. The APR describes the loan�s cost as an annual rate.
Under the new rules, a lender will need to report the spread between a loan�s APR and the yield on Treasury securities with a comparable maturity if this spread equals or exceeds 3 percentage points for first-lien loans or 5 percentage points for subordinate-lien loans. This reporting requirement applies to home-purchase, refinance, and dwelling-secured home-improvement loans subject to Regulation Z. Regulation C and its appendices provide detailed guidance on how a lender should determine and report this rate-spread information.
In making this change, the Board believed it was important to collect some type of loan-pricing-related information through HMDA. Such information will be valuable in evaluating fair lending concerns related to loan pricing. The information will also enable better analysis of mortgage markets�particularly the subprime mortgage market, in which loan pricing practices vary significantly.
Lien status. HMDA reporters will need to identify whether a loan is secured by a first or second lien or not secured by a lien. Given that loan rates often vary based on lien status, the reporting of that status should aid in the analysis of loans for which APR information is reported.
HOEPA status. The Home Ownership Equity Protection Act (HOEPA), adopted in 1994, covers certain high-cost mortgages whose APRs or total costs and fees exceed certain thresholds. HOEPA requires lenders to make disclosures that are designed to provide the borrower with complete information on the loan�s costs and terms. HOEPA also prohibits lenders from applying certain terms to or engaging in certain practices related to these types of loans.
The new rules require HMDA reporters to indicate whether a loan is subject to HOEPA. This requirement will enhance regulators� understanding of the subprime mortgage market, given that many loans subject to HOEPA are considered subprime mortgages.
Manufactured home status. HMDA reporters will need to report whether an application or loan involves manufactured housing, as determined by a U.S. Department of Housing and Urban Development regulation that establishes construction and safety standards for manufactured homes.
The availability of manufactured housing information will improve the value of HMDA data, given that most institutions underwrite such loans differently from other types of housing loans. Loans for manufactured housing also tend to have higher denial rates, thus making the information valuable for evaluating an institution�s fair lending performance.
Preapproval request information. In some real estate loan transactions, a lender may preapprove or commit to making a mortgage loan to a customer once the customer identifies an acceptable property. Under current HMDA rules, if a preapproval request results in an origination, the origination�not the preapproval�is reported under HMDA.
Under the new rules, lenders will need to report denied preapproval requests if the preapproval is reviewed under a program meeting certain criteria. Lenders will also need to identify whether a loan or application involved a preapproval request for a home-purchase loan. In order for a request to be considered a preapproval under HMDA, the lender must complete the following steps:
To be considered a preapproval, the written commitment may include limited conditions discussed in the regulation. The lender has the option of reporting preapproval requests that are approved but not accepted by the applicant.
The Board�s changes to the reporting of preapproval requests stem from its belief that requests reviewed under a highly structured program�such as the one described above�would be considered applications under Regulation C and, thus, should be reported.
Finally, the categories under which HMDA reporters collect information on borrowers will change in 2004. Currently, Regulation C requires that lenders collect and report information on an applicant�s race or national origin. Such information aids regulators and others in helping to identify lending practices that might be discriminatory.
The changes taking effect in 2004 will add a new category for ethnicity; race will become a separate category. Designations for "Hispanic or Latino" and "Not Hispanic or Latino" will appear under the ethnicity category. The race category will contain five designations: American Indian or Alaska Native; Asian; Black or African American; Native Hawaiian or Other Pacific Islander; and White. "Other" will no longer be an option under the race category. The changes will make the collection of ethnicity and race information consistent with Office of Management and Budget guidelines titled "Standards for Maintaining, Collecting, and Presenting Federal Data on Race and Ethnicity."
The two final rules that implement these amendments are posted on the Board�s Web site at www.federalreserve.gov/boarddocs/press/bcreg/2002/20020621/
default.htm and www.federalreserve.gov/boarddocs/press/
boardacts/2002/20020207/.
The definitions of two important terms will change when the Regulation C amendments take effect in 2004.
Refinancing. Under Regulation C, refinancings of home-purchase and home-improvement loans must be reported. The regulation defines a refinancing as a loan that satisfies and replaces an existing obligation by the same borrower.
Currently, HMDA reporters may choose among four scenarios in determining which refinances to report. In order to make the data more consistent, the Board amended this definition. In 2004, a refinancing will be defined as a transaction in which a new obligation satisfies and replaces an existing obligation with the same borrower, where both the existing and the new loans are secured by a dwelling.
Home-improvement loan. Currently, a "home-improvement loan" under Regulation C is a loan that:
Under the new rules, the definition of home-improvement loan will differ depending on whether or not the loan is secured by a dwelling. For those loans not secured by a dwelling, the definition above will still apply. As such, the bank will be required to report only those nondwelling-secured home-improvement loans that it chooses to classify as home-improvement loans in its loan system or elsewhere.
For dwelling-secured home-improvement loans, the bank will need to report any such loans made for the purpose of repairing, rehabilitating, remodeling or improving a dwelling or the real property on which it is located. Regulation C will require the reporting of all such loans, even if the institution does not classify the loan as a home-improvement loan in its loan system or elsewhere. This change should help ensure more consistent reporting of home-improvement data and aid the evaluation of such information.
HOEPA prohibits a lender from engaging in a pattern or practice of extending HOEPA loans without regard to the borrower's ability to repay from sources other than the encumbered home's equity. 12 CFR § 226.34.
Remedies available to borrowers where a HOEPA violation is present include all those under TILA, including rescission. In addition, where the lender's failure to comply with HOEPA is material, a borrower may recover an amount equal to the sum of all finance charges and fees paid in the transaction. 12 CFR § 226.23. Further, all claims and defenses that arise under any non-TILA, non-HOEPA theory against the original lender may be asserted against a subsequent purchaser or assignee of the loan.
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 Housing dreams turning into nightmaresMortgage fraud cases detailed in LawrenceLAWRENCE -- Jose Felipe dreamed of buying a retirement house in Florida, where palm trees and balmy breezes would remind him of his native Dominican Republic. So the commercial painter went to a storefront mortgage consultant in Lawrence two years ago and asked for a credit check. Top-notch, he recalled being told. But not for long. About a year later, he said, he discovered that the consultant, Rafael D. Reyes -- who turned out to have been convicted twice for identity fraud since 1998 -- had used his name and Social Security number to buy a $260,000 duplex in Lawrence. Since then, Felipe has struggled to repair his credit rating and get authorities to charge Reyes. ``This is driving me crazy," said Felipe, 59, who had tried to put his life back together after being convicted of two drug charges in 1992 and receiving suspended sentences. ``Imagine: I'm paralyzed here. I'm living with this problem, and I can't believe it." A Globe investigation of mortgage practices in Lawrence found a variety of abuses by brokers, including overstating incomes so borrowers would qualify for mortgages, arranging loans that borrowers could not afford, and identity fraud, the allegation against Reyes. The Globe investigation also found that state oversight of the brokers appears to be inadequate. Some brokerage firms, which promise borrowers ``100 percent financing" and ``guaranteed home ownership," operate without required state licenses. And because the state licenses mortgage companies and their owners, and not the loan officers who work for them, it is difficult for consumers to check the record of an individual officer. In contrast, the state has a website where consumers can easily review the licenses and disciplinary records of dozens of other professionals, including accountants, veterinarians, and manicurists. After the Globe inquired about possible mortgage fraud in Lawrence, the state Division of Banks on Aug. 11 shut two licensed mortgage brokers, Diamond Mortgage Services and Synergy Mortgage Group , and fined Diamond $200,000 for inflating the income of borrowers on applications to help them qualify for loans. The state seized Diamond's mortgage license for its Lawrence office and allowed the Taunton headquarters to keep its license because regulators found no evidence of fraud there. But the division was unaware last week that Diamond had until recently operated an unlicensed branch in Lowell and had an ad in a local Cambodian newspaper published last month. On the same day it shut Diamond and Synergy, the banking division ordered Reyes and a local businesswoman to stop operating illegally without state licenses. But the division made no mention of the more serious allegation of identity fraud against Reyes. Reyes, 49, owner of Reyes Multi-Services , could not be reached for comment despite calls to his cellphone, his relatives, and a lawyer who recently represented him. His office, which now appears to be empty, was across the street from an evangelical church, where he is identified on the window as the pastor. Community leaders in Lawrence, a former mill city, say they fear that the state has only scratched the surface of the mortgage fraud problem. Housing specialists say that one indicator of problems is a spike in the number of foreclosures. Filings in the city have risen almost 180 percent in the past two years, among the steepest increases of any city in Massachusetts, according to ForeclosuresMass Corp. ``In my opinion, people should be going to jail," said Juan Bonilla , who counsels home buyers at Lawrence CommunityWorks Inc., a nonprofit community development group. ``I'd be willing to bet a million dollars that there are more people being deceived out there." Mortgage fraud is ``the best-kept dirty secret in Lawrence," said Sal Tabit , a former Essex County prosecutor who helped Felipe file a complaint with the attorney general's office. He said Attorney General Thomas F. Reilly should prosecute cases of fraud more aggressively. However, Reilly spokeswoman Beth Stone cited at least eight instances in which he took action against abuses in the mortgage and real estate industry since 2002. Stone said that prosecutors also began a criminal investigation last month of a complaint of identity theft and bank fraud by a Lawrence-area resident, but she would not say whether the complaint involved Reyes. She said that probe has widened based on information that the alleged offender may have committed other crimes. Joseph A. Leonard Jr. , general counsel for the banking division, said the state vigorously regulates licensed mortgage brokers. Regulators make on-site inspections of brokerage firms, which can include examination of financial records, at least every three years. Applicants for licenses must undergo criminal background checks and demonstrate good character through letters of recommendation. But Leonard acknowledged that some in the lending industry say loan officers should also be required to go through licensing, including background checks. A bill to require loan officers to be licensed was introduced in the state Senate last year, but the division opposed it, saying the current law was tougher because it holds firms responsible for the abuses of employees, he said. The Globe uncovered at least a half-dozen cases of deception, financial ruin, and shattered dreams among Lawrence home buyers. Mortgage documents and income tax statements obtained by the Globe indicate that several brokers and real estate businesses besides Diamond and Synergy (which is not affiliated with a company of the same name based in Annapolis, Md.) exaggerated the earnings of home buyers to secure high-interest loans. In virtually every case examined by the Globe, monthly mortgage bills were hundreds of dollars more than borrowers could afford. The buyers soon faced foreclosure and ruined credit ratings that will probably hound them for years. Gary Klein , a Boston lawyer who has represented borrowers in lawsuits alleging fraud, examined the documents obtained by the Globe and said they represent the ``full Monty of predatory lending." ``It's a case of the sophisticated preying on the unsophisticated," he said. Mortgage fraud has become widespread in recent years, fueled by the real estate boom in the first half of the decade, according to housing specialists. The problem is particularly widespread in communities such as Lawrence, which has a large Hispanic immigrant population and first-time purchasers who specialists say may be uninformed and too trusting of brokers who speak their languages and live in their neighborhoods. Silvio and Rumalda Torres said they were among the buyers who were too trusting. He is a tow-truck driver; at the time, she stocked shelves at a department store. They applied by telephone for a loan to buy a house in Lynn about two years ago, but were rejected because their credit score and annual income of nearly $60,000 were too low. A few months later, they said, Silvio's uncle introduced them to Jorge A. Elias , a lawyer and real estate broker. The Torreses said he arranged a $370,000 loan for a three-decker house in Lawrence. What the couple did not know, they said, was that Elias had been indicted the year before on felony charges that he had employed people to stage automobile crashes to collect insurance. The Torreses' happiness was short-lived. Their monthly mortgage payment, they said, was $1,000 more than they had been told -- about $3,200, and they were unable to quickly rent both apartments to help pay it. And when they reexamined their mortgage application, they said, they realized that their annual income had been inflated by $27,600 -- to $7,300 a month from $5,000 a month. Silvio Torres blamed himself for not reading the mortgage documents before signing them. This summer the couple declared bankruptcy; the house is in foreclosure. ``I never imagined that I would be deceived," Silvio Torres said. ``But in these matters of real estate, you can't trust your own mother." Elias, who was later convicted in the auto insurance fraud case, is in prison and could not be reached for comment. His lawyer did not return phone calls. A 2004 state law aimed at preventing predatory lending forbids anyone from arranging a high-cost mortgage unless he or she ``reasonably believes" that the borrower will be able to repay it. State consumer protection regulations also forbid brokers from withholding information that might cause potential borrowers to back out. But some brokers ignore the provisions, said several housing specialists and lawyers. Isabel Frias , 39, a native of the Dominican Republic, said broker Jose Guillermo , then of American Home Loan Mortgage , helped her get two loans totaling $344,000 for a house. The single mother of three said she gave her broker her pay stubs and he knew she earned $9 an hour as a machine operator. But her wages aren't on her application because she got a loan that requires no income statement. The broker did record, however, that her monthly rent at the time was $400 and that she had $13,000 in savings. Like the Torreses, Frias said, her monthly mortgage payments totaled about $1,000 more than she had been led to believe -- $3,000. In eight months, she lost the house, and she is now on food stamps. ``I lost my house, I lost my credit, I lost my savings," she said in her rented apartment in Lawrence. ``And more than that, I lost my dream." Guillermo, who no longer works for American Home, could not be reached for comment. Earl Taylor , co-owner of American Home, based in Burlington, acknowledged that the company did know that Frias was paying only $400 a month in rent. But he said Guillermo would not have asked her about her wages because Frias signed a loan that required no income statement. If she could not afford the loan, Taylor said, she should not have signed it. ``I guess the question is, as a society, how protective do we want to be?" he said in a telephone interview. ``We don't stop people from buying cigarettes. We don't stop people from buying candy or going to But Andrea Bopp Stark , a staff attorney with Neighborhood Legal Services in Lawrence who is representing Frias, said her client relied on the broker's expertise. ``How would she know which loan product to choose?" Stark said. ``That is the broker's duty, to educate the borrower." Globe correspondent Catherine Elton contributed to this report. Maria Sacchetti can be reached at msacchetti@globe.com, and Jonathan Saltzman at jsaltzman@globe.com (Clarification: A story published on Page One Aug. 27 about allegations of abuses by mortgage brokers described a complaint from a Lawrence woman who said a broker from Burlington-based American Home Loan Mortgage helped her obtain two loans that she could not afford. The woman, Isabel Frias, said she lost her home as a result. In subsequent references in the story, the company was identified as ``American Home." The story should have made clear that the company is not affiliated with American Home Mortgage, a Melville, N.Y.-based lender that operates in 50 states.) |
referred to in section 129(aa)' each place such term appears and inserting `a high-cost home loan' in lieu thereof.
