Q9. What price data are available under HMDA?

A9. The price data take the form of a “rate spread.” Lenders must report the spread (difference) between the annual percentage rate (APR) on a loan and the rate on Treasury securities of comparable maturity—but only for loans with spreads above designated thresholds. So rate spreads are reported for some, but not all, reported home loans.

Q10. Which loans are deemed “higher-priced” and therefore have their prices reported?

A10. A loan’s rate spread (see Q9) must be reported if the spread exceeds the threshold set by the Board in Regulation C. For first-lien loans, the threshold is 3 percentage points above the Treasury security of comparable maturity; for second-lien loans, which tend to have higher prices, the threshold is 5 percentage points above the Treasury security of comparable maturity. The Board chose the thresholds in the belief that they would exclude the vast majority of prime-rate loans and include the vast majority of subprime-rate loans. From year to year, however, the proportion of subprime-rate loans that have their prices reported may vary because of changes in the interest rate environment (see Q27).

Q11. Why is the requirement to report price data limited to higher-priced loans?

A11. The higher-priced mortgage market has grown substantially in the last decade. Its expansion has afforded some consumers greater access to home mortgage credit. The growth of the higher-priced mortgage market, however, has raised concerns that consumers in this market lack the information needed to negotiate the best terms and may be vulnerable to unfair or deceptive practices. Also, the wider range of prices in this market has raised concerns that price differences may reflect unlawful discrimination rather than legitimate risk- and cost-related factors.

Q12. Is price information reported on all mortgage loans that have prices above the price reporting thresholds?

A12. Price information is reported on most, but not all, loans that have prices above the price reporting thresholds. Under Regulation C, some loans are not reportable at all, such as home-equity loans for consolidation of debt (see Q4). Moreover, for certain kinds of loans that Regulation C requires be reported, a lender need not report price information. Examples in this category include unsecured home-improvement loans, assumptions, and loans purchased from other lenders (though purchased loans would likely have been reported by the original lenders). Finally, reporting information about home-equity lines of credit (HELOCs) is optional; a lender opting to report HELOCs need not report price information.

Q13. To the extent the HMDA data indicate that minorities pay more for loans than whites on average, does that difference prove unlawful discrimination?

A13. No. However, such a disparity may indicate a need for closer scrutiny. Supervisory and enforcement agencies investigating disparities typically collect additional information about factors that may determine loan prices from lenders’ loan files or other sources. Without information about relevant price determinants, one cannot draw definitive conclusions about whether particular lenders discriminate unlawfully or take unfair advantage of consumers. HMDA data include some potentially relevant determinants of price, such as lien status, but exclude many other potential determinants, such as borrower credit history, borrower debt-to-income ratio, and the ratio of the loan amount to the value of the property securing the loan (loan-to-value ratio). Therefore, price disparities by race, ethnicity, or sex disclosed in HMDA data will not alone prove unlawful discrimination.

Q14. Why aren’t all pricing factors reported in HMDA data?

A14. In 2002, when the Board adopted the requirement to report price data and lien status, an important determinant of loan price, the Board considered adding to HMDA data other data items relevant to loan pricing, such as loan-to-value ratio. For each possible new data item, the Board weighed the potential benefit and burden that would result, such as the costs of collection and reporting. On the basis of that analysis, which relied in part on public comments, the Board decided not to add more factors.

Q15. If HMDA data cannot support definitive conclusions about whether price differences reflect unlawful discrimination, then what is the point of requiring disclosure of price data?

A15. Though the price data do not support definitive conclusions, they are a useful screen, previously unavailable, to identify lenders, products, applicants, and geographic markets where price differences among racial or other groups are sufficiently large to warrant further investigation. Enforcement and supervisory agencies can use the HMDA price data to better target their resources. HMDA price data can also be a valuable part of any mortgage lender’s self-evaluation program.

Q16. What other tools beside the HMDA price data are used to detect price discrimination?

A16. The federal banking agencies analyze HMDA price data in conjunction with other information to evaluate the potential for price discrimination. The interagency fair lending examination procedures direct examiners to identify risk factors for discrimination by reviewing a variety of information, including an institution’s records, to understand the institution’s fair lending compliance management program. Examiners evaluate a lender’s risk of price discrimination based on several factors, including the relationship between loan pricing and compensation of loan officers or brokers; the presence of broad pricing discretion; the use of a system of risk-based pricing that is not empirically based and statistically sound; substantial disparities among prices quoted or charged to applicants who differ in their protected characteristics such as race or ethnicity; and consumer complaints alleging price discrimination. The HMDA price data are analyzed in conjunction with these other factors to determine the level of risk of price discrimination. The level of risk of price discrimination, in turn, is one of the factors examiners consider when determining the depth and breadth of a fair lending examination by a federal banking agency.

Q17. Why do some borrowers pay higher prices than others?

A17. Many factors affect the price of a mortgage loan. Some factors, such as a borrower’s credit history, debt-to-income (DTI) ratio, or the ratio of the loan amount to the value of the property that secures the loan (LTV), are used by lenders to set loan prices because they have been shown to predict whether or not borrowers will pay their loans as agreed. Generally, borrowers with poor credit histories or high DTI or LTV ratios represent increased risk of nonpayment, which lenders offset with a higher price to such borrowers.

Q18. How can a consumer obtain the best price on a loan?

A18. It is important that borrowers shop, compare, and negotiate the price and other terms of their loans. For more information about shopping for a mortgage loan, go to www.mymoney.gov or call 1-888-MYMONEY.

Q19. Lenders are required to report a loan’s HOEPA status. What is HOEPA?

A19. Lenders are required to report whether a loan is subject to the provisions of the Home Ownership and Equity Protection Act (HOEPA). HOEPA, enacted as part of the Truth in Lending Act, imposes substantive limitations and additional disclosures on certain types of home mortgage loans with rates or fees above a certain percentage or amount. For more information about HOEPA, see the Board’s Regulation Z, 12 CFR 226.31, 226.32, and 226.34.

Q20. What is the difference between a HOEPA loan and a higher-priced loan reported under HMDA?

A20. Many, but not all, HOEPA loans are reported under HMDA; there are some kinds of home-equity loans that HOEPA covers that HMDA does not require to be reported (see Q4). Moreover, only a minority of loans that have their rate spreads reported under HMDA are HOEPA loans, because HMDA’s threshold rate for reporting a loan’s rate spread is much lower than the threshold rate for HOEPA’s coverage of a loan. On first-lien loans, for example, HMDA-reportable loans must have their rate spread reported if the APR exceeds the yield on comparable Treasury securities by three or more percentage points (see Q9, Q10), while HOEPA covers loans with APRs that exceed the comparable Treasury yield by more than 8 percentage points—a much higher threshold. An alternative test for HOEPA coverage (whether the points and fees exceed 8 percent of the total loan amount) also sets a high threshold. In short, Congress limited HOEPA’s protections and disclosures to the highest-priced loans in the subprime home mortgage market, while the Board set HMDA’s price thresholds to include the vast majority of subprime-rate mortgage loans.

Q21. Does the requirement in Regulation C to report HOEPA status impose any new obligations on lenders?

A21. Under the amendments to Regulation C, lenders are required to report whether a loan is subject to the requirements of HOEPA. The amendments to Regulation C do not, however, affect any of HOEPA’s requirements or limitations. Lenders should already have in place procedures for monitoring and complying with the provisions of HOEPA.

Q22. Why must lenders report the lien status of a loan?

A22. Lenders report whether a loan is or would be secured by a lien on a dwelling and, if so, whether a first lien or a subordinate (junior) lien. A loan’s lien status determines what rate-spread reporting threshold applies to the loan (see Q9, Q10). Also, because lien status is an important determinant of loan price (interest rates on first-lien loans are generally lower than rates on junior-lien loans), lien-status differences may explain some price disparities.

Q23. Why must lenders identify loans involving manufactured homes?

A23. HMDA has long required lenders to identify whether a loan or application involved a one- to four-family home or a multifamily home. Lenders also must identify whether a loan or application involves a manufactured home. Generally speaking, manufactured homes are factory-built homes essentially ready for occupancy when they leave the factory. The market for credit to finance manufactured home purchases is somewhat different from the market for credit to finance site-built home purchases. For example, applications for manufactured home financing are denied at much higher rates than applications for site-built home financing. Identification of manufactured home loans will make it easier to identify the sources of differences in denial rates and will improve understanding of manufactured home financing.

Q24. How has the reporting of borrower ethnicity and race under HMDA changed?

A24. In 2002, the Board amended Regulation C’s rules for collection of information about applicants’ ethnicity and race, to conform them to revised standards of the Office of Management and Budget (OMB) for collection of such data. These standards are available at www.whitehouse.gov/omb/fedreg/1997standards.html. The new rules for collecting ethnicity and race information under HMDA became effective with the collection of 2004 data. Therefore, the change may complicate comparisons based on race between HMDA data preceding 2004 and HMDA data from 2004 and later years. For more information about the changes, go to www.federalreserve.gov/boarddocs/press/bcreg/2004/20041210/attachment2.pdf.

Q25. How will changes in OMB’s standards for defining metropolitan and micropolitan statistical areas affect comparison of HMDA data preceding 2004 with data from 2004 and later years?

A25. HMDA requires the use of metropolitan statistical areas defined by OMB for a variety of purposes: determining whether a lender has reporting obligations, reporting property location, providing disclosures and reports of lending activity, and posting notices about the availability of HMDA data. For HMDA data collected in 2003 and previous years, OMB’s 1990 standards for defining MSAs were in effect. OMB’s 2000 standards, however, apply to HMDA data collected in 2004 and later years. The application of the new OMB standards will, therefore, affect comparisons of HMDA data for 2004 and later years with data for previous years. For more information, go to www.federalreserve.gov/boarddocs/press/bcreg/2003/20031219/attachment.pdf.

Q26. How do the transition rules affect the HMDA data?

A26. HMDA requires lenders to report data about an application in the year in which the application was denied or resulted in an origination. The 2002 amendments to HMDA took effect on January 1, 2004. The Board provided guidance, in the form of transition rules, to assist lenders in collecting and reporting data for applications received before January 1, 2004, but not acted on until later. For more information, go to www.ffiec.gov/hmda/pdf/transitionrules.pdf

Q27. How should year-to-year changes in the number or proportion of loans with prices above the HMDA price reporting thresholds (higher-priced loans) be interpreted?

A27. Year-to-year changes in the number or proportion of loans with prices that exceed the thresholds for reporting price information (higher-priced loans) should be interpreted with great care. Changes in the number or proportion of higher-priced loans could be due to changes in the interest-rate environment—specifically, in the relationship between short-term and long-term interest rates. Such changes also could be due to changes in lenders’ business practices or consumers’ borrowing practices or risk profiles.