[Federal Register: June 27, 2002 (Volume 67, Number 124)]
[Rules and Regulations]               
[Page 43218-43227]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jn02-2]                         

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FEDERAL RESERVE SYSTEM

12 CFR Part 203

[Regulation C; Docket No. R-1120]

 
Home Mortgage Disclosure

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule; staff interpretation.

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SUMMARY: The Board is publishing amendments to Regulation C (Home 
Mortgage Disclosure). The amendments establish the thresholds for 
determining the loans for which financial institutions must report loan 
pricing data (the spread between the annual percentage rate on a loan 
and the yield on comparable Treasury securities) as required under a 
final rule approved in January 2002; the thresholds are a spread of 3 
percentage points for first-lien loans and 5 percentage points for 
subordinate-lien loans. The amendments require lenders to report the 
lien status of a loan or application. The amendments also require that 
lenders ask applicants their ethnicity, race, and sex in applications 
taken by telephone; this monitoring requirement is made applicable as 
of January 1, 2003, through a rule published elsewhere in today's 
Federal Register.

DATES: The amendments are effective January 1, 2004.

FOR FURTHER INFORMATION CONTACT: John C. Wood, Counsel, Kathleen C. 
Ryan, Senior Attorney, or Dan S. Sokolov, Attorney, Division of 
Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, Washington, DC 20551, at (202) 452-3667 or (202) 452-
2412. For users of Telecommunications Device for the Deaf (TDD) only, 
contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

    The Home Mortgage Disclosure Act (HMDA) (12 U.S.C. 2801-2810) has 
three purposes. One is to provide the public and government officials 
with data that will help show whether lenders are serving the housing 
needs of the neighborhoods and communities in which they are located. A 
second purpose is to help public officials target public investment to 
promote private investment where it is needed. A third purpose is to 
provide data that assist in identifying possible discriminatory lending 
patterns and enforcing antidiscrimination statutes.
    HMDA accordingly requires certain depository and for-profit 
nondepository lenders to collect, report, and publicly disclose data 
about originations and purchases of loans secured by residential real 
property and of home improvement loans. Lenders must also report data 
about applications that did not result in originations.
    The Board's Regulation C implements HMDA. Regulation C generally 
requires that lenders report data about:
     Each application or loan, including the application date; 
the action taken and the date of that action; the loan amount; the loan 
type and purpose; and, if the loan is sold, the type of purchaser;
     Each applicant or borrower, including ethnicity, race, 
sex, and income; and
     Each property, including location and occupancy status.
    Lenders report this information to their supervisory agencies on an 
application-by-application basis using a loan application register 
format (HMDA/LAR). Lenders must make their HMDA/LARs--with certain 
fields redacted to preserve applicants' privacy--available to the 
public. The Federal Financial Institutions Examination Council (FFIEC), 
acting on behalf of the supervisory agencies, compiles the reported 
information and prepares an individual disclosure statement for each 
institution. The FFIEC also aggregates data and prepares reports for 
all lenders in each metropolitan area and for the nation. These 
disclosure statements and reports are available to the public.
    On January 23, 2002, the Board approved amendments to Regulation C 
after a comprehensive review of the regulation. 67 FR 7222, February 
15, 2002. Among other things, the final rule requires lenders to report 
the spread between the APR on loans and the yield on Treasury 
securities with comparable maturity periods, if the spread meets or 
exceeds certain thresholds specified by the Board.
    At the same time that the final rule was published, the Board 
issued a proposed rule for comment on whether thresholds of 3 
percentage points above the yield on comparable Treasury securities for 
first-lien loans and 5 percentage points for subordinate-lien loans 
(which generally have a higher APR) are appropriate thresholds for 
identifying the loans for which financial institutions must report loan 
pricing data. 67 FR 7252, February 15, 2002. The Board also proposed to 
require lenders (1) to report the lien status on loans and applications 
and (2) to ask telephone applicants their ethnicity, race, and sex.
    The Board received approximately 250 comments on the proposed rule; 
commenters were generally divided on the issues. Industry commenters 
provided differing views on the appropriate thresholds for reporting 
pricing data and on the burden associated with reporting lien status. 
They were generally opposed to the proposed collection of applicants' 
ethnicity, race, and sex in telephone applications.
    Commenters representing community groups, researchers, and state, 
local and tribal officials generally urged the Board to require lenders 
to report pricing information on all loans. These commenters supported 
the reporting of lien status for originations and applications, and 
argued for extending the requirement to purchased loans. They believed 
that lenders should be required to ask for applicants' ethnicity, race, 
and sex in telephone applications.
    Many industry commenters, in addition to commenting on the proposed 
rule, also requested a delay in the effective date of the final rule 
published on February 15, 2002. On May 2, 2002, the Board delayed the 
effective date of the final rule to January 1, 2004. Lenders must, 
however, use the census tract numbers and corresponding geographic 
areas from the 2000 Census for all applications and loans recorded on 
their 2003 HMDA/LAR and reported to the supervisory agencies by March 
1, 2004. 67 FR 30771, May 8, 2002.
    Industry commenters also requested guidance on how to collect and 
report data when an application is received before--and final action is 
taken after--January 1, 2004, the effective date of the revised rule. 
In some instances, several months may elapse between application and 
final action, and applications taken in 2003 may not be acted upon 
until 2004.
    Lenders generally must comply with the revised rules for all 
applications upon which final action is taken on and after January 1, 
2004. The Board plans

[[Page 43219]]

to issue guidance later this year to alleviate the burden on lenders to 
``look back'' at all applications taken in 2003 but acted on in 2004. 
For example, the Board could establish that for applications taken 
before a certain date--such as November 1, 2003--a lender would not be 
required to use the revised rules.

II. Section-by-Section Analysis of the Final Rule

    The following discussion generally tracks the regulation (including 
appendices) as amended by the Board. Revisions to the staff commentary 
are addressed under the sections of the regulation that they interpret.

Section 203.2--Definitions

2(i) Manufactured Home

    Commenters asked whether the definition of a manufactured home in 
Sec. 203.2(i) includes modular, panelized, and pre-cut homes. The 
definition in Sec. 203.2 refers to the federal building code for 
factory-built housing established by the Department of Housing and 
Urban Development (HUD). The HUD code requires generally that housing 
be essentially ready for occupancy upon leaving the factory and being 
transported to a building site. Modular homes that meet all of the HUD 
code standards are included in the definition because they are ready 
for occupancy upon leaving the factory. Other factory-built homes, such 
as panelized and pre-cut homes, generally do not meet the HUD code 
because they require a significant amount of construction on site 
before they are ready for occupancy. Loans and applications relating to 
manufactured homes that do not meet the HUD code should not be 
identified as manufactured housing under HMDA. Comment 203.2(i)-1 
contains this guidance.

Section 203.4--Compilation of Loan Data

4(a)(12) Rate Spread Information

    The Board proposed a reporting threshold of 3 percentage points 
above the yield on Treasury securities of comparable maturity for 
first-lien loans and 5 percentage points for subordinate-lien loans 
(which generally have a higher APR). The thresholds are intended to 
ensure, to the extent possible, that pricing data for higher-cost loans 
are collected and disclosed. The data available to the Board when it 
proposed the thresholds indicated that these thresholds would exclude 
the vast majority of prime loans and include the vast majority of other 
loans. The Board solicited comment on the appropriate thresholds before 
finalizing them. Information on the following specific issues and 
questions was also solicited:
     Whether the rule for determining coverage under the Home 
Ownership and Equity Protection Act (HOEPA) should be used to determine 
whether rate spread information must be reported under HMDA--
specifically, whether the 15th day of the month preceding the month in 
which the application for the loan was received should be used for 
determining the APR spread.
     The proportion of loan originations (by number of loans) 
reported under HMDA that would fall above and below various thresholds, 
segregated by risk class (for example, A, A-minus, and B) and lien 
status.
     Circumstances or special credit products that might be 
particularly subject to misclassification, as loans associated with a 
higher credit risk than prime loans, should the proposed thresholds be 
implemented. For example, are there product lines in which loans with 
very little credit risk nonetheless have high APRs? Alternatively, are 
there product lines in which loans with relatively high credit risk 
nonetheless have low APRs?
     Is the 2-percentage point difference between the proposed 
thresholds for first- and subordinate-lien loans appropriate?
    Some industry commenters supported the thresholds of 3 and 5 
percentage points, although they objected to reporting any pricing 
data. These commenters stated that, based on their experience, the 
tentative thresholds would exclude nearly all prime loans from the 
pricing-data reporting. Nearly all industry commenters--whether or not 
they supported thresholds of 3 and 5 percentage points--indicated that 
a 2-percentage point difference between thresholds is appropriate.
    Many industry commenters argued that the proposed thresholds were 
too low, based on a belief that the thresholds would capture a 
significant number of prime loans. Some commenters stated that the 
proposed thresholds would include loans that they believe are not 
higher-priced loans, for example, short-term loans with balloon 
payments, loans involving manufactured homes, and FHA-insured and VA-
guaranteed loans. These commenters did not, however, provide data to 
support their views. Industry commenters also expressed concern that 
stigma would attach to loans that meet the pricing thresholds and that 
responsible subprime lending would consequently be curtailed.
    Some commenters urged the Board to adopt the thresholds for HOEPA 
coverage (8 percentage points for first-lien loans and 10 percentage 
points for subordinate-lien loans) for reporting pricing information 
under Regulation C. Others suggested thresholds of 5 percentage points 
and 7 percentage points for first- and subordinate-lien loans, 
respectively, so as to capture only what they believe to be higher-
priced loans.
    In addition to commenting on the proposed thresholds, many industry 
commenters urged the Board to reverse its decision to require lenders 
to report pricing information under HMDA. Some of these commenters 
stated that, in the alternative, the Board should allow lenders the 
option of reporting the APR on a loan and having the Board calculate 
the spread. They said that reporting the spread would be more 
burdensome than reporting the APR, because lenders do not track the 
yield on Treasury securities and may have difficulty obtaining the 
correct information to use in calculating the spread. Commenters were 
concerned that lenders could make inadvertent errors in calculating the 
spread and, if the errors were pervasive, could incur the costs of 
resubmission of HMDA data or civil money penalties.
    A few industry commenters urged the Board not to use the yield on 
Treasury securities for calculating the spread. They suggested that 
lenders be permitted to use other indices for calculating the spread, 
such as the LIBOR (London Inter-Bank Offered Rate) index, that they 
said play a more direct role in their pricing.
    Still others--community groups, researchers, and state, local, and 
tribal officials--urged the Board to require pricing information on all 
loans reported under HMDA, and not just those that meet or exceed 
certain thresholds. These commenters believed that requiring pricing 
information only on higher-priced loans would allow discrimination and 
other abusive lending practices to go undetected in the prime market. 
Some of these commenters also argued that the APR, and not the spread, 
should be reported to facilitate fair lending enforcement. Some 
community groups, while preferring pricing information on all loans, 
stated that the thresholds of 3 and 5 percentage points were 
appropriate.
    The Board is adopting the proposed thresholds of 3 and 5 percentage 
points for first- and subordinate-lien loans, respectively. In January 
2002, the Board adopted the requirement to report the spread only for 
loans over specific thresholds in order to adjust pricing

[[Page 43220]]

data for changes in market conditions over time, focus on higher-cost 
loans, and limit reporting burden (because fewer loans would be subject 
to the reporting requirement). The data supplied by commenters tended 
to confirm the data available to the Board indicating that the proposed 
thresholds would avoid capturing the vast majority of prime loans while 
capturing the vast majority of other loans.
    The Board believes that the thresholds will not result in 
misclassification of the products mentioned by some commenters--for 
example, FHA-insured loans, VA-guaranteed loans and manufactured home 
loans. While the spread on many manufactured home loans may exceed the 
thresholds, these loans tend to have elevated credit risk and are 
generally not considered prime loans. The thresholds should exclude 
most FHA-insured loans and VA-guaranteed loans. Moreover, Regulation C 
requires lenders to distinguish FHA and VA loans from other loan types 
on their HMDA/LARs; and under the final rules, lenders will also be 
required to distinguish loans for manufactured homes from loans for 
site-built homes. Thus, even if these loans are misclassified as 
higher-priced loans, data users can treat these loans as distinct 
product lines in their analyses.
    The Board will take steps to minimize any difficulties lenders may 
have in calculating the spread and also to minimize the risk of errors. 
These steps include publishing the applicable Treasury yields for 
common maturity periods on the FFIEC's Internet web site, in addition 
to making the information available by fax upon request. Lenders will 
be required to use only the rates published by the Board--and not the 
H-15 or the Treasury auction results, which lenders may use for HOEPA 
purposes--to ensure consistent and accurate calculations for HMDA data 
collection and reporting. An interactive tool could also be available 
on the FFIEC Web site to calculate the rate spread for a loan, based on 
information input by the lender.
    The final regulation approved in January set an ``application 
date'' rule for determining whether the rate spread must be reported. 
That is, lenders would compare the APR on a loan at consummation with 
the yield on Treasury securities of comparable maturity as of the 15th 
day of the month preceding the month in which the loan application was 
received. This is the rule used to determine HOEPA coverage. The Board 
solicited comment on whether HOEPA's application date rule is 
appropriate in calculating the spread for HMDA purposes.
    Many industry commenters, including the banking trade associations, 
supported use of the application date for identifying the applicable 
Treasury security yield. They noted that adopting the HOEPA rule would 
ease compliance burden, as lenders whose loans are covered by HOEPA are 
already familiar with this rule. Other industry commenters suggested 
that the ``lock date,'' or date that the lender sets the interest rate 
for the loan, would result in a more accurate determination of whether 
a loan was a prime loan or a higher-priced loan. A small number of 
industry commenters suggested using the date of origination or 
consummation.
    The Board is adopting the date the final interest rate is set as 
the date for determining the yield on comparable Treasury securities. 
The rule provides that lenders use the 15th-of-the-month prior to the 
date the final rate is set. For example, if the lender sets the 
interest rate for the final time before the loan closing on September 
3, 2004, the relevant date for use of the Board's table is August 15, 
2004; if the lender sets the rate for the final time before closing on 
September 17, 2004, the relevant date is September 15, 2004. If the 
rate is set on September 15, 2004, the relevant date is September 15, 
2004. These instructions have been incorporated into Appendix A, 
Paragraphs I.G.1. and 2.
    The date the final rate is set more accurately reflects the 
lender's pricing decision than a date related to the date of 
application or to the date of consummation. A date related to the date 
of application or consummation might reflect a different rate 
environment than existed when the final interest rate was established, 
and could result in inaccurate and misleading data for periods when 
interest rates are volatile.
    Using the date the final rate is set may impose additional burden 
on some lenders, as many lenders do not systematically track the date 
the interest rate is set or locked. In contrast, using the HOEPA rule 
(a date measured from the application date) may impose less burden on 
lenders that currently make HOEPA loans or routinely monitor their 
loans for HOEPA coverage (although it does not pose that advantage for 
lenders that do not make HOEPA loans); and the dates of application and 
consummation also may be less burdensome because these dates are 
already collected and reported under HMDA. On balance, however, the 
Board believes that the benefits of increasing the accuracy of pricing 
information by selecting the date the final interest rate is set 
outweigh the compliance burden associated with the requirement.
    Section 4(a)(12) is also modified to clarify that lenders must 
report the rate spread on a loan if the spread equals or exceeds the 
thresholds. This change conforms the regulation to the instructions for 
reporting rate-spread information in Appendix A, Paragraph I.G.1.

4(a)(14) Lien Status

    The Board proposed to require lenders to report whether a loan is 
or would be (1) secured by a first lien on a dwelling; (2) secured by a 
subordinate lien on a dwelling; or (3) not secured by a lien on a 
dwelling. The Board solicited comment on these reporting categories 
(and also on whether reporting of lien status should be required for 
purchased loans). Data on lien status may help explain some pricing 
disparities, because interest rates, and therefore APRs, vary according 
to lien status. Rates on first-lien loans are generally lower than 
rates on subordinate-lien or unsecured loans. In addition, lien status 
would enable data users to better analyze information on secured and 
unsecured home improvement loans.
    Most industry commenters--although opposed generally to reporting 
more data under HMDA--stated that lien status was closely linked to 
pricing and that it would not be unduly burdensome for them to report 
this information for originations on their HMDA/LAR. Most industry 
commenters, however, opposed a requirement to collect and report these 
data for purchased loans, because they believe the additional burden is 
not warranted. Some commenters stated that lien status should not be 
required for applications that do not result in loans; they suggested 
that an application might be denied before the lender knows what the 
lien status of the loan would have been.
    Other industry commenters opposed the requirement to report lien 
status even for originations as unduly burdensome. These commenters 
stated that while they know when a loan they make is secured, they 
often do not know their lien position with certainty. They were 
concerned that a final rule would require title searches for all 
reportable loans. Some commenters stated that they generally assume 
they will have a first lien for all home purchase applications and 
loans; but for other home mortgages, often they do not know their lien 
position even if the loan is originated, and base their pricing 
decisions on the assumption that they will have a subordinate lien. A 
few commenters suggested that the Board

[[Page 43221]]

should allow lenders to report lien status based on these assumptions.
    Community groups, researchers, and state, local, and tribal 
officials stated that lien status was critical to interpreting pricing 
data and distinguishing secured from unsecured home improvement loans, 
and many argued that lien status should be reported for purchased loans 
as well. Some of these commenters suggested that the data collection 
might serve to deter lenders from persuading consumers to consolidate a 
small first mortgage and unsecured debt into a new first mortgage (when 
a second mortgage or an unsecured loan might be more in the consumer's 
interest). Some also stated that data on lien status for purchased 
loans would facilitate monitoring of the activities of subprime lenders 
that purchase loans which may be unfairly priced, and for which little 
data are available.
    The final rule requires lenders to report lien status on 
applications and originations, but not on purchased loans. Conforming 
changes have been made to the HMDA/LAR and the HMDA/LAR Code Sheet in 
Appendix A. Lien status on loan originations will help the public and 
the agencies interpret the pricing information. Collecting lien status 
on loan originations will enable data users to differentiate between 
secured and unsecured home improvement loans, and will facilitate fair 
lending data analysis.
    Lien status for applications that do not result in originations is 
also important information in the analysis of acceptance and denial 
ratios for borrowers of different races. Disparities by race or 
ethnicity in acceptance and denial ratios that initially suggest 
unlawful discrimination are often explained by differences in the lien 
status of the loan for which application was made, but only after 
significant effort is expended to retrieve information on lien status 
from individual loan files.
    Lenders are required to report the lien status according to the 
best information readily available to them at the time final action is 
taken on an application. A comment has been added to the staff 
commentary, clarifying that Regulation C does not require lenders to 
conduct title searches solely for HMDA reporting purposes. Lenders may 
rely on the title search they routinely require for home purchase 
loans; lenders may also rely on other information readily available to 
them and that they reasonably believe to be accurate, such as the 
applicant's credit report or the applicant's statement on the 
application. For example, a lender would report a loan origination as 
secured by a subordinate lien if the application states that there is a 
mortgage on the property (and the mortgage will not be paid off as part 
of the transaction). If the same application did not result in an 
origination--for example, because the application is denied or 
withdrawn--the lender would report the application as an application 
for a subordinate-lien loan.
    The final rule does not require lenders to collect and report lien 
status for loans that they purchase. Pricing information is not 
required for purchased loans, nor is information on ethnicity, race, 
and sex. Thus, the utility of lien-status data on purchased loans would 
be limited and would not justify the additional reporting burden.
Appendix A to Part 203--Form and Instructions for Completion of HMDA 
Loan/Application Register
    In the final rules, the instructions for completing the HMDA/LAR 
provide three codes for indicating whether a loan or application 
relates to a preapproval request as defined in Sec. 203.2(b). Codes 1 
and 2 indicate whether a preapproval for a home purchase loan was 
requested. Because only preapprovals for home purchase loans are 
covered under the final rule, lenders use code 3, ``not applicable,'' 
for refinancings and home improvement loans and applications and for 
purchased loans of any type. Commenters asked what code should be used 
for home purchase applications and loans if a lender does not have a 
preapproval program as defined in Sec. 203.2(b). Appendix A has been 
changed to clarify that code 3 should be used for home purchase loans 
and applications if the lender does not offer covered preapprovals.
    Instructions for calculating the rate spread and for reporting lien 
status have been added to Appendix A, as discussed above under 
Secs. 203.4(a)(12) and (14). The HMDA/LAR and the HMDA/LAR Code Sheet 
have been modified to reflect the requirement in Sec. 203.4(a)(14) to 
report lien status. Appendix A has also been modified to reflect the 
revised rules regarding collection of ethnicity, race, and sex in 
applications taken by telephone, discussed under Appendix B below.
Appendix B to Part 203--Form and Instructions for Data Collection on 
Ethnicity, Race, and Sex
    The Board proposed to conform the telephone application rule 
regarding ethnicity, race, and sex to the rule applicable to mail and 
Internet applications. There has been a substantial decline in response 
rates regarding race and ethnicity. From 1993 to 2000, the proportion 
of home mortgage loan applications of all types with missing race or 
ethnicity data increased from about 8 percent to about 28 percent. 
(Missing data about the applicant's sex have increased in a similar 
fashion.) At least part of this decline may be explained by an apparent 
increase in lenders' use of the telephone to take applications. The 
Board solicited comment on the benefits and burdens of this proposal.
    Commenters were divided on whether lenders should be required to 
ask for ethnicity, race, and sex in telephone applications. Community 
groups, researchers, and state, local, and tribal officials urged the 
Board to require lenders to ask for such information on telephone 
applications. Many of these commenters pointed out that without the 
information, fair lending analyses based on HMDA data are less 
effective. These commenters also believe that the number of 
applications taken by telephone will continue to grow and, thus, that 
the rate of applications and loans missing information about ethnicity, 
race, and sex will increase as well. Some industry commenters supported 
the proposal, stating that it was simpler to have one rule on 
collection of ethnicity, race, and sex that applies regardless of the 
manner in which an application is taken.
    On the other hand, many other industry commenters opposed the 
proposal because they believe that applicants will resent the intrusion 
into an area they regard as confidential or sensitive. Some commenters 
believe that applicants will fear discrimination, and will not pursue 
an application, will refuse to supply the information, or will supply 
incorrect information. Still others said that requiring lenders to ask 
for information about ethnicity, race, and sex would raise the cost of 
taking telephone applications. A few commenters asked the Board to 
provide a script for requesting the information in telephone 
applications.
    The final rule requires lenders to ask for applicants' ethnicity, 
race, and sex in telephone applications. This amendment will serve the 
fair lending enforcement purpose of HMDA by improving the data obtained 
on ethnicity, race, and sex; the Board believes this benefit outweighs 
the costs of compliance.
    The Board is making the amended rule applicable as of January 1, 
2003, through a rule published elsewhere in today's Federal Register. 
Although for at least some lenders the cost of implementing the 
telephone rule in

[[Page 43222]]

2003 may be somewhat greater than the cost of implementing it in 2004, 
the Board believes that the cost difference is justified by the need to 
try to stem the increasing rate of missing data.
    The final rule conforms the procedures for requesting applicant 
information in telephone applications to those for applications taken 
by mail or on the Internet. Generally, loan applicants must be advised 
that requesting information about ethnicity, race, and sex is mandated 
by the federal government to assist in the enforcement of fair lending 
laws. In addition, applicants must be advised that the lenders are 
prohibited from discriminating on the basis of the information 
provided, or on the basis of the applicant's choosing to provide or not 
provide the information.
    For applications taken beginning January 1, 2003, lenders are 
required to ask telephone applicants for monitoring information using 
the national origin or race categories in the current Appendices A and 
B, as set forth in a notice published elsewhere in today's Federal 
Register. For applications taken by telephone on or after January 1, 
2004, lenders are required to ask for monitoring information using the 
ethnicity and race categories in revised Appendices A and B.

III. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule under the 
authority delegated to the Board by the Office of Management and 
Budget. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless it displays a currently valid OMB control number. The OMB 
control number is 7100-0247 for the Federal Reserve's information 
collection under Regulation C.
    The mandatory collection of information that is revised by this 
rulemaking is found in 12 CFR part 203, which implements 12 U.S.C. 
2801-2810. Public officials use this information to determine whether 
financial institutions are serving the housing needs of their 
communities; to help target public investment to promote private 
investment where it is needed; and to identify possible discriminatory 
lending patterns for enforcement of antidiscrimination statutes.
    The respondents are all financial institutions, depositories and 
non-depositories, that meet the tests for coverage under the 
regulation. Depository institutions with offices in metropolitan areas 
whose assets are below an asset size threshold (currently $32 million) 
that adjusts yearly are not required to comply. Under the Paperwork 
Reduction Act the Federal Reserve accounts for the burden of the 
paperwork associated with the regulation only for state member banks, 
their subsidiaries, subsidiaries of bank holding companies, U.S. 
branches and agencies of foreign banks (other than federal branches, 
federal agencies, and insured state branches of foreign banks), 
commercial lending companies owned or controlled by foreign banks, and 
organizations operating under section 25 or 25A of the Federal Reserve 
Act (12 U.S.C. 601-604a; 611-631). Other federal agencies account for 
the paperwork burden for the institutions they supervise. Respondents 
must maintain their HMDA/LARs and modified HMDA/LARs for three years, 
and their disclosure statements for five years.
    The final rule has three principal elements. In January 2002, the 
Board approved several amendments to Regulation C, including one that 
requires lenders to report the spread between the APR on a loan and the 
yield on Treasury securities of comparable maturity when the spread 
exceeds a certain threshold. The final rule sets the reporting 
threshold (which depends on lien status) at the level proposed by the 
Board in January 2002. The final rule also adds a field to the HMDA/LAR 
for lien status, which must be reported for loans and applications, but 
not for purchased loans. Finally, the final rule requires lenders to 
ask telephone applicants their ethnicity, race, and sex. The public 
comments on these issues are summarized above in the Supplementary 
Information.
    When the Board adopted the January 2002 amendments, it estimated 
the annual burden for the information collection as varying from 12 to 
12,000 hours, averaging 242 hours for state member banks and 192 hours 
for mortgage banking subsidiaries and other respondents. (These 
estimates were based on the number of HMDA data submissions by Federal 
Reserve supervised respondents that were required to report calendar 
year 2000 data in March 2001.) Two items in the present amendments will 
increase the annual burden: The requirement to report lien status and 
the requirement to ask telephone applicants their ethnicity, race, and 
sex. The Board estimates that the addition of these two items will 
increase the burden by 7 percent. Accordingly, the Board estimates that 
the annual burden for the information collection varies from 13 to 
12,840 hours per institution, averaging 260 hours for state member 
banks and 200 hours for mortgage banking subsidiaries and other 
respondents. Therefore, the annual burden of the information collection 
under Regulation C is estimated to be approximately 155,000 total 
annual hours for Federal Reserve supervised respondents.
    The present rule changes will also cause respondents to incur a 
modest programming cost in addition to the programming cost associated 
with the January 2002 amendments. In particular, institutions will have 
to program their systems to add a new field to the HMDA/LAR for lien 
status; and institutions that do not now collect ethnicity, race, and 
sex on telephone applications may have to reprogram their systems to 
enable such collection. The Board believes that these additional costs 
will fit within the broad cost ranges the Board estimated applied to 
the January 2002 amendments. For convenience, those ranges are 
reproduced here: Institutions that use vendor-provided software systems 
(the bulk of reporting institutions) will face costs averaging around 
$2,000-$5,000; institutions that purchase and adapt off-the-shelf 
applications will face costs averaging between $20,000-$50,000; and 
institutions that use mainframe systems (the largest institutions) will 
face costs averaging between $120,000-$270,000. Using the maximum cost 
for each of the three ranges to calculate a weighted average, it is 
estimated that the average covered financial institution will incur a 
total cost from the January 2002 amendments and the present amendments 
of approximately $17,500.
    The Board's Legal Division has determined that HMDA data collection 
and reporting are required by law; completion of the loan/application 
register, submission to the Federal Reserve, and disclosure to the 
public upon request are mandatory. After the data are redacted as 
required by the statute and regulation, they are made publicly 
available and are not considered confidential. Data that the statute 
and regulation require be redacted (loan number, date the application 
is received, and the date the action is taken) are given confidential 
treatment under exemption 6 of the Freedom of Information Act (5 U.S.C. 
552(b)(6)).
    The Board has a continuing interest in the public's opinions of its 
collections of information. At any time, comments regarding the burden 
estimate, or any other aspect of this collection of information, 
including suggestions for reducing the burden, may be sent to: 
Secretary, Board of Governors of the

[[Page 43223]]

Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551; 
and to the Office of Management and Budget, Paperwork Reduction Project 
(7100-0247), Washington, DC 20503.

IV. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 604(a)), the Board has prepared a final regulatory analysis 
of these revisions. A copy of the analysis may be obtained from 
Publications Services, Board of Governors of the Federal Reserve 
System, Washington, DC 20551, at (202) 452-3245. A summary of the 
analysis follows.
    The final rule is a consequence of Board policy to review its 
regulations periodically and a desire to update the regulation to 
reflect mortgage markets more clearly and enhance consumer protection.
    The Board received no comments specifically responding to the 
initial regulatory analysis published in conjunction with the proposed 
rule. As discussed in Sections I and II, however, some comments the 
Board received discussed the burden arising from particular aspects of 
the proposed rule. Such comments are summarized throughout Sections I 
and II, as are the Board's responses. Section II also discusses 
alternative measures the Board considered.
    The changes under the final rule require more data on certain 
covered transactions. Some of the changes will affect all institutions 
currently within the scope of the regulation, including covered small 
institutions; others will affect only certain institutions, depending 
upon the interest rates and fees they charge and on whether they take 
applications by telephone.
    It is difficult to quantify the benefits and costs associated with 
the final rule. The new information will provide data to help identify 
possible discriminatory lending patterns and assist regulators in 
conducting examinations under the Community Reinvestment Act and other 
laws. Additional data on covered transactions will allow for more 
precise differentiation among loan products and reduce the potential 
bias that results when dissimilar loan products are jointly classified. 
The data will also help inform the public about developments in the 
mortgage market by revealing pricing information on higher-cost home 
loans, and improve local governments' ability to use HMDA data to help 
guide local investments. More complete data about applicant 
characteristics in telephone applications will improve fair lending 
analysis.
    Although the final rule offers a number of benefits, it also will 
require covered lenders, including small institutions, to change their 
current procedures and systems for collecting and reporting required 
data. The Board believes the benefits outweigh these added costs.

List of Subjects in 12 CFR Part 203

    Banks, Banking, Mortgages, Reporting and recordkeeping 
requirements.

    For the reasons set forth in the preamble, the Board amends 12 CFR 
part 203 as follows:

PART 203--HOME MORTGAGE DISCLOSURE (REGULATION C)

    1. The authority citation for part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 2801-2810.

    2. Section 203.4 is amended by:
    a. Revising paragraph (a)(12); and
    b. Adding a new paragraph (a)(14).


Sec. 203.4  Compilation of loan data.

    (a) Data format and itemization. * * *
    (12) For originated loans subject to Regulation Z, 12 CFR part 226, 
the difference between the loan's annual percentage rate (APR) and the 
yield on Treasury securities having comparable periods of maturity, if 
that difference is equal to or greater than 3 percentage points for 
loans secured by a first lien on a dwelling, or equal to or greater 
than 5 percentage points for loans secured by a subordinate lien on a 
dwelling. The lender shall use the yield on Treasury securities as of 
the 15th day of the preceding month if the rate is set between the 1st 
and the 14th day of the month and as of the 15th day of the current 
month if the rate is set on or after the 15th day, as prescribed in 
appendix A to this part.
* * * * *
    (14) The lien status of the loan or application (first lien, 
subordinate lien, or not secured by a lien on a dwelling).
* * * * *

    3. Appendix A is amended by:
    a. Revising paragraph I.A.8.;
    b. Revising paragraph I.D.2.;
    c. Revising paragraph I.G.1.;
    d. Redesignating paragraph I.G.2. as paragraph I.G.3. and adding a 
new paragraph I.G.2.;
    e. Adding a new paragraph I.H.;
    f. Revising the Loan/Application Register; and
    g. Revising the Loan/Application Register Code Sheet.

Appendix A to Part 203--Form and Instructions for Completion of HMDA 
Loan/Application Register

* * * * *

I. Instructions for Completion of Loan/Application Register

* * * * *
    A. Application or Loan Information
* * * * *
    8. Request for Preapproval of a Home Purchase Loan
    Indicate whether the application or loan involved a request for 
preapproval of a home purchase loan by entering the applicable code 
from the following:

Code 1--Preapproval requested
Code 2--Preapproval not requested
Code 3--Not applicable

    a. Enter code 2 if your institution has a covered preapproval 
program but the applicant does not request a preapproval.
    b. Enter code 3 if your institution does not have a preapproval 
program as defined in Sec. 203.2(b).
    c. Enter code 3 for applications or loans for home improvement 
or refinancing, and for purchased loans.
* * * * *
    D. Applicant Information--Ethnicity, Race, Sex, and Income
* * * * *
    2. Mail, Internet, or Telephone Applications. All loan 
applications, including applications taken by mail, Internet, or 
telephone must use a collection form similar to that shown in 
appendix B regarding ethnicity, race, and sex. For applications 
taken by telephone, the information in the collection form must be 
stated orally by the lender, except for information that pertains 
uniquely to applications taken in writing. If the applicant does not 
provide these data in an application taken by mail or telephone or 
on the Internet, enter the code for ``information not provided by 
applicant in mail, Internet, or telephone application'' specified in 
paragraphs I.D.3., 4., and 5. of this appendix. (See appendix B for 
complete information on the collection of these data in mail, 
Internet, or telephone applications.)
* * * * *
    G. Pricing-Related Data
    1. Rate Spread
    a. For a home purchase loan, a refinancing, or a dwelling-
secured home improvement loan that you originated, report the spread 
between the annual percentage rate (APR) and the applicable Treasury 
yield if the spread is equal to or greater than 3 percentage points 
for first-lien loans or 5 percentage points for subordinate-lien 
loans. To determine whether the rate spread meets this threshold, 
use the Treasury yield for securities of a comparable period of 
maturity as of the 15th day of a given month, depending on when the 
interest rate was set, and use the APR for the loan, as calculated 
and disclosed to the consumer under Secs. 226.6 or 226.18 of 
Regulation Z (12 CFR part 226). Use the 15th day of a given month 
for any loan on which the interest rate was set on or after that 
15th day through the 14th

[[Page 43224]]

day of the next month. (For example, if the rate is set on September 
17, 2004, use the Treasury yield as of September 15, 2004; if the 
interest rate is set on September 3, 2004, use the Treasury yield as 
of August 15, 2004). To determine the applicable Treasury security 
yield, the financial institution must use the table published on the 
FFIEC's Web site (http://www.ffiec.gov/hmda) entitled ``Treasury 
Securities of Comparable Maturity under Regulation C.''
    b. If the loan is not subject to Regulation Z, or is a home 
improvement loan that is not dwelling-secured, or is a loan that you 
purchased, enter ``NA.''
    c. Enter ``NA'' in the case of an application that does not 
result in a loan origination.
    d. Enter the rate spread to two decimal places, and use a 
leading zero. For example, enter 03.29. If the difference between 
the APR and the Treasury yield is a figure with more than two 
decimal places, round the figure or truncate the digits beyond two 
decimal places.
    e. If the difference between the APR and the Treasury yield is 
less than 3 percentage points for a first-lien loan and less than 5 
percentage points for a subordinate-lien loan, enter ``NA.''
    2. Date the interest rate was set. The relevant date to use to 
determine the Treasury yield is the date on which the loan's 
interest rate was set by the financial institution for the final 
time before closing. If an interest rate is set pursuant to a 
``lock-in'' agreement between the lender and the borrower, then the 
date on which the agreement fixes the interest rate is the date the 
rate was set. If a rate is re-set after a lock-in agreement is 
executed (for example, because the borrower exercises a float-down 
option or the agreement expires), then the relevant date is the date 
the rate is re-set for the final time before closing. If no lock-in 
agreement is executed, then the relevant date is the date on which 
the institution sets the rate for the final time before closing.
* * * * *

H. Lien Status

    Use the following codes for loans that you originate and for 
applications that do not result in an origination:

Code 1--Secured by a first lien.
Code 2--Secured by a subordinate lien.
Code 3--Not secured by a lien.
Code 4--Not applicable (purchased loan).

    a. Use Codes 1 through 3 for loans that you originate, as well 
as for applications that do not result in an origination 
(applications that are approved but not accepted, denied, withdrawn, 
or closed for incompleteness).
    b. Use Code 4 for loans that you purchase.
* * * * *

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    4. Appendix B is amended by revising Paragraph II.A to read as 
follows:

Appendix B to Part 203--Form and Instructions for Data Collection on 
Ethnicity, Race, and Sex

* * * * *

II. Procedures

    A. You must ask the applicant for this information (but you 
cannot require the applicant to provide it) whether the application 
is taken in person, by mail or telephone, or on the Internet. 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.
* * * * *

    5. In Supplement I to Part 203:
    a. Under Section 203.2--Definitions, a new heading 2(i) 
Manufactured Home and a new paragraph 1 are added.
    b. Under Section 203.4--Compilation of Loan Data, under Paragraph 
4(a)(12), paragraph 1 is revised; and a new heading Paragraph 4(a)(14) 
and a new paragraph 1 are added.

Supplement I to Part 203--Staff Commentary

* * * * *

Section 203.2--Definitions

* * * * *
    2(i) Manufactured home.
    1. Definition of a manufactured home. The definition in 
Sec. 203.2(i) refers to the federal building code for factory-built 
housing established by the Department of Housing and Urban 
Development (HUD). The HUD code requires generally that housing be 
essentially ready for occupancy upon leaving the factory and being 
transported to a building site. Modular homes that meet all of the 
HUD code standards are included in the definition because they are 
ready for occupancy upon leaving the factory. Other factory-built 
homes, such as panelized and pre-cut homes, generally do not meet 
the HUD code because they require a significant amount of 
construction on site before they are ready for occupancy. Loans and 
applications relating to manufactured homes that do not meet the HUD 
code should not be identified as manufactured housing under HMDA.
* * * * *

Section 203.4--Compilation of Loan Data

    4(a) Data Format and Itemization. * * *
    Paragraph 4(a)(12) Rate spread information.
    1. Treasury securities of comparable maturity. To determine the 
yield on a Treasury security, lenders must use the table entitled 
``Treasury Securities of Comparable Maturity under Regulation C,'' 
which will be published on the FFIEC's Web site (http://
www.ffiec.gov/hmda) and made available in paper form upon request. 
This table will provide, for the 15th day of each month, Treasury 
security yields for every available loan maturity. The applicable 
Treasury yield date will depend on the date on which the financial 
institution set the interest rate on the loan for the final time 
before closing. See Appendix A, Paragraphs I.G.1. and 2.
* * * * *
    Paragraph 4(a)(14) Lien status.
    1. Determining lien status for applications and loans 
originated. i. Lenders are required to report lien status for loans 
they originate and applications that do not result in originations. 
Lien status is determined by reference to the best information 
readily available to the lender at the time final action is taken 
and to the lender's own procedures. Thus, lenders may rely on the 
title search they routinely perform as part of their underwriting 
procedures--for example, for home purchase loans. Regulation C does 
not require lenders to perform title searches solely to comply with 
HMDA reporting requirements. Lenders may rely on other information 
that is readily available to them at the time final action is taken 
and that they reasonably believe is accurate, such as the 
applicant's statement on the application or the applicant's credit 
report. For example, where the applicant indicates on the 
application that there is a mortgage on the property or where the 
applicant's credit report shows that the applicant has a mortgage--
and that mortgage is not going to be paid off as part of the 
transaction--the lender may assume that the loan it originates is 
secured by a subordinate lien. If the same application did not 
result in an origination--for example, because the application is 
denied or withdrawn--the lender would report the application as an 
application for a subordinate-lien loan.
    ii. Lenders may also consider their established procedures when 
determining lien status for applications that do not result in 
originations. For example, a consumer applies to a lender to 
refinance a $100,000 first mortgage; the consumer also has a home 
equity line of credit for $20,000. If the lender's practice in such 
a case is to ensure that it will have first-lien position--through a 
subordination agreement with the holder of the mortgage on the home 
equity line--then the lender should report the application as an 
application for a first-lien loan.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, June 21, 2002.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 02-16191 Filed 6-26-02; 8:45 am]
BILLING CODE 6210-01-P