District Circular Letters

December 27, 2001

BANKING SUPERVISION AND REGULATION:
HOME MORTGAGE DISCLOSURE ACT (HMDA) ANNUAL ADJUSTMENT AND REGULATION Z FINAL RULE

To State Member Banks, Bank Holding Companies,
U.S. Branches and Agencies of Foreign Banks,
and Others Concerned,
in the Twelfth Federal Reserve District

Annual Adjustment of Asset-Size Exemption Threshold (R-1119)

The Federal Reserve Board has increased the asset-size exemption threshold for depository institutions under Regulation C (Home Mortgage Disclosure) from $31 million to $32 million.

Depository institutions with assets of $32 million or less as of December 31, 2001, are exempt from data collection in 2002. However, an institution’s exemption from collecting data in 2002 does not affect its responsibility to report the data it was required to collect in 2001.

The revision to the exemption threshold is based on the annual percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers for the twelve-month period ending in November 2001.

The adjustment is effective January 1, 2002.

The Home Mortgage Disclosure Act (HMDA) requires most depository institutions and certain for-profit, nondepository institutions to collect, report, and disclose data about applications for, and originations and purchases of, home mortgage loans, home improvement loans, and refinancings. Data reported include the type, purpose, and amount of the loan; the race or national origin, sex, and income of the loan applicant; and the location of the property. The purposes of HMDA include helping to determine whether financial institutions are serving the housing needs of their communities and assisting in fair lending enforcement.

Final Rule on Regulation Z (R-1090)

The Federal Reserve Board has approved the issuance of a final rule that amends its regulations aimed at curbing predatory lending.

Compliance with the amendments becomes mandatory on October 1, 2002.

The amendments to Regulation Z (Truth in Lending) broaden the scope of loans subject to the protections of the Home Ownership and Equity Protection Act (HOEPA) of 1994 by adjusting the price triggers that determine coverage under the act. The rate-based trigger is lowered by two percentage points for first-lien loans and the fee-based trigger is revised to include optional insurance premiums and similar credit protection products paid at closing. Certain acts and practices in connection with home-secured loans are prohibited, including a rule to restrict creditors from engaging in repeated refinancings of their own HOEPA loans over a short time period when the transactions are not in the borrower’s interest.

HOEPA’s prohibition against extending credit without regard to a consumer’s repayment ability is strengthened by requiring creditors to document and verify income for HOEPA-covered loans. Disclosures received by consumers before closing for HOEPA-covered loans would include the total amount of money borrowed and whether that amount includes optional credit insurance or similar products paid at closing.

HOEPA was enacted in response to anecdotal evidence of predatory lending practices in the home-equity lending market. HOEPA imposes additional disclosure requirements. It also imposes substantive limitations, such as restrictions on short-term balloon notes, on certain home-equity loans with rates and fees above a certain percentage or amount.

HOEPA authorizes the Board to expand HOEPA’s coverage and prohibit certain acts and practices in connection with mortgage lending. The Board published proposed amendments in December 2000, after holding public hearings on possible ways to curb predatory lending by using its regulatory authority.

The term "predatory lending" encompasses a variety of practices. Oftentimes homeowners in certain communities - particularly, the elderly and minorities - are targeted with offers of high-cost, home-secured credit. The loans carry high up-front fees and may be based on the homeowners’ equity in their homes, not their ability to make the scheduled payments. When homeowners have problems repaying the debt, they are often encouraged to refinance the loan. Frequently this leads to another high-fee loan that provides little or no economic benefit to the borrower.

Additional Information

All circulars and documents are available on the Internet through the Federal Reserve Bank of San Francisco's Internet site, at http://www.frbsf.org/banking/letters. Paper copies of the Board's notice (Docket R-1119 and R-1090) are available from our Corporate Services Department. To request copies to be sent by mail, please call (415) 974-2060.

For additional information on these matters, please contact our Banking Supervision and Regulation Department at (415) 974-3329.

FEDERAL RESERVE BANK OF SAN FRANCISCO