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CFPB discusses mortgage financing risk options in current environment
On December 21, the CFPB reported that higher mortgage interest rates have led to increased monthly payments and higher debt-to-income ratios for borrowers. According to a recent Bureau analysis of quarterly HMDA data, some interest rates on 30-year fixed-rate mortgages have risen as high as seven percent and are at levels higher than what has been seen for nearly 20 years. The Bureau reported that in response to increasing interest rates, financial service providers are offering alternative financing options to provide opportunities for consumers to access lower rates, including adjustable-rate mortgages, temporary buydowns, home equity lines of credit and loans, and loan assumptions where a homebuyer assumes responsibility for the remaining balance of a home seller’s mortgage with the original loan terms. Explaining the various risks associated with these offerings, the Bureau warned consumers that they should understand the costs associated with cash-out refinances and risks related to alternative sales transactions (e.g., contract-for-deeds or land contracts, rent-to-own arrangements, and equity-sharing arrangements), which may sound appealing in a higher interest rate market but may “lack the protections of traditional mortgages, including the ability to build and access home equity, foreclosure protections, or even basic disclosures that allow for comparison shopping.”
CFPB issues HMDA technical amendment
On December 12, the CFPB issued a technical amendment to the HMDA Rule to reflect the closed-end mortgage loan reporting threshold of 25 mortgage loans in each of the two preceding calendar years. As previously covered by InfoBytes, in September, the U.S. District Court for the District of Columbia granted partial summary judgment to a group of consumer fair housing associations (collectively, “plaintiffs”) that challenged changes made in 2020 that permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under HMDA. The 2020 Rule, which amended Regulation C, permanently increased the reporting threshold from the origination of at least 25 closed-end mortgage loans in each of the two preceding calendar years to 100, and permanently increased the threshold for collecting and reporting data about open-end lines of credit from the origination of 100 lines of credit in each of the two preceding calendar years to 200 (covered by InfoBytes here). The plaintiffs sued the CFPB in 2020, arguing, among other things, that the final rule “exempts about 40 percent of depository institutions that were previously required to report” and undermines HMDA’s purpose by allowing potential violations of fair lending laws to go undetected. (Covered by InfoBytes here.) As a result of the September 23 order, the threshold for reporting data about closed-end mortgage loans is 25, the threshold established by the 2015 HMDA Rule.
CFPB releases spring 2022 semi-annual report
On December 6, the CFPB issued its semi-annual report to Congress covering the Bureau’s work for the period beginning October 1, 2021 and ending March 31, 2022. The report, which is required by Dodd-Frank, addresses several issues, including complaints received from consumers about consumer financial products or services throughout the reporting period. The report highlighted that the Bureau, among other things, has: (i) conducted an assessment of significant actions taken by state attorneys general and state regulators related to federal consumer financial law; (ii) initiated 21 fair lending supervisory activities to determine compliance with federal laws, including ECOA, HMDA, and UDAAP prohibitions, and engaged in interagency fair lending coordination with other federal agencies and states; (iii) “encouraged lenders to enhance oversight and identification of fair lending risk and to implement policies, procedures, and controls designed to effectively manage HMDA activities, including regarding integrity of data collection”; and (iv) launched a new Diversity, Equity, Inclusion, and Accessibility Strategic Plan to increase workforce and contracting diversity.
In regard to supervision and enforcement, the report highlighted the Bureau’s public supervisory and enforcement actions and other significant initiatives during the reporting period. Additionally, the report noted rule-related work, including advisory opinions, advance notice of proposed rulemakings, requests for information, and proposed and final rules. These include rules and orders related to the LIBOR transition, fair credit reporting, Covid-19 mortgage and debt collection protections for consumers, small business lending data collection, and automated valuation model rulemaking.
CFPB will not initiate HMDA enforcement actions for certain reporting failures
On December 6, the CFPB issued a blog post emphasizing that financial institutions may need time to implement or adjust policies, procedures, systems and operations to come into compliance with the new HMDA volume reporting threshold and that the agency does not view action regarding institutions’ HMDA data as a current priority. As previously covered by InfoBytes, in September, the U.S. District Court for the District of Columbia granted partial summary judgment to a group of consumer fair housing associations that challenged changes made in 2020 that permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under HMDA. The 2020 Rule, which amended Regulation C, permanently increased the reporting threshold from the origination of at least 25 closed-end mortgage loans in each of the two preceding calendar years to 100, and permanently increased the threshold for collecting and reporting data about open-end lines of credit from the origination of 100 lines of credit in each of the two preceding calendar years to 200 (covered by InfoBytes here). The plaintiffs sued the CFPB in 2020, arguing, among other things, that the final rule “exempts about 40 percent of depository institutions that were previously required to report” and undermines HMDA’s purpose by allowing potential violations of fair lending laws to go undetected. (Covered by InfoBytes here.)
According to the blog post, the Bureau “does not intend to initiate enforcement actions or cite HMDA violations for failures to report closed-end mortgage loan data collected in 2022, 2021 or 2020 for institutions subject to the CFPB’s enforcement or supervisory jurisdiction that meet Regulation C’s other coverage requirements and originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years.”
Fed releases study on racial bias in mortgage lending
Recently, the Federal Reserve Board published a study titled How Much Does Racial Bias Affect Mortgage Lending? Evidence from Human and Algorithmic Credit Decisions. Using confidential supervisory data collected under HMDA to estimate the extent of racial and ethnic discrimination in mortgage lending, the study found that racial bias has played “a limited role” in recent years in generating disparities seen in mortgage lending denials. The researchers acknowledged that as a self-reporting mechanism, HDMA reports may not reflect reality, “as a lender engaged in illegal discrimination would be unlikely to explicitly admit this.” The study also analyzed denial rates among fintech lenders, finding that by automating more of the application process, fintech firms have the potential to decrease racial discrimination. The study also found that excess denials are higher at fintech lenders, which is “the opposite result we would expect if excess denials reflect racially biased human judgment.” Additionally, the study found that group differences in risk characteristics drive most of the disparities in credit access. The study showed that Black and Hispanic applicants tend to be more leveraged and have much lower credit scores. Both groups of applicants are “less likely to receive algorithmic approval recommendations from government automated underwriting systems (AUS) than white applicants,” the study found. The study also noted caveats, such as that the researchers “only study discrimination in approval decisions conditional on formally applying.”
District Court criticizes CFPB’s cost-benefit analysis in HMDA change
On September 23, the U.S. District Court for the District of Columbia granted partial summary judgment to a group of consumer fair housing associations (collectively, “plaintiffs”) that challenged changes made in 2020 that permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under HMDA. As previously covered by InfoBytes, the 2020 Rule, which amended Regulation C, permanently increased the reporting threshold from the origination of at least 25 closed-end mortgage loans in each of the two preceding calendar years to 100, and permanently increased the threshold for collecting and reporting data about open-end lines of credit from the origination of 100 lines of credit in each of the two preceding calendar years to 200. The plaintiffs sued the CFPB in 2020, arguing, among other things, that the final rule “exempts about 40 percent of depository institutions that were previously required to report” and undermines HMDA’s purpose by allowing potential violations of fair lending laws to go undetected. (Covered by InfoBytes here.) The plaintiffs also claimed that the agency’s cost-benefit analysis underlying the 2020 Rule was “flawed because the Bureau exaggerated the ‘benefits’ of increasing the loan-volume reporting thresholds by failing to adequately account for comments suggesting that the savings would be much smaller than estimated, and by relying on overinflated estimates of cost savings to newly-exempted lending institutions with smaller loan volumes.” The plaintiffs asked that the 2020 Rule be vacated and set aside on the grounds that the Bureau acted outside of its statutory authority in issuing the 2020 Rule and violated the Administrative Procedure Act. The Bureau countered that issuing the 2020 Rule was within its scope of authority because HMDA’s text “does not unambiguously foreclose” the agency’s interpretation of the statute.
The court first determined that promulgation of the 2020 Rule did not exceed the Bureau’s statutory authority because “HMDA grants broad discretion ‘in the judgment of the’ agency to create ‘exceptions’ to the statutory reporting requirements…” “[E]ven a regulation relieving roughly forty percent of institutions from data collection and reporting requirements is an exception to the ‘rule’ of disclosure, which continues to apply to the majority of institutions,” the court wrote, adding that the 2020 Rule preserves the reporting requirements, “as compared to the 2015 Rule, for most institutions, the vast majority of loans, and the vast majority of communities.”
However, the court agreed with the plaintiffs that the cost-benefit analysis for the 2020 Rule’s increased reporting threshold for closed-end mortgage loans was arbitrary and capricious. The court expressed criticism of the cost-benefit analysis used by the Bureau to justify setting the minimum number of closed-end loans in each of the two preceding calendar years at 100, and found that the Bureau failed to adequately explain or support its rationales for revising and adopting the closed-end reporting thresholds under the 2020 Rule. The Bureau “conceded the new rule would cause identifiable harms to the public, but effectively threw up its proverbial hands, citing an inability to incorporate these harms into its analysis as quantifiable ‘costs,’ and moved on to the next topic of discussion,” the court said.
The Bureau “exaggerated the savings to ‘covered persons’ under the new rule, and did not engage appropriately with the nonquantifiable ‘harms’ of the 2020 Rule, and the disparate impact of those harms on the traditionally underserved populations HMDA is intended to protect, even as it conceded the revised threshold would certainly result in some harm to consumers,” the court said, questioning the Bureau’s analysis of disparate impacts on rural and low-to-moderate-income communities. The court determined that the plaintiffs identified several flaws in the Bureau’s cost-benefit analysis supporting the increased closed-end mortgage loan threshold, thus rendering this aspect of the 2020 Rule “arbitrary, capricious and requiring vacatur.” The court asked the Bureau for a “more reasoned explanation as to whether and how the cost-benefit analysis accounted for the ongoing need to collect data on home mortgages pursuant to other statutory requirements and underwriting purposes, and why, when a lender must collect and report multiple data points for each mortgage and loan application, the marginal cost of collecting the additional, HMDA-specific data points is so significant that the increased reporting threshold of the 2020 Rule renders unique cost savings.”
CFPB releases 2021 HMDA data
On September 15, the CFPB released a Data Point report titled 2021 Mortgage Market Activity and Trends, which analyzes residential mortgage lending activity and trends for 2021. The 2021 HMDA data encompasses the fourth year of data that incorporates amendments to HMDA by Dodd-Frank. The changes include new data points, revisions to some existing data points, and authorizes the CFPB to require new data points. As covered by a Buckley Special Alert, the CFPB issued a final rule that implemented significant changes that reflected the needs of homeowners and the evolution in the mortgage market.
The Bureau previously reported a 66.8 percent increase in originations from 2019 to 2020, largely driven by refinances. However, most of the increase from 2020 to 2021 was a result of jumbo home purchase loans. Other highlighted trends in mortgage applications and originations found in the 2021 HMDA data point include, among other things:
- 4,332 financial institutions reported at least one closed-end record in 2021, down by 3.1 percent from 4,472 financial institutions who reported in 2020;
- At least one closed-end mortgage loan had been reported by 4,332 financial institutions, down by 3.1 percent from 4,472 financial institutions in 2020;
- Black borrowers’ share of home purchase loans increased from 7.3 percent in 2020 to 7.9 percent in 2021; and
- “The refinance boom, especially in non-cash-out refinance that dominated mortgage market activities in 2019 and 2020, peaked in March 2021.”
FFIEC releases new HMDA tool
On August 30, the CFPB unveiled the Federal Financial Institutions Examinations Council’s Quarterly Graphs tool, which permits users to view HMDA mortgage loan data and, for the first time, follow mortgage market trends throughout the collection year. According to the CFPB, the new tool integrates currently available quarterly data submitted by financial institutions who report a combined total of at least 60,000 applications and covered loans (excluding purchased covered loans) for the preceding calendar year. The tool provides graphs for an extensive lists of metrics, including loan-to-value ratios, debt-to-income ratios, borrower credit scores, denial rates, interest rates, and total loan costs. The tool also allows users to download graphs in a number of formats, including CSV, XLS, PDF, or custom web link. The tool currently contains data for 2019, 2020, 2021 and the first quarter of 2022, with future quarter data being added as it is available.
FFIEC releases 2021 HMDA data
On June 16, the Federal Financial Institutions Examinations Council (FFIEC) released the 2021 HMDA data on mortgage lending transactions at 4,338 covered institutions (a decline from the 4,475 reporting institutions in 2020). Available data products include: (i) the Snapshot National Loan-Level Dataset, which contains national HMDA datasets as of May 1, 2022; (ii) the HMDA Dynamic National Loan-Level Dataset, which is updated on a weekly basis to reflect late submissions and resubmissions; (iii) the Aggregate and Disclosure Reports, which provide summaries on individual institutions and geographies; (vi) the HMDA Data Browser where users can customize tables and download datasets for further analysis; and (v) the Modified Loan/Application Register for filers of 2021 HMDA data.
The 2021 data includes information on 23.3 million home loan applications, of which 21.1 million were closed-end and 1.8 million were open-end. The Snapshot revealed that an additional 350,000 records were from financial institutions making use of the Economic Growth, Regulatory Relief, and Consumer Protection Act’s partial exemptions that did not designate whether the records were closed-end or open-end. Observations from the data relative to the prior year include: (i) the percentage of mortgages originated by non-depository, independent mortgage companies increased, accounting for “63.9 percent of first lien, one- to four-family, site-built, owner-occupied home-purchase loans, up from 60.7 percent in 2020”; (ii) the percentage of closed-end home purchase loans for first lien, one- to four-family, site-built, owner-occupied properties made to Black or African American borrowers increased from 7.3 percent in 2020 to 7.9 percent in 2021, while the share of these loans made to Hispanic-White borrowers increased slightly from 9.1 percent to 9.2 percent and the share made to Asian borrowers jumped from 5.5 percent to 7.1 percent; and (iii) “Black or African American and Hispanic-White applicants experienced denial rates for first lien, one- to four-family, site-built, owner-occupied conventional, closed-end home purchase loans of 15.7 percent and 9.8 percent respectively, while the denial rates for Asian and non-Hispanic-White applicants were 7.5 percent and 5.6 percent respectively.”
CFPB releases guide for accessing HMDA lending patterns
On June 13, the CFPB published a guide to assist a range of stakeholders accessing publicly available HMDA data on lending patterns that may result in racial and economic inequality due to redlining practices or other “unjustified disparities.” Through the Beginner’s Guide to Accessing and Using Home Mortgage Disclosure Act Data, stakeholders can better understand the sources and meanings of various HMDA data types as well as the financial institutions that are required to maintain, report, and publicly disclose loan-level information about mortgage applications and loans. According to the Bureau, HMDA data can provide insights on whether lenders are serving the housing needs of their communities and help guide policy decisions.