Community banks and credit unions may soon be subject to new guidelines that will require them to report information on home equity lines of credit, due to Home Mortgage Disclosure Act (HMDA) reporting requirements. Under rules scheduled to go into effect, credit unions and community banks are exempt from the requirement if they have originated fewer than 100 HELOCs during each of the previous two years.
The Consumer Financial Protection Bureau (CFPB) is proposing a two-year test run of a higher threshold. The new proposal would increase the rule’s threshold to 500 loans in each of the previous two years. The change would be temporary, in use through calendar years 2018 and 2019, so that the Bureau can consider whether to make a permanent adjustment.
“Home-equity lines of credit worsened the foreclosure crisis that swept the country in 2008 and 2009,” said CFPB Director Richard Cordray. “We need to keep track of the responsible use of these loans for consumers, but after hearing from community banks and credit unions we want to reconsider whether that goal can be achieved with a higher reporting threshold.”
HMDA, originally enacted in 1975, requires most lenders to report information on loan applications they receive and on loans they originate or purchase. The data collected is made available so that banking regulators and the public can monitor whether financial institutions are serving the housing needs of their communities, identify possible discriminatory lending patterns and assist in distributing public-sector investment to attract private investment to needed areas.
The Dodd-Frank Wall Street Reform and Consumer Protection Act transferred responsibility for HMDA reporting to CFPB, and the Bureau has updated the regulations to improve the quality and type of data collected. The requirement to report data on HELOCs and other dwelling-secured open-end lines of credit is one of the more significant changes to the regulations.
CFPB said including these loans in the reporting requirements is important because, just like traditional mortgage, a customer can lose their home if they default. Over leverage and defaults due to these products contributed to the foreclosure crises that many communities experienced in the late 2000s but this type of lending was not visible in the HMDA data or in any other publicly available data source collected at the time.
CFPB said that, while revamping HMDA it heard from community banks and credit unions that the new HELOC requirements represented a new, and in some cases, significant compliance burden for them. The original threshold of 100 dwelling-secured open-end lines in each of the previous two years was proposed for small-volume lenders where the benefits of the data do not justify the costs, Now CFPB is hearing that this threshold may still present challenges and costs greater than the Bureau had estimated. Additionally, analysis of more recent data suggests changes in open-end origination trends that may result in more institutions reporting open-end lines of credit than was initially estimated. The Bureau estimates that the temporary 500-loan threshold would still capture about three-quarters of the home-equity lending market, down from about 88 percent at the 100-loan threshold.