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For Release on Delivery Expected at 10 a.m. February 19, 1980 Statement by Nancy H. Teeters Member Board of Governors of the Federal Reserve System Before the Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. February 19, 1980 I appreciate having this opportunity to present the Federal Reserve Board's views about the Home Mortgage Disclosure Act. future, we must address two issues: In discussing the act's first, whether the life of the act should be extended beyond its June 27 termination date; and, second, if extended, whether its coverage should be broadened or narrowed. In order to determine what course to follow, I think that we must ask ourselves three basic questions: * How useful has the information produced under the act been? * How much does producing the information cost? * If the information has been useful for certain purposes, how can the reporting requirements be modified to further those purposes in the most cost effective way? The original purpose of the act was to provide local citizens and public officials with information about the home purchase and home improvement lending patterns of depository institutions located in their communities. Armed with this information, citizens and public officials could, as Senator Proxmire stated in March 1975 upon introducing the legislation, "intelligently decide which institution deserved their business." Presumably, an institution with a good community lending record would be rewarded with increased deposits, while an institution with a poor record would suffer a deposit outflow. The public was to be provided with information, and "the free market [would] do the rest." - 2 - Two years later, however, the Congress decided that "more coordi nated efforts" were necessary "in order to increase the viability of our urban communities." Consequently, it adopted the Community Reinvestment Act. With the passage of CRA, the primary vehicle for monitoring "to determine whether depository institutions are filling their obligations to serve the housing needs of the communities and neighborhoods in which they are located" shifted from the public to the federal financial regulatory agencies. (Inci dentally, the focus also shifted from narrower "housing needs" to broader "credit needs.") While citizens used home loan disclosure information prior to CRA and perhaps use it even more now, that use is still small in comparison to the number of disclosure reports prepared each year. The predominant use of the information is by the financial regulatory agencies, which analyze it to help monitor lending performance under CRA and to help detect possible ethnic or racial discrimination in violation of the Equal Credit Opportunity and Fair Housing Acts. Thus, the answer to the first question about the utility of the in formation is that it provides the principal, quantifiable measure by which to gauge the performance of depository institutions located in urban areas in helping to meet housing-related community credit needs. Although that yard stick is a more appropriate measure of overall performance for thrift institu tions than commercial banks, it nevertheless is a useful one even for banks with their relatively lower home loan volume. Even if home loan disclosure information is useful to the agencies, there still is the question of cost. In a study jointly sponsored by the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board, the 1977 cost of reporting the information was estimated at about $1.50 per - 3 - loan on average or approximately $6 million for all loans subject to disclo sure. (That figure should be considered only as a rough estimate because of the difficulty of determining the number, as opposed to the amount, of covered home mortgage and home improvement loafts made nationwide in any given year.) The cost of compliance, however, is not an insignificant burden on depository institutions, particularly smaller-sized ones. Indeed, as one would expect, the cost per loan rises appreciably— three fold and more— as the number of loans to be reported declines. Consequently, if reporting is continued, efforts should be made to reduce the cost, especially for institutions making fewer than 200 loans per year (the FDIC-FHLBB study shows a significant per loan cost escalation below 200 loans). Since home mortgage disclosure information is useful for helping to monitor CRA performance and for enforcing various civil rights laws, the issue becomes how the reporting requirements could be modified to support those uses in the most cost-effective way. The Board believes that the essen tial usefulness of the information could be preserved while reducing the costs for reporting institutions if three steps were taken: * Exempt an institution from reporting requirements if it has a resi dential mortgage and home improvement loan portfolio of $10 million or less un less it originates more than 200 home purchase loans each calendar year, instead of only exempting an institution that has assets of $10 million or less; * Require disclosure by census tract only for loans relating to homes located in SMSA counties that have a population of more than 50,000 person8—rather than require disclosure by census tract of all loans on homes within an SMSA--and by county in other areas within an SMSA; and - 4 - Simplify the reporting categories by grouping- together conventional home purchase loans and governaentally insured or guaranteed ones and by elimi nating separate disolosure of loans made to non-occupant borrowers. The current exeaption, based upon asset size, treats coaaercial banks and thrifts unequally. Since coaaercial banks alaost universally devote a smaller percentage of their lendable funds to hoae loans than thrifts, a bank with assets just above the exeaption level alaost always will report aaking or purchasing fewer hoae loans than a comparable-size thrift. With the reporting cost per loan rising as the nuaber of loans declines, saaller-sized banks bear a disproportionate share of the total cost of disclosure given their relatively low profile in the residential loan market. To distribute the cost burden more fairly, the asset-size exeaption should be eliminated in favor of an exeaption based upon the size of an insti tution's hoae purchase and hoae iaproveaent loan portfolio and the nuaber of hoae purchase loans aade in a year. This two-part test of hoae loan stock and flow appears better adapted than an asset-size test to measuring whether an institution is a sufficiently proainent participant in the hoae lending market to be required to report. The Board recoaaends that an institution be subject to disclosure requireaents only if it has a hoae loan purchase and iaproveaent portfolio of more than $10 ail lion or it aakes more than 200 home purchase loans each calendar year. The cutoff of 200 loans per year is based upon the finding of the FDIC-FHLBB study that per loan reporting costs escalate sharply when fewer than 200 loans have to be reported. On the other hand, the loan flow measure would require reporting by institutions that make a significant number of hoae purchase loans each year, but sell thea in the secondary aarket, thereby not increasing the size of their portfolios. - 5 - Under the current asset exemption, 5,160 of the nearly 6,000 commer cial banks with a head office in an SMSA were required to report loan infor mation in 1978. If the exemption cutoff were changed along the lines suggested, about 1,394 banks would be required to'report (assuming 1978 portfolio size; we have, however, no readily available information on how the 200 loan cutoff would affect the number of reporting banks). Although that would result in a significant decrease in the number of reporting banks (a decrease of about 3,766 banks or 73 percent), it still would require the major bank lenders in the home loan area to make disclosures. About 67 percent of the amount of all home purchase and home improvement loans held by banks headquartered in SMSAs would be held by banks subject to the changed reporting requirements. As indicated previously, a combined portfolio-flow measure would significantly reduce the cost of compliance by eliminating from coverage those institutions—particularly smaller commercial banks— with high per loan reporting expenses. Furthermore, the home lending performance of those institutions under both CRA and the civil rights laws is easier to judge since they make relatively fewer home loans. In most cases, examiners could review all or a sufficient number of their loan files to determine their lend ing policies and patterns; that would not be feasible for institutions with larger home loan portfolios. Of course, there is a trade-off in reducing insti tutional compliance costs; the amount of time spent examining institutions that were previously subject to reporting requirements would increase, thereby dimin ishing the net saving from cutting back on disclosures. The second recommendation that the Board would make to focus home loan reporting requirements on the areas tfiere the information would be most useful is to require reporting of loans by census tract within SMSAs only for - b - counties with a population of more than 50,000 persons— that is, those counties that are most urban. Loans relating to properties located in SMSA counties with a population of 50,000 or fewer persons would be reported by county. fftien we see or hear the term "standard metropolitan statistical area," we think of cities like Boston, Chicago, Dallas, Denver, Los Angeles, maybe even Milwaukee—metropolitan areas with populations greater than one million persons. Although an SMSA, by definition, must have a population of at least 50,000 persons, many SMSAs, particularly in areas of rapid population growth, encom pass counties that are predominately rural and that have much smaller popula tions. To illustrate the point, consider the Atlanta SMSA. It currently is composed of 15 counties, but the two central counties have two-thirds of the population. Based upon 1970 Census figures, none of the outer ten counties had a population of more than 31,000 people, and two counties had as few as 11,000 persons. character. Moreover, those ten outer counties are predominately rural in The Atlanta situation is not unique. At least 36 of the 288 SMSAs have two or more counties with fewer than 50,000 people (based upon the 1970 Census), and many more have at least one county in that category. Although CRA has no geographic limits to its coverage, the major thrust behind its passage was, as the Conference Committee report states-^ "to increase the viability of our urban communities." As noted, however, many of the coun ties in the 288 currently designated SMSAs are not "urban" in character. Gen erally, fewer loans are made in those non-urban counties, making interpreta tion of the data more tenuous. Moreover, the critical comparisons between lending patterns and information on race, national origin, family income, and housing stock—comparisons that are at the heart of CRA monitoring and civil rights enforcement— are more difficult to perform for non-urban areas and in - some instances would be meaningless. 7Consequently, requiring disclosure by census tract of loans relating to homes in non-urban counties does relatively little to advance CRA monitoring or civil rights enforcement. Therefore, the Board believes that, to maximize utility and efficiency, census tract report ing should be refocused on urban areas within SMSAs where the information has been used in the past and where it would be most helpful in the future. Con tinued reporting of the non-urban areas of an SMSA on a county basis would still permit comparisons of the volume of urban versus suburban lending patterns. At this juncture, let me say a few words about expanding home loan reporting to depository institutions located outside SMSAs. The Board believes that expansion would be unwise and generally would be unnecessary. If the act were extended and geographic coverage expanded without any further changes, the 8,700 institutions currently subject to disclosure would be joined by approximately 6,800 additional institutions. About 1,000 institutions that have offices both inside and outside SMSAs would be required to make addi tional disclosures. Thus, expansion would significantly increase (perhaps double) total reporting costs because of the additional institutions covered and the higher per loan cost for institutions reporting fewer loans (which would be a common characteristic of institutions that are located outside SMSAs). Moreover, those 6,800 institutions account for less than 15 percent of the home loans held by all depositary institutions. Hence, the cost for obtaining that marginal increase in loan coverage would be high. Although expansion would provide, some useful information for urban ized areas outside SMSAs, generally, it would not materially further the purpose of CRA; nor would it particularly enhance civil rights enforcement. The critical link between geographic reporting units—which, for practical - 8 - purpose8, would have to be ZIP code— and population and housing stock charac teristics would be either nonexistent or too tenuous in most cases to be of any real help. ZIP codes simply encompass too much territory; in rural areas a town or perhaps several towns and the surrounding countryside may have a single ZIP code. Returning to the Board's third major recommendation, we believe that the reporting categories should be simplified. The current distinction between conventional and government insured or guaranteed loans should be eliminated. While it might be interesting information, it has not been critical in any CRA review that the Board has conducted. it contributes to reporting errors. It is simply too fine a distinction, and The same is true of the requirement that home loans to borrowers who do not intend to reside in the home be disclosed separately. It is a theoretically interesting piece of information, but it has not been used—either by the public or by the agencies. The consequences of these proposed changes are illustrated in the two exhibits appended to my testimony. Exhibit 1 is the current model disclosure statement; Exhibit 2 shows what the statement would look like if the changes were adopted. Community groups have suggested that the reporting period be stan dardized by substituting calendar year disclosures for the current fiscal year disclosures. In our view, the change makes sense and would not increase compliance costs. Another suggestion is that the financial regulatory agencies establish central collection centers— for example, at public libraries or local government offices— for the disclosure reports. While centralized collection and maintenance of the reports would be helpful to the public, we are concerned about the potential costs and logistical problems of specifying convenient repositories for each SMSA. The Comptroller, FDIC, FHLBB, and Federal Reserve System have Federal Reserve Banks* branches or regional offices in only 40 of - the 288 SMSAs. 9 - Therefore, post offices and libraries would be the most likely candidates for collection centers, but presumably both the Postal Service and local library authorities would object to having the burden placed on them; and, in the case of libraries., the federal government has no authority to require them to serve as collection centers. On the other hand, renting space and paying for minimum maintenance of the records could be more expensive than the cost of reporting. The Board does not support this proposal. There also has been some discussion of requiring a nationwide, stan dardized reporting format. The Board has no objection to that requirement for federally chartered institutions. We would only point out that such a requirement might preempt to some degree the home loan disclosure require ments of five states—California, Connecticut, Massachusetts, New Jersey, and New York— all of which have adapted those requirements to their own per ceived needs. That brings me to the ultimate question regarding the Home Mortgage Disclosure Act: should it be renewed? On balance, the Board believes that the reported information, if confined to truly urban areas, is useful for analysis of community reinvestment and civil rights issues. We also beiieve that the cost of reporting, if reduced along the lines suggested, would be reasonable in relation to the value of the information gained. purpose of the act has been supplanted by CRA. But the original Therefore, we suggest that the Home Mortgage Disclosure Act, as a distinct statute, be allowed to lapse and that more limited and finely focused reporting .requirements be incorporated in CRA. The Board also recommends that a sunset provision— similar to the one that has prompted this review—be attached to any new reporting requirements. We suggest that three years would be an appropriate extension period because by then we will have developed sufficient experience with CRA evaluations and with - 10 - new civil rights enforcement systems to determine how useful the proposed home loan disclosures would be for those purposes and whether further changes or elimination would be appropriate. FORM HMDA-1 (Pursuant to Public Law 94-200) MORTGAGE LOAN DISCLOSURE STATEMENT (Specimen Form) Federal Enforcement Agency for this Institution Name __________-..... - -________________ Address Name of Depository Institution Relevant SMSA ____________ Reporting Period------------------- PART A ORIGINATIONS Section I Mortgage loan data relating to residential real property located within the relevant SMSA Loans to both Occupants and Non-occupants of the Property CENSUS TRACT ZIP CODE (in numerical sequence) OTHER RESIDENTIAL MORTGAGE LOANS (“Conventional”) (except on multi family dwellings) Principal No. of Loans Amount —•" .... TOTAL HOME IMPROVEMENT LOANS (except on multi-family dwellings) No. of Principal Loans Amount TOTAL RESIDENTIAL MORTGAGE LOANS (except on multi* family dwellings) No. of Principal Loans Amount | | TOTAL MORTGAGE LOANS ON MULTI FAMILY DWELLINGS No. of Principal Loans Amount [ Section II Mortgage loan data relating to residential real property located outside the relevant SMSA (or SMSA’s) NON-OCCUPANT LOANS (except on multi-family dwellings) No. of Principal Loans Amount Exhibit 1 Column Totals FHA, FmHA or VA LOANS (except on multi-family dwellings) No. of Principal Loans Amount Addendum Item IHMHB FORM HMDA-1 (Pursuant to Public Law 94-200) Name of Depository Institution Relevant SMSA ____________ Reporting Period------------------ MORTGAGE LOAN DISCLOSURE STATEMENT (Specimen Form) Federal Enforcement Agency for this Institution Name ______________________________ Address PART A ORIGINATIONS Section I Mortgage loan data relating to residential real property located within the relevant SMSA CENSUS TRACT or ZIP CODE (in numerical sequence) TOTAL RESIDENTIAL MORTGAGE LOANS (except on multi family dwellings) No. of Principal i Loans Amount TOTAL HOME IMPROVEMENT LOANS (except on multi-family dwellings) No. of Principal Loans Amount TOTAL MORTGAGE LOANS ON MULTI FAMILY DWELLINGS No. of Principal Loans Amount Column Totals Section II Mortgage loan data relating to residential real property located in non-urban counties within the relevant SMSA County _ _ _ _ _ _ _ _ _ I_ _ _ _ _ _ _ _ _ _ j Section III Mortgage loan data relating to residential real property located outside the relevant SMSA (or SMSA’s) Exhibit 2 ________________ j_ MORTGAGE PLUS HOME IMPROVEMENT LOAN PORT FOLIO SIZE (Conventional and FHA/VA 1-4 Family Residential Loans) (Dollars) Greater than or to zero Greater than or to 5 million Greater than or to 10 million Greater than or to 20 million X of all Mortgage Plus Home Improve ment Volume Number of Banks X of all Banks 14,377 100.0 123.9 100.0 5,986 42.0 96.4 78.0 4,002 28.0 108.1 87.0 2,403 17.0 89.9 73.0 1,966 13.7 93.7 76.0 1,394 10.0 82.6 67.0 890 6.2 79.0 64.0 732 5.0 73.5 59.0 X of all Banks Total SMSA Bank Assets ($ billions) % of all Bank Assets X of all Mortgages Plus Home Improve ment Volume Number of Banks in SMSA equal equal equal equal ASSET SIZE (Dollars) Zero or greater Greater than or equal to 5 million Greater than or equal to 10 million Greater than or equal to 20 million Greater than or equal to 50 million Greater than or equal to 100 million X of all Banks Total SMSA Mortgage Plus Home Improvement Volume ($ billions) Total Mortgage Plus Home Improvement Volume ($ billions) % of all Bank Assets Number of Banks in SMSA Number of Banks Z of all Banks Total Assets ($ billions) 14,377 100.0 1,264.9 100.0 5,986 42.0 1,049.3 83.0 13,402 93.0 1,261.4 99.0 5,776 40.0 1,048.6 83.0 11,054 77.0 1,243.8 98.0 5,160 36.0 1,043.9 82.0 7,469 52.0 1,191.6 94.0 3,968 28.0 1,026.4 81.0 3,006 21.0 1,051.1 83.0 2,134 15.0 967.0 77.0 1,393 9.7 939.1 74.0 1,286 8.9 899.9 71.0
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