WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) today issued a proposal on reporting requirements for banks and credit unions that issue home-equity lines of credit. Under rules that are scheduled to take effect in January 2018, financial institutions are generally required under the Home Mortgage Disclosure Act (HMDA) to report home-equity lines of credit if they made 100 such loans in each of the last two years. The new proposal would increase that threshold to 500 loans 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.”
The Home Mortgage Disclosure Act—originally enacted in 1975—requires most lenders to report information about the home loans that they originate or purchase, as well as applications received. Banking regulators and the public can use this data to monitor whether financial institutions are serving the housing needs of their communities, to assist in distributing public-sector investment in order to attract private investment to areas where it is needed, and to identify possible discriminatory lending patterns.
As directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB updated the Home Mortgage Disclosure Act regulation in 2015 to improve the quality and type of data reported by financial institutions. Most of the updated requirements take effect in January 2018, and the industry is working to bring operations into compliance. One of the significant changes that will take effect in 2018 is a requirement for some lenders to collect, report, and disclose data on certain dwelling-secured open-end lines of credit, including home-equity lines of credit. With a home-equity line of credit, consumers are able to borrow money against the equity in their home over time, usually up to an established credit limit, using special checks or a credit card. As the principal is repaid, consumers can take out that amount again.
Collecting data on these products is important because of the risks they pose to consumers and to financial markets. Just like traditional mortgages, if a consumer defaults on these loans, they may lose their home. Overleverage and defaults due to these products contributed to the foreclosure crises that many communities experienced in the late 2000s. However, this type of lending was not visible in the HMDA data or in any other publicly available data source collected at the time.
To eliminate this blind spot, the 2015 rule requires certain lenders to collect, report, and disclose information about their open-end lending as part of their HMDA data. However, when adopting the rule, the Bureau recognized that reporting these loans represents a new and, in some cases, significant compliance burden for smaller institutions. To avoid imposing those burdens on small-volume lenders where the benefits of the data do not justify the costs, the Bureau limited this new requirement to lenders that originated at least 100 dwelling-secured open-end lines of credit in each of the two preceding calendar years.
Through outreach, the Bureau has heard increasing concerns from community banks and credit unions that the challenges and costs of reporting open-end lending may be greater than the Bureau had estimated when adopting the 100-loan threshold. Additionally, the Bureau’s 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.
Accordingly, the Bureau is seeking comment on whether to postpone collection of this information for smaller-volume institutions so that the Bureau can study whether the threshold should be adjusted permanently. 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.
The public comment period is open until July 31, 2017. The Bureau will issue a separate proposal with a longer notice and comment process to consider adjustments to the permanent threshold at a later date.