On September 23, 2022, the United States District Court for the District of Columbia issued a Memorandum Opinion that reversed a section of Regulation C, the Consumer Financial Protection Bureau’s (CFPB) regulation which implements the Home Mortgage Disclosure Act (HMDA).
The April 2020 final HMDA rule increased the reporting threshold for closed-end mortgage loans from 25 covered loans originated in each of the prior two years to 100 covered loans originated in each of the prior two years. The Memorandum Opinion invalidates the change. A similar change for open-end credit, which lowered the threshold from 500 loans to 200 loans, was untouched by the Memorandum Opinion.
After the adoption of the 2020 rule, the National Community Reinvestment Coalition, Montana Fair Housing, Texas Low Income Housing Information Service, Empire Justice Center, the Association for Neighborhood & Housing Development, and the City of Toledo, Ohio, filed a lawsuit challenging the changes to the closed-end loan and open-end line of credit reporting thresholds. The court noted the plaintiffs asserted “that HMDA data have been invaluable in ‘uncovering and addressing redlining, fair lending violations, and other inequitable lending practices’ over the decades.” The plaintiffs challenged the 2020 Rule as arbitrary and capricious, contrary to law, and in excess of the CFPB’s statutory authority under the Administrative Procedure Act (APA). The court noted that the CFPB based the change in the reporting thresholds on concerns from lower-volume reporting institutions that the burdens of reporting were not justified based on the small amount of data that they report.
The parties each filed motions for summary judgment, with the court granting the plaintiffs’ motion on the closed-end loan threshold change and granting the defendant’s motion on the open-end line of credit threshold change.
As noted by the court, the October 2015 rule not only changed the threshold to be a HMDA reporting institution for closed-end loans, and made the reporting of open-end lines of credit mandatory, the rule more than doubled the number of data points that institutions must collect and report. Additionally, a number of the new data reporting items are complex. However, a subsequent law enacted by Congress, the Economic Growth, Regulatory Relief and Consumer Protection Act, created a partial exemption for lower volume lending depository institutions that basically exempted the institutions from the expanded reporting requirements.
After addressing the assertions of both parties, the court concluded with regard to the change in the reporting threshold for closed-end loans that while the change did not exceed the CFPB’s statutory authority, the “CFPB failed adequately to explain or support its rationales for adoption of the closed-end reporting thresholds under the 2020 Rule, rendering this aspect of the rule arbitrary and capricious.”
The court appears to have been influenced by the position of the CFPB under Director Cordray regarding reporting. The court noted that under Director Cordray the CFPB concluded that “while higher volume exemption thresholds ‘might not significantly impact the value of HMDA data for analysis at the national level,’ they ‘would have a material negative impact on the availability of data about patterns and trends at the local level,’ which data was ‘essential to achieve HMDA’s purposes.’” The court cited to the preamble to the October 2015 rule in noting that the “CFPB further explained that ‘the loss of data in communities at closed-end mortgage loan-volume thresholds higher than 25 would substantially impede’ the ability of the public and public officials in these locales and others ‘to understand access to credit in their communities.’” However, the portions of the preamble cited by the court provided generalized or conclusory statements as to why the 25 loan reporting threshold is the appropriate level, and not concrete data as to why such threshold is necessary.
Addressing the changes made by the April 2020 rule, the court noted data cited by the CFPB for calendar year 2018 indicating that 1,700 institutions out of 4,680 HMDA closed-end loan reporting institutions ceased to be reporting institutions based on the rule. As previously reported, focusing on the number of HMDA reporting institutions, and not the number of transactions, can misrepresent changes in HMDA data reporting. Significantly, the court also noted that based on 2018 data the April 2020 threshold change would exclude 112,000 closed-end loan applications taken by the 1,700 institutions from reporting. For 2018, a CFPB report indicates that there were 10.3 million closed-end loan applications reported. Based on these numbers, requiring the 1,700 institutions to resume HMDA reporting will increase the number of closed-end loan applications reported by approximately 1.09% per year, an infinitesimal increase in the number of reported closed-end loan applications.
As noted, the court let stand the threshold of 200 open-end lines of credit originated in each of the prior two years. Based on an initial action and subsequent action taken by the CFPB, the 100 open-end lines of credit reporting threshold provided for in the October 2015 rule never became effective. The threshold was temporarily increased to 500 open-end lines of credit originated in each of the prior two years in order to provide the CFPB with time to assess if the 100 lines of credit threshold was too low. The CFPB ultimately decided on the threshold of 200 lines of credit originated in each of the prior two years. The fact that the 100 lines of credit threshold never became effective, and that in the end the CFPB was for the first time requiring the reporting of open-end lines of credit, were factors influencing the court in allowing the 200 lines of credit threshold to stand.
The CFPB has not issued a public statement regarding whether it plans to appeal the ruling. Presumably, the current leadership of the CFPB would favor the reduction of the closed-end loan reporting threshold to the 25 originated loans in each of the prior two years level set by the October 2015 rule.
- If the CFPB does not appeal the ruling, then the CFPB will need to determine how to re-implement the 25 closed-end loan threshold.
- When the CFPB increased the threshold from 25 to 100 closed-end loans in April 2020, it required the collection of HMDA data through June 30, 2020 for institutions that would no longer be subject to HMDA requirements for closed-end loans. Such institutions no longer had to collect data starting July 1, 2020, and the reporting of any closed-end loan data collected in 2020 was optional for such institutions.
- A potential approach that the CFPB may take is to re-implement the 25 closed-end loan threshold for the 2023 reporting year, with institutions that originated at least 25 covered closed-end mortgage loans in both 2021 and 2022 being subject to HMDA requirements for closed-end loans.