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HMDA Proposal – Major expansion in reportable applications!
As you most likely know, the Consumer Financial Protection Bureau (CFPB, or the Bureau) published proposed amendments to the Home Mortgage Disclosure Act on July 24, 2014.
While changes have been anticipated, due to the requirements in Dodd-Frank, the extent of the changes in the proposal were a surprise. I plan to review these changes here, discussing them individually while tying in related changes. Some of these changes came about from the Small Entity Review Panel meetings and other comments received by the Bureau.
The place to start understanding the proposal and its impact is with the definitions in Regulation C at 1003.2, particularly the definitions of application, covered loan, and open-end credit. According to the discussion in the proposal, the Bureau states that financial institutions complained that it is difficult to determine if an application is reportable. Well, to make it “easier”, the Bureau has proposed that all applications, regardless of purpose, would be HMDA reportable if the application is for a loan to be secured by residential real estate. This does eliminate decisions to be made, but certainly increases the number of reportable applications.
The current definition of application is: “Application means an oral or written request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with procedures used by a financial institution for the type of credit requested.”
The proposed definition is: “Application means an oral or written request for a covered loan that is made in accordance with procedures used by a financial institution for the type of credit requested.”
Purpose is not mentioned in the proposed definition and the phrase “covered loan” is added. These 2 changes bring in any applications with residential real estate as collateral, such as a cash out equity loan that is not a refinance of a prior lien, a business purpose loan that takes a lien on the business owner’s home in an abundance of caution (or for any reason), in fact, any loan for any purpose that will be secured in any amount by residential real estate. A new purpose code of “Other” has been added to identify applications that are not for purchase, home improvement or refinance purposes.
The entirely new definition of covered loan, together with the revised definition of application greatly expands reportable applications. The proposed definition of covered loan, which would be at 1003.2(e), is:
Covered loan means a transaction that is, as applicable, a closed-end mortgage loan under paragraph (d) of this section, an open-end line of credit under paragraph (o) of this section, or a reverse mortgage under paragraph (q) of this section.
Open-end Line of Credit
The new definition of open-end line of credit states quite clearly that it covers all open-end lines, regardless of whether the line is for personal, family, or household purposes or business purpose, and regardless of whether the applicant is a consumer or an entity. I won’t discuss reverse mortgages here because very few financial institutions make them and it is not pertinent to the discussion.
The new definition for open-end line of credit is at 1003.2(o):
(o) Open-end line of credit means a transaction that:
(1) Is an open-end credit plan as defined in § 1026.2(a)(20) of Regulation Z, but without regard to whether the credit is for personal, family, or household purposes, without regard to whether the person to whom credit is extended is a consumer, and without regard to whether the person extending credit is a creditor, as those terms are defined under Regulation Z, 12 CFR part 1026;
(2) Is secured by a lien on a dwelling, as defined under paragraph (f) of this section;
(3) Is not a reverse mortgage under paragraph (q) of this section; and
(4) Is not excluded from this part pursuant to § 1003.3(c). (1003.3 references exempt institutions and excluded transactions:)
Excluded transactions at proposed 1003.3(c) include:
(c) Excluded transactions. The requirements of this part do not apply to:
(1) A loan originated or purchased by the financial institution acting in a fiduciary capacity;
(2) A loan secured by a lien on unimproved land;
(3) Temporary financing;
(4) The purchase of an interest in a pool of loans;
(5) The purchase solely of the right to service loans;
(6) The purchase of loans as part of a merger or acquisition, or as part of the acquisition of all of the assets and liabilities of a branch office as defined in § 1003.2(c);
(7) A loan or application for which the total dollar amount is less than $500;
(8) The purchase of a partial interest in a covered loan; or
(9) A loan used primarily for agricultural purposes.
Open-end Credit Under Regulation Z
The definition of open-end credit in Regulation Z at 1026.20 is: Open-end credit means consumer credit extended by a creditor under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.
Well, this proposed change certainly does remove the need to analyze a transaction to determine if the application is reportable for HMDA! Of course, it greatly expands the number of applications that will be reportable, increasing the workload and need for training and accuracy.
This also raises the question of error rates. In the proposal, the Bureau discusses comments from members of the Review Panels and, while no change has been proposed to 1003.6(b), the Bureau has requested comments on appropriate error rate methodology.
“The Bureau is not proposing specific changes to § 1003.6(b). However, the Bureau is concerned about the issues related to errors raised by the small entity representatives. The Bureau is seeking feedback generally regarding whether, in light of the new proposed reporting requirements, it would be appropriate to add new provisions to § 1003.6 to clarify compliance expectations and address compliance burdens or operational challenges. The Bureau is seeking feedback on whether a more precise definition of what constitutes an error would be helpful, whether there are ways to improve the current methods of calculating error rates, and whether tolerance levels for error rates would be appropriate.”
HMDA and CRA
This expansion of reportable applications also has direct impact on CRA. There are limited exceptions to allow reporting of loans under both CRA and HMDA (for CRA only actual originations are reported.) When the definition of a refinance under HMDA was expanded back in the 1990s, a change was made to CRA allowing loans that were now reportable under HMDA to also be reported as small business loans. This was important because many business loans are partially or wholly secured by residential real estate, often the residence of the borrower or business owner if the borrower is an entity. All of those loans would now be HMDA reportable. This could have a dramatic impact on CRA data and the effort needed for both banks and CRA examiners to sort out a bank’s small business loans for an examination.
I hesitate to suggest an additional field, but if this definition of covered loan is finalized, it would be very helpful to add a field indicating if a loan is business purpose.
All in all, without even reviewing the major addition of reportable fields, I believe that it is definitely worthwhile for financial institutions and others in the industry to submit comment letters, particularly if the reporting entities can provide statistics demonstrating how many additional applications will be reportable with the expanded coverage and what that means to staffing, testing, auditing, etc. If the proposal is finalized as it stands, any creditors that have less than ideal processes now (one person recording all data manually, for example) will have to look into methods to automate.
In future updates, I will go into the added fields and how those can affect the data gathering process and workload.