Revised HMDA Rule Published

Important Changes Made to HMDA


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The CFPB published revisions to HMDA yesterday, August 24th, 2017.

Open End Threshold Increase is Official

The revisions include the temporary increase in the open end volume threshold (from 100 in each of the two prior years to 500).  The temporary increase in the open end volume threshold (from 100 in each of the two prior years to 500) is now official for two years while the Bureau studies the issue to arrive at the best threshold. You must meet the threshold in each of the two years prior to the reporting year in order to be required to report – so that will be 2016 and 2017 to measure volume for 2018 reporting. If you miss the threshold in one of the two prior years, you are not required to report. Voluntary reporting is allowed and will be helpfult to institutions that hover around the threshold and could otherwise stop and start reporting.

Multifamily – Multiple 1 to 4 Family Properties Will NOT Be Treated as Multifamily!

Yahoo is all I can say.  The CFPB has done a turnaround, thank goodness, and decided that 5 or more 1 to 4 family homes taken as collateral will NOT be treated as a loan secured by a multifamily property.  This is a relief as it presented a number of problems, particularly CRA reporting, let alone training. Their comment in the analysis section states:

“After careful consideration of all the comments received, the Bureau now believes that it is not appropriate to add language to comment 2(f)–2 providing that a loan secured by five or more separate dwellings in more than one location is a loan secured by a multifamily dwelling. To ensure clarity and facilitate compliance, the Bureau is now changing the language proposed in the April 2017 HMDA Proposal to provide explicitly that such a loan is not secured by a multifamily dwelling. The Bureau is also altering the example provided to clarify that the multilocation loan described in the example should not be reported as secured by a multifamily dwelling.”

Revisions to Appendix B on Reporting Demographic Data

Applicants can select whatever they want; the financial institution is limited to reporting 5 ethnicities and 5 races per applicant. An applicant can select both Hispanic or Latino and Not Hispanic or Latino.  A person can certainly have mixed ethnicity and will be able to report that if they wish.

There is updated information on how to report when an applicant selects a subcategory but no aggregate race or ethnicity, or writes in a race or ethnicity but does not select “Other”.

This chart will walk you through the demographic changes.

Voluntary Reporting of Geocoding

The rule now says that an institution can voluntarily report geocoding outside of MSAs where they have an office and regardless of county population.  This is a good clarification; the current rule allows this and many institutions have geocoding automated and picking out applications not to report is extra work (and open up the data for more errors).  Additionally, for penetration analysis, you need to know where applications and loans are located, so you need the geocoding data.

We will be issuing more detail on the revisions (there are other changes) and offering training and other resources as we enter this final run up to January 1, 2018.

You can find the revised rule, and an Executive Summary of the changes, at this link.

The 2018 FIG has also been revised and is available here.

 

Try the HMDA Academy – 6 Months for $450

Hard Work Ahead on Revised HMDA Rule

Time to Get Started


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It Is Not Too Early – In Fact It Is Late to Be Getting Started

There is a lot of hard work ahead to implement this major regulatory change. Have you started working on understanding and planning implementation of the revised HMDA rule? Don’t be deceived into thinking it is too early and that you have plenty of time to learn the rules and get them implemented and staff trained. Get your project management toolkit out of storage.

Tools design.

What Kinds of Changes Are Happening in the Revised HMDA Rules?

The changes that are effective 1/1/2018 are extensive, will take study to understand, and will require work to implement.

  • The number of fields on the LAR increase from 39 to 110;
  • Some existing fields were removed;
  • Definitions are changing – particularly the definition of dwelling;
  • Reporting of some existing fields change – for example, loan purpose, preapproval, owner occupancy, and HOEPA are handled differently;
  • Race and ethnicity choices are expanded and reporting is complex;
  • New fields require data beyond what has been collected for HMDA – for example, loan to value, debt to income, credit score and credit scoring system, automated underwriting system and the recommendation all will be reported;
  • The reported response for some fields is tied to how the loan is treated by TRID and Ability to Repay under Regulation Z.

Along with the mechanics of making this happen, staff will need extensive training.  Data integrity and testing will be more important than ever. What is reported on 12/31/2017 will be vastly different on 1/1/2018.

Another issue to consider is that applications taken in 2017 with final action determined in 2018 must be reported under the revised HMDA rules.  That means that the additional data for reporting will have to be gathered. There is one minor exception for the ethnicity and race data that depends upon when it was gathered.

Additionally, while the 2017 rules remain the same, the Loan Application Register format is changing to a text format with a pipe “|” delimiter and a “txt” file extension.  It will no longer be a fixed field length file with leading and trailing zeroes or spaces making up the field length.  There will be new submission software for 2017, to be provided by the CFPB.

It is important to start working on the revised HMDA rules now.  It takes in depth study to understand the new rules and will require strong project planning working with IT and other departments and vendors to accomplish this major change on time and correctly.

I will be writing regularly on more specific changes in future articles. Check back or opt in to be added to the mailing list. You can do that at the top right of this page.

Year End CRA Data Preparation- Where Are Those Elves?


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santa helper cartoon laptop laying down

It is that time of year when banks have to prepare their small business and small farm loans for Community Reinvestment Act reporting. Unfortunately, no helpful elves are going to do this for you! Every year I answer many questions regarding what loans are reported.  If your bank doesn’t submit a report, it is still important to gather and prepare your data so that you have a file ready for the past year with the appropriate annual revenue data. Not having that data prepared for each annual period creates a risk for the bank’s next CRA examination.  Unless the data is fully prepared and geocoded, regulators will only pull a sample of data which may or may not reflect the bank’s actual performance. You also run the risk of not retaining the correct annual revenue data with the annual loan data.

Small business and small farm loans for CRA are directly tied to the Call Report. Accurate call codes are key, both for submitting Call Reports and for CRA reporting.

Small Business Loans are loans of $1 million or less originated, or maturity extended by renewal or refinance or modification, or new money added in the applicable time period – in this case 2014 – from the following Call Report line items on Schedule RC-C1, Loans and Leases:

  • Line 1.e(1) – Loans secured by owner occupied nonfarm nonresidential properties
  • Line 1.e(2)- Loans secured by other nonfarm nonresidential properties
  • Line 4.a – Commercial and industrial loans to US addresses-

Small Farm Loans are loans of $500 thousand or less (same caveats on extended/renewed/refinanced) from the following Call Report line items on Schedule RC-C1:

  • Line 1.b – Secured by Farmland
  • Line 3 – Loans to finance agricultural production and other loans to farmers

Loans are reported if they meet these criteria regardless of annual revenue. The revenue data is simply reported as code 1 (revenue of $1 million or less) or code 2 (greater than $1 million).

These loans would have then been included in Schedule RC-C2, Small Business and Small Farm loans. When CRA reporting was implemented, the definitions from the Call Report were used rather than creating new definitions just for CRA.

The Call Report instructions will help you to determine proper classifications if the bank’s coding is suspect or just so you can understand why certain loans cannot be small business or small farm. For example, it is because of Call Report rules that a loan to a not for profit that is not secured by nonfarm/non residential real estate cannot be reported as small business. Those loans are not reported on line 4.a. It is as simple as that.

The instructions are available at:

Call Report Instructions

The Call Report Glossary is also helpful, as it contains definitions of Loans Secured by Real Estate and other needed terms.

Call Report Glossary

Adjustments

Small business loans that were HMDA reportable EXCEPT for those that were captured for HMDA as refinances must be backed out of the data. The CRA q and a, available at the FFIEC site, explains this carve out.

“§ll.22(a)(2)—7: How are refinancings of small business loans, which are secured by a one-to-four family residence and that have been reported under HMDA as a refinancing, evaluated under CRA?

A7. For banks subject to the Call Report instructions: A loan of $1 million or less with a business purpose that is secured by a one-to-four family residence is considered a small business loan for CRA purposes only if the security interest in the residential property was taken as an abundance of caution and where the terms have not been made more favorable than they would have been in the absence of the lien. (See Call Report Glossary definition of ‘‘Loan Secured by Real Estate.’’) If this same loan is refinanced and the new loan is also secured by a one-to-four family residence, but only through an abundance of caution, this loan is reported not only as a refinancing under HMDA, but also as a small business loan under CRA. (Note that small farm loans are similarly treated.)

It is not anticipated that ‘‘double reported’’ loans will be so numerous as to affect the typical institution’s CRA rating. In the event that an institution reports a significant number or amount of loans as both home mortgage and small business loans, examiners will consider that overlap in evaluating the institution’s performance and generally will consider the ‘‘double-reported’’ loans as small business loans for CRA consideration. The origination of a small business or small farm loan that is secured by a one to-four family residence is not reportable under HMDA, unless the purpose of the loan is home purchase or home improvement. Nor is the loan reported as a small business or small farm loan if the security interest is not taken merely as an abundance of caution. Any such loan may be provided to examiners as ‘‘other loan data’’ (‘‘Other Secured Lines/Loans for Purposes of Small Business’’) for consideration during a CRA evaluation. See Q&A §ll.12(v)—3. The refinancings of such loans would be reported under HMDA.”

The current Call Report instructions are slightly different than expressed in the q and a; the definition was changed as of April 1, 2009.  From the Call Report Glossary:

“Loan Secured by Real Estate: For purposes of these reports, a loan secured by real estate is a loan that, at origination, is secured wholly or substantially by a lien or liens on real property for which the lien or liens are central to the extension of the credit – that is, the borrower would not have been extended credit in the same amount or on terms as favorable without the lien or liens on real property. To be considered wholly or substantially secured by a lien or liens on real property, the estimated value of the real estate collateral at origination (after deducting any more senior liens held by others) must be greater than 50 percent of the principal amount of the loan at origination.”

The definition then goes on to explain that liens taken solely in an abundance of caution will not cause a loan to be “secured by real estate”.

Good luck!

Time to Gather CRA Services!


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Donation concept - Time to give

It is the season to gather the CRA Services that have been performed in the past year.  (It would be nice to have those reported all year and we will discuss that in another post!)

In talking with banks recently, I have found that many are not aware of the expanded technical assistance examples provided by the regulators. Banking skills are now recognized to go beyond financial advice to organizations.  The list in the supplementary Q and A is provided below.  This should help greatly in reporting and in developing services for next year!

The supplementary Q and A is available at

www.ffiec.gov/cra/qnadoc.htm

Here is the list! Enjoy.

Technical Assistance by Bank Employees:

  • Examples of technical assistance activities that are related to the provision of financial services and that might be provided to community development organizations include:
  • Serving on the board of directors;
  • Serving on a loan review committee;
  • Developing loan application and underwriting standards;
  • Developing loan-processing systems;
  • Developing secondary market vehicles or programs;
  • Assisting in marketing financial services, including development of advertising and promotions, publications, workshops and conferences;
  • Furnishing financial services training for staff and management;
  • Contributing accounting/ bookkeeping services;
  • Assisting in fund raising, including soliciting or arranging investments; and
  • Providing services reflecting financial institution employees’ areas of expertise at the institution, such as human resources, information technology, and legal services.

Expertise can include assistance with job description preparation (by anyone whose job includes that task, not just human resources staff), assistance with setting up computer networks, training in customer service….be creative!

In my next post – this week! – I will talk about ways to simplify reporting of services to the Compliance or CRA department.

2013 HMDA Data


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Hopefully you have all heard by now that the FFIEC released the 2013 HMDA data yesterday. This is where mortgage lenders, including banks, obtain their annual disclosure reports. For banks, these documents must be placed in the CRA Public File. You will now have 2012 and 2013 in that file.

The link for the disclosure reports is: http://www.ffiec.gov/hmdaadwebreport/diswelcome.aspx

I wanted to mention another very useful tool that is available in the HMDA Data Products section of the FFIEC site. There is a downloadable program that allows you to pull any LAR in the country by bank name, respondent ID, by agency, by state, etc. You can, for example, download all LARs of banks regulated by the OCC.

The LARs can be exported to Excel for analysis. This is a great tool.

You can also pull summary data from the CFPB’s website.

http://www.consumerfinance.gov/hmda/explore#!/select=state_hame,count&section=summary

These are excellent resources to help banks and other lenders judge performance across their region. Take a look at what the competition is doing. Are you light in some census tracts but other lenders are making loans there? That kind of information will really help you to understand what is going on and complete risk assessments and be prepared for exams.

I am always happy to chat about this data if you have questions!

Dwelling – Revised Definition in HMDA Proposal


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The revised definition and commentary for a dwelling should make folks happy.  The proposed revision, if finalized as proposed, really will mean less time agonizing about whether properties are HMDA reportable or not as a dwelling.  And for those banks that can’t seem to believe that a home purchased to be used as an office is an office and not a dwelling, well, the proposed rules will make that clear.

The proposed definition of a dwelling has exclusions that definitely clarify what is a reportable dwelling. Many of the property types that have caused much agonizing in the past would be clearly not reported, such as RVs or boats used a primary dwellings, house boats, floating homes, etc. The commentary also clearly states that residences purchased to be used for a non-residential purpose such as an office will not be reportable, clearing up that misunderstanding that confused many banks. (It is no longer a house!)

The proposed revised definition is:  “(f)Dwellingmeans a residential structure, whether or not attached to real property.  The term includes but is not limited to a detached home, an individual condominium or cooperative unit, a manufactured or other factory-built home, or a multifamily residential structure. “

The new commentary as proposed should resolve a lot of agonizing questions! No floating homes, no RVs used as residences, no mobile homes built prior to 1976 and thus not built under HUD rules.

2(f)  Dwelling.

1. General.  The definition of a dwelling is not limited to the principal or other residence of the applicant or borrower, and thus includes vacation or second homes and investment  properties.  A dwelling also includes a multifamily residential structure such as an apartment, condominium, or cooperative building or complex.

2. Exclusions.  Recreational vehicles, including boats, campers, travel trailers, and park model recreational vehicles, are not considered dwellings for purposes of § 1003.2(f), regardless of whether they are used as residences.  Houseboats, floating homes, and mobile homes  constructed before June 15, 1976, are also excluded, regardless of whether they are used as  residences.  Also excluded are transitory residences such as hotels, hospitals, and college  dormitories, and structures originally designed as dwellings but used exclusively for commercial purposes such as homes converted to daycare facilities or professional offices.

3. Mixed-use properties.  A property used for both residential and commercial purposes,  such as a building containing apartment units and retail space, is a dwelling if the property’s  primary use is residential.  An institution may use any reasonable standard to determine the  primary use of the property, such as by square footage or by the income generated.  An  institution may select the standard to apply on a case-by-case basis.  However, an institution  shall consider a property that includes five or more individual dwelling units to have a primary  residential use. 

The Bureau is soliciting feedback on whether the revised definition and exclusions are appropriate. Personally, I think it is helpful that these items, which are questioned frequently, are so clearly spelled out.

The bright line regarding mixed use properties with five or more individual dwelling units may confuse people.  Those properties would be reportable as residential regardless of square footage devoted to non-residential use or total income from non-residential use.  Regardless, it does  make it a hard and fast rule to point to and to train on. Confusion could arise from insurance requirements; staff will just have to understand that HMDA reporting is a separate rule and does not govern how a property is insured for flood or other hazards.

 

 

HMDA – Expanded Reportable Applications under CFPB Proposal


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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.

Application

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.

Covered Loan

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.

Error rates

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.

Hello!


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I have created this site to provide a place to record my thoughts on the many new (and problematic old) regulations that we in banking are dealing with so much every day. While I have been working on the integrated Reg Z and RESPA disclosures, it was the HMDA proposal the prompted me to do this. I have been getting so many questions regarding “what have they said, I don’t have time to read it”, to specific questions about my take on individual topics. I decided it would be better to record my thoughts as I work my way through the proposal.

Also, I have been recently involved in ADA issues and find that there is a shortage of information for banks. It is easy to get so wrapped up in bank specific laws and regulations and forget that there are other rules that are equally important. I will cover many of those requirements here.

And last but not least, I will be talking about community development and CRA.