Ten Ways to Avoid Common HMDA Reporting Errors

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1 Ten Ways to Avoid Common HMDA Reporting Errors Home Mortgage Disclosure Act (HMDA) data must be submitted to the regulators by March 1 st. During this environment of enhanced regulatory and public scrutiny, it is important to know that your HMDA data is accurate, and what it suggests about your institution s lending practices. Are you ready to submit an error-free Loan Application Register (LAR)? Here are 10 things you can do to avoid common HMDA reporting errors: 1. Use a Consistent Application Date While it seems simple enough, the application date is often one of the most inaccurately reported HMDA fields. Consistency is the key! Documented procedures addressing the recording and reporting of the application date on the LAR will help to minimize errors. The procedures may differ by application channel, but must be consistently applied within each channel. For example, the date for applications received through various channels could be reported as follows: Internet applications - the date the customer completed the application online Face to face applications - the date documented on the application form or the system date when the application information was entered into your origination system Broker applications - the date it was received by the broker, the date you received it from the broker, or the date on the application itself 2. Review Commercial Loans Failure to report HMDA data on what may be considered a Commercial Loan is another common error. The purpose of the loan triggers HMDA reporting regardless of whether the Common HMDA Errors Incorrect application dates Omission of commercial loans Incorrect reporting of multi-use/multipurpose loans Incorrect rate spreads Failure to report non-originated applications Improper reporting of ethnicity, race, gender Incorrect income Distinguishing between pre-qualification and pre-approval requests Misunderstanding of the broker rule Technical reporting errors application is taken by a commercial lender and classified as a commercial loan. For example, a loan application for the purpose of improving or purchasing an apartment complex or multifamily dwelling is subject to HMDA reporting. Be sure your procedures address the collection and reporting of HMDA data on applications taken by the commercial lending area. 3. Report Multi-Purpose Loans and Multi-Use Properties Correctly Multi-purpose Loans: The purpose of an application is reported as either a home purchase, home improvement or refinancing under HMDA, however, confusion arises when the application is for a loan that has multiple purposes. If the loan has multiple purposes, the regulation provides specific guidance on what to report. If the loan is for home purchase, and home improvement or refinancing, report it as a home purchase loan. If the loan is for home improvement as well as refinancing, report it as a home improvement loan. 1 P age

2 Multi-Use Properties: If loan proceeds will be used to improve or purchase a multi-use property, the details of the transaction will determine proper reporting. If the property being purchased is primarily residential, then report the application as a purchase for HMDA purposes. If the loan proceeds will be used to improve a property that is both residential and commercial, for example an apartment building with a convenience store, determine whether the improvements are going to be made primarily to the residential or the commercial portion of the property. If the proceeds will be used to improve the property as a whole, determine if the property is primarily residential or commercial by using a reasonable standard such as square footage or income generated. If primarily residential, then report the home improvement loan on your LAR if it is secured by a dwelling or classified as a home improvement loan. 4. Report Rate Spreads Properly The October 1, 2009 changes to the HMDA reporting requirements may cause additional errors on the reporting of rate spread premiums because two sets of rules apply during the 2009 reporting year. For applications received prior to October 1, 2009, institutions must report the difference between the Annual Percentage Rate (APR) and the yield on Treasury securities of comparable maturity if it is 3 percentage points or greater for first lien loans, and 5 percentage points or greater for subordinate lien loans. For applications received on or after October 1, 2009, institutions must report the difference between the APR and the average prime offer rate if it is 1.5 percentage points or greater for first lien loans, and 3.5 percentage points or greater for subordinate lien loans. See for Federal Reserve Board published tables. Be sure to use the most recent average prime offer rate as of the date the interest rate was set. Regulators and consumer advocacy groups will be looking at this field for potential discriminatory trends, so be sure to report accurate information and only report rate spreads when required. 5. Review your Non-originated Applications Many errors in HMDA reporting are caused by inaccurately reporting the action taken for nonoriginated applications. Confusion around determination of whether an application is classified as denied, withdrawn, closed for incompleteness or approved not accepted is especially common. The facts of the transaction, as documented in the loan file, will determine how a non-originated application should be reported on the LAR. It is imperative that loan officers and processors document the progression and decisions made throughout the application process. Non-originated loans should be reported as follows: Application Approved but not Accepted This code is used when you have approved the application, but the applicant does not move forward to close the loan. This could be expressly indicated by the applicant or assumed if the applicant fails to respond to your approval notification. A transaction that is rescinded after closing can also be reported as approved but not accepted. Another common error is to report counteroffers that are not accepted by the applicant, as approved but not accepted, however, if you give the applicant a counteroffer, or you approve the application with less favorable terms or underwriting conditions and the applicant does not accept the offer, the action taken should be reported as a denial. Do not use this code for a preapproval request. 2 P age

3 Application Denied If you deny the application, or if the applicant does not accept a counteroffer on less favorable terms than originally requested, report the action taken as denied. A conditional approval should also be reported as a denial if the conditions are something other than customary loan commitment or loan closing conditions and the conditions are not met. Customary loan commitment or loan closing conditions include such things as clear title requirements, appropriate title insurance and or property survey. Conditions that are not customary include such things as requiring a higher down payment, satisfactory debt-to-income or loan-to-value ratios, or other creditworthiness related conditions. An application can also be denied if it is incomplete. If you choose to deny an application for incompleteness, you must provide an adverse action notice under Section of Regulation B Equal Credit Opportunity Act. Alternatively, an application can be closed for incompleteness, when certain notices are provided as discussed below. Application Withdrawn Use this code only if the applicant specifically and expressly withdraws his or her application prior to you making a credit decision. You cannot assume the applicant withdrew the application because he or she has not contacted you recently. All too often, originators incorrectly mark inactive files as withdrawn with no communication from the applicant. The loan file should include documentation of how the application was withdrawn including the name of the person withdrawing the application, the date, and the method of withdrawal, i.e. phone call, and any information that is given about the reason for withdrawing the application. Another common mistake is that a lender will provide negative information to the applicant, such as indicating the debt to income ratio is too high, and the applicant will choose to withdraw the application rather than move forward. In this example, the lender actually made a credit decision and technically denied the application due to a high debt to income ratio. The lender should provide an adverse action notice to the applicant and report the application as a denial on the LAR. Do not use this code for preapproval requests that are withdrawn, as these are not reported under HMDA. Regulators and consumer advocacy groups are using more sophisticated software to analyze HMDA data. You don t want to be surprised by their findings! Be sure you identify unusual patterns and trends and are able to explain them appropriately. File Closed for Incompleteness This code is used if you send a written notice of incompleteness under section 202.9(c) (2) of Regulation B Equal Credit Opportunity Act, and the applicant does not respond within the requested timeframe. If you receive an incomplete application, Regulation B allows you to either deny the application for incompleteness, (and therefore report the action taken as denied on your LAR) or within 30 days of receiving the application, send a written notice to the applicant specifying the information needed, designating a reasonable timeframe for the applicant to provide it and informing the applicant that no further consideration will be given if the information is not provided. If the applicant does not supply the requested information within the timeframe 3 P age

4 designated, you need not take any further action on the application, and should report it as closed for incompleteness on your LAR. A special note for preapproval requests: The action taken codes listed above should not be used for reporting preapproval requests. Preapproval requests that do not result in an originated loan should be reported using a separate code - Preapproval request denied or at the financial institutions option preapproval request approved but not accepted. 6. Review the Data on Ethnicity, Race and Sex. You must ask the applicant to provide his or her ethnicity, race and sex in accordance with the regulation; however, you cannot require the applicant to provide it. This applies to all applications, whether taken in person, by mail, phone or via the internet. If taken by phone, the required data collection information should be provided orally to the applicant. If the applicant chooses not to provide the information, look to the method of application to determine what to report. For in person applications, you should report the information based on visual observation and surname to the extent possible. Report that the information was not provided if the application was taken by mail, internet or telephone. Do not complete the information based on surname or any other means. Be sure to document on the application how the application was received, i.e. phone, mail, or the internet. You must allow the applicant to provide partial information. For example, if the applicant chooses to provide ethnicity, but not race, you must collect and report on your LAR, whatever partial information the applicant provides. 7. Make Sure Income is Accurate During the course of the application process, the initial income provided by the applicant may be adjusted for many reasons including underwriting adjustments and the results of income verifications. A common error in reporting income is failure to update the loan origination system and the LAR for such adjustments. This results in the income relied upon in the credit decision not being properly reflected on the LAR. 8. Distinguish Pre-qualification Requests from Preapproval Requests Many institutions still struggle with prequalification and pre-approval requests. Only those institutions with a covered pre-approval program should report preapproval requests on their LAR. A covered pre-approval program is one where 1) the institution completes a comprehensive analysis of the creditworthiness of the application, and 2) issues a written commitment to extend a home purchase loan to the applicant up to a specified dollar amount for a specified time period. The written commitment must be subject to only non-credit related conditions such as identifying a suitable property, and that no material changes occur in financial condition or creditworthiness prior to closing. Covered pre-approval programs should be documented in your operating policies and procedures. If you offer a covered pre-approval program, then for each home purchase application received, you must report whether a pre-approval was requested, or not requested. Since pre-approvals only apply to home purchases, you would report not applicable for other application types. If you do not offer a covered pre-approval program, then pre-approval requests are not reportable and not applicable should be reported on the pre-approval request section of the LAR. Requests to determine how much house an applicant can afford that are not based on thorough underwriting analysis and do not result in a commitment to provide financing, are prequalifications, and are not required to be reported on the LAR. 4 P age

5 9. Understand the Broker Rule Continued confusion exists around the broker rule, and since the definition of broker in the HMDA guidance does not necessarily have the same meaning as in the mortgage industry, it is easy to understand why confusion persists. The key to proper reporting is to remember that the institution(s) making the credit decision on the application report that credit decision for HMDA purposes. An institution that acquires loans from a broker will need to examine the facts when determining whether to report the application as an approval, a purchased loan, an approved but not accepted or a denial. If an acquiring institution reviews an application from a broker prior to closing, and makes a credit decision, the institution reports the application on its LAR using the appropriate action taken code, i.e. as an approval or denial. If the acquiring institution does not review the application prior to closing, it reports only the loans it acquires from the broker on its LAR as a loan purchased by financial institution. This means that if multiple institutions receive the same application for review prior to closing, each of the institutions will report its decision on its LAR. If the broker makes a credit decision based on underwriting criteria set by an acquiring institution, but the acquiring institution does not review the file prior to closing, then the broker records the application on its LAR based on the decision made, i.e. approved or denied. If originated, the acquiring institution reports the loan as a loan purchase. 10. Review your LAR for Accuracy You may think this one is too obvious and should not have made the list, but many HMDA errors are caused by simple keying errors. Be sure to use the edit checks supplied by the FFIEC, or equivalent edit checks provided by your software vendors or developed in house. While many errors can be caught by using the edit checks, don t underestimate the benefit of scanning the LAR with a critical eye for logical errors. Once you are certain your HMDA data is accurate, you should analyze it to determine what it suggests about your lending practices. Are there trends that may suggest discrimination? Are your denial rates or rate spreads cause for concern? Regulators and consumer advocacy groups are using more sophisticated software and methods to analyze HMDA data and you won t want to be surprised by their findings. Be sure you identify any unusual patterns or trends in the data and are able to explain them appropriately. CrossCheck Compliance LLC regulatory compliance, internal audit, and loan review services to financial institutions and mortgage companies. To learn more about our firm, visit our website at 5 P age