Alert: The HMDA Commentary is Out!
The FRB has published its final commentary to Regulation C, Home Mortgage Disclosure. It takes effect on January 1, 1996 and will affect your data collection and reporting for 1996. Fortunately, there are few surprises, and the changes from the proposal tend to be clarifications or improvements. We will cover points on the new commentary in this and the next several issues.
One of the most important clarifications is the explanation of prequalifications. "Prequalification" is used to describe the practice of providing credit applicants with an early indication of the amount of mortgage they are generally qualified for or whether they are qualified at all. This practice raises questions of whether the prequalification review is an application for credit under Regulation B (Equal Credit Opportunity) and whether it should be reported on the HMDA-LAR.
The FRB has clarified the treatment of prequalifications under both regulations. For purposes of reporting applications on the HMDA-LAR, a prequalification is not an application to be reported on the LAR. It should only be reported when the applicant comes back to the bank with a purchase contract for a specific property. This rule is consistent with the original purpose of HMDA: to deter redlining by using lending data to measure the bank's willingness to lend on specific properties and in specific locations.
Be careful! The prequalification rule is different under Regulation B. The purpose of ECOA is to prevent discrimination. Adverse action notices are specifically designed to help customers understand their credit qualification shortcomings and to identify any mistakes or discrimination that may occur. Because of this, the FRB has taken the position that a request for prequalification is an application for purposes of Regulation B. Therefore, any negative decision or denial that is communicated to the applicant should be accompanied by an adverse action notice.
The Commentary clarifies what buildings are included as "dwellings." Your reporting should include all dwellings, whether or not they are the borrower's "principal" dwelling. The Commentary specifically identifies loans secured by vacation homes and second homes as loans that should be reported. Other reportable loans include loans secured by rental properties, whether single-family or apartment buildings, mobile homes, and manufactured homes.
The new Commentary excludes several types of structures from HMDA reporting. Recreational vehicles are not dwellings for purposes of HMDA and loans for these should not be reported. Similarly, loans on time-share units are secured by a "use" and not by a dwelling. As such, they should not be reported.
Loans for home improvement have been one of HMDA's most confusing areas. They include secured and unsecured loans, loans secured by property other than that being improved, and loans that will be used for home improvement and for other purposes. The list of variations seems to be endless.
Some of these issues are impossible to resolve in a regulation or commentary. However, the new Commentary provides fairly detailed guidance and leaves banks with discretion to exercise judgment in some cases.
The first criteria of a reportable home improvement loan is that the loan be >
Whether a loan to purchase or install fixtures is reportable will be determined by whether the bank treats the loan as a home improvement loan. For example, if the bank treats a loan to purchase and install a furnace as a home improvement loan, it is reportable. If, instead, the bank treats it as a consumer installment loan, it is not reportable.
Some loans that are subject to HMDA reporting may be secured by several properties, or by a property other than the property that is being purchased or improved. The Commentary provides several guidelines for reporting these loans. First, for home improvement, report the property that is being improved. This, after all, is where the loan will have its impact.
If more than one property will be improved with the proceeds of a single loan, you may either choose one location, or allocate the loan proceeds to the properties being improved and make multiple entries on the LAR. If you do this, be careful not to over-report the total amount of the loan.
For home purchase, report the property taken as security. If the bank takes security in both the property being purchased and another property, report the property being purchased. As with home improvement loans, for more complex transactions, you may allocate the proceeds to multiple properties being purchased and/or improved. Again, the amount reported should not be greater than the amount of the loan.
Many compliance laws, such as HMDA, contain a relatively simple concept that becomes complex upon implementation. The law simply does not anticipate the wide variety of situations that arise in banking. The FRB wisely provides you with the ability to make choices and states that you will be in compliance as long as your choice is reasonable. In making choices, we have two pieces of advice. First, make the choice that seems most consistent with the purpose of the law: to measure your bank's willingness to make loans on dwelling-secured property. Second, document your decision. Even if an examiner later disagrees with your decision, your documentation will prove that you tried to comply. Effort and intent can be the crucial difference in establishing compliance.
- Advise loan staff about the prequalification rule. Include this in training materials for both HMDA and Regulation B.
- If your bank provides a prequalification service, review the procedures to make sure they provide adequate instruction about Regulation B and Regulation C procedures.
- Check the instructions used by data entry staff for the HMDA LAR to be sure the instructions reflect the new Commentary. Pay special attention to how loans are identified and >Review the loan files for home improvement loans entered onto the LAR to determine whether they are properly >Document the gray matters.
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 2, 1/96
First published on 01/01/1996