We have a situation where the applicants inquired about a loan (subordinate lien) on their principal dwelling. Loan officer discussed their options with them, including a closed-end 2nd mortgage, and a HELOC. Ultimately, they selected the HELOC and completed the application. For our bank, HELOCs are not subject to HMDA, so we did not collect Demographic Info at application. After underwriting was complete and the loan had been approved, the applicants decided they wanted to go with a closed-end 2nd Mortgage instead, which is subject to HMDA. Should the loan officer have given the applicants the opportunity to provide DI at that point? Or had that opportunity passed, because we were no longer in the application process?

My next question is, what about HMDA reporting? Currently, our gender, race, and ethnicity fields have “not provided by applicant,” and the obtained method for those fields state “not applicable.” That currently shows an error code of QS631-5. Our HMDA software allows me to “OK” the quality edit.

The loan has already been booked, and therefore it’s all water under the bridge in this point. So now it’s a matter knowing what the correct way to have handled this is, in case there is a next time. I also would like an opinion on whether it’s being reported correctly (marking the quality edit as “OK,” and leaving it as is). Thank you to those who are willing to weigh in!

Definitely the LO should have asked for the DI upon the change in product. Don't have the time to check right now, but i'm wondering if the DI rules in Reg. C might allow DI collection for HELOCs that aren't reported (since they are optional reporting anyway).

I would have reported the closed-end loan as "approved but not accepted" and started the application process over for the HELOC, along with them filling out the DI section. You had to provide the early HELCO disclosure, consumer brochure, etc., anyway at the time of the switch.

Edited: Sorry, I got that totally bassackwards, but I think you get my drift.

Yep, I got the drift anyway. Thanks!

Just a follow-up question, though. When you say "start the application process over," I think that's exactly what the LO was trying to avoid, out of convenience to the customer. It seemed impractical to him to ask the applicants to complete an entirely new application, when nothing else changed except for the loan product. The loan amount didn't even change from one product to the other. I understand that in a perfect world, reporting the first application as "approved not accepted," then having them apply for the other product, would be the cleanest. But in reality, that's the kind of thing that makes loan officers rip their hair out. And I get it, because then they have to deal with customers who are ticked off because they have to fill out a whole new application, for only one change. I do think the LO should have collected DI at the time of product change, though. One day closer to retirement.....

OK - so you take a copy of the original application, and you have them complete the DI and mark the new application package with a new date received - that starts your clock for HMDA, the loan estimate and any other closed-end initial disclosure that is required.

Now THAT is a solution we can all live with! I was definitely overthinking. Thank you!

My next question is, what about HMDA reporting? Currently, our gender, race, and ethnicity fields have “not provided by applicant,” and the obtained method for those fields state “not applicable.” That currently shows an error code of QS631-5. Our HMDA software allows me to “OK” the quality edit.

This is being incorrectly reported and you should not be clearing the quality edit.
'not provided by applicant' is only allowed on mail or internet apps. That's why you're getting the error for marking it as 'not applicable.'

Good point. Thank you!

I'd be having the loan officer contact the customer, explain that the change of loan type triggered the need for DI, and the bank slipped up. "Can I ask you to complete the information for us now so that we can update our records?"

So we have a business loan closing tomorrow. The application was originally in a business name, but the customer decided today that they want the loan in their names, not the business name. Application process is long over and no DI collected due to the application being in the business name. Would you suggest the same in this situation? Get the DI now?

Is it going to change your underwriting? Sounds like a new application, even if you use the loan file that you have already created to approve the loan to the individuals. I would gather it now as part of the new application process.