QUESTIONS AND ANSWERS TACKLING THE INTRICACIES OF HMDA

Welcome to ADI’s first issue of our quarterly HMDA Q&A series, HMDA Huddle. With another HMDA filing deadline behind us, lenders who successfully submitted their 2021 LAR can breathe a sigh of relief, and ADI is already looking ahead to 2022 reporting. ADI assists a wide variety of lender clients with HMDA LAR audit and quality control throughout the year, including preparing for standard submissions and resubmissions. Below, we present questions that highlight nuances and sometimes misinterpretations of the HMDA guidance, and our answers to those questions. Please check back for future installments or subscribe to ADI Insights to automatically receive updates each quarter.

Q:

Should the field “Initially Payable to Your Institution” be reported as “NA” for applications that do not result in originated loans?

A:

Though “NA” may seem to be the appropriate value when there is no lender being paid, in many cases a lender should report this field as code 1, “Initially payable to your institution.” In the FFIEC’s A Guide to HMDA Reporting Getting it Right, lenders are instructed to indicate whether the obligation arising from the covered loan was, or, in the case of an application, would have been, initially payable to the institution. Code 3, “NA,” should be reported only for purchased covered loans and for applications that were withdrawn, denied, or closed for incompleteness, if the institution had not determined whether the covered loans would have been initially payable to the institution reporting the applications.

Q:

May a reporting institution omit income information if the application is for an employee?

A:

The FFIEC’s Guide allows an institution to report Income as “NA” for covered loans or applications from the institution’s employees to protect their privacy, even if the lender relied on the employee’s income in making the credit decision. However, a similar allowance is not provided for the debt-to-income (DTI) field. DTI should be reported for employees when the DTI is considered as part of the credit decision. ADI recommends reporting the DTI if it is calculated, unless it is clearly documented that the DTI was not considered in the credit decision.

Q:

If an institution makes a loan to a consumer to purchase an investment property (not owner-occupied) and provides a Truth in Lending Closing Disclosure, should the disclosed amounts (e.g., Origination Charges, Total Loan Costs, etc.) for the applicable fee-related HMDA fields be reported?

A:

The Guide instructs lenders to report “NA” for covered loans that are not subject to Regulation Z closing disclosure requirements. Regulation Z specifically exempts, as “business purpose,” loans extended to acquire, improve, or maintain rental property that is not owner-occupied. Therefore, the above-described loan should be reported as “Primarily for a business or commercial purpose” (code 1) and the fee fields (Total Loan Costs, Origination Charges, Discount Points, and Lender Credits) should be disclosed as “NA.”

Q:

How should a lender code fields related to loan costs when no fees were charged, such as a VA loan where no origination fee was charged?

A:

For Total Loan Costs and Origination Charges, the Guide instructs lenders to report “0” when the total amount is zero for these fields. The Discount Points and Lender Credits fields, however, should be left blank if there were no points or credits in the transaction.

Q:

What Loan Term should be reported for construction to permanent loans where the temporary financing for Truth in Lending is disclosed separately from the permanent financing?

A:

The legal obligation, not the Truth in Lending disclosures, determines the reportable term. If the loan involves one legal obligation for the temporary financing and a separate legal obligation for the permanent financing, only the term of the permanent loan is reported. Temporary financing is excluded from HMDA reporting, so the term is not reported for the temporary phase of the loan when it is executed separately. If, however, there is a single legal obligation for the construction and permanent financing, resulting, for example, in a total term of 372 months, then 372 months should be the reported term. Regulation C requires the lender to report the number of months after which the legal obligation will mature or terminate. See the CFPB’s Home Mortgage Disclosure Act FAQs (CFPB FAQs) for more detail.

Q:

Regarding the fields related to observation basis for the Ethnicity, Race and Sex field values, may an institution report either code 3 (NA) or code 2 (Not Collected on the Basis of Visual Observation) for consumer applications received by mail, internet, or telephone?

A:

Technically the answer is yes, the lender may report these fields as either code 2 or code 3. The CFPB clarified this in its March 2020 CFPB FAQs. However, the CFPB states in those same FAQs the following: “For consistency of data across all HMDA reporting financial institutions, the Bureau suggests, but does not require, that financial institutions use code 2.”

Therefore, we recommend that lenders use code 2 for these fields, for all applications received by mail, internet, or telephone – unless management has a compelling reason to report the field as code 3.

Q:

If a loan’s purpose is to pay off a previous line of credit, but the line of credit balance is zero, so there is no actual payoff, can the loan still be reported as a refinance or should it be excluded from the LAR?

A:

By definition, a loan may be a refinance, even if no balance is owing. To be reported as a refinance, the new dwelling-secured loan must satisfy and replace an existing dwelling-secured debt obligation by the same borrower (Regulation C definition of refinancing). Whether a refinancing has occurred is based on whether, by contract and applicable law, the original debt obligation has been replaced by a new debt obligation. Whether the original lien is satisfied, or whether a balance is already paid off, is irrelevant to determining whether a loan is reportable as a refinance.

 

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