HMDA: Lenders’ Favorite Mistakes
Welcome to ADI’s 2023 edition of “Four Common HMDA Reporting Errors.” Though the 2015 HMDA Final Rule has been in effect for years, lenders continue to make errors when satisfying reporting requirements under the Home Mortgage Disclosure Act (HMDA). Therefore, we will continue to compile and share some especially prevalent ones, with advice on how to mitigate them.
As the fourth quarter of 2023 begins, lenders should already be preparing for the 2023 HMDA Loan Application Register (LAR) submission deadline. Regulators have increased scrutiny of LAR accuracy. Resubmission thresholds are fairly low, considering the volume and detail of data involved. Robust training, procedures, and monitoring processes are a must for every reporting lender.
In working with lenders throughout the year, ADI has seen many recurring errors in HMDA data recording, as well as some unique issues. Here is a sampling of the misreported fields we encountered.
1. Action Taken: Non-originated applications
While some lenders use terms such as “withdrawn” and “denied” loosely, these terms have strict definitions. To report a non-originated application’s Action Taken type as withdrawn or denied on your LAR, the application must meet certain requirements. For example, lenders can report a loan application “Code 4—Application withdrawn by applicant” only if the applicant expressly requested the application be withdrawn before the lender issues a credit decision.
If the lender approved an application without pending underwriting or creditworthiness conditions prior to the applicant’s request for withdrawal, the Action Taken is “Code 2—Application approved but not accepted.” If the lender had already decided to deny the application when the applicant asked to withdraw, the Action Taken is “Code 3—Application denied.”
Applications internally considered “withdrawn” may not meet the requirements to be coded as “Code 4—Application withdrawn by applicant” for HMDA purposes. For example, a loan officer may instruct processors to withdraw an application after the customer become non-responsive shortly after applying. This application is not reportable as withdrawn, because the lender, not the applicant, requested the action.
Similarly, the lender may close a file it conditionally approved (e.g., pending income verification or an appraisal supporting a certain loan-to-value) after the applicant failed to respond. Both types of applications must be reported in one of two ways:
- Provide the applicant a Notice of Incomplete Application in accordance with Regulation B. If the applicant does not respond within the time frame, report the file as “Code 5—File closed for incompleteness.”
- Report the application as “Code 3—Application denied” and list the Reason for Denial as “Code 7—Credit application incomplete.”
An application closed for incompleteness requires less information than a denial for incompleteness. Additionally, an institution that reports such applications as Denied may have denial rates that appear higher than those of peer lenders during a Fair Lending analysis of the lender’s LAR data. ADI recommends establishing procedures for providing the Notice of Incomplete Application, when applicable, and reporting applications using “Code 5—File closed for incompleteness.”
2. Loan Purpose: Refinancing versus Other
Loan Purpose continues to trigger LAR errors, particularly with applications for refinancing of non-mortgage secured debt. Lenders’ common terms for loan refinancing do not always match HMDA’s definition of a refinancing. Therefore, loans that should be “Code 4—Other purpose” often appear as “Code 31—Refinancing” or “Code 32—Cash-out refinancing” on the LAR.
Section 1003.2(p) of Regulation C defines refinancing as “a closed-end mortgage loan or an open-end line of credit in which a new, dwelling-secured debt obligation satisfies and replaces an existing, dwelling-secured debt obligation by the same borrower.” Therefore, to be a refinancing, both the old and new loans must be to the same borrower and must be dwelling-secured.
If an applicant applies for a $100,000 mortgage-secured loan used to pay off $70,000 of auto and credit debt and a $30,000 home equity line of credit, the loan purpose may be reported as “Code 31—Refinancing” or “Code 32 – Cash-out Refinancing.” However, a loan to replenish funds from a recent home purchased with cash, secured by the home but for which there is no existing dwelling-secured mortgage to satisfy, is reported with a loan purpose of “Code 4—Other purpose.”
One more important note: Business purpose loans that are “Other” purpose loans are not HMDA reportable.
3. Loan Features on Home Equity Lines of Credit
The CFPB’s reporting threshold for open-end lines of credit fell from 500 to 200 in 2022. With that change, some lenders began reporting their Home Equity Lines of Credit (HELOCs) for the first time. As a result, HELOCs have become a common source of HMDA reporting errors.
The errors appear in several fields: Rate Spread, Open-End Line of Credit, Non-Amortizing Features (including Balloon Payments, Prepayment Penalty, Interest-only Payments, Negative Amortization, and Other Non-amortizing Features).
Most often, we see inaccuracies in reporting the rate spread and certain loan features for the loans. HELOCs are typically variable-rate loans with no fixed rate period. Therefore, lenders should calculate the rate spread using “1” for the Years to First Adjustment on the FFIEC Rate Spread Calculator.
Surprisingly, many lenders also make errors with the straightforward Open-End Line of Credit field. Report HELOCs as “Code 1—Open-end line of credit.”
Lenders should code their loan origination systems accurately to report whether the lines of credit in their loan programs have balloon payments, prepayment penalties, interest-only payments, and/or could result in negative amortization. These features also appear in the HELOC agreement. Without a systematic way of recording these fields, it’s possible to overlook the data and misreport it on the LAR.
4. Commercial Loan Training and Procedures
Whether or not a commercial loan is HMDA-reportable can trip up even the most experienced compliance staff. Data requirements for reporting loans to individual, non-entity commercial borrowers (such as individuals purchasing property to rent to others, for example) are similar to the ones for consumer borrowers and differ from those of loans to typical commercial entities. As such, the information collection procedures do not always align with HMDA reporting needs.
For example, the lender may rely on a credit score for the credit decision without documenting that score during the application and underwriting process. Likewise, determining the income, property value, and combined loan to value relied upon in the credit decision can be impossible if the loan officer does not follow standard procedures for recording this information. It’s essential to ensure consistent documentation of field values that may not appear on a commercial application.
Many lenders mishandle the collection and reporting of demographic information – ethnicity, race and sex – in the application process for commercial entities. Regulation B (implementing the Equal Credit Opportunity Act) and Regulation C prescribe how to collect and document this information. In this arena, lenders may collect and report too much information, rather than too little. We often see commercial loan files that contain Demographic Information Addenda, though the only borrower is an entity.
This error typically occurs when an individual owns the borrowing entity and is a guarantor on the loan. Lenders should not report demographic information for guarantors, but rather only for individual, non-entity applicants.
Guidance for each reportable field discussed in this article is in the latest Guide to HMDA Reporting – Getting it Right.
What Lenders Can Do to Mitigate Errors
Managing HMDA errors requires a solid grasp of HMDA reporting requirements and how data points are identified, entered into your loan origination system, and preserved for eventual reporting. When assisting clients, ADI recommends several steps for assessing and correcting common HMDA errors, including:
• Review automated systems to ensure they are accurately identifying HMDA-reportable applications and loans;
• Analyze excluded transactions, such as leads, to ensure they do not meet the definition of an application under HMDA;
• Establish controls to minimize data entry errors;
• Review and analyze processes that transfer data between systems to ensure transferred data are accurate and correctly mapped for the HMDA submission;
• Perform an audit on a sample of applications to determine the accuracy of the recorded data based on source documentation; and
• Conduct a full HMDA data scrub if error rates are above thresholds established by the Consumer Financial Protection Bureau.