Prepare for 2018 HMDA Reporting With This Q&A
On October 15, 2015, the Consumer Financial Protection Bureau (CFPB) updated the final rule amending Regulation C. You may be well-read at this point in chapter one of the CFPB’s Home Mortgage Disclosure Act (HMDA) rule changes, which took effect this year. But how prepared are you to turn the page next year to the more voluminous HMDA chapter two?
A review of the effective changes for the first phase of implementation and a Q&A surrounding the impending changes for phase two can help your financial institution better prepare for the majority of changes taking effect in 2018.
2017 amendment will disappear
Effective for 2017 only, the CFPB added a temporary change intended to reduce the burden on depository financial institutions. This change narrowed the scope of covered depository institutions by adding an additional prong to its current coverage criteria.
To qualify as a HMDA-reportable under the temporary change, a depository institution must not only meet the asset size, location, loan activity, and federally-related tests of the original rule, but also meet a loan volume “look back” test. The additional prong requires depository institutions to have originated at least 25 home purchase loans and/or refinances in 2015 and 2016 to qualify as a HMDA-reportable institution in 2017. Beginning in 2018, this prong will no longer exist.
Review common HMDA implementation questions
Institutions are not alone as they work toward the second round of implementation. To help you prepare for 2018, we have compiled a list of frequently asked questions to help guide your plans for implementation.
Effective January 1, 2018, the HMDA rule adopts a uniform loan-volume threshold applicable to all depository institutions, which replaces the temporary loan-volume prong instituted in 2017. This amended prong stipulates that covered depository institutions must meet all prongs outlined below to qualify for HMDA-reportable status:
- Asset-size test — The financial institution had assets in excess of the asset-size threshold published annually in the Federal Register and posted on the CFPB’s website. The asset threshold maybe updated annually based on changes in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers. Presently, this threshold is $44 million.
- Location test — The financial institution had a home or branch office located in a Metropolitan Statistical Area (MSA) on the preceding December 31.
- Loan activity test — In the preceding year, the institution originated at least one home purchase loan or refinancing of a home purchase loan secured by a first lien on a one-to-four family dwelling.
- Federally-related test — The financial institution is federally insured; federally regulated; or originated a home purchase loan or refinancing that was secured by a first lien on a 1-4 family dwelling also insured, guaranteed, or supplemented by a federal agency, or was intended for sale to Fannie Mae or Freddie Mac.
- Loan volume test — The financial institution must have originated at least 25 closed-end mortgage loans or 100 open-ended lines of credit in 2016 and in 2017. (This rule replaces the temporary loan volume test established for 2017 only.)
Under the amendment, qualifying under one volume test does not automatically require you to report HMDA data related to both types of products. You are required to report HMDA data only for the product categories that have met the related volume tests. For example, if you originate 25 mortgage loans in 2016 and 26 mortgage loans in 2017, but originate 99 open-end lines of credit in 2016 and 100 open-end lines of credit in 2017, you are required to report HMDA data only for the mortgage loans. Alternatively, if your financial institution originates 24 mortgage loans in 2016 and 25 mortgage loans in 2017, but originates 100 open-end lines of credit in 2016 and 100 open-end lines of credit in 2017, then you would be required to report HMDA data related only to the open-end lines of credit.
While there were no changes affecting non-depository “other mortgage lending institutions” in 2017, non-depository institutions need to prepare for significant changes to the coverage test. Beginning in 2018, non-depository institutions are covered institutions for HMDA purposes if:
- It is a for-profit mortgage-lending institution (other than a bank, savings association, or credit union)
- It either:
- Had a home or branch office in an MSA on December 31, 2017; or
- received applications for, originated, or purchased at least five home purchase loans, home improvement loans, or re-financings related to property located in the same MSA or Metropolitan Division (MD) in the preceding calendar year.
- It originated at least 25 closed mortgage loans or 100 open-end lines of credit in 2016 and in 2017.
With the new prong, an institution is also covered if:
It’s important to note that beginning in 2018, the test no longer includes either a consideration of a non-depository institution’s asset size, nor does it consider its home purchase loan originations or re-financings measured in dollars. Therefore, institutions that may not have been covered up to this point could very well become HMDA-reportable in 2018 with the removal of these two test prongs.
Yes. You’ll report all applications that would have resulted in a reportable loan or line of credit.
No. Beginning in 2018, institutions will move from a purpose-based test to a dwelling-secured test for consumer purpose transactions. This means that for consumers the only home improvement loans or open-end lines of credit that will be subject to HMDA reporting requirements are those that are secured by a lien on a dwelling. For purposes of HMDA, a dwelling is a residential structure, whether or not it is attached to real property. Remember, a dwelling is not limited to a principal residence, nor is it limited to a structure that has four or fewer units. Some examples of dwellings include second home and vacation homes, investment properties, multi-family residential structures or communities such as apartments, condominiums, and cooperative buildings or complexes, and manufactured homes or other factory-built homes.
If the financial institution determines the loan proceeds will primarily be used for a business or commercial purpose, but the loan also meets the Regulation C definition of a home improvement loan, home purchase loan, or a refinancing, than it would be a covered transaction (e.g., a closed-end mortgage loan to purchase a multi-family dwelling secured by the dwelling or a home improvement loan to improve an office located in a dwelling).
Commercial loans that will retain their exclusionary status include closed-end mortgage loan and open-end lines of credit in which the proceeds will be used to expand a business or purchase business equipment.
If the borrower intends to operate it as a mobile home park, consider it a dwelling for HMDA regardless of whether there are any mobile homes securing the loan. Under Regulation C, a transaction related to a manufactured home community is secured by a dwelling even if it is not secured by individual manufactured homes.
Not necessarily. The 2017 HMDA Getting It Right Guide specifically excludes construction loans and other temporary financing from HMDA reporting requirements.
The 2018 revised HMDA rule specifically excludes only temporary financings. Under the rule, the definition of temporary financing is a loan that is designed to be repaid with other long-term financing. So, while construction loans could fit the definition of temporary financing, under the rule they do not carry the present exemption.
Yes. You will also need to start reporting more of your pre-approvals. The 2015 HMDA rule expands preapproval requests for closed-end transactions that are approved but not accepted. Up to this point, reporting for these types of applications was optional. However, requests for open-end lines of credit, reverse mortgages, and loans to be secured by multi-family dwellings are still excluded.
Additional data collection points include applicant age, credit score, underwriting information, unique loan identifier, property value, application channel, point and fees, borrower-paid origination charges, discount points, lender credits, loan terms, prepayment penalty, non-amortizing loan features, interest rate, and loan originator identifier. We recommend institutions modify internal systems and enhance software at the beginning of the final quarter of 2017 to ensure proper data collection for loans that you do not take action upon until 2018.
If the applicant does not complete the demographic information on an application, the lender should collect this information on the basis of visual observation or surname (a new option), and note this on the collection form. However, when completing the categories, the lender is limited to the main ethnicity, and race categories. A lender cannot select on behalf of the borrower any of the subcategories listed for ethnicity and race.
You will no longer be required to provide a disclosure statement and modified LAR to the public upon request. Instead, you must modify your current disclosures to provide notice that the institution’s disclosure statement and modified LAR are available on the CFPB’s website.
LEI stands for “Legal Entity Identifier” and all HMDA reporting institutions will need to obtain an LEI in order to use the new HMDA platform starting in 2018. The LEI is a 20-character alpha-numeric code that identifies legal entities that engage in financial transactions, and it replaces the entity identifier in the reporter’s identification number. For implementation purposes, you will want to obtain this number as soon as possible; you will need the LEI to create a universal loan identifier (ULI) for each application received, each originated loan, and each purchase covered loan. Some institutions already have an LEI, so before you apply for one, go to GMEI Utility’s website to see if your institution already has one. The total cost to initially register is $219. Annual renewals are $119.
The rule retains a “good faith” provision; if you make a good faith effort to record all data fully and accurately within 30 calendar days after the end of the calendar quarter, but some data is inaccurate or incomplete, the inaccuracy or omission is not a violation of HMDA or Regulation C if you correct or complete the data prior to your annual submission in 2019.
How we can help
A 2018 HMDA institutional coverage chart is now available to help you determine whether your institution is covered by Regulation C in 2018.
As you review how the new changes will affect your institution, CliftonLarsonAllen’s professionals can assist with mortgage regulatory compliance and will continue to answer questions and give insight surrounding the second phase of implementation. In addition, as you plan for the long term, additional information on the electronic submission process that begins in 2019 for data collected in 2018 is now also available. Questions or requests for information related to 2017 HMDA data collection can be directed to email@example.com.