Preparing your HMDA LAR can simply be described as “Tedious,” with a capital “T.” The ins and outs of HMDA are one of the most frequently discussed topics on hotline. The Federal Reserve recently released its top consumer violations for 2022 and unsurprisingly a whopping 59.4% of all violations involved inaccurate collection of residential mortgage data pursuant to HMDA. We want to make sure you avoid the most common pitfalls so the following is a rundown of the some of the most frequent violations and how to fix them.
The first noted issue was loan purpose, specifically reporting that a loan was a refinancing when it was really a cash-out refinancing, or vice versa. The regulation defines a 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.” On the other hand, a loan is designated as a cash-out refinancing if it is a refinancing as defined previously and the bank considered it to be a cash-out refinancing in processing the application or when setting the terms. Thus, whether a loan is a cash-out refinance is a bank-level determination. It depends on your internal standards instead of a specific regulatory definition.
Another common reporting issue is income, which is also dependent on your internal standards. When you evaluate income as part of a credit decision, you report the gross annual income relied on in making the credit decision, so, if you rely on only a portion of an applicant’s income, you do not report the portion of income not relied on. For example, suppose an applicant has $100,000 of income: $80,000 from salary and $20,000 from commissions. The bank chooses not to rely on this applicant’s commission income because it has been earned for less than 12 months, so the bank does not include the applicant’s commission income and reports $80,000 as the income relied on.
Examiners frequently cited banks for not reporting covered loans made primarily for a business or commercial purpose. Often, the root cause of the violation was a misunderstanding of the HMDA exclusion of a business or commercial purpose loan. People mistakenly tend to think that any business purpose loan is excluded from HMDA reporting. To clarify the meaning, business/commercial purpose loans are excluded from reporting unless they otherwise meet the definition of a refinancing, home purchase or home improvement loan under HMDA. So, if you have a business applicant taking out a loan to make improvements to their rental property, it is a business purpose loan but it is a reportable business purpose loan.
Scoring models were another common hiccup. Examiners observed lenders reporting the scoring model by the name of the credit reporting agency, such as TransUnion, when the regulation requires you to specifically identify the name and version of the scoring model used to generate the credit score. For example, instead of reporting TransUnion as the credit reporting agency used, an institution could comply with the regulatory requirement by reporting “FICO Risk Score Classic 04.”
Keep the above in mind next time you’re tediously reviewing your LAR and please feel free to submit any questions to our Hotline team. Together, I’m confident we can bring down that 59.4% number.