More On The HMDA Commentary

A Commentary is a document which interprets and explains the regulation and law. But commentaries are not always clear and self-explanatory. To better understand the commentary and the rules it interprets, it can be useful to be familiar with the goals and philosophy of the agency.

The Federal Reserve staff had several objectives in writing the commentary to Regulation C. First, they made an effort to reduce burden whenever possible. This process can never be perfect because any attempt to reduce burden is necessarily limited by the constraints of the law.

Because of the relationship of HMDA data to CRA and fair lending, the FRB must take into account the uses for the data by examiners and by interest groups. Inevitably, HMDA reporting becomes enmeshed with the highly visible and political aspects of fair lending and CRA.

The FRB's other goal in issuing the commentary was to maximize the quality of data reported. HMDA data has generally proved to be less useful than hoped. In addition, errors and technical problems in reporting have generated heavy criticism. The Federal Reserve has therefore also placed a high priority on issuing interpretations that will maintain or improve the quality of data reported. With all this in hand, let's look at more of the new interpretations.

Occupancy
Guidance in Appendix A has directed banks to only report occupancy status on loans secured by property located in MSAs in which the bank has an office. The final commentary relaxes this rule and specifically permits reporting occupancy for loans made outside the MSA(s) in which the bank has an office. You may also choose to indicate "not applicable" for these loans. This interpretation also applies to loans secured by multi-family properties.

This new position means that staff responsible for entering data on the LAR will not need to distinguish between loans based on location for the purpose of designating occupancy status.

The FRB has not changed the language in Appendix A. As a result there is an apparent conflict between the two positions. Until Appendix A is revised, make note of the fact that the commentary position overrides the rule in Appendix A.

Improvements on home improvement reporting
If the loan is for more than one purpose, such as purchase and improvements, the new commentary carries forward the previous staff position that you should report the loan based on how you >
A rule of thumb to use is that home improvement overrides other purposes if you >
The regulatory burden relief is twofold. First, you determine how the loan is reported by how you book the loan. Second, you may make these decisions on a case by case basis. Therefore, two loans for purchase and improvements need not be reported in the same way if the bank >
For home improvement loans, report the location of the property being improved. If more than one property being improved, you may choose to report one of the properties or allocate the loan proceeds over the several properties being improved. This method will result in multiple entries. Be sure, if you opt for this method on any loan, that there is no double reporting of the loan amount.

This reporting method shows where the loan proceeds were actually invested and used to make a difference in property value. In doing so, it is fully consistent with the purpose of the act. It also provides the bank with the flexibility to choose how it >
Loan assumptions
The assumption rule is clear: report assumptions in the full amount of the assumption. Note that there is no distinction based on whether the bank was obligated to allow the assumption. The commentary makes a clean cut and reports all assumptions. This should be fairly easy to get correct and, like other provisions in the commentary, is consistent with the purposes of the act by reporting where the bank continues to be willing to lend.

Reporting action taken
Counteroffers are always troublesome to get right. The first rule of thumb is that if the applicant accepts the counteroffer, you report the loan as made. If the applicant does not accept the counteroffer, it should be reported as a denial. It may help staff to get this straight by reminding them of the rule in Regulation B: a counteroffer that the applicant rejects is a denial triggering an adverse action notice.

The other rule is that final action is final. Even if the loan went through several stages of negotiation, you report only the final disposition. In other words, you will either have a counteroffer accepted by the applicant that is reported as an approved loan, or you will have a denied loan if the applicant rejects the counteroffer. The bottom line is that the LAR reflects what goes on the books - or doesn't.

Conditional approvals follow a similar concept. If you approve a loan subject to a condition which the applicant meets, the loan is made and reported as an approved loan. If the applicant fails to meet the conditions, the loan is reported is denied. There is, after all, no loan.

Rescission presents an interesting twist. What if you approve a loan that is subject to rescission, close the loan, and the borrower rescinds within the legal time period? The commentary gives you a choice. You may report the loan as approved (it actually was approved and closed, even if only for a brief time) or you may report it as approved but not accepted. Either method accurately shows the bank's willingness to make the loan.

Approved but not accepted
What about situations where the bank approved the loan but the customer did not accept the loan? Generally, for loans that are closed, the reporting date is the date of closing. For loans that are denied, you report the date of the decision. Approved but not accepted loans could fall into both categories.

The commentary does the only reasonable thing - it imposes a test of reasonableness. You may report these loans using any reasonable date. The commentary provides choices such as the date of your decision, the date the offer expired, or the date on which the bank closed the file.

The commentary does not require a uniform method but strongly recommends that the bank pursue a consistent policy for reporting the dates for these files.

ACTION TRAINING

Mark your copy of Regulation C, Appendix A, paragraph 7c to note that the new commentary permits noting the occupancy of multi-family properties and properties located outside of MSAs where the bank has offices.
Review the "type and purpose" rules for reporting with staff. Make sure that they understand how to report multiple purpose loans.
Conduct a sample audit of home improvement loans from your 1995 LAR. Determine whether the loans were correctly >Have your loan officers identify loans secured by multiple locations. Review the LAR to determine that they are correctly reported and that there is no over-reporting of the total amount of the loan.
Determine how to handle reporting items for which you have options (approved but not accepted, multiple properties) and provide instructions in your procedures. Discuss these reporting decisions in training.
Conduct training for affected staff on HMDA reporting. Include a discussion of the new provisions on the commentary. Be sure to discuss treatment of counteroffers, home improvement loans, multiple property locations, assumptions, action taken, and date of action.