Running the HMDA Gauntlet

You have two months to get your HMDA report entered, checked, corrected, and sent in. And that's on top of all the Y2K activities. However, this is not the time or the year to let HMDA data submission slide. Regulatory agencies' frustration with inaccuracies rises each year and any of this cumulative frustration is not affected by Y2K - except possibly for the worse.

The OCC has issued guidance for bankers on filing HMDA reports. In OCC 99-47, the agency identifies the most common HMDA reporting errors and advises banks to take steps to correct or minimize these errors before submitting their HMDA reports. If you aren't motivated yet, the OCC reminds banks that civil money penalties may be imposed for violations. For "violation" read "error."

Details
Many of the HMDA reporting problems are in the details. This simply comes down to making a mistake. OCC notes that areas where you should look for mistakes include location codes, including the MSA, state, and county codes, and the census tract number. Also make sure that the respondent code, agency code, and tax ID are correct. These issues are basic and don't relate to the substance of the loan transaction. For that reason, we tend to overlook them and the mistakes slide through. When it comes to review and compilation of the data, these mistakes are every bit as frustrating to the regulatory agency as mistakes of loan amount, income amount, or monitoring data codes. So remember that these count. Find as many of these errors as you can through the software's quality checks.

Counteroffer problems
Other common errors relate to choices or decisions that are more substantive. For example, reporting counteroffers often involves errors. The problem is that what you should report depends not only on what the customer asked for, but what decision the bank made. As with the adverse action issues of Regulation B, how to report a counteroffer depends on your decision. If the bank made a counteroffer which the applicant accepted, the bank should report the terms that the applicant accepted - the closed loan. One way of thinking about this is that. HMDA measures the loans that the bank makes. Where and how much the bank was willing to lend is its central question. Then HMDA looks at what the bank refused to do.

If the applicant did not accept the counteroffer, the LAR should reflect the terms that the applicant actually requested. The loan that the bank refused to make is what is useful when evaluating what the bank will or will not do - and where. This is also a reason to make sure that loan officers ask applicants to complete the loan amount, purpose, and type. Good documentation from the start is essential for HMDA LAR accuracy.

Reporting All Residentials
The HMDA report is an opportunity to get credit for all the lending the bank does. Too many banks omit important information - some of their loans - from the LAR.

There are several regulatory ins and outs that may contribute to this misconception of what to report. One important one is the collection of monitoring data. We collect monitoring data when we have a consumer applicant. However, the data may not be available or applicable when we are dealing with a multi-family dwelling or commercial loans. This does not change the reporting status of the loan. Generally, you should report any loan secured by a building in which someone - or lots of someones - lives. Advise your staff that monitoring data is not a prerequisite to a loan being HMDA-reportable.

Your bank's LAR should include information on loans to owner occupants and loans secured by non-owner-occupied dwellings. The important issue for HMDA is whether the bank is providing mortgage money in places where people live - in all parts of the bank's community. Thus, the starting point for finding which loans to report is whether the loan is secured by a building in which people live. If so, report it. Then we figure out what reporting category it goes in - single family, multi-family and the like. After that, we worry about the identity - in terms of monitoring data - of the borrowers.

Reasons for Adverse Action
For some banks - including OCC regulated banks, reporting the reason(s) for denial is not optional. The OCC reminds banks in this circular that National Banks must report the reasons for denial. Failing to make these reports is a common violation that the OCC examiners find. And they are tired of finding it. Not only is this a violation, but the reasons for adverse action are useful to the examiner and the bank.

Choosing not to report the reasons for denial may not actually save the bank any work. This information is valuable for purposes of evaluating lending policies and practices. This information reveals who did not get a loan and why. When you use this information in fair lending audits or CRA self-assessments, you will find you have a powerful tool.

Reasons for denial reveal how applicants fail underwriting. You can also use this information to identify denial patterns by branch, loan officer, and even product type.

Renewals and Refis
When to report a loan that is tied to or evolved from a previous loan is one of the most difficult issues to resolve. No definition that the regulators have produced works in the way intended. The OCC advises national banks to report only those loans in which the existing obligation for home purchase or refinance is extinguished and replaced with a new obligation.

If your staff has trouble dealing with this, you might try pointing out that this is essentially the same rule as that in Truth in Lending for determining whether to give new disclosures. It's worth a try anyway.

The important thing to communicate is that this reporting test is not the same as the test for the flood regulation. HMDA reports should involve new decisions and/or new funds. Renewals, extensions, and modifications should not be reported on the LAR. They could, however, be triggering events for flood hazard certification.

No matter what the agencies decide about reporting renewals and refinances, it can be useful to maintain information on your entire portfolio. Present this as part of your performance context. It should show how and where the bank makes its loan decisions over time.

Broker and Correspondent Loans
A brokered or correspondent loan should be reported by the entity making the decision and that by prior agreement acquires the loan at or after closing. This is the entity that influences whether or not mortgage money goes into specific locations and specific types of loans. Redlining or discrimination by these entities could be camouflaged if their decisions were put into the larger report of loan activity by the lender functioning as the settlement service provider.

This rule also means that the lender that denied the application must report all denials. One important view of lending that HMDA provides is the amount of lending relative to demand as measured by applications. For this reason, reporting of denials is vital.

Finally, however you decide to report or not report a loan, keep some documentation of your reasoning. This proves that you tried. It also enables you to identify the questions you have for the examiner when they come in.

ACTION STEPS

Share the information in this article with staff that works on the HMDA LAR.
Review procedures for completing the LAR and consider these against the common errors. Look for ways to revise procedures to reduce errors.
Audit your LAR and identify any pattern to errors. Compare your findings to the OCC's list of common errors.
Establish a practice of logging and reporting reasons for denial. Then use these reasons in your fair lending audits and CRA self-assessment.
Review which loans get reported on the LAR - and which do not. Put an exercise on this in your HMDA training materials.
Review your bank's agreements with settlement service providers, other lenders, and loan purchasers. Identify any relationships that could affect whether your bank or the third party should report certain loans and denials.