HMDA Problem Areas (5 Action Steps)

The final lap of the new 2004 HMDA reporting is now being run. We can expect all sorts of new problems, ranging from missing some new requirements to discovering that there is something wrong with the new software system. In short, we can expect both minor league and major league problems.

As we usually do when trying to smooth out a compliance procedure, we take a close look at what we know is likely to go wrong. Thanks to compliance managers who have tried to stay ahead of the curve (or the huge boulder rolling down at them) and to examiners with foresight, we have some early indicators of what is going wrong with 2004 HMDA reporting.

GMI
With the change from the old categories to the separation of Hispanic ethnicity from race categories, government monitoring data collection is at the top of the problem list.

The most common problem is customers who indicate that they are Hispanic but then refuse to go further by indicating a race. In a face-to-face interview, the loan officer or person conducting the interview must complete the information by selecting one or more races for each applicant. Failure to do so is a violation.

Completing monitoring data if the applicant refuses is not a requirement if the application is taken by a method other than a face-to-face interview, such as by telephone, mail or Internet. However, the method for taking the application should be clearly documented to establish that the failure to complete the data is not a violation.

Property Location
On pre-approvals, the instructions direct the lender to use n/a for property location. This has caused some confusion when the situation for pre-approval does actually have a property location or for when a property address is identified later.

Some who want their data to be as "complete" as possible may actually be providing too much information - more than was requested - and therefore will find themselves with violations. For the purpose of 2004 reporting, the rule stands. However, the FRB may consider revising this procedure to allow for property address reporting. This will only be for future reporting - not for 2004. So don't start this until there is an official position.

It is never a bad idea to know where the loan is going, or where the applicant wants to purchase property. But be sure that the LAR reporting is limited to the data definitions. Over-reporting will be a violation. Remember that the agencies want the data to be clean and consistent. Don't stray off the directed path.

HOEPA Status
This one has to be everyone's favorite. Too many lenders assume that they don't make high cost mortgages and are therefore paying little attention to reporting the HOEPA status of loans. This may be a serious mistake. And if you get this wrong, you may also be violating the high cost rules of Regulation Z's Section 226.32.

Examiners report that their early checks on the HOEPA reporting show that most lenders are checking the "no" box, indicating that the loan is not a high cost loan. However, when the examiners check the calculations, they find that some of the loans are in fact high cost loans.

The advice here is to check your high cost status before completing the LAR. Don't let others decide whether they are making high cost loans. Remember that these calculations are different and include more than the traditional finance charges.

Next Year
These problems and others that emerge from the LAR reporting and analysis process are likely to result in a proposal to update Regulation C, the Commentary, or both in 2005. Until then, the best advice is to check the FFIEC web site's Q&A on HMDA for the latest guidance. The agencies will update these Q&As as the concerns and questions come in.

As for asking questions, it is in your best interest to ask. First, asking will produce an answer that you can show to your examiner. Second, asking will call attention to the gray areas quickly - as they come up. Finally, the number and quality of questions raised may have an impact (a positive one) on the tolerance of the agencies for discrepancies or errors in reporting. In short, the more the agencies know about the problems you face and how you are dealing with them, the less likely they may be to impose civil money penalties this time around.

ACTION STEPS

Review documentation of government monitoring information and of how and when applications are taken to be sure that you have what you need to establish compliance with HMDA data gathering.
Conduct a quick audit of loan files to assess compliance with Section 226.32 calculations and disclosures. Then compare any high cost findings to LAR entries. Be sure your sample includes balloon loans and short-term dwelling-secured loans.
Review the process for pre-applications and pre-approvals. Then check the LAR to evaluate whether the reporting is correct.
Do all your usual checks and edits on the LAR.
Run your own charts and start to look at the questions your data may raise. Give careful attention to pricing and race or ethnicity issues.