Consumer Compliance Outlook > 2011 > Second Quarter 2011

Consumer Compliance Outlook: Second Quarter 2011

Home Mortgage Disclosure Act (HMDA) and Community Reinvestment Act (CRA) Data Reporting: Questions and Answers

By Karin Modjeski Bearss, Senior Examiner, Federal Reserve Bank of Minneapolis, and Jason Lew, Compliance Risk Coordinator, Federal Reserve Bank of San Francisco

On November 17, 2010, the Federal Reserve System conducted an Outlook Live webinar titled “Tips for Reporting Accurate HMDA and CRA Data.” Participants submitted a significant number of questions before and during the session. Because of time constraints, only a limited number of these questions were answered during the webcast. This article addresses some of the questions we received.

HMDA Data Reporting: Questions and Answers

Coverage

  1. We are taking a piece of land as collateral. The land contains a mobile home that is incidental to the loan (for example, the bank is not requiring insurance on the mobile home). It will be booked on the system as a “land-only” loan; we will take the mobile home as collateral by default. Is this loan reportable?

    The manner in which you code the loan into your system generally does not determine if the loan is HMDA reportable. The primary question is whether this loan meets the definition of a home purchase loan or a refinancing under Regulation C. Section 203.2(h) defines a home purchase loan as a loan secured by and made for the purpose of purchasing a dwelling. Section 203.2(k) defines a refinancing as a dwelling-secured loan that satisfies and replaces a dwelling-secured loan to the same borrower. The definition of dwelling in §203.2(d) is a residential structure, including a mobile home or manufactured home. Because a mobile home is a dwelling under Regulation C, the loan would be reportable as a home purchase loan if the loan was used to purchase the land and the mobile home or reportable as a refinancing if the loan replaces another dwelling-secured loan with the same borrower.

  2. Our bank brokers most of its mortgage loans through another bank. Currently, I report applications denied by our bank or withdrawn while still at our bank. Do I report on our loan application register (LAR) only those loan applications that do not close with the other bank?

    The entity that makes the credit decision on a loan application has responsibility for reporting that application if the loan is HMDA-reportable. As noted in comment 203.1(c)-2 of the Official Staff Commentary (Commentary) for Regulation C External Site, an institution that makes a credit decision prior to closing reports that decision regardless of whose name the loan closes in. Therefore, your institution would report any applications for which it makes the credit decision, whether or not those applications close with the other bank.

  3. Is this loan reportable: A 12-month construction loan that must be refinanced at the end of the 12-month period? (The loan does not include an option for rolling into permanent financing.)

    Based on the Federal Financial Institutions Examination Council's (FFIEC) HMDA Frequently Asked Questions (HMDA FAQs),1 a primary consideration for determining if a loan is temporary financing is whether it will be replaced by permanent financing of a much longer term. Therefore, if this loan will likely be replaced by permanent financing by the bank or another lender, even if the loan does not include a permanent financing rollover option, it would likely be considered temporary financing and therefore exempt from HMDA reporting.

  4. Do we report short-term home improvement loans that have a documented take-out commitment?

    If a home improvement loan is set up like a construction-permanent loan, the loan should be reported, as explained in comment 203.2(h)-5. This section states that a construction-permanent home purchase loan is not considered a temporary loan and should be reported for HMDA purposes. If the short-term home improvement loan will be replaced with permanent financing of a much longer term, the bank would report the permanent take-out loan but not the short-term temporary loan.

  5. We have a mobile-home-secured loan that does not involve real property. Most of the funds will be used for debt consolidation; however, a small portion will also be used for home improvement purposes. The loan is not coded as a home improvement loan. Should this loan be reported?

    Yes. Regulation C has two standards for reporting home improvement loans. Under §203.2(g)(1), a dwelling-secured loan made for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located is considered a home improvement loan. Under this standard, a loan does not have to be classified as home improvement to be covered. Conversely, under §203.2(g)(2), a non-dwelling-secured loan for the same purposes stated above is a HMDA-reportable loan if it is classified by the financial institution as a home improvement loan. In this example, the loan would be reported because it is: (1) dwelling secured (mobile home) and (2) made in part for home improvement purposes.

  6. Is the reporting of home equity lines of credit (HELOCs) optional, even if funds are used for home improvement purposes or to provide funds for a down payment on a home purchase loan?

    Yes. Section 203.4(c)(3) specifically states that it is optional for banks to report home equity lines of credit made in whole or in part for the purpose of home improvement or home purchase.

  7. Do we have to report all HELOCs even if the borrower does not advance on the line of credit? For example, if the borrower intends to use $10,000 of a $30,000 HELOC for home improvement purposes but does not advance on the loan, does this loan need to be reported for HMDA?

    If the bank chooses to report HELOCs for HMDA, the bank should report all HELOCs intended for home improvement or home purchase purposes, even if the borrower does not advance on the line of credit. The HMDA LAR instructions included in Appendix A to Regulation C (HMDA instructions) explain that the bank should report only the portion of the HELOC intended for home improvement or home purchase purposes. The use of the word “intended” implies that the bank should report the line of credit even if the borrower does not actually advance on the funds as anticipated.

  8. If the bank modifies, but does not refinance, a temporary construction loan into permanent financing, does this loan become a HMDA-reportable loan?

    Yes. Comment 203.2(h)-5 explains that when permanent financing replaces a construction-only loan, the loan should be reported for HMDA. In addition, construction-permanent loans must also be reported for HMDA. In essence, the bank has replaced its temporary construction loan with permanent financing through this loan modification. Because it is no longer a temporary loan and has not been previously reported, it should be reported as a home purchase loan if it meets Regulation C's definition of home purchase.

    9. Mergers-Acquisitions

  9. We are a HMDA-reportable bank. In September, we merged with a bank that does not report HMDA. Do we need to report loans originated by the other bank prior to September?

    If the surviving institution is a HMDA reporter, the institution has the option of reporting the transactions handled in the offices of the previously exempt institution during the year of the merger, as discussed in comment 203.2(e)-3. For example, if Bank A (a HMDA reporter) merges with Bank B (a non-HMDA reporter) in 2010 with Bank A as the surviving institution, Bank A would report all of its 2010 HMDA activity and have the option of reporting 2010 HMDA transactions handled by Bank B.

    10. HMDA Applications

  10. Are we required to report as a home purchase loan an application based on an oral property address even though the applicant did not provide any documents showing the acceptance of the offer to purchase the home?

    The primary issue is whether you have an “application,” as defined in §203.2(b). Under this section, an application is an oral or written request for a home purchase, home improvement, or refinancing made in accordance with the procedures used by the institution for the type of credit requested. In general, if the borrower has requested credit in accordance with the bank's application procedures, the institution would likely consider the request as an application. The regulation does not require that an institution obtain an offer and acceptance on a home purchase loan for it to be considered a HMDA-reportable application.

    If the application is a prequalification (a request by a prospective applicant for a preliminary determination on whether the applicant would qualify for a loan and for how much), it is not a HMDA-reportable application. If the application is a preapproval request for a home purchase loan, the institution has a covered preapproval program, and the bank approved or denied the request, the application is HMDA reportable. As discussed in §203.2(b)(2), a covered preapproval program has these primary elements:

    • The institution reviews home purchase preapproval requests using a comprehensive creditworthiness review;
    • Based on this review, it issues a written commitment agreeing to extend a loan up to a specified amount for a designated period of time; and
    • The written commitment contains only limited conditions, such as the identification of a suitable property.

    Prequalification and preapproval requests that transition to the application stage, such as when the borrower identifies a property, become HMDA-reportable applications if they meet Regulation C's definition of home purchase.2

  11. We have 20 bank locations; however, only two locations have a formal preapproval program as defined by Regulation C. Is our bank considered to have a preapproval program for all locations, or is it acceptable for the 18 locations without a preapproval program to use “3” (NA) when reporting the preapproval code on home purchase loans?

    Under §203.4(a)(4), an institution must report whether an application is a request for preapproval. The HMDA instructions explain that an institution should enter code 3 (NA) if an institution does not have a covered preapproval program. An institution should report code 2 if the institution has a covered preapproval program but the applicant does not request a preapproval.

    If applications submitted at the 18 branches will not or could not be evaluated under a covered preapproval program, these applications could be reported as code 3 or “NA” because the bank does not have a program at those offices for issuing preapprovals, as defined under Regulation C.

  12. If the bank discontinued its preapproval program during the first quarter, may the bank report the preapproval codes 1 and 2 for home purchase applications received before the change and code 3 (NA) for the applications received after the change?

    If the bank no longer has a covered preapproval program as defined by Regulation C, it would be appropriate to report code 3 or “NA” for applications received after the bank discontinued its program.

    13. HMDA Data Fields

    Loan Purpose

  13. Is a loan to pay off a contract for deed considered a home purchase or a refinancing for HMDA reporting purposes?

    A loan to pay off a contract for deed should generally be reported as a home purchase loan for HMDA reporting purposes if a dwelling secures the loan. Section 203.2(h) defines a home purchase loan as a loan secured by and made for the purpose of purchasing a dwelling. Although the borrower acquires some interest in the home through the contract, the borrower generally purchases and acquires full title for the home upon paying off the contract for deed. Conversely, a contract for deed transaction generally does not meet the definition of refinancing under §203.2(k). Because the contract for deed is not a dwelling-secured obligation, the loan to pay off the contract does not replace an existing dwelling-secured obligation and, thus, does not meet the definition of refinancing under HMDA.

    14. Loan Amount

  14. What is the appropriate loan amount to report for withdrawn, denied, and approved not accepted HMDA applications?

    An institution should report the amount applied for on a withdrawn or denied HMDA application, as discussed in the HMDA instructions. An institution should also report the amount applied for on an approved not accepted HMDA application, including when the institution issues a counteroffer that the applicant does not accept.

  15. Should we report the entire loan amount or only the amount used for home improvement purposes for a HMDA-reportable unsecured home improvement loan?

    An institution should report the entire loan amount even if only part of the proceeds will be used for home improvement or home purchase purposes, as discussed in Comment 203.4(a)(7)-2. For HELOCs, however, the institution should report only the portion of the line of credit intended for home improvement or home purchase purposes. See comment 203.4(a)(7)-3.

    16. Type of Action Taken

  16. An applicant applies for a HMDA loan. The bank pulls the credit report and qualifies the borrower based on the information provided. The borrower decides not to continue with the application prior to an appraisal being ordered. Should we report this application as withdrawn, approved not accepted, or incomplete?

    The answer depends on whether the bank has made a credit decision. If the institution requires the appraisal before making its credit decision, the application should be reported as withdrawn. Based on the HMDA instructions, the institution reports an application as “approved not accepted” if the institution has made a credit decision before the borrower withdraws the application. In addition, an institution would report an application as incomplete if it had sent a notice of incompleteness under §202.9(c)(2) of Regulation B and the applicant did not respond to the request within the specified time period.

    17. Property Location

  17. What property location do we report when a home purchase loan is secured by multiple singlefamily residential properties and the properties are located in different census tracts?As discussed in comment 203.4(a)(9)-2, an institution reports the property taken as security for a home purchase loan. If the institution takes more than one property as security, it should report the property location being purchased if the applicant is purchasing only one property. If the applicant is purchasing multiple dwellings that will secure the loan, the institution has two reporting options:

    • Report the property location for one of the properties, or
    • Report the loan using multiple entries on the LAR and allocate the loan amount among the properties.

    18. Applicant Information

  18. Should an income amount be reported if the borrower is a corporation but the co-borrower is an individual?

    The HMDA instructions state that if the applicant or co-applicant is not a natural person, the institution should report “NA” when reporting the income amount for the HMDA application. In this example, the bank should report “NA” because the borrower is not a natural person.

  19. On a denied application, what income amount should be reported if the borrower's tax return shows negative income?

    The HMDA instructions state that an institution should report the gross annual income relied on in making the credit decision (not the net income). If the institution did not rely on the income or did not request income, it should report the income as “NA.”

    20. Type of Purchaser

  20. On the FFIEC LAR coding sheet, it states the following should be coded as a 0: “Loan was not originated or was not sold in calendar year covered by the register.” So what purchaser code should be used for portfolio mortgages that are originated but not sold to another entity?

    For those loans, the bank would report the code as “0” to reflect that the loan was not sold during the current year, even though it will eventually be sold. The language for a loan's sale, which is also included in the HMDA instructions for reporting the type of purchaser code, reflects two concepts. First, if a loan is never sold, the institution should use code “0” to reflect this. Second, this code is used if a bank intends to sell a loan but did not do so during the current reporting year.

  21. How do we determine the appropriate purchaser type code when the contract does not specify the company's type and the bank's contact at the company cannot help determine the purchaser type?

    The institution has an obligation to ensure that it reports the purchaser type correctly on its HMDA LAR. Therefore, the institution should conduct the research necessary to determine the appropriate purchaser code to report.

  22. During the Outlook Live webinar, the presenters mentioned that institutions should monitor their loan purchase contracts to ensure that they report the appropriate loan purchaser type code. Would you please elaborate further on how merger and acquisition activity may affect such reporting?

    As discussed during the webinar, it is a good practice to review newly signed or renewed loan purchase contracts to ensure the bank has identified the actual purchaser and reports the purchaser type correctly. Occasionally, upon renewal of the contract, the purchaser may change, which could affect the purchaser type for HMDA reporting purposes. In some cases, even though the bank's purchase relationship has not changed, the actual purchaser type may be different because of two entities merging or one entity acquiring another entity.

    23. Lien Status

  23. We often originate unsecured loans to purchase dwellings. The HMDA-reporting software will not allow us to report lien status as code 3 (not secured by a dwelling). What lien status should be reported for these loans?

    The bank should not report unsecured home purchase loans under HMDA because such loans are not secured by a dwelling. The definition of home purchase loan in §203.2(h) is a loan secured by and made for the purpose of purchasing a dwelling. Similarly, a refinancing, as defined in §203.2(k), must be a dwelling-secured loan. The FFIEC HMDA-reporting software contains a number of edits intended to identify potential errors in an institution's reported HMDA data. One edit in the software notes that the reported lien status cannot be 3 (not secured by a lien) if the loan purpose is 1 (home purchase) or 3 (refinancing). This edit helps ensure that the bank reports only dwelling-secured home purchase and refinance loans as required by HMDA. Additional information about HMDA edits is available at: http://bit.ly/ffiec-edit.

CRA DATA reportin g QUESTIONS AND ANSWERS

Reportable Loans

  1. What types of loans to nonprofits are not reportable?

    This issue is addressed in question ___.12(v)-1 of the March 11, 2010 Interagency Questions and Answers Regarding CRA (Q&A), which are available at http://bit.ly/CRA-qa External Site. (Question __.12(v)-1 appears on page 11653 of the Federal Register notice External Site.) In general, a loan to a nonprofit organization secured by nonfarm, nonresidential property for business or farm purposes is:

    • A small business loan if it is a business loan with an original loan amount of $1 million or less, or
    • A small farm loan if it is a farm loan with an original amount of $500,000 or less.

    In addition, as explained in the Consolidated Reports of Condition and Income (Call Report) Instructions for Schedule RC-C, a loan to a nonprofit organization that is collateralized by an oil or mining production payment would be considered a small business loan; however, all other loans to nonprofit organizations would generally be classified under Item 9 (Other Loans) and, therefore, would not be reportable as small business or small farm loans. Loans to nonprofit organizations that are not small business or small farm loans for Call Report and Thrift Financial Report (TFR) purposes may be considered as community development loans if they meet the regulatory definition of community development.

  2. Are small business loans secured by business assets and a personal residence taken as an abundance of caution reportable?

    This issue is addressed in Q&A ___.12(v)-3 (page 11653 of the Federal Register notice External Site). For Call Report filers, loans secured by nonfarm residential real estate that are used to finance small businesses are generally not included as “small business” loans unless the security interest in the nonfarm residential real estate is taken only out of an abundance of caution. (See Call Report glossary definition of Loans Secured by Real Estate.) The Q&A also highlights the potential consideration of these transactions as community development loans if they promote community development.

    Similarly, institutions that file TFRs may report certain nonfarm residential real estate depending on how the loan is classified for TFR purposes. Loans secured by nonfarm residential real estate to finance small businesses may be included as small business loans only if they are reported on the TFR as nonmortgage commercial loans. (See TFR Q&A No. 62. External Site)

    3. Mergers

  3. For banks that acquired failed institutions during 2010, does the purchasing bank report all the loans acquired through the acquisition, or does the purchasing bank ensure that only the 2010 loans and applications from the acquired institution are reported?

    Institutions should treat acquisitions of failed institutions as they would a typical merger or acquisition. Q&A ___.42-5 (page 11667 of the Federal Register notice External Site) provides specific data collection responsibilities for the calendar year of a merger and subsequent data reporting responsibilities. Institutions should not report data for loan activity that occurred prior to the year of acquisition. In a situation where neither a merger nor an acquisition of a branch is involved, and the institution purchases CRA-related loans in bulk from another entity (for example, from a failing institution), the purchasing institution must report those loans as purchased loans.

    Conversely, acquisitions of loan portfolios would be treated differently. In those circumstances, the acquired loans would be reported as purchased loans, as outlined in §228.42 of Regulation BB.

  4. For purchased CRA loans (Action “6”), do we report revenue as “NA”?

    The data collection and reporting requirements outlined in §228.42 of Regulation BB require an indicator of whether the loan was to a business or farm with gross annual revenues of $1 million or less. The “NA” response should be used only when the gross annual revenue information is not available or was not used in making the credit decision.

    5. Income

  5. When reporting revenue for CRA data, are the terms co-borrower, guarantor, and co-signer used interchangeably when determining whether to include revenue?

    Q&A ___.42(a)(4)-1 (page 11669 of the Federal Register notice External Site) discusses the revenue to be included in determining whether a small business borrower had gross annual revenues of $1 million or less. Generally, an institution should rely on the revenues that it considered in making its credit decision. The Q&A provides specific examples with affiliated business relationships. The Q&A further clarifies that revenue or income relied on from cosigners or guarantors that are not affiliates of the borrower should not be factored into the revenue determination.

  6. If the loan is to a start-up business but no actual revenue information has been provided, should revenue be recorded as “1”?

    Q&A ___.42(a)(4)-3 (page 11670 of the Federal Register notice External Site) clearly states that institutions should use the actual gross annual revenue to date (including $0 if the new business has had no revenue to date). Although a start-up business will provide the institution with pro forma projected revenue figures, these figures may not accurately reflect actual gross annual revenue and therefore should not be used.

  7. If a business is being purchased, may the acquiring bank rely on the purchaser's revenues when reporting data? How would the acquired entity's revenue be considered? Similarly, if an established business is starting a business, what revenue figures would be used?

    A number of scenarios may arise relating to startups and business acquisitions. Consistent with previous answers and Q&A _.42(a)(4)-3, an institution would generally use gross annual revenue for existing business entities and actual revenue for a start-up business that were relied on in making the credit decision. Because the Q&As do not address all possible scenarios, institutions should consult their primary regulator regarding the treatment of specific transactions.

  8. If cash flow analysis is performed using gross income, may an institution use “NA” in reporting gross annual revenue?

    Q&A ___.42(a)(4)-2 (page 11670 of the Federal Register notice External Site) discusses the reporting requirements for gross annual revenue for small business or small farm loans. If an institution that is not exempt from data collection and reporting does not request or consider revenue information to make the credit decision regarding a small business or small farm loan, the institution should enter the code indicating “revenues not known” on the individual loan portion of the data collection software or on an internally developed system. Loans for which the institution did not collect revenue information may not be included in the loans to businesses and farms with gross annual revenues of $1 million or less when reporting these data.

  9. When is it acceptable to use “unknown” for gross annual revenues when reporting CRA data?

    Q&A __.42(a)(4)-2 addresses circumstances in which no revenue information is requested or considered in making the credit decision. In these instances, institutions should enter the code indicating “revenues not known.” Examples of these transactions include loans secured by certificates of deposit or savings, which often do not require revenue information in the credit decision.

    10. Loan Location

  10. What is the most appropriate way to establish the loan location, for example, if the loan is secured by real estate and there is an alternative business location? Can we report the location of the collateral as the reported loan location?

    Q&A ___.42(a)(3)-1 (page 11669 of the Federal Register notice External Site) addresses the loan location to be recorded. Specifically, an institution should record the loan location by either the location of the small business borrower's headquarters or the location where the greatest portion of the proceeds are applied, as indicated by the borrower. A loan location based solely on the collateral location would be inappropriate.

    11. Dodd-Frank Act

  11. Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is effective on the transfer date for the Consumer Financial Protection Bureau (CFPB), which is July 21, 2011. Does this mean that the small business data requirements in §1071 of the act are effective on this date as well? In what reporting year will the new regulations take effect?

    Although §1071 is effective on the designated transfer date of July 21, 2011, this section of the act also explains that the CFPB has responsibility for prescribing rules and issuing guidance for implementing the small business data collection requirements. Therefore, the act's new small business data collection requirements will not begin until the CFPB publishes final implementing regulations, which will identify an effective date. The CFPB published a letter discussing this issue, which is available online.

CONCLUSION

As referenced in this article, institutions should rely on existing HMDA and CRA data reporting rules and guidance for ensuring compliance with reporting requirements. Specific issues and questions about consumer compliance matters should be raised with the appropriate contact at your Reserve Bank or with your primary regulator.

RESOURCES

Additional resources for CRA and HMDA data reporting are available on the Outlook website.