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To Collect or Not Collect

By Jon Tavares, JD, LLM, CRCM, NCCO 4 Oct 2017

A frequent question we get is whether a financial institution must collect government monitoring information (GMI) in accordance with Reg. B, HMDA, or both. Reg. B generally prohibits a creditor from collecting information on an applicant's race, color, religion, national origin, or sex. Of course, as with any rule, there are exceptions. One exception to the general rule is for applications for credit primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence, where the extension of credit will be secured by the dwelling. In such cases, the creditor must request the applicant's ethnicity, sex, marital status, and age. Another exception in Reg. B permits a creditor to collect any information required by a Regulation, order, or agreement issued by, or entered into with, a court or an enforcement agency to monitor or enforce compliance with federal or state statutes or regulations, including HMDA. HMDA requires that a creditor collect information on all applications for home purchase loans, home improvement loans, and refinancings. The information that HMDA collects regarding an applicant differs slightly from Reg. B. HMDA requires the collection of the applicant's ethnicity, race, and sex. Beginning on January 1, 2018, in addition to the information on ethnicity and race, HMDA will require creditors to permit the applicant to identify a subcategory (e.g. under the Hispanic or Latino category, an applicant may also select Mexican, Puerto Rican, Cuban, and/or Other Hispanic or Latino). Reg. B does not require this disaggregated ethnicity and race information. Creditors will also need to begin collecting the applicant's age. For consumer purpose loans, HMDA will require GMI collection for all dwelling secured loans, not just for home purchase loans, home improvement loans, and refinancings (GMI for commercial loans will be limited to home purchase loans, home improvement loans, and refinancings). Further, HMDA provides that a creditor who is not required to collect this information may do so voluntarily and HMDA provides that some creditors may be required to collect this information for closed-end loans but not open-end loans, or vice versa. Even though the information required for Reg. B is different from that required by HMDA, a new comment is added that makes it clear that a creditor who is required to collect GMI under HMDA may satisfy the Reg. B GMI collection requirement by collecting GMI in accordance with HMDA. While Reg. B requires a creditor to collect marital status, because HMDA does not, if a creditor collects GMI in accordance with HMDA and does not collect the applicant's marital status, they have still complied with Reg. B's GMI collection requirements.

 

That's fine and dandy, if you have to collect GMI for all HMDA covered loans. The exception in Reg. B is for information you are required to collect under HMDA, not information you are permitted to collect under HMDA. What do you do if you have to collect GMI on closed-end loans but not open-end loans? What about dwelling secured loans that are not for home purchase, home improvement or refinancing where you are not sure at application whether it will be for commercial or consumer purpose? What about loans for which you voluntarily collect HMDA GMI? Fortunately, the CFPB issued a final rule (published in the Federal Register on Monday, October 2, 2017) that helps clarify this a little bit, but as always, some questions remain.

 

For applications primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence that will be secured by the dwelling, the final rule will permit creditors to collect the applicant's GMI using either the aggregate ethnicity and race categories or disaggregated ethnicity and race categories and subcategories required by HMDA. Note that this is optional; creditors that are not required to collect GMI under HMDA do not need change their GMI collection practices but they may do so. This is important because the Uniform Residential Loan Application (URLA) will be changing to include the disaggregated ethnicity and race information. A creditor that is not subject to HMDA may use the new URLA and still comply with Reg. B.

 

For loans that are not subject to Reg. B's GMI collection requirements, the Rule permits creditors that are subject to HMDA, that have been subject to HMDA within the past five years, or who may soon be subject to HMDA to collect the HMDA GMI under certain circumstances. This is where it gets tricky, so stay with me here for a second:

  •  If you are a creditor subject to HMDA but are exempt from reporting closed-end loans because you did not meet the closed-end threshold (i.e. you did not originate 25 or more closed-end, dwelling-secured loans in both of the previous two years), you may collect HMDA GMI if you will submit HMDA data concerning closed-end loans this year or if you have done so in the previous five years;
  •  If you are a creditor subject to HMDA but are exempt from reporting open-end loans because you did not meet the closed-end threshold (i.e. you did not originate 500-until 2020 when it reverts to the 100-loan threshold-or more open-end, dwelling-secured loans in both of the previous two years), you may collect HMDA GMI if you will submit HMDA data concerning open-end loans this year or if you have done so in the previous five years;
  •  If you are not a HMDA reporter but you have reported HMDA data within the past five years, you may collect HMDA GMI;
  •  If you have exceeded the applicable threshold for closed-end loans, open-end loans, or both for one year, you may collect HMDA data in the second year;
  •  If you are a HMDA reporter or you have reported HMDA data in the previous five years, you may collect HMDA GMI for a dwelling-secured commercial loan that is not a home purchase loan, home improvement loan; or a refinancing;
  •  If you are collecting HMDA GMI for an applicant or first co-applicant, you may collect HMDA GMI for any additional co-applicants if any of the above circumstances apply.

Let's take a closer look at a couple of these circumstances. The second bullet point permits creditors who are exempt from HMDA reporting for open-end lines of credit to collect the HMDA GMI if it will report that information or if it has reported HMDA GMI for open-end lines within the past five years. Here's the rub-until January 1, 2018, reporting of open-end lines of credit was optional under HMDA. This creates an issue for the institutions that are right on the line. Silly Example Bank originated 500 HELOCs in 2016, are on pace for 500 HELOCs this year, have not reported on HELOCs in the past, and have not been collecting GMI on HELOCs. If they stay on target and hit 500 HELOCs this year, they will have to collect GMI for HELOCs next year, but they will not have to collect HMDA GMI on HELOCs if they do not hit 500 this year. So how do they train their loan officers to collect GMI? They essentially have two options: have different GMI collection procedures for closed- and open-end applications; or collect HMDA GMI beginning in 2018 and report in 2019. After they report in 2019, assuming that they haven't passed the threshold, they do not need to report on HELOCs again until 2024 (but keep in mind that the threshold changes in 2020) but they may continue to collect the HMDA GMI.

 

The fourth bullet raises a question as well. What does a creditor do if they collect HMDA GMI in the second year after crossing the threshold in the first year? Going back to the example above, Silly Example Bank originated 499 HELOCs in 2016 but will originate 500 or more this year, again they have never reported on HELOCs and have not been collecting HMDA GMI on HELOCs. Next year they will not have to collect HMDA GMI on HELOCs because they did not meet the threshold in each of the previous 2 years but if they originate 500 or more HELOCs in 2018, they will need to begin collecting HMDA GMI on HELOCs in 2019. So, either they train their loan officers to not collect one year and to collect the next (which could be very confusing) or they go ahead and begin collecting HMDA GMI in 2018. But what happens to Silly Example Bank if in 2018 they have a bad year and originate less than 500 HELOCs? We're right back where we started. They'll have to either report on HELOCS for 2018 or not collect HMDA GMI in 2019.

 

As you can see, the final rule helps answer the question of whether to collect or not collect HMDA GMI, but it still leaves some questions unanswered. Perhaps 'tis nobler in the mind to suffer the slings and arrows of outrageous fortune.

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