How to avoid most common HMDA violations
The Home Mortgage Disclosure Act (HMDA) requires hundreds of credit unions to collect member monitoring information and report the information to the government. The collection and reporting requirements are very specific as to the types of loans that you must report and the manner in which they are to be reported. The reason the law is so exacting relates to the overall purpose and objective behind HMDA reporting - to allow the government to determine the presence or absence of illegal discrimination. Recently, Credit Union Times reported on an analyses of HMDA data that showed that blacks and Hispanics have significantly higher denial rates than do white consumers. The Association of Community Organizations for Reform Now (ACORN) reported a study of 1998 HMDA data that showed financial institutions (which includes credit unions) denied mortgages to blacks and Hispanics respectively 2.17 and 1.83 more times than to whites, and the increasing size of this gap over the years indicates the cause as racial discrimination and not creditworthiness. While there is much disagreement over whether HMDA provides a valid indication of illegal discrimination, it is easy to see that HMDA results are most useful when financial institutions correctly report the required information. Faulty data from financial institutions leads to misleading results when the government compiles the HMDA information. Consequently, the government is becoming more diligent in verifying whether financial institutions, including credit unions, are complying with HMDA. This article first explains how to know whether your credit union is covered by the HMDA reporting requirements. Next I describe the most common compliance violations cited by federal regulators for HMDA. I also explain the most common HMDA reporting mistakes you should look for in your HMDA data. Finally, I include the steps your credit union can take to ensure that your HMDA data is accurate before you submit it to the regulator. HMDA Coverage Your credit union is subject to HMDA reporting if you meet the following requirements: * Total assets of more than $30 million, * Have a home or branch office located in a metropolitan statistical area (MSA) as of December 31 of the preceding year, and * Made at least one first lien home purchase loan (including refinancings) on one- to four-family dwellings (including mobile homes, condominiums, and rental and vacation homes) in the preceding year. If you meet these requirements, then your credit union is required to compile and report loan data on the loan/application register (LAR). Credit unions are required to report their data about originations, applications, and purchased loans for each calendar year to the government by March 1 of the following year. The data to be reported includes the following: * Loan application and/or loan number * Application date * Loan type * Loan purpose * Owner/occupancy status of the property securing the loan * Amount of the loan or application * Type of action taken and the date of the action * Location of the property that is securing the loan by MSA, state, county, and census tract * Race and sex of the applicant and the income that he or she is relying on to process the loan application * Type of entity purchasing a loan that was originated or purchased and then sold by the credit union in the same calendar year * Reason a loan application was denied (optional) Sounds simple enough. However, errors occur throughout this process. Federal Regulators cite the following violations most often for HMDA: * Leaving coapplicant race and sex fields blank when there is only one applicant (use codes 8 and 4); * Originated loans not reported by the correct entity making the credit decision (e.g., secondary market loans); * Incorrect property location codes; * Incorrect or missing respondent ID, agency code, or tax ID number; * Monthly income reported instead of gross annual income; * Failure to report all HMDA applications (unsecured home improvement loans that are classified as such by your credit union; construction/permanent loans; Avoiding Mistakes The following are common errors to look for before your credit union submits HMDA data: * Incorrectly reporting applications as withdrawn. In order to report the action taken on HMDA as withdrawn, the loan must have been expressly withdrawn by the member. * Incorrectly reporting property location. For example, when a home purchase loan is secured by one dwelling for the purpose of purchasing another dwelling, you should report the property location for the home that is used as collateral, not the property being purchased. * Incorrectly reporting applicant income. For example, you should report the income used to make your credit decision, and make sure the file is clear about what that amount is, so examiners can easily understand your logic. * Not reporting construction loans that become permanent loans. You are not required to report short-term financing. This is because the Federal Reserve Board expects that the lender making the permanent financing will record the loan and does not want the loan to be recorded twice. However, suppose you make a construction loan and the permanent financing falls through. If you extend the construction loan and require payments with a balloon of say, three years, then examiners will consider this a permanent loan. Concentrate on three things before submitting your HMDA-LAR data: * Syntax errors. The first review by regulators is for syntax errors, which are errors that prevent applications from being uploaded to the database. Generally, syntax errors result from the format of your data. To avoid syntax errors, be certain your data diskette or tape is in the format requested; include all information requested in the transmittal; double-check each number in the transmittal; verify that the action taken date is always the year for which you are filing; be certain that spaces for application numbers are not left blank; double-check that no application numbers are duplicated. * Validity errors. Validity errors occur when applications generate incorrect information. When regulators find a validity error, your application has a problem that you will need to fix. The best way to catch validity errors is to use an automated HMDA system that seeks them out. No matter how diligent your approach, it is difficult to catch validity errors in a manual system or in an automated loan/application register that cannot review for errors. Here are some common validity errors: - Census tract, metropolitan statistical area, state, or county codes are not valid. - A required field, such as action taken, is not complete. - An action taken date is prior to the date the application was received. - A reason for denial is shown, but the application was not denied. * Quality edits. Quality edits should be researched thoroughly when you receive the edit reports. Many of them will require a response or explanation, but not changes to your data. Quality edits are not necessarily errors. In fact, you could receive a list of 100 quality edits and have no errors. These edits may flag your credit union in general or any individual loan that appears to be unreasonable. Typically, quality edit flags appear if: * Your applications approved figure is greater than 95%; * Your applications approved but not accepted figure is greater than 15% of your total applications; * Your number of applications in this filing year increased or decreased by more than 25% from the previous year; * Applicant race is 8 (N/A), and applicant sex is other than 4 (N/A). If your credit union cannot obtain race information, it should not be able to obtain sex information. A Mouse Click Away Remember that HMDA information is public information. Viewing of your HMDA data is not just limited to the government. HMDA data is available for the public to review in a couple of ways. First, a member can visit the credit union and request to see your HMDA report. Second, and more importantly, the Internet has made it very easy for anyone to view your credit union's HMDA data. All you need to do is log on to the FFIEC's website and enter the HMDA database. Each credit union's HMDA data is on the Web site. The easier it is to gain access to HMDA data, the more people will look at it and make assumptions based on the data. Consequently, you need to ensure that your HMDA data is accurate as it is now out there for everyone to see with a only couple of mouse clicks.