Historically, commercial lenders paid little attention to the data collection and reporting requirements of the Home Mortgage Disclosure Act.1
Enacted in 1975, the purpose of HMDA is to provide the public with loan data that can be used to assess how financial institutions are serving the housing needs of their communities. Not something on commercial lenders’ radar—until now.
From 1975, fast forward to Oct. 15, 2015: The Consumer Financial Protection Bureau released a 796-page final rule amending Regulation C2, which implements HMDA. In brief, the final rule is designed to bring certain commercial loan transactions under the purview of HMDA’s reporting requirements.
What kinds of commercial loans are considered reportable? The following is a breakdown of the final rule and its impact on commercial lenders. [Editor’s note: Due to the technical nature of this matter, footnotes to guide the reader to appropriate authorities are provided.]
Basics of amended Regulation C
The final rule includes changes to Regulation C in four broad areas:
1. Types of institutions required to collect and report HMDA data.
2. Types of transactions and applications subject to collection and reporting requirements.
3. The data that must be collected and reported.
4. The method and frequency of reporting data and making data available to the public.
Types of institutions covered
The major change to HMDA’s institutional coverage criteria is the “uniform loan-volume threshold,” which will apply to both depository and non-depository institutions effective on Jan. 1, 2018.
These institutions are covered by Regulation C if, in addition to other existing criteria3, they originated at least 25 covered, closed-end mortgage loans, or 100 covered, open-end lines of credit in each of the previous two calendar years.4 Although the threshold becomes effective for all institutions on Jan. 1, 2018, a portion of the threshold section—exemption from coverage for those who originated fewer than 25 closed-end mortgage loans in each of the past two years—becomes effective for depository institutions on Jan. 1, 2017, a year earlier.
Upon first glance, it would appear that the uniform loan-volume threshold lets financial institutions off the hook if they engage in a fairly small quantity of closed-end mortgage loans or open-end lines of credit. However, this assumption is not entirely accurate.
Although the final rule created a uniform loan-volume standard for all institutions, it also eliminated two existing coverage criteria for non-depository institutions. As a result, more non-depository institutions are potentially covered by Regulation C.
Specifically, the final rule removes the existing coverage requirement that, in the preceding calendar year, a non-depository institution have originated home purchase loans (including refinance loans) equaling at least: (a) 10% of the institution’s origination volume in dollars; or (b) $25 million.
In addition, the final rule removes the existing coverage requirement that a non-depository institution have: (a) total assets of more than $10 million as of the preceding Dec. 31, or (b) originated at least 100 home purchase loans (including refinance loans) in the preceding calendar year.”5
By removing these coverage thresholds for non-depository institutions, the final rule increases the number of non-depository institutions required to collect and report data. On the other hand, the rule will decrease the number of depository institutions covered, because the rule adds the uniform loan-volume threshold to the existing coverage criteria for those institutions.
Commercial transactions/applications not covered
First, the good news. The following points concern those commercial, closed-end mortgage loans or open-end lines of credit that are not covered by HMDA6:
1. Ag exception. The final rule now expressly excludes loans or lines of credit to be used primarily for agricultural purposes. This includes a lending transaction secured by a dwelling (e.g., a farm) that is located on real property that is used primarily for agricultural purposes.7
2. No dwelling involved. Commercial purpose loans that are not secured, in whole or in part, by a “dwelling.”8
Example: A closed-end mortgage loan or an open-end line of credit in which funds will be used primarily to improve or expand a business, e.g., to purchase a warehouse, business equipment, or inventory.
3. No collateral, no HMDA. Unsecured loans or lines of credit are no longer covered, even if made for home improvement purposes.9
4. Temporary financing. Consider the following examples:10
Scenario 1: Lender A agrees to extend credit in the form of a bridge loan to finance Borrower B’s down payment of an apartment building. Borrower B intends to pay off the bridge loan with funds from the sale of an existing condominium building and then to obtain permanent financing for the apartment building from the same lender. This type of bridge loan is excluded from HMDA as temporary financing under § 1003.3(c)(3).
Scenario 2: In contrast, consider the following: Lender Y extends credit to Borrower Z to finance construction of an assisted living facility. The loan will automatically convert to permanent financing with Lender Y once the construction phase is complete. Under § 1003.3(c)(3), this loan is not designed to be replaced by permanent financing and thus, does not fall under the temporary financing exclusion.
5. Raw land deals. Loan or line of credit secured by a lien on unimproved land.11 However, the exemption does not apply if the institution knows—based on information received from the applicant/borrower at the time the application is received or the credit decision is made—that the loan or credit line proceeds will be used within two years after closing or account opening to construct a dwelling on, or to purchase a dwelling to be placed on, the land.
6. Bank as fiduciary. Lending transaction where the financial institution acts in a fiduciary capacity, for example, a trustee.12
7. Investment transactions. Purchase of an interest in a pool of loans or lines of credit, such as mortgage-participation certificates, mortgage-backed securities, or real estate mortgage investment conduits.13
8. Strategic acquisitions. Purchase of loans or lines of credit as part of a merger or acquisition, or as part of the acquisition of all of the assets and liabilities of a branch office.14
9. Fractional purchases. Purchase of a partial interest in a loan or a line of credit.15
Types of transactions/applications covered
The more difficult task is to determine which commercial lending transactions do trigger HMDA’s data collection and reporting requirements.
Regulation C has always tied collection and reporting requirements to consumer loans based on the purpose of the loan, i.e., if a loan is for a home purchase, home improvement, or refinancing. With respect to business and commercial loans, the final rule retains this purpose-based criteria—but also includes a new collateral-based test.
Thus, under the final rule, data must be collected and reported on a business or commercial loan or line of credit if that loan or line of credit is: (1) secured by a dwelling; and (2) made for a home purchase, home improvement, or refinancing.16
Because of the addition of the collateral-based test, the following definitions are critical in determining whether a commercial transaction is subject to HMDA:
1. “Dwelling” is defined as a “residential structure, whether or not attached to real property” and includes, but is not limited to, “a detached home, an individual condominium or cooperative unit, a manufactured home or other factory-built home, or a multifamily residential structure or community.”17
Examples: An apartment building, a mixed-use property (e.g., a building containing both apartment units and retail stores) where the primary purpose of such property is residential, or an assisted living property.
2. “Home purchase” is “a loan that is for the purpose of purchasing a dwelling.”18
Example: A loan or line of credit to purchase an apartment building that originated in the commercial loan department of a lender.
3. “Home improvement” is defined as “a loan that is for the purpose of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which the dwelling is located.”19
Example: A loan to make repairs to a mixed-use property containing condominium units and retail space.
4. “Refinancing” is defined as “a new, dwelling-secured debt that satisfies and replaces an existing dwelling-secured debt obligation by the same borrower.”20
Example: Replacing a closed-end mortgage loan with an open-end line of credit secured by a multifamily dwelling or a single-family investment property.
The official comments to the amended Regulation C also help to further flesh out the various types of commercial lending scenarios that would trigger the HMDA reporting requirements, including, but not limited to, a commercial/business purpose loan:21
1. Secured by a dwelling that is intended to be used by the borrower as an investment property.
2. Secured by a multifamily residential structure or community—e.g., apartment, cooperative unit, or condominium building/complex, or a manufactured home community. However, there are some caveats with respect to what constitutes a “dwelling” for collateral purposes. Here are two examples:22
Scenario 1: Developer A applies with Lender B for a commercial loan to develop a community of manufactured homes. As part of the application, Developer A proposes to use as collateral the land on which a manufactured home community is located, and not the actual manufactured homes. Lender B ultimately approves the loan application.
Question: Must Lender B collect and report data on this loan under HMDA’s final rule?
Answer: Yes. For a manufactured home community, a lien on the real estate itself triggers HMDA’s reporting requirements. There is no need to put up the actual manufactured homes as collateral.
Scenario 2: To develop a condominium building, Borrower applies for a loan from Senior Lender. Senior Lender’s loan will be secured by all of the anticipated condo units.
Borrower also applies for a loan with Junior Lender for additional financing, which will be secured by either an assignment of leases and rents or the common spaces in the building.
Question: Which of these lenders must collect and report data under the final rule?
Answer: Only Senior Lender has a HMDA-reportable loan under the final rule.
Official Comment 2(f)-2 clarifies that a commercial loan for multifamily residential structure is not considered secured by a dwelling unless it is secured by individual dwelling units. Loans secured only by an assignment of rents or dues or by the common areas of a multifamily residential structure are not dwelling-secured loans, and therefore are not reportable under HMDA.
3. Secured by a mixed-use property where the financial institution making the loan determines that the primary use of the property will be residential.
4. Secured by a dwelling that has medical or services components, e.g., assisted living homes, retirement homes, nursing homes, etc.
5. Refinancing of a commercial/business purpose loan with the same/original borrower that is partially secured by the borrower’s residential dwelling.23
Now that we know which financial institutions must comply with HMDA and what types of commercial loan scenarios are covered, a final question remains: What data must be collected and how?
The final rule requires the collection of numerous data points on covered loans, applications for covered loans, and purchases of covered loans.24 The rule includes a blend of data points that were modified, unchanged, and wholly new requirements, all of which can be grouped into four broad categories:
1. Information about applicants, borrowers, and the underwriting process, such as age, credit score, debt-to-income ratio, and automated underwriting system results.
2. Information about the property securing the loan, such as construction method, property value, and additional information about manufactured and multi-family housing.
3. Information about the features of the loan, such as additional pricing information, loan term, interest rate, introductory rate period, non-amortizing features, and the type of loan.
4. Certain unique identifiers, such as a universal loan identifier, property address, loan originator identifier, and a legal entity identifier for the financial institution.
Some of these items will be reported as “not applicable” (NA) for commercial loans based on the characteristics of the loan. These items include:25
1. When the applicant or co-applicant is not a natural person: Race, sex, and ethnicity and whether collected on the basis of visual observation or surname; age; income; credit score, and name and version of scoring model; debt-to-income ratio; and automated underwriting system.
2. Income when the covered loan is secured by a multifamily dwelling.
3. Debt-to-income ratio when covered loan is secured by a multifamily dwelling.
4. When the covered loan is not subject to Regulation Z: rate spread; HOEPA status; total loan costs (even if subject to Regulation Z, NA is reported if a disclosure is not provided pursuant to 1026.19(f), 1003.4(a)(17)); total points and fees (even if subject to Regulation Z, NA is reported if a disclosure is not provided pursuant to 1026.19(f), 1003.4(a)(17)); origination charges; discount points; lender credits; and prepayment penalty term.
5. Manufactured home secured property type and manufactured home land property interest when the property identified is a manufactured home community that is a multifamily dwelling.
6. Mortgage loan originator’s Nationwide Mortgage Licensing System and Registry Identifier, in instances where the mortgage loan originator is not required to obtain and has not been assigned an NMLSR ID, e.g., in connection with a commercial loan.
In addition, the final rule includes several other data points, e.g., the amount of lender credits and whether the loan is for a business or commercial purpose.
Importantly, the final rule also requires financial institutions to also report whether ethnicity, race, or sex information was collected on the basis of visual observation or surname when an application is taken in person and the applicant does not provide the information.26
For transactions where ethnicity and race information is provided by the applicant or borrower, the final rule requires financial institutions to permit applicants and borrowers to self-identify using disaggregated ethnic and racial categories, e.g., “Mexican,” “Puerto Rican,” “Cuban,” or “Other.”
However, when race and ethnicity data is completed by the financial institution, the final rule retains the current requirements, requiring financial institutions to provide only aggregated ethnic or racial data, e.g., “Hispanic or Latino.”
Lenders may not yet have a HMDA data collection process in place that can collect the requisite data for covered commercial transactions by January 2018. It is important for lenders to begin the process now of understanding how each line of business is affected by HMDA’s final rule, impacts on staff, technology, and existing operational processes. A lender’s biggest implementation hurdle will be time; and there’s no time like the present.
About the author
Sheila deLa Cruz is an attorney with the Compliance Services section of Wolters Kluwer.
1 12 U.S.C. 2801 et seq.
2 12 CFR 1003.
3 A helpful guide regarding existing criteria for types of covered institutions can be found on the CFPB’s website at http://files.consumerfinance.gov/f/201512_cfpb_hmda_small-entity-compliance-guide.pdf
4 12 CFR 1003.2 (financial institution)(1); see also 12 CFR 1003.2(g)(1), (2).
5 12 CFR 1003.2(financial institution)(2)(i), (iii).
6 12 CFR 1003.3.
7 12 CFR 1003.3(c)(9).
8 12 CFR 1003.3(c)(10); see Official Comment 3(c)(10)-4. The definition of the term “dwelling” is provided later in this article.
9 12 CFR 1003.3(c)(2).
10 12 CFR 1003.3(c)(3); see also Official Comments to 12 CFR 1003.3(c)(3) for the following scenarios. These Official Comments also provide other examples on the temporary financing exclusion.
11 12 CFR 1003.3(c)(2).
12 12 CFR 1003.3(c)(1).
13 12 CFR 1003.3(c)(4).
14 12 CFR 1003.3(c)(6).
15 12 CFR 1003.3(c)(8).
16 12 CFR 1003.3(c)(10).
17 12 CFR § 1003.2; see also Official Comments to 12 CFR 1003.2(f) for additional information and examples.
18 12 CFR 1003.2(j); see also Official Comments to 12 CFR 1003.2(j) for additional information.
19 12 CFR 1003.2(i); see also Official Comments to 12 CFR 1003.2(i) for additional information.
20 12 CFR 1003.2(p); see also Official Comment 3(c)(10)-3(i).
21 See Official Comments to 12 CFR 1003.2(f).
22 See Official Comment 1003.2(f)-2.
23 See Official Comments to 12 CFR 1003.2(p) for additional information.
24 12 CFR 1003.4(a).
25 12 CFR 1003.4; see also related Official Comments to 12 CFR 1003.4 for additional information.
26 12 CFR 1003.4(a)(10)(i).