HMDA Hmmm? Reporting Data Points as “Not Applicable”
Like many of you, I have been busy, busy, busy attending NAFCU’s Virtual Regulatory Compliance School. The virtual experience was new for me (and I bet most of you), but the conference was a great success. I learned so many new things, but studying to be an NCCO is no easy task. However, after many long evenings of studying, I get to update my signature line to: Janice Ringler, NCCO!
Congratulations and welcome to all the new NCCOs!
On July 28, 2020, CFPB released its fourth update to its HMDA FAQs, updating question #7 in the Ethnicity, Race, and Sex section, and questions #1 and #2 in the Multiple Data Points section. The FAQ’s attempt to clarify when combined loan-to-value (CLTV), debt-to-income ratio (DTI), income, and property value needs to be reported on the LAR. The FAQs state that all of these fields must be reported “if they were a factor relied on in making a credit decision—even if the data was not the dispositive factor.” The FAQs set a “relied on” standard to determine when the credit union must report the data for income, credit score, DTI, CLTV, and property value. However, Regulation C allows credit unions to report these data points, along with credit score and credit score model, as “not applicable.” A frequent question we get from credit unions is:
If these data points must be reported if they are “relied on in making a credit decision”, in what instances would these fields be reported as “not applicable?” I have explored some possible scenarios below.
Non-traditional credit
Some credit unions allow for non-traditional credit underwriting for members who do not have a credit history and score, possibly due to age or being a foreign national. The credit union may require the member to provide 12-months of bill payments (rent, phone, etc) to show the member is capable of making timely payments.
Section 1003.4(a)(15) states that a credit union must report the credit score and scoring model the credit union relied on in making a credit decision. The official interpretation states “if a [credit union] makes a credit decision without relying on a credit score for the applicant or borrower, the [credit union] complies with § 1003.4(a)(15) by reporting that the requirement is not applicable.”
If the credit union made the credit decision based solely on past payment history and other types of non-traditional credit, and did not rely on a credit score, the regulation requires the credit union to report “not applicable.”
Bridge loans/Swing Loans
The NCUA exam manual defines a bridge loan as “a temporary loan generally made to borrowers who need financing between the purchase of a new home and the sale of an old home.” Often, credit unions will not look at a borrower’s income or assets when underwriting these loans because of the short maturity term, and instead rely on the value of the property that will eventually be sold.
When reporting income, section 1003.4(a)(10)(iii) states that the credit union must report “the gross annual income relied on in making the credit decision,” “except for covered loans or applications for which the credit decision did not consider or would not have considered income.” When reporting DTI, the official commentary to section 1003.4(a)(23) states if a credit union “made a credit decision without relying on the [member’s] debt-to-income ratio, the [credit union] complies with § 1003.4(a)(23) by reporting that the requirement is not applicable since no debt-to-income ratio was relied on in connection with the credit decision.”
In a situation in which a credit union does not rely on income or DTI, such as by not calculating, reviewing, or considering income and/or DTI in the underwriting decision, the rule requires reporting “not applicable” for those data points.
VA IRRRL
Chapter 6 of the VA Lender’s Handbook states that for VA Interest Rate Reduction Refinancing Loans (IRRRL) the credit union does not need to re-underwrite the loan, nor does it need any credit/income documentation. An IRRRL is a streamlined refinancing of a VA loan to lower the interest rate or to shorten the repayment period. In originating an IRRRL, if a credit union does not obtain income documentation, obtain a credit report, or calculate the DTI, as noted above, HMDA would require the credit union to report those data points as “not applicable.”
Also, the VA IRRRL does not require a credit union to obtain an appraisal. The official commentary to sections 1003.4(a)(24) and (a)(28) uses the same “relied on” standard for CLTV and property value, respectively, as income, credit score, and DTI. If the credit union is not relying on a property value or CLTV in its credit decision (such as to determine pricing or safety and soundness) then these data points would be reported as “not applicable” for.
These are just a few common situations in which a credit union would not have “relied on” a factor in its credit decision and therefore must report “not applicable” on their HMDA LAR. The credit union may want to review its underwriting procedures and loan programs to ensure that these HMDA data points are being reported properly.