ICYMI: NCUA’s Recent HMDA Observations
Greetings Compliance Friends!
In case you missed it, NCUA addressed its Home Mortgage Disclosure Act (HMDA) review observations in the Federal Reserve’s recent 2019 Fair Lending Interagency Webinar. In the webinar, NCUA provided a brief update of its activities from 2019 examinations. NCUA uses HMDA data to assist in identifying and enforcing anti-discrimination rules. So far this year, NCUA appears to have followed its 2019 supervisory priorities by reviewing for good faith efforts to comply with the new HMDA reporting requirements. It is our understanding that NCUA will conduct more expansive fair lending reviews in 2020, in part because collection of the new data points enables the agency to conduct greater analysis of possibly discriminatory lending patterns since it’s now possible to control for more variables. Accordingly, this update provides valuable insight into the activities from recent examinations that NCUA found to be problematic. In the webinar, NCUA identified issues in the areas of reporting originations, reporting preapproval requests, as well as inconsistencies in reporting withdrawn applications and race/ethnicity/sex information.
Failure to Report Originations. When it comes to appropriately reporting loan originations, NCUA found the most issues in cases where a third party plays a role in a credit union’s lending process. According to Regulation C (which implements HMDA), if more than one party is involved in the origination of a loan, the party making the credit decision is required to report the loan. See, 12 CFR Part 1003, Supp. I, Comment 4(a)-2. Whether the loan eventually closes in the credit union’s name is not relevant for HMDA reporting purposes. Although such violations appear to be technical in nature, NCUA still views this as a major issue. As explained in the webinar, systemic HMDA errors can make the data that is collected unreliable. If the data is unreliable, it cannot be used for its intended purpose, which is to help NCUA track trends and analysis. In order to ensure that originations are properly reported, NCUA recommends additional oversight over the HMDA reporting process, especially with regard to third parties who collect data for more than one financial institution but defer the credit decision-making authority to the credit union.
Reporting Preapproval Requests. In its HMDA reviews, NCUA also found several reporting errors where prequalification applications were erroneously reported as preapprovals. Under Regulation C, preapproval requests are reportable where a credit union’s program analyzes the applicant’s creditworthiness and determines whether to issue a written commitment to extend a home purchase loan, subject to certain conditions. In contrast, prequalification requests are not considered applications under Regulation C. . In the webinar, NCUA explains that a prequalification request is a request for a preliminary determination of whether a prospective applicant would likely qualify for an extension of credit or a request to determine how much credit the prospective applicant may qualify for under the credit union’s standards. Since such applications do not evaluate the creditworthiness of the applicant, fewer data points are collected on the application, and erroneously reporting such applications decreases the reliability of the data set according to NCUA. See also, 12 CFR Part 1003, Supp. I, Comment 2(b)-2.
Withdrawn Applications. NCUA also observed issues with regard to reporting applications as “withdrawn” that were not expressly withdrawn by the applicant prior to making a credit decision. Under section 1003.4(a)(8)(i)(B), credit unions are required to report whether an application for a covered loan that did not result in an origination was approved but not accepted, denied, closed for incompleteness, or withdrawn by the applicant. The official commentary explains that a credit union is to report the application as withdrawn only in the following circumstances:
· When the application is expressly withdrawn by the applicant before a decision is made to deny the application, to approve the application, or to close the file for incompleteness; or
· When the credit union provides a conditional approval specifying underwriting or creditworthiness conditions, and the application is expressly withdrawn by the applicant before the applicant satisfies all of the conditions.
See, 12 CFR Part 1003, Supp. I, Comment 4(a)(8)(i)-5.
NCUA examiners found that applications were erroneously reported as withdrawn in situations where credit union employees would verbally inform a prospective borrower to withdraw their application because it is not likely to be approved. NCUA strongly discourages such activity as it affects the accuracy of HMDA data in addition to potentially violating Regulation B’s requirement to provide an adverse action notice in such circumstances. NCUA reiterates that when a prospective borrower withdraws an application after being informed that their request will be denied, the credit union should report the application as a denial and send a notice of adverse action.
Reporting Inconsistencies. HMDA now permits an applicant to self-report up to five racial and ethnic categories/subcategories on an application. Subcategories are generally more detailed than the primary categories. It appears that NCUA examiners compared self-reported information from loan applications to information from a credit union’s loan activity registry (LAR) for consistency. Examiners identified inconsistencies in the following ways:
· Instances where a credit union’s LAR did not match information that was entered on the application by the applicant. For example, an applicant that self-reported as black or African-American on the application was recorded as white in the LAR.
· Instances where an applicant reported information for a primary category and one or more subcategories, but the credit union only reported the primary category on the LAR. For example, an applicant that reported Asian and Chinese on the application, however, the LAR only reported Asian.
· Instances where an applicant reported belonging to several categories or subcategories, but the credit union only reported the first category.
· Instances where the credit union reported a sex that was different from the application.
· Instances where the credit union’s Nationwide Mortgage Licensing System and Registry (NMLSR) ID were erroneously reported instead of the loan originator’s NMLSR ID. In instances where the loan originator is not required to obtain or has not been assigned an NMLSR ID, the credit union is required to report N/A, as opposed to the credit union’s ID. See, 12 CFR Part 1003, Supp. I, Comment 4(a)(34)-2.
A significant number of these types of errors could evidence a larger mapping problem and invite further scrutiny from examiners. NCUA also mentioned that the appropriate use of automated collection and reporting tools may help limit many of these types of errors.
Overall, NCUA attributes HMDA reporting errors to weaknesses in a credit union’s compliance management system. NCUA further interprets a failure to understand when and how to report covered applications as a reflection of poor oversight and recommends additional training, monitoring of the collection process and corrective action to address deficiencies. Check out the full webinar for a greater summary of recent fair lending enforcement activities and the primary risk areas that financial regulators will focus on in the near future. The following resources may also be helpful:
NAFCU’s Advocacy Team is currently polling our members on exam-related issues, including areas of focus, consistency, and pain points. The deadline for the survey is this Friday, November 1. Every survey submission helps us provide feedback to NCUA and to advocate for a fairer process for all credit unions.
Click here to take the survey. Thanks for your participation!