Consumer Compliance Outlook: Fourth Quarter 2013

Government Monitoring Information Requirements Under the HMDA and the ECOA

Introduction

Government monitoring information (GMI) refers to the loan applicant demographic data creditors must collect under Regulation B, which implements the Equal Credit Opportunity Act (ECOA), and Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), when consumers apply for certain mortgage loans. The regulatory requirement for lenders to collect such information dates back to 1977 when the Federal Reserve Board (Board) amended Regulation B to require creditors to collect monitoring information regarding age, sex, marital status, and race or national origin on home-purchase loans and refinancing transactions.1 The Board explained that this information would help federal regulators detect mortgage lending discrimination. Consumer groups also believed that this data would be valuable in detecting mortgage lending discrimination.2

Similarly, in 1989, the Financial Institutions Reform, Recovery and Enforcement Act amended the HMDA to require creditors to collect race, sex, and income data from applicants for home mortgage loans to help identify discriminatory lending practices and facilitate enforcement of antidiscrimination statutes.3 In 2002, the Board amended Regulation C to conform the collection of race and ethnicity information to changes adopted by the Office of Management and Budget.4 Overall, the scope of the HMDA data collection requirements is broader than the ECOA’s requirement because the HMDA applies to all mortgage loans, including home-improvement loans.

Based on the frequency of examination violations, complying with GMI requirements can be challenging. On the one hand, Regulation B generally prohibits creditors from collecting information about race, color, religion, national origin, or sex “to discourage discrimination, based on the premise that if creditors cannot inquire about or note applicants’ personal characteristics, such as national origin or race, they are less likely unlawfully to consider the information in connection with a credit transaction.”5 But the regulation also contains an exception in 12 C.F.R. §1002.13 that requires creditors to collect GMI for home-purchase and refinanced loans secured by an owner-occupied dwelling.6 Similarly, Regulation C requires that creditors collect GMI for certain types of mortgage loans. Thus, creditors must ensure they have procedures in place to ensure that applicant information is not collected about race, color, religion, national origin, or sex, except in the context of GMI for mortgage loans, when they must collect certain information.

A review of supervisory data from Federal Reserve System compliance examinations reveals that GMI requirements regularly appear on the list of the most frequently violated regulations. These violations involve failing to collect GMI when required, collecting it when not required, and recording the GMI information incorrectly. To facilitate compliance, this article reviews the GMI requirements under Regulations B and C, identifies common GMI violations in Federal Reserve System compliance examinations, and discusses the new GMI provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

ECOA/Regulation B

Under 12 C.F.R. §1002.13(a)(1), a “creditor that receives an application 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, shall request as part of the application” the applicant’s ethnicity, race, sex, marital status, and age. This requirement does not apply to loans secured by the applicant’s principal residence for purposes other than to purchase or refinance a dwelling (such as home-improvement or debt-consolidation purposes) or to loans to provide temporary financing to construct a dwelling, unless the application for the temporary loan is also accompanied by an application for a permanent mortgage that becomes effective when the construction is completed.7 Home equity lines of credit are not subject to this section unless it is readily apparent to the creditor at application that the primary purpose is to purchase or refinance a principal dwelling.8 The requested information may be listed on the application form or on a separate form that references the application.9 The creditor must explain the reason the information is requested. If the applicant does not voluntarily provide the information, the financial institution must make a visual observation or determination by surname to collect the GMI.10 Unlike the HMDA, Regulation B does not require creditors to aggregate the information into a register or report it.

HMDA/Regulation C

Creditors subject to the HMDA that purchase or originate home purchase, home improvement, and refinancing loans must collect information about the ethnicity, race, and sex of the applicant either on a loan application or on a separate form that references the application.11 As with Regulation B, the creditor must explain the reason the information is requested and disclose that the applicant is not required to provide the information. If the applicant does not voluntarily provide the information, the financial institution must make a visual observation or determination by surname to collect the GMI.12

The table below compares the information creditors must collect under Regulations B and C.

GMI: What Information Must Be Collected
Field
Regulation B13
Regulation C14
Ethnicity
X
X
Race
X
X
Sex
X
X
Marital status
X
 
Age
X
 

Differences Between Regulations B and C

Both Regulations B and C require creditors to collect customer-specific information such as ethnicity and sex of the applicant. However, Regulation C additionally requires creditors to collect more specific loan information, such as loan type, rate spread, purpose, property type, and other pertinent data. Regulation B requires creditors to collect marital status and age while Regulation C does not. The scope of Regulation C data collection is broader because it is required for most closed-end mortgage loans, including home-improvement loans, and it is optional for home equity lines of credit, whereas Regulation B data collection only applies to applications for credit primarily for the purchase or refinance of a dwelling to be occupied as a principal residence.

Because the regulations define some terms differently, both rules may not apply to the same transaction. For Regulation B, a purchase is defined as the purchase of a principal residence using an extension of credit secured by the residence.15 But under the HMDA, a purchase is more broadly defined as the purchase of a dwelling using an extension of credit secured by a dwelling, but the security does not have to be the dwelling being purchased.16 Similarly, Regulation B requires GMI for a refinance loan for a principal dwelling, where the dwelling secures the loan, whereas Regulation C defines refinance as a new obligation that satisfies and replaces an existing one by the same borrower, in which the existing and new obligations are secured by liens on dwellings. For example, a loan to refinance an existing loan for a vacation property (satisfying and replacing the loan) would not be subject to Regulation B GMI, but would be subject to Regulation C GMI requirements. The table below lists the GMI requirements under Regulations B and C.

The regulations also define dwellings differently. Under Regulation B, a dwelling is limited to residential structures with one to four units.17 But Regulation C defines dwellings to contain any number of units, and it excludes recreational units and “transitory residences such as hotels, hospitals, and college dormitories.”18 Occupancy status is another source of variance. As noted, Regulation B requires collection of GMI only for a home-purchase or a refinance application involving an applicant’s principal residence.19 However, Regulation C requires data collection for applications involving home-purchase, refinance, or home-improvement loans for owner-occupied and nonowner occupied properties.20 Creditors must ensure that their systems reflect these differences when collecting loan information.

What Types of Loans Are Subject to GMI
 
Regulation B
Regulation C
Loans subject to GMI

Purchase or refinance loans secured by a dwelling that is, or will be, applicant’s principal residence

An application for a home equity line of credit is not subject to GMI requirements unless it is readily apparent when the application is taken that the primary purpose of the line is for the purchase or refinancing of a principal dwelling

Purchase and refinance loans secured by a dwelling and home-improvement loans; reporting is optional for HELOCs

Home-purchase loan

Not defined in Regulation B

A loan secured by and made for the purpose of purchasing a dwelling

Dwelling

Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes, but is not limited to, an individual condominium or cooperative unit and a mobile or other manufactured home.

A residential structure (whether or not attached to real property); the term includes an individual condominium unit, cooperative unit, or mobile or manufactured home.

Home-improvement loan

Not applicable; GMI not required to be collected

A loan secured by a lien on a dwelling that is for the purpose (whole or part) of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located, or

A nondwelling-secured loan that is:

  • for the purpose (whole or part) of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located, and
  • classified by the financial institution as a home-improvement loan

Home equity line of credit (HELOC)

Not applicable; GMI not required to be collected

An open-end credit plan secured by a dwelling as defined in Regulation Z

Refinancing

An existing obligation is satisfied and replaced by a new obligation undertaken by the same borrower. A creditor that receives an application to refinance an existing extension of credit made by that creditor for the purchase of the applicant’s dwelling may request the monitoring information again but is not required to do so if it was obtained in the earlier transaction

A new obligation that satisfies and replaces an existing obligation by the same borrower, in which for coverage purposes:

  • the existing obligation is a home-purchase loan (as determined by the lender, for example, by reference to available documents; or as stated by the applicant), and
  • both the existing obligation and the new obligation are secured by first liens on dwellings

For reporting purposes, both the existing obligation and the new obligation are secured by liens on dwellings.

Common Violations

In considering a recent five-year examination period covering 1,328 examinations conducted by the Federal Reserve System, 10.2 percent of these examinations included a citation for violating §1003.4(a)(10) of Regulation C.21 This violation involves errors in the collection of information regarding ethnicity, race, and sex of the applicant, and/or the gross annual income the creditor relied upon in processing the application. Additionally, 10.3 percent of examinations included a violation of §1002.13(a)(1)(i) of Regulation B involving the failure to request ethnicity and race information on home-purchase and refinancing loans as required. Also, 88 examinations cited violations of §1002.13(a)(1)(ii) of Regulation B regarding failure to collect information about an applicant’s sex. Finally, examinations of 88 institutions involved violations of §1002.13(b) of Regulation B. These violations relate to either deficiencies concerning the method of collecting GMI or failing to collect the applicant’s ethnicity, race, and sex based upon visual observation when the applicant chooses not to provide the requested GMI.

Institutions can also be cited for collecting GMI when it is not required or permitted. In considering the same five-year examination period, 8.3 percent of examinations included violations of §1002.5(b) of Regulation B, concerning a creditor’s collection of GMI on loans not subject to collecting such data.

The complexity of the collection of GMI is reflected in the violations data. A high percentage (56.3 percent) of the Regulation C §1003.4(a)(10) violations are procedural (i.e., not isolated). Furthermore, 31.8 percent of the Regulation B §1002.5(b) violations were procedural. At least 27.3 percent of the other violations previously mentioned are procedural in nature. These statistics suggest that violations often result from systemic breakdowns involving internal controls and training.

Future HMDA Collection

Section 1094 of the Dodd-Frank Act amended the HMDA to expand the number of required data collection fields, as shown in the following table.

New HMDA Fields Required by the Dodd-Frank Act
Age Application channel
Credit score Loan originator identifier
Loan term Negative amortization
Prepayment penalty term Property’s parcel number
Property value Rate spread for all loans
Term of introductory rate period Total origination points and fees
Universal loan identifier  

The Dodd-Frank Act also authorizes the Consumer Financial Protection Bureau (CFPB) to add other fields.22 Also, the CFPB may waive the requirement to collect a particular data item if it raises privacy concerns.23 These new data collection requirements do not become effective until the CFPB issues an implementing regulation. As of this date, the CFPB has not yet published a rulemaking proposal.24

Minority-Owned, Women-Owned, and Small Businesses

Section 1071 of the Dodd-Frank Act added new Section 704B to the ECOA to impose additional data reporting responsibilities on financial institutions related to women-owned, minority-owned, and small businesses. These additional data collection requirements seek “to facilitate enforcement of fair lending laws and enable communities, government entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”25 The CFPB issued a bulletin on April 11, 2011, explaining that creditors need not comply with Section 1071 of the ECOA “until the Bureau issues necessary implementing regulations.”26

Conclusion

Financial institutions must have strong controls and training to ensure bank staff can distinguish between the information they are required to collect under Regulations B and C versus the information they cannot collect. In addition to the existing requirements, the Dodd-Frank Act added new GMI requirements. The new information will provide regulators and bankers with more robust data to monitor, identify, and address fair lending issues. Specific issues and questions should be raised with your primary regulator.