Will HMDA changes affect commercial lenders?
Will this have a major impact on commercial lenders, or will it be business-as- usual?
So the new HMDA rule will, of course, have a bigger impact on residential lenders than on commercial lenders. But let's explore how big that gap is. There's an exemption for "business-purpose" loans and let's also look closer at what that means.
Scope of New HMDA: Reportable Residential Transactions
Now every consumer-purpose loan or line of credit secured by a dwelling will be HMDA-reportable. This means residential lenders have to report even those loans that wouldn't qualify as a home purchase, home improvement, or refinancing. That's also why the new "Loan Purpose" added two fields: "Cash-out refinancing" and "Another purpose."
Scope of New HMDA: Reportable Commercial Transactions
But the rules don't go as far for business-purpose loans (in fact, that was a big win for the industry, because the original rule simply required all loans secured by a dwelling to be reported).
So the commercial department will have to report the following: All dwelling- secured loans or lines of credit that qualify as either a Home Purchase, Home Improvement, or Refinancing.
Non-dwelling secured transactions are never reportable
Transactions that don't count as either home purchase, home improvement, or refinancings are never reported, for example a dwelling-secured loan to a small business owner to purchase a forklift or commercial property.
Business-purpose loans are also exempt from 9 out of the now 48 total data fields:
Origination charges
Discount Points
Lender Credits
Pre-Payment Penalty
Total loan costs
Total points + fees
Rate spread (APOR less APR)
Whether the loan is a High-Cost mortgage
Total borrower-paid costs before closing
"Consumer-Purpose" Definition
Now when we refer to "consumer-purpose" fortunately, this is not any new language. The CFPB didn't reinvent the wheel and instead simply aligned this with the same old TILA/RESPA test that we're used to (also used for other exemptions, such as mandatory Flood escrow). So unlike other cases (like where we have a different definition of "application" under what feels like a hundred different overlapping regulations) - the same definition applies for HMDA (Reg C), TILA (Reg Z), RESPA (Reg X), and Flood insurance.
Understanding which loans are consumer-purpose has become increasingly important because it's part of so many recently-passed regulations.
It determines exemption from ATR/QM Regulations and TRID disclosure requirements (as of 2014 and 2015)
It determines whether the strict scope applies for HMDA or the less strenuous standard (above) (as of 2018)
It determines whether the 9 data fields above need to be entered (as of 2018)
Every loan has to be classified as either consumer- or business- purpose and reported on HMDA (this is one of the new data fields) (as of 2018)
It determines whether loan originator compensation limits apply (as of 2010)
Business-purpose loans are exempt from mandatory escrow for Flood (as of 2015)
And no doubt I'm forgetting others.
Consumer-Purpose Test (In General)
So let's go over how to determine if a loan is business-purpose or consumer- purpose (must be one or the other).
A loan is "consumer-purpose" where it is made primarily for a "personal, family, or household purpose," as opposed to loans with a "business- purpose," which are made primarily for "business, commercial, or agricultural" purposes (which we just refer to as "business-purpose" for sanity's sake).
Some principles to remember:
Every loan must either be "consumer-purpose" or "business- purpose." It's gotta be one or the other!
Loans may have mixed purposes, but there is only one primary purpose. Where there are mixed purposes, "primary" purpose controls. This is a general balancing test with no hard and fast rules. If a businessman takes out a $100,000 loan - $95,000 for business purpose, but with $5,000 set aside for a personal item, it is clear this is a "business-purpose" loan.
Loans cannot be "consumer-purpose" if they are made to an organization, as opposed to a natural person. Note: this does not include Trusts, which are generally considered made to natural persons.
Special rules apply for investment properties. Loans secured by non-owner-occupied properties are always "business-purpose," where even owner-occupied properties can be exempt depending on loan purpose and the number of units.
Some "business-purpose" loan examples:
Loans to LLCs or other corporations
Loans secured by investment properties
Loans to a small business owner for a business expense, even if secured by the borrower's principal residence
In Other News
What will it mean if Team Trump carries through with promise to dismantle Dodd-Frank? Well, here's one article's opinion on it. First of all, something that took years to implement would probably take years to dismantle. Second of all, mortgage lenders aren't the only ones that have been affected by Dodd-Frank - there are plenty of provisions in Dodd-Frank that would probably be removed before any attention is paid to mortgage-related regulations passed in the last 5 years. Think the Volcker Rule, the Durbin Amendment, Basel 3 capital requirements, and rules on bank bailouts. Of course, the CFPB will be in the cross-hairs, but discussion has been about changing its structure (replacing director with a board), rather than destroying it altogether - which wouldn't affect regulations that are already written and in place. Finally, if we're hoping for less regulation, I would just comment that the Financial Choice Act, designed to combat/replace the Dodd-Frank Act, is itself 500+ pages and likely to spawn its own set of detailed rules/regulations. A 3-page summary available here.
We're rolling out a regulatory support hotline - currently available to some clients and now available on request. Users simply e-mail the question in to Compliance-Questions@scapartnering.com and one of us will respond within 48 hours.
It might not be unusual for an MLO to work with a realtor eventually found guilty of committing fraud or even giving/accepting bribes, but how about your realtor for being a serial killer? That's happening in South Carolina, article here, where mortgage bankers are giving interviews on their experiences working with this person, including how they had to regularly visit him at his home where he had his office. Yikes!
Too late to sign up now, but we're delighted to host the MMBA's annual Commercial Compliance/Risk seminar today. Going to be a good time!
How does a company keep employees - from bottom to top - engaged at work? An employee is "engaged" at work when they have both the desire and the ability to do their job. So a new hire might have a strong desire to put in 80-hour work weeks, but with a malfunctioning keyboard and without adequate training, they won't be fully engaged. Conversely, a 30-year veteran might know every trick in the book, but have lost the desire to go above and beyond. Less than one-third of Americans are engaged in their jobs.
I'm not sure - I imagine there's a thousand ways to look at it. But I'd be surprised if it didn't help to have something to rally around - to feel like the company had goals bigger than just profit/loss. I know it's important to me that we have (at least that I feel that we have) a positive impact on the lending community at large, helping manage all kinds of different hurdles. Another example is IT company Rackspace who commits to "fanatical" customer support. (Notice in neither of those cases are we solving world hunger, but both suffice.) Probably helps to kill bureaucracy as much as possible -- that's a quick way to drag down people devoted to that cause who want to go above and beyond. And that's certainly a higher cause I could rally around! See the HBR's "Bureaucracy Must Die", an excerpt here:
Most of us grew up in and around organizations that fit a common template. Strategy gets set at the top. Power trickles down. Big leaders appoint little leaders. Individuals compete for promotion. Compensation correlates with rank. Tasks are assigned. Managers assess performance. Rules tightly circumscribe discretion. This is the recipe for "bureaucracy," the 150-year old mashup of military command structures and industrial engineering that constitutes the operating system for virtually every large-scale organization on the planet. It is the unchallenged tenets of bureaucracy that disable our organizations - that make them inertial, incremental and uninspiring. To find a cure, we will have to reinvent
the architecture and ideology of modern management - two topics that aren't often discussed in boardrooms or business schools.
Maybe it also helps to set and meet new goals and challenges (personal example: spell 'bureaucracy' on the first attempt without auto-correct ... of course, it's important not to set unattainable goals, I suppose ...).
"The Dodd-Frank economy does not work for working people. Bureaucratic red tape and Washington mandates are not the answer.
The Financial Services Policy Implementation team will be working to dismantle the Dodd- Frank Act and replace it with new policies to encourage economic growth and job creation."
~ Policy statement on Donald Trump's website
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