Are you reporting too many loans as "withdrawn?" (if so, better check for HMDA errors)
Reporting too many mortgage loans as "withdrawn" is a sign that you're out of compliance with HMDA reporting requirements. This may mean you're mistakenly reporting some loans as withdrawn instead of denied, closed for incompleteness, or approved, but not accepted.
Federal regulators announced in 2016 they had identified "instances of systemic misreporting of 'application withdrawn' action taken codes."
Institutions reporting a suspiciously high number of withdrawn loans get closer scrutiny on this issue, with regulators checking to see if you're reporting loans as Code 4 - Application Withdrawn that should be classified instead as Code 2 - Approved but not Accepted, Code 3 - Denied, or Code 5 - Closed for Incompleteness.
(Check out their full statements here).
How high is "too high"?
So when is your percentage of withdrawn loans unusually high?
Well, the NCUA pays attention when your withdrawn loans are 25% of your HMDA-reportable transactions. The NCUA says this is about twice the national average. Now, there are a lot of software options that will help you check for statistical outliers in your state, lending area, or other region. But in case you don't have easy access to something like that, I think it's fair to say the following statistics are approximate national averages:
2.5% - Approved, not accepted 16% - Denial
11% - Withdrawn
4.5% - Closed for incompleteness
So maybe your regulator's "spidey sense" only tingles at 25% for withdrawn loans, but there's no reason you can't be a little more careful than that. Statistics will vary significantly by institution, but look for areas where the general trend is reversed, e.g., you have more withdrawn loans than denied loans, which is counter to the national trend.
How to use Code 4 - "Application Withdrawn" (correctly)
Remember this simple rule:
Only report an application as Code 4 - Withdrawn where it is expressly withdrawn by the applicant before a credit decision is made.
Common Mistakes:
Reporting as withdrawn when ...
Borrower doesn't expressly withdraw - they just stop communicating. Maybe they got a better deal elsewhere or just decided against getting a mortgage. Whatever the situation, you cannot report this as a withdrawn loan because the borrower did not expressly withdraw.
The borrower withdraws, but only after the institution has already made a credit decision and communicated that to the borrower.
For example, assume an appraisal comes in low. The loan officer communicates to the borrower that the original offer no longer stands ... "Would you be willing to take $175,000 instead of $190,000? What would you like to do?" If the borrower then withdraws the loan request, that cannot be reported as withdrawn.
Another example: Bank sends conditional commitment letter. Borrower receives this and then e-mails loan officer withdrawing the loan request. This cannot be reported as withdrawn because the credit decision has already been made. This is true even if the borrower expressly tells you to withdraw the loan.
Including pre-approval or pre-qualification withdrawals, which should not be reported under HMDA.
**Related Symptom -- Taking too long before taking action (say 100 days on a regular basis) is also a warning sign of mistakes related to Action Taken reporting errors. Federal regulators will look closer at whether an institution is accurately reporting loans as withdrawn in cases where the institution is reporting unusually long times for action taken.
Additional Consequences
Making mistakes with reporting loans as withdrawn has consequences beyond HMDA. It probably means we're not issuing adverse action letters required by Reg B. It's understandable that someone would rather not send denial letters to borrowers, especially in difficult cases, because they can come across as pretty harsh. Sometimes it's easier to report something as withdrawn or closed for incompleteness, and for that same reason we need to be especially careful here.
In Other News
Serious fair lending matters get referred to the Department of Justice. Read their last annual report here.
Some changes in leadership at the CFPB, if you're interested.
So as I'm writing this, I'm desperately hoping someone is going to either confirm or deny the breaking allegations against Trump - a British spy reporting that Russia has blackmail against him (under circumstances that I won't even try to get into). But I can't tell whether tomorrow morning (when you read this) it will be nothing at all or on the level of Watergate. (I tried checking both Drudge Report and the Huffington Post to combine into a non-biased piece of information, but even that isn't working.)
It's rewarding to be part of an industry that dedicates real resources to volunteerism. Now I know a lot of banks, credit unions, and mortgage companies go to incredible lengths, but did you hear about Berkshire Bank's "Xtraordinary Day of Service" this year? Back in June, they closed down the entire bank for a day to allow employees to go out and volunteer. Teams of employees in green t-shirts went out to tackle dozens of different charitable projects. Read more about this on their website, but it certainly seems to have been a success. This was the first year they did it, so hopefully it was successful enough to continue! While closing down an entire bank this large is pretty unique, Berkshire certainly isn't alone. Embrace Home Loans from Rhode Island has had a formal annual volunteer event (with orange t-shirts) since 2000, with this becoming a week-long event in 2011. Orange Week.
"It was involuntary. They sank my boat."
- J.F.K. (responding to praise of his courage while serving the US navy against the Japanese in WW II)
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