Dodging HMDA-applicability on pre- approvals under the new rules
It's nice to avoid HMDA reporting requirements when you can, for example by using pre-qualifications instead of full pre-approvals. But how exactly can you do this when the new rules take effect?
As my colleague Tom pointed out Monday morning, productivity for this week in New England suffered a blow on Sunday night. But hey, we're still here for the Wednesday newsletter!
We're preparing for the upcoming HMDA rules now. And here is some information on when you have a HMDA-reportable "pre-approval" under those new rules. (in case you want to try and avoid HMDA on your pre-qualifications or pre-approvals).
The good news is that this isn't a major change for us. The rules here are basically the same, although they've incorporated some less official guidance into written commentary to make us feel a little more confident.
HMDA "Pre-approval": Defined
When the new rules kick in, you will ONLY have a reportable HMDA pre- approval if all of the following requirements are met. Otherwise, whatever you want to call it, you will not report this on the HMDA LAR.
A borrower requests:
A Home Purchase Loan (no home improvement loan)
Secured by a 1-4 Unit Property (no multi-family 5+ unit homes)
With Closed-End Financing (no open-end lines of credit)
This request is reviewed pursuant to a qualifying "pre-approval program," which is defined as when the lender:
Conducts a Comprehensive Analysis of the Borrower's Creditworthiness (including income verification), resources, and other matters typically reviewed as part of the lender's normal credit evaluations program; AND
Issues a Written Commitment that:
Is for a Home Purchase Loan
Is valid for a Specified Time Period
Is valid for up to a Specified Amount; AND
Is only subject to limited conditions, including those related to collateral and those requiring no material change in the borrower's financial condition before closing.
SUMMARY of Definition
So you will never have a reportable pre-approval if ANY of those requirements is not met, such as where:
On properties with 5+ units
With open-end lines of credit
If you do not fully underwrite the file (aside from collateral issues)
If you place conditions beyond those limited to collateral and a material change in the borrower's financial position
Note: Pre-Approvals Without a "Program"
Lenders that consider pre-approvals on an occasional or "ad hoc" basis do NOT need to report pre-approvals because there is no "pre-approval program" in place.
When do you have enough pre-approvals to consider it a "program"? Well, that's a good question. Ask yourself if you "regularly" use the procedures above (e.g., fully underwriting the loan, issuing commitments with a maximum amount and a time limit, etc.). If, so that looks like a program to me.
And Note: Labels and ECOA Irrelevant (to HMDA anyway)
The HMDA rule expressly says that both labels and ECOA compliance is irrelevant to whether a reportable pre-approval exists.
All this means is that it does not matter whether you call yours a "Pre- Approval" or something else, like a pre-qualification. You won't convince a regulator that you don't have a pre-approval just because you're labeling it something else, or calling it something else in your Loan Policy. **BUT NOTE: While this might not be relevant to HMDA, some regulators may dislike a lender misleading borrowers by "over- selling" a weak pre-qualification as a full pre-approval that the borrower can rely upon. If you do not actually have a reportable HMDA pre- approval, best practice is to call it something - anything - else. Only use the term "pre-approval" if you really have that product.
Remember that ECOA has its own definition of "application" and that general HMDA and ECOA have guidance that crosses over. But as this makes clear, trying to rely on ECOA guidance to determine whether you have to report pre-approvals is a losing argument.
Best Practice on Avoiding HMDA Pre-Approvals
The new HMDA rules don't change this question much. Lenders that value a lower HMDA burden higher than the ability to offer pre-approvals will have to find a way to avoid the definition of "pre-approval". So what's the best way to do this but still offer as reliable a product to borrowers as possible when they're house hunting - what's the best way to do that?
Well, all the requirements for pre-approval must be met - so which one can we NOT do on purpose (which is perfectly legitimate).
Do everything the same, just call it a pre-qualification?
This won't work. The new guidance makes clear that labels are irrelevant, and if you have a pre-approval, it's going to be considered as such, no matter what you call it.
Not have a pre-approval program at all?
No, I don't think so. This will help small lenders avoid HMDA triggers by accident, but when you're talking about your standard product offerings, you can't rely on this. This is equivalent to deciding to NOT offer pre-approvals at all, in which case you'd still have the ability to do them on an ad-hoc basis. But if you do them regularly, you're back in HMDA territory.
Not issue a commitment in writing?
No, that makes no sense. The whole point is for the borrower to have a piece of paper to show real estate agents and sellers.
Not provide time limits on pre-approvals?
I don't know how this could work. It's true, that if the pre-approval is not good for any specific time period, then we avoid HMDA. But does this imply that the offer is good forever?
Avoid fully underwriting the loan?
This is probably the best practice, but it's not a specific enough answer. While we can avoid HMDA if we do less than a full underwrite, we want to do as much as possible (to make the product as reliable as possible for the borrower, plus, it's normally more efficient to do as much as possible up front). So what do you leave out? Automated underwriting? Running a credit report? Calculating ratios? None of those make sense to me (feel free to disagree). Perhaps a better idea is simply not to require all verifying documentation; state in policy that your institution does not review verifying documentation prior to issuing a pre-qualification. If the borrower's honest, the product is reliable. And in cases where the borrower voluntarily provides all that information, it still doesn't count as a "program" so we fit into the "ad hoc" exception. To increase efficiency, you could even still request, but probably not require, that borrowers submit verifying documentation to you to make the future underwriting process more efficient. Pretty slick, I think.
In Other News
Here's a good summary of the executive order from yesterday relating to financial system regulatory reform. As this summary notes, nothing implicates the CFPB directly, but there are several items that heavily involve consumer protection regulations.
Speaking of the CFPB, it seems like they have a new action every week ... see the summary on their website here
Going through the 4th quarter with a 99% chance of losing and finding a way to comeback and win the game ... the Pats gave us one heck of an inspirational story to tell.
Instead of our normal random thought to end the newsletter, here are some book recommendations:
Gritty and inspiring stories by the legendary Don Mann, Inside SEAL Team Six, My Life and Missions With America's Elite Warriors. This book is great despite all the portions blacked out by military editors.
At Home, a Short History of Private Life by Bill Bryson, which "gives us a fascinating history of the modern home"
Habit, Why We Do What We Do In Life and Business by Charles Duhigg. "Pulitzer Prize-winning business reporter Charles Duhigg takes us to the thrilling edge of scientific discoveries that explain why habits exist and how they can be changed. Distilling vast amounts of information into engrossing narratives that take us from the boardrooms of Procter & Gamble to sidelines of the NFL to the front lines of the civil rights movement, Duhigg presents a whole new understanding of human nature and its potential."
The Last Days of Socrates by Plato (translation by Christopher Rowe), a classic must-read.
And Residential Mortgage Lending: Principles & Practices, by my colleague Tom Pinkowish. An especially good training aid, but invaluable to anybody who thinks they already know all there is to know about mortgage banking.
"The NFL season, the calendar is what it is ... As of today, and as great as today feels and as great as today is, in all honesty we're five weeks behind on the 2017 season compared to the rest of the teams in the league."
- Bill Belichik (10 hours after winning Superbowl)
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful
- please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**