by Dennis H. Doss
Starting on January 1, 2018 most business purpose residential private money brokers will be subject to fines by the Consumer Financial Protection Bureau unless they file reports under the Home Mortgage Disclosure Act, known as “HMDA.” Congress thinks the information in the reports is important because it:
- Helps show whether lender are serving the housing needs of their communities
- Assists public officials in distributing public-sector investment to attract private investment to areas where it is needed; and
- Assists with the identification of potentially discriminatory lending patterns and enforcement of antidiscrimination laws.
Thanks to changes brought about as part of the Dodd-Frank legislation, Congress has reduced the threshold for HMDA reporting. Effective January 1, 2018 (unless dismantled as promised by Trump) private money residential lenders making business purpose loans will be required to report if they originated at least 25 “covered” closed-end mortgage loans in each of the two preceding calendar years. You are deemed to have “made” or “originated” a loan if you are the one that approved or declined the loan application you received.
A “covered” closed-end mortgage loan includes any business purpose (fix and flip, rental, investment property) residential loan to purchase or improve a residential property or to refinance a previous loan that was obtained to purchase or improve a residential property, including cash out refinances. Agricultural purpose loans are exempt.
The Broker Rule. Reporting by a hard money mortgage broker that does not actually fund any portion of a loan is required only if the broker makes the credit decision using its own criteria or that provided by the investor that will make or purchase a loan. This is known as the “Broker Rule” under Regulation C implementing HMDA (See Commentary to Regulation C, 12 CFR 1003.1(c)). Simply put, the person that says yes or no is required to report. So, if you issue approvals, term sheets, letters of intent or otherwise decide whether a borrower gets a loan, you are the reporting party under the Broker Rule. If your investors are the only ones that approve loan applications, you have an argument that the investors must report if they meet the 25 covered loan threshold. I suspect that most persons reading this article are the ones “pulling the trigger” on loan applications, so if that describes you, you should report.
What does this mean for you? Many of you make hard money business purpose loans to flippers and persons buying rental property. Not only will you have to track and report electronically 48 different fields of data for loans you fund or purchase, but also for loan applications that did not result in loans.
Generally, the new HMDA data points fall into four categories:
Information about the applicants/borrowers, and the underwriting process
- Applicant’s/borrower’s age
- Credit score/name and version of the credit scoring model
- Debt-to-income ratio
- Automated underwriting system name
Information about the property securing the loan
- Value of property to secure the loan
- Combined loan-to-value ratio
- Manufactured home property type – land or without land
- Manufactured home land interest – ownership or leasehold
- Total dwelling units securing the loan
- Multifamily affordable units – number of units that are income-restricted under affordable housing programs
The features of the loan transaction or requested loan transaction
- Total loan costs/total points and fees charged
- Origination charges paid by borrower
- Points paid to reduce interest rate
- Amount of lender credits
- Interest rate of the approved loan
- Prepayment penalty term in months
- Loan term in months
- Introductory rate period in months
- Non-amortizing features
- Application channel – submitted directly to FI, directly payable to FI
- Reverse mortgage indicator
- Open-end line of credit indicator
- Business/commercial purpose indicator
- Address of property to secure the loan
- Mortgage loan originator NMLSR identifier
How Do I Get Ready?
Your first HMDA report (called a Loan Application Register or “LAR”) must be submitted electronically to the CFPB by March 1, 2019. I wouldn’t wait until the week before to begin collecting data for 2018. Before January 1, 2018 you need to acquire software and training to gather application data in a format that can be transmitted to the CFPB in 2019. The largest provider of this software is QuestSoft.com. QuestSoft offers free online training as well.
Lastly, you will need to post this HMDA notice in your lobby:
Home Mortgage Disclosure Act Notice
The HMDA data about our residential mortgage lending are available online for review. The data show geographical distribution of loans and applications; ethnicity, race, sex, age, and income of applicants and borrower; and information about loan approvals and denials. These data are available online at the Consumer Financial Protection Bureau’s web site (www.confinance.gov/hmda). HMDA data for many other financial institutions are also available at this web site.
This article is intended as educational material, not legal advice. Consult a knowledgeable lawyer before implementing any of the ideas in this publication.