HMDA Audits

One of the most feared notices that a mortgage lender can receive is the one from a regulator regarding an audit of their HMDA reporting.  Many lenders believe that when this occurs the auditor will be checking only for the accuracy of the demographic and census tract information.  Not so!  While this will be reviewed, the primary focus of most HMDA audits is the accuracy of the action taken on a file and whether the information retained in a loan file supports what has been reported on the Loan Application Register (“LAR”).

Based on this, it is a good idea to do a quick review of the available actions for HMDA reporting.

  • Loan Originated – The most common and easiest action reported on the LAR.  These are loans that are approved and closed by the lender.  In addition to the demographic and census tract information required, accurate reporting of the terms of the loan as well as who the loan, if sold post-closing, is sold to.
  • Loan Denied – The Loans Denied category are for those files which have been rejected by the creditor.  Many lenders however suffer from regulatory penalty or a required refiling for these loans when the reasons for the rejection are not supported by documentation retained in the file or when the reasons for rejection do not match what was sent to the consumer.
  • Filed Closed for Incompleteness – Another category where lenders face increased scrutiny.  A File Closed for Incompleteness is a lender-initiated action on files prior to a credit decision by the lender.  For this to be compliant, there must be documentation within the file which indicates that the lender has made good faith efforts to contact the applicant to obtain required information however the applicant has not responded.  Document retention is the key element for avoiding regulatory issues with this classification.
  • Application Withdrawn – Files which are in this category are those where the applicant has indicated that they no longer wish to purse credit approval.  Like “File Closed for Incompleteness”, this classification occurs prior to a credit decision by a lender.  The lender must retain documentation within the file which affirms the application no longer wishes to continue the loan process. Failure to retain this documentation often results in regulatory issues.
  • Loan Approved But Not Accepted – Probably the rarest of all classifications for HMDA.  These are files where a loan approval has be rendered however, the applicant for whatever reason decides not to consummate the file.  Refinance loans where the applicant has rescinded fall into this category.  The lender must retain the request from the applicant that they do not wish to continue the file.

Beyond the accuracy of the information contained within the LAR, there are many fair lending implications for lenders.  Regulatory agencies as well as community activist groups take a keen interest in reviewing HMDA data looking for potentially discriminatory actions or actions which result in disparate impact.  These fair lending implications will be reviewed in the next blog post.

For more information regarding HMDA compliance and/or information regarding an independent audit before a regulatory audit, contract West Beibers at The Commonwealth Group for more information at either wbeibers@thecommonwealth.net or by phone at 901-413-6999.

The Commonwealth Group – Consultants to the Mortgage Industry