What to Do With GMI or HMDA/LAR after the Purpose of the Loan Changes

Issue/Question

The Bank asks what it should do after a customer informs it that the loan he applied for is really a “cash out” and not HMDA-reportable. Should it cross out the GMI and not report the loan on the HMDA/LAR?

Response Summary

Ordinarily, a creditor must not even inquire about the race, color, religion, national origin, or sex of an applicant in connection with a credit transaction. Under certain circumstances, however, Regulation B and HMDA require a credit to obtain such information for monitoring purposes. If a loan is requested for what is ostensibly a HMDA-reportable purpose and GMI obtained, and it is subsequently determined that the loan is not HMDA-reportable, the Bank should not report the loan on the HMDA/LAR and should redact the application or form on which the GMI was disclosed, so that such information will not be maintained in the loan file.

Response Detail

Neither Regulation B, nor HMDA, nor their official commentaries address what a creditor should do when it has been given Government Monitoring Information (“GMI”) for a loan that is non-HMDA reportable. The purpose for which the regulations require such information, however, indicates the proper course of action for the Bank.

Under Regulation B, a creditor must not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction. A creditor must not even inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction. [12 CFR §§1002.4(a); 5(a)(2)

Both Regulation B and HMDA, however, require the creditor to obtain this information under certain circumstances for monitoring purposes. Regulation B does so when an application is made for credit that will be primarily for the purchase or refinance of residential property that will be occupied by the applicant as his principal residence. [12 CFR §1002.13(a)(1)].

HMDA requires such information to be obtained for applications for originations and purchase of home purchase loans, home improvement loans, and refinancings. [12 CFR §1003.4(a)].

Except for these circumstances, information concerning what would otherwise be a prohibited basis should not be obtained.

In this case, a loan was applied for that was ostensibly for a HMDA-reportable purpose and GMI was obtained. Subsequently, the applicants indicated that the purpose was to obtain cash on the equity in the property.

While neither the regulations nor their commentaries address what should be done in such a situation, a transcript of a regulatory teleconference made available by the FDIC considers a similar question, where a loan was initially applied for by individuals, but ultimately made to a trust. The representative for the FDIC indicated that using “N/A” in the area of the HMDA Loan Application Register (“HMDA/LAR”) where GMI is reported would be more accurate, and reflective of the transaction that actually closed, where the borrower was not a natural person. [FDIC New York Region Regulatory Teleconference: HMDA Data Validation Procedures, June 16, 2011].

Following this logic, since the purpose of the loan in question was not HMDA-reportable, the loan should not be reported on the HMDA/LAR. And since the purpose of the loan was not one for which GMI is required, such information should not have been obtained. Since it was obtained, though inadvertently, maintaining it in the loan file would be a violation of Regulation B requirements.

What the Bank should do is redact the application or form on which the GMI was obtained, whiting or blacking out the information, and add a memorandum to the file, indicating the circumstances under which the GMI was initially obtained.

This entry was posted on Friday, November 7th, 2014 at 8:18 pm.