Should GMI be Obtained from Individuals Who Want to Form an LLC?

Inquiry/Issue

Three individuals apply to a New Jersey bank (the “Bank”) for a commercial loan for the purchase of a one-to-four family residential property. For the purposes of the loan, they intend to form a limited liability company. However, the Bank turns down the application. Was the Bank required to obtain GMI from the individuals?

Response Summary

HMDA requires a financial institution to collect information on the ethnicity, race, or sex of an applicant or borrower, provided that the applicant or borrower is a natural person. In this case, the limited liability company did not exist at the time of the application, since the statutory requirements for its formation had not been fulfilled. While the three individuals may not have intended for themselves to be contractually liable for any credit extended, they were nevertheless applicants for the purposes of HMDA. For that reason, GMI should have been obtained for them.

Response Detail

Under the Home Mortgage Disclosure Act (“HMDA”), as implemented by Regulation C, a financial institution must collect information on the ethnicity, race, or sex of the applicant or borrower (i.e., government monitoring information or “GMI”), provided that he or she is a natural person. If the borrower or applicant is not a natural person, such as a partnership or corporation, the Codes for “not applicable” are to be used for the HMDA Loan Application Register (“HMDA/LAR”), since this requirement would not apply to a legal entity which has no ethnicity, race, or sex.  12 CFR §1003.4(a)(10); Appendix A.D.1.b to 12 CFR Part 1003.

In this case, three individuals applied for a loan, but with the intention that the borrower would ultimately be a limited liability company yet to be formed. Neither HMDA nor Regulation C directly addresses this kind of situation. Nevertheless, the legal and regulatory context of the GMI requirement will provide a definite answer.

Under Regulation C, an “application” is a request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with procedures used by a financial institution for the type of credit requested. Regulation C does not define “applicant,” but the Official Commentary states that the official staff comments to Regulation B are generally applicable to the definition of an application under Regulation C.

The Official Interpretations to Regulation B provides that a creditor has latitude to establish its own application process and the information it will require from applicants. Under Regulation B, the term “applicant” means any person who requests or has received an extension of credit from a creditor, including any person who is or may become contractually liable for an extension of credit. 12 CFR §1003.2(b)(1); Supplement I to 12 CFR Part 1003, Staff Commentary on Regulation C, Section 1003.2-1; Official Interpretations, Section 1003.2(f)-1; 12 CFR §1002.2(e).
For the purposes of HMDA, the applicant in this case will be the person requesting an extension of credit from the Bank.

Generally, a legal entity, such as a limited liability company, comes into being when the statutory requirements for its formation have been fulfilled. Under the New Jersey Revised Uniform Limited Liability Company Act, a limited liability company is formed when the certificate of formation has been filed with the State and the company has at least one member. N.J.S.A. 42:2C-18(d).

Since a certificate of formation had not been filed for the limited liability company when the application was made, it did not exist and, thus, could not have been an applicant. While the three individuals may not have intended for themselves to be contractually liable for any credit extended, they nevertheless were applicants in that they had applied for the extension of credit. Given that GMI must be obtained not only from borrowers but also applicants who are natural persons, it should have been obtained from the three individual applicants.

Of course, whenever a financial institution makes a determination as to the effect of a HMDA rule, when its applicability is uncertain, as it was in this situation, it should document the reasons for its decision and apply them consistently.

 

This entry was posted on Monday, May 11th, 2015 at 1:36 pm.