HMDA Reporting When a Loan is Closed by Another Lender

Issue/Inquiry

The Bank table funds residential mortgage loans made by mortgage companies. The Bank underwrites the loans and issues a commitment to the mortgage company, not the loan applicant. The loans are closed in the name of the mortgage company and bought by the Bank the same day. The Bank has reported the loans on its HMDA LAR as “Code 6 – Purchase” and completes all the fields appropriate for a purchase. Is this correct?

Response Summary

According to Regulation C, which implements HMDA, in instances where there is more than one financial institution, the institution which makes the credit decision is the one to report the loan as an origination. In this scenario, the Bank, having underwritten the loan and approved it, should report the loan as “Code 1 – Home Purchase” and complete the appropriate data points for a loan origination.

Response Detail

Regulation C, which implements the Home Mortgage Disclosure Act (“HMDA”), distinguishes “brokers” from “investors”. An institution that takes and processes a loan application and arranges for another institution to acquire the loan at or after closing is acting as a “broker”, and an institution that acquires a loan from a broker at or after closing is acting as an “investor”.

Depending on the situation, a broker may or may not have reporting responsibilities. For example, a broker must report any credit decision it makes; however, if no decision is made by the broker, it has no reporting responsibility. Similarly, an investor must report any credit decision made if it reviews an application and makes such decision prior to closing. Otherwise, it must only report the loans that it purchases if the application for such is not reviewed by the investor prior to closing. A financial institution must report any credit decision on an application if such is made prior to closing, regardless of whose name the loan closes in. Official Interpretations,1003.1(c) – 2.

In this scenario, the Bank reviews the application, does the underwriting, and makes the credit decision as to whether to issue a mortgage loan commitment. If the Bank approves the loan, the mortgage company closes the loan in its own name. As such, the Bank is the “investor” and the mortgage company is the “broker”. Therefore, the Bank reports the loan for HMDA purposes, not the mortgage company.

According to Regulation C, only one financial institution reports each originated covered loan as an origination; however, in instances where more than one institution participates in the origination of a covered loan, the financial institution which makes the credit decision before closing reports the loan as an origination, regardless of whether the loan closed in the institution’s name. In instances where an application is approved by more than one institution prior to closing or account opening, and the loan is purchased after closing by one of the involved institutions, it is the responsibility of the institution which purchased the loan after closing to report the loan as an origination. A financial institution that reports a transaction as an origination is responsible for reporting all the information required with respect to originations, even if the covered loan was not initially payable to the financial institution that is reporting the loan as an origination. Official Interpretations,1003.4(a) – 2.i.

The official commentary to Regulation C offers the following example of a loan that is made by one financial institution and reported by another as an origination:

Financial Institution A received an application for a covered loan from an applicant and forwarded that application to Financial Institution B. Financial Institution B reviewed the application and approved the loan prior to closing. The loan closed in Financial Institution A’s name. Financial Institution B purchased the loan from Financial Institution A after closing. Financial Institution B was not acting as Financial Institution A’s agent. Since Financial Institution B made the credit decision prior to closing, Financial Institution B reports the transaction as an origination, not as a purchase. Financial Institution A does not report the transaction. Official Interpretations,1003.4(a) – 3.i.

Since the Bank underwrote the loans and approved them, it would report the loans as originations rather than as purchased loans, and use the appropriate code describing the purpose. In this scenario, “Code 1 – Home Purchase” should be used, since a “home purchase loan” is defined as a closed-end or open-end loan made for the purpose, in whole or in part, of purchasing a dwelling. 12 CFR 1003.2(j). The Bank would then complete the data points appropriate for a home purchase loan.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, January 13th, 2020 at 6:00 am.