How HMDA Rule Changes Could Impact Lenders
What impact will the CFPB’s proposed revisions have on reporting obligations? The veteran commercial finance attorney Michael Flynn of Buchalter breaks it down.
The Home Mortgage Disclosure Act 2015 Rule revisions promulgated by the Consumer Financial Protection Bureau expressly set forth when residential multifamily property lenders must collect and report data under HMDA.
The 2015 Rule set forth what data must be reported by multifamily lenders. In May 2019, the CFPB issued an Advance Notice of Proposed Rulemaking seeking comments about key obligations under the 2015 Rule. If enacted, the types of rule changes discussed in the ANPR would either eliminate or reduce multifamily lenders’ HMDA reporting obligations.
Either of these possible changes would cause elimination of multifamily lenders’ HMDA obligations, or, at the least, significantly reduce such lenders’ obligations. So what are the current 2015 Rule’s multifamily lender reporting obligations and what impact might changes suggested by the ANPR have?
THE 2015 RULE
The 2015 Rule Expanded the Data Points to be Collected and Reported
HMDA requires certain mortgage lenders to collect specific data about certain mortgage loan applications and closed mortgage loans. The data is then periodically reported to the federal government. The 2015 Rule greatly increased the number of data points and information that must be collected.
Covered Multifamily Lending Institutions and Commercial Multifamily Loans
The 2015 Rule also expressly set forth that under certain circumstances, HMDA covers multifamily lenders. It did this in two steps. First, it defined what types of institutions are covered. Second, it defined what types of mortgage loans are covered.
- When are Multifamily Lending Institutions Covered?
Even if the type of property and purpose of the loan would otherwise mean that the loan is covered (see below), a financial institution is obligated to collect and report data only if it is a “covered institution.” The test for a covered institution is different for a depository institution and a non-depository institution. Key requirements for both any depository or non-depository institution is that in each of the two preceding years, it originated at least 25 closed-end mortgage loans (for reporting closed-end loans), or at least 500 open-end lines of credit (for reporting open-end lines of credit).
An advantage for some banks, savings associations and credit unions is that such a depository institution would not be covered and would not have any obligation to report if it did not make at least one first lien single family mortgage purchase or refinance loan, even if it made 25 or more commercial multifamily loans. There is also a partial exemption for insured banks, savings associations and credit unions that originated few than 500 closed-end loans or fewer than 500 open-end lines of credit in each of the two previous calendar years.
A multifamily lender that is a covered institution must then determine if the particular mortgage loan is a covered loan which must be reported.
- Multifamily Dwelling Consumer Mortgage Loans Are Expressly Covered Under the 2015 Rule
Mortgage loans on residential properties are “covered loans” if they are a consumer purpose loan and meet the “dwelling-secured” test. The 2015 Rule expressly states that multifamily structures and communities are “dwellings.” The dwelling-secured test states that a loan is covered if it is secured by a dwelling, defined as “a residential structure, whether or not attached to real property, that includes . . . a multifamily residential structure or community.” A multifamily residential structure or community is one that has 5 or more units.
For a mixed-use building, the lender is allowed to use any reasonable measure, such as square footage or rental income, to establish whether the primary use is residential or commercial.
- A Commercial Purpose Multifamily Dwelling Loan Is Covered
Further, of particular significance for commercial multifamily lenders, even if a loan is primarily for a commercial or business purpose, the loan is covered if it is for purchase or improvement of a residential dwelling, or is a refinancing for such purposes. Thus, a mortgage loan used to purchase or improve a multifamily dwelling such as an apartment building is covered.
POTENTIAL REDUCTION OR ELIMINATION OF MULTIFAMILY LENDERS’ HMDA OBLIGATIONS
On May 2, 2019, the CFPB issued the ANPR, which focused on two possible changes to current HMDA obligations:
- Limiting the data points that must be collected and reported.
- Removing multifamily lenders completely from the coverage of the 2015 Rule, so that multifamily lenders would have no collection and reporting obligations under HMDA.
Reducing the Number of Data Points
The ANPR specifically addressed both new data points added by the 2015 Rule, and data points revised by the 2015 Rule. The CFPB asked for comments:
- Identifying new data points or any data point revised to require additional information for which the cost of collecting and reporting the information does not justify the benefit that the information collected and reported provides in furthering the purposes of HMDA.
- Similar questions about the free-form text fields for certain data points in the 2015 Rule.
- Other considerations the CFPB should take into account in deciding whether to propose to eliminate or revise any new data point or revised data point from the 2015 HMDA Rule.
These inquiries suggest that the CFPB has serious concerns that the new data points are overly burdensome relative to any benefits from obtaining the data. Obviously, any future reduction in the number of data points to be collected and reported would ease operational issues and costs.
Removing Multifamily Lenders’ HMDA Obligations
The ANPR also asked for comments regarding the elimination of collection and reporting obligations for commercial multifamily lending. The ANPR stated that the CFPB “seeks to assess the extent to which requiring reporting of information on business- or commercial-purpose loans made to a non-natural person and secured by a multifamily dwelling imposes burdens on financial institutions and furthers HMDA’s purposes.” The ANPR sought information about:
- The value that data on such transactions provides in serving HMDA’s purposes;
- Other benefits associated with reporting such transactions; and
- The burden imposed by the requirement to report data on such transactions.
These specific inquiries suggest that the CFPB is actively considering whether the data gathered from multifamily lenders is actually of enough benefit to justify the large costs and operational burdens they place on such lenders.
The Current Status of the CFPB’s ANPR
The time period for parties to submit comments regarding the ANPR was extended to Oct. 15, 2019. The ANPR received significant attention; the CFPB has received 120 comment letters from trade associations, consumer and community groups, individual institutions and others. The CFPB is now reviewing and analyzing these comments. It could ultimately do nothing, issue a proposed rule, or ask for further comments on aspects of these issues.
There is no timeline for when the CFPB must issue any proposed rule or follow up request for further comments it may decide to publish. However, given the length of time since the comment period ended, one could expect that any proposed rule would be forthcoming fairly soon. Commercial multifamily lenders should stay alert for any proposed rule and the need, if any, to comment on it.
Michael Flynn serves as Co-Chair of Buchalter’s Mortgage Banking and Financial Services Regulatory Industry Groups. He previously served as Acting General Counsel of the U.S. Department of Housing and Urban Development, and as General Counsel of Flagstar Bank and PNC Mortgage. He can be reached at [email protected] or at 213-891-5262.