Month: April 2017

Open-End Lines of Credit Under the New HMDA Rules

I wrote previously about the new HMDA rules, and how they are changing our vocabulary a bit. The new vocabulary includes new, broader definition of what’s included in HMDA, and that’s how it’s expanding the scope of HMDA. Some loans that were previously not covered by HMDA now are covered, such as HELOCs.

Here’s a quick refresher/reference of what’s covered under the old and new rules:

  • Old HMDA: Home purchase loans, home improvement loans, and refinancings.
  • New HMDA: “Covered loans,” meaning closed-end mortgage loans and open-end lines of credit, not otherwise exempt.

Let’s look at the open-end lines of credit definition because it is a bit clunky and awkward. “Open-end lines of credit” have their own special meaning under the new HMDA rules, and the rules refer to and semi-incorporate the definition of “open-end credit” in Reg. Z (TILA).

Under HMDA, an open-end line of credit is an extension of credit that:

  1. Is secured by a lien on a dwelling, and
  2. Is an open-end credit plan as defined under Reg. Z, but without regard to whether the credit is
    1. consumer credit,
    2. extended by a creditor, or
    3. extended to a consumer.

(12 CFR § 1003.2(o))

Just looking at that definition requires some mental gymnastics, not to mention simultaneous references to two different regulations, just to determine whether or not a loan is HMDA reportable or not. So I’m going to try to combine the rules for a slightly simpler, easier to reference rule. But first, what’s an “open-end credit” plan under Reg. Z?

Under Reg. Z, “open-end credit” means consumer credit extended by a creditor under a plan which:

  1. The creditor reasonably contemplates repeated transactions;
  2. The creditor may impose finance charges on an outstanding balance; and
  3. The credit extended to the consumer during the term of the plan (up to a limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

(12 CFR § 1026.2(a)(20).

Reg. Z and HMDA have their own distinct definitions for terms, hence the part about disregarding the Reg. Z definitions of “consumer credit,” “creditor,” and “consumer.” So HMDA, in the final part of its definition, is trying to a Reg. Z definition without all the other Reg. Z terminology as well.

Ugh…

But you can essentially substitute “consumer credit” for just “credit,” and “creditor” for “financial institution,” and “consumer” with “applicant” and plug it back into the HMDA definition for open-end line of credit.

So to put it together into one HMDA rule, for HMDA an open-end line of credit is an extension of credit that:

  1. Is secured by a lien on a dwelling, and
  2. Is credit extended by a financial institution which,
    1. The institution reasonably contemplates repeated transactions;
    2. The institution may impose finance charges on an outstanding balance; and
    3. The credit extended to the applicant during the term of the plan (up to a limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

Some final notes: I didn’t go into the first part of the HMDA definition because it’s fairly self-explanatory, but it’s very important and distinguishes between a HMDA reportable line of credit and a non-reportable line. This goes to the new dwelling-secured standard of HMDA.

Also the last requirement for the credit being generally available during the term of the plan means the plan must have a reusable line, even if it has a termination date. (See 12 CFR § 1026.2(a)(20)—Official Interpretation 5). This means the total credit lent under the plan is theoretically unlimited for the term of the plan as long as the borrower continues to repay the credit used.

Finally, for real estate, open-end real estate mortgages must be evaluated independently under the definition regardless of what it’s called in the industry. “The fact that a particular plan is called an open-end real estate mortgage, for example, does not, by itself, mean that it is open-end credit under the regulation.” (See 12 CFR § 1026.2(a)(20)—Official Interpretation 7.) In other words, don’t be fooled by a name; just because something may be called an “open-end mortgage” doesn’t meet it necessarily meets the regulatory definition for open-end credit.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Covered Loans Under HMDA

The old HMDA rules required financial institutions to report on applications, originations, and purchases of home purchase loans, home improvement loans, and refinancings. The new rules, however, replaces the “home purchase,” “home improvement,” and “refinancing” language with “covered loans.” Whether a transaction is a “covered loan” has become much more complicated though.

A “covered loan” is

  1. a closed-end mortgage loan, or
  2. an open-end line of credit, and
  3. not an excluded transaction.

Both closed-end mortgage loans and open-end lines of credit need to be secured by a lien on dwelling, not just any old open-end line of credit. The new HMDA rules give “open-end line of credit” its own unique definition, so don’t be confused. I’m also going to refer to both types of credit as just “a loan” in the following list of excluded transactions:

Excluded Transactions (12 CFR § 1003.3(c)(1)-(12))

  1. A loan purchased by a financial institution acting in a fiduciary capacity (such as as a trustee)
  2. A loan secured by a lien on unimproved land;
  3. Temporary financing
  4. Purchase of an interest in a pool of loans;
  5. The purchase of servicing rights;
  6. The purchase of loans as part of a merger or acquisition (or as part of the purchase of assets and liabilities of a branch office)
  7. A loan or application for a loan for under $500;
  8. The purchase of a partial interest in a loan;
  9. A loan used primarily for agricultural purposes;
  10. A loan used primarily for business purposes
    1. UNLESS it is a home improvement loan, home purchase loan, or a refinancing, as determined by the “primary purpose” test of Regulation Z (TILA).
  11. A closed-end mortgage loan originated by a financial institution that originated fewer than 25 closed-end mortgage loans in each of the two preceding calendar years; OR
  12. An open-end line of credit originated by a financial institution that originated fewer than 100 open-end lines of credit in in each of the two preceding calendar years.

A Closer Look at #11 and #12

Numbers 11 and 12 are important for when you determine whether you need to report certain loans. They come up again when you’re looking at whether you’re a “financial institution” that needs to report under HMDA. (Section 1003.2(g)). One part of the test of being a reporting financial institution for HMDA is you need to have originated either the 25 closed-end or 100 open-end loans in the previous two calendar years. But, once you’ve figured out whether you’re a financial institution that needs to report, when looking at which loans you report, you only report the type loans above the “25 or 100 for 2 years” test.

For example, if you originate 200 and 250 open-end lines of credit for the last 2 years, but only originated 20 and 15 closed-end mortgages, then you would only report the information for the open-end lines and not the closed-end.

And if you’re asking yourself “why?” or trying to figure out the logic of it all, it’s because of #11 and 12 above. The closed-end mortgages in that example are a excluded transactions under section 1003.3(c)(12), and therefore they are not a “covered loan.”

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Identifying Your Loans Under the New HMDA Rules

The Universal Loan Identifier

You don’t nearly triple the amount of reportable data by keeping things simple. The new HMDA rules expand on nearly everything that needs to be reported on the LAR, including how loans are identified for reporting purposes. The current rules require an “identifying number for the loan or loan application” and each institution “must ensure that each identifying number is unique within the institution.” (12 CFR 1003.4(a)(1) and Comment 4). The new rules though require a “universal loan identifier (ULI),” which has its own specific requirements now.

There are now 3 parts to a ULI:

  1. A Legal Entity Identifier (LEI);
  2. A 23 character identifier that’s “unique within the financial institution;” and
  3. A 2 character check digit.

The first part is likely to be the most confusing and newest, so let’s break it down.

The Legal Entity Identifier

History and Regulation

The LEI is a unique identifier for financial institutions internationally, like an international social security number for banks. It was first introduced around the beginning of 2013 as part of an international effort with the G20 nations as a reaction to the financial crisis. It established the LEI Regulatory Oversight Committee (ROC), which helped establish the Global LEI Foundation (GLEIF), whose goal was to help oversee the issuing of LEIs. The GLEIF accredit Local Operating Units (LOUs), which are the organizations that are authorized to issue LEIs. But before GLEIF was established, the ROC was endorsing organizations who were also issuing LEIs, and these are called “LEI ROC-Endorsed pre-LOU.” These organizations can be international or national; in fact, at the moment there does not appear to be any organization issuing LEIs that is based in the United States. They also have multiple purposes and functions; for example, the London Stock Exchange is a pre-LOU LEI issuer.

That history is to put into context the following regulatory language: Section 1003.4(a)(1)(i)(A)(1) and (2) requires the LEI be issued by “ a utility endorsed by the LEI Regulatory Oversight Committee” or “a utility endorsed or otherwise governed by the Global LEI Foundation (GLEIF) (or any successor of the GLEIF) after the GLEIF assumes operational governance of the global LEI system.” Or, in other words, a “LEI ROC-Endorsed pre-LOU” or a LOU.

There are about 30 total pre-LOUs and LOUs, and the list can be found here: https://www.gleif.org/en/about-lei/how-to-get-an-lei-find-lei-issuing-organizations. As of October 2015, if an institution wishes to issue LEIs, they must be a GLEIF-accredited LOU.

Getting a LEI

Financial institutions need to register to receive an LEI. There is a lot of discretion on which pre-LOU or LOU to register with, though when selecting where to register to receive an LEI, take into account such things as language, currency, and time zones. Each LEI charges its own fees, usually a larger initial fee (about $200 at the moment) and annual re-registration fees (about $100).

After selecting an organization and applying, the LOU needs to collect a “minimum set of reference data,” such as the official name of the entity, headquarters address, and the address of legal formation to name a few. The LOU is required to check each entry against reliable sources such as official public records to verify the provided information.

The wait time can vary depending on the LOU.

I reached out to the GLEIF to ask about LEI issuers in the US, and the three biggest LEI issuers in the US are:

  1. Business Entity Data B.V. (https://www.gmeiutility.org/) (Netherlands)
  2. London Stock Exchange (http://www.lseg.com/LEI) (U.K.)
  3. WM Datenservice (https://www.wm-leiportal.org/) (Germany)

The LEIs and associated data submitted to the LOU about the institution are public record, and made available to regulations and the public continuously and for free.

Portability of LEIs

The good news is that LEIs can be transferred or “ported” from one LOU to another. Like keeping your cell phone number when switching carriers, once an organization is given an LEI, it will not change depending on which LOU is maintaining it. This means you won’t be stuck with your original LEI issuing LOU. So you can register now with the London Stock Exchange, and later transfer it to a more local LOU if a new one is established.

The upcoming changes to HMDA will take some time to really understand and get used to, but one big step is understanding and preparing for the new LEI requirement. Getting the issue of obtaining an LEI down is likely something that is better handled sooner rather than later though, as applications are sure to spike soon. Best of luck!

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com