VIDEO: HMDA Demographic Information Determinants
In this Compliance Clip (video), Adam answers a question which had been a topic of debate before the CFPB finally issued a guidance, that is whether to list code 2 or code 3 on the HMDA LAR for when information about determinants are not available. And if you don’t know what is a determinant, watch this video to find out.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about HMDA demographic information determinants. This is a HMDA topic. Now, if you don't know what a determinant is, we'll talk about that in just a minute. In fact, the question I received is this, “I'm reviewing loans on our HMDA LAR and noticed that our loan operating system is not setting the demographic information determinants as not applicable, which is code 3, on the telephone, mail, or internet applications. I have always used code 3 and I’ve been consistent with this, and now our loan operating system is not letting us do this. It used to, but it's not doing it anymore. It's forcing us to not use code 3, it wouldn't let us use it. So what do I do? Help!”
That is the question I received. Now, when the HMDA changes first came out, this was a topic of great discussion. There was great debate on whether code 2 should be listed or code 3 of the determinant. I’ll explain with the determinants here in just a second, because our answer is actually going to come from HMDA Frequently Asked Question Number Seven, under the section of Ethnicity, Race and Gender. This relates back to Regulation C 1003.4(a)(10)(i). The regulation itself doesn't really answer this for us. The HMDA FIG doesn't answer it for us, but the frequently asked question does, and I think they did that in part, because so many of us have called the CFPB asking this question, that they finally gave us guidance. And they did that in the frequently asked question.
Frequently Asked Question Seven says this, and explains what the determinants are so I'll just read it. It says, “Regulation C requires that a financial institution collect the ethnicity, race and sex of a natural person applicant or borrower and collect whether this information was collected on the basis of visual observation or surname. Where a natural person applicant does not provide ethnicity, race, or sex information for a mail, internet or telephone application, and the financial institution does not have an opportunity to collect this information during an in person, face-to-face meeting during application process, the financial institution may report either that the information was not included on the basis of visual observation or surname, which will be code 2, or that the requirements to report this data field is not applicable, code 3.” For a long time, we’ve had a debate whether it's supposed to be code 2 or code 3. The CFPB came back and said, you know what? You're both right. It's fine. Either one works. But then they turned this little twist and what they said was, “For consistency of data across all HMDA reporting financial institutions, the Bureau suggests, but does not require, that financial institutions use code 2. Go, camp 2! The people who were in camp 2 were thrilled because they got to win this argument, sort of, because code 3 does work as well. But this was the clarification from the CFPB.
So the bottom line to this question is, in summary, if your loan operating system is now forcing you to use code 2, where you’ve always used code 3 before, you should be fine. Now, the one thing that I want to make sure or I would want to make sure if I was in your shop is that you can be consistent in your year of HMDA reporting. If you’ve always reported code 3 previously, make sure you draw a line in the sand starting on January 1st of the new year and then report code 2 to be consistent. So what I would do is make sure that starting on January 1st the entire HMDA LAR is consistent in how you do it and make sure you're consistent across departments if you have different departments that report HMDA on the same LAR.
That's it for this Compliance Clip.