VIDEO: Reg B GMI on Refinance
In this Compliance Clip, Adam takes a deep dive into the world of government monitoring information (GMI) under Regulation B. If your financial institution recently became exempt from HMDA and you now collect GMI only under Regulation B - or maybe you have always been a Reg B bank - then you will want to check out this video. Basically, Adam answers the long-asked question of: Is GMI required under Reg B on a loan that is refinancing a loan that was not purchase money?
Video Transcript:
The following is a transcript of this video.
This Compliance Clip is going to talk about Regulation B, Government Monitoring Information for a Refinance. If your financial institution is no longer a HMDA reporter or maybe has never been, and you are subject only to the government monitoring information collection requirements of Regulation B, you want to pay attention to this video. This is a question I've had several times over the last decade or two, but it's something that's come up quite a bit lately now that there are more banks that are no longer HMDA reporters and subject only to Regulation B. But the question is this, it says you're no longer a HMDA reporter and collect GMI only under regulation B. Do we collect GMI on a refinance of a loan that did not originally have purchase money?
What they're talking about here is an original loan that was an equity loan, a cash out loan. It was not a purchase, it was not a refinance but it was an equity loan where now they're refinancing that existing loan. Now the reason they're asking this question is under Regulation B, a loan that is not for the purpose of a purchase or refinance, so an equity loan where maybe you own the home free and clear, you're taking cash out to pay for college or to pay for home improvement or debt consolidation. It's not a purchase. It's not a refinance. It's an equity loan. Those types of loans under Regulation B do not require government monitoring information. In fact, you're not allowed to collect it, or that would be a potential fair lending violation and a violation of Regulation B.
So the question here is what if we're refinancing one of those loans that was not originally purchase money? Since it was not originally a purchase or refinance, we now have a refinance of a previous equity loan. Do we collect the government monitoring information? The answer to this is found in Comment 6 to 1002.13(a).
To give you a backstory on this, it's my understanding that back in 2003, 2004, in fact, I know this was the case. It was issued in 2003, it was final in 2004, there were major revisions to Regulation B and to some of the sections of Regulation B especially with government monitoring information. It's my understanding that prior to that, and that was just before my banking career got into the point where I would understand and follow rules and regulations so I didn't pay attention to that back at that time. However, back then, it's my understanding that prior to 2003, 2004, some point prior to that, maybe in the nineties, there was a requirement that clearly said in order to collect GMI free financing, it had to be refinancing of purchase money. That was my understanding of the rules at some time ago. Unfortunately, I’ve dug and dug over the years trying to find something that talks about that, I've not been able to see it. I went back to the original 2003, 2004 rule, it was issued in 2003 effective in 2004, looked through it and didn't see anything that talks about purchase money on this refinance. But it was my understanding a long time ago, that was the case, that these rules of course had been here in some form or another since the seventies. So it was my understanding, that's where it came from.
There's some people who still believe that collecting government monitoring information on a refinance of a loan that was not originally purchase money does not collect GMI. However, let's look at Comment 6 to 1002.13(a). It says, a refinancing occurs when an existing obligation is satisfied and replaced by a new obligation undertaken by the same borrower, period. It doesn’t say anything about purchase money. It just defines a refinancing as one obligation that satisfies and replaces an existing obligation by the same borrower. That's a refinancing. So that's what a refinancing is and that's what triggers government monitoring information.
The comment does go on so let's just take a look at this and see what it says. I don't think it's relevant, but let's look at it. It says the creditor that receives an application to refinance an existing extension of credit made by that creditor for the purchase of the applicant’s dwelling may request the monitoring information again, but is not required to do so if it was obtained in the earlier transaction. What they're saying here is if you originally had a purchase and now you're refinancing that purchase money, you don't have to collect government monitoring information again because presumably you already have that on file and you've already collected that in the first place. But it clearly says you can collect it again. So what it does not say is you cannot collect it if it was previously purchase money. What it also doesn't say is you cannot collect it if it was not purchase money, if it was an equity loan, it doesn't say that anywhere. So this is something that has been a debate in the compliance world. This is really a deep dive topic. It's really getting into the weeds quite a bit.
Early on in my career, I would tip toe the line in talking about collecting GMI for a refinancing and I would kind of throw in purchase money here and there and see if the audience bit and usually they didn’t but I would really tip toe the line. Over the years I’ve looked at this question time and time again, trying to find something that talks about the requirement for purchase money to be there in order for you to collect GMI on a refinancing. However, it's not there. The core rules say this, that you must collect GMI on a refinancing. And they define refinancing at Comment 6 to 1002.13(a) as occurring when an existing obligation is satisfied and replaced by a new obligation undertaken by the same borrower. That's it, that's all it says.
I've looked and looked in the preamble, in the prefatory tax, and other publications to see if there is anything. I couldn't find it anywhere so I’ve come to the terms that if you have a refinancing, which is a loan that satisfies and replaces an existing obligation of the same borrower, you collect government monitoring information.
Don't worry whether or not the previous loan had purchased money. Don't worry about that because what the rule says with the Comment 6 to 1002.13(a) is that refinancings require government monitoring information. That's what it says. And also, if you were one of the banks who was trying to or thinking about trying to look for only loans that were for purchase money, or not purchase money, to determine whether or not you need a GMI, logistically that was a nightmare. And it is a nightmare. It's very difficult to manage that. It's much easier to manage GMI by saying collect it on a refinance, don’t collect it on an equity loan. Collect it on a purchase, don’t collect it on an equity loan. So I recommend just going with: all refinancings don’t look for purchased money.
If you know of something, a publication out there, the original rule, prefatory text, commentary, anything like that, that would sway me differently, let me know because I've looked at this for years, I've not found anything. So my current stance is in refinancing, it’s good to go to collect government monitoring information. In fact, you should collect it for all refinancings, whether or not it was previously purchase money..
Again, this is a deep dive. This is a pretty intense topic but it's something I saw brought up this week and I wanted to share this with you. If you have any questions on that, you can let me know. But I think I've explained this pretty clearly, and that's it for this Compliance Clip.