Most people follow ethically acceptable standards in all their business dealings. Unfortunately, there are situations where bias and prejudice can present a problem. One of those areas in the United States fell upon financial institutions entrusted with lending money to purchase real estate. This goes by the name of HMDA reporting.
To ensure that fairness in mortgage lending was uniform across the country, Congress established the Home Mortgage Disclosure Act. First, we will present you a very brief overview of the legal aspects of the law, followed by 17 important steps on how to comply with it using reliable HMDA reporting principles.
What Is HMDA?
The legal specifics of the Home Mortgage Disclosure Act immediately increased federal authority over the regulation of interest rates, depository situations, and Electronic Fund Transfers (EFTs). However, the primary focus was to establish a clear set of HMDA reporting principles for home mortgages. In the mid-1970s, the government noticed an alarming disparity in the issuance of home mortgages, especially in urban areas.
The US Congress felt much of this disparity was because lending institutions were refusing to loan to qualified applicants. Many loan applications were declined with a notable bias towards race and gender.
Another problematic issue was approved loans made to these groups, containing unfair terms and conditions. In 1975, the Home Mortgage Disclosure Act was passed into law to combat unethical mortgage bias, making it illegal to use these unfair lending principles.
Steps on How to Comply with the Home Mortgage Disclosure Act
HDMA reporting involves a series of important steps to make sure your lending institution adheres to the principle of the law. If you’re a financial institution that offers mortgage loans, or even a buyer who wants to be certain they are dealing with an ethical lender, there are specific HMDA reporting requirements.
The first thing is to know if you must follow HMDA reporting rules. It does not matter if you’re a depository or nondepository financial institution. If you’re a lender who provides mortgage loans to the public, federal law may require you to follow HMDA reporting rules and guidelines.
The Home Mortgage Disclosure Act data your institution is required to submit is extensive but easy to produce if you record each item in a uniform, step-by-step process. Here are 17 steps for reporting for HMDA getting it right. These are all the steps, which federal law requires everyone to record as a financial lender of mortgages.
One must submit the date of the loan application. This is important concerning making sure someone cannot delay loan applications beyond a reasonable timeframe.
The loan application requests the landlord to provide a record of how much money he/she asked for in the loan application.
All financial lenders must report what type of property is financing applied.
You must record who is going to occupy the property. There are registration requirements for owner occupied dwellings vs. purchases that are made to generate rental income.
The category of the loan request is important. Has the borrower applied for a conventional loan, FHA loan, VA loan, or another type of guaranteed loan.
You need to ask specifically what the borrower’s purpose is for the loan. They can use the money for a purchase, home improvements, and remodeling, or refinancing of an existing mortgage.
You should record every borrower request for pre-approval separately from an actual mortgage application.
One should submit every result, or action to the Consumer Financial Protection Bureau, the agency that oversees the collective HMDA data to ensure fairness in home lending. Lenders must make a record of approvals, denials, (with reason), including all loan applications that they withdraw.
One must note a record of all dates contained within the transaction, including final actions.
Each loan applications must include the precise location of the property. This information should contain the state, county, township and census data of record.
Since one of the primary objectives of the Home Mortgage Disclosure Act was to stop gender and racial bias, each loan application must record the ethnicity, race, and gender of the applicant. This is not an option extended to the buyer.
Each loan must show the gross income of the borrower or borrowers. All guaranteed mortgage loans must be accompanied by a federal income tax return to support these calculations.
Whenever a lender sells a mortgage in the secondary financial market, one must submit the name and type of purchaser of the loan under HMDA reporting guidelines.
If your institution denies an application, you must specifically list the reason for the denial.
Every mortgage application must specify the interest rate applied to the loan. This is called the Rate Spread. It is a metric, which the government uses to analyze interest data. It helps prevent extortion of borrowers, by preventing lenders from surpassing the federal lending rate threshold for unethical reasons, such as gender or race.
The financial lender must note if the loan and application are not covered under the Home Ownership and Equity Protection Act of 1994. This information falls under a federal mandate.
The final thing you must list, as part of HMDA reporting, is the status of the loan. HMDA information records whether it is a 1st or 2nd mortgage.
The HMDA was an essential law that specialists wrote to combat the racial and gender bias in lending. It has helped to promote inner city development and enhanced the lives of individuals who otherwise were refused mortgages. Adherence HMDA reporting ethics still falls within the Fair Housing Act, but the Consumer Financial Protection Bureau now oversees the legalities of the law.
Finally, if you are part of a financial institution that extends mortgage loans as part of your business, you must understand how to comply HMDA reporting guidelines. Also, if you follow the steps listed consistently, you won’t have any problems. When you fail to apply these guidelines, the consequences can be lending restrictions place on your company or outright loss of your ability to extend mortgage loans.