The Wisconsin Bankers Association has recently become aware of banks facing scrutiny over Home Mortgage Disclosure Act (HMDA) reporting. Specifically, reporting of the number of individual dwelling units when the covered loan is cross-collateralized by multiple properties. While the rules have not changed, there has been some confusion regarding the interplay of cross-collateralization clauses and HMDA rules. This article will discuss those HMDA requirements in relation to cross-collateralization considerations.
Subject to certain exemptions, HMDA requires financial institutions to report data on covered transactions. Data is reported on those fields as required by Regulation C section 1003.4. For institutions which qualify for a partial exemption, some of those fields are optional. For purposes of this article, only one of those data fields is discussed, being the number of individual dwelling units related to the property securing the covered loan or, in the case of an application, proposed to secure the covered loan (total units). This data point is required by Regulation C section 1003.4(a)(31). Total units is not a field subject to optional reporting.
The total units field requires a reporting institution to enter, in numeral form, the number of individual dwelling units related to the property securing the covered loan. For example, if there are five (5) individual dwelling units, bank will enter 5 on the HMDA LAR. When a loan is secured by multiple properties, bank may need to consider each of those properties securing the loan to properly report this field. This includes property securing the loan by any means.
This could be the result of future advance language or other cross-collateralization. For example, when taking a loan using the WBA 451 Business Note, cross-collateralization language is included which provides broad coverage in support of the bank as lender. This language provides in part that the note is secured by all existing and future security agreements and mortgages by the borrower, by any indorser or guarantor, and by any other person providing collateral security. Lenders must carefully consider this language, and its relationship with the borrower, including guarantors and other parties, in order to determine those properties which secure the loan. This type of broad cross-collateralization language is most common on business notes.
As a consumer example, when taking a loan secured by a WBA 428 Real Estate Mortgage, the mortgage document states that the mortgage will secure certain future advances. However, in general, most WBA consumer notes disclaim dwellings as collateral, unless the dwelling is specifically described in the note or agreement. So, a pre-existing mortgage on a dwelling does not secure a future consumer note or agreement unless the note or agreement specifically identifies the dwelling.¹
Lenders need to review their notes and security agreements for this, and similar language. While this is important for a number of reasons, this article strictly discusses the significance of such language as it relates to reporting HMDA total units.
When reporting total units, HMDA provides clarity within its commentary. Comment 1 to section 1003.4(a)(31) makes a cross-reference to section 1003.4(a)(9) comment 2 regarding transactions involving multiple properties with more than one property taken as security (comment 2). This discussion provides clarity regarding how to report on various data points. Comment 2 draws distinctions between those data points which require reporting for a single property (selected by the lender), and those which must be considered for every property securing the loan (in addition to that single property selected by the lender). The information reported for total units is one of those which must be reported for every property securing the loan. Comment 2 in relevant part provides:
“…for aspects of the entries that do not refer to the property identified in § 1003.4(a)(9) (i.e., § 1003.4(a)(1) through (4), (7), (8), (10) through (13), (15) through (28), (31) through (38)), Financial Institution A reports the information applicable to the covered loan or application and not information that relates only to the property identified in § 1003.4(a)(9).”
Because the commentary includes total units as one of those categories for which information must be reported applicable to the covered loan, and not that which relates only to the single property identified under 1003.4(a)(9), then the lender must report total units based upon every property which secures the loan. As a result, lenders must consider whether the loan is secured by multiple properties. Lenders must review their language specifically to make this determination, but as a final point of distinction, note that the effect of cross-collateralization clauses is to secure the loan with multiple properties.
While this is not a new rule, it is recommended that banks review the above HMDA sections as a refresher. From there, banks should review their contracts and HMDA reporting to ensure that all applicable fields are being reported for all applicable properties. It may be that additional monitoring systems need to be put into place to account for multiple properties securing a loan. Banks should conduct this review in advance of any upcoming compliance exam and prepare accordingly.
In summary, if a loan is secured by multiple properties, those properties must be included for purposes of reporting total units. As a result, lenders must review their notes and security agreements to understand the extent of how their loans are secured. This is a contractual matter which can vary from note to note, and from one loan relationship to the next. As such, each loan relationship must be reviewed to determine HMDA reporting requirements. Lastly, as mentioned above, this article is specific to the implications of cross-collateralization clauses in relation to reporting of total units for HMDA purposes. However, cross-collateralization clauses are important to understand for reasons beyond HMDA reporting, and such matters will be addressed in a broader sense in a future article.
For any questions on this matter or others, please contact WBA’s legal team at email@example.com or 608-441-1200.
¹This is for purposes of flood rules. For further discussion on cross-collateralization as it relates to flood requirements, please review the WBA Compliance Journal from February, 2022.