Demographic Information Under Reg B & HMDA

On the surface, collecting and recording demographic information (DI) seems fairly straightforward and simple.  One would assume that requesting and collecting the ethnicity, race, and gender of an applicant wouldn’t be terribly difficult.  Besides, the requirement to collect government monitoring information (GMI) has been around for nearly 40 years (though the regulators just recently changed the reference from GMI to DI).  Why is it then that so many financial institutions still struggle with DI and GMI requirements?  The answer to this is twofold: 1) the rules are actually quite complex; and 2) procedural deficiencies are common in DI/GMI collection processes.

While you may be thinking to yourself that your organization does not struggle with DI/GMI issues, the statistics show that DI/GMI violations are commonly cited violations during examinations.  In a recent edition of the Consumer Compliance Outlook published by the Philadelphia branch of the Federal Reserve, the Fed shares some percentages of violations they have observed during 1,328 examinations in a recent five-year period. 

According to the Fed, 10.2 percent of examinations have cited Regulation C violations and 10.3 percent of examinations have cited Regulation B violations.  While all of these violations related to “either deficiencies concerning the method of collecting DI/GMI or failing to collect” the DI/GMI, institutions were also cited for collecting DI/GMI when it is not required.  8.3 percent of examinations also included Regulation B violations for collecting DI/GMI on loans that are not subject to such collection.

Knowing the Rules

One of the main challenges with DI/GMI data collection is to fully understand what the financial institution’s requirements are.  We have often heard the assumption that DI/GMI requirements are only the responsibility of financial institutions subject to data reporting requirements of the Home Mortgage Disclosure Act (HMDA).  The excuse that “we aren’t a HMDA institution” doesn’t work as Regulation B imposes data collection requirements for financial institutions whether or not they are subject to the HMDA. 

Furthermore, those institutions that are subject to HMDA are also subject to the DI/GMI provisions of Regulation B.  While much of the data collection rules in Regulation B overlap with the HMDA rules, Regulation B has a few instances where DI/GMI would be required when it is not required under the HMDA rules (i.e. a HELOC used to purchase a home).

As a financial institution, you are going to be subject to either 1) only Regulation B, or 2) both HMDA and Regulation B.  Sufficient employee training is critical in understanding the requirements that apply to your organization.

Demographic Information Under ECOA

Regulation B states that a “creditor that receives an application for credit primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence, where the extension of credit will be secured by the dwelling, shall request as part of the application” the marital status, age, ethnicity, race, and gender of the applicant.

Home equity lines of credit are generally exempt from DI/GMI collection under ECOA.  However, the commentary is clear that if, at the time of application, it is “readily apparent” to the creditor that the primary purpose is for the purchase or refinance of a principal dwelling, then the DI/GMI must be collected.

The ECOA GMI requirements also do not apply to loans that do not have a primary purpose to purchase or refinance a dwelling.  This exception includes home improvement loans as well as debt-consolidation purpose loans.  In addition, temporary financing to construct a dwelling is generally exempted (unless the application for the permanent mortgage is included with the application for temporary financing).  Furthermore, vacation homes and other secondary residences are not included as regulation B only applies to transactions that involve the applicant’s principal residence.

The full DI/GMI requirements for ECOA can be found in 1002.13 of Regulation B and the associated commentary.

Understanding Demographic Information Complexity

Once an institution understands which DI/GMI regulations apply, the complexity of complying is exacerbated by the differences in each of the rules.  For example, a “purchase” is defined differently under each regulation.  Under HMDA, a “purchase” is defined as a loan secured by and made for the purpose of purchasing a dwelling.  This means that a loan secured by one dwelling that is used to purchase a different dwelling is included in the definition of a purchase under HMDA.  For ECOA, however, a purchase only includes an extension of credit where the collateral being secured is the dwelling being purchased.

In addition, the information that is included under “demographic information” is not consistent between the HMDA and Regulation B. Under Regulation B, DI/GMI includes five data fields: ethnicity, race, sex, marital status, and age.  DI/GMI under HMDA, however, only includes ethnicity, race, and sex.

Furthermore, a “dwelling” is defined differently between Regulation B and HMDA.  The Philadelphia Fed explains the difference: “Under Regulation B, a dwelling is limited to residential structures with one to four units.  But Regulation C defines dwellings to contain any number of units, and it excludes recreational units and “transitory residences such as hotels, hospitals, and college dormitories.”

Increasing Demographic Information Burdens

As challenging as DI/GMI compliance has been in the past, the reality is that the burdens just became even greater.  Section 1094 of the Dodd-Frank Act amended the Home Mortgage Disclosure Act to significantly expand the number of required data collection fields which ultimately resulted in a new requirement to collect subcategories of demographic information for ethnicity and race.

In addition, Section 1071 of the DFA expanded the Equal Credit Opportunity Act (ECOA) to impose data collection and reporting requirements for financial institutions for certain small businesses (i.e. small business data reporting). While HMDA reporting is only required for certain financial institutions, it appears that the small business data reporting requirements may apply to all financial institutions.

Furthermore, examiner scrutiny and concern has appeared to increase in recent years.  For example, the recent edition of Consumer Compliance Outlook, began with an article on DI/GMI compliance that spanned five and a half pages.  This article concluded with the following directive: “Financial institutions must have strong controls and training to ensure bank staff can distinguish between the information they are required to collect under Regulations B and C versus the information they cannot collect.”

Demographic Information Going Forward

As both HMDA and ECOA data collection requirements will be expanding in the next few years, it is important to ensure that your organization has a handle on the existing rules for DI/GMI compliance.  It is much easier to update an existing program than it is to try to both fix and expand a program.  The following are some practical tips for ensuring your DI/GMI posture is at a comfortable level before the rules are expanded and an increased burden is placed on your staff:

  1. Determine whether your organization is subject to 1) ECOA or 2) HMDA and ECOA
  2. Conduct transaction testing to
    1. Ensure appropriate data collection when required
    2. Ensure data collection is not occurring when it is not required
  3. Evaluate the results of any deficiencies discovered during transaction testing
  4. Conduct appropriate training to applicable employees regarding the GMI requirements of your organization

View the full article found in the Consumer Compliance Outlook can be found here. 

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