The new HMDA rules have created a whirlwind of challenges for HMDA reporters as reporters have had to learn which knowledge they could retain from the prior rules and which knowledge they had to adjust - not to mention the new elements that had to be learned. The reality is that it takes time to get all of the “kinks out” when learning a new, especially one that is as complicated as HMDA and Regulation C. A prime example of the challenges that are created due to the implementation of a new rule is the HMDA loan amount when there has been a counteroffer.
The Challenge With the Loan Amount for Counteroffers
While reporting the loan amount for originated and denied loans for HMDA is typically a fairly straightforward process, the rules actually seem to complicate things when a creditor does not accept the loan amount the applicant originally applied for but counteroffers with a different loan amount. The confusion in Regulation C comes from the commentary to 1003.4(a)(7), as the associated comments are not as clear as they could be. In fact, comment 1 is the only comment under 1003.4(a)(7) that specifically talks about counteroffers and the final rules do not give any further information in this section regarding the covered loan amount and how it applies to counteroffers.
Therefore, the only thing we seem to have to go off of in determining how to report the loan amount where there was a counteroffer is comment 1 to 1003.4(a)(7) which says the following:
"1. Covered loan amount—counteroffer. If an applicant accepts a counteroffer for an amount different from the amount for which the applicant applied, the financial institution reports the covered loan amount granted. If an applicant does not accept a counteroffer or fails to respond, the institution reports the amount initially requested.”
The challenge with this comment is that the comment only really talks about three instances: 1) when a loan is "granted," 2) if an applicant does not accept a counter offer and 3) if an applicant fails to respond. As you know, these three scenarios don't cover all of the purpose options under Regulation C and - probably the biggest source of confusion is that - "granted" is not a defined term in Regulation C. As “granted” is not a defined term, we don't know if the term relates to 1) the loan amount of the counteroffer that was available to the applicant or 2) only loan amounts that were actually "originated" - meaning that the counteroffer loan amount should not be used for loans that did not originate. Again, “granted” is not defined in Regulation C and, therefore, this leaves much question on how to report the HMDA loan amount when there was a counteroffer for an application that was ultimately withdrawn, closed for incompleteness, or denied.
The bottom line is that the way the loan amount is reported when there was a counteroffer is going to depend on action taken for the application.
HMDA Loan Amount for Originated Counteroffers
When the action taken for a loan that had a counter offer is originated - meaning that the applicant accepted the counteroffer and the loan closed - the loan amount listed on the HMDA LAR is the amount of the promissory note. This is very straightforward and should not cause any confusion, even if a counteroffer was involved. That said, things start to get a bit more complicated when action taken on a counteroffered application was an action other than an origination.
HMDA Loan Amount for Counteroffers Approved But Not Accepted
If an application is approved but not accepted, the commentary actually provides us with a bit more guidance than some of the other action taken types. Specifically, comment 2 makes it clear that the counter-offer amount (i.e. approved amount) is what goes on the LAR. The following is comment 2 to 1003.4(a)(7):
"2. Covered loan amount—application approved but not accepted or preapproval request approved but not accepted. A financial institution reports the covered loan amount that was approved."
As is the case with originated loans, the HMDA loan amount for counteroffers that are approved but not accepted should be fairly straightforward.
HMDA Loan Amount for Counteroffers Denied, Withdrawn, or Closed for Incompleteness
While the rules may not seem that difficult at this point, things start to get more complicated when we try to determine the HMDA loan amount for counteroffers that are denied, withdrawn, or closed for incompleteness. Upon a preliminary review of comment 3 to 1003.4(a)(7), one can see that comment 3 says to report the amount the applicant applied for in the case of a denied application, closed for incompleteness or withdrawn application. The following is comment 3 to 1003.4(a)(7):
"3. Covered loan amount—preapproval request denied, application denied, closed for incompleteness or withdrawn. For a preapproval request that was denied, and for an application that was denied, closed for incompleteness, or withdrawn, a financial institution reports the amount for which the applicant applied."
Now, comment 3 is clearing talking about applications where a counteroffer was not made. The confusion with comment 3 is whether or not a denied, withdrawn, or closed for incompleteness application that has had a counteroffer also applies to comment 3.
In other words, the question becomes this: does a denied, withdrawn, or closed for incompleteness application that has had a counteroffer need to 1) follow comment 1 of 1003.4(a)(7) and report the loan amount as the counteroffer amount or 2) follow comment 3 of 1003.4(a)(7) and report the original amount the applicant applied for?
At this point, one may think that this is a gray area as neither the regulation nor the commentary are clear on the issue. When this happens, the typical way to proceed is to just have choose a method (i.e. camp) and be consistent. In this case, however, the 2017 HMDA final rule actually discussed counteroffers a bit more and provided guidance that seems to point toward a more concrete answer on which loan amount to report. The interesting thing about the additional guidance is that the preamble clarification is actually found in section 1003.4(a)(8) (which is the section that talks about loan purpose) rather than 1003.4(a)(7) (which is the section that talks about loan amount).
The preample to 1003.4(a)(8) - the section on loan purpose - goes on and on about how accepted counteroffers basically restart and reset the application for Reg C purposes. The preamble in this section appears to make make it clear that they expect a counteroffer to take the place of the original application.
Here are just a few of the statements in the preamble to the 2017 final rule under section 1003.4(a)(8):
"The Bureau proposed to clarify that, if the applicant agrees to proceed with consideration of the financial institution's counteroffer, the counteroffer takes the place of the prior application, and the financial institution reports the action taken on the application under the terms of the counteroffer."
"...where the applicant agrees to proceed with consideration of the financial institution's counteroffer, the financial institution reports the action taken field as the disposition of the application based on the terms of counteroffer."
Therefore, the bottom line is this: it appears the CFPB is telling us to report the loan amount based on the accepted counteroffer rather than the original application.
Counteroffer Preamble from the August 2017 Final Rule
For reference, here are a few of the full excerpts from the August 2017 final rule:
"The Bureau recognized that revised comments 4(a)(8)(i)-9 and 4(a)(8)(i)-13 may be read as in tension regarding how to report the action taken on an application for which a counteroffer is made, the applicant expresses interest in the new terms, and the financial institution provides a conditional approval to which the applicant does not respond or which otherwise does not result in an originated loan. Comment 4(a)(8)(i)-9 could be read to require the financial institution to report the action taken as a denial on the original loan terms applied for, while comment 4(a)(8)(i)-13 could be read to require the action taken to be reported as a denial, file closed for incompleteness, approved but not accepted, or application withdrawn, depending on the circumstances.....
In addressing inquiries raising this concern, the Bureau had provided informal guidance that a financial institution should follow comment 4(a)(8)(i)-13 when an application for which a counteroffer is made is followed by a conditional approval that does not result in an originated loan. In accordance with this informal guidance, and to address the need to provide a full range of options in reporting the action taken on an application when there is a counteroffer, the Bureau proposed to amend the language of comment 4(a)(8)(i)-9 to broaden the possible actions taken that could be reported. The Bureau proposed to clarify that, if the applicant agrees to proceed with consideration of the financial institution's counteroffer, the counteroffer takes the place of the prior application, and the financial institution reports the action taken on the application under the terms of the counteroffer. In addition, the Bureau proposed to illustrate this interpretation by providing an example in comment 4(a)(8)(i)-9. The example would clarify that, if a financial institution makes a counteroffer, the applicant agrees to proceed with consideration of the counteroffer, and the financial institution sends a conditional approval letter stating the terms of the counteroffer, the financial institution reports the action taken on the application in accordance with comment 4(a)(8)(i)-13 regarding conditional approvals."
"One commenter who expressed opposition to the changes preferred that comment 4(a)(8)(i)-9 be read to require that the action taken be reported as loan denied whenever a counteroffer is made and the loan is not ultimately originated. This commenter also stated that the new language was a major change and that financial institutions would have problems implementing it before the effective date."
"The Bureau now adopts the amendment to comment 4(a)(8)(i)-9 largely as proposed, with some modifications to address commenters' concerns. First..... Second, the comment is revised to clarify that a financial institution reports the action taken based on the final disposition of the application in response to the terms of the counteroffer. Information such as the application date and ULI will not change as a result of the existence of a counteroffer with which the applicant is proceeding. An additional example is also added to the commentary.
"The Bureau agrees with the industry commenter who stated that the guidance would ease the difficulties of reporting by allowing financial institutions' systems to reflect more accurately the specifics of the loan file at the time of final action."
"Furthermore, the Bureau has replaced the language in the proposed comment stating that the counteroffer takes the place of the prior application. This change is meant to make clear that the revisions to comment 4(a)(8)(i)-9 do not treat a counteroffer as a new covered loan that must be reported as a separate entry in the loan/application register, but rather provide that for purposes of reporting action taken, where the applicant agrees to proceed with consideration of the financial institution's counteroffer, the financial institution reports the action taken field as the disposition of the application based on the terms of counteroffer.”