By: Timothy A. Raty, Sr. Regulatory Compliance Specialist
Note: All Regulation C citations are to the 2020-version of the Regulation, as amended by 80 FR 66128 (2015)
Loan applications may appear to be straightforward documents, where borrowers make their case to creditors as to why the latter should extend to the former a line of credit, by providing them with useful items of information which are often weighed to see whether such a extension is a sound investment (e.g. income used to pay back the loan, assets used to secure the loan in case of default, employment history to indicate income stability, etc.)
However, there are more to loan applications than meets the eye. Their purposes delve beyond simple considerations of investment viability and into the realms of data collection, government monitoring, and discrimination. They are well-regulated by the Consumer Financial Protection Bureau (“CFPB”) through Federal Regulations B and C, as well as by the Federal Housing Finance Authority (FHFA) through its two government-sponsored enterprises, the Federal National Mortgage Agency (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). Recent changes to the requirements of all these actors make it worthwhile to take a “high-level” look at what these requirements mandate and how they are evolving.
Regulation B (12 CFR Pt. 1002)
The alleged purpose of Regulation B “is to promote the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); to the fact that all or part of the applicant’s income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act.” (12 CFR § 1002.1[b])
To fulfill this purpose, Regulation B prohibits creditors from inquiring “about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction” (Ibid. § 1002.5[b]), except for a limited number of purposes (outlined primarily in Ibid. § 1002.5). One of these exceptions is as follows:
“. . . a creditor may obtain information required by a regulation, order, or agreement issued by, or entered into with, a court of an enforcement agency (including the Attorney General of the United States or a similar state official) to monitor or enforce compliance with the [Equal Credit Opportunity] Act, this part [Regulation B], or other Federal or state statutes or regulations.” (Ibid.§ 1002.5[a][2])
Another is found under Ibid. § 1002.13(a), which requires that a creditor which “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” to request information concerning the applicant’s ethnicity, sex, marital status, and age.
The purpose for requesting this information is not explicitly outlined under Ibid., but considering the record retention requirements under Ibid. § 1002.12, it is clear that this information will be used by the CFPB to effectuate the purposes of Regulation B (e.g. to determine whether the creditor discriminated against the applicant based on these characteristics or not).
Regulation C (12 CFR Pt. 1003)
While Regulation B is geared towards preventing creditors from inquiring “about the race, color . . . national origin, or sex of an applicant or any other person in connection with a credit transaction” (Ibid. § 1002.5[b]), Regulation C is geared towards permitting the Federal government to inquire about this information, in order to make it available to the public and for the following alleged purposes:
“[Regulation C] implements the Home Mortgage Disclosure Act [12 USCA §§ 2801 – 2811], which is intended to provide the public with loan data that can be used:
i. To help determine whether financial institutions are serving the housing needs of their communities;
ii. To assist public officials in distributing public-sector investment so as to attract private investment to areas where it is needed; and
iii. To assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.” (12 CFR § 1003.1[b])
To achieve this, financial institutions are required to collect and report various elements of the loans which are covered by Regulation C (aka “covered loans”). These elements include (but are not limited to) “ethnicity, race, and sex” (Ibid. § 1003.4[a][10][i]).
FNMA Form 1003
The “Uniform Residential Loan Application” (“URLA”; FNMA Form 1003/FHLMC Form 65) has been used in the industry since 1992 (see FHA ML 92-7) and is required for nearly all types of mortgage loans (see FNMA 2017 Selling Guide B1-1-01, FHLMC Single-Family Seller/Servicer Guide ch. 4101.1, FHA Single Family Handbook 4000.1 II.A.1.a, VA Lender’s Handbook ch. 5, 4-c, and RD HB-1-3555 ch. 15.3).
To comply with the provisions of Regulations B and C, the current edition of the URLA (rev. 6/ 2009) contains Section X (“Information for Government Monitoring Purposes”) which formally requests that the loan applicant self-report his or her characteristics (e.g. ethnicity, race, and sex), to enable the financial institution to report this information to the Federal government.
Historical Relationship Between Regulations B and C and the URLA
Because Regulation B’s purpose is to both limit creditors from collecting certain information about loan applicants and to collect this same information for the Federal government, while the purpose of Regulation C is to collect this information for public distribution, there is both a dual and conflicting relationship between these two regulations which necessitates extra vigilance on the part of creditors to ensure that they are complying with both.
For example, because Regulation C requires the ethnicity, race, and sex of the applicant to be reported for “applications for covered loans” (12 CFR § 1003.4[a]), a part of the loan application process must involve requesting the loan applicant to voluntarily provide this information (a financial institution cannot independently report these characteristics, unless the “information was collected on the basis of visual observation or surname” [Ibid. § 1003.4{a}{10}{i}] after the applicant does not self-disclose them).
Regulation B, on the other hand, limits the creditor’s ability to identify the ethnicity, race, and sex of the applicant and places certain restrictions on the form and type of application that can be used (see 12 CFR § 1002.4), particularly against the use of any language which would “discourage on a prohibited basis a reasonable person from making or pursuing an application.” (Ibid. § 1002.4[b])
Even when effectuating government-monitoring purposes under Ibid. § 1002.13, the application itself must contain a disclosure concerning the purpose for collecting information about the loan applicant’s ethnicity, race, sex, marital status, and age (see Ibid. § 1002.13[b]). It must also contain questions about these categories, as well as a request for the applicant to voluntarily submit this information (again, the creditor cannot independently report this information, unless it is done “on the basis of visual observation or surname” after the applicant does not provide this information; see Ibid. § 1002.13[b]).
To simplify matters for creditors who must navigate between “a rock and a hard place” as to the form of the application, the CFPB does provide the following guidance for how the applications of creditors can comply with Regulation B:
“The disclosure to an applicant regarding the monitoring information may be provided in writing. Appendix B contains a sample disclosure. A creditor may devise its own disclosure so long as it is substantially similar. The creditor need not orally request the monitoring information if it is requested in writing.” (12 CFR Pt. 1002, Paragraph 13[c] – 1)
The sample form referred to is located in 12 CFR Pt. 1002, App. B. It is the fifth model form and is also a duplicate of the 2004-version of the URLA. This ties the three different requirements (Regulations B and C and FNMA/FHLMC requirements) together and provides a means for creditors to comply with them all.
Recent Amendments
On October 28, 2015 the CFPB published in the Federal Register amendments to Regulation C, made pursuant to the requirements of Section 1094 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (124 Stat. 1376 [2010]; for the amendments, see 80 FR 66128 [2015]) One of the many substantial changes to Regulation C included the way in which the ethnicity and race of the applicant is to be collected and reported to the Federal government.
Before these amendments (commonly referred to as the “2018 HMDA Changes”) were promulgated, under both Regulations B and C the ethnicity and race of the applicant was collected using aggregated categories (e.g. ethnicities were lumped into five general categories of American Indian, Native Hawaiian, Asian, White, or Black). However, under the 2018 HMDA Changes, this information is collected using disaggregated categories (e.g. instead of simply reporting “Asian”, an applicant can report “Asian – Filipino”; see 80 FR 66187 – 66194 [2015] for details).
This has created a “domino effect” on both Regulation B and FNMA/FHLMC requirements. Currently, Sections X of the 2009- and 2004-verison of the URLA only permits an applicant to report aggregated information – thus, use of Section X will not be sufficient to comply with Regulation C. These changes necessitate a revision to the URLA.
FNMA and FHLMC have been working on revising the URLA for several years (planning began before the final amendments to Regulation C were published). On August 23, 2016 FNMA released the beginning designs of the newest version of the URLA (see FNMA articles about the revision here), which is still undergoing some modifications – including adding an area to the form wherein loan applicants can indicate the language they would prefer to communicate in (see https://www.fhfa.gov/Media/PublicAffairs/Pages/Preferred-Language-Question-to-be-Added-to-the-Redesigned-Uniform-Residential-Loan-Application.aspx?utm_medium=email&utm_source=govdelivery).
The newest version of the URLA would replace Section X with a new Section 7 (“Demographic Information”), which is substantially similar to the “Sample Data Collection Form” published by the CFPB in Regulation C under 12 CFR Pt. 1003, App. B (see 80 FR 66136 [2015]). FNMA and FHLMC have announced that creditors may begin using the new URLA on July 1, 2019, with mandatory usage required for new applications in February, 2020 (see https://www.fanniemae.com/content/news/urla-announcement-september-2017.pdf).
The CFPB has also issued an official opinion that use of this new URLA would be considered compliant with certain provisions of Regulation B, specifically 12 CFR § 1002.5(b) through (d) (see 81 FR 66930 [2016]).
Demographic Information – Between Now and Then
Interlacing the provisions of the three requirements inevitably creates conundrums. Creditors covered by Regulation C must begin collecting disaggregated ethnic and racial data for covered loans originated in 2018, for reporting purposes in 2019. However, they cannot use the 2019-version of the URLA until July, 2019 (without causing the loan to be unsalable to FNMA/FHLMC and uninsurable by FHA/VA/RD), yet the 2009-version of the URLA is not sufficient for compliance with the 2018-version of Regulation C.
To solve this predicament, FNMA/FHLMC have created a “Demographic Information Addendum” which is to be used in lieu of Section X of the 2009-URLA for compliance with Regulation C. This addendum is substantially similar to the “Sample Data Collection Form” published by the CFPB in Regulation C. The CFPB has also amended Regulation B by adding a similar form to both of these to 12 CFR Pt. 1002, App. B, along with amending 12 CFR § 1002.13(a) and its associated Official Staff Commentary to permit creditors to use such form for collecting Regulation B-required information – which required information will also change (see below).
Overlap of Regulations B and C
While Regulations B and C cover the same types of entities, loans, and properties in most cases, they do not do so in all cases.
For example, Section 13 of Regulation B (12 CFR § 1002.13) applies to “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.” (Ibid. § 1002.13[a][1]) “Dwelling” is defined (in part) as “a residential structure that contains one to four units” (Ibid. § 1002.13[a][2])
Regulation C applies to a “financial institution” (see Ibid. § 1003.1[c]). When all the definitions under and associated with “financial institutions” are considered (starting in Ibid. § 1003.2[g]), along with the general exemptions to Regulation C (see Ibid.§ 1003.3), there are cases where Section 13 of Regulation B may apply to a creditor, but not Regulation C; and vice versa. For example:
- ABC Bank accepts a loan application for a loan made to purchase a single-family residence which will become the applicant’s primary residence. Section 13 of Regulation B clearly applies to the application. However, because ABC Bank did not originate at least 25 closed-end mortgage loans and at least 100 open-end lines of credit over the preceding two years, Regulation C does not apply because the Bank is not considered a “financial institution” (see § 1003.2[g][1][v]).
- DEF Bank accepts a loan application for a closed-end, covered loan to refinance a six-unit multi-family dwelling, which is the applicant’s primary residence. Regulation C applies to the application, since Regulation C is not generally limited in scope to the number of units a dwelling has (see § 1003.2[d] & [e]). However, Section 13 of Regulation B does not apply, since it is only applicable to loans secured by a dwelling of one-to-four units (see Ibid. § 1002.13[a]).
Because the application of Regulation C is heavily dependent upon how many loans a financial institution originates over a certain period of time, it is possible for a creditor to be covered by both Regulations one year, then covered only by Regulation B for another year, then covered by both again the next year, et cetera. Also, because Section 13 of Regulation B applies primarily based on the type of loan applied for, it is possible for both Regulations to apply to one loan, while another loan may only be subject to Regulation C (e.g. a closed-end loan on a vacation home).
Compounding this is the fact that (currently) Section 13 of Regulation B requires the collection of aggregated ethnic/racial information, while Regulation C requires the collection of disaggregated ethnic/racial information. Thus, depending on which Regulation applies on any given loan and in any given year, a creditor would have to collect different types of information on a case-by-case basis.
To alleviate this problem, the CFPB is amending Section 13 of Regulation B to permit a creditor to collect either aggregated or disaggregated ethnic/racial information (see 82 FR 45680 [2017]). This will permit creditors who are not frequently (if ever) governed by Regulation C to continue collecting aggregated ethnic/racial information using the 2009-version of the URLA for compliance with Section 13 of Regulation B until July, 2019. It will also permit creditors who are always (or frequently) governed by Regulation C to collect the disaggregated ethnic/racial information without asking separately for the aggregated ethnic/racial information for Regulation B purposes.