A compliance lead excludes every file where the applicant declined to state their ethnicity, reasoning that an incomplete record cannot be reported. What is wrong with the reasoning?
Correct Answer
C) Use Regulation C coverage rules before excluding the file
Why this is correct: The question involves a HMDA reporting issue. Regulation C is the implementing regulation for HMDA. The core concept is that an institution must first determine if a loan or application is covered under Regulation C's specific coverage rules before deciding whether to collect and report HMDA data or to exclude the file. The correct action is to apply these federal coverage rules to the facts of the advertising approval to make a proper determination. Why the other choices are wrong: "Use an internal exception instead of the required federal disclosure or timing rule" is wrong because internal policies cannot override federal HMDA reporting mandates. "Wait until a regulator asks for the file before applying the federal requirement" is wrong because HMDA compliance is proactive, not reactive; data must be collected and reported as required, regardless of regulatory inquiry. "Apply the PMI cancellation timing rule even though the file is testing HMDA Reporting Requirements" is wrong because PMI cancellation rules (under the Homeowners Protection Act) are unrelated to the HMDA coverage determination needed here. Exam tip: For HMDA questions, remember that the first step is always to check Regulation C coverage. If the loan/application is covered, you report; if not, you may exclude it.
Why This Is the Correct Answer
The correct response is "Use Regulation C coverage rules before excluding the file" because Covered institutions collect and report HMDA data for covered mortgage applications and loans.
Why the Other Options Are Wrong
Option A: Use an internal exception instead of the required federal disclosure or timing rule.
Use an internal exception instead of the required federal disclosure or timing rule. is not correct because it does not apply the rule tested by this file scenario.
Option B: Wait until a regulator asks for the file before applying the federal requirement.
Wait until a regulator asks for the file before applying the federal requirement. is not correct because it does not apply the rule tested by this file scenario.
Option D: Apply the PMI cancellation timing rule even though the file is testing HMDA Reporting Requirements.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Memory Technique
HMDA reporting: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
Match the file facts to HMDA reporting; do not choose an exception or shortcut that skips the required rule.
Common Mistakes to Avoid
- -Choosing an internal exception instead of the governing rule
- -Treating preliminary or informal facts as a substitute for required documentation
- -Answering from a familiar but unrelated mortgage topic
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