Nov. 11: Notes on ECOA & HMDA, blockchain & credit reporting; corporate tax fallacies; tallying mortgage production

Pass this along to any veteran(s) in your life, as I did earlier this week to my father who was in the U.S. Navy from 1942 to 1962: free things for veterans. And check out the cool story for today’s “joke.”

While everyone is focused on HMDA, ECOA is coming

Lenders hoping that their vendors will cover them on the upcoming HMDA changes are making a mistake. They need to make sure “all systems are go” with themselves. What about ECOA, which is also governed by the CFPB? Let’s look at changes to lending operations. Specifically, the new data collection and reporting requirements under the Equal Credit Opportunity Act (ECOA) for loans and loan applications for small businesses and firms owned by minorities and/or women. The new requirement will probably impact new loan applications, where banks will need to register for business loan data collection and submission.

The requirement will be entirely separate from the data collection and reporting requirements of both the HMDA and the Community Reinvestment Act (CRA) and apply to financial institutions as the ECOA defines them. This includes banks, though it’s not clear whether any banks will be exempt based on asset size or loan volume.

Lenders will have to collect and report data for any credit application made by a small business or one owned by women and/or minority members, with “application” defined as an oral or written request for defined or open-ended credit, secured or not. “Minority” members include African Americans, Native Americans, Hispanic Americans, and Asian Americans. “Ownership” means that the person in question owns more than 50% of the business, or receives more than 50% of the profit or loss.

Steve Brown with PCBB states that, “According to the law, a ‘small business’ is the same as a ‘small business concern’ in the Small Business Act (SBA). As anyone who regularly deals with the SBA can tell you, however, this is not always a particularly helpful definition. Banks have asked the Bureau to either follow the definition in the CRA or permit flexibility based on bank practices. In any case, the ECOA will have to clearly indicate what constitutes a small business, and banks will need to identify the businesses, applications, and loans that qualify for reporting.

“All commercial loan officers will need to develop procedures for asking loan applicants about their status, as well as for making sure underwriters have no access to the answers. In an instance where that isn’t possible or practical, banks will have to tell applicants that underwriters will know their demographic information, but that this will not affect the decision to grant or withhold credit. The statute requires that banks collect and submit a list of information including the census tract of the applicant’s principal place of business, the business’s gross annual revenue during the fiscal year before application, the primary owner’s or owners’ race, sex, and ethnicity; and any other information the ECOA ultimately deems necessary.

“The bank’s record of that required information may not include any information that could personally identify the applicant: name, phone number, email address, or any specific address beyond census tract information. Again, this means keeping the records separate from the application.

“Once the bank has the information, it will have to report that data to the ECOA and make it available to the public on request, deleting or modifying anything private. Banks can also aggregate data for their own use and must make that data publicly available. Aggregated data is the overall point, after all. This rule’s purpose is to facilitate the enforcement of fair lending laws. Ultimately, this national data will help all banks analyze small business lending. Although nothing has been set in stone yet, it may be in your bank’s interest to start planning to meet such requirements as you continue to monitor things.”

Double counting loans

“Rob – Thanks for continuing to point out the insanity that is the counting of correspondent loans as ‘originations.’ A correspondent transaction is a secondary market transaction – the buying of an already closed loan. If purchased loans are truly considered ‘originated’ loans then Fannie and Freddie are, by far, the largest originators on the planet. It’s hard to understand why this misleading approach lives on. It seems easy enough to separate ‘originations’ where the company’s funds are used at the table from ‘correspondent’ where a firm buys another firm’s closed loans. These two things are wildly different. Putting them together is simply irresponsible.”

Death and taxes

Certainly, no accountant wants to simplify the tax code. Making tax preparation easier for everyone is not in their best interest. And it’s easier for a company to change countries than it is for an individual. “While the final Republican tax plan is still a work in progress that may never become law, one thing’s very clear; its philosophy is to tax people, who are relatively immobile, and lower taxes on corporations, which can much more easily move their money. Yes, while workers will generally get short-term relief, two-thirds of the tax cuts will go to corporations.” So observed Elliot Eisenberg.

Steve N. penned, “I read your column every day and these ‘alleged’ tax cuts are a myth. Rarely does a corporation pay 35% in taxes. There are various newspaper articles with ‘real facts’ about the corporate tax rates and all of the multi-billion-dollar corporations that pay no taxes. If the government just stops giving tax subsidies to corporations, it could save $527 billion (yes billion) dollars in 10 years. That is what the government has already given corporations.

“I’m just the little middle-class guy trying to get the word out. It’s ‘all about the wealthy.’ Tax rates are very misleading. Apple reports its effective tax rate as 25.8%, which is quite a bit lower than the statutory 35% rate. Microsoft’s income tax expense was $3.3 billion, for an effective rate of 16.5%. Alphabet, the parent company of Google, posted a $4.7 billion tax expense, or 19%. General Electric earned $10 billion last year, but recorded a tax benefit of $400 million for a 12-month tax rate of -4.5%. ExxonMobil, because of the collapse in oil prices, had an odd income statement in 2016, with EBIT (earnings before income tax) of $4.2 billion, net income of $7.8 billion, and a $406 million income tax benefit. That would imply that Exxon paid no taxes in 2016.

The 35% corporate tax rate is a myth. Profitable corporations are subject to a 35 percent federal income tax rate on their U.S. profits. But many corporations pay far less, or nothing at all, because of the many tax loopholes and special breaks they enjoy. This report documents just how successful many Fortune 500 corporations have been at using loopholes and special breaks over the past eight years. As lawmakers look to reform the corporate tax code, this report shows that the focus of any overhaul should be on closing loopholes rather than on cutting tax rates.

“As a group, the 258 corporations paid an effective federal income tax rate of 21.2 percent over the eight-year period, slightly over half the statutory 35 percent tax rate. Eighteen of the corporations, including General Electric, International Paper, and PG&E, paid no federal income tax at all over the eight-year period. A fifth of the corporations (48) paid an effective tax rate of less than 10 percent over that period. Of those corporations in our sample with significant offshore profits, more than half paid higher corporate tax rates to foreign governments where they operate than they paid in the United States on their U.S. profits.”

Steve’s information went on. “One hundred of the 258 companies (39 percent of them) paid zero or less in federal income taxes in at least one year from 2008 to 2015. The sectors with the lowest effective corporate tax rates over the eight-year period were Utilities, Gas and Electric (3.1 percent), Industrial Machinery (11.4 percent), Telecommunications (11.5 percent), Oil, Gas, and Pipelines (11.6 percent), and Internet Services and Retailing (15.6 percent). Each of these industries paid, as a group, less than half the statutory 35 percent tax rate over this eight-year period.”

“Congress should repeal the rule allowing American multinational corporations to indefinitely ‘defer’ U.S. taxes on their offshore profits. This reform would effectively remove the tax incentive to shift profits and jobs overseas. Limit the ability of tech and other companies to use executive stock options to reduce their taxes by generating phantom ‘costs’ these companies never incur.

Having set ‘bonus depreciation’ on a path toward expiration at the end of 2019, Congress should take the next step and repeal the rest of accelerated depreciation, too. At a minimum, lawmakers should resist calls to expand these tax breaks by allowing for the immediate expensing of capital investments. Reinstate a strong corporate Alternative Minimum Tax that does the job it was originally designed to do.

“Facebook, Aetna and Exxon Mobil, among others, saved billions in taxes by giving options to top executives to buy stock in the future at a discount. The companies then get to deduct their huge payouts as a loss. Facebook used excess tax benefits from stock options to reduce its federal and state taxes by $5.78 billion from 2010 to 2015, the institute found. Individual industries have successfully lobbied for specific tax breaks that function as subsidies: for instance, drilling for gas and oil, building NASCAR racetracks or railroad tracks, roasting coffee, undertaking certain kinds of research, producing ethanol or making movies (which saved the Walt Disney Company $1.48 billion over eight years, the report says).

“Companies take advantage of an array of tax loopholes and aggressive strategies that enable them to legally avoid paying what they owe. The NY Times did a good story on how billion-dollar companies pay no taxes. We’d all be advised to at least skim it.” Thanks Steve!

Blockchain in the credit reporting arena

Regarding the potential for blockchain to change consumer financial services, Jeremy Potter wrote, “American Banker published an article that implied blockchain could upend the traditional credit bureau.  The idea, at least from what I can see, would be a new system that does a better job rating creditworthiness and secures information. Unfortunately, it’s not that easy.

“For instance, ‘I would not believe for one second that the big three players in the U.S. are going to let some startup blockchain company take their franchise away from them,’ said Steve Ely, CEO of the alternative credit bureau eCredable. ‘There’s way too much money at stake for them to allow that to happen. As much as they compete with each other, they’re also smart enough to know that they do have the goose that lays the golden eggs every year.’

“This is the catch, right? On one hand, we’re all suspicious of the traditional credit models. Lenders want to know the models account for student debt, medical debt and alternative sources of repayment. On the other hand, blockchain remains an unproven technology. The real estate finance industry is looking for an application of blockchain but it’s an old school industry. So, there are still experts on both sides banking on the success or failure of blockchain (pun intended). What do you think? Will the Equifax breach threaten the entire credit bureau model? Is blockchain technology a threat or solution to the traditional credit bureau model?”


The Anthem Veterans Memorial, located in Anthem, Arizona, is a monument dedicated to honoring the service and sacrifice of the United States armed forces. Once a year at 11:11 am the sun shines perfectly on this Memorial. At precisely 11:11 a.m. each Veterans Day (today, Nov. 11), the sun’s rays pass through the ellipses of the five Armed Services pillars to form a perfect solar spotlight over a mosaic of The Great Seal of the United States.

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Rob Chrisman