HMDA: new data requirements, new opportunities for risk.
Procedures Act (RESPA) Integrated Disclosure (TRID) rule and its upcoming--now twice postponed--effective date. But compliance experts are also watching for the next shoe to drop: the final Home Mortgage Disclosure Act (HMDA) rule, due any day now, at the time of this writing.
Based on the Consumer Financial Protection Bureau's (CFPB's) proposal issued last July, the final rule will dramatically increase reporting requirements and potentially take by surprise those lenders who have been lax on HMDA reporting and analysis.
The changes will revamp Regulation C--the HMDA reporting regulation--in a variety of ways. The rule will most likely apply to a much broader class of transactions, essentially all dwelling-secured loans regardless of their purpose.
The data reported on each application or loan will be much more comprehensive than the annual loan application register (LAR) reports currently required from covered lenders. Compiling this information and preparing reports will certainly add to the already high cost of compliance. It will be particularly burdensome for those lenders who are not using advanced technology to handle the heavy lifting and are instead trying to do it with outdated software.
Wholly apart from the costs of compliance, however, the new requirements will expand potential fair lending liability for covered institutions. Using the new information, regulators, advocacy groups and plaintiffs' attorneys will draw their own conclusions as to whether discriminatory lending patterns exist. Accordingly, in addition to mastering the new reporting requirements, prudent lenders will also take steps to analyze and explain their lending data.
The Supreme Court's Texas Department of Housing and Community Affairs v. The Inclusive Communities Project Inc. decision in June heightens the importance of HMDA data. That ruling held that disparate-impact claims may be brought under the Fair Housing Act.
Under this theory, there is no need to prove that the outcomes in question were the result of discriminatory intentions. The expanded HMDA data will surely be cited as evidencing prohibited discrimination, especially now that it will reveal many more details of transactions.
Why big data may mean big exposure
Until the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, several federal regulatory agencies were responsible for collecting and reviewing HMDA LAR, and determining whether prohibited discrimination was occurring at individual institutions or in certain areas or markets. Dodd-Frank, however, shifted the responsibility for HMDA rule writing from the Federal Reserve Board to the CFPB.
As part of this change, the bureau was directed to expand the information reported on each application or loan. The Dodd-Frank-mandated dataset includes total points and fees, rate spread for all loans, "riskier" loan features, unique identifiers for the loan officer and the loan, application channel, property value and detailed property location information, borrower's age and borrower's credit score.
In 2014, the CFPB issued a proposed rule to implement the statutory changes. The bureau used this opportunity to build substantially on the Dodd-Frank foundation. On its own initiative, the bureau proposed to add reporting of additional data elements associated with underwriting and pricing decisions. These included debt-to-income ratio (DTI), combined loan-to-value ratio (CLTV), the automated underwriting system (AUS) used and results, denial reasons (which, under current rules, are optional), Qualified Mortgage (QM) status, additional rate and points and fees information (interest rate; risk-adjusted, pre-discounted interest rate; total origination charges; total discount points), additional property information (units financed and construction method replacing property type; affordable-housing deed-restriction information), manufactured housing data and unique financial institution identification number.
In all, this data will dramatically expand information regarding the demographic and credit characteristics of loan applicants and the terms and conditions of loans that they receive--or don't receive.
Under the proposed rules, institutions that report 75,000 or more loans per year will be required to file reports on a quarterly basis, within 60 calendar days of the end of each calendar quarter. The CFPB has estimated that this change would impact about 28 financial institutions that, combined, report about half of all HMDA-reported transactions.
Because as currently envisaged, much of this data will likely be public information, viewable on the Federal Financial Institutions Examination Council (FFIEC) website, there is real risk that industry critics and overzealous regulators at both the state and federal levels will discern patterns of discrimination without much effort. (As an aside, making available so much information carries significant privacy risks that the CFPB will hopefully be sensitive to in determining what data to release to the public.)
To be clear, no one is disputing the need to root out discrimination within mortgage lending or to use data to prevent intentional redlining or other discriminatory practices. And in my company's experience, most lenders are committed to expanding access to credit and helping borrowers of all races and ethnicities become homeowners. Having said that, there are valid reasons for mortgage denial and for higher pricing to compensate for greater risk and these can lead to apparent disparities in treatment.
For the most part, however, the lender and investor guidelines and overlays that are in place today are based on historical loan performance data and prudent underwriting--not prejudice.
Some industry observers believe that caution may have gone too far. For example, Jim Parrott, the Obama administration's former senior adviser on the National Economic Council, was quoted last September in Housing Wire as saying: "Law enforcement has been on a bit of a run with settlements and enforcement--with the open-endedness (lenders) are just not sure what closure looks and feels like. It's hard for them to quantify their legal risk in this space, so there's a lot of pressure from boards to put in overlays to protect against this."
Ongoing self-monitoring will be critical
Our company, and our internal and external legal research teams, have been developing HMDA reporting best practices that include LAR data processing as an ongoing--rather than once a year--activity.
By collecting and reviewing required HMDA data monthly, lenders will have the opportunity to spot potential red flags early and to address them--before an examiner sees them and before they constitute a pattern.
If lenders process LAR data only once a year, it may be too late. A good analogy is putting off developing a tax strategy until April 14. Usually by then there isn't much you can do.
An area where lenders should concentrate more of their self-analysis is in paying more attention to loans that are canceled, denied and withdrawn, as they are the most often neglected during the HMDA data-capture process.
In the past, HMDA LAR data processing and reporting has not been on the industry's radar screen. Now, with the new HMDA rule, this priority needs to change.
Expanded HMDA reporting is coming--it's just a question of when. If what has been proposed so far is eventually implemented, it will be a significant change for currently covered institutions, and potentially a burden for some of the covered lenders who are not currently in compliance.
So after TRID finally goes live on Oct. 3, take a few days off. Relax. Recharge. Then get ready to tackle an even bigger compliance challenge: HMDA and big data.
John Vong, CMB, CMT, is president and co-founder of ComplianceEase, Burlingame, California. He can be reached at firstname.lastname@example.org.
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|Title Annotation:||COLUMNS: EXECUTIVE SUITE; Home Mortgage Disclosure Act|
|Comment:||HMDA: new data requirements, new opportunities for risk.(COLUMNS: EXECUTIVE SUITE)(Home Mortgage Disclosure Act)|
|Date:||Aug 1, 2015|
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