Preparing for the new HMDA rule.
The Consumer Financial Protection Bureau's (CFPB's) Oct. 15, 2015, amendments to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), represent a major change in the way financial institutions collect, report and disclose data concerning their mortgage lending activity. [paragraph] But at 800 pages, the new HMDA rule and its adopting release is so expansive that it can be daunting for financial institutions trying to know what to expect or where to begin. In this article, we provide an overview of which businesses the new rule will likely impact, what those impacts will be and how institutions should prepare for the rule's implementation.
An overview of the rule
Beginning in 2018, institutions otherwise covered by Regulation C become subject to the new HMDA rule's requirements if, in each of the prior two calendar years, they originated at least 25 closed-end mortgage loans or at least 100 open-end lines of credit.
The rule requires covered entities to begin collecting data on Jan. 1, 2018, which they then must report beginning Jan. 1, 2019.
The new rule changes the criteria for determining which transactions to report. For loans or lines of credit that are for personal, family or household purposes, the rule will impose a dwelling-secured test that will sweep in most consumer-purpose transactions, including closed-end home-equity loans, home-equity lines of credit and reverse-mortgage loans.
For commercial loans, the rule retains a purpose-based test, which will include commercial loans or lines of credit for home purchase, home improvement loans and refinancings. The rule makes clear that home-improvement loans not secured by a dwelling, as well as all agricultural-purpose loans and agricultural-purpose lines of credit, will no longer be covered under the rule.
The new rule also significantly expands the data-collection and reporting requirements for covered lenders and transactions.
Specifically, the rule adds the following 25 new data points:
* property address;
* borrower age;
* credit score;
* total points and fees;
* borrower-paid origination charges;
* discount points;
* lender credits;
* interest rate;
* prepayment penalty term;
* debt-to-income (DTI) ratio;
* combined loan-to-value (CLTV) ratio;
* loan term;
* introductory rate period;
* non-amortizing loan features;
* property value;
* manufactured-home secured property type;
* manufactured-home land property interest;
* total number of dwelling units on property;
* number of dwelling units that are income-restricted under affordable-housing programs;
* application channel (i.e., whether the application was submitted directly to the financial institution and whether the obligation was initially payable to that financial institution);
* loan originator identifier;
* automated underwriting system information;
* whether loan is for reverse mortgage;
* whether loan is open-end line of credit; and
* whether loan has primarily a business or commercial purpose.
Who will be most affected, and how?
The rule is expansive and contains many changes that will impact covered institutions. Those company types most likely to be impacted include the following.
Although many vendors will not be directly subject to the new HMDA rule, the rule will nevertheless impact companies that supply the technological platforms and software that lenders use to generate loans and the data that must be compiled under HMDA.
Vendors will be on the front lines of developing and testing the systems required to collect, analyze and report the information from the 25 new data points identified under the new rule--a task that, in itself, presents a significant logistical and technological challenge.
But the complexities of the HMDA rule present additional considerations for vendors. For example, if vendors are not nimble enough to develop comprehensive, reliable systems that accommodate the new regulatory requirements well before the 2018 deadline, they may experience pressure from their clients or even lose clients altogether as lenders find other vendors that were better able to adjust.
And even though vendors may not be directly subject to the HMDA rule, they still need to pay close attention to the rule and its requirements because, if vendors' systems produce inaccurate or incomplete data and lenders encounter supervision or enforcement problems as a result, lenders likely, to the extent possible, will seek to hold the vendors accountable for any resulting liability.
Mortgage brokers and correspondent lenders
Like technology vendors, mortgage brokers and correspondents--whether subject to the HMDA rule or not--will still find themselves adjusting their practices in response to the new data requirements. Lenders that are subject to the rule will be relying on brokers and correspondents to provide accurate information about the loans the lenders are purchasing. Therefore, brokers and correspondents must take care in collecting and reporting data about their loans to lenders. Inaccurate or incomplete reporting could subject lenders to liability. Lenders, therefore, will closely manage the quality of inputs from their brokers and correspondents.
Mortgage lenders that originate hundreds of thousands or millions of loans annually will find their reporting obligations and technology burdens significantly increased under the new HMDA rule.
Beginning in 2020, lenders that report at least 60,000 applications and covered loans for the previous year will be required to make data submissions on a quarterly basis for the first three quarters of the year--in addition to their annual reporting requirements. Complying with this new reporting schedule will require a considerable outlay of time and resources. Not only will these lenders need to collect and report information from the 25 new data points for each loan, but the number of times they have to collect and report that data will quadruple.
These demands may be particularly difficult for larger institutions. If a lender makes 2 million mortgage loans a year, for instance, that is at least 50 million new data points that must be accurately collected and reported (four times a year). Such large numbers alone increase the odds of reporting errors, and mean that any single type of reporting error could result in high numbers of misreported loans.
For large institutions, coming into compliance with the new HMDA rule while managing high loan volume will have substantial costs in terms of the development, implementation, testing and monitoring of the needed technology, as well as the compliance, risk and audit oversight needed for such large platforms.
Small lenders and non-depository Institutions
On the opposite end of the spectrum, smaller lenders will face the types of problems they often see when required to modify existing systems or to create new systems. Such smaller institutions will lack the economies of scale that larger lenders are typically able to leverage when adjusting their systems to the new rule. Smaller institutions may also lack the in-house expertise to fully manage the rollout of their changes and to fully evaluate the impact of the new data fields.
Additionally, and perhaps more significantly, the change in the rule's scope means that some businesses will no longer be subject to HMDA while others will be subject to the rule's requirements for the first time.
Certain depository institutions originating fewer than 25 closed-end mortgage loans or fewer than 100 open-end lines of credit each year may no longer be subject to HMDA's reporting requirements at all. On the other hand, non-depository entities that make home-equity loans (and are not currently subject to HMDA) will have to collect and report HMDA data beginning in 2018 if they 1) originated at least 25 closed-end mortgage loans or at least 100 open-end lines of credit in each of the previous two years and 2) had a home or branch office in a metropolitan statistical area (MSA) as defined by the U.S. Office of Management and Budget.
The expansion of HMDA's institutional scope presents a significant challenge for entities that have not historically been subject to HMDA's reporting requirements. These institutions must determine now whether they will be subject to the reporting requirements in or after 2018 and, if they believe they will, they must put in place all of the data-collection and reporting systems, oversight systems, policies and procedures, and staffing during the next two years so they can comply with the reporting requirements beginning in 2018.
The new rule's reporting requirements are likely to be onerous for all regulated institutions, but they will be particularly challenging for entities creating their reporting compliance programs from scratch.
The impact on supervision and enforcement
In addition to having a substantial impact on how lenders collect and report loan data, the new HMDA rule is likely to affect important changes in supervision and enforcement.
Perhaps most importantly, the increase in information available will make it much easier for regulators to observe lending trends across the industry and initiate investigations if they see patterns of concern. Such regulatory inquiries are especially likely in the fair lending arena, where more information about borrowers and the types of loans they receive may reveal possible differences in lending outcomes that had not previously been tracked.
For instance, the rule's requirement that lenders collect and report information on applicants' ages is likely to lead to more focused analyses on whether institutions have unfairly targeted older borrowers with unfair loan terms and rates. Likewise, the rule's expansion of the types of transactions covered likely will result in increased scrutiny of products, such as reverse mortgages and home-equity credit products on which creditors had previously reported little or no data.
In essence, the additional data reported will empower regulators and others to conduct more comprehensive fair lending analyses of lending practices, making it harder for lenders to argue that non-discriminatory factors not captured by HMDA data affected their lending decisions.
The increased availability of more loan data may also change the way regulators evaluate the health of lenders' portfolios. The new requirement that lenders report on indicators of borrower creditworthiness, such as DTI and CLTV (both of which correlate strongly with actual loan performance), may allow regulators and others to scrutinize the safety and soundness of a lender's loan portfolio.
This new level of insight could prove to be a double-edged sword: Not only will it be easier for regulators to tell if a lender's portfolio is unsound, but the availability of that data could also make it easier for regulators to argue that the lender knew or should have known about the weaknesses in its portfolio.
It is also possible that private litigants will be able to use the new HMDA data to bring lawsuits against lending institutions, though it is important to note that the degree to which private parties will have access to the new data is still unclear.
The CFPB and other regulators--including the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), National Credit Union Administration (NCUA) and Department of Housing and Urban Development (HUD), all of which may enforce compliance with the rule--will have immediate access to this new data once institutions begin reporting under the new rule. The rule does not, however, elaborate on the degree to which the new data will be made broadly available to the public.
The CFPB has indicated it will use a "balancing test" to weigh public disclosure against the need to protect applicant and borrower privacy. But the precise nature of this balancing test has yet to be determined. The CFPB has merely stated it will "provide a process for the public to provide input regarding the application of this balancing test to determine the HMDA data to be publicly disclosed."
Accordingly, financial institutions should be aware that the public may have access to some or most of the new HMDA data and, if they desire, should monitor for opportunities to provide feedback to the CFPB on how much data should be made publicly available.
What to consider in preparing for 2018
Given the significant impact of the new HMDA rule on regulated entities (and those that do business with them) in terms of both internal compliance structures and regulatory supervision and enforcement, early preparation is essential. The earlier institutions begin revising their data-collection and reporting systems, the better off they will be when the time comes to collect and report that data under the rule.
Any entity subject to the new reporting requirements should plan to complete extensive, upfront systems testing. Fundamentally, this testing is important to make sure that lenders' data-collection and reporting programs actually function--that they produce the reports they are supposed to produce and that those reports are accurate.
Lenders surely remember from the transition to the new Truth in Lending Act (TILA)-Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure (TRID) rule that simply getting new computer programs to run correctly and reliably across a lender's entire business can be extremely time-consuming. And of course, if lenders are going to complete early systems testing, this means they need to have those systems in place even earlier--meaning lenders should start actively working with their vendors on developing these new programs as soon as possible.
In addition to early technical testing, it will be important for lenders to test what the new data being collected might show. As discussed earlier, these new data points represent information that may not have been tracked and analyzed before--perhaps not even by lenders, which until now had no reason to collect and analyze the data. And as mentioned, it is possible these new data points may reveal patterns suggesting fair lending or other issues of which lenders may not have been aware.
Therefore, institutions should not wait until the HMDA rule is in effect to review fair lending performance based on these new data fields. Such analyses, whether performed in-house or with the help of econometric consultants, should be conducted now, under the direction of counsel and subject to the attorney-client privilege.
Any analysis should pay special attention to underwriting and pricing decisions, recognizing that even the rule's expanded HMDA data set likely will not capture all the transaction characteristics that might explain actual outcomes. Institutions conducting such analyses should examine their lending patterns over time and across geographies, and when appropriate, should consider testing for performance against peer groups.
With early and comprehensive preparation and testing, institutions can ensure that they are fully equipped for the new rule to go into effect in 2018, with regard to both technical capabilities and the substantive information that will come out of these new data points.
Michael Flynn is a partner in Goodwin Procter LLP's Financial Institutions Group in Washington, D.C., and is a member of the firm's Banking, Consumer Financial Services, and FinTech practices. His practice focuses on consumer financial services, including mortgage originations and servicing, and banking issues. Ben Saul is a partner in Goodwin Procter's Washington, D.C. office, where he represents a wide range of financial institution, consumer finance, and FinTech clients in government investigations and enforcement actions as well as in regulatory and compliance matters, with special expertise in fair and responsible lending and servicing issues. Lindsay Raffetto is an associate in Goodwin Procter's Washington, D.C. office, where she represents consumer financial services clients in a variety of mortgage-related litigation and regulatory matters. They can be reached at email@example.com, firstname.lastname@example.org and email@example.com.
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|Title Annotation:||REGULATORY COMPLIANCE|
|Comment:||Preparing for the new HMDA rule.(REGULATORY COMPLIANCE)|
|Author:||Flynn, Michael; Saul, Ben; Raffetto, Lindsay|
|Date:||Feb 1, 2016|
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