New year brings significant changes to HMDA guidelines

The first day of a new year means different things to each and every one of us. Some will begin eating healthier, starting up a gym membership (again), or spending more time with family. For many in the financial services industry, the new year represents an additional challenge regarding mortgage disclosure regulations.

More than seven years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the updates to reporting standards under the Home Mortgage Disclosure Act (HMDA) will take effect on Jan. 1, 2018. These updates represent by far the most substantial expansion of data reporting requirements since the original passage of the regulation in 1975, and financial institutions are racing to adapt to the change.  

Background

Analysis of loan application data enables regulatory agencies, economists, advocacy organizations and the public to study the availability of credit and monitor for potential disparities based upon prohibited basis factors. The data collected under HMDA enables monitoring for potential discrimination as defined under the Equal Credit Opportunity Act (ECOA), as well as broader study of the conditions within the real estate market.

Statistical analysis of loan application data serves a key role in identifying and quantifying disparities in underwriting and pricing practices along potential prohibited basis factors. HMDA data represents the primary instrument driving the Consumer Financial Protection Bureau’s (CFPB) mandate to monitor and prevent lending discrimination. Statistical analysis of this data is often the impetus of additional investigation into a financial institution’s lending practices. Therefore, reporting accurate data is critical for effective analysis.

While HMDA data attributes have facilitated study of trends in real estate lending activity and monitoring of potential disparities based upon raw outcome ratios, the file standard did not keep up with industrywide changes. These changes included the adoption of automated underwriting systems, innovations with the structure and pricing of real estate loan products, as well as broader environmental changes such as the creation of web-based lending platforms. In particular, the previous data collection requirements do not capture critical underwriting and pricing criteria such as credit score, combined loan-to-value ratios, or debt-to-income (DTI) ratios.

Changes to transactional and institutional coverage

To address new challenges and innovations, beginning with the 2018 reporting period, HMDA reporting requirements have expanded institutional and transactional coverage. For the first time, real estate secured open-end lines of credit are required to be reported if the institution meets the reporting threshold. In August 2017, the CFPB amended the HMDA Final Rule to increase the reporting threshold to 500 originations in each of the two prior years. On Jan. 1, 2020, the threshold will be reduced to the originally proposed 100 home equity line of credit (HELOC) originations.

Expansion of data reporting standards

In addition, starting Jan. 1, 2018, mortgage lenders will be required to collect up to 110 reportable data fields, a significant increase from the 39 fields previously collected. The 2018 HMDA reporting standard introduces 76 fields which were not previously collected. Furthermore, 23 data fields previously included in the HMDA data specifications have been modified. The collection and reporting of the new data set represents a significant challenge for filing institutions.

The CFPB has characterized the new data fields as falling into one of the following four categories:

• Information about the applicant and underwriting process
• Property information
• Loan features
• Unique identifiers

In October 2017, the prudential regulatory agencies (Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corporation) announced 37 key fields which will be the primary requirements corresponding with the HMDA reporting requirements scheduled to take effect on Jan. 1, 2018. These fields have been identified as most important for the execution of analysis and oversight of HMDA data.

Key focal points for HMDA readiness

In order to effectively prepare for the new HMDA reporting standard, financial services organizations will require adjustments from personnel at each line of business.

Compliance with HMDA requires understanding from stakeholders from each affected line of business. It is vital that organizations identify the areas where personnel need to adapt to the new standard. This is particularly true since HMDA collection and reporting does not simply represent the introduction of new data points or new loan types, but corresponding changes in documentation,

The following are relevant questions to be addressed in the institution’s implementation plan:

Systems readiness

• Have loan origination or documentation systems been updated to collect the expanded data points across all applicable business units—mortgage, consumer and retail, business and commercial?

Staff training

• Has training been provided to affected staff—mortgage loan originators, processors and operations, but also consumer/retail and business and commercial front-line and operations personnel?

Data integrity and validity testing

• If automated data feeds are used to populate the loan application register (LAR), has the institution validated the systems to ensure data is mapping to the LAR correctly?

Post-closing events

• Has the institution adopted procedures to ensure the LAR is updated to reflect accurate rate and pricing information if corrected closing disclosures have to be issued post-consummation?
• Will an update be made in the origination software and feed to the LAR, or will there be a manual adjustment?
• How will potential discrepancies be investigated, resolved and documented?

Implications on fair lending analytics and oversight

Although many of the most immediate challenges related to the new reporting requirements relate to the capture of the reportable data itself, institutions must be mindful of the broader implications stemming from the availability of the expanded data, particularly with respect to regulatory monitoring and enforcement.

The CFPB has made clear its focus on data-driven enforcement. However, the previous HMDA reporting standard substantially limited the ability to differentiate loan products and to quantify a borrower’s potential creditworthiness. The availability of the new data fields will enhance the robustness of statistical modeling employed to identify potential risk factors.

For institutions facing the new standard, a key question to consider is how they need to adapt their ongoing monitoring for fair lending risk factors, particularly with the availability of the new data such as the reporting of HELOCs and applicant age. It will be vital for institutions to expand their fair lending analysis to gain a clear understanding of potential risk factors.

Some key issues to consider with respect to fair lending analytics include:

• Does your organization’s fair lending analysis and monitoring utilize fields to be collected in 2018?
• If your organization uses fair lending models or software, are there opportunities to update your model variables to leverage the new data?
• If your organization meets the HELOC reporting threshold, have you analyzed your HELOC programs for fair lending risk factors?

By focusing on more expansive data reporting and analysis, the new HMDA guidelines increase visibility for regulators, aiming to enhance fair lending practices and ensure that community housing needs are met. Financial services organizations must evaluate current processes and oversight, identifying any potential gaps or risk areas to remain in HMDA compliance and avoid potential enforcement actions.