New Home Mortgage Disclosure Act rule requires more data
Access to credit is the lifeblood of communities across the country, enabling consumers to buy homes and raise families and, in turn, help their communities grow. This continuous influx of capital allows neighbors and neighborhoods to thrive.
Of course, this virtuous circle can be obstructed if lending practices are not fairly applied. Loan approvals from unscrupulous or inattentive lenders may illegally use factors such as race, gender, ethnicity or neighborhoods to turn down loans. To combat these practices and strengthen compliance with fair lending laws, the Consumer Financial Protection Bureau proposed amendments to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA). The new rule goes into effect starting Jan. 1, 2018.
While financial institutions have been required to provide financial data to the U.S. government regarding financial loan applications, the new rule now mandates that most non-depository institutions collect and report HMDA data if certain criteria are met. The rule requires 48 data points and most have been modified or are new and will allow regulators to determine if unfair lending practices could be occurring through the use of data analytics.
What is covered by the rule?
The revised and new data points have complicated definitions to determine what data is reported. Most data points have several criteria to be considered by the loan officer to ensure the data is reported correctly. One example is determining a “covered loan” for reporting purposes.
Only covered loans are reported; these are defined as closed-end mortgages or open-end lines of credit secured by lien on a dwelling and the dwelling is a residential structure. Further, the dwelling does not have to be the applicant or borrower’s residence. Investment properties, manufactured homes, multifamily homes, condominiums and vacation homes are also considered covered loans. In addition, dwellings need not be limited to four units.
Dwellings do not include unimproved land unless loan proceeds are used to construct a dwelling within two years. Further, loans considered temporary financing, as defined, would not be a covered loan (temporary is not defined by its short term).
Risk is high and reporting is complicated
The HMDA Final Rule is quite complex and is contained in a document that defines each data point and runs nearly 800 pages; it can be challenging to read, analyze, assess and implement. In fact, the financial institutions industry considers the implementation of the new rule to be a high risk. The original data points have changed and new data points have been added, potentially exposing unfair lending or redlining issues that have previously gone undetected.
This is the point of the rule, of course, but many small and middle market non-depository institutions may not be able to prove they are complying with fair lending practices in all of the communities they serve. This may be due in part to not having the in-house resources to collect the data and the proper compliance management system in place to implement the 2015 HMDA final rule. Some institutions may never have had to file in the past but are now required..
Each data point in the HMDA final rule needs to be assessed and implemented in the institution’s standardized policies and procedures to ensure data is collected and reported correctly. The CFPB is allowing ample time for such institutions to get their processes in order. Once this data is reported to the CFPB, however, it is fair game for the regulators to assess—and the data must be accurate. At a recent Mortgage Bankers Association conference, CFPB regulators stated they have no tolerance for data being reported incorrectly.
Setting up infrastructure
There are several steps that financial institutions can take to be sure data is being reported correctly:
Analyze: Policies and procedures used to collect information for these data point requirements need to be analyzed to ensure the data is collected and reported correctly, as defined in the final rule. If the data is not being reported correctly, it will give false positives of possible fair lending issues which could be detected by the CFPB prior to their site visit. Fines in the millions of dollars have been levied due to incorrect filings.
Assess: Prior to submission of the data points to the CFPB, this data needs be assessed internally or by outside consultants to analyze for unfair lending or redlining indicators. Through this analysis, financial institutions will be able address any possible issues prior to submission of data. If such variations are valid, the institutions will know their operations that much better and be able to provide explanations to regulators who will have access to the data submitted.
Review: Policies and procedures and HMDA data should be reviewed at least annually to determine if any new loan products, practices of loan originators and new markets may have affected HMDA reporting. Institutions need to be in control of their data and be able to explain variations prior to a regulator’s assessment. No matter what types of controls are in place, they are meaningless if the institution’s board and committees are not made aware of the issues and bad behaviors, do not take action to contain the problem, or ignore court orders to make corrections.
The rule may take some months to read; it may take several more to implement the necessary infrastructure. Boards and Chief Compliance Risk Officers should start addressing it now; 2018 is not that far off.