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Revamped HMDA is a game changer

The Consumer Financial Protection Bureau (CFPB) published a final rule last year that greatly expanded the loan data that lenders will have to gather and report to the government beginning in January 2018 to comply with the Home Mortgage Disclosure Act (HMDA). Warren Traiger, a senior counsel in the Manhattan office of the law firm BuckleySandler, spoke with Scotsman Guide News about why this will be a game changer for fair-lending enforcement, and why lenders should prepare for the rule now.  

Could you explain what the Home Mortgage Disclosure Act is and why it was enacted?

HMDAIt was originally enacted back in the mid-1970s, and it was part of an effort to confront redlining, that is, the failure of mortgage lenders to make loans in certain communities, usually inner city minority communities. The idea was that if certain types of reporting were required from lenders, that the government would better be able to monitor where loans were being originated and where there might be indications of redlining. Since that time, there have been significant changes to the law, requiring the reporting of more information application by application, and the public disclosure of that information. So it has become the primary fair-lending tool in the mortgage-lending context.

Why has the CFPB expanded the data collection requirements recently?

One of the provisions of the Dodd-Frank [Wall Street Reform and Consumer Protection] Act created the Consumer Financial Protection Bureau, and transferred various authorities to it, including administering the HMDA rule, which was previously administered by the Federal Reserve. Congress directed the bureau to revise the regulation enforcing HMDA, and actually mandated  that there be certain new fields of data collected, and gave the bureau the authority even to go beyond the required fields with an eye toward what is most useful to enforce our fair-lending laws, and to help make sure that lenders are in compliance.

Has the Bureau gone beyond what was required by Dodd-Frank in this latest revision?

They have required more fields than Dodd-Frank required. Congress said, you need to include at least these fields, and you have the discretion to require additional fields if you think they are related to the purpose of the act. That is what the bureau did. For instance, interest rate is required, and isn’t part of the Dodd-Frank Act, but the spread on APR [annual percentage rate] is. So it kind of expanded on what Congress required. The bureau required debt-to-income ratio.The bureau required that lenders provide a reason for the denial, which is optional now and wasn’t addressed by Congress. The bureau required that if the underwriting is done by an automated system, that be specified. The bureau tried to fill out [the data fields] in order to accomplish Congress’ intent. It is very typical for Congress to give a general direction to a regulatory agency, and let the regulatory agency deal with the details.

Why is the industry worried about how the government will use the data?

The industry has a lot of concern, starting with data integrity. That is, establishing a system that reliably collects and reports the data in the form that the bureau wants. On a substantive level, let me take you back a little bit to a law called FIRREA [the Financial Institutions Reform, Recovery and Enforcement Act of 1989], which was passed in response to the savings and loan crisis of the 1980s. One of the requirements of FIRREA was to expand the data collected under HMDA and require its public disclosure.

Pretty much all FIRREA required was to collect the race, ethnicity and sex of the applicant, and indicate the outcome of the application, whether it was approved, denied or withdrawn, etc. Lenders had to collect data in 1990, and that data was released in 1991. What is showed was significant disparity in the rate at which applications were approved for whites and minorities. So, in other words, blacks and Hispanics were much more likely to get their applications denied than whites.

That was true as far as it went, but there was no information on the credit quality of the applicant or the type of the loan. Nevertheless, the public, the media, took that data and basically reported it as if lenders were discriminating. The industry responded by saying, well, you can’t tell anything from the HMDA data. All it is telling you is demographic information on an applicant. You don’t know the applicant’s FICO score. You don’t know the loan-to-value ratio; we don’t know much about the property, etc., etc.  

Well, now that [information] is going to all be part of the HMDA data. At a minimum, the regulators are going to have all the data on every application, and they are going to be able to contrast it from lender to lender. The whole point of it is to enhance [the government’s] lending enforcement, which is already an active area for the regulators. It really will be a new day, a game changer, in fair-lending enforcement.

Is this a tough rule to comply with technically?

I think that is fair to say. Depending on what you are collecting now and how you are collecting it, it can be a significant challenge. It varies from lender to lender, depending on what kind of systems they have in place. One thing the bureau did do was give plenty of time for lenders to gear up, both in terms of collecting and reporting and, I hope, in terms of understanding the data, with a chance to address or explain if [they uncover] any discrimination. Essentially the data has to be collected starting on Jan. 1, 2018, which means it will be reported and made available in 2019.

Why do you say that lenders should take two years to prepare for this?

What I am really trying to say is that lenders should take advantage of the amount of time that they have to get ready for the new rule, both in terms of getting the systems in place and, more importantly, understanding what their data shows and being able to explain it. A lender now can do a dry run to make sure that it is able to collect and report, and then take the data and crunch it, and see what it looks like, and whether there are any issues. 


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