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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2016

New HMDA Rules Expand Data-Reporting Mandates

With more lending information being collected, mortgage originators can expect heightened fair-lending scrutiny

This past October the Consumer Financial Protection Bureau (CFPB) issued long-awaited final rules that completely revise the requirements of the Home Mortgage Disclosure Act (HMDA). Naturally, major revisions to the regulations governing the long-standing HMDA law, which was enacted in 1975, can cause anxiety among mortgage lenders and brokers originating the home loans that the act targets.

An annual compliance-concerns survey conducted this past March showed that 68 percent of the more than 400 responding lenders ranked the new HMDA rules as a high concern, with an additional 27 percent rating the rule changes as a medium concern. While it makes sense that lenders are anxious about HMDA, the good news is that there also are a few reasons why lenders and other mortgage professionals should not panic.

The nature of the expanded HMDA reporting requirements and the long timeline provided for their rollout should assure mortgage originators adjust more smoothly to the changes than has been the case with some other recent regulatory edicts. There is one result of the HMDA-rule changes, however, that mortgage lenders and brokers will have to pay attention to closely, and that is the impact the new data-reporting mandates will have on fair-lending scrutiny and enforcement.

Timeline

Deadline dates for new Home Mortgage Disclosure Act (HMDA) rules

  • 2016: No new regulatory requirements go into effect.
  • Jan. 1, 2017: Effective date that low-volume lending institutions are excluded from HMDA coverage; data for covered lenders still collected under current rules
  • Jan. 1, 2018: Effective date for most new provisions related to institutional and transactional coverage, and HMDA data collection
  • Jan. 1 2019: Effective date for changes to enforcement provisions and additional amendments to HMDA reporting provisions; HMDA data collected in 2018 to be submitted to the CFPB
  • Jan. 1, 2020: Effective date for quarterly reporting of HMDA data by large-volume institutions
    Source: U.S. Treasury Department
 

Data and deadlines

One of the biggest challenges posed by the new HMDA rules is the sheer amount of raw data that needs to be collected. This past February, the CFPB issued its first data specifications for the revised HMDA regulations, which revealed that lenders will have to report HMDA information across 110 data fields. This is nearly three times the current number of data fields reported. The new data mandates include reporting requirements for automated underwriting results, credit scores, expanded co-borrower information and loan characteristics.

There is no reason for mortgage professionals to panic, however. These are all fields used today to make basic underwriting decisions for mortgage loans. In addition, many of the fields are already included in loan-origination software databases. Consequently, the fact that much of the data required under the new HMDA rules is already being collected by loan originators should help to reduce the ramp-up impact on lenders’ IT systems.

Another reason not to panic is that a generous time frame is in place for implementing the new HMDA rules. In short, there will be no changes to the current HMDA rules in 2016, which means the data submissions due March 1, 2017, will follow the same guidelines as in previous years. Additionally, the Federal Reserve Board will continue to collect the HMDA data until 2018 — after which the CFPB will take on that role.

In addition to not needing to collect the new data fields until 2018, mortgage originators also can count on their vendor partners to begin testing and revising the new data fields starting later this year and continuing into 2017. What lenders, in particular, should do to prepare prior to the implementation of the new rules is to evaluate their data-scrubbing and address-confirmation processes. Making changes now to ensure 100 percent accuracy will save heartache and stress at the end of 2017.

The new HMDA regulations are not likely to pose the same level of challenges for the industry as the TRID consumer-disclosure rules that took effect this past fall. Still, there are a few aspects of the expanded HMDA-reporting requirements that will require more diligence on the part of mortgage originators — specifically to assure they are obtaining certain information early in the loan process. First is the expansion of race and ethnicity information to be reported under the revised HMDA rules. There will be new data sets that supplement the existing data categories.

The designation Hispanic, for example, will be broken down into subcategories such as Mexican, Puerto Rican, Cuban, or other Hispanic or Latino. These subcategories can only be self-identified by the borrower, however. Wrong assumptions made by mortgage originators will result in HMDA errors. The Universal Residential Loan Application (commonly known as Form 1003) is being expanded and adjusted to collect this information.

Another inconvenience that will be posed by the expanded HMDA rules is the mandated collection of property addresses. The new data standards require exact address data, so general “space fillers,” such as 123 Main Street or TBD, will be rejected instantly and their use could even result in a possible fine from the regulators.

Fair-lending implications

The expansion of the HMDA data to be submitted under the new rules, combined with the additional loan types being reported, means that regulators will be able to do a more comprehensive fair-lending analysis in minutes not months. Lenders not previously thought to have fair-lending issues because of their size or lack of government audits will be immediately identified under the new data. In addition to giving federal and state regulators more fair-lending data, the public release of HMDA data also opens up a financial institution’s lending practices to more in-depth scrutiny from community organizations and watchdog groups.

When it comes to handling the fair-lending impact of HMDA, the key to a successful transition will be in diligent preparation.

When it comes to handling the fair-lending impact of HMDA, the key to a successful transition will be in diligent preparation. The first place to focus is ensuring that data collection and system integrity are robust and compliant with the new definitions. Next, lenders should begin testing their fair-lending profiles using the expanded HMDA data sets. Using this information, lenders can analyze their lending footprint compared to their peers and proactively discover potential issues throughout the year. This way, they can ensure that all lending activity is nondiscriminatory.

Finally, mortgage originators must be prepared to tell their own fair-lending story. Do not rely on regulators to understand the entire picture better than the management of the mortgage company. Using the same data the regulators will use, lenders and the brokers they work with can tell the entire story, backing it up with data previously unavailable from peers, and avoiding misinterpretations of lending activity.

• • •

In the end, how well mortgage originators adjust to the new fair-lending environment will come down to how well they prepare for a more expansive and automated HMDA process. Consequently, it makes sense to take advantage of the time now available to plan, test and get ready for the 2018 kickoff of the new HMDA requirements. 


 
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