With the advent of a new year, expectations loom large for lenders around finalization of rules for the new Home Mortgage Disclosure Act data collection requirements.
Amending the existing HMDA rules as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the new provisions authorize the Consumer Financial Protection Bureau to expand the current Home Mortgage Disclosure Act dataset to help “financial regulators and public officials keep a watchful eye on emerging trends and problem areas in the mortgage market.”
The new requirements are designed to help regulators “understand better how to protect consumers’ access to mortgage credit while simplifying the reporting requirements for reporting institutions,” in the words of CFPB Director Richard Cordray.
CFPB’s proposed changes include required reporting of 37 new data fields—including 20 not required under Dodd-Frank. Those 20 fields represent additional information that CFPB proposes to collect for analytical purposes.
Overall, the new data requirements include detailed property location information; total points and fees; the rate spread for all loans; information on loan features, such as teasers and introductory rates; and the applicant’s age and credit score.
In addition, CFPB proposes to collect data such as the borrower’s debt-to-income and combined loan-to-value ratios; the loan’s QM (qualified mortgage) status; and whether the collateral includes manufactured housing.
When CFPB proposed the expanded HMDA data collection in summer 2014, it argued for the need for greater transparency and timely access to regulate lending activity, citing concerns that “under the current regime, HMDA data may be reported as many as 14 months after final action is taken on an application or loan.”
Consequently, for institutions reporting at least 75,000 covered loans per year, which accounts for the vast majority of loan application registrations in the annual HMDA files, the new rules would require submission of HMDA data on a quarterly rather than annual basis.
Concerns growing over new reporting
The regulatory landscape changed dramatically with the 1975 enactment of HMDA and then again with the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The latest proposed regulatory changes may have an equal or even greater impact on institutions affected by the proposal.
That observation is borne out in the anxiety over the new data reporting requirements evident in the October 2014 Regulatory & Risk Management Indicator report, conducted by Wolters Kluwer Financial Services. The study found that U.S. banks and credit unions specifically point to the Dodd-Frank Act and the associated HMDA data collection requirements as among their chief concerns.
The new data will unleash a flood of additional public scrutiny of mortgage lending and, by extension, will likely generate a new level of criticism of the mortgage industry, including commercial banks, from those interpreting the newly available data.
Clearly, CFPB’s recent enforcement actions and guidance views accurate HMDA data as central to fair-lending compliance and its ability to enforce fair lending laws. And, just as clearly, inaccurate HMDA data will be seen as misleading to the public, and will not be tolerated.
That said, the additional data, however accurately reported, will be an insufficient basis on which to ground definitive conclusions about discrimination on a prohibited basis. But the data will generate more room for error as it gets interpreted—or misinterpreted—by regulators, analysts, or the public.
Although most industry observers expect issuance of the final regulation sometime in 2015, we don’t yet know which specific data fields will ultimately be included, nor the amount of time that financial institutions will have to prepare before the requirements go into effect.
Nor do we know for certain yet whether or how much of any additional data collected will be made public by the regulators. Protecting the privacy of personally identifiable financial information should be a priority. The inclusion of items such as credit scores, borrower age, and other personal data may raise legitimate privacy concerns, particularly if it becomes possible to identify a specific consumer by combining the new data with other publicly available data.
Despite the unknowns, one thing is certain. The extent and breadth of the proposed data collection fields will be considerable. They will impose significant regulatory compliance and information technology challenges on mortgage lenders.
Whatever requirements are ultimately adopted, lenders will need to evaluate their current data collection capabilities, identify gaps, and make needed investments to be compliant. What impact will this have for your institution’s staffing decisions, training, vendor support, and technology infrastructure—and how can you begin to prepare for these changes?
How your bank can prepare
While the specifics have not yet been announced, you needn’t wait before initiating some preparatory action.
1. Plan now for the increased data capture requirements and remember that data integrity is essential.
Do not wait to get your organization focused around the fact that the changes coming will be sweeping and broad, impacting your organization in many ways. Minimally, these changes will include all new data fields outlined in the Dodd-Frank legislation—and likely, many if not all of the CFPB’s additional proposed data fields—so preparation should get underway.
2. Identify all lines of business that will be impacted by the HMDA changes.
Determine how you will organize these lines of business so that their efforts are coordinated. Ensure that the individuals responsible for implementation are connected and developing a plan of action so your organization is as ready as it can be once the final rules are announced.
3. Identify and prepare for any needed staff training, and determine what your enterprise methodology and approach will be to manage the implementation.
It’s never too early to start planning when it comes to planning and staff training.
4. Strengthen and bolster your analytical staff—you don’t want any surprises.
The last thing you want is to submit data to the government that you haven’t already fully analyzed. Know what the implications of that data are for your institution—and how you plan to go about addressing any problems found in that analysis.
You don’t want others analyzing and interpreting your organization’s findings in advance of conducting your own, comprehensive review.
5. Deal as quickly as possible with what your analysts find.
If your analyses find indications of potential disparate treatment or impact of protected classes, conduct a root cause analysis to determine the extent of the problem and what is causing it. Then fix it.
6. Lay in a supply of “midnight oil.”
This is a big one. Accept the fact that whatever implementation timeline is ultimately defined, the transition time for managing a regulatory change of this magnitude can never really be sufficient.
But with some thoughtful and concerted advance preparation, you will be best positioned to ease some of the challenges in transitioning effectively to the new requirements.
About the author
Edward Kramer is executive - president of regulatory affairs at Wolters Kluwer Financial Services. Previously, Kramer was Deputy Superintendent of Banks in charge of the Consumer Services Division of the New York State Banking Department, which is responsible for performing consumer compliance and fair-lending examinations and administering the Community Reinvestment Act. Kramer was previously first senior vice-president and director of Residential Mortgage Lending at The Dime Savings Bank of New York, among other posts.
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