The Home Mortgage Disclosure Act (HMDA) has long been a focus of Fair Lending compliance examinations since it was enacted by Congress in 1975. A new push by federal regulators to improve HMDA data brings fresh scrutiny to these collection and reporting requirements. Changes to HMDA reporting announced in late 2015 are now in force, effective January 1, 2018, related to the number of data fields, the type of impacted lending products and more frequent reporting based on number of loans.
These HMDA changes expose banks, credit unions and other institutions to more opportunities for errors, regulatory scrutiny and increased cost of compliance.
Impact on all financial institutions (even those currently in compliance)
Even for currently compliant financial institutions, these new changes bring another level of exposure, cost and scrutiny for their existing HMDA procedures, including applications received before the January 1, 2018 effective date. Federal regulations specify that an application received in 2017 but acted upon in 2018 is subject to the collection, recording and reporting requirements for the new HMDA data points, with a special transition rule for data related to an applicant’s ethnicity, race and sex.
Let’s take a look at what lenders need to know about the new changes and how they can prepare for compliance with increased HMDA scrutiny.
Institutional and Transactional Coverage
As of January 1, 2018, financial institutions that originated 25 or more covered, closed-end mortgage loans or 500 or more covered, open-end lines of credit in each of the two preceding calendar years are subject to HMDA requirements.
Furthermore, HMDA expanded the category of covered loans to include previously excluded consumer-purpose open-end loans, business-purpose open-end loans, approved/not accepted preapprovals for home purchases and home improvement loans that are dwelling secured. A new “other” category was also added, which makes virtually all consumer dwelling secured loans now reportable for HMDA purposes. This represents a significant expansion of HMDA requirements for previously unaffected financial institutions.
New and Modified Data Fields
The biggest change to HMDA is the addition of 25 new data fields which doubles the amount of data that needs to be collected and reported. Examples of new data fields include total loan costs or total points and fees, origination charges, discount points, lender credits, interest rates, prepayment penalty, reverse mortgage and property value.
In addition, 13 previously existing data fields, such as loan purpose, business/commercial purpose and applicant demographics, have been modified. The Consumer Financial Protection Bureau (CFPB), the federal agency charged with administering HMDA, composed this reference chart on reportable HMDA data that provides more information on all new, modified and existing data fields and reporting guidelines.
Reporting Process Changes
In addition to the coverage and data field changes, the CFPB also made changes to the reporting process.
Not only has the format of the Loan Application Register (LAR) changed to a pipe delimited format, financial institutions will be required to submit LAR data starting in 2017 via the CFPB’s developed HMDA Platform. Filing instructions for 2017 and 2018 data are available on the CFPB website and financial institutions are strongly encouraged to review these prior to submission. The CFPB is also developing a new geocoding tool that will identify the census data for addresses in order to provide safe harbor for filers.
Another change related to reporting and disclosure is that copies of LAR will no longer be provided to the public upon request. Instead, financial institutions will provide public notice that their disclosure statements and modified LAR can be accessed on the CFPB website.
Action Items for Compliance with HMDA Changes
Financial institutions need to ensure their computer systems are up-to-date and loaded with the proper HMDA reporting fields. Vendors are still making changes to systems to support compliance, but ultimately the financial institutions will be accountable for properly collecting and reporting the data. Here are some action items to prepare:
- For some lenders, LAR data could be increasing by as much as 40 percent. Therefore, allocation of appropriate resources is crucial to ensure compliance. Larger HMDA reporters are hiring dedicated HMDA staff.
- Provide HMDA training to all lending and retail staff to ensure they are aware of the new Government Monitoring Information Requirements. Some fields are for applicant use only and loan officers need to know which fields they are responsible for obtaining and under which circumstances.
- Conduct independent periodic reviews of the new data collection requirements to see if any deficiencies exist and address those deficiencies early on in the process.
- Stay abreast of all vendor release notes dealing with HMDA compliance, and make sure you understand how to use systems for optimal compliance.
Contributed by Juliya Kofman Greenfield, member of RKL’s Financial Services Industry Group. Juliya draws upon deep bank examining, auditing and consulting experience to help banks meet their consumer compliance obligations through risk assessments, training and compliance review performance.