For over a year, it has been all TRID, all the time. As we pass the TILA RESPA Integrated Disclosures (“TRID”) implementation date, regardless of how prepared lenders are feeling, one thing is certain: TRID is happening. So now the question becomes: What is the “next big thing” for the industry?
Arguably, the next big industry change is the recently published Home Mortgage Disclosure Act (“HMDA”) final rule. The Consumer Financial Protection Bureau (“CFPB”) published a proposed rule amending Regulation C to implement amendments to the HMDA as required by the Dodd-Frank Act in August 2014. The comment period for this proposed rule closed on October 29, 2014, and the final rule was published October 15, 2015.
The current HMDA Loan Application Report (LAR) requires that specific data by specific institutions on specific loans be reported. The data collected and reported includes:
>> Data on the loan application (application number, application date, loan type, loan purpose and the loan amount requested)
>> Action taken on the application (e.g. originated, approved or denied)
>> Reasons for denial (optional)
>> Date action was taken
>> Loan information (lien position and rate spread in some instances)
>> Property information (property type, occupancy status, property location by MSA, state, county, and census tract)
>> Applicant information (ethnicity, race, sex, and annual qualifying income)
Just as the Dodd-Frank Act mandated that the CFPB promulgate the TILA RESPA Integrated Disclosure rule, Dodd-Frank mandated certain changes to HMDA via Regulation C amendments; however, the CFPB expanded on the mandate requirements when they drafted their final rule. Section 1094 of the Dodd-Frank Act specifically required the CFPB to promulgate their rule to expand HMDA reporting to include total points and fee, rate spread for all loans, “riskier” loan features (for example, prepayment penalty or negative amortization), unique identifiers for loan originators and loans, origination channel (retail or wholesale), property value, more detailed property location information, the borrowers’ age(s), and the borrowers’ credit score(s).
The CFPB met this obligation by adding data fields to the HMDA LAR as mandated by Dodd Frank, but went above and beyond their minimum obligations by modifying or adding over 30 data points. Some of the new and modified data fields required by the final rule are:
>> Debt-to-income ratio (DTI)
>> Combined loan-to-value (CLTV)
>> Which automated underwriting system (AUS) was used and the recommendation
>> Interest rate
>> Credit score
>> Applicant age
>> Total origination charges
>> Total discount points
>> Total lender credits
>> Property value
>> Units financed
>> Affordable housing/income-restricted housing information
>> Manufactured housing classification and land property interest status
>> Unique identifier for the lender
>> Removal of the option for denial reasons, making that data mandatory
While the additional data fields in the HMDA LAR are arguably the most significant changes imposed by the new HMDA rule, a close second are the changes in institutions obligated to submit that LAR data. Under the current HMDA regime, there are two different standards for institutions that must submit a HMDA LAR: one for depository institutions, and one for non-depository institutions. For depository institutions, several factors come into play when determining their obligation, including asset size and originating at least one home purchase loan or refinancing of a home purchase loan in the prior year. Under the new final rule, the threshold for the number of originated loans is increased to 25 closed-end or 100 open-ended covered loans in the preceding two calendar years for depository institutions.
Currently, for non-depository institutions, the major qualifying factors are whether the institution has a branch or home office in a Metropolitan Statistical Area (MSA), if at least 10% of its total origination dollars are from home purchase or refinanced home purchase loans, and if those home purchases or refinancings total $25 million or more dollars in the prior calendar year. Additionally, non-depositories have an asset threshold of $10 million or 100 or more home purchases or refinancings in the prior calendar year. Under the CFPB’s final rule, in addition to having a branch or home office in an MSA, a non-depository institution must file a HMDA LAR if it originated 25 or more closed-end or 100 or more open-ended covered mortgages in the two preceding calendar years. The definition of “closed-end” mortgages, under the final rule, includes closed-end reverse mortgages and home equity loans secured by a dwelling. This change dramatically expands the number of non-depository institutions that must collect and submit the data on a HMDA LAR each year.
Although most loan origination systems (LOS) collect a vast majority of the new data points already, the obligation to collect and submit this data could be a difficult undertaking for some smaller lenders. Even for those who already collect and store this information in their LOS, the enhanced need for accuracy imposed by the submission of the data to the Bureau is bound to increase costs to the business for personnel and likely technology or even outside legal, quality control, compliance and technology assistance.
The new data collection and reporting obligations will be especially burdensome – and unfamiliar — to those non-depository institutions that are new to the HMDA reporting process. Many of these institutions will not only be new to the process, but will be relatively small, requiring significant “spin up” on the staffing and data integrity responsibilities that come along with being a HMDA reporting lender.
For consumers, the additional data collected, such as FICO score(s) and property address, present privacy issues. The CFPB has indicated that there is sensitivity to this potential issue, but the industry remains concerned about consumer privacy.
It is also not clear what the CFPB will use this additional data in the LAR for, but there is plenty of speculation. The most popular speculation is that the CFPB will use the HMDA LAR data to pre-examine lenders for a Fair Lending exam. That is, the CFPB will analyze the new HMDA LAR for statistical evidence of Fair Lending violations. Combine this speculation with the recent United States Supreme Court ruling that Fair Housing Act claims can utilize the legal theory of disparate impact, and the HMDA stakes rise significantly.
The Court’s opinion regarding the legal theory of disparate impact, as applied to the mortgage industry under the Fair Housing Act in particular, means that lending practices that are not explicitly discriminatory, but that have a negative impact on minorities disproportionately as compared to non-minorities, can be found to have violated the Fair Housing Act. Now, let’s apply that theory now to the analysis of the expanded HMDA LAR data prior to ever setting foot in a lender’s office for a Fair Lending exam. The fear, warranted or not, is that examiners could potentially have a predisposed opinion of a lender based on data alone.
Under the new HMDA rule, establishing a robust Fair Lending Program is going to be essential for all mortgage lenders. This Program and the results of quarterly and annual reviews should be documented and retained. HMDA data should be tested for accuracy and completeness regularly. Analysis of the LAR for outliers should be completed on a quarterly basis and a full regression analysis conducted annually. It is also wise to have an independent third party conduct the annual regression and outlier file review. How much of the Fair Lending review is conducted internally and how much is outsourced will often be a question of pricing and resources.
Lenders may be able to conduct the quarterly self-assessment, minimizing costs to third party vendors, using specialized compliance technology that analyzes and reports on the statistical review of a lender’s HMDA data. Self-correction is as important as self-assessment. Any violations of the law or the company’s own Fair Lending policies and procedures should be self-corrected and documented for possible presentation to a regulator or examiner.
The new HMDA rule is upon us. While we continue to adapt to life with TRID, the industry needs to begin to refocus its attentions on what’s next, and HMDA and Fair Lending are the next candidates affected by reform.
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