Meeting the Challenge of HMDA Compliance

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Affairs · Securities Lending
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MEETING THE CHALLENGE OF
HMDA COMPLIANCE
From The RMA Journal, February 2018

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HMDA DATA SET EXPANSION
As of January 1, 2018,
lenders subject to the
reporting requirements of
the Home Mortgage
Disclosure Act were
required to begin reporting
specific new information in
accordance with the
Consumer Financial
Protection Bureau’s final
rule issued in October 2015.

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HMDA DATA SET EXPANSION (CONT.)
The Dodd-Frank Act directed the
CFPB to expand the HMDA data set
as a way to improve public
understanding of market conditions
and to aid in identifying emerging
risks and potential discriminatory
lending practices in the marketplace.

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The CFPB states that much of the
new reportable data represents
information similar to or the same
as that customarily collected by
lenders for their own:
• Processing.
• Underwriting.
• Pricing of loans.
• Facilitation of the sale of loans
in the secondary market.

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The CFPB has also attempted to align the
final rule’s requirements with well-established
industry standards, including definitions
already in use by a significant portion of the
mortgage market.

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Since issuance of the 2015 final rule, the CFPB has issued
amendments intended to ease the rule’s compliance burden—
particularly for smaller institutions.
To assist lenders in achieving compliance with the new rule, the
CFPB and the prudential regulators have:
• Provided information on their websites.
• Held audio conferences.
• And issued guidance and explanations.

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BACKGROUND

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BACKGROUND: PURPOSE
The Home Mortgage Disclosure Act was originally
enacted by Congress in 1975.
Its purposes are to:
• Collect information about home mortgages to help determine
whether financial institutions are serving their community’s
housing needs.
• Assist public officials in distributing public-sector investment to
attract private investment in areas where it is needed.
• Help in identifying possible discriminatory lending patterns and
enforcing anti-discrimination laws.

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BACKGROUND: REGULATION C
• The 2015 HMDA final rule
amended Regulation C to
incorporate the Dodd-Frank Act’s
HMDA provisions.
• These changes affected which
financial institutions report HMDA
data, which transactions must be
reported, and what data about each
transaction must be recorded and
reported.

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BACKGROUND: AMENDMENTS
In 2017 the CFPB issued
amendments to the 2015 rule
that made clarifications and
changed certain requirements
contained in the earlier rule.

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BACKGROUND: AMENDMENTS (CONT.)
Beginning in 2018, a bank or savings association is subject
to Regulation C if it originated:
• At least 25 covered closed-end mortgage loans in each
of the two preceding calendar years.
• Or at least 500 covered open-end lines of credit in each
of the two preceding calendar years and meets the
existing Regulation C tests (asset size, location,
federally related, and loan activity tests).

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BACKGROUND: STANDARDS
• Generally, reportable
transactions will be based on a
dwelling-secured standard as
opposed to a purpose-based
test.
• Regulation C contains a list of
transactions that are specifically
excluded from rule coverage.

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BACKGROUND: DATA COLLECTION
On or after January 1, 2018, covered institutions
will collect the data points specifically identified
in the Dodd-Frank Act, as well as data points
that the CFPB has determined will assist in
achieving HMDA’s purposes.

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BACKGROUND: NEW DATA POINTS
Applicant or
borrower age
Credit
score
Automated
underwriting
system
information
Unique loan
identifier
Property
value
Application
channel
Points and
fees
Borrower-paid
origination
charges
Prepayment
penalty
Loan
term
And interest
rate, among
others
New data points include:
The new rule also modifies several existing data points.

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BACKGROUND: ASSISTANCE
To assist covered
institutions with respect to
these new and modified
data points, the CFPB has
prepared “Summary of
Reportable HMDA Data:
Regulatory Reference
Chart,” which is available
on its website.
The CFPB has also issued
transition rules to assist
institutions in correcting
incomplete or erroneous
information.

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BACKGROUND: REPORTING
The new rule requires covered institutions to report when
they collect information—based on visual observation or
surname—about an applicant’s or borrower’s:
• Ethnicity
• Race
• Sex
The rule allows applicants and borrowers to
self-identify using ethnicity and race subcategories.

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BACKGROUND: ELECTRONIC SUBMISSION
The new rule requires electronic submission
of HMDA data using new procedures.
And it adds a quarterly reporting
requirement for larger-volume reporters.

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COMPLIANCE
TOOLS AND
ASSISTANCE

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COMPLIANCE TOOLS AND ASSISTANCE
The CFPB has established a dedicated web page,
“Home Mortgage Disclosure Act Rule Implementation,”
which contains:
The
reportable
data chart
A link to the
complete
HMDA rule
The CFPB’s
Small Entity
Compliance
Guide
Summaries
of the final
rule and
subsequent
amendments
And other
valuable
compliance
information
including
archived
webinars

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COMPLIANCE TOOLS AND ASSISTANCE (CONT.)
The Federal Financial Institutions Examination
Council (FFIEC) has issued
“Examiner Transaction Testing Guidelines”
for use in assessing the accuracy of the
recorded and reported HMDA data.

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COMPLIANCE TOOLS AND ASSISTANCE (CONT.)
These guidelines, which describe the agencies’
procedures for sampling and validating HMDA data,
should help bankers understand the approach that
will be used to assess HMDA data during the
examination process.

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The guidelines afford a
consistent, coordinated
approach to interagency
examination and accord
leniency for small reporters
(Loan Application Register
counts of 100 or less).

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The banking agencies have issued
“Designated Key HMDA Data Fields,”
a document identifying and designating
37 HMDA data fields as “key.”
The agencies have stated that
examination staffs will focus primary
attention on these data fields during
transaction testing, although additional
data fields may be reviewed in certain
circumstances.

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The FFIEC has issued a
Filing Instructions Guide
that provides institutions with
information on such points as how
to format a Loan Application
Register (LAR), which information
to enter into each data field on the
LAR, and how to file HMDA data.

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This guide provides information about
each of the 110 reportable data fields and
groups them into 46 data points.

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ETHNICITY
AND RACE
DATA

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ETHNICITY AND RACE DATA
• Neither the ethnicity data
point nor the race data point
is new, but both have
changed.
• The new rule allows loan
applicants to report
subcategories for Hispanic or
Latino ethnicity, Asian race,
and native Hawaiian or other
Pacific Islander race.

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ETHNICITY AND RACE DATA (CONT.)
The final rule also allows
applicants to list a particular
enrolled or principal tribe under
the category American Indian or
Alaska native.

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ETHNICITY AND RACE DATA (CONT.)
Applicants may select as
many categories and
subcategories for race
and ethnicity as they
wish.
Financial institutions
must report every
aggregate ethnicity
category selected.
If an applicant also selects
one or more subcategories,
the institution must report
those as well, up to a
maximum of five entries.

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REGULATION
B

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REGULATION B
The CFPB has amended
Regulation B to give
lenders additional
flexibility in complying
with Regulation B and
Regulation C.

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REGULATION B (CONT.)
These amendments clarify that
creditors subject to both regulations
generally satisfy the applicant
information requirements of
Regulation B simply by complying
with Regulation C.

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The amendments also
facilitate the collection and
retention of information on
certain mortgage
applicants’ ethnicity, race,
and sex.

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Additionally, the
amendments:
• Remove from Appendix B a 2004
version of the Uniform Residential
Loan Application (an optional
model form for creditors’ use).
• And add two alternative model
forms.

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The CRA rule changes aim to conform to Regulation C by:
Updating the
definition of “home
mortgage loan” to
mean a “closed-end
mortgage loan” or an
“open-end line of
credit” as defined in
Regulation C.
Removing the term
“home equity loan.”
Changing the content
of the CRA public file.
The banking agencies have also issued a final rule
amending their respective Community Reinvestment Act
regulations.

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PRIVACY
ISSUES

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PRIVACY ISSUES
The CFPB has issued
proposed policy guidance
pertaining to the public
disclosure of loan-level
HMDA data.

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PRIVACY ISSUES (CONT.)
The proposal envisions the modification of
public HMDA data when the release of the
unmodified data creates risks to applicant
and borrower privacy that are not justified by
the benefits of releasing the data to the
public.

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The guidance would exclude
certain information from
release, such as application
date, property address, and
credit score.

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The guidance
proposes
modification of
other data
points such as:
• Loan amount
• Age
• Property value.

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BEST
PRACTICES

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BEST PRACTICES
The prudential regulators have
provided RMA with the following
guidance and advice for
institutions striving to achieve and
maintain compliance with HMDA
data collection requirements.

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BEST PRACTICES (CONT.)
Policies and procedures Training
Monitoring and/or audit
A function for responding to
consumer complaints
Primary importance: regulators
stress the need for a sound
compliance risk management
system (CMS) with these key
components:

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The regulators state that a
CMS should also be dynamic
and adjust on an ongoing
basis, to focus resources
where they are most needed
based on risk to the institution.

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In judging an institution’s commitment to effective HMDA
compliance management, regulators will determine if the
board and management are doing the following:
Performing
satisfactory
oversight of
the
institution’s
CMS.
Providing
adequate
compliance
resources.
Employing
staff generally
able to
ensure
compliance
with HMDA
laws and
regulations.
Conducting
adequate due
diligence and
oversight of
third parties.

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Given the HMDA rule changes, regulators advise that it
would be prudent for boards and management to be
apprised of these activities:
Updated policies
and procedures
regarding HMDA
compliance.
Internal monitoring
efforts designed to
detect and remedy
issues as early in
the process as
possible.
Audits and internal
reviews that detail
HMDA-related
findings and
recommendations.

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Regulators suggest that
institutions conduct internal
research to determine
where within the
organization HMDA-
reportable loans are
originated.
Also, they should review
one-off loan originations to
see if they are
appropriately categorized
and recognized for HMDA
purposes.

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The process of receiving and
accepting loan applications
should also be reviewed for
consistency of approach.

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The regulators also advise that
institutions maintain clear and
consistent practices and
procedures regarding HMDA
data collection and management.

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Banks should consider establishing roles and
responsibilities for:
Data
collection
Data
integrity
File
documentation
Monitoring Reporting

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Banks should also identify adequate
and consistent data collection and
file documentation requirements.

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Along these lines is another important recommendation for
HMDA compliance:
• Oversight of third-party service providers.

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Lastly, regulators emphasize
the importance of employee
training as part of the HMDA
compliance process.

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Institutions should consider
who should be trained for
HMDA and what the training
should include.

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The agencies state that any employees who
receive, process, or underwrite applications
that are potentially HMDA reportable,
or who are responsible for monitoring or
auditing the HMDA program,
should be aware of their HMDA
responsibilities as well as the HMDA
requirements.

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LEARN MORE
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Meeting the Challenge of HMDA Compliance

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