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The deadline for expanded reporting requirements for the Home Mortgage Disclosure Act (HMDA) is coming soon, and it is important that your financial institution is prepared. More credit unions will have to report data to comply with this act and the data points will become more numerous. For some, the reporting will come every three months, instead of annually. So, it is important to know about this act, the new reporting requirements, and how it will affect your financial institution.
About the HMDA
The U.S. Home Mortgage Disclosure Act, as implemented by Regulation C, is a federal statute that requires most entities that make dwelling-secured loans, including depository and non-depository institutions, to collect a series of data points about each covered loan application they receive. The required data points include information about the loan applicant, the secured property, and the ultimate disposition of the application.
HMDA was enacted in 1975 to prevent racial discrimination in lending. It has its roots in the Civil Rights movement and opposition to “redlining” practices that effectively choke off credit to African Americans and black neighborhoods.
New HDMA Reporting Requirements Explained
On October 15, 2015, the Consumer Financial Protection Bureau (CFPB) issued a new final HMDA rule that includes significant changes to the reporting requirements for lenders, as well as changes in coverage for institutions, transactions, and reporting. The new rules change:
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Who must report HMDA data, by setting uniform loan-volume thresholds for depository and non-depository institutions, including thresholds for open-end lines of credit
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The data elements that must be reported, by adding new data elements and modifying existing ones
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What types of loans and applications (transactions) must be reported
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When HMDA data must be submitted to the CFPB, for certain large-volume HMDA filers
Lenders are to collect the new data required by the rule beginning on January 1, 2018, and they will need to report this data by March 1, 2019, using the CFPB's web-based submission tool for HMDA data reporting.
The new HMDA rule adds 25 data points, modifies 14 others, and maintains an additional nine data points required by the existing HMDA rule. These changes include adding data fields mandated by the Dodd-Frank Act, as well as additional fields established by the CFPB under its discretionary authority. Some of the new HMDA fields include:
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Age of borrower and credit store
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Application channel
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Points and fees
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Borrower’s debt-to-income (DTI) ratio
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Borrower-paid origination charges
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Discount points
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Lender credits
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Loan term
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Prepayment penalties
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Non-amortizing loan features
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Interest rate
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Rate spread (collected, recorded and reported for a broader range of loans)
Covered financial institutions will be required to collect, record and report information for approved-but-not-accepted preapproval requests for home purchase loans (the collection, recording, and reporting of this information is currently optional).
The CFPB has developed an additional prong to determine which institutions must report HMDA data. On January 1, 2018, an institution will only be subject to HMDA reporting requirements if it originated at least 25 covered closed-end mortgage loans, or at least 100 open-end lines of credit, in each of the two preceding calendar years and meets all other coverage requirements.
For data collected in or after 2018 and reported in or after 2019, the CFPB will use a balancing test to determine whether, and if so how, HMDA data should be modified prior to its disclosure, in order to protect applicant and borrower privacy while also fulfilling HMDA's disclosure purposes. At a later date, the CFPB says it will provide a process for the public to provide input regarding the application of this balancing test to determine the HMDA data to be publicly disclosed.
Also, beginning in 2020, covered institutions that reported a combined total of at least 60,000 applications and covered loans in the preceding calendar year will be required to report data quarterly. The first quarterly submission will be due by May 30, 2020.
The Affect on Financial Institutions
This new HMDA rule will bring major challenges to the financial service industry, including:
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Extensive implementation costs for systems and business process changes, as some of the systems currently used by financial institutions may not support collecting this additional data.
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Privacy concerns for borrowers because the new data set contains confidential information such as credit scores, which if publicly released in the wrong manner could cause significant harm and even undermine homeownership
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New data security concerns
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Increased litigation risk. HMDA has been a major source of fair lending claims in the past, and the new data will allow the government, community activists, and plaintiffs to analyze lender application and loan data along with the risk factor used to evaluate the impact on protected classes.
How You Can Prepare Your Institution
Given the significant changes to the collection and reporting requirements of HMDA, financial institutions should begin preparing for the new HMDA rule now.
A financial institution should consider reviewing its products to determine which may fall within the expanded scope of the new HMDA rule and the information it should obtain from the borrower depending on when the information is collected. Also, increasing the number of data points collected and reported could lead to a rise in reporting errors, which may impact fair lending data, compliance, and enforcement.
While a financial institution may correct inaccuracies or omissions prior to its annual submission, a violation of Regulation C is subject to administrative sanctions, including civil money penalties. Therefore, once a financial institution implements new policies, procedures, processes, and systems, in addition to performing the institutional coverage test at the outset and yearly to determine its reporting obligations, it should also consider performing regular quality-control reviews in advance of and after the effective date to ensure that the mandatory information is accurately collected, recorded and reported as required by HMDA and Regulation C.
Have your back-end systems ready for the new loan tracking process by 2018, or you will have to use special addendum forms. Fannie Mae and Freddie Mac use different decision engines, so financial institutions will have to design two types of forms to submit if your back-end systems are not ready for this new process.
Don’t wait to make these changes. January 1, 2018 is right around the corner and now is the time to prepare.
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