Knowledge and Insights

Once again, banking compliance professionals are in full swing preparing for the new HMDA rules. This is the biggest change since the recent TRID rules that banks still are getting used to.

HMDA/Regulation C remains one of the top three most-commonly cited laws/regulations by the regulatory agencies. In the years since HMDA was originally enacted, it has shifted from being a statute aimed at monitoring and redlining prevention to one widely used by the regulators as a fair lending tool. With the new proposed changes, we see this trajectory continue.

In 2012, 7,400 financial institutions reported information about approximately 18.7 million mortgage applications and loans. While the HMDA dataset is the leading source of information about the mortgage market, it has not kept pace with the market’s evolution. For example, the HMDA data does not provide adequate information about certain loan features that helped contribute to the mortgage crisis, such as adjustable-rate mortgages and non-amortizing loans.

The rule would shed more light on consumers’ access to mortgage credit by updating the reporting requirements of the Home Mortgage Disclosure Act (HMDA) regulations. The Bureau also aims to simplify the reporting process for financial institutions.

Some of the biggest change is around Government Monitoring Information (GMI).

GMI must be asked for, even in telephone and internet applications. The lender may not require it be provided, however:

• Applicants must be advised that the information is mandated by the federal government to assist in enforcement of fair lending laws.
• Applicants also must be advised that lenders are prohibited from discriminating on the basis of the information provided, or on the basis of the applicant’s choice of whether or not to provide the information.
• In the request, the financial institution must offer applicant the option of selecting more than one ethnicity and race as well as permit applicant to self-identify using both aggregate and disaggregate subcategories.

GMI Specific Tips

• Develop a script to ensure business lenders are correctly requesting GMI.
• Make sure stand-alone GMI collection forms are being used when necessary (for example, in commercial lending).
• Develop a review process during the application stage to ensure GMI is collected correctly before the loan closes.
• Periodically review applications (post-closing) to ensure GMI is noted correctly on applicable applications.
• GMI errors are frequently unfixable. If you didn’t collect it properly to begin with, you’re in a situation where you can’t evidence compliance.

GMI for Business Leaders

• If the applicant for the business loan is an individual (or individuals) you still collect GMI.
• If the applicant for the business loan is any other entity, such as an LLC or a C-Corp, GMI becomes N/A and you must NOT collect it. If you accidentally collect GMI, that becomes a regulatory violation.
• This is why stand-alone GMI collection forms should be used in business lending.
• Develop a review process during the application stage to ensure GMI is collected correctly before the loan closes.

Quality of Data for New Fields

• TRID Effect
  • Ensure any last-minute changes are documented in the system of record. (For example, current focus is on timely disclosures of tolerance cures. Also need to go back and update HMDA data.)
  • Is line of business equally concerned about ensuring all those last-minute changes are accurately documented in HMDA system?
  • Is there a plan to update any HMDA data that might have been pulled already?
  • Underwriting data frequently changes during the process. For example, applicant/co-applicant information, debt-to-income, etc., may be documented in the credit file as the credit officer continues to receive new information. Ensure all changes are translated to the system of record.
    • Tip! Engage key stakeholders to discuss the importance of accurate data within the system of record that pulls HMDA data.

Tip – Do a Self-Assessment

• Does the business have a process to ensure all changes or updates made through closing and thereafter are promptly entered into the system of record?
• Is there a timely, qualified quality control process embedded within the business that provides oversight over all final data points at or about the time the loan closes and cures are finalized, extended to the system of record that will pull the HMDA data?
• Have the 2^nd and 3^rd lines of defense perform monitoring and audits before January 1, 2018 to allow adequate remediation time. Embed the ongoing process for 2018 data.

What Story Does Your Data Tell?     

• Review HMDA data from a Fair Lending and Unfair, Deceptive or Abusive Acts or Practices (UDAAP) perspective.
• Start this analysis as soon as you can understand your data, then compare to your peers when the aggregate data comes out in Fall 2019.
• Consider evolving concepts to monitor trends. Minority – Consider various categories of race/ethnicity beyond African American/Hispanic. Further dissect data by overlaying new data points like FICO scores. This provides an opportunity for regulators to slice and dice data in unexpected ways. Ensure you have a reasonable business justification for any perceived differences.
• Engage key stakeholders.  Keep them aware of trends and key risk indicators to be prepared for any required remediation or action plans.

As with any major change, the industry is still seeking clarity on some aspects. One thing is certain: there is more detail and transparency coming to the business of mortgage lending.  To discuss the HMDA changes in further detail or for assistance with your regulatory compliance, please contact me at [email protected] or 609-689-9700.