Michael L. Vitali, Sr., presently serves as the Chief Compliance Officer of LoanLogics, monitoring regulatory developments and their practical implications for lenders, servicers and vendors in order to support Executive Management in high-level strategic decision-making. Vitali recently spoke with MReport about the CFPB's updates to the Home Mortgage Disclosure Act (HMDA), which require lenders to provide more data from the loan application, such as pricing, credit history, debt-to-income ratio, and interest rate. As a result of having to report more data, lenders may experience more Fair Lending violations, resulting in costly settlements, class-action lawsuits and reputational damage. What can lenders to do prepare for the changes?
What new policies and procedures need to be implemented as a result of the HMDA updates?
We've always had the HMDA rules and we've always collected certain data and reported that data to the government so they could determine what lenders are doing, where they were lending, and the types of loans they were doing. It's now a matter of just expanding that information, gathering more data, and the way that it's going to be reported and what's going to be reported. Fannie and Freddie's new URLA (Uniform Residential Loan Application) will help, because coincidentally, it was drafted and created to capture much of the ethnicity, race, and age data and the subcategories that will be implemented under the HMDA modifications. Lenders, LOS and technology providers will need to update their systems to capture all of the data. Where the additional challenges come in is a lot of the information that now needs to be reported has to do with the loan itself; specifically the type of loan, the rate, the rate spread in some cases, and the fees being charged to the consumer. Although that information is already in most LOS systems because TRID requires it, lenders will now have to also capture that data for HMDA reporting.
How can lenders use technology to enhance data access and accuracy while minimizing disruption and expense?
The key is to work with your technology providers to upgrade the data they're going to extract from the new URLA application as well as from their own documents. Lenders today should be able to extract data from not only the loan application but from other loan documents as well. This data includes the rate lock, the registration document they use to register a loan with their secondary market source, and the information which is captured in their loan estimate and closing disclosures. They should be able to extract all that data electronically, import it into their own LOS system, and then use that information to create the reports required by HMDA. So technology is the key.
Most entities today are already working with a provider because they've been reporting HMDA data. I'm sure that those entities are going to update their systems to be able to capture and report all the new required data. They should be working with their own LOS and HMDA reporting providers to make it a seamless process. In the middle would be their own capability to run those reports and to do a pre-review of what they're going to deliver to the government, so they know in advance if they have potential problems. They'll get penalized for missing data, so it’s important to identify if they're missing data points, and if so, to find out why and enter that information. They should also be able to run their own reports to look at where they're lending and whether they are they seeing a higher decline rate in a certain race, ethnicity, or class of borrower, or a certain market. Basically, they should review the same data that the CFPB is going to look at to get a jump on problems and make the necessary adjustments or corrections in their process to avoid any major fines, penalties or worse.
Given that lenders conducted HMDA reporting quarterly or yearly, how often do new requirements mandate evaluations?
I'm not a lender anymore, but I was a lender for 40 years. My personal opinion is I would do it monthly, initially. I'd capture my HMDA data, run my internal reports to make sure I'm capturing everything that I should initially, just to make sure that the data is accurate and complete. Then start running reports at least quarterly before we're required to do it in 2020 to determine the results of the data that I've collected and whether they indicate any potential problems. This is so I can jump on it right away and make adjustments and changes as needed in my lending practices, data collection, and data extraction.
What steps should lenders take if they discover there are some Fair Lending issues?
As a technology provider of QC services, this is probably our biggest challenge. Lenders don't want to see the bad news. If they discover they have potential fair lending issues, obviously the first thing to do is investigate further, even if they have to bring in an outside entity to take a look at what they're doing. If they determine they do have a fair lending issue, they should go right to the CFPB and say, "Here's what we uncovered, here's what happened, here's how it happened, and here's what we're doing to correct it." Whether it be the CFPB, Fannie Mae, Freddie Mac, FHA, state auditor, or you name it, it's a lot better to self-report and show what you're doing to correct the problems than it is to wait for CFPB to come in and find the problem. For example, you should explain how the problem occurred and why, and whether an individual person has been fired. If the issue is a breakdown in the system, how has the system has been upgraded or modified? That's why it would be important under the new rule to report at least monthly initially and then quarterly rather than wait until the end of the year and find out you have a problem. Otherwise, somebody's going to want to know why you waited so long to identify the problem and do something about it.
Another thing lenders need to look at is how many consumers may have been harmed by the fair lending issue and what they need to do to rectify the problem. Is it a matter of refunds or a matter of re-reviewing loans that may have been declined to see if they can make the loan? The main thing is to identify the issue, find out how can you correct it, do what needs to be done to correct it, and self-report it.