(Editor's note: This select print feature originally appeared in the October 2016 issue of MReport magazine)
In a constantly changing regulatory environment, common goals ring true: It is critical to prepare business processes to comply with industry changes and to set expectations for staff, as well as consumers. The Home Mortgage Disclosure Act (HMDA) requires many financial institutions to collect and report mortgage data each year. Between now and 2018, additional modifications to HMDA will be implemented, changing the way mortgage and lending data is disclosed and analyzed.
The primary goal of HMDA is to create a mechanism to identify and analyze the degree to which lenders are serving the housing needs of their communities, to provide insight into lending patterns that might be discriminatory, and to generate information about the mortgage and lending space that can ultimately assist public officials in shaping future policies. While most financial institutions have historically collected data through lending transactions, many of these companies have not invested the time and resources to analyze their own data or compare them to their peers’ data. New updates to HMDA will require not only greater data disclosure but also will give regulators and consumer advocates a deeper understanding and ability to ensure financial institutions are lending in accordance with existing fair lending standards, thus, establishing a new degree of transparency and, possibly, a more equitable lending environment for borrowers.
The updates to HMDA have been a long time coming. Part of the 2010 Dodd-Frank legislation mandated that financial institutions report additional data elements in their HMDA reports. So, many lenders might be thinking: Will this be the next TILA-RESPA Integrated Disclosure (TRID) Rule? It is a daunting thought with all of the time and effort spent on preparation, execution, and the long-term effects of TRID to date. However, such fears are unwarranted. Although the HMDA updates will require significant preparation, they should not have the impact on operations that TRID continues to have.
The good news is that HMDA is aligned with existing regulations. For instance, if a data element such as loan costs must be reported, it can be cross-referenced to the Closing Disclosure required by TRID in order to make the reporting requirements easier for financial institutions to understand and implement. Many of the definitions in HMDA, such as open-end lines of credit, tie back to the Truth in Lending Act (TILA). Thus, in creating these new regulations, the Consumer Financial Protection Bureau (CFPB) took care to promote consistency, which makes it easier for everyone to understand and implement these rules.
Unveiling the Changes and the Motives
With any regulatory changes, it is difficult to foresee how businesses will be affected. However, it is the responsibility of businesses not just to understand new legal processes but also to prepare customers and clients to cope with the changes in a sustainable way. One of the best ways to proceed can be to first gain a complete understanding of the changes. In the case of HMDA, updates will include:
Data disclosure: While HMDA has always centered on reporting data, new requirements prompt the disclosure of data items that have never been reported. This could be the most obvious and influential change for businesses and customers alike. For example, personal information, such as credit scores and property addresses, is now required to be submitted directly to the CFPB for review and analysis. But updates to HMDA involve more than a series of new data points that must now be reported—existing data requirements have been modified as well.
New institutional thresholds: These new terms more clearly define and determine which institutions must report HMDA data. For example, institutions of a certain size may not be required to report data beginning in 2020. This element will reduce the data gathering and reporting burden felt by smaller organizations that may not have the resources to do so in a frequent and effective way.
Transactional coverage requirements: New transactional coverage requirements will come into play as a result of updates to HMDA. For instance, reporting of home equity lines of credit used to be optional but is now required. Additionally, all dwelling-secured loans are reportable, including those for apartments and other commercial buildings not previously reported.
Discovering the Benefits and Challenges
As with any regulatory update, there are benefits and challenges as well as an inevitable learning curve. Before HMDA goes into effect, make a plan to prepare and set expectations accordingly. An easy place to begin can be with the clear benefit, the information that is reported and collected. It is used in important and impactful ways, allowing government funding to be utilized in a way that ultimately benefits consumer communities.
Enforcement of antidiscrimination laws is one of the main goals of HMDA. Regulators, researchers, and consumer advocates can use the data provided to identify any pattern of discrimination. Believe it or not, current statistics can be shocking. With the availability of new data, regulators can examine whether banks and lenders are objectively serving their communities without discriminating according to race, ethnicity, or other prohibited bases.
Additionally, governments and public agencies use the data collected to allocate housing and community development investments. For instance, Flint, Michigan has used data disclosed in compliance with HMDA to identify neighborhoods to target for a blight eradication program.
In a constantly evolving industry such as the mortgage space, professionals at all levels can acknowledge that before benefits can be realized, there are often obstacles to overcome. For example, with HMDA—and this has been the case even before these new updates—lenders are liable for the accuracy of their data. This underscores why it is so important to put appropriate procedures and validations in place to ensure that the data is categorized and reported correctly. While this can be costly and time-consuming, it may be a critical component of a lender’s compliance management system.
An equally large challenge must also be navigated: consumer privacy, one of the main concerns surrounding the new data elements in HMDA. At this time, it appears that the CFPB will provide a website platform for lenders to upload HMDA data files; however, there could be privacy risks regarding where files will be downloaded and stored. As more data is being shared on a larger scale, cybersecurity will certainly be needed to help facilitate the safe sharing of information that can ultimately improve the way the housing industry operates.
Casting Your Eyes to the Horizon
There is still much to learn about the HMDA updates as well as the timeframe various updates will be implemented. Once organizations take steps to understand the new rule, the next logical action is to determine how to move forward in order to remain compliant and successful.
Consumer privacy can be a great place to start, given the importance of protecting consumer data. Updates to HMDA will put organizations under the microscope regarding data analysis. As demonstrated by major data breaches that have occurred in a number of large, well-known corporations over the past few years, there are risks associated with increased data access.
One of the best ways to ease the process of data reporting is to do the analysis on the front end. Many of the new data elements required are already collected and used by financial institutions, such as credit score, loan-to-value ratio, and automated underwriting system findings. However, many companies have not taken the time to analyze the data or monitor their own fair lending patterns. Some have failed to do so because it can be expensive and time-consuming; and frankly, many lenders have been able to skate by with dated processes. What is interesting about this is when fair lending has been questioned in the past, HMDA data could be reviewed, yet this data did not paint a full picture. For example, perhaps the individuals involved also had a low credit score or a high debt to income ratio, data not readily available for analysis. The availability of more data can avoid this issue as regulators may now be able to analyze the “whole picture” of a transaction.
If lenders aren’t analyzing peer data in order to determine how their information stacks up to others in the market, they should be. In doing so, it is critical to determine the practices in place to ensure that data is accurate so erroneous data is not reported at the federal level. How should this be done? Scrub the data. While this can be a heavy lift for companies that don’t already have such data management processes in place, a good way to start is with just a few key elements such as determining which data can indicate information about particular products and then build from there as the company’s loan origination software releases new data fields. Lenders should try to understand what the data says about their company before a regulator tells them.
In addition to putting more time and effort into internal data analysis, lenders and bankers must read the new rule. While lengthy, that may be the best way to gain a thorough understanding of HMDA and increase your chances of successfully implementing changes to address the updates, mitigate audit risk, and properly advise clients and customers in the future. Part of this process includes analyzing fair lending patterns. Finally, file any concerns with the CFPB and be sure to communicate with the company counsel to determine what precautions must be taken with files downloaded from the company systems to avoid problems such as private customer data existing on local hard drives.
While there is no doubt that HMDA will create challenges, it is important to view these new regulations as an opportunity, an opportunity for lenders and financial institutions to better understand the data they are collecting, an opportunity for customers to be better educated and served, and an opportunity for vendors to improve the functionality of their solutions to best address this updated rule.
Melissa Kozicki is the Director of Compliance for the Mortgage Builder division of Altisource. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Mortgage Builder or Altisource.