Michael Flynn, a partner in Goodwin Procter’s Financial Institutions Group sat down with MReport to explain how the HMDA rule is shaking up the mortgage industry and advises on how to cope with the changes.
MReport: How are lenders are held accountable for the actions of their vendors under the CFPB?
Flynn: There’s two different kinds of vendors to think about. First, there are the vendors who supply the platforms such as origination platforms or document platforms that lenders use to generate mortgages. To break that down further, you can look at how the lender relates to those vendors and how the regulators relates to them. Clearly, if there is a problem with the vendor's system so that the data the lender needs to pull together can’t be pulled off of the third-party platform system, the lenders Is going to be looking at the vendor both in terms of any problems with regulators and in terms of contractual obligations of the vendor to the lender in order to get the vendor to fix the system quickly. If any vendor is having a problem in that area, that vendor is going to have some real issues in the market—this would not be a good thing for the vendor, obviously.
The regulators would potentially look at such a problem in two different ways. First, looking directly at the vendor, regulators may think that certain vendors have serious problems and will then put pressure perhaps the vendors, if possible, and on the lending community to say if you use this vendor you may want to look out for these problems and hold the vendor accountable. This then makes it the lender’s problem to pay attention to the vendor's product in order to avoid a vendor management issue with the regulator. The other, more direct, way the regulators can approach such a problem is just to say whatever bad data is produced by the vendor system that feeds into the lender’s data required by HMDA, the lender is going to be accountable. It's unlikely that a regulator will just accept a lender saying, “Oh my vendor did it” or “It was my vendors fault.” In certain circumstances, it certainly should help that a lender is actively managing its vendor, but even active vendor management does not relieve a lender of its HMDA obligations.
The other type of vendors are third-party originators. If a lender is dealing with a third-party originator, the regulators, particularly the CFPB, might have more direct interest in those vendors. To the extent the new HMDA data shows particular fair lending issues with specific third party originators, regulators may focus on both the lender and the third party originator, raising a different focus vendor management.
MReport: What institutions will be most affected by the HMDA regulation?
Flynn: It goes in two directions. It will affect new players that will be under these rules for the first time. Those institutions will include a fair share of non-depository, non-bank lenders, who under the new rules, would have to start reporting if they do a specific numbers of closed-end or open-end mortgage-secured loans. Some of these institutions previously had to report HMDA data, but large numbers of them did not. If these are smaller institutions, its obviously a big cost issue for them relative to their size and available resources.
Other institutions that have a different kind of problem are the bigger originators. There are at least 25 new data points that are going to have to be reported on and at least 12 more of the exisiting data points are modified. Let’s just take the 25 new ones. If you are a lender doing 2 million loans per year, you’ve now got 50 million more opportunities to make a data mistake, whether it is entering a wrong number or having a system problem. The scale of the problem is greater for big lenders, even if it just considering the amount of time it takes to get such large systems up and running. But it is also a bigger problem for these larger institutions because a glitch in the system could cause very large numbers of affected loans and a lot of incorrect data. The other issue for larger lenders is that if a system fix is needed, the system could be much larger than the system of a smaller institution. This could be a real strain on these lenders.
MReport: What types of vendors will most likely to face increased regulatory scrutiny in the near future?
Flynn: I think third-party originators will certainly get more scrutiny partly because data identifying them and an originator is going to be more regularly gathered now. This will give regulators and other parties the opportunity to identify their lending patterns more accurately. As discussed previously, I n terms of vendor liability, the data generated by vendors whose platforms are used by lenders to originate loans or to gather data from originations are, given the volume of data that will be reported, going to face heavy scrutiny from the lenders who use them. They are going to face contractual pressures from their customers, the lenders, to make their systems and data collection work really well.
MReport: How will HMDA affect consumers?
Flynn: If in fact, there are lenders that are engaged in fair lending violations, the increased HMDA data will make it easier to identify such behavior. If regulators or others identify such problems (or if lenders self-identify such problems), lenders will be incentivized to correct their behavior. This should increase access to credit for consumers who were wrongly being denied such access.
The other the new reverting requirements might help consumers is that the increased amount and types of data may show which lenders are most likely to deny credit based on type of loan, credit background, and other factors. This might help consumers to choose carefully who they borrow from. If this occurs, it could also affect the market as a whole as lenders see which lenders themselves study this data.