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Commentary: Changes to Reporting Requirements Could Mean Trouble

Seeking to "gain greater insight into issues about access to credit," the Consumer Financial Protection Bureau (CFPB) announced the launch of a rulemaking process to change reporting requirements under the Home Mortgage Disclosure Act (HMDA). The new reporting requirements could have unintended consequences for both mortgage servicers and legal teams who assess discriminatory lending practices.

“[T]hese efforts are about better information, better collection, and better access to mortgage loan data,” said CFPB Director Richard Cordray in a press call. He explained that the agency was tasked pursuant to the Dodd-Frank Act to improve HMDA reporting.

The Dodd-Frank Act specified new data points to be collected and reported: namely, the total points and fees of the mortgage; property value and improved property location information; the length of any teaser interest rates, prepayment penalties, and non-amortizing features; lender information, including a unique identifier for the loan officer and the loan; and the borrower’s age and credit score.

The CFPB intends to add to that list. The agency is considering requiring financial institutions to gather and share information such as an applicant’s debt-to-income ratio, the interest rate, the total origination charges, and the total discount points of the loan. "This will help regulators spot troublesome trends in mortgage markets around the country," Cordray said.

In addition to pricing and underwriting information, the CFPB is weighing whether or not institutions should be required to explain why a loan application was rejected and whether lenders need to indicate if a loan is considered a "Qualified Mortgage."

The process of collection and reporting for HMDA purposes may also undergo some changes, the agency said. An estimated 70 percent of all loans use the Uniform Loan Delivery Dataset of the Mortgage Industry Standards Maintenance Organization (MISMO). Aligning HMDA information with this system may ease compliance burdens on lenders, the CFPB said.

The first step for servicers and law firms is to gather feedback via the Small Business Review Panel. Community banks, credit unions, and other entities that may be affected by the changes are encouraged to respond to the CFPB’s suggested changes. Later in 2014, the agency plans to issue a proposed rule open for public comment.

As part of the rulemaking kickoff, the CFPB also announced a new online tool designed to improve public access to HMDA data. The new tool is loaded with data from 2007 to 2012 and allows users to filter and sift through data, download it, and create summary tables.

Expanded reporting will inherently be more burdensome, requiring system changes initially and more work on an annual basis thereafter. More data also means more chance of errors, and more manpower spent on preventing or reducing errors. The CFPB is inviting input on both the content and the method of reporting. Now is the time to speak up on these matters. The CFPB seems sincere in its interest in streamlining the reporting process.

Beyond trying to shape the future reporting requirements to ease the burden, though, there is a larger concern about how HMDA data are used. More detailed data could have the potential for greater interpretation and potential misinterpretation in connection with allegations of discriminatory practices. The costs of litigation in this arena—for both sides—could escalate as statisticians have more categories of data to manipulate and purport to interpret.

Meanwhile, the issue of whether "disparate impact" is sufficient to prove unlawful discrimination remains in the hands of the courts. If that issue is resolved against "disparate impact," the consequences of having more data points will be muted.

About Author: Ellen Marshall

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Ellen Marshall is a Partner at the law firm, Manatt, Phelps & Phillips. Marshall specializes in business transactions, including capital markets, finance, mergers and acquisitions, and securitization.

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