Don’t get lulled by the 2018 date for collecting the expanded data required under the revised Home Mortgage Disclosure Act (HMDA). Yes, banks and non-bank mortgage lenders have two more years to meet the requirements. However, collecting that data accurately and understanding the story it tells will likely turn into the equivalent of a tough hike through rugged mountains. So, it’s best to be prepared.
Before venturing into any unfamiliar territory, it’s essential to have an updated map and a thorough understanding of the potential risks. The expansion of HMDA gives lenders so much to learn, consider and act on that 2018 really is much closer than it seems at first. Lenders that invest now in learning and training will be better prepared to make the HMDA journey.
Understandably, many lenders feel like they’re still recovering from their last foray into the wilderness, with the controversy and debate over the TILA RESPA Integrated Disclosure (TRID) rule. “I think they’re just exhausted,” says Melissa Blaser, senior manager, compliance, at consulting firm Wipfli, LLP, based in Milwaukee. But she warns that the expanded version of HMDA may prove an even steeper climb than TRID was. “With this regulation, I think the changes are going to be much harder to implement and are going to take a lot more time to implement than TRID took,” Blaser says.
Lenders also shouldn’t expect the deadline to be shifted into the future, says Richard Horn, principal at Washington, D.C.-based Richard Horn Legal, PLLC and former senior counsel and special advisor at the Consumer Financial Protection Bureau (CFPB), the agency that oversees both TRID and HMDA. “The CFPB gave a generous implementation period in the rule,” he says. “And it’s very unlikely to delay this rule like it did for the TRID rule. There are not going to be any last-minute extensions that save lenders from non-compliance. So even though it looks like it’s far down the road, lenders should be thinking about it right now.”
The new version of HMDA doesn’t simply add to the number of data points being collected, Horn adds. For example, the rule now applies to any residential loan that’s secured by a dwelling. “That means more loans will be covered by HMDA on the residential side, and it expands the scope for commercial loans. Commercial loans covered under the rule still have to satisfy the HMDA purpose test, which is for purchase, home improvement or refinancing, but this is still a major change in how HMDA affects commercial lending.”
Many lenders separate commercial and residential lending, Horn says, but now those systems will need to connect. “Lenders will need to figure out how to expand their software systems to compile this data in a format that can be collected and then reported.”
Integrating data from multiple sources does not happen overnight for lenders, especially when data is coming from disparate systems. Without a thorough understanding of HMDA’s new requirements, lenders may not know what their technology will need to do to enable accurate compliance. They’re also unlikely to know what business process changes will be necessary. After all, accuracy issues don’t arise only from technical problems, such as incorrectly entered data or software coordination problems; they also occur when people collect incorrect information or when they do get the right data but don’t regularly update the system with it.
For example, says Blaser, Home Equity Lines of Credit (HELOCs) will be subject to reporting under the expanded regulation. That means employees who may have little to no experience with HMDA now need training.
In her work helping lenders comply with HMDA, Blaser has also seen many lenders struggle with data accuracy. “In much of the testing we do, even though the regulation hasn’t changed since 2004, most financial institutions still have a lot of inaccuracies under the existing rules,” she says. “Lenders have to be trained now that didn’t even know the original 26 pieces of information. Now, they’ve got to learn all 48.”
Lenders that report inaccurate data or otherwise fail to comply with the HMDA expansion over the course of several exam cycles could face fines or damage to their exam ratings, Horn says. Blaser warns that regulators may ask a lender to re-validate and re-submit its data within a relatively tight time frame, such as 60 to 90 days, if they identify problems. To meet that deadline, the lender may need to bring in consultants, hire additional staff or re-assign staff, all of which often comes at a higher cost than any fine that might be levied.
“If you have a small Loan Application Register (LAR), that might not be too cumbersome,” Blaser says. “But if you have five thousand, ten thousand or twenty thousand lines on your LAR, you might need a whole room full of consultants to get it done within the time period requested.”
There’s another issue lenders won’t have time to focus on if they don’t prepare early enough for the 2018 collection deadline: understanding the potential impact of the data. “After HMDA data is released publicly, many, many folks go through it to find potential fair lending cases and issues, including regulators and consumer advocacy groups,” Horn says. “It would be a good idea to start conducting the statistical analysis that consumer advocacy groups would do on the HMDA data before you report it.”
With more data in electronic form, the CFPB will be able to more easily analyze lending patterns, Blaser says. “If it looks like, for example, that there was a disparity in denials between white applicants and Hispanic applications, they can look at the denied Hispanic applicants and compare their debt-to-income ratios to the white approved applications. They don’t have to come in and pull a file to do that. They can do it electronically. So, it would definitely be a good idea for financial institutions to be analyzing their data, maybe even every quarter, to see what the story is.”
To reach that point in a timely, efficient manner, Blaser and Horn suggest that lenders start work this year. It’s a good idea for lenders to establish project timelines, analyze the new data requirements and determine staffing requirements in 2016, Horn says. He also suggests communicating with vendors to understand their planning, implementation and testing timeline.
“Get your thought leaders, those who will be responsible for implementation, thoroughly trained,” Blaser says. “Map your data, write your procedures, get any manual tools that you’re using ready so that you can spend all of 2017 training. I don’t think it’s going to be just one training session. You’re going to train, test, re-train and re-test if you really want to kick off 2018 successfully.”
Mr. Dahlgren is managing director, Learning & Development, at BAI. He can be reached at [email protected].
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