Addressing Upcoming Changes in HMDA Directed by the Dodd Frank Act-A Two Part Series

Part Two:  Being proactive is the Way to go! 

In part one of this series, we discussed a brief history of HMDA.  The goal of this regulation has always been to collect comprehensive information about the lending practices of financial institutions.  We also noted that changes in the regulation have been directly related to changes in the mortgage industry. 

The Dodd Frank Act is yet another example of how occurrences in the banking industry have affected regulation.   The official statement of CFPB director Rich Cordray describes how the Dodd Frank Act has been impacted by the most recent financial meltdown. 

When Congress enacted the Dodd-Frank Act in 2010, it specifically tasked us, the Consumer Financial Protection Bureau, with getting better information from mortgage lenders. Congress directed us to improve HMDA reporting because, just as Louis Brandeis, America’s original consumer advocate and later a distinguished Supreme Court Justice, observed, “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”[1]

With that thought in mind, the Dodd Frank Act added several specific new requirements to HMDA.    These new requirements include the following:  

·         The total points and fees;

·         the term of the loan;

·         the length of any teaser interest rates;

·         the borrower’s age

·         the borrower’s credit score and credit score. This new data may be made available to the public, consistent with the privacy interests of borrowers and applicants

The Proactive Approach

As we mentioned in part one of this series, the above list of changes to HMDA are already known because they are written into the Dodd Frank Act.  We suggested that  for these changes, your bank could immediately start collecting this additional information, taking comfort in knowing that these will eventually be required. 

 In addition to these Dodd Frank mandated changes, the  changes CFPB has been empowered to look at additional ways that HMDA can be changed to require data collection that can help with analysis of the mortgage industry.  The February statement makes it clear that the CFPB  is taking this duty seriously and is considering a number of additional changes. 

“ So we are considering other types of information that would give regulators a better view of developments in all segments of the housing marketplace. We are considering asking financial institutions to include more underwriting and pricing 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.[2]

The following is a list of changes being considered  by the CFPB and their explanation: 

New Data Element	CFPB  Description
Mandatory reporting of denial reasons	Denial reasons are important for understanding whether financial institutions are serving the housing needs of their communities and treating applicants fairly. Lenders currently have the option of reporting the reasons for denial of loan applications. Many, but not all, lenders report denial reasons – in fact, certain lenders that report to the OCC and FDIC are already required to provide this information. The Bureau believes that requiring this information for all HMDA reporters will result in more consistent and statistically meaningful data
Debt-to-Income (DTI) ratio	Debt-to-income is a key factor in underwriting decisions, closely related to borrowers’ ability to repay, and is critical in understanding patterns in mortgage outcomes. When denial reasons are reported, too much debt is a primary reason for rejection of loan applications. In assessing  repayment ability under Bureau rules, lenders are required to consider the borrower’s total DTI or residual income. Thus, including DTI in HMDA data could provide additional insight into lenders’ denial rates.
Qualified Mortgage status of loan	The Bureau is considering proposing to require lenders to report whether they determined the loan to be a Qualified Mortgage. Qualified Mortgages are loans that meet certain criteria and are presumed to comply with the Bureau’s Ability-to-Repay rule. Including Qualified Mortgage status in HMDA data could help regulators better   determine how the CFPB’s rules are impacting the mortgage market.
Combined loan-to-value (CLTV) ratio	The combined loan-to-value (CLTV) ratio is a key factor in underwriting decisions, and is critical in understanding patterns in mortgage outcomes. The CFPB is considering requiring lenders to report the ratio of the combined unpaid principal balance of multiple loans to the value of the property. The Dodd-Frank Act expanded HMDA to include loan-to-value ratios, but lenders consider the CLTV in underwriting and pricing loans, so including CLTV in HMDA will improve analyses of pricing information
Automatic underwriting systems results.	Lenders widely use automatic underwriting systems (AUS), as a critical part of their decision whether to approve or deny an application. Including AUS decisions in HMDA could help regulators better understand credit decisions and identify problems .
Affordable housing programs	For loans secured by dwellings with more than one unit, the Bureau is considering requiring lenders to report whether the property is deed restricted for affordable housing. This data might enable more robust analysis of access to credit in certain communities and better targeting of public resources, consistent with HMDA purposes and assisting with Community Reinvestment Act compliance exams
Manufactured housing data	Lenders are currently required to report whether a loan will be for a manufactured home. The market for credit to finance manufactured home purchases is different from the market for credit to finance site-built home purchases. Additional information on manufactured home loans, including the type of financing and whether the borrower will own or lease the land where the home is sited, will make it easier to identify the sources of differences in denial rates, and will improve understanding of manufactured home financing
Additional points and fees information	The Dodd-Frank Act requires lenders to report total points and fees and rate spread. The CFPB is considering requiring more detailed pricing-related information which will help regulators compare similarly situated borrowers to identify potentially discriminatory lending practices for further investigation and reduce “false positives” when analyzing disparities.  Additional information may include:    ·         Total origination charges ·         Total discount points ·         Risk-adjusted, pre-discounted interest rate ·         Interest rate

 

While it is impossible to accurately predict which of changes will be implemented or in fact all of them will, we believe that a discernable theme is developing.  Put most directly,  the time is now to gather as much information about the lending process as  possible.   Your new HMDA data collection process should be as expansive as possible.  The good news is that all of this information should be readily available from the loan application process.  If you look at the above list again, you see that that there is virtually nothing that you don’t ask for during the application process.  Now is the time to look at the information about HMDA,  what it is intended to do and what the CFPB is considering . We believe that the best practice is to address this data collection in a proactive matter. 

As we noted before, the changes that are mandated by Dodd Frank and the changes being considered by the CFPB have not yet been implemented through a new regulation.  What we suggesting is that now is the time to address  the increased information requirements so that when the implementing regulation is finally adopted, the transition will be smooth.  It is also worth noting that with the additional information being collected, a bank can greatly enhance its knowledge of the credit needs of its community.  This information will be critical for CRA, Fair Lending and strategic planning purposes. 

We have attached our suggested form that includes all of the categories being considered in addition to the ones that we know will change. 

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[1] FEB 7 2014 Prepared Remarks of CFPB Director Richard Cordray on the HMDA Press Call

 

[2] Ib. id.