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

This is an update to a blog we posted earlier this year.  

Part One: The “Known-Knowns”  

In August of 2014, the CFPB released it proposed changes to the Home Mortgage Disclosure Act (“HMDA”) (Regulation C).  The comment period for these changes ended in October of 2014 and the final rule is scheduled for July of 2015.   Of course it is impossible to predict exactly what the changes will be, but to paraphrase a speech from Donald Rumsfeld, there are some known-knowns when it comes to these changes.     

A Quick Bit of Background

Remember that HMDA is designed to help develop information on the lending practices of banks.  In its original form, HMDA was designed to make banks disclose where they were lending to help stop “red-lining”.   Red-lining is the  practice of specifically refusing to make loans in areas or neighborhoods.  In the past there were lenders who would literally take a map of a city and draw a red line around neighborhoods in which they refused to lend.  

As the mortgage industry grew and changed, HMDA also changed.  The focus of the information being collected moved from disclosure of information at banks collectively to the experience of individual borrowers at banks.  Information on the application process and the results of the application were added to HMDA data collection requirements in the 1980’s. 

At the turn of the 21^st century, the focus of the information collected changed again and this time the type of credit being offered became the focus.  As a result the terms of the loans and more information about the lien status of the loans was added to HMDA.  

Dodd Frank Changes

The changes in HMDA that are being brought about by Dodd Frank are another step in the progression of the regulation.   The idea here is that HMDA will be used to develop more information about the overall status of the mortgage industry.  For example, the CFPB noted in press releases that;  

“While a lot of information is contained in HMDA….additional mortgage information could help federal regulators, state regulators, lenders, consumer groups, and researchers better monitor the market. For example, no data is currently gathered on home equity lines of credit which surged prior to the housing crisis nor on teaser mortgage rates which had a hand in causing it.  HMDA data currently contains only limited information about loan features and interest rates.”[1]

In addition, the Dodd Frank changes will also require a HMDA-like program that will collect information on women and minority owned businesses.   Don Sokolov, the Deputy Associate Director, Division of Research, Markets & Regulations for the CFPB put it this way: 

“The Dodd-Frank Act helps small businesses by filling a major gap in knowledge about the market for small business credit. Section 1071 of the Dodd-Frank Act amends the Equal Credit Opportunity Act to require that financial institutions collect and report information concerning credit applications made by small businesses and women- or minority-owned businesses. One stated purpose of Section 1071 is to strengthen fair lending oversight. The CFPB and other authorities will be able to use these data to improve the effectiveness and efficiency of fair lending enforcement efforts ^[2]”

The type of information that will be required here is still very much unknown and we will discuss this area further in Part Two of this series. 

Update-Types of Loans Reported

One of the most significant changes that will occur when the new HMDA rules are effective is that that the all loans that are secured by a dwelling will be reported.  This means that HELOC’s will now be required to be reported on the HMDA LAR.  Reverse mortgages will also be reported on the LAR.  This also means that one headache for reporting, the unsecured home improvement loan will no longer have to be reported.  

 Update- HMDA Reporters

There are several significant rule changes that were included in the CFPB announcement.  The first of these changes is the definition of who is a HMDA reporter.  Under the new rules, any institution that originates more than 25 mortgage loans in the previous calendar year, will be subject to HMDA reporting.  It is as simple as that. 

Update-Disclosure Requirements

The new guidelines will change the way HMDA data is disclosed.  For large originators (more than 75,000 entries annually) HMDA data will be reported quarterly.  For all reporters, the disclosure will be made available to the public through a website. 

Update-Staff Commentary

There will be additional staff commentary that is directed some of the thorniest questions surrounding the collection and reporting of data.  Questions such as the treatment of modular homes, refinancings and which structures are considered dwellings. 

Moving Forward-Getting Ready for Changes

Despite the fact that there are currently no regulations that specifically, address these changes, the CFPB has begun the process.  Therefore, one of the” known-knowns” is that the regulations are coming.     

We also know that there are several data points that will be part of the new regulation.  We know this because these data points are written into the law and will be required to be part of the new regulations.  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.

 Finally, we also have a good idea of additional changes that the CFPB is considering.  We know this because they released a factsheet that shows they required changes and changes being considered. [3]

Using what we know about the changes that are coming, we know that there are at least different approaches that financial institutions can take to prepare: 

1)       Do nothing and what for the regulations to be published;

2)      Address the “known-knowns” by collecting the data that is written in the law;

3)      In addition to the above attempt to start collecting data on the proposed areas.  

We whole heartedly do not advise taking the first approach.  While it can seem prudent to wait until a change is actually made, in this case, we know that the change is coming.  Waiting until the rule is published leaves your bank open to higher risk and the costs associated with last minute alterations that need to be made.  The risk adverse route is to marshal forces now to get ready for the changes that you know are coming. 

Taking the second route and addressing the areas that are certain to be part of the new regulations is, in our opinion, a risk adverse approach. 

The following is a list of data that is required by Dodd Frank, along with the CFPB comments; 

New Data Element	CFPB  Description
Age & Credit score	Unscrupulous lenders may target the elderly for unsuitable and costly loans – having applicant age will help regulators identify and potentially take action to discourage these schemes. Credit score will make it easier to understand why some borrowers are denied and why some borrowers pay higher rates than others. Credit score will also help regulators identify lenders  who may warrant closer review.
Total points and fees at origination	It is critical that regulators understand how much borrowers are paying for their loans in the form of the total points and fees and the rate spread. These data points will significantly enhance financial regulators’ understanding of pricing outcomes and risk factors for  borrowers.
Value of property securing loans	The value of a property is an important part of a lender’s decision whether to make a loan and what rate to charge. Property value information  will help regulators better understand lenders’ acceptances and denials, and the rates and fees they charge borrowers. Improved location information will help with analyses of local mortgage  markets.
Introductory fixed-rate period for variable-rate loans, Prepayment penalties,  Ability to make other than fully-amortizing payments	Particularly in the years leading up to the mortgage crisis, certain types of loan features have been  problematic  for consumers. Including this information in HMDA will give financial regulators a  better  view of the effect of riskier loan features.
SAFE Act unique identifier, Universal loan identifier.	Including  information such as an identifier for the loan officer who works with the borrower, a unique identifier  for the loan, and information about whether the applicant or borrower works with a mortgage broker,  would help regulators keep track of lenders’ business practices.

 

There are several points of information that are also being considered by the CFPB.  We will discuss these and the implications for reporting in our next post. 

Since we know that this information will be part of any new regulation, now is the time to start developing the processes and getting the training necessary for staff to understand the requirements.  In doing so, your institution will make the transition smooth, reduce risks and overall costs. 

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[1] See Swanson- CFPB Changes HMDA Data Collection-Mortgage News Daily February 2014

[2] Testimony of Testimony of Dan Sokolov Deputy Associate Director, Division of Research, Markets & Regulations Consumer Financial Protection Bureau

[3] CFPB FACTSHEET: CONSUMER FINANCIAL PROTECTION BUREAU TAKES STEPS TO IMPROVE INFORMATION ABOUT ACCESS TO CREDIT IN THE MORTGAGE MARKET  February 7, 2014