President & Managing Director
Lenders Compliance Group
“It’s just a way to keep the PhD’s employed in
Washington, DC!” Such was the statement that a CEO of a regional mortgage
banker said to me recently about the new changes to the Home Mortgage
Disclosure Act, known by its acronym HMDA. “More statistics that go nowhere and
tell us nothing,” he said, “and more ways to interfere in our loan origination
process.” I grant that the regulatory burdens these days are demanding, but I
was surprised by the sense of futility in those remarks.
Over the years, in fact, HMDA data has played a
very useful role in identifying fair lending concerns, helping financial
institutions to avoid disparate impact and disparate treatment violations. It
certainly is important to mortgage lenders and originators in their obligation
to ensure a level market to all consumers, without the impediment of
discriminatory practices by bad actors. Perhaps another way to make sense of
the Bureau’s amendments to HMDA is to recognize that a primary reason for those
changes is to create a better tool for rectifying adverse fair lending
patterns.
At the core of the revisions undertaken by the
Consumer Financial Protection Bureau (“Bureau”) is the commitment to consumer
protection laws generally, and, by enhancing the metrics of HMDA data
collection, the commitment in particular to strengthening fair lending
standards. What better way to understand fair lending than through a deep
analysis of the HMDA Loan Application Register or “HMDA-LAR.” The fact is, the
new changes to HMDA will derive over 250 million data points from financial
institutions related to mortgage loan applications and originations in 2018.
The amendments to existing HMDA requirements,
effectuated through HMDA’s implementing Regulation C, will be spread over four
effective dates between January 1, 2017, and January 1, 2020.[i]
However, the key date that contains most of the amendments, will be the compliance
effective date of January 1, 2018. On that effective date, financial
institutions will be required to collect HMDA data for applications they
receive and loans they originate on or after January 1, 2018.[ii]
[iii]
Certain changes will be new to non-banks, though
familiar to depository institutions. For instance, beginning in 2018, non-banks
will be required to record HMDA data internally within 30 days of the end of
the quarter in which final action was taken. Regulation C has not previously
required quarterly recording for non-banks, so this will be a new undertaking for
non-depository institutions.[iv]
I am going to provide an outline of four
HMDA-related areas that the Bureau revised in its update to Regulation C,
promulgated through its issuance of the Final Rule (“Rule”) on October 15, 2015.
These changes to Regulation C affect the following guidelines:
- Covered institutions (financial institutions required to collect and report HMDA data);
- Covered transactions (transaction types and applications);
- Loan-level data (transaction data to collect and report on); and
- Reporting and disclosure (method and frequency of data reporting and public access to that data).
Covered Institutions
The Rule provides guidelines to both depository and
non-depository institutions. Both of these institution types are covered if, among
other things, they originated at least 25 covered closed-end mortgage loans or
100 covered open-end lines of credit in each of the previous two calendar
years. This standard is called a “uniform loan volume threshold,” and is part
of the new evaluation process to determine if an institution is required to
collect and report HMDA data. Regulation C eliminates the existing origination volume
and asset size criteria and replaces them with the “uniform loan volume
threshold.”
The standard will have the most impact on non-depository
institutions, sweeping up many non-bank creditors into Regulation C compliance.
This is due to the fact that the Rule actually removes the current coverage
requirement that, in the preceding calendar year, a non-depository institution
should have originated home purchase loans (including refinancings) equaling: (A)
at least 10 percent of the institution’s origination volume in dollars, or (B)
at least $25 million.
Comparatively, the Rule removes the current coverage
requirement for a non-depository institution; to wit, (a) have total assets of
more than $10 million as of the preceding December 31, or (b) have originated
at least 100 home purchase loans (including refinancings) in the preceding
calendar year. Furthermore, currently a non-depository institution must satisfy
at least one prong (either (a) or (b) above) or both of these coverage criteria
in order to be covered. Consequently, the removal of the foregoing thresholds
for non-depository institutions will increase the number of non-depository
institutions required to collect and report data.
Yet, the Rule will actually decrease the number of
depository institutions covered, because it adds the uniform loan volume threshold
to the existing coverage criteria for those institutions. The Bureau estimates
that the new coverage criteria will exclude from coverage approximately 1400
depository institutions that are currently covered by the rule and include
about 450 non-depository institutions that are not currently covered by the
rule. Clearly, the Bureau is casting a wide net in order to apprehend the
largest, reliable data set possible!
Consider
the following chart for depository institutions:
Depository
Institution
|
Coverage
Criteria - Now
|
Coverage
Criteria - Later
|
Asset Size
|
$44 million
|
Same[v]
|
Federal Status
|
Insured or regulated federally
|
Same
|
Preceding December 31
|
Home/Branch office in MSA[vi]
|
Same
|
Preceding Calendar Year
|
Originated at least one purchase or
refinance on first lien 1-4 family dwelling
|
Same
|
January
1, 2017
|
Meet existing criteria and originated
at least 25 home purchase loans (including refinancings) in each of the two
preceding calendar years.
|
|
January
1, 2018
|
Meet existing criteria and originated
(a) at least 25 covered closed-end mortgage loans in each of the past two
years or (b) at least 100 covered open-end lines of credit in each of the two
preceding calendar years.[vii]
|
|
Thus, on January 1, 2018 a depository institution will be
covered by Regulation C if, assuming asset size and the other coverage criteria
are met, it originated at least 100 covered open-end lines of credit in each of
2016 and 2017, even if it did not originate 25 closed-end mortgages in each of
2016 and 2017.
Now consider the following chart for non-depository
institutions:
Non-Depository Institution
|
Coverage Criteria - Now
|
Coverage Criteria - Later
|
Volume
|
10% dollar production or $25 million
|
See below.
|
Asset Size
|
$10 million or 100 purchases
|
See below.
|
Preceding December 31
|
Home/Branch office in MSA[viii]
|
See below.
|
January
1, 2018
|
If (1) on the preceding December 31,
it had a home or branch office in an MSA, and (2) it originated (a) at least
25 covered closed- end mortgage loans in each of the two preceding calendar
years, or (b) at least 100 covered open-end lines of credit in each of the two
preceding calendar years.
|
|
Therefore, on January 1, 2018, a non-depository institution
will be covered by Regulation C if it has an office in an MSA and it originated
at least 25 closed-end mortgages in each of 2016 and 2017.
COVERED
TRANSACTIONS
Currently, HMDA data is collected and reported on
closed-end, dwelling-secured loans made for home purchase and refinancing
purposes. Also included are closed-end loans made for home improvement
purposes, regardless of whether the loan is secured by a dwelling. Reporting
home equity lines of credit (HELOCs) to the HMDA-LAR is optional. Regulation C does
not specify a distinction between loans made for a consumer or business
purpose; that is, both consumer-purpose and business-purpose loans are reportable
only if they satisfy Regulation C’s specific “purpose” test, which determines
the subject loan to be for the purchase of a dwelling, refinance a
dwelling-secured loan, or to make home improvements.
Certain terminology is being either changed or will remain intact.
These terms are intrinsic to the understanding of the amended Regulation C.
Three salient terms are “dwelling,” “preapproval,” and “coverage.”
The first term, “dwelling,” is used throughout the HMDA
regulatory framework. The definition of “dwelling” remains unchanged from the
current rule. Dwelling means any residential structure, whether or not attached
to real property. It includes vacation or second homes and rental properties;
multifamily as well as one-to-four-family structures; individual condominium
and cooperative units; and manufactured and mobile homes. It excludes
recreational vehicles such as boats and campers, and transitory residences such
as hotels, hospitals, and college dormitories.
The second term, “preapproval,” requests for preapproval
for a purpose other than a home purchase, will not be reportable. In addition,
a covered institution may (but is not required to) report requests for
preapproval for home purchase loans that the institution approved but that the
applicant did not accept. This will change under the amended Regulation C. On
the applicable compliance effective date, institutions will be required to
report preapproval requests for home purchase loans that were approved but not
accepted. It is worth noting that preapproval requests for home purchase
open-end lines of credit, home purchase reverse mortgages, and home purchase
loans secured by a multifamily dwelling are excluded from the requirement.
The third term, “coverage,” refers to the operative factor
that institutions generally will be covered by Regulation C if, in addition to
other criteria, they originated at least 25 covered closed-end mortgage loans
or 100 covered open-end lines of credit in each of the previous two calendar
years. (See chart.) If an institution satisfies one of these two criteria but
does not satisfy the other, the institution need only collect and report data
for the type of transactions that qualified the institution for coverage. In
this circumstance, institutions are not required to collect data for the other
type of transactions.
Factors affecting business
purpose transactions are provided in the Rule, as well. The coverage test for
commercial- and business-purpose loans and lines of credit is similar to, but
narrower than, the test for consumer-purpose transactions.
In the first place, like the test
for consumer-purpose transactions, business-purpose transactions are covered
only if secured by a dwelling. Thus, unsecured transactions will be exempt. Open-end
lines of credit will be covered. Unlike the test for consumer-purpose
transactions, the Rule retains the specific purpose test for business-purpose,
closed-end mortgages and extends that test to business-purpose, open-end lines
of credit.
Therefore, a commercial- or
business-purpose loan is covered only if it is secured by a dwelling and it is
made to purchase a dwelling, to refinance a dwelling, or to make home
improvements. Also, a commercial or business-purpose, open-end line of credit
is covered if it is dwelling-secured and it is made to purchase a dwelling, to
refinance a dwelling, or to make home improvements.
Importantly, if a consumer
applies for a loan or line of credit, the proceeds of which will be used for a
business purpose, the business-purpose transactional coverage criteria apply. But
such a loan or line of credit is not covered unless the specific purpose of the
transaction is to purchase a dwelling, refinance a dwelling-secured obligation,
or to make home improvements.
Commercial or business-purpose
loans and lines of credit for other purposes will not be covered transactions,
even if they are secured by a dwelling.
A word about agricultural loans: a loan to purchase
property for an agricultural purpose is not covered as a home purchase loan,
even if a dwelling is situated on the property. The amended Regulation C
specifically states that all dwelling-secured loans and lines of credit for an
agricultural purpose are excluded from coverage, not just transactions to
purchase a home.
LOAN
LEVEL DATA
There are 13 new data points in the revised Regulation C.
This number of data points was required by the Dodd-Frank Wall Street Reform
and Consumer Protection Act. But the Bureau used its authority in order to further
require the collection and reporting of many more data points – that is, all in
all, in addition to the 25 or so data points required under the current rule.
To put a fine point on it, in sum, the Rule seems to require the collection of
up to 54 data points. Of these 54 data points, 10 are unchanged from the
current rule, 11 have been modified from the current rule, and 33 are entirely
new.[ix]
Unchanged data points are the (1) Application Date, (2)
Loan Type, (3) Action Taken, (4) Action Taken Date, (5) Property State, (6)
Property County, (7) Property Census Tract, (8) Borrower/Applicant Sex, (9)
Borrower/Applicant Income, and (10) HOEPA Status.
The Rule adds these data points:
- Information about applicants and borrowers, including age, credit score, and debt-to-income and combined debt-to-income ratios;
- Information about the loan process, including whether the application was submitted directly to the institution, whether the loan was, or would have been, initially payable to the institution, and the name of, and results from, the automated underwriting system that was used;
- Information about the property securing the loan, including value and type (i.e., manufactured home);
- Information about the features of the loan, such as total loan costs or total points and fees, origination charges, discount points, lender credits, interest rate, prepayment penalty term, loan term, introductory rate period, and non-amortizing features; and
- Certain unique identifiers, such as property address, legal entity identifier for financial institutions, and mortgage originator NMLSR identifier.
There are some exclusions. For business- or
commercial-purpose loans, the following data points are not required: (1) Rate
Spread, (2) Total Loan Costs or Points and Fees, (3) Origination Charges, (4)
Discount Points, (5) Lender Credits, and (6) Prepayment Penalty Term. For
purchased loans, these data points are not required: (1) Rate Spread, (2)
Credit Score, (3) Credit Score Model, (4) Total Loan Costs or Points and Fees,
(5) Prepayment Penalty Term, (6) Debt-to- Income Ratio, (7) Loan-to-Value
Ratio, (8) Application Channel, (9) Obligation Initially Payable, (10)
Automated Underwriting System, (11) Result Generated by Automated Underwriting
System.
Ethnicity and race data are significantly modified, in
that, as amended, Regulation C will allow applicants to add details about their
ethnicity or race. Thus, additional data may be available about “subcategories”
of race and ethnicity. Institutions will not be required or permitted to
complete these “subcategories.”
On October 3, 2015, the TILA/RESPA Integration Disclosure
(“TRID”) rules became effective. Four new data points involve TRID data for
closed-end mortgage loans. There may be a cumbersome heuristic to deriving TRID
data on the four data points. Here’s how I see the debacle: these four data
points will need to “link” (or be mapped) or otherwise match the information
disclosed on the TRID form with what is reported under the Rule. Furthermore, if
an institution cures an erroneous disclosure as permitted under Regulation Z,[x]
that revised disclosure must be reported under Regulation C to the extent the
revision affects information required under Regulation C.
Let’s consider a scenario. A financial institution
discloses discount points on the TRID disclosures in the amount of $2500. The
amount of $2500 discount points is sent to the HMDA-LAR. In due course, the
$2500 discount points is found to be an error, with $2000 being the actual
discount points. So, the institution rediscloses for the $2000, makes all
required adjustments to the TRID disclosures, and then seeks to correct the
data thus far recorded in the HMDA-LAR. However, if an institution must report
data quarterly and already reported the amount as $2500, it must correct the
amount and report $2000 in its annual reporting under Regulation C. Inevitably,
this infers that institutions will have to link, map, or otherwise match any
TRID redisclosures to the data reported to the HMDA-LAR. This would be a
significant, logistical challenge.
REPORTING
AND DISCLOSURE
A new electronic submission portal will be introduced soon
by the Bureau. There is a website landing page for it on the Bureau’s website, although
it is not yet functional.[xi]
This portal will be the new way in which the HMDA-LAR will be sent to the
Bureau. Guidance on how to complete the current HMDA-LAR will be deleted,
effective January 1, 2019. New instructions will be integrated into the
electronic submission portal beginning in 2019.
In addition, public access disclosure for 2017 and beyond
will be available at the Bureau’s website. Where institutions are required to
maintain their modified HMDA-LAR on their premises, the Bureau will require the
filers to send consumers and interested others to the Bureau’s own online
database.
As to the public database itself, the Bureau has not yet
announced what information and data sets will be made public from the amended
Regulation C filings. Apparently, the Bureau is contemplating a tiered approach
to providing public access, such as access to the general public, the press, researchers,
academics, consultants, and so forth. Exactly which data sets will be made
available to the public and on what basis will soon be the subject of an
elicited response from the public.
As I mentioned at the outset, the amended Regulation C may
be viewed as a new tool in the maintaining of fair lending initiatives. The
Bureau’s enforcement actions make it abundantly clear that HMDA data is and
will continue to be intrinsic to fair lending compliance.
The use of enforcement orders in reviewing HMDA compliance,
along with many new reporting obligations, will amplify regulatory risks for
HMDA filers. The obtained data can be expected to form the basis for increased
legal and regulatory scrutiny with respect to fair lending requirements. Institutions
will also need to be prepared to devote additional and supplementary resources
to evaluating potential fair lending matters, particularly where they will be
reporting data on a quarterly basis.
On December 1, 2015, the Bureau issued a guide, entitled Home
Mortgage Disclosure (Regulation C) Small Entity Compliance Guide (“Guide”).[xii] According to the Guide, its purpose is to
provide “an easy-to-use summary of Regulation C, as amended by the 2015 HMDA
Rule, and to highlight information that financial institutions and those that
work with them might find helpful when implementing the 2015 HMDA Rule.”[xiii]
In addition to the Guide, the Bureau has a website devoted
to HMDA compliance support.[xiv]
Although you may want to read the 797 page Rule itself, at this time the Bureau’s
website contains useful information and documentation on the Home Mortgage
Disclosure Act rule (Federal Register); a HMDA Executive Summary (an overview
of changes to the HMDA rule issued October 15, 2015); HMDA Key Dates Timeline
(an overview of the effective dates for different elements of the rule); a HMDA
Compliance Guide (a guide to the new rule which makes the content “more
accessible for industry constituents, especially smaller businesses with limited
legal and compliance staff”); a template for Reporting “Not Applicable” (a
reference tool on when to report data as not applicable); a Summary of
Reportable Data (a reference tool for HMDA data required to be collected,
recorded, and reported); and, a HMDA Institutional Coverage Chart (entities
covered for 2017 and 2018).
[i]
On October 15, 2015, the CFPB released a final rule amending Regulation C, 12
C.F.R part 1003, the implementing regulation of the Home Mortgage Disclosure
Act. Published in the Federal Register on October 28, 2015.
[ii]
On January 1, 2019, additional amendments related to electronic data submission
and public disclosures become effective January 1, 2019. Also, institutions
will report the data collected under the new requirements by March 1, 2019. On
January 1, 2020, quarterly reporting begins for large-volume lenders as of the
first quarter of 2020. The first data under the new reporting schedule must be
reported by May 30, 2020.
[iii]
Beginning in 2020, institutions with a combined total of 60,000 or more loan
originations and applications will be required to report HMDA data on a
quarterly basis. For the first three quarters of each year, these large-volume
institutions must report the required data within 60 calendar days of the
relevant quarter’s end. The first submission (for the first quarter of 2020)
will be due on May 30, 2020. Fourth quarter data will be submitted with the
annual submission, which will continue to be due by March 1 of the following
year.
[iv]
FFIEC examination guidance for depository institutions already mandates this practice.
[v]
May be revised
[vi]
Metropolitan Statistical Area
[vii]
The terms “closed-end mortgage loan” and “open-end line of credit” are defined
as part of the new transactional coverage criteria, which also become effective
on January 1, 2018. Covered open-end lines of credit by definition are secured
by a dwelling.
[viii]
Op. cit. 3
[ix]
Not every data point is collected for every application or origination.
[x]
12 C.F.R. §§ 1026.19(e)(3)(iv), (e)(4)
[xi]
See http://www.consumerfinance.gov/hmda
[xii]
Home Mortgage Disclosure (Regulation C), Small Entity Compliance Guide,
Consumer Financial Protection Bureau, December 2, 2015
[xiii]
Idem, p 6
