HMDA HIGHLIGHTS: NEW RULES FOR 2018 AND BEYOND

Jonathan Foxx, PhD, MBA

Chairman & Managing Director

Filing the HMDA LAR annually often seems like a Rite of Passage. Most filers vacillate between dread and certitude in their evaluation of the data integrity, let alone enduring the stress of submitting the report by the deadline. The acronyms HMDA LAR refer (of course) to the Loan Application Register (LAR) of the Home Mortgage Disclosure Act (HMDA or “Act”) and its implementing Regulation C (“Regulation”). By the way, the HMDA acronym is pronounced “hummda” – not “himmda”. Each year about this time, we get a lot of calls for HMDA support, especially in LAR preparation and filing. In the last few years, changes in filing requirements seem to have pushed filers to the point of reaching for the bottle (of Maalox). But the filing requirements are not that complicated, though they are now more involved in obtaining data and include partial exemptions (more on that later).

If you don’t think HMDA data is all that important except to the PhD’s at the Federal Reserve, you should spend some time with financial institutions who have undergone fair lending examinations. One of the first data sets a regulator asks for in a fair lending audit happens to be the HMDA LAR. The data is used to help identify possibly discriminatory lending patterns, and compliance with the Equal Credit Opportunity Act, the Fair Housing Act, and the Community Reinvestment Act. Inaccurate HMDA data can make it difficult for the public and regulators to discover and stop discrimination in home mortgage lending or for public officials and lenders to tell whether a community’s credit needs are being met. Yet I was told by a senior executive that there is nothing to be concerned about these days, given that under the current Administration there has been a reduction of regulatory enforcement. The same person told me that regulators have been advised to go easy on examinees. So, that means you can get away with lowering the compliance bar. After all, less enforcement means less worries, right? Wrong!

The bird of compliance flies on two wings: examination and enforcement. Examination is intrinsic to supervision; and enforcement is intrinsic to ensuring implementation of the regulatory framework. If an examiner finds violations and defects, administrative actions can ensue. If you want to be a test case, go ahead, tempt the devil, see what happens! In compliance, virtually all transactions and policies leave tracks. If “don’t get caught” is your game plan, I am going to tell you straight-out that you will get caught. Any creditor that fails to comply with a requirement imposed by the Act or the Regulation is subject to civil liability for actual and punitive damages in individual or class actions.[i] Violations of the Act or the Regulation also constitute violations of other federal laws. The civil monetary penalties can be onerous! Last year a financial institution was ordered to pay a civil money penalty of $1.75 million for persistent and substantial reporting errors.[ii] Liability for punitive damages can apply only to nongovernmental entities and is limited to $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor's net worth in class actions.[iii] There is not only equitable and declaratory relief but also the awarding of costs and reasonable attorney fees to an aggrieved applicant in a successful action.[iv] Still want to tempt the devil?

When it comes to HMDA, a financial institution must make a good faith effort to record all data concerning covered transactions fully and accurately within 30 days after the end of each calendar quarter.[v] The concept of “good faith” is a feature of many statutes, but the notion comes down to a simple idea: if you operate on the basis of a positive commitment to fulfill the terms and spirit of a regulation, yet despite doing so you still had some defects in implementation, regulators will take this into consideration in determining administrative actions. How would you prove such good faith? Just show the regulator the compliance tracks which support your actions and best efforts.

A financial institution is not required to record all of its HMDA data for a quarter on a single LAR. Instead, an institution may record data on a single LAR or may record data on one or more LARs for different branches or different loan types (such as home purchase loans, home improvement loans, and loans on multifamily dwellings).

A financial institution may maintain its quarterly records in electronic or any other format, provided it can make the information available to the regulatory agency in a timely manner upon request.[vi]

Whatever the case, institutions must submit their LARs to their regulatory agencies by March 1^st following the calendar year for which they are reporting.[vii] The required data requested on the LAR must be entered for each loan origination, each application acted on, and each loan purchased during the calendar year.[viii] An application must be reported in the year when final action is taken. Originations must be reported in the year they close; if an application has been approved but not yet closed, it must be reported the next year.[ix]

Legal Entity Identifiers and HMDA 2018: Questions and Answers

Jonathan Foxx
Managing Director

The Legal Entity Identifier (“LEI”) is a unique 20-character code that identifies distinct legal entities which engage in financial transactions. The LEI is a global standard, designed to be non-proprietary data that is freely accessible to all. Many financial institutions have not obtained a Legal Entity Identifier (LEI).

A financial institution must provide with the following information in its HMDA submission on or after January 1, 2018:

 i.  Its name;

ii.  The calendar year the data submission covers pursuant to paragraph (a)(1)(i) of this section or calendar quarter and year the data submission covers pursuant to paragraph (a)(1)(ii) of this section;

iii. The name and contact information of a person who may be contacted with questions about the institution's submission;

iv.  Its appropriate Federal agency;

v.  The total number of entries contained in the submission;

vi.  Its Federal Taxpayer Identification number; and

vii. Its Legal Entity Identifier (LEI) as described in § 1003.4(a)(1)(i)(A)

[Emphasis added. See 5(a)(3)(vii)—Legal Entity Identifier (LEI)]

For purposes of the submission requirement, “appropriate Federal agency” means the appropriate agency for the financial institution as determined pursuant to § 304(h)(2) of the Home Mortgage Disclosure Act [12 U.S.C. 2803(h)(2)] or a financial institution subject to the Consumer Financial Protection Bureau's (“Bureau”) supervisory authority under § 1025(a) of the Consumer Financial Protection Act of 2010 [12 U.S.C. 5515(a)].

If your financial institution needs an LEI, the GMEI Utility is endorsed by the Global LEI Foundation and also has a search function. There are some frequently asked questions on their website and we provide below a few highlights derived from that resource.

-     Who can register the financial institution? You must currently be an employee of the financial institution you are registering and also authorized by the financial institution to register for an LEI. Alternatively, financial institutions may use a third party through an assisted registration process. The person registering the financial institution will need a user account, which may be created here.

-     What information is needed to register? The basic information listed in the ISO 17422, such as the financial institution’s legal name, registered address, headquarters address, legal form, and so forth.

-    What is the cost? The GMEI Utility charges $200 for each registration request plus a $19 surcharge. To maintain and keep the LEI registration active, the fee for each registration is $100 plus a $19 surcharge. For more information, visit the FAQs specific to payment.

Once payment is processed, the GMEI will validate the financial institution using public sources. Once this process is complete, it takes about three business days for an LEI to be issued in the GMEI database. Overall, the GMEI Utility’s FAQs state that most requests are “cleared” within three to five business days.

It is advisable to review the CFPB’s HMDA implementation webpage for more information.

Frequently Asked Questions

Q: Why do we need an LEI?

A: The Bureau has taken the position that an LEI could improve the ability to identify a financial institution reporting data and correlate it to its corporate configuration. In addition, the Bureau has stated that “facilitating identification of a financial institution's corporate family could help data users identify possible discriminatory lending patterns and assist in identifying market activity and risks by related companies.” By facilitating identification, this requirement apparently is also meant to help data users identify whether financial institutions are serving the housing needs of their communities. [§ 1003.5(a)(3)]

Q: Should we be getting our LEI as soon as possible? Can we get an LEI before we have to start using it, or do we have to use it as soon as we obtain it?

A: We recommend that you obtain your LEI by the first or second quarter of 2017. There is no reason to delay. We don’t anticipate the price to change. However, you must have an LEI for all loans submitted for HMDA on or after January 1, 2018.

Q: Do you anticipate the Uniform Loan Identifier ("ULI") to be calculated by Loan Origination Systems?

A: We do anticipate that many LOSs will offer to provide this number. However, it is very possible that they may leave this to the vendor collecting your HMDA data. Some concern has been raised about commercial or consumer systems needing such a programming solution. It is our understanding that the Bureau is evaluating this requirement with respect to a compliance effective date for calculating and verifying the ULI and ensuring it has not been previously used.

HMDA Highlights

HMDA Highlights

Last month I published an article on the changes coming in Regulation C,[1] the implementing regulation of the Home Mortgage Disclosure Act.[2] The article can be viewed here and downloaded here or here.

I would like to highlight a few of the salient features for you.

Essentially, HMDA serves three purposes: (1) it provides public and public officials with information to help determine whether financial institutions are serving the housing needs of the localities in which they are located and to assist public officials in their determination of where to distribute public sector investments to improve the private investment environment; (2) it requires the reporting of racial characteristics, gender, and income information on applicants; and (3) it identifies possible discriminatory lending patterns and enforcing anti-discrimination statutes. 

In 2010, the Dodd-Frank Act amended HMDA to expand the scope of information compiled, maintained and reported. In August 2014, the CFPB proposed amending Regulation C to implement the Dodd-Frank changes.

The CFPB chose not to adopt several data points specified in the Dodd-Frank Act and included a few on its own. Take the following summary listing of the changes made by the CFPB’s October 2015 Regulation C amendments (hereinafter, “Rule”) as a tool to be used along with my article and the CFPB’s own promulgated guides and issuances regarding the HMDA changes.

Institutional Coverage

Although it is not required by the Dodd-Frank Act, the CFPB nevertheless adopted uniform loan-volume thresholds for depository and non-depository institutions, which require an institution to report data if it originated in each of the two preceding calendar years at least 25 closed-end mortgage loans or at least 100 open-end lines of credit, assuming the institution meets the other criteria for coverage.

Institutions that meet only the closed-end threshold are not required to report open-end lending, and institutions that meet only the open-end threshold need not report closed-end lending.

The regulation retains the other coverage criteria for depository institutions, which require reporting by depository institutions that satisfy an asset-size threshold ($44 million in 2015), have a branch or home office in an MSA on the preceding December 31, originated at least one first-lien home purchase loan or refinancing secured by a one- to four-unit dwelling in the previous calendar year, and satisfy a “federally-related” test (i.e., the institution is federally insured or regulated or the loan previously mentioned was insured, guaranteed, or supplemented by a federal agency or intended for sale to FNMA or FHLMC).

For non-depository institutions, the above loan-volume threshold test replaces the current loan-volume or loan-amount test and Regulation C retains the criterion that the institution must have a branch or home office in an MSA on the preceding December 31.

Transactional Coverage

Also not required by the Dodd-Frank Act, the Rule adopts a dwelling-secured standard for reporting all loans or lines of credit for personal, family, or household purposes, whether the purpose of the loan is to finance the property serving as security or another property. Accordingly, the amendments discard the purpose test that previously required the reporting of home improvement loans, whether or not dwelling-secured. Among other things, this makes the reporting of dwelling-secured consumer open-end credit mandatory (no longer optional).

Most commercial-purpose transactions are subject to Regulation C reporting only if they are for the purpose of home purchase, home improvement, or refinancing (i.e., the Rule retains Regulation C’s traditional purpose test only for commercial-purpose transactions). The regulation does not apply to home improvement loans not secured by a dwelling, or agricultural-purpose loans/lines of credit. The regulation now uses the term “covered loans” as a shorthand term to refer to the universe of loans covered by HMDA.

·         The CFPB specifically noted that Regulation C does not require the reporting of loan modifications. There are two exceptions for which HMDA reporting is required because they represent new debt obligations in substance if not in form:[3] (1) assumptions, including successor-in-interest transactions (this differs from CFPB interpretations under TILA Regulation Z); and (2) New York consolidation, extension, and modification agreements (CEMAs) used in place of refinancings (this only refers to CEMAs made under § 255 of the New York Tax Law). The CFPB recognized that its determination that these New York CEMAs must be reported departs from past FRB guidance that they did not need to be reported. The CFPB noted that this Regulation C definition of the term “modification” differs from that of Regulation B, which defines it to include the granting of credit in any form, including the renewal of credit and the continuance of existing credit in some circumstances.

·         The amendments revise the definition of “dwelling.” Briefly put, the definition includes primary residences, second homes, investment properties (homes), multifamily properties, and manufactured home communities (whether or not any individual homes also secure the loan). The term excludes recreational vehicle parks, recreational vehicles, and pre-1976 mobile homes. The regulation retains the existing discretion for financial institutions to determine the primary use for multifamily properties (such as mixed-used properties with five or more individual dwelling units). Properties that provide long-term housing with related services such as a combined medical care component are reportable, while properties that provide medical care are not (consistent with the exclusion of hospitals).

Home Mortgage Disclosure Act – Big Changes on the Way!

Jonathan Foxx

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:

1. Covered institutions (financial institutions required to collect and report HMDA data);
2. Covered transactions (transaction types and applications);
3. Loan-level data (transaction data to collect and report on); and
4. 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!

HMDA: New Revisions Proposed

On June 21, 2010, the Federal Reserve Board issued a notice of public hearings regarding potential revisions to Regulation C, Home Mortgage Disclosure Act (HMDA).

And on July 20, 2010, The Office of Thrift Supervision, Office of the Treasury, issued a transmittal of the Federal Register notice.

Hearings on the proposed revisions to HMDA will be held on July 15, 2010 in Atlanta, GA; August 5, 2010 in San Francisco, CA; September 16, 2010 in Chicago, IL; and September 24, 2010 in DC. Comments may also be e-mailed, faxed, or mailed.

Deadline for Comments: August 20, 2010

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.

Highlights

Data Elements

• What, if any, additional data should be collected? What are the benefits, costs, and privacy issues associated with requiring lenders to report, for example: (i) Underwriting data such as borrower's credit score, loan-to-value ratio, combined loan-to-value ratio (i.e., including both the reported loan and other debts), and borrower's debt-to-income ratio; (ii) borrower's age; (iii) loan originator channel; and (iv) rate spreads for all loans, instead of only for higher-priced loans?

• Should any existing data elements be modified? If so, how? For example, what are the benefits, costs, and privacy issues associated with requiring lenders to report total income, rather than income relied on by the lender?

• Should any existing data elements be eliminated? Why?

Coverage and Scope

Coverage

• Should mortgage brokers and non-lender loan purchasers be required to report HMDA data?

• Should other types of institutions be required to report? If so, which types?

• Should any types of institutions be exempt from reporting?

• Should the rules governing who must collect and report HMDA data be revised in other ways? If so, how?

Scope

• Should any other types of mortgage loans be reported?

• Should any types of mortgage loans be excluded from reporting?

• Should the rules governing which mortgage loans are subject to reporting be revised in other ways? If so, how?

Preapproval Programs

• Do lenders use preapproval programs as defined by Regulation C?

• Is there a benefit to requiring lenders to report on these programs?

• How could the definition of preapproval program be modified to be easier to apply and to make reporting more useful?

Compliance and Technical Issues

• What are the most common compliance issues institutions face under HMDA and Regulation C?

• What parts of Regulation C would benefit from clarification or additional guidance?

• Are there technical issues regarding Regulation C that should be resolved?

Other Issues

• Are there emerging issues in the mortgage market that may warrant additional research, respond to technological and other developments, reduce undue regulatory burden on industry, and delete obsolete provisions?

Visit Library for Issuance

Office of Thrift Supervision, Department of the Treasury
Transmittal - TR-456, 7/20/10
Federal Register, Vol. 75, No. 118, pp. 35030-35033, 6/21/10