There is no room for getting comfortable quite yet, as the mortgage industry must focus on new reporting requirements under the Home Mortgage Disclosure Act (HMDA) – which has been dubbed “TRID’s Daughter” by one of the industry’s leading service providers. The new rule, which was introduced on Oct. 15, 2015, requires lenders to change their methodology of reporting and disclosing data. It takes effect on Jan. 1, 2018.
With one-and-a-half years of lead time, are lenders actively pursuing changes to their data reporting structures and making advancements to their technology development – or is this a ticking time bomb that will go off on Jan. 2, 2018?
The data point changes in the HMDA rule include 25 new data fields and a modification of 14 of the original 23 data elements, thus requiring a total of 48 data points. In addition, beginning in 2020, lenders that reported a combined total of at least 60,000 applications and covered loans in the preceding calendar year will be subject to an increased reporting frequency – from once a year to quarterly. The rule also changes the types of institutions and transactions that are subject to HMDA, as well as the specific information that covered institutions are required to collect, record and report.
The new reporting points include applicant/borrower age, credit score, automated underwriting system information, unique loan identifier, property value, application channel, points and fees, borrower-paid origination charges, discount points, lender credits, loan term, prepayment penalty, non-amortizing loan features, interest rate, and loan originator identifier. Furthermore, once considered a consumer loan, a home equity line of credit will be treated as a first mortgage under the new HMDA rule.
The increased reporting points promote more transparency to both consumers and regulators; however, such transparency is accompanied by an increased risk of regulatory scrutiny related to fair lending violations. Inevitably, lenders will have the burden of incurring productivity loss during implementation and costs related to training, technology and employing a revised framework. Lenders subject to the new rule will have to develop, implement, test and monitor their programs to confirm that reporting is accurate. More than ever before, lenders will be under the microscope and will have to maintain compliance for fear of potential violations and incurring penalties from a regulatory overseer and, perhaps worse, risking reputational damage, should that occur.
The Consumer Financial Protection Bureau (CFPB) has not yet advised on which data items are to be made public and in what form they will be made available. The bureau has advised that there will be a “balancing test” in public disclosure of the information, in which the regulators will assess the potential harm to the public against the need to accomplish the HMDA’s purpose. Thus, although the data to be made public remains to be seen, lenders will have to recognize that with the release of data, there could be privacy and cybersecurity concerns, as well. Lenders have to collect all of the required data necessary for the additional HMDA reporting fields, while, at the same time, adhering to and using internal protocols to maintain the confidentiality of private information. Further, it could be argued that cyber attacks could increase, as sophisticated hackers could utilize and combine the HMDA public data points to unlock passwords and prey upon individual borrowers and related lenders.
The Mortgage Bankers Association (MBA), law firms, compliance vendors and technology partners are providing guidance and resources to assist with adding the new data points, and they are recommending that lenders review and understand the rule and take a proactive approach to ensure readiness. This includes having compliance specialists work with all lines of business that will be impacted by the new changes, as well as implementing training.
Since the CFPB announced the new HMDA changes, the MBA has conducted a multitude of sessions – both at conferences and in stand-alone seminars. The organization has offered and continues to offer various forums discussing the new rule, and it has also compiled an HMDA Resource Guide written by leading legal experts. The MBA’s Mortgage Industry Standards Maintenance Organization has released an “HMDA Implementation Toolkit,” which offers guidance, mapping documents and information regarding the changes.
On Sept. 23, the CFPB issued guidance allowing for early collection of some HMDA data points. Beginning Jan. 1, 2017, lending institutions can allow applicants to self-identify using specific ethnic and racial categories under the new HMDA rule and will not have to report any of the extra data collected in 2017. If the CFPB had not issued such guidance, this self-identification would be prohibited under the current regulations. As a basis for allowing this, the CFPB is attempting to alleviate the compliance burdens prior to the full HMDA implementation on Jan. 1, 2018.
The small to midsize origination market
With any new regulatory reform, the need for incurring costs associated with compliance is particularly difficult for smaller lenders and credit unions with less capital. Although certain small lenders are exempt from reporting under HMDA and, thus, will not have to deal with the new rules, the clear majority of non-depositories and regional depositories will continue to struggle with the increased costs associated with new technologies, training and legal guidance as a result of the new rules. What’s more, they face the implications of fair lending violation allegations against their firms. The American Bankers Association notes that 46% of banks have scaled back their efforts to expand market share to grow loan and deposit accounts. Regulations have driven the costs so high that the top half-dozen banks by assets, just three years ago, spent $70 billion on compliance – nearly double the year before – and, of course, costs have continued to rise as the sheer number of regulations themselves have been implemented.
This has contributed to a contraction in the depository market share in mortgages. The Wall Street Journal reported on Nov. 2 that depositories accounted for less than half of the mortgage origination volume during the third quarter of 2016 – the first quarter that banks, credit unions and other depository institutions have fallen below that threshold in more than 30 years. Larger non-depositories are better capitalized, more focused and have a greater appetite to make riskier loans that many depositories turn away. Increased costs pertaining to HMDA and fair lending, let alone the pressure to expand lending to broader and more diverse communities of risk, add more color to the reason depositories are retracting from mortgage lending. It is noteworthy that independent mortgage lenders have historically come close to the 50% mark of origination volume, even up to the market crash. Thus, the shift to depositories having less than 50% of the market share further reflects the depository aversion to risk.
The cost of compliance is forecasted to take another jump in 2018, especially with anticipated litigation and class action lawsuits from consumer watch groups and representative associations with the intent to level the lending playing field and to capitalize on lenders that are widely considered vulnerable to class action claims and settlements.
To combat these threats, costs associated with the recruiting and retention of compliance officers, managers and “inspectors” to regulate all aspects of the mortgage operation have grown significantly. The biggest depository banks have regulators on-site, sent courtesy of the Federal Reserve and the Federal Deposit Insurance Corp., among other agencies. At JPMorgan alone, the compliance and regulatory head count has grown to 43,000 as of just last year compared with 23,000 in 2011.
These costs are likely to be distributed across a number of cost centers and will place pressures on loan officer compensation, street pricing (branch and corporate margins will inflate), bonus packages, the hiring and retention of employees, and, of course, whatever costs the consumer can absorb. Due to these dynamics, lower profitable loans such as bond programs, state housing programs and other loans will be dropped, leaving fewer creditworthy consumers who otherwise may be good candidates for a mortgage out of the housing market. Ultimately, consumers will shoulder much of the costs and negative effects of onerous compliance mandates. As a result of the rise in costs related to the new HMDA regulations, small to midsize lending institutions will likely seek additional capital for growth or simply merge with larger lenders, supporting the industry trend toward consolidation.
Compliance as an opportunity
Addressing compliance with HMDA changes will have to occur regardless of size of institution; thus, the strategy to implementation will play a key role. With the TILA-RESPA Integrated Disclosure rule, the incentive for lenders to have improved accuracy in implementation is driven by a business model of closing more loans. The incentive for HMDA reporting is not quite as direct. Executives must, therefore, take the lead in viewing the HMDA changes as a strategic opportunity to grow rather than simply training their defensive lines. Lenders are going to be collecting, cleansing and reporting many more details, and ideally, ahead of time, they will be testing and modeling these expanded data points. Data integrity and capturing the fields should become a routine practice and not just one that occurs infrequently as the reporting deadline draws near. With increased reporting points, lenders will have more data fields by which to analyze their lending patterns, compare with their peers and find opportunities in which their competitors are having success.
“quality control plan” will reflect these changes in how compliance will be managed, how it will be responded to and its net effect on the organization when issues are identified on a loan-by-loan basis. Central to this are a pricing management process and compliant management program to track pricing and relevant complaints on a consumer-by-consumer basis, across multiple branches throughout the organization and across multiple geographies. The process should document exactly how such complaints or price variances are analyzed, what parameters require actions, what actions are taken, and how progress is measured over time. This analysis is recommended to take place monthly – as opposed to quarterly or annually, as is frequently recommended by other consultants. A more routine review will reflect a more proactive process – desirably, attributes looked for by regulators and examiners. The control plan should clearly delineate lines of accountability – from the compliance officer, to production, branch administration and loan officer/branch manager training.
It is alarming how ostensibly unprepared most non-depository lenders appear to be in identifying, addressing and correcting fair lending issues within their retail or wholesale origination funding channels. Fair lending flags need to be detected in processing and underwriting, preferably at the branch level, so that relevant servicing or loan application alterations can be made in the process as opposed to after the fact. Although harnessing opportunities through a proactive approach would be more beneficial to lenders, most organizations will comply in a more basic manner. Unless and until lenders see other institutions demonstrating the success of progressive approaches, it is unlikely many organizations will implement innovative methods to take advantage of the new data points.
One lender that was interviewed for this article has a fair lending department, which is the largest department within the organization. This department reports to compliance but has a direct tie into the production, retail organization and leadership teams. The objective is to look at pricing disparities across all branches throughout the country and issue refunds to consumers whose pricing locks extend beyond a self-imposed variance and target. These decisions are made while closely analyzing market data when factoring in socioeconomic and other protected class dynamics on a lending branch-by-branch basis. When variances are detected beyond acceptable targets, actual checks are issued to the consumer to rectify the situation.
The seriousness and sophistication this lender has exhibited in addressing fair lending issues are impressive and perhaps overkill. But, in the event of a class action allegation regarding discriminatory practices, it would be difficult to argue the lender isn’t making a “best effort” in both practice and policy to ensure such practices do not occur and, when they do, are corrected in a timely manner. Clearly, this is an effective framework to ensure the lender will not face any violations of discrimination when exercising discretion in the loan approval process.
The goal of the CFPB is to help consumers. This should translate into a goal of lenders’ to determine methods of opening up lending to minorities, including blacks, Hispanics, Asians, Native Americans, women, the elderly and the disabled. In analyzing the data, lenders should be able to identify what groups have been underserved and utilize that information to determine where they should increase their footprint in underserved areas. The HMDA modifications, although perhaps tedious in nature, will also allow lenders to educate, disclose and promote transparency that, in turn, could improve customer satisfaction as a result of enhanced trust between consumer and lender.
Utilizing compliance as an opportunity could be viewed as a short-term loss for the possibility of sustainable growth.
Debbie Hoffman is chief legal officer of mortgage compliance technology firm Digital Risk, while Rick Roque is managing director of retail for mortgage lender Michigan Mutual. They can be reached at firstname.lastname@example.org and email@example.com.