Changes to HMDA Looming Fast
By Mike Sorohan
July 11, 2017
Since passage of the Dodd-Frank Act in 2010, the real estate finance industry has been inundated with hundreds of new regulations. And despite the desire of the Trump Administration to reduce the overall regulatory burden, these new HMDA rules--begun by the Federal Reserve and continued by the Consumer Financial Protection Bureau--are moving forward like a juggernaut.
"The Home Mortgage Disclosure Act shines a much-needed spotlight on the mortgage market, which is the largest consumer financial market in the world," said CFPB Director Richard Cordray.
The new HMDA rules, which largely go into effect Jan. 1, 2018, add dozens of new data collection requirements for lenders, including an alphanumeric Legal Entity Identifier for each lender making HMDA-covered loans and a Universal Loan Identification number for each reportable transaction. And that's all in addition to the new required demographic data fields.
Ken Markison, Vice President and Regulatory Counsel with the Mortgage Bankers Association, says the HMDA rule, most of which goes into effect Jan. 1, could be the most challenging regulation yet.
"There are new data fields that make it a difficult sort of gearing up problem for lenders," Markison said. "The big ticket is the data points--they include enormous detail about who the borrower is and how the loan was underwritten."
Years in the Making
HMDA, originally enacted in 1975, requires many lenders to report information about the home loans for which they receive applications or that they originate or purchase. The public and regulators can use this information to monitor whether financial institutions are serving the housing needs of their communities, to assist in distributing public-sector investment so as to attract private investment to areas where it is needed and to identify possible discriminatory lending patterns.
Each year, the Federal Reserve issued a report on HMDA data; often, its interpretation of the data suggested lenders engaged in "discriminatory" behavior, pointing out that minorities, particularly African-Americans, appeared to be turned down for mortgages at a higher rate than white borrowers.
However, as MBA and other industry trade groups just as often pointed out, HMDA data collected by the Fed pre-Dodd-Frank did not completely explain mortgage underwriting or pricing and should not be used to interpret loan decisioning.
"No data set can fully explain all underwriting or pricing decisions; there are often legitimate, necessary, and non-discriminatory factors influencing underwriting or pricing decisions, and such information, when reduced to individual data points, will be of limited use in understanding credit decisions," MBA and other trade groups noted in a 2014 joint letter.
Following passage of Dodd-Frank, purview of HMDA shifted from the Fed to the CFPB. Markison noted Dodd-Frank explicitly amended HMDA provisions to require new data fields be covered and new data be reported. And it also gave the CFPB the discretion to require additional information as it deemed necessary. In 2015, the CFPB announced its intent to update HMDA, doing just that.
"The result is both," Markison said. "The CFPB followed the stricture of Dodd-Frank and exercised its authority to create more data fields."
The CFPB created a chart (http://files.consumerfinance.gov/f/201510_cfpb_hmda-summary-of-reportable-data.pdf) outlining the new data points required to be collected, recorded and reported under HMDA regulation C. These new date points include:
--A Legal Entity Identifier (LEI), a 20-character alphanumeric identifier issued to a financial institution by a utility endorsed by the Global LEI Foundation or LEI Regulatory Oversight Committee.
--A Universal Loan Identifier (ULI), a 45-character alphanumeric identifier assigned to identify and retrieve a loan or application that contains the financial institution's LEI, an internally generated sequence of characters and a check digit.
--Loan specifics, including the date the application was received or the date on the application form; whether the loan or application is insured by the Federal Housing Administration, guaranteed by the Veterans Administration, Rural Housing Service or Farm Service Agency; and whether the transaction is for home purchase, home improvement, refinancing, cash-out refinancing or another purpose.
--Demographics such as preapprovals, construction method, occupancy type, loan amount, ethnicity, race and sex.
Required data fields now total nearly 50, although Markison noted that each data field could require multiple entries, "so it will feel like more."
This past April--in response to concerns by MBA and other trade groups seeking clarification--the CFPB issued a proposal (http://files.consumerfinance.gov/f/documents/201704_cfpb_NPRM_HMDA.pdf) to facilitate compliance with the 2015 updates to the HMDA rule. This proposal included a number of clarifications, technical corrections and minor changes to the HMDA regulation. These include clarifying certain key terms, such as "temporary financing" and "automated underwriting system." The proposal would also, for example, establish transition rules for reporting certain loans purchased by financial institutions. Another proposed change would facilitate reporting the census tract of a property, using a new geocoding tool the CFPB plans to provide online.
So What Does It Mean?
Markison said for lenders, the new requirements drill down pretty far.
"It really does reach down into relatively low-activity lenders," Markison said. "It says in effect that if you do 25 or more loans in first position (mortgage) or 100 Home Equity Lines of Credit, you are covered by the reporting requirements. HELOCs were not covered before. Another wrinkle is that commercial/multifamily loans are covered. There are no multifamily exemptions."
The new rules also "pretty much doubled the data points and there is more variance among them," Markison said. "For example, in the race and ethnicity area you can put down whether or not you're Hispanic, and specifically if you're Panamanian or Filipino. It's misleading to just say we've added a requirement for subcategorization as though it's one data point. It comes in many data points because you have to code for different choices within that point. This is an enormously large increase."
Another piece, Markison said, involves underwriting information. The new rule requires debt-to-income ratio, loan-to-value and credit scores to be collected.
"This creates a privacy problem," Markison said. "The CFPB recognizes--although they pay lip service--you can reverse-engineer whose house you're talking about; you can use existing data to figure out a credit score," he said. "The Bureau said it would engage a ‘balancing test' in measuring the public's need to know, but it has not done that yet. And the problem is all of this stuff is going to have to be start collected for loans actioned in 2018."
Markison said lenders can't afford to wait until then to have new data collection systems in place. "In terms of pipelines, if you have a loan that is going to close on January 1, 2018 you have to start collecting that data now," he said. "The problem is that there is a lot of data to be collected well before the deadline." He said MBA has asked the CFPB to delay implementation until 2019, but such as scenario appears unlikely.
Although the CFPB has delayed implementation of a few previous rules, it's no guarantee that will happen with the new HMDA rule. Markison said lenders should assume the Jan. 1, 2018 implementation date is hard and fast. Which means the time to begin collecting data is now.
Where to start? Last year, MISMO, the Mortgage Industry Standards Maintenance Organization (a subsidiary of MBA), released a set of products to help companies implement the new HMDA rule.
These tools, collectively referred to as the HMDA Implementation Toolkit, offer a comprehensive collection of guidance, mapping documents and other information about the rule and the use of MISMO in meeting the requirements of the rule. In particular, the tools help companies build upon existing reporting requirements, such as the GSE Uniform Mortgage Data Program.
MISMO President and MBA Chief Economist Mike Fratantoni said by building upon already existing reporting requirements, companies should gain efficiencies in developing and maintaining their HMDA solution. "This will be extremely valuable to lenders as they begin to prepare for HMDA reporting under the new rule," he said.
The MISMO HMDA Implementation Toolkit is available as a member benefit to MISMO members and is available to all other industry participants for a small fee. Additional information about the Toolkit is available on www.mismo.org or at email@example.com.
MERSCORP Holdings Inc., Reston, Va., also got on the early compliance bus. In May it announced a partnership agreement with The Depository Trust & Clearing Corp.'s subsidiary operating the Global Markets Entity Identifier Utility to facilitate LEI registrations and renewals for MERS System members and other mortgage industry participants. The company went live with its new web-based service on June 30. This partnership will enable MERSCORP Holdings to support the mortgage industry's efforts to comply with the HMDA requirements by facilitating issuance of LEIs needed to generate and assign Universal Loan Identifiers.
Camelia Martin, director of member integration with MERSCORP Holdings, noted MERSCORP already has the equivalent of an LEI, called the Organizational ID, which it assigns to each MERS System member, along with the equivalent of a ULI called the Mortgage Identification Number that identifies every loan registered on the MERS System.
"There are a number of financial transactions that use LEIs across the globe, but in the mortgage industry the most relevant use is as the primary component of the ULI" Martin said. "The ULI is 45 characters comprising three components: the first 20 characters are the LEI; the next 23 consist of a unique internal identifier that cannot directly identify the borrower; and the last two characters are the check digits--the result of a specific calculation of the LEI and the subsequent internal identifier. The check digit is calculated by giving a numeric value to each letter and can be used to determine the validity of the ULI.
Martin noted there's been talk of lenders using MINs they already generate for each loan as 18 of the 23 characters required for the second component of the ULI.
In anticipation of the HMDA rule, MERSCORP Holdings began discussions with DTCC in 2016. MERSCORP Holdings Senior Vice President and COO Brendon Weiss said the partnership emerged following its acquisition by Intercontinental Exchange to explore how MERSCORP Holdings could increase its footprint in the industry and expand its services.
"MERSCORP Holdings has existing relationships with approximately 90 percent of mortgage industry participants in the United States," Weiss said. "Our partnership with the DTCC enables us to support the mortgage industry's efforts to comply with HMDA by processing LEI registrations and renewals." He added most MERS System members will be affected by the new HMDA requirements.
Weiss also noted MERSCORP Holdings' online LEI application is completely paperless and requires no supporting documentation. For existing MERS System members, certain fields of the LEI application will be prepopulated based on information already maintained in membership profiles, making the application process even faster and simpler to complete.
"Once an organization applies for or renews an LEI through MERSCORP Holdings, subsequent renewal applications will be completely prepopulated to expedite the renewal process," Weiss said. "Additionally, to help organizations stay in compliance, reminder emails will be sent to prompt organizations to renew their LEIs before they lapse."
Since going live in late June, "we've already had several organization successfully obtain their LEI through our application," Weiss added. "It's had a quick uptake and we've received good feedback about users' experience with the application process and turnaround times."
Information regarding MERSCORP Holdings' LEI services and its online LEI application can be found at www.mersinc.org/lei. An online tutorial will also be made available in the coming weeks.
Martin said the time for HMDA filers to obtain an LEI is now. "Although the new HMDA requirements don't go into effect until January 2018, loan applications or activities that are first initiated in late 2017 may have reportable activities that occur within the 2018 reporting timeframe," she said. "Organizations will also want to allow adequate time to incorporate ULI generation into its business processes, procedures and systems. For these reasons, we suggest that organizations that have HMDA reporting requirements obtain an LEI no later than the fourth quarter."
MBA Education has been busy as well in preparation for the new rule. Over the past year MBA Education put together a comprehensive series of Compliance Essentials webinars dealing solely with the new HMDA rule (https://www.mba.org/conferences-and-education/mba-education/mba-compliance-essentials/mba-compliance-essentials-recorded-webinars). Markison said these webinars, along with "road show" presentations at MBA conferences, as well as free-standing presentations, provide a comprehensive overview of the rule and its data points.
"We've also discussed how to generate work plans--changes to policies and procedures and provide training," Markison said. It's fairly detailed."
Additionally, working with law firms Weiner Brodsky Kider PC and Goodwin LLP, MBA produced the Home Mortgage Disclosure Act Resource Guide (https://www.mba.org/store/products/publications-and-guides/ce-home-mortgage-disclosure-act-(hmda)-resource-guide), which provides essential background about the rule, individual data points and the new institutional and transactional coverage requirements. This guide also offers resources to help companies start to develop key policies and procedures around self-assessment, data integrity and data security.
The Compliance Essential webinars will continue through the fall and beyond, Markison said. "The final piece is let lenders know the Fair Lending implications of all this--cases of what has happened to date," he said. "Not to scare lenders, but we want them to make sure that they're examining their own data and spotting problems and addressing it before it becomes a problem."
Above all, Markison said, lenders should not wait. "This is just a few months away," he said.