HMDA With 2020 Hindsight | Wolters Kluwer
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  • HMDA With 2020 Hindsight

    by Barbara Boccia, CRCM, MBA, J.D.

    July/August 2017 - As published in ABA Bank Compliance magazine.

    Imagine sitting at your desk in the year 2020, head in hands, staring at your computer screen. Your gaze shifts to some movement outside the bank. You turn to look out your window, and there is Doc, sitting in a DeLorean time machine, door opened high…your “Back to the Future” moment! If you could travel back in time, what advice would you give your past self to help better prepare for HMDA in the year 2020?

    HMDA Changes in 2018

    To review, the number of data fields to collect roughly doubles in the year 2018, and points of data may total over 100 on any given file. In general, the changes will relate to four categories of new or modified data points:

    • Information about applicants, borrowers and the underwriting process, such as age, credit score, debt-to-income ratio, reasons for denial if the application was denied, the application channel, and automated underwriting system results, as well as expanded categories for ethnicity, race and gender.
    • Information about the property securing the loan, such as construction method, property value, lien priority, the number of individual dwelling units in the property, and additional information about manufactured and multi-family housing.
    • Information about the features of the loan, such as additional pricing information, loan term, interest rate, introductory rate period, non-amortizing features, and the loan type.
    • Certain unique identifiers, such as a universal loan identifier, property address, loan originator identifier, and a legal entity identifier for the financial institution.

    Initial Focus: System Implementation

    Very likely, your 2017 counterpart has spent a lot of time with the IT department to focus on system changes needed to collect the new fields of data in 2018. There will need to be two sets of data aggregation rules in place: the current rules to maintain getting it right for the 2016 and 2017 data flow, and the new rules in anticipation of the 2018 data fields. Don’t take your eye (or resources) off of monitoring the quality and integrity of 2016 or 2017 data–you don’t want to be correcting or resubmitting that data in 2018. A recent enforcement action resulting in the largest CFPB HMDA enforcement fine ever ($1.75 million) reinforces the importance of data integrity.

    Additionally, be prepared to capture the necessary 2018 data for any applications that are started in 2017, but for which the final action is taken in 2018. Typically, all new fields apply, with the possible exception of the expanded categories. A transition provision generally allows for the ethnicity, race and gender information to be collected, based on the requirements in effect on the date of collection–not the date of final action.

    Additional Focus: Submission Changes

    Also in 2017, your counterpart will be preparing for the changes in the submission process on the CFPB’s new HMDA Platform. In addition to the new process, platform and recipient for submitting the 2017 HMDA data to the CFPB on March 1, 2018, there are also changes in the way data edits are verified (prior to submission), how the signing officer acknowledges the accuracy and completeness of the data submitted, and a new CFPB geocoding process (optional.)

    Here is a summary of the overall changes that you are preparing for:

    • 2016 data collected under current rules, submitted annually to FRB
    • 2017 data collected under current rules, submitted annually to CFPB
    • 2018 data collected under new rules, submitted annually to CFPB
    • 2020 data collected under new rules, submitted quarterly to CFPB
      • Threshold for quarterly reporting: 60,000 covered loans in the preceding year
       

    As if this weren’t enough, what else should you be considering?

    Quality of Data for New HMDA Fields

    What is the quality of the data you are collecting as of January 1, 2018? Let’s take a look at those new fields and consider where that data flows through.

    • The TRID Effect: Yikes! Did you consider to what extent your institution’s state of readiness with the implementation of the TILA-RESPA Integrated Disclosure rules implementation may affect your HMDA data in 2018? Many institutions have manual workarounds to meet thresholds and to effect timely cures for loan features such as pricing and interest rate. There are times that refunds are made to cure tolerance violations, and focused concern about getting this information documented within the customer’s disclosures. However, is the line of business equally concerned about ensuring that all those last-minute changes are accurately documented in the system of record? What if the cure is done and falls into the next quarter/year after the loan closed–is there a plan to update any HMDA data that may have already been pulled?
    • Underwriting Data: Similarly, there are times when there are a lot of changes in the applicant and co-applicant information during the loan application process that may be documented in the credit file, but may not get updated into the system of record. Consider how, for example, the DTI (debt-to-income) ratio might change as the credit officer receives new information during the underwriting process. What is the data that was relied upon by credit in making the credit decision? Have you engaged key stakeholders to discuss the importance of accurate data within the system of record that will pull the HMDA data?

    Key questions to consider:

    • Does the business have a process to ensure that all changes or updates made through closing, and thereafter, are promptly entered into the system of record?
    • Is there a timely, qualified quality control process embedded within the business that provides oversight over all final data points at or about the time the loan closes and cures are finalized, extended to the system of record that will pull the HMDA data?
    • Have the second and third lines of defense included time in their schedules to provide monitoring or audit on this data to allow time for the business to institute action plans, training and process improvements on any findings to correct data quality prior to January 1, 2018?

    What Story Does Your Data Tell?

    Fast forward to 2019, and congratulations! You have filed your LAR on March 1, 2019, getting the new fields right! If you haven’t had time to do this before, now is the time to review your data from a fair lending and UDAAP (Unfair, Deceptive or Abusive Acts or Practices) perspective.

    What story does your data tell? You want to start this analysis as soon as you can to understand your data, then compare your data to your peers when the aggregate data comes out in the fall of 2019. What do you need to do to prepare if the regulators come knocking at your door in 2020?

    Initially, do your best to stay current on any changes in fair lending and UDAAP. You are diligently doing all the other work suggested already. However, regulatory investigative techniques and other concepts surrounding fair lending and UDAAP are changing rapidly. Following are some evolving concepts to consider as you evaluate your data and monitor trends:

    • “Minority” – We are already seeing a regulatory focus on evaluating only African-American and Hispanic data in some recent cases. Consider the various categories of race and ethnicity in the new HMDA data, and the opportunity to further define populations that are potentially treated differently on a prohibited basis, when that prohibited basis is further defined with additional data, such as a FICO score. The new data fields provide an opportunity for the regulators to slice and dice data in unexpected ways–are you familiar with what your data looks like? Are you evaluating your data to support a reasonable business justification for any perceived differences?
    • New Unique Identifiers – We are also seeing a regulatory investigative approach that focuses on the REMA–Reasonably Expected Marketing Area–that may differ from your assessment areas. This means that how your institution attracts applicants, and where, becomes more relevant. With identifying data that can be evaluated down to the branch level, the new data fields could be used to identify underperforming branches within the assessment area or REMA. The identifiers may also expose branches with significant variances in pricing or other signals to suggest inconsistent or broader areas of discretion applied at certain locations.

    Next, update reporting to keep key stakeholders well informed. As the type of data increases, the data analytics flowing out of the new fields will result in a need for more robust reporting–and to a broader audience. Consider, for example, if the initial data analysis suggests patterns of pricing or fees that are of concern.

    Remediation that might be required could have a bottom-line impact on core business strategies, ROI and, ultimately, in the extreme, safety and soundness. Those of us responsible for implementing the overdraft changes some years ago can attest to the pain some institutions had to go through, with abrupt changes in the flow of income from fees. The impact could potentially be larger for smaller, niche institutions that don’t have the nimbleness to adjust to significant changes in strategy.

    The sooner you can engage key stakeholders, and keep them aware of trends and key risk indicators, the better prepared the entire institution will be for any required remediation or action plans.

    Key questions to consider:

    • Have you engaged key stakeholders to help them understand the impact of the new rules–and to discuss the importance of accurate data within the system of record that flows into HMDA?
    • Do you know what story your data are telling?
    • Are you prepared for remediation steps that may impact core business strategies?

    Updates for Your Compliance Management System (CMS)

    With all your hard work and strained resources these past couple of years, do you arrive back in 2020 with your CMS fully updated? Here are a few key considerations to consider along the way:

    • Complaint Management System – The definition of “complaint,” and the tracking and/or routing of complaints with a fair lending or UDAAP component may expand as the expansive HMDA data fields are implemented. For example, customer complaints relating to denials, underwriting or pricing of a loan might take on an even greater significance in fair lending analysis, given the rich analytics available. It is critical to return to your Complaint Management System to ensure it is updated to label, quantify, track and respond to consumer complaints, especially with a fair lending or UDAAP component.
      • Vendor Management System – Vendors who in any way impact the collection of data needed for HMDA fields need to be monitored and assessed to ensure that validating the quality of data and routing of complaints remains vigilant.
      • Controls and Risks – As the collection of data becomes more complex, organized and risk-focused controls may need to be created or enhanced. Risk assessments should be updated to adequately assess risks and the adequacy of mitigation through documented controls.
      • Policies, Procedures and Training – It is likely obvious by this time that the new HMDA field changes may result in updates in policies, procedures and training that extend beyond just the HMDA/Regulation C documentation. This data is interrelated with the Fair Lending Program, UDAAP Program, as well as Complaint and Vendor Management programs. There may be additional field guides that need to be updated at the business level and across business operations.
      • Compliance Monitoring and Audit – Monitoring and audit schedules may need to be enhanced to promptly evaluate the quality of data flowing into the new HMDA fields, especially as the source of this data expands into various areas within the institution. Additionally, this work by the second and third lines of defense needs to be performed in a timely fashion so that any fields of data with high error rates are promptly identified and corrected. Finally, the Board of Directors needs to receive timely and comprehensive reports.
       

    Key questions to consider:

     

    • Are you using consumer complaints to identify emerging areas of concern?
    • How are you keeping your Board informed of trends and evolving risks?
    • Are you taking a holistic, enterprise view of risks from regulatory areas that are now converging and potentially overlapping?

     

    2020 Hindsight

    Quite a whirlwind of time travel? Hopefully, with this travel guide in your back pocket, you can climb out of the DeLorean and return to your desk, knowing you prepared as well as you could, for the future, and beyond. Safe travels!

    ABOUT THE AUTHOR:

    Barbara Boccia, CRCM, MBA, JD, is a senior director and manages the Advisory Services and Regulatory Relations team at Wolters Kluwer across a wide range of consulting engagements, including fair lending, CRA, HMDA and UDAAP. She brings more than 30 years of professional experience to strategic and technical regulatory compliance engagements relating to consumer protection regulations, including reviews of Compliance Management Systems (CMS), Compliance Risk Assessments (including fair lending, UDAAP), Complaint Management Programs, and Third Party Vendor Management Programs. Her work includes helping clients with regulatory change management, preparing for exams, resolving regulatory enforcement actions, assisting with remediation efforts and Board training. She is a frequent speaker at industry events. Barbara can be reached at barbara.boccia@wolterskluwer.com.



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