January 2018 is just around the corner—at least in terms of compliance with new reporting requirements for Regulation C, implementing the Home Mortgage Disclosure Act (HMDA). Last year, the Consumer Financial Protection Bureau (CFPB) finalized its call for more and better reporting from lenders amid dramatic changes in the mortgage market and under the statutory requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Operationally, that translates into 25 new and 14 modified data points.
Some lenders began the painstaking process of reworking this data soon after the CFPB issued its proposed regulation in 2014—and they are, in effect, demonstrating the way forward. Others should start soon, if they haven’t already, to ensure a seamless and error-free HMDA data disclosure in 2018.
Public officials use HMDA data to raise and allocate housing and community development investments, respond to market failures and monitor financial institutions for discriminatory lending practices. Updating HMDA reporting will also require lenders to test, scrub and reformat data, as well as refine overall HMDA processes.
Some banks have had the opportunity to work directly with regulators to begin to define best practices. How does your institution compare with the forerunners in this space? Here are steps to consider.
Perform multiple data scrubs and checks
Institutions should perform several rounds of data scrubs and file-level testing exercises before submitting their Loan Application Register (LAR). The data should be reviewed by multiple groups, scrubbed by a dedicated team of HMDA subject-matter experts, error tested internally and tested again by an independent team. This can reveal root causes of data anomalies early so data can be updated and corrected before it’s too late. Understand which sample sizes are adequate for HMDA file-testing purposes and ensure testing results are used to correct root-cause issues. If multiple layers of file testing are not possible due to resource constraints, consider
software solutions that automate some of the scrub process.
Revamp and update software
Many institutions are re-evaluating their current HMDA reporting and analysis software solutions to ensure that their functions align with new expectations. What has worked in the past may not be the best solution for the future, and it is important to have the best and most applicable HMDA reporting software available. Software that can assist in detailed fair lending analysis is preferred. If a change is
warranted, now is the time to make it in order to train employees, work through mock submissions and fix root cause issues.
Certain new fee-related data points such as total loan costs will need to align with documents that are also required under the Truth in Lending Act (TILA)–Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule (TRID). These fields require back-end calculations that introduce the risk of further data inconsistencies. Any post-closing regulatory cures such as those made pursuant to RESPA must be reflected in the data and be consistent across platforms as well. Before reporting, a targeted point and fee analysis for both RESPA fee tolerances and HMDA data will improve this consistency.
Both front-line and behind-the-scenes employees must understand the importance of accuracy and timeliness of data upload as well as which new fields will be most important to enter accurately. Training will help bring awareness to what is new as well as how all teams
can help avoid creating issues that will lead to further errors.
Align data and data sources
Institutions must understand which data sources should be used to build new LARs. Should you use a verified data source or simply what a borrower has stated when applying? Is the proper data format for a particular field a dollar amount or a percentage? What is your
file-testing error rate between physical loan documents and what is shown in your loan origination system and LAR? What testing error rate/risk exposure are you willing to accept as an institution? What does the industry accept? Answering these questions will show
regulators that you’ve done your homework, and it will bridge your interaction with them by lending confidence and transparency to their own examination procedures.
Regulators are willing to work with you and help address questions before the implementation deadline. If your institution is making a concerted effort to be right upon first submission, and that effort is clear to the regulators, then you will be in a much stronger position if small errors are unearthed later. Create a data glossary that explains data sources and the mapping and rationale behind data decisions.
Track self-identified issues closely, and record them for easy retrieval. Update policies and procedures to reflect these new processes.
Prepare for fair lending analysis
One of the intents of the new HMDA disclosure rules is to inhibit institutions from pointing to alternate applicationdenial reasons using data not found within current HMDA reporting requirements. Your institution should be running fair lending analysis using the new data before submission to ensure the data supports differing credit decisions in like files—in particular, in the case of any identified denial reason that is an outlier. This is what regulators (and community groups) will be doing, and it’s always best to know your potential
fair lending issues from the new data before someone else has to tell you.
Takeaway: Expect close inspection
With the new changes coming, there is little doubt the CFPB will take a harder look at HMDA data. As such, it is extremely important that the data be accurate from the start. There will be little leeway, particularly given the length of time the CFPB has provided institutions to bring processes up to snuff. Don’t wait, expecting that the CFPB will provide an extension as it did with TRID. You have the time now—spend it wisely to ensure you will be HMDA-ready in 2018.