Reporting for Duty: HMDA Regs Finalized

Why it matters

Reporting requirements for financial institutions under the Home Mortgage Disclosure Act (HMDA) regulations were finalized by the Consumer Financial Protection Bureau (CFPB), with most provisions of the final rule set to take effect January 1, 2018. Covered entities will be required to report to the Bureau several new data points, such as the term of the loan, the value of the property, and the duration of any teaser or introductory interest rates. In addition, information about loan underwriting and pricing (including the applicant’s debt-to-income ratio and the interest rate of the loan) must be supplied to the CFPB. The final rule was tweaked somewhat based on comments received on a proposal issued by the Bureau in 2014, with the agency dropping some of the data points, but overall the new rules require that substantially more information be provided. The CFPB also said it is working with other federal agencies to streamline the reporting process in an attempt to ease the burden on financial institutions. The finalized rule will provide additional information about applications and loans that will be used to keep “a watchful eye” on trends and problem areas in the mortgage market, the CFPB noted, leaving industry concerned that the data could be used as the basis for fair lending enforcement actions as well as an increase in private litigation.

Detailed discussion

To “shed more light” on consumers’ access to mortgage credit and keep “a watchful eye” on the mortgage industry, the Consumer Financial Protection Bureau (CFPB) has released its final rule under the Home Mortgage Disclosure Act (HMDA).

Originally enacted in 1975, the HMDA mandates that lenders report information about home loans, from applications to origination to purchase data. Regulators rely upon the data to monitor financial institutions for problems or trends. For example, in 2014, the CFPB said 7,062 financial institutions reported information about roughly 11.9 million mortgage applications, preapprovals, and loans. Despite this pile of data, the Bureau said the dataset failed to keep pace with changes in the mortgage market, noting that data was not collected on loan features that figured prominently in the mortgage crisis, such as adjustable-rate mortgages.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act directed the CFPB to expand the HMDA dataset. In response, the Bureau convened a Small Business Panel and issued a proposed rule in July 2014. After making adjustments based on comments about the proposed rule, the CFPB said the final rule “will improve the quality and type of HMDA data.”

Both depository and nondepository institutions are covered by the final rule if they originate at least 25 closed-end mortgage loans or at least 100 open-end lines of credit in each of the two preceding calendar years.

To get “better information” about the mortgage market, the final rule requires lenders to report additional data points. New information covers the property itself (including address, construction method, and property value) as well as information about borrowers, such as age, credit score, and debt-to-income ratio—data that can help identify discriminatory lending practices in the marketplace, the CFPB said.

Pursuant to the final rule, financial institutions will also be required to supply information about mortgage loan underwriting and pricing. The term and interest rate of the loan, the duration of any teaser or introductory rates, borrower-paid loan costs and origination charges, any prepayment penalty, and the discount points charged for the loan—as well as information about applications and loans secured by dwellings, such as reverse mortgages and open-end lines of credit—must all be reported to the CFPB so that the Bureau can monitor fair lending compliance and access to credit.

In addition to new requirements, the CFPB provided clarification on existing rules. All lenders must report the reasons for a loan denial and in some circumstances provide a written explanation, the Bureau said, and loan amounts may no longer be rounded to the nearest thousand dollars. Instead, the exact amount must be reported.

The CFPB said it also attempted to make life easier for financial institutions. Small banks and credit unions located outside a metropolitan statistical area are excluded from coverage under the final rule, which also established a new standardized reporting threshold so that small depository institutions with low loan volume will not be required to report HMDA data. “For small lenders with few staff members, this change could make a significant impact in easing compliance costs,” the CFPB said. The Bureau estimated that the new threshold will reduce the overall number of financial institutions required to report HMDA data by 22 percent.

For covered lenders above the threshold, the Bureau also tried to streamline the reporting process. Because many of the financial institutions collect the HMDA data for other purposes (the pricing of loans or to facilitate the sale of loans on the secondary market, for example), the CFPB said the new rule aligns with “many well-established industry data standards,” which “will mitigate the burden on many lenders, and improve the quality and the value of the information reported.”

In addition, the Bureau will continue to work with the Department of Housing and Urban Development as well as other members of the Federal Financial Institutions Examination Council to modernize the reporting process. Industry feedback on a pilot program for a web-based data collection tool was “very positive,” the Bureau said, with the hope that implementation of the technology will reduce compliance costs.

Some changes were made from the 2014 proposal. Based on comments, the Bureau removed several data points from collection (the risk-adjusted, pre-discounted interest rate, among others) and elected not to require reporting of all dwelling-secured transactions made for commercial purposes.

Most provisions of the final rule will take effect January 1, 2018, meaning lenders will collect information for that calendar year to report by March 1, 2019.

One issue still undecided: whether the information collected will be made public. The Bureau recognized that HMDA data contains sensitive, personal information and said it will solicit additional public input before determining the extent of disclosure.

Although not immediately effective, the new reporting requirements will require extensive changes to existing systems and additional training. Institutions should begin planning for the changes. Also, the expanded data points likely will feed more allegations of fair lending violations by both regulators and private litigants, and internal fair lending analysis should be enhanced in anticipation of the effective date of the reporting requirements.

To read the CFPB’s 797-page final rule, click here.