On October 15, 2015, the Consumer Financial Protection Bureau (CFPB) issued a adopting release amending Regulation C, which implements the Home Mortgage Disclosure Act (HMDA). At nearly 800 pages, the new HMDA rule changes (i) the type of institutions that must collect, report, and disclose information about their mortgage lending activity, (ii) what transactions are subject to the HMDA rule, (iii) what information must be collected, recorded, and reported, and (iv) the process for reporting and disclosing data. Because most of the substantive provisions of the final rule do not take effect until 2018, financial institutions have some (but not much) time to adjust their collection and reporting systems to comply with the new rule.
Beginning in 2018, institutions that meet other applicable Regulation C tests will be subject to the HMDA rule’s requirements if they originated at least 25 closed-end mortgage loans or 100 open-end lines of credit in each of the prior two calendar years. Covered entities must begin collecting data under the new rule on January 1, 2018, and will have to report beginning on January 1, 2019.
The new rule changes the criteria under which transactions will be subject to reporting under HMDA. For loans or lines of credit that are for personal, family, or household purposes, the rule will impose a dwelling-secured test that will sweep in most consumer-purpose transactions, including closed-end home-equity loans, home-equity lines of credit, and reverse mortgage loans. For commercial loans, the rule retains a purpose-based test, which sweeps in commercial loans or lines of credit for home purchase, home improvement, or refinancing. The rule makes clear that home improvement loans not secured by a dwelling and all agricultural-purpose loans and agricultural-purpose lines of credit will no longer be covered under the new rule.
New Reporting Requirements and Data Fields
The HMDA rule changes data reporting requirements, modifying 12 existing data points and adding 25 data points to the data to be collected and reported. Modified data points include loan purpose, preapproval, construction method, occupancy types, and loan amount, among others. New data points include, among others, applicant or borrower age, debt-to-income ratio, combined loan-to-value ratio, credit score, automated underwriting system information, unique loan identifier, property value, application channel (i.e., whether the application was submitted directly to the financial institution and whether the obligation was initially payable to the financial institution), 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. Reporting of these new data points will begin in 2018. In addition, starting in 2020, institutions that collect or make 60,000 applications and/or covered loans in the prior calendar year will have to supplement annual data submission with quarterly reports.
Reporting Procedures and Disclosures
Although the CFPB and prudential bank regulators will have immediate access to this new data once institutions begin reporting under the new rule, the rule is less clear on the degree to which new data will be made broadly available to the public. Specifically, the CFPB indicates it will use a “balancing test” to weigh public disclosure of the data against the need to protect applicant and borrower privacy. However, the precise nature of this balancing test remains to be determined, with the CFPB merely stating that it will "provide a process for the public to provide input regarding the application of this balancing test to determine the HMDA data to be publicly disclosed."
The new rule also streamlines HMDA reporting. The CFPB is developing a web-based submission tool for reporting HMDA data. Moreover, covered institutions will no longer have to provide a disclosure statement or modified Loan/Application Register to the public upon request – instead, the institution can provide a notice that all available HMDA information can be accessed on the CFPB’s website.
Impact of the HMDA Rule
As with prior enhancements to HMDA’s data reporting requirements, the HMDA rule will likely trigger enhanced fair lending scrutiny by regulators and, to the degree new data becomes publicly available, private parties. Driving such scrutiny is the ability of regulators and others to review expanded data that can be compared across the industry. For example, new requirements to collect and report on an applicant’s age will likely lead to more focused analyses of whether institutions have unfairly targeted older borrowers with unfair terms and rates. Likewise, the rule’s expansion of the transactions covered will result in increased scrutiny of products, like reverse mortgages and home equity credit products, on which creditors had previously reported no or limited data. Overall, the additional data reported pursuant to the rule will empower regulators and others to conduct more comprehensive fair lending analyses of lending practices, making it harder for lenders to argue that non-discriminatory factors not captured by HMDA data affected their lending decisions.
The rule’s requirement that lenders report data points concerning creditworthiness factors like debt-to-income and combined loan-to-value ratios, which correlate highly with actual loan performance, may also allow the new HMDA data to be used by regulators and others to scrutinize the safety and soundness of an institution’s loan portfolio.
In light of the HMDA rule, to the extent they are not already doing so, covered institutions should:
- Ensure technical reporting capabilities. Institutions – especially those that gather and report through different channels – should confirm through internal analyses that they have in place the ability to accurately and consistently collect and report the new data points. Beyond such internal assessments, institutions should implement quality control measures at all points of inspection in the loan application process, thereby allowing them to test and adjust operations, as appropriate, and to identify and correct the source of any errors.
- Conduct proactive fair lending analyses. Institutions should not wait until the HMDA rule is in effect to review fair lending performance based on the new fields. Such analyses, whether performed in-house or with the help of consultants, should be conducted now, under the direction of counsel and subject to the attorney-client privilege. Any analysis should pay special attention to underwriting and pricing decisions, recognizing that even the rule’s expanded HMDA data set likely will not capture all the transaction characteristics that might explain actual outcomes. Institutions conducting analyses should examine their lending patterns over time and across geographies, and when appropriate, should consider performance against peer groups.
The HMDA rule is extensive and complex; it must be analyzed comprehensively to ensure adherence to all its collection and reporting obligations. For more information about the rule and its impact on your business, please contact the authors or the attorney with whom you regularly work at Goodwin Procter.