In 2015, The Consumer Financial Protection Bureau (CFPB) significantly amended the Home Mortgage Disclosure Act (HMDA). This is important because HMDA, often referred to as Regulation C by the Bureau, requires financial institutions like yours to collect information to show you’re serving the housing needs of your community and complying with anti-discrimination laws. The data is also used to increase public understanding of housing market conditions and attract private investment.
The new guidelines will change how you’ll collect, report, and disclose information about your mortgage lending activity. Basically, the new rule modifies the information you’re required to gather. In addition, it’s designed to streamline reporting, making it easier for you to comply with regulations.
Overview of the changes:
Institutions Subject to HMDA Guidelines
The new rule adopts a uniform loan-volume threshold for depository and non-depository institutions, while the uniform loan-volume threshold eliminates reporting requirements for community banks and credit unions that originate a lower quantity of loans, as defined in the Rule.
Initially, the rule excluded institutions originating fewer than 25 closed-end mortgage loans in each of the two preceding calendar years or fewer than 100 open-end lines of credit in each of the two preceding calendar years. However, after requesting industry comments on sections of the proposed regulation, the CFPB has made a temporary change to the reporting threshold, increasing the threshold to 500 loans through calendar years 2018 and 2019. This allows the Bureau time to consider the appropriate level for the threshold for data collected beginning January 1, 2020.
The 2017 asset exemption threshold for depository institutions remains unchanged at $44 million. This means that depository institutions with assets of $44 million or less as of December 31, 2016 are exempt from 2017 data collection. For credit unions, The National Association of Federally-Insured Credit Unions (NAFCU) has proposed a $100 million asset threshold but no decision has been made and the 2018 threshold hasn’t been set.
Transactions Subject to HMDA
For consumer loans, the transactional coverage will change from a purpose-based test to a dwelling-secured test. Transactional coverage refers to the type of lending activity executed by the community bank or credit union. A transaction is reportable only if it’s an application for, an origination of, or a purchase of a covered loan.The purpose-based test and dwelling-secured test are used to evaluate a borrower’s ability to repay the loan. With purposed-based loans, the CFPB requires that a purpose be assigned to every loan such as a purchase transaction, a refinance transaction, or a home improvement loan. For dwelling-secure loans, the CFPB defines a dwelling as a place where people live, more specifically, a 1 to 4 family residence. This may include a private residence, a 1 to 4 unit townhouse or a 1 to 4 unit condo. These are regulated by HMDA. Apartments are considered commercial properties and aren’t regulated by HMDA. A dwelling doesn’t include recreational vehicles, houseboats, and pre-1976 mobile homes.
For business loans, transactional coverage retains the purpose-based test and adds a dwelling-secured test.
Requests for open-end lines of credit, reverse mortgages, and loans for multifamily dwellings are excluded.
Which Transactions are Covered?*
- Only covered institutions that originated at least 500 covered open-end lines of credit in each of the two preceding calendar years are required to collect, record, and report information about open-end lines of credit.
- Dwelling-secured business-purpose loans and lines of credit will be covered only if they’re home purchase loans, home improvement loans, or refinances.
- Covered institutions will be required to collect, record, and report information for approved but not accepted preapproval requests for home purchase loans.
- Preapproval requests for open-end lines of credit, reverse mortgages, and home purchase loans to be secured by multifamily dwellings won’t be covered transactions under the HMDA Rule, effective January 1, 2018.
*See the Minimum Standards for Dwelling-Secured Loans resource link at the end of this article for more detail.
Specific Information Covered Lenders are Required to Collect, Record, and Report
Under the new rule, lenders are required to collect specific Information related to market conditions. This includes applicant or borrower age, credit score, property value, term of the loan, interest rate, borrower-paid origination charges, and other data points. The lender also must report applicant’s or borrower’s ethnicity, race, and sex.
- Lenders are required to submit HMDA data electronically using new procedures. Fortunately, software developers have begun to design 2018 HMDA compliant Loan/Application Register (LAR) and mortgage application software.
- Beginning in 2020, the HMDA Rule requires quarterly reporting for lenders reporting large volumes.
When Do the New Guidelines Go into Effect?
Institutional coverage is being implemented in two phases.
- First, in 2017, the HMDA Rule narrows the scope of depository institutions.
- Second, the Rule implements a uniform loan-volume threshold for all institutions, effective January 1, 2018.
For Financial Institutions, the Stakes are High.
Information that financial institutions currently consider to be confidential or proprietary will now be shared among all regulators. Further, regulators and examiners no longer need to wait until examination time to assess fair lending compliance. Agencies responsible for enforcement will have comparison data from all other comparable financial institutions and similar geographies and locals.
In short, this implies an introduction of “Big Data” to the regulatory process. Fair Lending examinations have the potential to become highly automated, statistically verifiable, and difficult to correct. The analysis will be created within minutes of the submission.
The potential risk to financial institutions is apparent; there will be no second chance with the media and consumer groups if an unfavorable report is published. Getting HMDA right has always been important. With data collection in 2018, it will become critical to the organization.
There’s much more to learn about HMDA.
The Consumer Financial Protection Bureau and other organizations have many resources to help you navigate the new HMDA regulations.
- The HMDA Technology Preview website is available at: https://www.consumerfinance.gov/data-research/hmda/tech-preview
- A copy of the final rule is available at: http://files.consumerfinance.gov/f/201510_cfpb_final-rule_home-mortgage-disclosure_regulation-c.pdf
- Resources that explain and facilitate implementation of the rule are available at: http://www.consumerfinance.gov/regulatory-implementation/hmda/
- The CFPB’s online HMDA tool is available at: http://www.consumerfinance.gov/hmda/
- Minimum Standards for Dwelling-Secured Loans are available at: https://www.consumerfinance.gov/eregulations/sxs/1026-43-a/2013-00736?from_version=2015-12719
- Information on types of institutions subject to Regulation C is available at: http://www.ballardspahr.com/alertspublications/legalalerts/2015-10-21-summary-of-final-rule-amending-hmda.aspx
- A resource on uniform loan-volume and Asset-Exemption threshold is available at: https://www.ffiec.gov/hmda/pdf/2017letter.pdf
- CFPB proposes HMDA changes for community banks and credit unions is available at: https://www.housingwire.com/articles/40694-cfpb-proposes-hmda-changes-for-community-banks-and-credit-unions
- CFPB temporarily adjusts HMDA rule for community banks and credit unions: https://www.housingwire.com/articles/41085-cfpb-temporarily-adjusts-hmda-rule-for-community-banks-and-credit-unions