Final Rule Takes Effect Jan. 1, 2018
Though it once seemed a distant obligation, the effective date for the Home Mortgage Disclosure Act’s (HMDA) Final Rule is now less than five months away: Jan. 1, 2018. As that deadline nears, various groups are pressing the Consumer Financial Protection Bureau (CFPB) to either delay that date and/or increase coverage thresholds. Members of Congress, the National Credit Union Administration (NCUA), the National Association of Federally-Insured Credit Unions (NAFCU) and the Independent Community Bankers of America (ICBA) have all been a part of this effort.
Two recent proposed changes to the final rule by the CFPB suggest it is listening, at least in part, but covered financial institutions should still be preparing for the HMDA changes that begin next year.
Reviewing the HMDA Final Rule
Published in October 2015, the rule redefined who must collect and report HMDA data. For this year, an institution meeting all other criteria (i.e., asset size, Metropolitan Statistical Area, etc.) that originated at least 25 home purchase loans in 2015 and 2016 is subject to 2017 HMDA reporting. As of Jan. 1, 2018, the criteria expands to include institutions that originate at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the previous two years.
The following transaction types are covered under the HMDA Final Rule as of Jan. 1, 2018:
- Closed-end mortgage loans
- Open-end lines of credit secured by a dwelling
- Home improvement loans only if they are secured by a dwelling
- Dwelling-secured business purpose loans and lines of credit only if they are home purchase loans, home improvement loans or refinances
Covered financial institutions are subject to the following phased-in transition to the new requirements:
- In 2017:
- Collect 2017 HMDA data using the current rule to report it in 2018
- Submit 2016 HMDA data to the Federal Reserve using the current rule
- In 2018:
- Collect 2018 HMDA data using the new rule to report it in 2019
- Submit 2017 HMDA data to the CFPB using the current rule
- In 2019:
- Collect 2019 HMDA data using the new rule to report it in 2020
- Submit 2018 HMDA data to the CFPB using the new rule
Recent Proposed Changes from the CFPB
A possible reprieve emerged this spring when the CFPB proposed technical changes to its final rule that “would help financial institutions comply with the 2015 HMDA Final Rule by clarifying the information they are required to collect and report about their mortgage lending.”
A flurry of comments and entreaties followed.
On May 17, NAFCU President and CEO Dan Berger urged CFPB Director Richard Cordray to approve a one-year delay of the rule’s effective date. Advocating the same message in early June, Senators Mike Rounds and Heidi Heitkamp introduced the Home Mortgage Disclosure Adjustment Act and wrote Cordray also asking for a one-year postponement.
NCUA Acting Chairman J. Mark McWatters wrote a letter to Cordray on behalf of credit unions on May 24, proposing that the CFPB raise “the various thresholds to a more substantive asset and transaction volume level to further reduce the reporting burden on smaller institutions.” The following day, the ICBA’s Joseph Gormley requested an increase of the loan volume threshold for HMDA reporting to 1,000 closed-end mortgages and 2,000 open-end lines of credit.
Their efforts partially paid off. On July 14, the CFPB issued a second proposed change to its final rule. If ratified, it would revise the “threshold for collecting and reporting data with respect to open-end lines of credit so that financial institutions originating fewer than 500 open-end lines of credit in either of the preceding two years would not be required to begin collecting such data until Jan. 1, 2020.” The CFPB also requested comments on the length of time—more or less than two years—for the open-end transactional coverage threshold increase.
Institutions whose volume falls between the final rule’s original credit line threshold and the proposed revision should monitor these ongoing developments to determine their HMDA compliance status for 2018. However, institutions whose transaction volume exceeds either threshold must plow ahead with preparations, as it appears unlikely the CFPB will propose a third change this year to delay the effective date.
Ensuring Your Financial Institution’s HMDA Readiness
The final rule increases the HMDA data fields that must be collected from 23 to 48. In addition to 25 new fields, 14 of the existing fields were modified. New fields include such straightforward items as property address, credit score, interest rate, loan term and property value, along with more obscure items like introductory rate period, non-amortizing features and manufactured-home-secured property type.
Institutions must ensure that they update and approve their policies, processes and procedures accordingly for the Jan. 1, 2018, effective date. They must also prepare their systems to capture these data fields and train affected employees—including mortgage, home equity line of credit, and even commercial lending staff because of the covered transactions comprised in the final rule.
Training should fully explain the rule; your correlating policy, processes and procedures; and the system changes. It is critically important that institutions not skimp on this aspect of their transition plan because even with an automated solution, HMDA compliance still requires human judgment and action. This is especially true under the new rule, which requires that applicants be asked to self-identify using disaggregated categories. In other words, if an individual applies for a loan in person and they decline to provide this information, then the employee taking the application is required “to note ethnicity, race, and sex on the basis of visual observation or surname.”
Finally, Fannie Mae and Freddie Mac have updated the Uniform Residential Loan Application (URLA) in conjunction with the HMDA Final Rule so that it includes the new data fields. Make sure your policy, processes, procedures, systems and training take into account this revised URLA.
Watching Out for the Overlap Period
Institutions will undoubtedly take applications in the latter half of 2017 that do not close until after the HMDA effective date in 2018. This overlap period could cause significant problems for institutions that do not devise a well-thought-out plan that clearly delineates how to handle such loans.
When the CFPB approved the revised URLA in September 2016, it granted a safe harbor for this overlap period that allows institutions to begin using the new URLA in 2017 and collecting the disaggregated category information without violating the Equal Credit Opportunity Act (ECOA) and Regulation B.
A post by the law firm Buckley Sandler explains the catch to 2017 use of the revised URLA for loans that close in 2017: “If a lender opts to collect information using the disaggregated categories for 2017, for applications that see final action before January 1, 2018, the lender must report the data to the Bureau using only the current aggregate categories for ethnicity and race.”
There also is a catch for applications taken in 2017 that close in 2018. If an institution waits to begin using the revised URLA until Jan. 1, 2018, will it go back and collect the new HMDA information in 2018, or report the aggregated categories collected under the old rule and the old URLA? While either is allowed, regulators emphasize consistency. So either collect and report all new HMDA data or collect and report all old HMDA data on applications made in 2017 that close in 2018.
The danger of not adopting a consistent plan for this overlap period is that it will greatly increase the chance of an incorrect Loan Application Register (LAR). If the error rate of the LAR exceeds regulatory standards, an institution will have to perform a HMDA scrub, which can cost a lot in time and labor.
Learning More about HMDA
The HMDA Final Rule is a complicated regulation, one that the CFPB continues to tinker with as evidenced by their April and July proposed changes. If your institution is still confused about the new data fields, unsure about its covered status, hazy about the collection and submission timeline, or concerned about how to handle applications taken in 2017 that end up closing in 2018, join me on Sept. 7 at 2PM CDT for CSI’s Quarterly Compliance Update webinar. I’ll discuss the status of the CFPB’s proposed changes, provide advice on getting your institution ready for Jan. 1, 2018, and answer your lingering questions about the HMDA Final Rule.
Keith Monson serves as CSI’s chief risk officer. In this role, Monson maintains an enterprisewide compliance framework for risk assessment and reporting, as well as other key components of CSI’s corporate compliance program. With nearly 25 years of banking experience, he has a wide range of expertise in the compliance arena, having served as chief compliance officer for both large and small financial institutions.