Plan Now (Not Later) for the Phased Implementation
After anxiously waiting for more than a year, bank compliance officers are now busy digesting the CFPB’s final rule on the Home Mortgage Disclosure Act (HMDA). But there’s no audible sigh of relief as they read this 797-page rule and translate its impact for their boards and senior management.
Already on regulatory overload, institutions are left to determine their specific impact from the rule as well as the best way to implement its massive changes. Our advice for the smoothest possible transition: begin planning now—and do so methodically.
Use Formal Change Management to Successfully Implement HMDA Final Rule
Just one day before the CFPB issued the HMDA final rule, an update to Regulation C, CSI Chief Risk Officer Keith E. Monson urged banks to adopt a formal change management strategy. While the timing was coincidental, the advice could not be more timely. The HMDA rule precisely exemplifies the need for change management as discussed in Monson’s blog: a matter requiring significant enterprisewide changes to systems, processes, channels, and/or products. In fact, the CFPB’s extended timeline suggests it fully expects institutions to use change management methodology to effectively tackle the various phases of HMDA implementation.
Despite the long interval before all of the HMDA changes take effect, time is still of the essence. Submitting this implementation project to your Project Oversight Committee or Project Management Office is priority one. If you don’t have a permanent project committee, identify a project team right away so that the full scope of the project can be mapped out and integrated into your institution’s overall schedule. Remember to identify a senior-level project champion and include representatives from all affected business lines and functional areas.
5 Key Considerations As You Plan for HMDA Implementation
As your institution’s project team begins scoping out this project, there are five crucial matters to consider.
The Strategic Plan: The final rule establishes new regulations for HMDA institutional coverage. After a hybrid institutional test in 2017, new volume thresholds go into effect for all institutions. If an institution meets all other criteria (i.e. asset size, Metropolitan Statistical Area) and originated at least 25 closed-end mortgage loans in each of the preceding two years, it will be covered by Regulation C and must collect, report and disclose the new HMDA data on all such transactions beginning in 2018. Likewise, if an institution originated 100 open-end lines of credit in each of the two preceding years, it will be responsible for HMDA data on those types of transactions as of 2018.
This raises a difficult question for institutions that have historically originated volumes within the vicinity of these new thresholds. They will need to carefully consider their overall strategic plan and, within that framework, analyze the benefit of continuing to offer the covered transaction types (see below under Processes) against the cost of complying with the HMDA final rule.
Systems: While the following CFPB deadlines buy additional integration time, institutions using an automated HMDA compliance system will have to plan for and implement multiple technology updates:
- 2017: Collect and report 2017 data per current rule and submit to the Fed in 2018
- 2018: Collect and report 2018 data per new rule and submit per current rule to the CFPB in 2019
- 2019: Collect and report 2019 data under new rule and submit it under new rule to the CFPB
- 2020: Begin quarterly reporting provisions for larger-volume reporters
These moving parts and rolling dates will require close coordination between your project team and your HMDA software provider to ensure you are ready for each deadline. For example, by Jan. 1, 2018, your system must be able to collect the new HMDA rule’s 48 data fields, including 25 new and 14 modified fields.
The additional HMDA data fields may cause an even bigger headache for covered institutions that are currently using a manual process for HMDA compliance. If these institutions will continue offering the covered transactions as part of their strategic plan, they should consider adopting an automated system to reduce the risk of HMDA data falling through the cracks. And that software purchase and implementation needs to be factored into the overall HMDA project plan.
Processes: Automated software certainly eases the burden of collecting and storing HMDA data, but HMDA compliance still requires human judgment and action. This is especially true with the new rule, since mortgage, home equity lines of credit, and even commercial lending processes will need to be updated to ensure staff comply as follows:
- Identify Covered Transactions Per HMDA Final Rule (Dwelling-Secured Test):
- Closed-end mortgage loans are covered
- Open-end lines of credit secured by a dwelling are covered
- Home improvement loans are covered only if secured by a dwelling
- Dwelling-secured business purpose loans and lines of credit are covered only if they are home purchase loans, home improvement loans or refinances
- Dwelling secured agricultural purpose loans are not covered
- Collect and Report Applicant/Borrower Information
- As of Jan. 1, 2018, covered institutions will have to:
- Report whether or not they collected information about the applicant/borrower’s ethnicity, race and gender based on either visual observation or surname
- Allow the applicant/borrower to self identify their ethnicity and race based on disaggregated ethnic and racial subcategories
- As of Jan. 1, 2018, covered institutions are no longer required to provide a HMDA disclosure statement or modified LAR upon public request. Instead they can provide a notice stating that those documents are available on the CFPB’s website.
People: A project of this magnitude will affect a large portion of your staff, so it is especially critical that the project team include representatives from your Corporate Communications and Training departments. An extensive communication plan, spanning the length of the project, should be developed to ensure everyone at every level understands the “what, when, and how” of each phase of the implementation. In addition, a comprehensive training plan must be developed that includes system and process update training for business lines involved in covered transactions, including home equity/line of credit and commercial lending units.
Future compliance: Beyond daily HMDA compliance, this new rule creates longer term compliance implications. Bank Law Monitor warns that the additional HMDA data will be used by the CFPB and other banking regulators “to determine whether financial institutions are serving the housing needs of their communities and identify potentially discriminatory lending patterns so that the CFPB can enforce anti-discrimination laws.” On a macro level, this could lead to further regulatory changes, and on a micro level, it could mean that an institution is in full compliance with HMDA, but not fair lending laws.
The Ramifications and Realities of the Final HMDA Rule on Community Financial Institutions
In its press release about the HMDA final rule, the CFPB lauded the fact that “the rule will shed more light on consumers’ access to mortgage credit,” and that it will “ease the reporting requirements for some small banks and credit unions.” Most industry advocacy groups agree with the merits of modernizing HMDA, but seriously question the premise that this lengthy rule will ease compliance burdens. In fact, they argue, it will have the opposite effect. NAFCU warned that it “may only serve to impose significant additional compliance and reporting burdens on responsible lenders, like credit unions.” And ICBA lamented that the rule “adds to the excessive regulatory burdens for many community banks, which will further restrict access to credit in local communities.”
It’s difficult to say at this point what the impact will be on financial institutions, in particular smaller ones. It could be the final straw that pushes some community banks and credit unions to follow in the footsteps of those who have already opted to get out of the mortgage business due to the cumbersome ability-to-repay and qualified mortgage rules.
But for those who choose to stay in the mortgage business, keep some of the positives of the final rule in mind: it aligns HMDA reporting requirements with industry data standards; excludes some of the further-reaching, initially proposed data fields; modernizes and simplifies the HMDA submission process with a new web-based tool; and with its five-year timetable, provides institutions with sufficient time to implement the changes.
Your best bet for success is to build on these positives by initiating your HMDA project plan now and staying keenly focused on it through the final effective date.
Amber Goodrich, compliance strategist for CSI Regulatory Compliance, has more than 10 years of financial industry experience. She is a Certified Regulatory Compliance Manager (CRCM) and Certified Bank Secrecy Act (BSA) Professional (CBAP).