The new Home Mortgage Disclosure Act rule goes into effect in a few months, creating new compliance reporting requirements and risks, especially CUs that are active in portfolio and home equity lending. What should CUs know to prepare for HMDA?
1. The new fields create greater transparency and provide for justifications. The new rule requires 48 data points be collected, recorded and reported: 25 are new data points and 14 are modified from the previous rule. Ultimately, this data will give regulators, advocacy groups and plaintiff’s attorneys unprecedented access to credit unions’ lending practices and allow them to more easily question whether a CU has violated The Fair Housing Act and Equal Credit Opportunity Act, also called Fair Lending.
Because the two main focal points of Fair Lending are underwriting and pricing, there are new HMDA fields that highlight disparity (e.g., action taken, discount points, rate spread). This allows regulators to drill down into denials or higher costs toward protected classes. But there are also new HMDA fields that can justify disparities (such as credit score), allowing a credit union to objectively and consistently explain them.
2. The expanded dataset cannot account for all variables. Not all the variables that go into a lending decision are captured. There are additional factors not included in the new HMDA dataset, such as number of months’ reserves, number of financed properties, credit history, mortgage lates, qualifying trade lines, and most recent housing event (i.e., short sale, foreclosure), as well as supporting documentation. Because CUs cannot explain these lending disparities through the HMDA Loan Application Register, this can lead to “false positives” for violations.
3. HELOCs now must be reported. Beginning Jan. 1, 2018, CUs that originated at least 25 closed-end mortgages or 100 HELOCs in each of the two preceding calendar years will be required to collect, record, and report data under HMDA. For CUs that have already been reporting closed-end mortgages, adding HELOCs to their HMDA LAR won’t be difficult, as long as they use their mortgage loan origination system as their system of record for both open and closed-end seconds. CUs using LOSs can easily produce the proper reporting format to be uploaded directly to the CFPB’s site.
However, CUs that originate HELOCs on core banking or consumer lending systems will face new reporting challenges. Unlike LOSs, core banking and consumer lending systems weren’t developed to be used for HMDA data collection and reporting, which means they do not track all 48 fields required by HMDA.
In addition, these systems often don’t ensure that loan approvals and the rate/price given to borrowers is consistent and fair. Today, many credit unions use “underwriter discretion” on loan approvals, which are essentially undocumented exceptions to their stated credit policy. This manual decisioning/pricing is problematic because it does not demonstrate unbiased and uniform lending practices.
4. Using automated technology can ensure Fair Lending at the point of sale. The use of automated technology can help CUs collect, record and report their data. In addition, whether a CU is using a core banking or consumer lending system or an LOS, having an automated underwriting system (AUS) in place can help demonstrate a consistent, quality underwriting process is being used.
Some CUs already use Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector, but in the case of portfolio loans or HELOCs, they will need to turn to an alternative AUS to show how the underwriting and pricing applied to each loan were based on the same objective criteria. A breakdown of what went into the decision and price, especially factors not visible to regulators in the new HMDA, can then be seen, documented, and properly managed. This gives CUs what they need to be prepared to defend each file individually and explain violations or “false positives.”
5. Waiting until Feb. 28 to scrub year-end HMDA data for “errors” will be too late. At that point, CUs have long since made their underwriting and pricing decisions (“Fair Lending” or not). Technology and workflow changes need to be in place as soon as possible in order to take year-end 2017 applications that close starting Jan. 1, 2018 and properly report them in 2019. So if your CU hasn’t already started getting ready for HMDA, you should start now.
Ben Wu is executive director of LoanScorecard, a leading provider of automated pricing, underwriting and compliance solutions. He can be reached at ben_wu@loanscorecard.com.
