On Friday, the CFPB released a proposed rule that would significantly expand the scope of financial institutions’ mortgage lending data reporting requirements under the Home Mortgage Disclosure Act, or HMDA.
First enacted in 1975, HMDA was originally intended to allow both regulators and the public at large to examine whether lenders were effectively serving the credit needs of the communities in which those lenders were located. To that end, the Act required covered institutions to collect and publicly disclose data regarding their mortgage lending activities, thus allowing both public officials and the mortgage lending industry the means necessary to respond to areas of need. Subsequent amendments to the Act, designed to assist regulators in monitoring compliance with fair lending laws, required that covered financial institutions also report the race, ethnicity, sex, and annual income of both applicants and borrowers for home mortgage loans (and mortgage loans purchased by the institution).
However, regulators have struggled to keep up with changing lending practices and new product offerings in the rapidly evolving home mortgage industry; HMDA’s implementing regulation, Regulation C, currently requires that covered financial institutions report only some of the many types of credit products provided by lenders today. In addition, HMDA does not require that institutions collect data regarding certain loan features and credit products seen by many as contributing to the mortgage crisis. Therefore, in light of these industry changes, Section 1094 of the Dodd-Frank Act requires the Bureau to promulgate rules that modernize HMDA and ensure that regulators have a more complete understanding of lending activity today.
Highlights and points of interest from the Bureau’s 573-page proposal include:
Changes to institutional coverage criteria. Regulation C currently contains distinct applicability thresholds for determining which institutions are required to submit HMDA data: in general, depository institutions must report if they originate any covered loans, while nondepository institutions’ reporting obligations are only triggered if they reach certain lending volume thresholds. The proposed rule would create one threshold, requiring HMDA disclosures by any institution —depository or nondepository — that originates 25 or more covered loans. In addition to streamlining the coverage criteria for both types of institutions, this change also likely reflects the Bureau’s growing interest in the lending activities of nondepository institutions and responds to industry concerns that small and community banks, simply by virtue of their status as a depository institution, shoulder a disproportionately significant compliance burden under financial reform legislation and regulation.
Changes to loan coverage criteria. Regulation C currently requires that institutions report only information regarding home purchase, home improvement, and refinancing loans; reverse mortgages that fall within any of these three categories are reported but not separately identified, and reporting data for home equity lines of credit, or HELOCs, is optional. The Bureau’s proposed rule would address these gaps by simply requiring covered financial institutions to report all mortgage loans secured by dwellings, including closed-end loans, open-end lines of credit, and reverse mortgages. While the recast definition simplifies and streamlines the scope of covered transactions, it would also necessarily increase the volume of reportable data and impose an additional administrative burden on covered financial institutions.
New data collection requirements. For covered loans, HMDA and Regulation C currently require that institutions report, among other pieces of information, the loan or application type, purpose, and amount; the property type and location; the borrower’s race, ethnicity, sex, and annual income; and the action taken on the application. The proposed rule would significantly expand the scope of required information by mandating that covered institutions collect a variety of new data points, including:
• More information about applicants, borrowers, and the lender’s underwriting process — for example, the lender’s total points and fees and the borrower’s age, credit score, debt-to-income ratio, denial reasons, application channel, and automated underwriting system results;
• More information regarding the subject property — for example, construction method, property value, lien priority, number of dwelling units, and additional provisions that apply specifically to loans made for manufactured and multifamily homes;
• More information with respect to the loan’s features — for example, additional pricing information, loan term, the interest rate (including any introductory period or “teaser” interest rate), information regarding any non-amortizing features, and loan type; and
• Unique loan-level identifiers, including a universal loan identifier number, the property address, and the financial institution’s Legal Entity Identifier (LEI).
Many of these elements, including the points and fees, loan term and interest rates, and borrower age and credit score requirements, are specifically required by the Dodd-Frank Act, while Dodd-Frank provided that the Bureau could require others, such as the unique loan-level identifier provisions, at its discretion.
Reporting format and procedures. Likely cognizant of the heavier administrative burden that the proposed rule places on covered institutions, the proposal also includes provisions that aim to simplify data reporting. Principally, the proposal would align HMDA data submission requirements with those promulgated by the Mortgage Industry Standards Maintenance Organization, or MISMO. MISMO, a nonprofit subsidiary of the Mortgage Bankers Association, creates and maintains standards required for delivery of loan-level data to Fannie Mae and Freddie Mac. While implementation of this format, already in wide use, is designed to make it easier for lenders to fulfill their HMDA responsibilities, it may actually impose an additional burden on smaller lenders and community banks that do not sell loans to GSEs and/or that exclusively engage in portfolio lending.
Furthermore, though Regulation C currently requires covered institutions to report HMDA data on an annual basis, the proposed rule would require the largest volume institutions — that is, those engaging in 75,000 or more covered transactions per quarter — to move to a quarterly reporting schedule. The Bureau argues that this change would allow financial institutions to report data in smaller and more discrete batches, thereby better allocating institutional resources and reducing the likelihood of errors in collection, aggregation, and submission. The proposed rule estimates that this more frequent reporting schedule will cost about $19,000 per year for most covered institutions.
Finally, in an effort to address longstanding aspects of Regulation C that are unclear or confusing, the proposal contains clarifications and “improvements” to the existing version of the regulation, the Appendix A instructions, and the official staff commentary.
Comments to the proposed rule are due on October 22, 2014. If you have any questions about the proposal or would like assistance with submitting comments to the same, please let us know.