On October 15, 2015, the Consumer Financial Protection Bureau (CFPB) released a final rule with significant amendments to the Home Mortgage Disclosure Act (HMDA). The 796-page document includes new and clarified reporting requirements that are likely to have a major impact on financial institutions. Some key changes include:
New coverage criteria for institutions. The new criteria will significantly increase the number of non-banking institutions that are required to collect and report HMDA data. However, banking institutions that originate a very low number of covered loans (fewer than 25 per year) will no longer be subject to the reporting requirements.
New coverage criteria for transactions. Any consumer loan that uses a dwelling as collateral–regardless of the loan’s purpose–will now be subject to HMDA reporting. This is a major shift from the current regulations and will greatly expand the number of consumer loans covered by the requirement, notably home equity loans/lines of credit and reverse mortgages. However, the good news for financial institutions is that for business and commercial loans the current purpose-based criteria (home purchase, home improvement, or refinancing) will continue to apply alongside the new collateral-based criteria.
Expanded data requirements. The amended regulations more than double the amount of data that financial institutions will need to collect for each covered loan—adding 25 new data points (and requiring modifications to 14 of the 23 current data points). The final rule’s data requirements are even more expansive than those in the proposed rule, encompassing a wide range of detailed information about the borrower, property, and loan features.
Increased frequency of reporting. Financial institutions that report more than 60,000 applications and covered loan transactions annually will be required to submit HMDA data on a quarterly basis. Institutions with lower transaction volumes will continue to report annually.
Filing and public disclosure. To improve efficiency, the CFPB will require financial institutions to submit HMDA data electronically (using a tool that has yet to be specified). Also, the CFPB plans to make HMDA public disclosure statements available on its website; however, the exact data to be published is still being determined in light of considerations relating to privacy and competitiveness.
The amended reporting requirements are designed to benefit the public by giving the CFPB the data it needs to better analyze and enforce fair lending laws, assess the effectiveness of “ability to repay” rules, and identify and monitor important market issues and trends. However, the new regulations will likely create a significant burden for many banking and non-banking financial institutions–requiring upfront and ongoing changes to numerous facets of residential lending operations, including application intake and processing, compliance and internal audit, and the regulatory reporting process.
The rule’s broader scope of covered loans and expanded data requirements will require significant modifications to information systems and operating processes, along with the related training and change management for front-line staff. It may also impact staffing levels, especially for high volume institutions, due to the need for increased data collection and more frequent regulatory reporting. In addition, new compliance controls and new monitoring and testing procedures will likely be needed to help ensure data integrity and support compliance oversight and internal audit validation activities.
Initial requirements for the final rule will go into effect on January 1, 2017, with all requirements in full force by January 1, 2019 (except for the quarterly reporting requirement for high volume institutions, which will take effect on January 1, 2020). This is really not much time given the magnitude and scope of changes that will be required.
To avoid a last-minute fire drill, affected institutions should start taking action now. A good first step to consider is to conduct an impact assessment with all internal stakeholders to understand how the new requirements will affect the risk inventory, systems, and processes. This can provide the solid base of information necessary to develop a detailed action plan and roadmap. Institutions should also spend some time perusing the final rule, which can be downloaded from the CFPB website, as its 796 pages provide not only a detailed description of the new requirements, but also interpretations about how the CFPB expects decisions on dwelling secured loans to be classified and reported.