When the Consumer Financial Protection Bureau issued its long-awaited final Home Mortgage Disclosure Act rule last week the amount of data readily available to the agency was greatly expanded. This isn't heralded by the mortgage industry, however. Combined with the disparate impact theory, recently recognized by the U.S. Supreme Court under the Fair Housing Act, the HMDA rule further compounds legal risks and business challenges to lenders.
The CFPB's 797-page rule takes effect on Jan. 1, 2018, when lenders will begin collecting information, the first wave of which will be reported by Mar. 1, 2019. The influx of available data means the CFPB will be armed with all of the necessary information to run a regression analysis taking into account overlays and the criteria necessary to review overall lending patterns as well as match pairs.
Put another way, the data collected by the CFPB will allow the agency to evaluate fair lending both on the basis of socioeconomic class and also on an individualized level. Now, without a lenders' knowledge, the agency will have all the information it needs to thoroughly evaluate fair lending practices and detect violations both on a micro and macro level. In fact, the CFPB will be able to potentially trace such violations down to a loan channel or even specific originator. Regulators will be entitled to regularly receive information that they currently obtain only after formally initiating a fair lending investigation.
The CFPB intends to allow much of this information to be publicly available, which has caused some industry experts to recoil at what that can mean for borrower privacy. The increased transparency in the lending market that borrowers will have access to provide will, in-turn, create an environment allowing various nonprofit agencies to obtain data supporting the initiation of lawsuits. Moreover, it will increase downward pressure flattening pricing variances.
To begin with, banks, savings associations and credit unions will be subject to the reporting requirements if they originate either 25 closed-end mortgage loans or 100 open-end lines of credit in each of the two preceding calendar years, and meet current asset-size, location and loan activity tests.
Other lenders will be subject to HMDA reporting if, in addition to existing location tests, they originate at least 25 closed-end mortgage loans or 100 covered open-end lines of credit in each of the two preceding calendar years. For loans to be reportable they need only be secured by real property. Pre-approvals (regardless of whether ultimately approved) on closed-end loans are also reportable. Lenders will submit the data via a web-based tool.
The new rules require 48 data fields to be collected. The fields span a broad breadth from property address and borrower age to non-amortizing features, manufactured home land property interest and identity of loan originator. Existing data points have also seen modification. Congress determined that the prior HMDA reporting requirements failed to keep up with the complexity of mortgage products, leading to an information deficit the lawmakers in part blamed for the financial crises.
The amendment to HMDA reporting was viewed by Dodd-Frank as a necessary piece in the overall regulatory framework, and is unlikely to be rolled back. Conducting fair lending and compliance testing should be a matter of course, and the more data is collected, the more accurate the testing should get. It's crucial to conduct testing in those areas, given the scope of enforcement actions the CFPB has already undertaken and promises to continue. Lenders have ample time to begin putting internal processes in place to collect data, and prepare their systems for the new reports, and should begin doing so as early as possible.
Ari Karen is a partner at Offit Kurman.