By Burton Embry and Cassandra Wayman
Although summer is just beginning and there is a little more than half a year remaining until January 1, 2018, compliance officers, IT professionals, and those working to implement the new HMDA changes have precious little time to make key business decisions and technology changes to meet the ever-approaching HMDA rule change deadline. While there are still many questions remaining unanswered by the CFPB, each compliance team should by now have their plan of action in place; the subject matter experts of each affected department should be meeting and discussing their data points and areas of overlap and required application process changes; the updated HMDA policy should be near finalization; and a launch date should scheduled for collecting and auditing the new HMDA data, which may be largely dependent on whether your data collections systems are ready to test and release. Through each of the stages of implementation, challenges abound, and unraveling the solutions may take time – time that is quickly running out, and it doesn’t end there. Changes will have to be made to your auditing process once the data is collected.
The 2018 HMDA changes require new data fields be reported on files that are started in 2017 and will close (or final action will be taken) in 2018; this means there may already be files in your LOS with an estimated closing date in 2018 (e.g., construction loans). While you are not required to collect the new demographic information on these loans yet (the new demographic information is required on files with an application date on or after January 1, 2018), you need to quickly—if not already—have processes in place to begin collecting the additional data on these loan applications. However, there are still many unanswered questions that make this data collection difficult. In April 2017, the CFPB released proposed changes to the rule to increase clarity within the currently published rule and commentary. This publication has been useful to allow us to better understand the intent of some of the data points as we outline and write out data collection procedures; however, until this is finalized and the 2018 HMDA error codes are released, it makes it difficult to write procedure on some of the nuances of the HMDA data that we need to be collecting today for our 2018 final action loans.
Speaking of things that may be difficult, have you obtained your Legal Entity Identifier (LEI) yet? If not, you may want to make this a priority quickly, as you may be surprised at the challenges you may face completing the application.
As we have been working to implement the necessary policies, data collection changes, and trainings, we have identified as well as received input from other compliance officers regarding some technological challenges that you may also need to consider as you are finalizing your 2018 HMDA plan.
The first and biggest of these challenges may be your data collection systems. Has your LOS provider already launched their HMDA solution? Do you have multiple LOS’s for various channels or products (HELOC, Reverse Mortgages, Brokered, and Correspondent)? If you are working in multiple systems, or have multiple lines of business, you get to do HMDA implementation for each of these; do you have the time and staffing available to test each of these? What is your back-up plan if the system is not ready to launch when you are? Is your loan numbering convention different enough that you won’t produce the same ULI on different files in different systems ever? Do the online application tools that integrate into your LOS have a plan to be ready to launch into the 2018 data as quickly as you need them or will you be collecting additional data outside of the application process—how will you manage that if the customer submitted an application, but won’t return your phone call? Will you be using your LOS to submit the HMDA report, or do you need to be testing the integration of your LOS with your HMDA data aggregation software?
Once your software is ready to gather the data, how will you ensure proper documentation of the data? Technology companies and some of our investors are speculating that the Uniform Residential Loan Application (URLA) will not be ready for use until 2019 or 2020. So how will you, as the compliance officer in the back office, accurately document the loan purpose when the current URLA does not ask the questions needed to solve the loan purpose puzzle?
- Is this a purchase, refi or cash-out refi?
- Does the borrower currently have a dwelling-secured debt?
- Will the loan replace the dwelling secured-debt?
- Will any of the proceeds be used to purchase a dwelling?
- Will any of the proceeds be used for home-improvement?
Other questions that are not addressed on the current application include construction method of the property and the subject property interest when the home is a manufactured home. Will you require a printed document to answer these questions, or do you feel confident that just having the information marked in your system will be acceptable to a regulator or your investors? If you are going to require the documentation, will you produce your own addendum to the URLA and can you tie it to the application so that the questions are being addressed by the LO on every loan application?
One of the more challenging requirements is identifying and reporting the “relied upon data.” Identifying which data fields were truly “relied upon” may be very difficult and possibly create substantially more work for your underwriting team. From the technology aspect, once the credit decision is made, will your system capture and lock down those identified “relied upon” data points? What if information changes between the approval and closing—for instance, if the hazard insurance coverage comes in less than anticipated, updating the system to show the updated amounts to calculate the accurate monthly payment will affect your DTI; does your system have the capability to capture and retain the “relied upon” data for the credit decision as well as the data used to close the file so that your system of record accurately reflects the closing information?
While most lenders are working on the HMDA revisions solely from an origination standpoint, companies are also going to have to make significant changes in their HMDA data auditing processes. Adding 25 new data fields will substantially increase the audit time per file. Have you considered the impact of these new data fields, additional auditing requirements and whether you are adequately staffed to manage auditing this new data to meet your organization’s audit expectations? Auditing HMDA data may have previously been an entry level position, merely comparing data on one screen to data on a different screen.With the amount of logic and situational based questions in the new HMDA regulations, auditors will require either prior industry origination knowledge or you may need to provide more in-depth training and crystal clear procedures in order to ensure the level of accuracy necessary to meet the requirements of your regulators.
Lenders may believe utilizing OCR technology in order to streamline the audit process may be a solution to the challenge of auditing the additional data points; however, due to lacking integrations between the GSEs’ automated underwriting systems and credit repositories into the LOS’, determining which data points were “relied upon” and existing loan documentation omitting some of the data points (e.g. construction method and property interest) creates obstacles that may inhibit the possibility—and benefit—of automation.
There is no doubt that complying with the new HMDA revisions is going to present significant challenges for all lenders in many areas across the business. Throw in a significantly revised URLA, and that only adds to the fun. Fortunately for lenders, we have become accustomed to implementing new regulations without receiving detailed guidance (think TRID). Unfortunately, it appears the new HMDA reporting regulation will follow the same track.
Good luck with your HMDA implementation.
Burton Embry is executive vice president and chief compliance officer for Primary Residential Mortgage and president of the Mortgage Compliance Professionals Association of America. He can be reached at BEmbry@Primeres.com.
Cassandra Wayman is the HMDA/Fair Lending Manager for Primary Residential Mortgage. She has enjoyed 8 years working at Primary Residential Mortgage, starting as a HMDA data auditor. She can be reached at Cwayman@Primeres.com.