Community banks will feel the full weight of the HMDA Rule on New Year’s Day. Ensuring internal controls for data collection and reporting are solid now is the key to staying ahead.
By Mary Thorson Wright
New Year’s Day 2018: the dawn of a new year and most provisions of the new Home Mortgage Disclosure Act (HMDA, or Regulation C) Rule. During 2017, community banks that qualify as HMDA reporters will collect 2018 data as required under the new rule for reporting in 2019. Between
Jan. 1 and March 1, 2018, they will submit 2017 data as required under the current rule.
How can community banks ensure their internal controls for HMDA data collection and reporting are solid ahead of the new data-collection rules going into effect on Jan. 1, 2018?
“Community banks have let us know that HMDA is a very troublesome rule,” says Ron Haynie, senior vice president, mortgage finance policy, and executive vice president, ICBA Mortgage. “Most of the rule changes must be implemented by the end of 2017 for banks to collect the expanded data beginning Jan. 1, 2018. For community banks, it is a massive undertaking, probably on the level of what the industry encountered to implement TRID.”
Many of the new and revised data points are not one-step “check-the-box” items and require some calculation or comparison with other information to produce the reportable data. Haynie notes that banks that will use loan origination systems to conduct those calculations or comparisons and feed the data into a reporting system will rely on vendors for software updates for those processes. Many community banks are still waiting for that software to be ready, so they can implement it, test it and train staff.
Due to the expansion and complexity of the new rule, there is concern for community banks that report manually. Manual entry generally lacks efficiency, is time consuming and can lead to errors in reporting. The Consumer Financial Protection Bureau (CFPB) is creating a web portal for manual data entry; however, the portal is not yet operational, which prevents banks from finalizing processes and getting people trained.
Community banks should follow some key steps to position themselves for the new requirements. “One of the first steps for community banks should be to understand whether the rule applies to them and identify where the bank is in relation to the type of transaction, asset size and other thresholds for data collection,” advises Barbara Boccia, senior director, US advisory services and regulatory relations, compliance solution, with Wolters Kluwer. “As the CFPB continues to tweak the requirements, the landscape is evolving, and community banks will need to continuously monitor for changes and use the most up-to-date sources available in the months before the Jan. 1, 2018 start date.” She also notes the industry is waiting for the CFPB platform and geocoder to become available.
In the interim, according to Boccia, community banks should be evaluating “what’s in and what’s out” for reporting. Which lines of business must report? Which procedural changes will be needed? Who will be affected? Which additional training requirements might be needed for staff who are new to HMDA data collection and reporting? How might file documentation procedures change for some business lines? Where are the control points on data collection and reporting, and how might they change with the new requirements? Which policies, procedures and training materials will need to be revised? Will the bank use the CFPB geocoding tool or the existing FFIEC tool, and how might a change to that process affect the bank’s HMDA data?
View ICBA’s HMDA summary document at tinyurl.com
Beginning Jan. 1, 2018, Regulation C generally applies to consumer-purpose, closed-end loans and open-end lines of credit that are secured by a dwelling, including business-purpose loans. The HMDA Rule adopts a uniform loan-volume threshold for all institutions of at least 25 closed-end mortgage loans or at least 500 open-end home equity lines of credit (HELOC) originated in each of the two preceding calendar years.
In August, the CFPB did increase the threshold on HELOCs to 500 loans through calendar years 2018 and 2019 to reduce the compliance burden for smaller institutions. While many community banks may be relieved of the burden to collect HMDA data on HELOCs, Haynie observes that the reduction in HELOC coverage will not have a meaningful impact on the overarching burden to develop systems and procedures to implement the rule and to train and monitor staff for data collection and reporting.
Data collection, recording and reporting
The Dodd-Frank Act amended HMDA to require financial institutions to report new data points and authorized the CFPB to require financial institutions to collect, record, and report additional information. The bureau’s final rule for HMDA reporting includes 25 new data points, 14 fields revised from prior requirements and nine mostly unchanged data points, bringing the total to 48 unique data fields for which covered financial institutions must collect and report data on most residential mortgage loan applications—not just approved loans.
“It’s critical to check your systems and test them to be sure all the new, modified and current data points can be pulled,” notes Boccia. “There are some good resources available that detail each reporting field. One is the CFPB’s “Summary of Reportable HMDA Data – Regulatory Reference Chart” that is on its website.”
Banks must begin well ahead of the Jan. 1 start date, because some of the data have prerequisite actions. For instance, the first step to record HMDA data is assigning a Universal Loan Identifier (ULI), which identifies a loan or application. It begins with the financial institution’s Legal Entity Identifier (LEI), followed by an internally generated sequence of characters that are in a format specified by Regulation C, and a check digit. Community banks must apply ahead of time for the LEI.
Boccia also sees documentation as a critical component to successful HMDA data collection and reporting compliance. Using a document hierarchy to guide data collection produces a more consistent process. Checklists or worksheets that are completed for each reportable file also make data collection more consistent and help prevent gaps. Planning now for accurate, consistent and complete documentation facilitates data validation during and after the reporting year.
Beginning in 2018, covered institutions will no longer have to provide a disclosure statement or a modified loan/application register (LAR) to the public upon request. Instead, a covered institution will post a notice that its disclosure statement and modified LAR are available on the CFPB’s website. The HMDA Rule includes sample language that covered institutions for the notice. Although this technical change will need to be addressed, Boccia notes that the CFPB will not have data until 2018, when reporting begins for 2017. She recommends banks train branch personnel so they are aware of the change and prepared to offer past years’ data upon request. Banks should also watch for the CFPB to issue a change on this requirement in the coming months.
Each bank must gain a full understanding of the new requirements and how it may be affected. Haynie encourages community banks to take advantage of the ICBA summary document (see page 69) but advises banks to review the actual rule in its entirety. Although data collection begins in 2018 and won’t be reported until 2019, with the first application for a covered transaction on or after Jan. 1, banks need to be ready to preclude creating a backlog of files that must be handled again and again to address compliance.
“ICBA has been working through its advocacy efforts to delay the implementation or change reporting thresholds, but there is currently no sign that there will be relief,” Haynie says. “So, it’s clear that covered community banks must place their focus on HMDA data collection and reporting now.”
A quick look at upcoming regulatory changes
Oct. 10, 2017
Effective date for final rule amending and clarifying TRID requirements pursuant to Regulation Z and RESPA. Mandatory compliance date is Oct. 1, 2018
Oct. 19, 2017
Effective date for final rule amending certain mortgage servicing provisions under Regulations X and Z
Jan. 1, 2018
Effective date for final rule implementing changes to the Home Mortgage Disclosure Act (HMDA)
April 1, 2018
Effective date for final rule implementing requirements for prepaid accounts (Regulation E)
View ICBA’s online regulatory calendar at icba.org/compliance/regulatory-calendar
Mary Thorson Wright, a former Federal Reserve examiner, is a financial writer in Virginia.