Insight

Addressing Upcoming Changes in HMDA Directed by the Dodd Frank Act – Part One

The “Known-Knowns”

Early in February, we wrote about Section 1071 of the Dodd Frank act. This section adds a part to the Regulation B that will require collection of information on business borrowers. The best guess is that the collection process will resemble the current HMDA process. Section 1071 of the Dodd Frank Act also directs that additional information must be collected by banks that report under HMDA. Right now, this section does not have implementing regulations, so the exact date that the new information will be required is unknown. But…to paraphrase a speech from Donald Rumsfeld, there are some known-knowns when it comes to these changes.

A Quick Bit of Background

Remember that HMDA is designed to help develop information on the lending practices of banks. In its original form, HMDA was designed to make banks disclose where they were lending to help stop “red-lining”. Red-lining was the practice of specifically refusing to make loans in areas or neighborhoods. In the past, there were lenders who would literally take a map of a city and draw a red line around neighborhoods in which they refused to lend.

As the mortgage industry grew and changed, HMDA also changed. The focus of the information being collected moved from disclosure of information at banks collectively, to the experience of individual borrowers at banks. Information on the application process and the results of the application were added to HMDA in the 1980’s.

At the turn of the century, the focus of the information collected changed again and this time, the time of credit being offered became the focus. As a result the terms of the loans and more information about the lien status of the loans was added to HMDA.

Dodd Frank Changes

The changes in HMDA that are being brought about by Dodd Frank are another step in the progression of the regulation. The idea here is that HMDA will be used to develop more information about the overall status of the mortgage industry. For example, the CFPB noted in press releases that:

While a lot of information is contained in HMDA….additional mortgage information could help federal regulators, state regulators, lenders, consumer groups, and researchers better monitor the market. For example, no data is currently gathered on home equity lines of credit which surged prior to the housing crisis nor on teaser mortgage rates which had a hand in causing it. HMDA data currently contains only limited information about loan features and interest rates.[1]

In addition, the Dodd Frank changes will also require a HMDA-like program that will collect information on women and minority owned businesses. Don Sokolov, the Deputy Associate Director, Division of Research, Markets & Regulations for the CFPB put it this way:

“We know that the changes in the Act are designed to The Dodd-Frank Act helps small businesses by filling a major gap in knowledge about the market for small business credit. Section 1071 of the Dodd-Frank Act amends the Equal Credit Opportunity Act to require that financial institutions collect and report information concerning credit applications made by small businesses and women- or minority-owned businesses. One stated purpose of Section 1071 is to strengthen fair lending oversight. The CFPB and other authorities will be able to use these data to improve the effectiveness and efficiency of fair lending enforcement efforts[1]”

The type of information that will be required here is still very much unknown and we will discuss this area further in Part Two of this series.

Moving Forward-Getting Ready for Changes

Despite the fact that there are currently no regulations that specifically, address these changes, the CFPB has begun the process. Therefore, one of the” known-knowns” is that the regulations are coming.

We also know that there are several data points that will be part of the new regulation. We know this because these data points are written into the law and will be required to be part of the new regulations. The Dodd-Frank Act specified new data points to be collected and reported: namely, the total points and fees of the mortgage; property value and improved property location information; the length of any teaser interest rates, prepayment penalties, and non-amortizing features; lender information, including a unique identifier for the loan officer and the loan; and the borrower’s age and credit score.

Finally, we also have a good idea of additional changes that the CFPB is considering. We know this because they released a factsheet that shows they required changes and changes being considered. [2]

Using what we know about the changes that are coming, we know that there are at least different approaches that financial institutions can take to prepare:

Do nothing and wait for the regulations to be published
Address the “known-knowns” by collecting the data that is written in the law
In addition to the above, attempt to start collecting data on the proposed areas

We whole heartedly do not advise taking the first approach. While it can seem prudent to wait until a change is actually made, in this case, we know that the change is coming. Waiting until the rule is published leaves your bank open to higher risk and the costs associated with last minute alterations that need to be made. The risk adverse route is to marshal forces now to get ready for the changes that you know are coming.

Taking the second route and addressing the areas that are certain to be part of the new regulations is, in our opinion, a risk adverse approach.

The following is a list of data that is required by Dodd Frank, along with the CFPB comments:

There are several points of information that are also being considered by the CFPB. We will discuss these and the implications for reporting in our next post.

Since we know that this information will be part of any new regulation, now is the time to start developing the processes and getting the training necessary for staff to understand the requirements. In doing so, your institution will make the transition smooth, reduce risk and overall costs.

[1] See Swanson-CFPB Changes HMDA Data Collection-Mortgage News Daily February 2014
[2] Testimony of Testimony of Dan Sokolov Deputy Associate Director, Division of Research, Markets & Regulations Consumer Financial Protection Bureau
[3] CFPB Factsheet: Consumer Financial Protection Bureau Takes Steps to Improve Information About Access to Credit In The Mortgage Market. February 7,2014.