Home Mortgage Disclosure Act: Auditing Tips 1 2 Regulation - PDF document

3/13/20 Regulation Overview Home Mortgage Disclosure Act: Auditing Tips 1 2 Regulation Overview Regulation Overview • Requires certain financial institutions to collect, report, and disclose • The data are submitted electronically to the Consumer Financial information about their mortgage lending activity. Protection Bureau (CFPB) on behalf of the NCUA • Threefold purpose: • Most of the data are made available to the public on both an aggregate and a loan level basis 1. Helps show whether financial institutions are serving the housing needs of their communities • The CFPB’s Regulation C (12 CFR 1003) implements HMDA 2. Assists public officials in distributing public-sector investment to attract private investment to areas where it is needed 3. Assists with the identification of potentially discriminatory lending patterns and enforcement of antidiscrimination laws 3 4 Institutional Coverage Rule Changes Since 2015 • Asset Size Test ($47 million for 2020 collection) • Location Test (home or branch office located in a MSA • Loan Activity Test (during the preceding calendar year, the institution originated at least one home purchase or refinance of a home purchase loan secured by a first lien on a one-to-four-unit dwelling • Federally Related Test (federally insured or federally regulated) • Loan Volume Threshold Test: • Originated at least 25 closed-end mortgage loans in each of the two preceding calendar years • Originated at least 100 open-end lines of credit in each of two preceding calendar years (temporary threshold is currently 500 through 2021) 5 6 1

3/13/20 Rule Changes Since 2015 Data Everyone Reports Date Summary of Changes • Ethnicity • Action Taken 2015 2015 HMDA Rule changed: • The definition of a financial institution that is subject to Regulation C; • Race • Action Taken Date • The types of transactions that are subject to Regulation C; • The data that financial institutions are required to collect, record, and report pursuant to Regulation C; and • Sex • State • The processes for reporting and disclosing HMDA data. • Age • County 2017 Temporarily increased the threshold for collecting and reporting data with respect to open-end lines of credit from 100 to 500 • Income • Census Tract for the 2018 and 2019 calendar years. • Legal Entity Identifier • Construction Method 2018 • Added partial exemptions from HMDA’s requirements for certain transactions made by financial institutions that • Application Date • Occupancy Type originated fewer than 500 closed-end mortgage loans in each of the two preceding calendar years • Preapproval • Lien Status • Insured depository institutions do not need to collect or report certain data with respect to open-end lines of credit if it originated fewer than 500 open-end lines of credit in each of the two preceding calendar years • Loan Type • Number of Units • Loan Purpose • HOEPA Status 2019 Extends to January 1, 2022 the current temporary threshold of 500 open-end lines of credit for reporting data about open- • Loan Amount • Type of Purchaser end lines of credit. Proposed Increase the current 25-loan coverage threshold for reporting data about closed-end mortgage loans (to 50 or 100). Rules 7 8 Partial Exemption: Exempt Data Your Fair Lending Story • Universal Loan Identifier (ULI) • Interest Rate • Application Channel • Introductory Rate Period • Loan Term • Rate Spread • Reasons for Denial • Non-Amortizing Features • Property Address • Total Loan Costs or Total Points and Fees • Manufactured Home Secured Property Type • Origination Charges • Manufactured Home Land Property Interest • Discount Points • Property Value • Lender Credits • Multifamily Affordable Units • Prepayment Penalty Term • Debt-to-Income Ratio • Reverse Mortgage Flag • Combined Loan-to-Value Ratio • Open-End Line of Credit Flag • Credit Score • Business or Commercial Purpose Flag • Automated Underwriting System • Mortgage Loan Originator Identifier 9 10 Your Fair Lending Story Your Fair Lending Story Of the newly reportable HMDA data fields, many may be utilized to inform fair lending risk areas. • Underwriting: • Use of HMDA data can tell you where you are lending and to whom • Credit score you are lending • Debt to income ratio • Combined loan to value • Comparing HMDA data to demographic information can pinpoint • Terms of the loan: discrepancies • Total loan costs (including origination charges, discount points, and lender credits) • Expanded data can help explain discrepancies up front without the • Interest rate • Prepayment penalty term need for a file review • Loan term • Introductory rate period • Fair lending issues almost always occur with outliers and marginal • Non-amortizing features (balloon, interest only, negative amortization, or other) borrowers • Open-end line of credit or reverse mortgage • HMDA data is only a starting point for evaluating fair lending • Property information (including location and census tract): • Property value (examiners understand this, the larger community may not) • Total units • Total affordable units • Manufactured home status 11 12 2

3/13/20 Primary Audit Issue: Data Integrity Data Integrity • Your story is fiction if the data is incorrect • Some errors make you look worse than you need to • There is no such thing as “over compliance” with HMDA: • Applications covered by HMDA must be reported • Application not covered by HMDA must NOT be reported • The larger the institution, the greater scrutiny HMDA data will receive (especially if you are directly regulated by the CFPB) • Resubmission is no fun! 13 14 Data Integrity Testing Timelines • The FFIEC HMDA Examiner Transaction Testing Guidelines is your first • Very large institutions (those that reported a combined total of at stop least 60,000 applications and covered loans in the preceding calendar year) must report HMDA data to the CFPB on a quarterly basis • Contains testing procedures examiners will use to validate your data beginning in 2020 (errors can be corrected prior to annual submission • QC/compliance should review 100% of HMDA Loan Application • All other institutions are required to record data about a covered loan Register (LAR) entries or application on a LAR within 30 days after the end of the calendar • Audit should validate data via sample testing quarter in which final action is taken 15 16 Examiner Transaction Testing Guidelines Error Tolerances • Select sample size based on size of LAR • Test individual data fields • Verify information using documents from the loan file, not summaries, boarding data sheets or print outs from loan production systems 17 18 3

3/13/20 Error Thresholds for Resubmission Error Thresholds • Only applies to fields with identified errors that exceed the error threshold (meaning you don’t have to scrub and resubmit data fields that passed your data integrity test) • Better than it used to be (breaks for small institutions) 19 20 Data Reporting Guidance Data Reporting Guidance • Getting it Right Guide • Credit union HMDA procedures • Regulation allows different definitions on some fields • What definition does your credit union use? • Identify data “owners.” (the compilation and reporting of HMDA data often crosses multiple areas of the credit union. Make sure corrective action gets back to all the right people) 21 22 Problem Areas Application Date Application Date: “Report as either the date that the Application was received or the date on the Application form.” • Multiple definitions of ”application.” (Reg Z, Reg B, HMDA) • Applications are sometimes not dated • Evidence in the loan file you had an application sooner than the date reported on the LAR • This field more important than you think 23 24 4

3/13/20 Business/Commercial Loans Demographic Data • Dwelling can mean a 1-4 family home or a 100-unit apartment • It’s sensitive information complex • During a face to face loan application interview demographic data • Commercial lenders may need to get their compliance on MUST be collected based on visual observance (awkward!) • Only reportable on HMDA if the loan is for the purchase, refinance or • During phone application, the MLO must ask the applicant about improvement of the dwelling demographic data (really awkward!!) • Applicants can report multiple fields for race and ethnicity 25 26 Loan Purpose Loan Purpose 1003 HMDA • Purchase • Home purchase • Refinance • Home improvement • Construction • Refinancing • Construction-Permanent • Cash-out Refinancing • Other • Other purpose • Not applicable 27 28 Geocoding Non-Originations • Should have a standard method for geocoding (test any geocoding • Nearly ever data field is more difficult software against the FFIEC website) • Documentation can be spotty • Have procedures to follow for rural locations or new construction • Specific problem areas: • Geocoding from the appraisal can be a starting point, but should be verified • Action taken type • Use cross streets • Action taken date • Verify location with loan officer • Income • Debt to Income Ratio • Zombie files 29 30 5