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

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Home Mortgage Disclosure Act: Auditing Tips

1 Regulation Overview 2 Regulation Overview

• Requires certain financial institutions to collect, report, and disclose

information about their mortgage lending activity.

• Threefold purpose:

1. Helps show whether financial institutions are serving the housing needs of their communities 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 Regulation Overview

• The data are submitted electronically to the Consumer Financial

Protection Bureau (CFPB) on behalf of the NCUA

• Most of the data are made available to the public on both an

aggregate and a loan level basis

• The CFPB’s Regulation C (12 CFR 1003) implements HMDA

4 Institutional Coverage

• 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
• riginated 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 Rule Changes Since 2015 6

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Rule Changes Since 2015

Date Summary of Changes

2015

2015 HMDA Rule changed:

• The definition of a financial institution that is subject to Regulation C;
• 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
• The processes for reporting and disclosing HMDA data.

2017

Temporarily increased the threshold for collecting and reporting data with respect to open-end lines of credit from 100 to 500 for the 2018 and 2019 calendar years.

2018

• Added partial exemptions from HMDA’s requirements for certain transactions made by financial institutions that
• riginated fewer than 500 closed-end mortgage loans in each of the two preceding calendar years
• Insured depository institutions do not need to collect or report certain data with respect to open-end lines of credit if it
• riginated fewer than 500 open-end lines of credit in each of the two preceding calendar years

2019

Extends to January 1, 2022 the current temporary threshold of 500 open-end lines of credit for reporting data about open- end lines of credit.

Proposed Rules

Increase the current 25-loan coverage threshold for reporting data about closed-end mortgage loans (to 50 or 100).

7 Data Everyone Reports

• Ethnicity
• Race
• Sex
• Age
• Income
• Legal Entity Identifier
• Application Date
• Preapproval
• Loan Type
• Loan Purpose
• Loan Amount
• Action Taken
• Action Taken Date
• State
• County
• Census Tract
• Construction Method
• Occupancy Type
• Lien Status
• Number of Units
• HOEPA Status
• Type of Purchaser

8 Partial Exemption: Exempt Data

• Universal Loan Identifier (ULI)
• Application Channel
• Loan Term
• Reasons for Denial
• Property Address
• Manufactured Home Secured Property Type
• Manufactured Home Land Property Interest
• Property Value
• Multifamily Affordable Units
• Debt-to-Income Ratio
• Combined Loan-to-Value Ratio
• Credit Score
• Automated Underwriting System
• Interest Rate
• Introductory Rate Period
• Rate Spread
• Non-Amortizing Features
• Total Loan Costs or Total Points and Fees
• Origination Charges
• Discount Points
• Lender Credits
• Prepayment Penalty Term
• Reverse Mortgage Flag
• Open-End Line of Credit Flag
• Business or Commercial Purpose Flag
• Mortgage Loan Originator Identifier

9 Your Fair Lending Story 10 Your Fair Lending Story

• Use of HMDA data can tell you where you are lending and to whom

you are lending

• Comparing HMDA data to demographic information can pinpoint

discrepancies

• Expanded data can help explain discrepancies up front without the

need for a file review

• Fair lending issues almost always occur with outliers and marginal

borrowers

• HMDA data is only a starting point for evaluating fair lending

(examiners understand this, the larger community may not)

11 Your Fair Lending Story

Of the newly reportable HMDA data fields, many may be utilized to inform fair lending risk areas.

• Underwriting:
• Credit score
• Debt to income ratio
• Combined loan to value
• Terms of the loan:
• Total loan costs (including origination charges, discount points, and lender credits)
• Interest rate
• Prepayment penalty term
• Loan term
• Introductory rate period
• Non-amortizing features (balloon, interest only, negative amortization, or other)
• Open-end line of credit or reverse mortgage
• Property information (including location and census tract):
• Property value
• Total units
• Total affordable units
• Manufactured home status

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Primary Audit Issue: Data Integrity 13 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!

14 Data Integrity

• The FFIEC HMDA Examiner Transaction Testing Guidelines is your first

stop

• Contains testing procedures examiners will use to validate your data
• QC/compliance should review 100% of HMDA Loan Application

Register (LAR) entries

• Audit should validate data via sample testing

15 Testing Timelines

• Very large institutions (those that reported a combined total of at

least 60,000 applications and covered loans in the preceding calendar year) must report HMDA data to the CFPB on a quarterly basis beginning in 2020 (errors can be corrected prior to annual submission

• All other institutions are required to record data about a covered loan
• r application on a LAR within 30 days after the end of the calendar

quarter in which final action is taken

16 Examiner Transaction Testing Guidelines

• 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 Error Tolerances 18

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Error Thresholds for Resubmission 19 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)

20 Data Reporting Guidance 21 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
• ften crosses multiple areas of the credit union. Make sure corrective

action gets back to all the right people)

22 Problem Areas 23 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

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Business/Commercial Loans

• Dwelling can mean a 1-4 family home or a 100-unit apartment

complex

• Commercial lenders may need to get their compliance on
• Only reportable on HMDA if the loan is for the purchase, refinance or

improvement of the dwelling

25 Demographic Data

• It’s sensitive information
• During a face to face loan application interview demographic data

MUST be collected based on visual observance (awkward!)

• During phone application, the MLO must ask the applicant about

demographic data (really awkward!!)

• Applicants can report multiple fields for race and ethnicity

26 Loan Purpose

1003

• Purchase
• Refinance
• Construction
• Construction-Permanent
• Other

HMDA

• Home purchase
• Home improvement
• Refinancing
• Cash-out Refinancing
• Other purpose
• Not applicable

27 Loan Purpose 28 Geocoding

• Should have a standard method for geocoding (test any geocoding

software against the FFIEC website)

• Have procedures to follow for rural locations or new construction
• Geocoding from the appraisal can be a starting point, but should be verified
• Use cross streets
• Verify location with loan officer

29 Non-Originations

• Nearly ever data field is more difficult
• Documentation can be spotty
• Specific problem areas:
• Action taken type
• Action taken date
• Income
• Debt to Income Ratio
• Zombie files

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Other Audit Considerations

• Adequate policies to define how data will be collected and reported
• Defined roles for initial collection of data (especially demographic

information)

• Annual reporting
• Branch signage
• Quarterly LAR updates
• Quarterly LAR submissions if required
• Notice of disclosure statement and modified LAR provide upon

request (slightly different than the posted notice)

31 Enforcement Actions

• Resubmission
• Civil Money Penalties

32 Freedom Mortgage Corporation 33 Morningstar Mortgage

• Ninth-largest HMDA reporter by originations (2014)
• $9.6 billion in assets
• $1.75 million CMP in 2017
• History of non-compliance (they were warned)
• Various inadequacies:
• Not maintaining detailed and centralized HMDA data collection and validation procedures
• Not clearly and consistently defining, with specificity, employee roles and responsibilities for

HMDA data collection and reporting

• Not performing formal compliance tests or audits
• Allowing inconsistent data definitions among different lines of business, resulting in data

inconsistencies

• Inadequate ongoing monitoring of vendors related to HMDA
• Not implementing adequate compliance management measures to detect and prevent

deficiencies

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