United States: Heads Up On Final HMDA Rule

As we reported in November, the CFPB issued a final rule on October 15, 2015 amending Regulation C to implement changes to HMDA made by the Dodd-Frank Act requiring financial institutions to collect and report additional home loan information. While required collection of the new loan data points will not begin until January 1, 2018, it is not too early to begin thinking about it and planning for the changes. This article will provide an overview of the final rule including the changes in covered institutions and covered loans, key compliance dates, and reporting requirements.

Compliance Dates. The good news is that no new Reg. C requirements go into effect in 2016. HMDA reporters will report 2015 loan data and collect 2016 data for reporting in early 2017 under the existing rule. Effective January 1, 2017, a new exemption from HMDA reporting for certain low volume depository institutions will be added, but except for that one change, HMDA reporters will submit 2016 data and collect 2017 data for reporting in 2018 under the existing rule. The big changes take place beginning January 1, 2018, when the rules concerning covered institutions, covered transactions, and required collection of new and modified data points will begin for 2018 loan data to be reported in early 2019. Additional changes affecting reporting and enforcement provisions become effective January 1, 2019, and quarterly reporting begins for large reporters effective January 1, 2020.

Covered Institutions. The final rule adds a new exemption for certain low volume depository institutions. Effective January 1, 2017, a bank, savings association or credit union that would otherwise be covered under the current rule will be exempt if the institution originated fewer than 25 home purchase or refinance of purchase loans in each of 2015 and 2016.

The coverage rules for federally insured depository institutions will change effective January 1, 2018. A depository institution will be covered by Reg. C if it meets the following tests:

  • Asset size threshold – the institution's total assets as of December 31 of the preceding year exceed the threshold set in the rule ($44 Million for 2016, adjusted annually for inflation).
  • Location test – the institution has a home or branch office in a MSA.
  • Loan activity test – the institution originated at least one first lien home purchase or refinance loan secured by a one to four family dwelling during the preceding year.
  • Loan volume threshold – the institution originated at least 25 closed-end mortgages or at least 100 open-end lines of credit secured by a dwelling in each of the two preceding calendar years.

Coverage for non-depository institutions will change as well. Effective January 1, 2018, for-profit, non-depository financial institutions are covered if they meet the following tests:

  • Location test – the institution has a home or branch office in a MSA or it took applications for, originated, or purchased at least five home purchase, refinancing, or home improvement loans on property in the same MSA or Metropolitan Division (MD) in the preceding calendar year.
  • Loan volume threshold – the institution originated at least 25 closed-end mortgages or at least 100 open-end lines of credit secured by a dwelling in each of the two preceding calendar years.

Covered Loans. Effective January 1, 2018, all closed-end mortgage loans and all open-end lines of credit secured by a lien on a dwelling will be reportable, including some business purpose loans secured by a dwelling. The term "dwelling" includes a principal residence, second or vacation home, investment property, condo, manufactured home, or single or multi-family dwellings, but excludes RVs (including campers, trailers and motor homes), houseboats and other floating residences, transitory residences (such as hotels and college dorms), and structures originally built as a dwelling but used exclusively for commercial purposes (such as a house converted to professional office space). Excluded from coverage are loans originated or purchased in a fiduciary capacity (such as a loan made by a trust where the bank is trustee), a loan secured by vacant or unimproved land, and temporary financing (such as a construction or bridge loan) which is intended to be replaced by permanent financing later. Also excluded are partial interests in a pool of loans, the purchase of mortgage servicing rights, loans acquired in a merger or acquisition, loans for less than $500, a participation or partial interest in a loan, and loans secured by property used primarily for agricultural purposes which includes a dwelling. Business purpose loans are excluded only if the loan is not a home purchase, refinancing, or home improvement loan.

Reportable Activity. Similar to the existing rule, applications which are denied, approved but not accepted, or withdrawn will be reported along with originations and purchases of covered loans. Also similar to the existing rule, pre-qualifications will not be reportable but pre-approvals under a formal pre-approval program will be reported if the request is denied or approved but not accepted. A pre-approval which results in a closed loan will be reported as an originated loan as in other cases. The purchase of a covered loan includes a repurchase of a loan originated by the lender such as a repurchase required by a secondary market investor.

Data Collection and Reporting. A covered institution must collect, record and report all of the new and modified data points beginning with applications for covered loans on which final action is taken on or after the effective date of January 1, 2018. As a result, the new requirements may apply to a loan application taken in 2017 but decided in 2018. There are 48 different data points under the new rule including 12 which are modified from the existing rule and 25 which are entirely new. The CFPB has not yet released the coding of the various data points, so it may be premature to start planning on exactly how the information will reported in the LAR. However, a list and description of the various data points can be found on the CFPB website at http://files.consumerfinance.gov/f/201510_CFPB_HMDA-summary-of-reportable-data.pdf.

Data will be required to be collected and recorded in the institution's LAR within 30 calendar days after the end of each calendar quarter and be made available to examiners if requested. An institution may maintain multiple LARs for different markets or locations or for different types of loans during the year and compile the data into a single LAR for reporting purposes at year-end. Annual reporting in electronic format by March 1 of each year will be required. Beginning January 1, 2020, large covered institutions that report at least 60,000 covered loans and applications for the preceding calendar year will be required to report data quarterly within 60 days after the end of the first three calendar quarters followed by reporting of full year data after year-end.

Data Disclosure. Beginning January 1, 2018, HMDA disclosure statement requirements will also change, and the changes will apply to data collected in 2017 and later years. Each year when the FFIEC provides the institution with notice that the financial institution's disclosure statement is available, the institution must, no later than three business days after receiving the FFIEC notice, make available to the public, upon request, a written notice stating that the institution's disclosure statement may be obtained on the CFPB's website. A model form is provided for that notice. At its discretion, the institution may also provide its disclosure statement directly to the person making the request and impose a reasonable fee for costs incurred in reproducing or providing the statement, but, in any event, the institution must comply with the notice requirement.

A financial institution's obligations with respect to disclosing its modified LAR will also change effective January 1, 2018. The new requirements will apply to data collected in 2017 and later years. Beginning in 2018, the institution must provide upon request from a member of the public a written notice regarding the availability of its modified LAR. The written notice must state that the LAR, as modified by the CFPB to protect applicant privacy, may be obtained on the Bureau's website. A model form is provided for that notice. At its discretion, a financial institution may also provide its modified LAR and impose a reasonable fee for any costs incurred to reproduce or provide the data, but, in any event, the institution must comply with the notice requirement. So, an institution will be able to direct inquirers to the CFPB website rather than having to provide the disclosure statement or modified LAR directly.

Also beginning January 1, 2018, the form of the lobby notice will change. An institution must post in the lobby of its home office and in each branch office that is physically located in a MSA or MD, a general notice about the availability of its HMDA data on the bureau's website. A sample notice is provided for that in the rule as well.

Compliance Considerations. Fortunately, institutions should have plenty of time to consider and plan for these changes. For many banks and other mortgage lenders, the best place to start is consideration of whether or not your institution will be covered by the revised rule. Note that very low volume depository institutions will be exempt beginning in 2017 even if they meet the other coverage tests. Also, the coverage criteria for all institutions changes effective January 1, 2018.

If your institution is covered, or is likely to be, the next step may be consideration of what loan products, lending areas and staff will be affected by the changes. Note that not all reporting institutions will necessarily be required to report open-end lines of credit. The loan volume threshold tests are separate, and an institution is not required to report open-end lines of credit if it originated fewer than 100 dwelling secured, open-end lines of credit in each of the preceding two calendar years. So, it is possible that an institution might be required to report either closed-end mortgage loans, or open-end lines of credit, or both, under the revised rule.

Once an institution determines which of its products may be reportable, then the institution can begin to assess what information must be reported and how the institution will collect all of the applicable data points required under the rule. Data to be collected and reported will vary some with different types of products. For example, the institution may not be required to collect and report the same information for a purchased covered loan as for an originated covered loan. The data elements might also vary for a business purpose loan as compared to a consumer purpose loan. The CFPB has published a list of data elements that will be reported as "not applicable" in certain instances on its website at: http://files.consumerfinance.gov/f/201511_cfpb_hmda-reporting-not-applicable.pdf.

The rule will also require changes to each reporting institution's procedures, processes, policies, and, possibly, loan origination systems and software. Working with third party providers to be sure systems are compliant will be critical. One thing to keep in mind is that beginning in 2018, institutions will no longer be able to use paper based submissions of HMDA data. Submission in electronic form will be required, and the Bureau is creating a web-based tool to be used for that purpose.

The final and, perhaps, most important element of implementation will be training of affected staff. It may be wise to consider beginning a written implementation plan. That plan might start with identifying those products, lending areas, staff, policies, procedures and systems that will be affected, and list the stakeholders in each area to be involved in the process. The plan can then be enhanced and updated as particular implementation steps and compliance activities are identified.

There are still a couple of things that are not final such as the codes for the various data elements. Also, the Bureau is seeking comment on establishing error rates that would trigger the need to scrub and resubmit loan data, so we will save discussion of those items and the enforcement provisions for a later date. No doubt, we will be talking a great deal more about the changes in future quarterly meetings as the compliance dates draw nearer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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