CFPB’s amendment of the Home Mortgage Disclosure Act, and consequences

CFPB’s amendment of the Home Mortgage Disclosure Act, and consequences

The mortgage industry of the US has matured over the past few years, many distinct phases of evolution has helped it to reach its current status as the largest and most advanced home-financing market in the world. In 2014, around 4.94 million of existing homes were sold within the U.S. Ever since 2008 financial collapse; […]

CFPB’s amendment of the Home Mortgage Disclosure Act, and consequences

The mortgage industry of the US has matured over the past few years, many distinct phases of evolution has helped it to reach its current status as the largest and most advanced home-financing market in the world.

In 2014, around 4.94 million of existing homes were sold within the U.S. Ever since 2008 financial collapse; each and every mortgage is closely scrutinized in an effort to avoid the mistakes that led to the collapse. CFPB (Consumer Financial Protection Bureau) has amended the HMDA (Home Mortgage Disclosure Act) and changes will be rolled out in 2017.

The rules

The final rule reflects the CFPB’s belief that the HMDA data should be updated to handle the informational shortcomings exposed by the 2008 financial collapse and to fulfill the wants of householders, potential owners, and neighborhoods throughout the country. Notable amendments are listed below:

  • Any banks, institution or non-profit organization which has not originated at least 25 covered close-end mortgage loan or at least 100 open end lines of credit in each of two preceding years and does not meet other criteria, will not come under Regulation C. This change will eliminate reporting requirement for low-volume depository institutions.
  • Financial institutions must report information about applications for and originations of closed-end home improvement, home purchase, and refinancing loans.
  • Lending institutes will be required to collect, record, and report information for preapproval requests for home purchase loans that were approved but not accepted. Under the current regulation, such collection is optional.
  • Information about applicants and borrowers, including age, credit score and debt-to-income and combined debt-to-income ratios.
  • Information about the loan process, including whether the application was submitted directly to the institution, whether the loan was, or would have been, initially payable to the institution, and the name of, and results from, the automated underwriting system that was used.
  • Information about the property securing the loan, including value and type (e.g., manufactured home).
  • Information about the features of the loan, such as total loan costs or total points and fees, origination charges, discount points, lender credits, interest rate, prepayment penalty term, loan term, introductory rate period, and non-amortizing features.
  • Certain unique identifiers, such as property address, legal entity identifier for financial institutions, and mortgage originator NMLSR identifier.

Implications

In its endeavor to coordinate  reportage necessities with well-established data standards and thereby reducing the reportage burden on lenders, the HMDA Rule modification includes legal entity identifier, universal loan identifier, purpose of loan, preapproved amount, construction technique, type of occupancy, loan quantity, ethnicity, race, sex, type of buyer, rate spread, status of lien, and reason for denial. Presently under Regulation C, the reportage of the explanations for denial is non-mandatory, though some establishments are needed to report the explanations under separate rules.

Data collections

For data collected in or after 2018, the rules would require an establishment to report whether or not it collected information concerning the applicant’s or borrower’s ethnicity, race, and sex based on visual observation or by surname. Additionally, an establishment has to allow the customer to self-identify their own ethnicity and race by filling out disaggregated ethnic and racial subcategories. These amendments will help to bring transparency and ensure fair lending. Government and other public agencies also use this information to decide how to allocate to community and housing investment.

Enhanced report

Earlier, the major flaw in the HMDA act was if the loan was denied, nobody knew for sure the reason for the loan request being rejected. Was the issue large debt to income ratio or bad credit score or was it because of someone’s race or ethnicity. To overcome this problem, CFPB has mandated to file a detailed report of the applicant which will include income ratio, credit score, charges, and fees. The issue is the enhanced reporting requirements might lead to overwhelming of the current system resulting in erroneous filings. Reporting inaccurate data can have severe implication in the shape of penalties; public agencies rely on this data to decide how well the public is served, and reporting wrong data can have an adverse effect. Another concern lending industry has with regards to reporting the information is CFPB has not yet determined how much information will be made public and what will be kept confidential by CFPB. Ensuring consumer privacy and rendering useful information will be a tough balancing act for the agency.

Information requirements

The new and changed information requirements will generate extra scrutiny for lenders and a proactive approach to these changes is important. The new data sets can embody far more details regarding lender, borrowers, credit, collateral, loan type, pricing, fees, and charges. This information will allow the regulators and personal parties to investigate a lender’s practices in a much more detailed manner than is presently doable. For instance, the age of the person or receiver may probably be analyzed in conjunction with rating, ethnicity, or geographic information so as to spot potential instances of discrimination. Lenders will be compelled to take into account the impression HMDA information has made and make applicable changes to policies, procedures, and pricing concerns. The additional information needed for loan rating (e.g., origination charges, discount points, loaner credits, and interest rate) is possibly of great interest to regulators and the potential complainant. State regulators could utilize this information so as to spot violations of limitations on fees and charges.

2018 timelines

Even though changes do not take effect until 2018, but never the less it is not early to look at the compliance management system in order to determine how new information will be collected and added to current HMDA system. Since HMDA system will be required to manage a large amount of additional data, the current system needs to be assessed if it can handle the additional data or not. Lending institutes should also identify the deficiencies in their systems and take corrective measures before the system takes on the additional load. Will the current staff suffice to manage the new requirements? What training resources need to be introduced to impart knowledge to the staff about the new changes? Internal audit, compliance should begin planning for new changes. Lending institutes should be prepared to conduct a self-analysis of their data well before the effective date of the new rule.

Altisource

One such company that has built its business on facilitating financial and mortgage companies in transition is Altisource. Its client includes one of the nation’s largest sub-prime servicers, government agencies and multiple lenders, servicers, investors, mortgage bankers, credit unions, money services corporations, and hedge funds across the country. It boasts of 9,000 employees across the globe. Its wide range of services includes:

  • Servicer Solutions
  • Origination Solutions
  • Real Estate Investor Solutions
  • Consumer Real Estate Solutions

The company is a leader in proprietary business processes, vendor and electronic payment management software and behavioral science-based analytics. It is redefining the industry standards and helping lending organizations have a renewed focus on compliance. The company is led by William Shepro, an industry veteran and previously COO of Ocwen Solutions.

Compliance burden

With over 20 major regulations supervising the industry in the US, the compliance is burdensome for largest of companies leave alone nimble fintechs looking to disrupt the market.  The 2008 financial crash and the consequent emergence of CFPB has been a good thing but has added a layer of compliance for the lenders. It is essential that Fintech start-ups with relatively little experience ensure that they are on the right side of the law. With no major financial backing, it can be a death knell for a startup to be caught on the wrong side of regulators. Partnering with an established compliance solutions provider like Altisource would not only help in ensuring compliance but will also signal prospective investors that they are not going to find any nasty legal surprises after investing in the company.

Author: Heena Dhir and George Popescu

George Popescu