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New HMDA Regs Require Banks to Collect Lots of Data...That They Already Have

posted by Adam Levitin

The Home Mortgage Disclosure Act  of 1975 is a key piece of fair lending legislation.  It requires mortgage lenders to report data on loan applications and loans funded that enables both government and private groups to monitor lending patterns for violations of the Fair Housing Act and Equal Credit Opportunity Act (as well as state fair lending laws).  In 2015 the CFPB adopted a new HMDA rule that would expand the number of data fields collected by some 25 fields, effective Jan. 1, 2018.  This is being decried as an unreasonable burden on small institutions and a bipartisan collection of Senators on the Senate Banking Committee have proposed a bill that would exempt financial institutions that made less than 500 open-end loans or 500 close-end loans in each of the previous two years from the new HMDA reporting requirements.  

There's no question that the new HMDA requirements add something to financial institutions regulatory burden. But a look at what these requirements are shows that the burden is really de minimis.  It's not going to make-or-break a small financial institution.  Below is a list of all 25 new data fields.  As you will see, after each one I have indicated whether it is data that is already required for the TILA-RESPA Integrated Disclosure (TRID) or would normally be in a loan underwriting file.  If it is in either, then it is simply a matter of having adequate software to plug that data into HMDA reporting.  Asking a bank to have integrated mortgage underwriting and reporting software doesn't seem like an unreasonable request, but none of this is stuff that should take very long to do even by hand-entry of data (something I've done plenty of). I've dotted all my i's and crossed my t's here, but the bottom line is this.  Almost every piece of information required under the new HMDA rule is already being collected by the lender for either its own underwriting purposes or for compliance with other regulatory requirements.  In other words, this just ain't a big deal.  My guess would be that the total additional compliance costs is a few thousand dollars per year for this.  

The CFPB itself estimates (see p. 66308) per the Paperwork Reduction Act requirement that for truly small banks total HMDA compliance costs (which includes existing costs) will be between 143 and 173 hours of time annually.  Even at $100/hr (which is far more than a compliance staffer at a small bank makes), this would total, at most, $17,300 annually.  Around half the fields are new, so we're looking at around $8,650 annually in additional costs for small banks as the high-end estimate.  So this leave me wondering why the pushback against the new HMDA rule.  

Am I missing something here?   This just doesn't seem to be a game changer for small financial institutions, and it will cause some serious damage to HMDA data in some communities and even some entire states in which large financial institutions don't have much of a presence.  

  1. Street address of the collateral property.  Required for TRID.  12 CFR § 1026.37(a)(6); 12 CFR § 1026.38(a)(3)(vi).  It's also going to be in the underwriting file--lenders want to know where their collateral is located.  
  2. Borrower’s age. This is potentially new.  It won't be in TRID, but it might be in the underwriting file, at least for a reverse mortgage.  Doesn't seem like a hard piece of data to obtain and report.  
  3. Credit score.  This is almost certainly going to be in the underwriting file, and if the lender takes adverse action based on the score it has to be produced to the consumer under the Fair Credit Reporting Act, 15 U.S.C. § 1681m(a)(2)(A)
  4. Total loan costs or total points ands fees.  Required for TRID.  12 CFR § 1026.37(f)(4);12 CFR § 1026.38(f)(4).  This is also likely to be in the underwriting file.
  5. Origination charges.  Required for TRID.  12 CFR § 1026.37(f)(1);12 CFR § 1026.38(f)(1).  Also in the underwriting file.
  6. Discount points.  Required for TRID.  12 CFR § 1026.37(f)(1);12 CFR § 1026.38(f)(1).  Also in the underwriting file.
  7. Lender credits.  That will be in the TRID disclosures already, and probably in underwriting file.
  8. Interest rate.  Required for TRID.  12 CFR § 1026.37(b)(1). Also in the underwriting file.
  9. Prepayment penalty term.  Required for TRID.  12 CFR § 1026.37(b)(7).  Also in the underwriting file.
  10. Debt-to-Income Ratio.  In underwriting file.  Also required for QM Rule compliance, 12 CFR § 1026.43(e)(2)(V)(B). 
  11. Cumulative Loan to Value Ratio.  In underwriting file (this gets reported in securitization data).
  12. Loan term.  Required for TRID.  12 CFR § 1026.37(a)(8).  Also in the underwriting file.
  13. Introductory Rate Period.  Required for TRID.  12 CFR § 1026.37(a)(10)(iv).  Also in the underwriting file.
  14. Non-amortizing features. Required for TRID.  12 CFR § 1026.37(a)(10)(ii).  Also in the underwriting file.
  15. Property value.  This is going to be in the underwriting file.  And for some loans an appraisal is actually required by statute under 15 U.S.C. § 1639h. 
  16. Manufactured home secured property type.  This is whether the lien is on just the manufactured house or also the land.  I'm guessing (but not sure) that this would be in the underwriting file.    It's pretty important for a lender to know if it wants to perfect its security interest. 
  17. Manufactured home land property interest.  This is about whether the loan applicant owns or rents the land on which the manufactured home is situated.  I'm guessing (but not sure) that this would be in the underwriting file.  
  18. Total units.  Again, I would expect this to be in the underwriting file, as a 1 family property has a different risk profile than a multi-family.  There would also need to be a rider to the mortgage if it covers multiple units.
  19. Multifamily affordable units.  I'm guessing that this is in the underwriting file because it affects the property value, but not sure.  Unlikely to be much of an issue for rural lenders, because multi-family is not common in rural America. 
  20. Application channel—should be in underwriting file; a loan that is done through a broker has different risk characteristics than one that isn't, etc. 
  21. NMLSR Identifier.  Required for TRID.  12 CFR § 1026.37(k); 1026.38(r)(4).  Should also be in the underwriting file for SAFE Act compliance. 
  22. Automated Underwriting system used.   This ought to be in the underwriting file.  
  23. Reverse mortgage indicator.  In underwriting file.
  24. Open-end Line of credit indicator.  In underwriting file.  The lender needs to know because it will necessitate different disclosure forms.  
  25. Business or commercial purpose. In underwriting file.  

Comments

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Many of the items (age, address, total units, etc.) are also located on the actual loan application form.

Not to nitpick, but just to dot a couple more is and cross some ts for the sake of being thorough.

4.Total loan costs or total points ands fees. Required for TRID. 12 CFR § 1026.37(f)(4);12 CFR § 1026.38(f)(4). This is also likely to be in the underwriting file.

Different points and fees than what is in TRID. The calculation for HMDA would be the points and fees under HOEPA, 12 CFR 1026.32(b)(1), which is a different calculation than what is disclosed on the LE and CD. Still should have it since they are checking for high cost mortgages and possibly QM status if you do QM loans.


You're also missing the new LEI, small cost, but still incremental for small banks. There are also new race and ethnicity fields.

The compliance hours reflects just the time it would take to collect and report (unless I missed something). Not sure that it includes costs to update policies, procedures, software, training, etc. $10k here and there doesn't seem like a lot, but it adds up for a $200 million bank with one compliance officer. Add to that the pending data collection for small business loans.

More fields also means a higher likelihood of an error. I imagine the re-submission rate for banks will increase as a result.

I'd like to follow up on ParanoidAndroid's comment.

Namely the notion that that a few thousand dollars here and there doesn't make much difference to a small bank.

Banks make about 1% on assets. So, $10,000 annually in expenses would require $1,000,000 million in additional assets and over $50,000 in additional capital.

But that is simply to offset the expense. To maintain the efficiency ratio, more assets and capital are required. Use whatever ratios you want -- I picked round numbers.

And if some of the data is already reported, why doesn't the regulator simply extract that data and leave bank financial reporting alone?

I suppose there really isn't much of an economic argument for the existence of these small banks. But then, why not simply take them out and shoot them?

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