The Consumer Financial Protection Bureau (CFPB) has released a final rule amending Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), requiring most lenders to report certain information about mortgage applications and loans in efforts to create transparency in the mortgage lending process.

The final rule reflects the CFPB’s belief “that the HMDA data must be updated to address the informational shortcomings exposed by the financial crisis and to meet the needs of homeowners, potential homeowners, and neighborhoods throughout the nation.”

The final rule modifies the the types of “Covered Institutions” subject to Regulation C; the types of transactions subject to Regulation C; specific information that covered institutions are required to collect, record, and report; and processes for reporting and disclosing data. The majority of the provisions will be effective on January 1, 2018. Covered Institutions will collect the new HMDA information in 2018 and report it by March 1, 2019.

Types of Institutions Subject to Regulation C

A bank, savings association, or credit union will not be subject to Regulation C in 2017 unless it meets the asset-size, location, federally related, and loan activity tests under the current Regulation C and originates at least 25 home purchase loans in both 2015 and 2016. This change eliminates reporting requirements for low-volume depository institutions.

Effective January 1, 2018, the HMDA rule adopts the following uniform loan-level thresholds which, if met, will subject the institution to Regulation C:

• An institution that originated at least 25 covered closed-end mortgage loans in each of the two preceding calendar years or at least 100 covered open-end lines of credit in each of the two preceding calendar years, and meets other criteria for institutional coverage.
• A bank, savings association, or credit union that originated at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the two preceding calendar years, and meets the current asset-size, location, federally related, and loan activity tests under the current Regulation C.
• A for-profit lending institution other than a bank, savings association, or credit union that originated at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the two proceeding calendar years and it satisfies the existing location test.

Types of Transactions Subject to Regulation C

Under the current Regulation C, financial institutions must report information about applications for and originations of closed-end home improvement, home purchase, and refinancing loans. The final HMDA rule generally adopts a dwelling-secured standard for all loans or lines of credit that are for personal, family, or household purposes. More specifically, effective January 1, 2018, covered loans will include the following:

• Closed-end consumer-purpose mortgage loans and open-end lines of credit secured by a dwelling.
• Dwelling-secured business-purpose loans and lines of credit, but only if used for home purchase, home improvement or refinancing.
• Home improvement loans secured by a dwelling.

Covered loans and lines of credit do not include agricultural-purpose or certain other specifically excluded transactions.

Also effective January 1, 2018, Covered Institutions 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. Pre-approval requests for open-end lines of credit, reverse mortgages, and home purchase loans to be secured by multifamily dwellings are excluded.

Specific Information that Covered Institutions Are Required to Collect, Record, and Report

After January 1, 2018, Covered Institutions will be required to collect, record, and report additional information about originations of, purchases of, and applications for covered loans. The CFPB explains that this additional information will “enhance the ability to screen for possible fair lending problems, helping both institutions and regulators focus their attention on the riskiest areas where fair lending problems are most likely to exist.”

The HMDA Rule adds the following new data points:

• 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.

In an effort to align reporting requirements with well-established data standards and thereby lessen the reporting burden on lenders, the HMDA Rule modifies certain data points, including legal entity identifier, universal loan identifier, loan purpose, preapproval, construction method, occupancy type, loan amount, ethnicity, race, sex, type of purchaser, rate spread, lien status, and reason for denial. Currently under Regulation C, the reporting of the reasons for denial is optional, although some institutions are required to report the reasons under separate requirements.

For data collected in or after 2018, the final rule will require a Covered Institution to report whether it collected information about the applicant’s or borrower’s ethnicity, race, and sex based on visual observation or surname. In addition, Covered Institutions must allow applicants to self-identify their own ethnicity and race using disaggregated ethnic and racial subcategories, which will be reported accordingly.

For data collected on or after January 1, 2017, and reported in or after 2018, Covered Institutions need no longer directly provide a disclosure statement or a modified loan application register (LAR) to the public upon request. Providing a notice that its disclosure statement and modified LAR are available on the CFPB’s website will be sufficient. In the future, the CFPB will ask the public to provide feedback regarding a balancing test that it will use to determine whether and how HMDA data should be modified prior to its disclosure in order to protect applicant and borrower privacy.

Processes for Reporting and Disclosing Data

In 2018, Covered Institutions will report data collected in 2017 as required under the current Regulation C, but will use a new web-based electronic submission tool. Starting in 2019, the new required dataset under the final rule will be reported using this new submission tool according to revised procedures which will be developed and made available at http://www.consumerfinance.gov/hmda.

Starting in 2020, in addition to the current requirement to submit HMDA data by March 1 following the calendar year for which data is collected, a Covered Institution must submit reports quarterly if it reported at least 60,000 total applications and/or covered loans (excluding purchased loans) in the preceding calendar year. The first quarterly report will be due by May 30, 2020.

What the HMDA Rule Change Means for Covered Institutions

The new HMDA rule requires Covered Institutions to report more data than is presently required. The new and modified data will likely cause additional scrutiny of lenders, and a proactive approach to these changes is necessary.   

As discussed above, the new and modified data will include much more detail about applicants, borrowers, credit, collateral, loan type, pricing, fees, charges, the originator, and the Covered Institution. The new and modified data will enable regulators and private parties to analyze a lender’s practices in much greater detail than is currently possible. Analyses of combined data points will also now be possible. For example, the age of the applicant or borrower could potentially be analyzed in conjunction with pricing, ethnicity, or geographic data in order to identify potential instances of discrimination. Covered Institutions will need to consider the impressions HMDA data will create when combined in this manner and make appropriate adjustments to policies, procedures, and pricing considerations. 

The additional data requirements concerning loan pricing (e.g., origination charges, discount points, lender credits, and interest rate) are likely to be of great interest to regulators and potential litigants. State regulators may utilize this data in order to identify violations of limitations on fees and charges. 

As noted above, most of the changes in Regulation C do not take effect until early 2018. Nevertheless, it is not too early to begin looking at compliance management  systems in order to determine how the new and modified data will be collected and added to the institution’s current HMDA data capture and reporting systems. Other issues to consider well in advance of the effective date, include the following:

• System Issues: HMDA data systems will be required to manage significant additional data under the amended rule. An assessment should be made of the capacity of current systems to handle these additional demands. In addition, institutions should identify deficiencies in their existing systems and take corrective action before subjecting those systems to additional demands.
• Staffing: Will current staffing levels be adequate to manage the additional data collection and reporting requirements? Are current training resources adequate to ensure that all employees will be made aware of the changes to policies and procedures necessitated by the amended rule? Internal quality control, compliance, and internal audit functions should begin planning for reviews of the new data, reporting, processes, policies, and procedures.   
• Covered Institutions should be prepared to conduct self-analysis of their data well before the effective date of the new rule. Consideration should be given to structuring these analyses so that they are protected by applicable privileges.
• Secondary Market Issues: It is reasonable to expect investors to adopt new loan purchase requirements.