This past October 15th, the Consumer Financial Protection Bureau announced the purported finalization of its “new rule” for “updating the reporting requirements” under the Home Mortgage Disclosure Act HMDA.”[1] The point of the CFPB”s new rule, as advertised by the CFPB (and which affects thousands of lending institutions), is to “improve information reported about the residential mortgage market.”[2] More recently, this past January 7, the CFPB announced that it was seeking public feedback “on the resubmission of mortgage lending data reported under” the HMDA.[3]
One of the purposes of this particular post is to provide a quick overview of the HMDA. Also, we’ll briefly touch on what will be required by lenders under the CFPB’s new rule and why it has quickened the pulses of some lenders (aside from the fact that it’s over 700 pages long). Finally, we’re going to take a quick look at the point of the CFPB’s January 7 announcement soliciting public feedback on the resubmission of mortgage lending data reported under” the HMDA.
Generally speaking, one might wonder why the CFPB is seeking additional feedback on anything related to its new rule on HMDA compliance, given that, in its October announcement, the CFPB was referring to its “new rule” as the “final rule.”[4] For starters, as for the “new rule” itself, we’re talking about a rule that modifies the existing regulations under the HMDA that govern lending institutions’ obligations to collect and report specified information from their mortgage applications. Moreover, we’re not talking about one simple, single, new rule. Rather, we’re talking about the CFPB’s collective set of regulations and guidelines comprising this new rule which come in at 700 plus pages. So we’re talking about an existing Act that is already vast in scope in terms of its application and affected stakeholders, and then, on top of that, this new set of regs and guidelines that, in itself, is pretty vast. That may have something to do with why the CFPB is showing some flexibility here.
Now, to be clear, the CFPB’s new rule doesn’t simply pertain to new requirements for compliance with the HMDA. Rather, as noted in the Federal Register, the “final rule (referring to the new rule in its form when the CFPB made its announcement in October) also provides extensive guidance regarding compliance with both the existing and new requirements.”[5] So the new rule is doing two things: 1) outlining new requirements to comply with the HMDA, and 2) providing guidance on how to comply with the existing and new requirements. I point this out only because, based on some articles I’ve seen, one might get the impression that the 700 plus pages consist of nothing but new requirements, which is not the case. Nevertheless, 700 plus pages of anything—even if the pages include guidance and clarification on compliance requirements--will get some pushback, just because we’re talking about 700 plus pages. Which likely explains why the CFPB has recently announced that it’s open to some more feedback on a particular point under its new rule. While the rule won’t go into effect for two years (unless the CFPB pushes back the effective date), the CFPB is presumably making a show of accommodation now in an effort to placate mortgage lenders affected by the rule.
In its most basic form, the HMDA, which was enacted by Congress in 1975, requires mortgage lenders to collect specified information from their mortgage applicants and provide this data to government regulators and the public at large. The HMDA was implemented by the Federal Reserve Board’s Regulation C. On July 21, 2011, the rule-writing authority of Regulation C was transferred from the Federal Reserve Board to the CFPB.[6] The HMDA and Regulation C originally “grew out of public concern over credit shortages in certain urban neighborhoods. Congress believed that some financial institutions had contributed to the decline of some geographic areas by their failure to provide adequate home financing to qualified applicants on reasonable terms and conditions.”[7] A primary purpose of the HMDA is to provide loan data to enable the public and government regulators to monitor and determine whether “financial institutions are serving the housing needs of their communities.”[8] Another purpose of the HMDA is to assist public officials in targeting and “distributing public-sector investments so as to attract private investment to areas where it is needed.”[9] Finally, and not surprisingly, another core purpose of the HMDA is to “assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.”[10]
If you read my November 12 post on “Redlining and the Joint Action by the Consumer Financial Protection Bureau and the Department of Justice against Hudson City Savings Bank,” you might have wondered where the CFPB and the DOJ got their data on Hudson’s mortgage lending footprint and lending history in order to launch their investigation and subsequent enforcement action against Hudson. The data collected from Hudson (and lenders in its peer group) via the HMDA provided a good chunk of the initial ammunition for the CFPB and the DOJ.
Most of the provisions of the new rule will go into effect January 1, 2018.[11] So why is this very dry subject--that the CFPB has updated and finalized the requirements for lending institutions in connection with collecting and reporting mortgage applicant data in order to comply with HMDA--such a big deal? For starters, we’re talking about very big numbers. Last year alone, “7,062 financial institutions reported information about approximately 11.9 million mortgage applications, preapprovals, and loans.”[12]
Think about that for a moment: in order for lending institutions in the U.S. to comply with HMDA for one year alone, over 7,000 lending institutions had to report information on close to 12 million mortgage applications.
That took time and resources, even though lenders have HMDA reporting and fair lending compliance software in place to facilitate this process. And now the rules on what information is collected and reported are being updated, meaning lending institutions will need to invest more in updating their systems, training, and software for HMDA reporting compliance. That’s why this is more than a minor tweaking of the existing HMDA compliance requirements. The CFPB takes the position that its new rule will help streamline the reporting process and make it “easier for financial institutions to comply,” while, at the same time, it will “ease reporting requirements for some small banks and credit unions.”[13]
For purposes of compliance with the HMDA, the information the CFPB is looking for from a mortgage application can be broken down into the following three areas: 1) demographic data (the applicant’s race, ethnicity, gender, income); 2. whether the applicant plans to use the property as the applicant’s residence (as opposed to an investment rental property), and 3) the property’s location. Also, of course, the lending institution will need to report whether the application is accepted or denied. But this makes it sound relatively simple. There is actually quite a bit of data that will need to be collected to satisfy the HMDA reporting requirements for each mortgage application under the CFPB’s new rule. As noted in a recent National Mortgage News article, the “CFPB’s 797-page rule makes sweeping changes to Regulation C…The final rule requires that financial institutions report 48 data fields on each borrower, including total points and fees and the borrower’s age, credit score and property value.”[14] The new information required to be reported also includes the term of the loan and the duration of any teaser or introductory interest rates.[15]
As for the CFPB’s January 7 announcement about seeking public feedback on the resubmission of mortgage lending data reported under the HMDA, this relates to the issue of “resubmission error thresholds.”[16] As noted in its announcement,“[s]ome stakeholders (mortgage lenders) have asked (the CFPB) whether the Bureau would adjust its mortgage lending data resubmission guidelines to reflect the expanded data that will be submitted under the new rules.”[17] For more clarification, as noted in a January 7 American Banker article, “[s]ome lenders have asked whether the bureau would adjust its so-called resubmission guidelines — which determine whether a lender has to resubmit data because of errors found in a sample — to better reflect the expanded HMDA data requirements…Lenders, of course, would prefer that the thresholds are set as high as possible, which would allow for more mistakes and a lower likelihood that they would have to restate data. Resubmitting data is expensive and is largely considered by lenders to be punitive… The CFPB had already set an acceptable error rate at less than 10% for institutions with fewer than 100,000 HMDA entries. For institutions with more than 100,000 HMDA entries, the acceptable error rate was set at below 4% of a sample of entries overall.”[18] So in view of this, the CFPB in its January 7 announcement is saying that, given the changes that come with its new rule on HMDA compliance, “the current resubmission guidelines may need to be updated, and the Bureau is seeking feedback on what modifications may be appropriate.”[19] More specifically, the CFPB said it is asking “for public comment on the Bureau’s use of resubmission error thresholds and how they should be calculated. The notice also invites comments on whether the thresholds should vary with the size of the submission or kind of data, as well as the consequences for exceeding a threshold.”[20] But lenders probably should not expect major concessions from the CFPB on this issue of resubmission error thresholds. In the same announcement, the CFPB noted that “[e]nsuring the accuracy of mortgage lending data is vital to carrying out the purposes of the law.”[21] So the CFPB is willing to listen to lenders’ concerns on this issue, but only to a point. The emphasis on accuracy is a running theme under the new rule.
Briefly, back to the point about the CFPB opening itself up to additional feedback about an issue under its new rule: Generally speaking, there’s nothing new about a tug of war between a regulator and an industry it regulates, where the regulator wants to introduce additional regulations to accomplish a particular mission and the industry responds by saying the new regs will be costly and burdensome to implement and follow. The CFPB’s new rule will no doubt go into effect, but the CFPB has heard some of the hue and cry of lenders affected by the new rule, which is why the CFPB’s new rule may not necessarily be its final rule—at least not at this point. But I don’t know of any lenders that are expecting a major revamping of the new rule.
