Ben Giumarra

Senior management and the boards of directors are ultimately responsible for an institution’s compliance. But with the complexity of a financial institution, it’s impossible to be a subject matter expert in all areas. Sometimes it’s tough knowing the right question to ask. Here are five of the most important to ask (right now) to assess your institution’s readiness for the significant upcoming HMDA changes.

Accountability: who owns this?

Major changes like this should have a champion – accountability spurs action. Imagine witnessing a car accident and yelling to the crowd “Someone call 911!” You’ll find it’s a better bet to instead say “You in the yellow shirt, call 911!” This might be your head of lending, compliance officer, HMDA specialist, or a team of people. Distinguish between accountability and responsibility – the head of lending might assume ultimate responsibility, but who specifically is reading the rules, watching the webinars, and doing training?

Whoever it is, do they have the know-how, resources, time and support to pull this off?

Are we “system ready”?

As my colleague Galina Kirpichov reminds me, your systems don’t have to be in final form for your institution to be “system ready.”

“As usual, lenders will probably still be waiting until the night before for final updates to their systems to arrive,” she noted. “But that doesn’t mean you should not/cannot be ‘system ready’ right now. System readiness means not waiting for final updates to start preparing. Right now, lenders should be preparing, for example, by deciding which fees will go into your total origination charges, reading the rule (12 CFR 1003.4), drafting policies/procedures, etc.”

Some lenders haven’t even decided which systems they will use to help with HMDA requirements come 2018 – they are certainly not “system ready”!

Related question: Are you planning to input/monitor HMDA with manual checklists? With double the amount of information you’ll need to report, manually entry will be the right decision for fewer institutions (but not for all). Switching to an automated system may be less expensive than you think, and the value of removing human error is significant.

When will we start collecting new demographic information?

Most new reporting requirements kick in on a loan where final action is taken in 2018 (even if the application is taken in 2017). But a lender has various choices in how it complies with the new demographic data requirements. A lender’s basic choices include voluntarily complying sooner than necessary, complying at the same exact time as all other data fields, and delaying compliance a little later than is required for the other data fields. This flexibility is a good thing for lenders that consider the pros and cons and make a deliberate decision. It will be a bad thing for other lenders, only adding to the confusion.

Handling HELOC applications in branches.

One major part of this rule change is that home equity lines of credit become reportable. With many institutions relying on non-mortgage branch personnel to handle HELOC applications, that raises questions. Will some lenders change that policy? If not, what will it take to bring them up to speed? What controls will be put in place to quickly catch any errors that do arise? How well will the system used to originate HELOCs (likely not the same system used with mortgages) handle these reporting requirements?

Should we be worried about Fair Lending?

Finally, lenders would be crazy to ignore the potential fair lending issues that the new HMDA requirements will shine a spotlight on. We’re at a stage now where we can actually fix those issues! The information currently available to regulators from HMDA is limited compared to what an institution can voluntarily use for self-assessments (most of which will now be readily available to regulators from HMDA itself). One example is with loan pricing. Currently, regulators see limited pricing information and only for higher-priced loans (a slim number). Under the new HMDA requirements, lenders will have to report a full suite of pricing information on almost all loans.

And anybody looking for extra HMDA motivation can look to the CFPB’s recent $1.75 million action action against Nationstar Mortgage. CFPB examiners found error rates of 13 percent, 33 percent and 21 percent in 2012, 2013 and 2014, respectively, which are far above permissible limits. Scary when one of the largest mortgage lenders in the country can’t get this right.

Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@SCAPartnering.com or (781) 356-2772.