Just when many credit unions are finally emerging from the storm of the TILA-RESPA Integrated Disclosure Rule (TRID), the amended Home Mortgage Disclosure Act (HMDA) effective date lurks in the shadows.
HMDA has been around for more than 40 years, and its primary purpose of monitoring discriminatory and predatory lending practices hasn’t changed.
But the Consumer Financial Protection Bureau (CFPB) completely overhauled the regulation when it published a new final rule in October 2015. As a result, credit unions will face a whole host of new compliance challenges because the rule requires lenders to collect and report many new data points after its Jan. 1, 2018, effective date.
As we learned with TRID, compliance with a rule this complex doesn’t happen overnight.
It’s crucial that credit unions ensure they’re ready by taking steps now, such as:
In fact, a few transition rules with respect to data collection could require your credit union to be ready to collect the new HMDA data points prior to the Jan. 1 effective date.
Monitoring data collection
The new HMDA rule requires collection of 25 new data points in addition to the modified and existing data points under the current rule. One significant change is how institutions will report government monitoring information about an applicant’s race and ethnicity.
Currently, ethnicity is reported as either “Hispanic or Latino” or “Not Hispanic and Latino,” and race is limited to five categories: American Indian or Alaska native; Asian; Black or African American; Native Hawaiian or other Pacific Islander; or White.
Under the new rule, lenders will be required to use disaggregated ethnicity and race subcategories to capture more detailed demographic information about the applicant.
For example, instead of selecting the aggregate category of “Asian,” an applicant will be able to self-identify as either Asian Indian, Chinese, Filipino, Japanese, Korean, Vietnamese, or other Asian using the new disaggregated categories.
These disaggregated categories are effective for data collected on or after Jan. 1, 2018.
But CFPB has stated that a credit union may, at its option, permit applicants to self-identify using disaggregated ethnic and racial categories as early as Jan. 1, 2017, in an attempt to ease the implementation burden of collecting disaggregated data.
While this is great news in theory, in practice it presents some compliance challenges.
Credit unions should collect the ethnicity, race, and sex data based on the date the credit union is in the best position to collect this information, also known as the “date of final action.”
For race and ethnicity data, this is usually the application date. But what happens when the applicant doesn’t voluntarily report this information? If the applicant doesn’t voluntarily reply during a face-to-face application, the credit union must provide the data based on visual observation and surname using the broader aggregated categories.
Only the applicant can select from the disaggregated categories on the application.
Another scenario arises when a credit union takes the application over telephone, mail, or online. If the applicant selects “I do not wish to provide this information” then no further action is required. If the applicant doesn’t select “I do not wish to provide this information” and fails to self-report it, the credit union would report based on visual observation or surname if there is face-to-face completion.
If the applicant and credit union don’t meet face to face until closing, then it’s too late to report the data and no further action is required.
Credit unions that heed CFPB’s advice and start collecting disaggregated data in 2017 before the effective date face another reporting challenge. Since the disaggregated race and ethnicity categories aren’t official until 2018, if a credit union collects disaggregated data for applications that have a date of final action in 2017, the credit union must reaggregate and report the data in aggregate form.
This will only be an issue during the transition, as applications made in 2018 and beyond will use the disaggregated categories. It does create an additional step for credit unions, which could make it more burdensome to comply early with the rule.
Strategies for dates of final action
While race and ethnicity data fields are collected based on the application date, the remaining HMDA data points are collected based on the date of final action. If an application is denied or withdrawn, the date of final action is the date of denial or withdrawal since no further action will be taken after that time.
If the application results in an origination, the date of final action is the date of loan closing or consummation.
As we approach the HMDA effective date, credit unions need to be prepared for another potential transition issue pertaining to applications that result in originations.
Because the final action on an application can occur many months after the application date, applications made at the end of 2017 could have a date of final action in early 2018.
Consider the scenario where a member applies for a closed-end mortgage on Nov. 30, 2017, and the credit union approves the loan and ultimately closes on Jan. 15, 2018. In this situation, the application date was made in 2017, prior to the HMDA effective date, and the date of final action occurred in 2018, after the HMDA effective date.
For race and ethnicity data, because the application date is in 2017, the credit union would report race and ethnicity under the current HMDA rule’s aggregated categories.
But because the loan origination (the “date of final action”) occurred in 2018, the credit union would report all the other data points required by the new HMDA rule. This effectively means that credit unions need to be ready to capture all the new HMDA data fields as early as the fourth quarter of 2017.
Any applications for loans made in 2017 that close on or after Jan. 1, 2018, will be reported under the new rule. Therefore, the best strategy for managing potential HMDA transition issues is proactive planning and pipeline management, starting now.
Credit unions must be prepared to capture all the new data fields on applications months in advance of 2018, especially if the credit union has loans with long closing periods in process.
One strategy to minimize transition issues is to try to finalize some open applications prior to year’s end, but not all applications will be ready for final action before Jan. 1. In those cases, credit unions must be prepared to have all the data available and ready for reporting.
Time is running out to involve vendors, ensure forms are up to date, train staff on the new data collection points, and inform staff of potential issues that could arise at the end of the year.
As the industry braces itself for HMDA, we need to be mindful of the lessons learned from TRID, where lenders scrambled to prepare and quickly realized that implementation is more complicated and time-consuming than once thought.
WHITNEY NICHOLAS is CUNA’s senior federal compliance counsel.