HMDA’s New Rule and What It Means

On October 15, 2015, the Consumer Financial Protection Bureau (CFPB) issued the final rule on the Home Mortgage Disclosure Act (HMDA) updates, as required by the Dodd-Frank Act.

A Bit of Background on HMDA:  Enacted in 1975, HMDA is a Federal law that requires certain financial institutions to report information about mortgage applications and originations. The reported HMDA data contain certain key information on borrowers, properties and underwriting decisions. The initial intention of HMDA legislation was to provide information on how well financial institutions are serving housing credit needs. HMDA has served an important role in studies on housing needs and mortgage lending practices, as well as possible discriminatory lending patterns. These data have been used by Federal agencies, advocacy groups, lending institutions, and academia. Every year, the Board of Governors of the Federal Reserve System publishes a study on the newly released HMDA data to provide an overview of the most current mortgage market trends (2013 HMDA study and 2014 HMDA study).

If you’d like to learn more about the fundamentals of HMDA, we suggest browsing the CFPB’s “About HMDA” page as well as yesterday’s press release on the new HMDA rule.

Highlights of the New HMDA Rule:  The new HMDA rule is part of a continuing effort to use mortgage lending data as an industry oversight tool. In the new HMDA rule, the CFPB issued a list of improvements to HDMA data reporting and signaled that HMDA data are an integral part of fair lending compliance and enforcement. The new rule:

•         Adopts uniform loan-volume thresholds for depository and nondepository institutions
•         Exempts institutions that originated less than 25 closed-end mortgage loans or fewer than 100 open-end lines of credit in each of the two preceding calendar years
•         Exempts small depository institutions that are located outside metropolitan statistical areas (MSAs)
•         Expands the transaction types included in HMDA reporting to include all loans or lines of credit secured by a dwelling for personal, family, or household purposes (included transaction types are closed-end home-equity loans, home-equity lines of credit, and reserve mortgages)
•         Requires lenders to report several additional underwriting and pricing details, such as the property value, loan term, duration of introductory interest rates, borrower’s debt-to-income ratio, and the loan’s interest rate and discount points

How HMDA Helps Ensure Fair Lending:  As the most comprehensive market data in mortgage application and origination, HMDA has become a principal tool in regulating and supervising fair lending compliance under the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). The Department of Urban and Housing Development (HUD), Consumer Financial Protection Bureau (CFPB), Comptroller of Currency (OCC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Association (NCUA) have used HMDA data and applied statistical models to both screen for potential discriminationatory practices and supervise regulatory examination of mortgage lenders.

Fair lending discrimination can occur during any part of the home purchase process, including mortgage products marketing, mortgage origination, loan terms and conditions, home appraisal, and loan servicing. Discrimination can occur in the form of unnecessary closing costs, inflated appraisal costs, increased broker/lender fees, unnecessary recording fees, excessive penalties, unconsented alterations to closing documents, and other irregularities. Agencies and researchers use HMDA to ascertain whether a disparate impact can be measured across protected classes and across various aspects of the application and origination processes. For example, HMDA has been used to study discrimination in mortgage approval/denial decisions and mortgage channel and product selections.

However, the lack of certain market and detailed borrower information (e.g. property value, terms of the loan, total points and fees, duration of any teaser or introductory interest rates, borrower’s debt-to-income ratio, interest rate, and borrower’s credit scores) has prevented regulatory agencies from enforcing fair lending compliance during the process of product marketing, pricing, loan terms and conditions, and home appraisal. With the expanded mortgage data collected by this newly-released HMDA rule, we anticipate significant improvements in fair lending compliance efforts.

Summit’s Work with HMDA: Summit’s Fair Lending Team assists various Federal agencies in examining HMDA data for evidence of discriminatory practices in mortgage lending. In light of the new rule, we’ll be posting a series of HMDA-focused blog posts over the next several weeks. We look forward to sharing more about HMDA history, fair lending applications, and potential impacts (on both regulators and lenders) as a result of the new rule.

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