When community groups come knocking: How to manage HMDA data to prove you are in compliance.Leonard RyanHMDA data, HMDA compliance fixed interest rates, adjustable-rate APR
Ever since federal regulators announced that additional
information regarding the interest rates for home mortgage
borrowers would be required as part of 2004 Home Mortgage
Disclosure Act (HMDA) compliance submissions, many mortgage lenders
have been worried about the impact this data might have on their
businesses.
Federal laws are very specific about what lenders must do to be
in compliance. Loans are required to be reported to regulators when
the price is higher than the thresholds tied to the Treasury
Securities Index. Logically, fixed interest rates and
adjustable-rate APRs will adapt reasonably close with this index,
resulting in a consistent yardstick for comparison of rate spreads
in low- and high- interest markets and over multiple years. What is
less certain to lenders is how community groups will use publicly
available HMDA data. In this situation, lenders are forced to use
technology to prove they are in full compliance when these groups
challenge them.
Federal regulations require banks to submit HMDA data in March,
which is generally available to the public between July and
September. As regulators review the information, community groups
and interested individuals, such as New York Attorney General
Elliot Spitzer, have already requested HMDA data before September
by directly contacting lenders. Since community groups and their
allies already have access to HMDA data, some are already charging
lenders with either outright failure to be in compliance or not
meeting societal obligations, despite repeated assertions from the
Federal Reserve to not rely on HMDA data alone as a basis for
accusations. Some lenders feel helpless in these situations, but
competent lenders with effective compliance processes are fully
equipped to defend themselves.
Being proactive
Lenders need to fully realize what HMDA data does not tell us in
order to combat consumer groups' claims. For example, the data
completely leaves out credit scores, the quality of the home, the
size of the down payment, a borrower's debt-to-income ratio or
loan-to-value ratio, lien status, and how much equity is in the
home. All of these factors impact the pricing of a loan, but are
completely off the radar of community groups or anyone else
reviewing the data.
Next, lenders should consider developing a program to help
manage HMDA data in order to simplify the compliance process. In my
16 years of experience in the lending software industry, the vast
majority of mortgage lenders, possibly as much as 70 percent, do
not even think about HMDA compliance until the last days before the
deadline for submitting data to regulators. Often, when they do
start to process the data, they find data has been entered
incorrectly and panic sets in, transforming the whole HMDA
compliance process into nothing more than a "get it off the desk"
clerical task.
On the other hand, proactive lenders establish internal controls
throughout the origination process to validate the accuracy of the
data and make sure it is entered into the system correctly. An
effective way of doing this is to check the data entered into the
loan origination system or conduct a random sampling test to
identify inaccurate patterns for entering data. Merely asking if
the HMDA data is entered correctly is not a substitute for a real
set of internal controls.
All lending executives, not just compliance officers, should be
familiar with the capabilities of compliance software to develop a
better understanding of the types of data that can be accessed to
defend lending practices. The best way to do this is to request
training from lenders' compliance software providers. Competitive
vendors will provide basic training to top executives for free or
for a few hundred dollars.
When dealing with compliance software vendors, lenders should be
aware of how often updates are made, as well as the quality of the
source of the vendor's data. If the vendor delays updating the
information, this is a warning sign that the vendor will not to be
able to provide quality service when you really need it.
Once lending executives understand how the compliance process
works, they should set up a system to monitor the compliance status
of their organization throughout the year. Performance reports
should be generated at least every quarter to analyze lending
patterns and provide an opportunity to fix any compliance issues. A
common issue arises when a lender realizes there is a shortage of
loans to minorities. When this happens, lenders are forced to seek
out expensive solutions such as buying minority loans at a higher
price. Lenders can easily identify emerging markets by using
geocoding and available demographic data tables to reach more
minority borrowers long before they have to submit HMDA data.
Geocoding software should cost in the range of a few hundred to a
few thousand dollars, depending on the geographic area served, and
take less than 30 minutes to master.
The ultimate goal of HMDA compliance laws is to prevent
discriminatory practices and to make more cost-effective loans
available to minorities. If lenders find that rates offered to
minority borrowers are too high, they can use fair lending software
to survey loan practices; this may reveal how underwriting
policies, compensation of loan officers, or brokers and
discretionary pricing policies unnecessarily increase the costs to
lenders and drive up the rates offered to borrowers. This kind of
survey is important because it enables lenders to analyze credit
attributes, factors impacting the loan-to-value, income ratios,
lien status and credit scores. These are unreported in the standard
HMDA data and often have the most affect on fair lending
performance.
The calm before the storm
Once lenders have made sure their data is correct, and they have
taken proactive steps to generate the right kind of loans needed to
meet federal requirements, they should review potential issues that
may interest community groups. Examples of the top issues include
low numbers of minority loans, high numbers of loans that go into
default, and high interest rates, especially when higher than those
charged by the Treasury Department.
Fair lending analysis software can identify vulnerabilities
within compliance data and help lenders to take corrective action.
This type of solution is especially valuable to lenders serving
non-prime markets because they are at greater risk for criticism
and may need to conduct a more detailed analysis of pricing and
underwriting disparities, retail or broker performance, or
redlining or reverse redlining issues.
After HMDA data has been submitted to regulators, but before the
results have been officially announced, many community groups may
request the data directly from the lending institutions. This
provides an opportunity to educate community groups through a
statement that summarizes relevant information that may have been
left out of HMDA data. The statement should emphasize the fact that
the lender is in full, legal compliance, and include additional
information about the lender's discretionary underwriting pricing
polices and practices, credit scores and credit histories, and
debt-to-income and loan-to-value ratios.
Lenders have more compliance options than they realize when it
comes to using technology to protect themselves from criticism.
Much of the protection comes from the ability to proactively avoid
problems and efficiently managing HMDA data. Lenders should keep in
mind that compliance is often an afterthought. Taking the necessary
steps to better manage and understand HMDA data can save money,
expose possible marketing opportunities, and eliminate painful
headaches caused by avoidable compliance issues.
Leonard Ryan is founder and president of Laguna Hills,
Calif.-based QuestSoft Corporation. He may be reached at
[email protected].
