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Interthinx® Offers FHA Compliance Support

National Mortgage Professional
Aug 25, 2008

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]
Aug 25, 2008
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