The deadline for covered institutions to submit their 2009 Home Mortgage Disclosure Act (HMDA) data is March 1, 2010. There are four steps that can be taken to assure accuracy and timely submission of HMDA data. Control data quality (Step 1):
1) Periodically evaluate HMDA data to ensure that all relevant product lines are included and that the data include all loan applications that are originated, denied or withdrawn.
2) Identify data that have been subject to a quality control or self-monitoring effort. Loan products that have not been subject to self-monitoring should receive enhanced scrutiny during the data review.
3) Conduct a rate-spread reporting test to loans for which applications are taken on or after Oct. 1, 2009 and for all loans consummated on or after Jan. 1, 2010 (regardless of their application dates).1
Note: Effective Oct. 1, 2009, the Federal Reserve Board (FRB) amended Regulation C, the implementing regulation for HMDA, to define a rate-spread loan as a HMDA loan subject to Regulation Z whose annual percentage rate exceeds the average prime offer rate for comparable transactions by 1.5 percent for first-lien loans or 3.5 percent for second-lien loans.2
4) Conduct a pre-Oct. 1, 2009 test to loans for which applications were taken before Oct. 1, 2009 and that were consummated in 2009. For those loans, HMDA reporters are required to identify first- and second-mortgage liens that exceeded the yield on comparable Treasury securities by three percent for first-lien loans and five percent for second lien loans, respectively.
Improve accuracy (Step 2)
1) Scan for common errors in the following data fields:
(a) Borrower’s income;
(b) Rate spread;
(c) Loan purpose;
(d) Property location; and
(e) Loan amount.
Note: Borrower’s Income … for the Borrower’s Income Field, §203.4(a)(10) of Regulation C requires that the borrower’s gross income relied on in making the credit decision be reported. Some institutions frequently report the borrower’s net income in this field. Rate-Spread … some institutions fail to report data because they do not have a good understanding of the definition of a rate-spread loan. Institutions must be careful to use the new definition of a rate-spread loan, where applicable.
2) Implement policies and procedures for identifying and correcting errors in HMDA data. The scope depends on the mortgagee’s risk profile and institutional complexity. Small institutions may be comfortable with their data collecting and reporting methods and may not require additional review, but large institutions—especially where there is a history of submission errors in their Loan Application Register (HMDA-LAR)—should ensure that data not subject to self-monitoring are comprehensively reviewed prior to the annual March submission. In any event, data subject to self-monitoring must be checked periodically to assure the efficacy of HMDA data collection procedures.
Report HMDA data (Step 3)
1) Preparation of the HMDA-LAR should commence in early January. This will ensure sufficient time to correct any noted errors before submitting the data on March 1 to the FRB.
2) After the LAR is submitted, FRB’s HMDA Reporter Panel will review the data in late March through early April and identify possible reporting errors. The FRB will contact those institutions that fail the quality edit tests and will expect a prompt response to correct the errors.
Note: This aspect of the process provides an opportunity to identify the business units and product lines from which the submission errors originated, because these data correction requirements directly affect the policies and procedures developed regarding the risk analysis, training and self-monitoring for these respective areas.
On-going training (Step 4)
1) Training should be based on familiarizing affected staff with the relevant HMDA data collection policies and procedures.
2) A “gap analysis” approach offers an opportunity to explore and suggest corrective actions. For instance, if geocoding or reasons for declination pose data quality problems, training should focus on these problem areas.
3) Periodically provide advice and training in any regulatory changes related to the filing of HMDA data, such as the recent Regulation C amendment to the definition of a rate-spread loan. Employees with input access to the HMDA-LAR, and/or employees involved in self-monitoring, require the most training.
Following the steps outlined in this article will help to enhance HMDA reporting protocol and assure reliable procedures to meet HMDA’s regulatory requirements. Issues and questions should be discussed with the compliance department, third-party HMDA data collection vendors, and risk management firms that have expertise in implementing Regulation C.
Submit your questions …
Do you have a regulatory compliance issue that you’d like to see addressed in the Regulatory Compliance Outlook Column? If so, e-mail your issue or concern to Jonathan Foxx at [email protected]
Jonathan Foxx, former chief compliance officer for two of the country’s top publicly-traded residential mortgage loan originators, is the president and managing director of Lenders Compliance Group, a mortgage risk management firm devoted to providing regulatory compliance advice and counsel to the mortgage industry.
1—The new definition of a reportable rate-spread loan appears in 12 C.F.R. §203.4(a)(12)(i), which also defines “average prime offer rate.” The new definition is based on the definition of a higher-priced mortgage loan under §226.35(a) of Regulation Z.
2—The Federal Financial Institutions Examination Council (FFIEC) maintains rate-spread calculators on its Web site to help institutions determine if a loan qualifies as a rate-spread loan under the new HMDA definition of a rate-spread loan that became effective on Oct. 1, 2009: www.ffiec.gov/ratespread/newcalc.aspx. The FFIEC Web site also lists current prime offer rates and is updated weekly. FFIEC offers both a single-loan and a batch-loan calculator on its Web site to determine if a single loan or a batch of them qualifies as rate-spread loans.