Procedures Act (RESPA) Integrated Dis-closure (TRID) rule and its upcoming—now twice postponed—effective date. Butcompliance experts are also watching forthe next shoe to drop: the final HomeMortgage Disclosure Act (HMDA) rule, dueany day now, at the time of this writing. Based on the Consumer Financial

Protection Bureau’s (CFPB’s) proposal is-sued last July, the final rule will dramat-ically increase reporting requirementsand potentially take by surprise thoselenders who have been lax on HMDAreporting and analysis.The changes will revamp Regulation

C—the HMDA reporting regulation—ina variety of ways. The rule will mostlikely apply to a much broader class oftransactions, essentially all dwelling-se-cured loans regardless of their purpose. The data reported on each application

or loan will be much more comprehen-sive than the annual loan applicationregister (LAR) reports currently requiredfrom covered lenders. Compiling thisinformation and preparing reports willcertainly add to the already high cost ofcompliance. It will be particularly bur-densome for those lenders who are notusing advanced technology to handlethe heavy lifting and are instead tryingto do it with outdated software.Wholly apart from the costs of com-

pliance, however, the new requirementswill expand potential fair lending liabilityfor covered institutions. Using the newinformation, regulators, advocacy groupsand plaintiffs’ attorneys will draw their

own conclusions as to whether discrim-inatory lending patterns exist. Accord-ingly, in addition to mastering the newreporting requirements, prudent lenderswill also take steps to analyze and ex-plain their lending data.The Supreme Court’s Texas Department

of Housing and Community Affairs v. The In-clusive Communities Project Inc. decision inJune heightens the importance of HMDAdata. That ruling held that disparate-im-pact claims may be brought under theFair Housing Act. Under this theory, there is no need to

prove that the outcomes in question werethe result of discriminatory intentions.The expanded HMDA data will surely becited as evidencing prohibited discrimi-nation, especially now that it will revealmany more details of transactions.

Why big data may mean big exposureUntil the passage of the Dodd-FrankWall Street Reform and Consumer Pro-tection Act, several federal regulatoryagencies were responsible for collecting

and reviewing HMDA LAR, and deter-mining whether prohibited discrimina-tion was occurring at individual insti-tutions or in certain areas or markets.Dodd-Frank, however, shifted the re-sponsibility for HMDA rule writing fromthe Federal Reserve Board to the CFPB. As part of this change, the bureau

was directed to expand the informationreported on each application or loan.The Dodd-Frank-mandated dataset in-cludes total points and fees, rate spreadfor all loans, “riskier” loan features,unique identifiers for the loan officerand the loan, application channel, prop-erty value and detailed property locationinformation, borrower’s age and borrow-er’s credit score. In 2014, the CFPB issued a proposed

rule to implement the statutory changes.The bureau used this opportunity tobuild substantially on the Dodd-Frankfoundation. On its own initiative, thebureau proposed to add reporting of ad-ditional data elements associated withunderwriting and pricing decisions. These

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IT’S PROBABLY SAFE TO ASSUME THAT MOST LENDERS AND VENDORS

are totally focused on the Truth in Lending Act (TILA)–Real Estate Settlement

HMDA: NEW DATA REQUIREMENTS,NEW OPPORTUNITIES FOR RISKby JOHN VONG

C O L U M N S

E X E C U T I V E S U I T E

Wholly apart from the costs of

compliance, the new requirements

will expand potential fair lending

liability for covered institutions.

included debt-to-income ratio (DTI), com-bined loan-to-value ratio (CLTV), the au-tomated underwriting system (AUS) usedand results, denial reasons (which, undercurrent rules, are optional), QualifiedMortgage (QM) status, additional rateand points and fees information (interestrate; risk-adjusted, pre-discounted in-terest rate; total origination charges;total discount points), additional propertyinformation (units financed and con-struction method replacing propertytype; affordable-housing deed-restrictioninformation), manufactured housing dataand unique financial institution identi-fication number. In all, this data will dramatically ex-

pand information regarding the demo-graphic and credit characteristics ofloan applicants and the terms and con-ditions of loans that they receive—ordon’t receive.Under the proposed rules, institutions

that report 75,000 or more loans peryear will be required to file reports on aquarterly basis, within 60 calendar daysof the end of each calendar quarter. TheCFPB has estimated that this changewould impact about 28 financial insti-tutions that, combined, report about halfof all HMDA-reported transactions. Because as currently envisaged, much

of this data will likely be public infor-mation, viewable on the Federal FinancialInstitutions Examination Council (FFIEC)website, there is real risk that industrycritics and overzealous regulators at boththe state and federal levels will discernpatterns of discrimination without mucheffort. (As an aside, making available somuch information carries significant pri-vacy risks that the CFPB will hopefullybe sensitive to in determining what datato release to the public.)To be clear, no one is disputing the

need to root out discrimination withinmortgage lending or to use data to preventintentional redlining or other discrimi-natory practices. And in my company’sexperience, most lenders are committedto expanding access to credit and helpingborrowers of all races and ethnicities be-come homeowners. Having said that,there are valid reasons for mortgage de-nial and for higher pricing to compensatefor greater risk and these can lead to ap-parent disparities in treatment. For the most part, however, the lender

and investor guidelines and overlaysthat are in place today are based on his-

torical loan performance data and pru-dent underwriting—not prejudice.Some industry observers believe that

caution may have gone too far. For ex-ample, Jim Parrott, the Obama adminis-tration’s former senior adviser on theNational Economic Council, was quotedlast September in HousingWire as saying:“Law enforcement has been on a bit of arun with settlements and enforcement—with the open-endedness (lenders) arejust not sure what closure looks andfeels like. It’s hard for them to quantifytheir legal risk in this space, so there’s alot of pressure from boards to put inoverlays to protect against this.”

Ongoing self-monitoring will be criticalOur company, and our internal and ex-ternal legal research teams, have beendeveloping HMDA reporting best practicesthat include LAR data processing as anongoing—rather than once a year—activity. By collecting and reviewing required

HMDA data monthly, lenders will havethe opportunity to spot potential redflags early and to address them—beforean examiner sees them and before theyconstitute a pattern. If lenders process LAR data only once

a year, it may be too late. A good analogyis putting off developing a tax strategyuntil April 14. Usually by then there isn’tmuch you can do.An area where lenders should con-

centrate more of their self-analysis is inpaying more attention to loans that arecanceled, denied and withdrawn, as theyare the most often neglected during theHMDA data-capture process.In the past, HMDA LAR data processing

and reporting has not been on the in-dustry’s radar screen. Now, with the newHMDA rule, this priority needs to change. Expanded HMDA reporting is com-

ing—it’s just a question of when. If whathas been proposed so far is eventuallyimplemented, it will be a significantchange for currently covered institutions,and potentially a burden for some ofthe covered lenders who are not currentlyin compliance.So after TRID finally goes live on Oct. 3,

take a few days off. Relax. Recharge. Thenget ready to tackle an even bigger com-pliance challenge: HMDA and big data.

John Vong, CMB, CMT, is president and co-founderof ComplianceEase, Burlingame, California. He canbe reached at j.vong@complianceease.com.

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REPRINT WITH PERMISSION FROM THE MORTGAGE BANKERS ASSOCIATION (MBA)