Article By: Gregg Oberg, Spillane Consulting Associates, Inc.

When regulatory requirements impact strategic or management action, our goal is to help business leaders make well-informed decisions.

Change has come to HMDA once again; see how the S.B. 2155 Regulatory Reforms will impact your institution moving forward…

S.B. 2155 and HMDA: A Simplified Explanation for “Small Banks”

As you likely have seen, S.B. 2155 is now law. Let’s take a moment to applaud Congress for doing SOMETHING (while reserving judgment on the propriety of the Act). As with most complicated legal/regulatory reforms, misconceptions abound with regard to how the new rules apply to institutions. Let’s take a few minutes to discuss one of the most anticipated (and impactful) changes from 2155; designated “Home Mortgage Disclosure Act Adjustment and Study” (found in Section 104 of S.B. 2155).

Specific Changes to HMDA

Section 104 of S.B. 2155 amends 12 U.S.C. 2803 by providing exemptions from certain HMDA requirements on the basis of the last two years loan production volume. Reading directly from S.B. 2155:

In order to understand what S.B. 2155 changes with regard to HMDA, a basic knowledge of interplay between law and regulation is necessary.

As a quick history lesson, § 2803 makes up the statutory mandate for HMDA reporting, as codified in regulation via 12 C.F.R. 1003 et seq. Laws are codified in U.S.C. (United States Code) and may direct regulatory agencies of the executive branch to promulgate rules in line with Congress’s grant of quasi-legislative authority to a relevant agency. In the case of HMDA, we’re talking about the CFPB (or BCFP, if you’re Mr. Mulvaney). In brief, Congress tells the agencies generally what they want from a law, and the agencies use that guidance to promulgate the regulation that we colloquially consider to be HMDA.

What does that mean?

I know, we’re not all legal geeks. For that reason, I removed the roughly 1,200 words Administrative Law Treatise that originally followed. The simple answer is “this means nothing yet.” The entire industry has spent time, effort, and money on implementing a new HMDA system, and that isn’t going to go away overnight. While it’s simple to say “just use the 2017 fields”, the best advice I have is “do nothing until the CFPB tells us otherwise.” As for institution specific guidance, what I can say is this:

• If you originated more than 500 closed-end loans AND 500 open-end loans in EACH of the past two years, stop reading now. Nothing has changed for you.

No relief is coming. You’ll be collecting and reporting the entire 110 field 2018 HMDA data until another change to regulation says otherwise.

• If you fall below 500 originations in each of the past two years for BOTH open-end and closed-end loans, things are going to (eventually) get easier. For now, don’t change a thing.

Alas, nothing worth having comes easy. This applies to regulatory relief as it does most things in life. At some point, you’ll be reverting to the pre-2018 HMDA data points (or at least closer to 2017 than 2018 rules). Exactly when and how that will happen remains to be seen, as the CFPB has not initiated the notice and comment rulemaking required by the change to Dodd-Frank via SB 2155. This will take some time.

Some industry commentators have noted the logistical issues related in having two different HMDA data requirements. Does that necessitate a second LAR template, complete with its own error checks, or do we simply input our “skinny” HMDA data into the current 2018 LAR formatting tool with massive amounts of open space? I don’t know. What I do know is that, according to Questsoft in April 2018, no LOS venders they surveyed intend to modify systems AGAIN to accommodate the lower volume HMDA reporters.

And what about Demographics? Does this mean you’ll go back to the old demographic form, or continue to use the disaggregated form? This one I will take an educated guess at. HMDA is used primarily as a data set to enforce fair lending and other anti-discriminatory regulations. The CFPB and Congress clearly believed that enhanced depth in demographic collection furthers this interest. Given the increased availability that was expected on 2018 HMDA information, it was thought institutions could better benchmark their fair lending practices against others. It would just seem to make no sense to have two different data sets that cannot easily be compared. For that reason, I predict the new demographic collection process outlined in Appendix B to 12 C.F.R. 1003 will stand.

This is just one example of the complexity in reconciling the new thresholds with the 2018 data requirements. While it is clear that lower volume originators will report AT LEAST the 2017 fields moving forward, it remains unclear exactly how that will be treated. For example, will we go back to the old hierarchy of loan purpose if we remove “cash out refinance” and “other”? Theoretically, a full rollback to 2017 would do this, but I am somewhat doubtful. Suffice to say, significant uncertainty exists.

• If you’re over one threshold (i.e. 600 open-end loans in each of past two years) but under another (i.e. 300 closed-end loans in each of the past two years), things will get tricky. Hold on tight and keep doing what you’re doing (for now).

There is conceivably a scenario where you could be required to report 2018 data on closed-end loans and pre-2018 data on open-end loans. Can you imagine that mess? We have already set up our systems (which again, are NOT reverting to pre-2018 according to the vendors surveyed by Questsoft), trained our people, and modified our procedures to account for 2018 reporting.

Would it make any sense to have one set of reporting policies and procedures for open-end loans and one for closed-end loans? Maybe, that’s likely a fact specific business decision. But, the fact remains that for at least the rest of this calendar year, we are unlikely to see formal rulemaking and implementation of amendments by the CFPB. But what about beyond that? I can easily imagine institutions simply voluntarily complying with HMDA data collection under the 2018 rule and either 1) voluntarily reporting all the data; or 2) scrubbing out excess data at quarter end. I personally favor the latter option, as who wants to train staff on two separate reporting obligations?

What Have We Learned?

• HMDA STILL APPLIES to institutions under the new volume thresholds created by SB 2155;

• HMDA will have “high volume” and “low volume” reporting obligations, which may vary substantially (think 2018 v 2017, respectively);

• The CFPB has not yet spoken on the exact requirements, and I doubt they will prior to the end of calendar year;

• Don’t change a thing YET, see bullet point 2. It’s just not an efficient use of mental energy to try and guess how things will shake out;

• After this year, you may still decide to collect all HMDA data and simply scrub out the data not needed at quarter end for reporting.

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**These are our opinions. We’re not authorized, or willing, to express those of others.**

Thank you to Gregg Oberg, Spillane Consulting Associates, Inc., who with the support of other experts at SCA have put together this newsletter.