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.
With the CFPB, the Only Certainty is Change
At this point, we’ve seen so many “will they or won’t they” moments for the 2018 (and beyond) HDMA rule that the CFPB should hire Brett Favre as the official HMDA spokesman.
In just the last 30 days, we’ve seen multiple legislative and administrative signals that HMDA (and potentially the CFPB under Mick “sick sad joke” Mulvaney) will be dismantled in some way. First we saw the notice from CFPB on their intent not to enforce penalties for good faith compliance with HMDA.
Then, over the weekend we saw a H.B. 2954 pass the house 243-184. This bill, named the Home Mortgage Disclosure Adjustment Act, would elevate the institutional coverage thresholds on covered open-end and closed-end transactions to 500 each.
The current thresholds are 25 for closed-end, and 500 for open-end. However, this 500 open-end threshold is set to drop down to 100 in 2020, assuming nothing changes.
Evaluating the “Threshold” Language
Under 12 C.F.R. 1003.4(c) (11)-(12), the threshold for Institutional coverage is set for closed-end and open-end transactions, respectively. These are to be read as separate exemptions. This is probably a very elementary point, but worth repeating: exemption from closed-end reporting has no application to whether you are exempt from open-end reporting. It is possible (although unlikely) that you could be reporting only open-end lines due to your business model.
A closed-end mortgage loan, if the financial institution originated fewer than 25 closed-end mortgage loans in either of the two preceding calendar years; a financial institution may collect, record, report, and disclose information, as described in §§ 1003.4 and 1003.5, for such an excluded closed-end mortgage loan as though it were a covered loan, provided that the financial institution complies with such requirements for all applications for closed-end mortgage loans that it receives, closed-end mortgage loans that it originates, and closed-end mortgage loans that it purchases that otherwise would have been covered loans during the calendar year during which final action is taken on the excluded closed-end mortgage loan[.]
Specifically, the exemption excludes otherwise covered ORIGINATIONS based on a backward-looking assessment of volume in the previous two years. Note that while HMDA requires reporting of applications, regardless of the action taken, only originations are counted towards this threshold.
Because institutional coverage is set based on the previous two years volume of applicable originations, there isn’t much you can do today. The numbers for past years are set, and your assessment of whether HMDA is applicable for a given set of transactions relies entirely on the number in the exemption language. Whether 25, 100, 500 or something else entirely, you’ll simply have to look back and determine “over, or under?”
So, what do we do?
Assuming the threshold goes up…
I’m not going to try and predict what Congress will or won’t do at this point. First, because I just haven’t read enough of the legislative history on this topic. Second, because who has any faith in Congress getting anything done? But for the sake of argument, let’s play out some lender scenarios if the threshold does go up.
1st scenario: Suppose you are substantially below the 500 thresholds in the past two years on both product types, and see no plans in your business future to reach that level in the future. Then, assuming the threshold changes, you can completely ignore HMDA (if you really want to, more on that later).
2nd scenario: This one is also easy. Suppose you originate well above the 500 marks for both products each of the last two years. Then its clear that whether or not the threshold changes, you’re going to be reporting. Keep doing what you’re doing, nothing to see here.
3rd scenario: But what about those in the middle? For some of you, the increase in threshold on one or both product types can make all the difference. Depending on your business, you could fall into either of the above situations, either clearly reporting or clearly not reporting. But for lenders who are increasing their originations year over year, it might just delay the timeline for when new HMDA is applicable to them.
Assuming that most of us expected to report at least one category of covered transactions, we’ve already invested time, energy and money into developing new policy and procedure, and training staff on how to comply with HMDA. FIs need to carefully consider how the threshold changes impact their business. Procedure can be overly burdensome for the sake of compliance, but the good procedures make logical sense within the scope of regulation. Does that policy still make sense if you remove the regulation (for example, in the case of a FI who now falls under the HMDA threshold when they previously did not)? And if not, is it worth retraining staff AGAIN, after you just taught them the new HMDA procedures?
Further Regulatory Changes
Mulvaney has indicated a focus on ending “regulation through enforcement” in a recently leaked memo, and multiple bills are before the House and Senate with regulatory roll backs. Last night, the President touted the rapid decrease in regulation during his first State of the Union address. Things will continue to change, for better or worse (and I suppose that largely depends on your politics).
While we cannot predict exactly how things will change, we can be prepared to meet changes. This requires staying up to date on the news, new developments in legislation and rulemaking, and continually re-evaluating your institution in light of these changes. Procedure may need redesign, training will be required, and some practices long used in the FI may no longer be regulatory requirements. Those institutions who plan and anticipate changes will be best prepared to both comply with regulation, and benefit from whatever roll back may come.
**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.