Understanding New HMDA Exemptions

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

The CFPB has provided updated interpretations on HMDA following EGRRCPA. How are you going to implement them? 

Background

The regulatory reform bill signed into law in May 2018 created two new “partial exemptions” to HMDA reporting; one for open-end loans and one for closed-end loans.

Briefly, if you originated less than 500 covered closed-end loans in each of the past two years, you are “partially” exempt from what we’ve come to call the “2018 HMDA Rules.” Same goes for open-end loans.

The question we were left with in May was “which specific points are we exempt from, and how do we report now?” Well, the CFPB has finally spoken.

HMDA has changed (yet again)

Let’s just get right to it—the below chart was issued by the CFPB on Aug 31 as part of an interpretive and procedural rule to “clarify changes made to HMDA by the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”):

Wait, Weren’t There 110 fields in HMDA?

A point of clarification is useful here. Under the 2018 HMDA rule as implemented on Jan. 1, 2018, HMDA included 48 DATA POINTS, which collectively total 110 DATA FIELDS. How is that possible? Peek back to the chart above, and take a look at the now (partially) exempted “Automated Underwriting System” Data Point: that POINT contains 12 FIELDS.

  • Moving forward, if you qualify for a partial exemption:

    • You Report 22 data points totaling 52 data fields (everyone reports these)

  • You may report (not required) 26 data points totaling 58 data fields

The distinction between “data points” and “data fields” is particularly salient post EGRRCPA, as the Interpretive rule states “institutions … have the option of reporting exempt data fields as long as they report all data fields within any exempt data point for which they report data[.]” (Aug 31, 2018 Interpretive Rule at 2.)

Returning to the AUS example, this means if you report one AUS, you must fully comply with AUS reporting rules, including alternative AUS used (if applicable) and AUS results.

Who Gets the Exemption?

In reality, this only applies to closed-end loans for the immediate future. HELOC reporting will not change at all until at least 2020. This is because the current threshold for reporting HELOCs is 500 in each of the previous two years.

The “partial exemption” threshold is also 500 currently. So, if you’re partially exempt you’re fully exempt when it comes to HELOCS. Takeaway: if you did less than 500 HELOCs, you’re OK unless (and until) the threshold for reporting reverts to 100 in 2020. NOTE-I’m not certain that will happen, the CFPB has indicated they’re reviewing that number; could very well stay at 500.

You Can’t Have One Without the Other

Technically not true. The exemptions operate independently of each other, so you could have one set of reportable data on open-end loans, and an entirely different (larger) set of reportable data on closed-end loans. Things are going to be interesting for institutions that only get one exemption. Do you establish two parallel policies, or over-report on one type of loans?

The answer will clearly be institution specific, but if I had to give one-size-fits-all advice here, I’d say “don’t change anything until at least 1/1/19, you need to have a good long think about this.” Don’t underestimate the disruption to your origination team that would come from re-learning HMDA a second time inside of a year.

So, What Do We Report? And When?

The Rule interpreted EGRRCPA to apply the instant it was signed on May 24, 2018. In a footnote, the Bureau clarifies that “because data collected from January 1, 2018, to May 23, 2018, would not be reported until early in 2019, the Act [EGRRCPA] relieves [institutions] … eligible for a partial exemption … of the obligation to report certain data [left side of chart] in 2019 that may have been collected before May 24, 2018.”

What that means is you can remove the exempt data from pre-May 24 decisioned loans, but are not required to. This again is an institutional decision, which must weigh the costs (time and effort) or risks (human error in editing, etc.) of removing exempt data to the benefits (potentially limiting regulatory findings on complicated points) to determine how to allocate your limited compliance resources.

Same determination applies to what to collect for the period of May 24, 2018 to December 31, 2018, although added costs in retraining and risk of human error exist.

A Note on Risk

The CFPB took the time to reiterate their December 2017 position that the Bureau, in examination of 2018 data (conducted in 2019), “does not intend to assess penalties with respect to errors in data collected in 2018 and reported in 2019.” (Aug. 31, 2018 Interpretive Rule, at 6).

Picking and Choosing

My impression is the partial exemption will not be an “all or nothing” situation for most institutions. There are very valid reasons to continue reporting some of the exempt fields still. Some significant thought should go into whether, and to what extent, your institution will take advantage of the “partial exemption.”

ULI is included in the partial exemption. So, should we stop generating the ULI?

Things to consider:

  • ULI requires a complicated mathematical formula to generate a “check digit”

  • Most (if not all) LOS tools will automatically create this

    • BUT-consider the commercial side of the house, where many institutions do not have a system for originating business purpose loans, and rely on paper processes.

    • ULI creation requires either use of the online CFPB tool (read-human error possibility) OR “hacking” your consumer system to include business loans for the sole purpose of generating the ULI (Trust me, I’ve seen both in practice).

  • You’ve already set your system up, why change it?

    • And how are you going to generate the NULI?

BOTTOM LINE: probably easier not to change this one, lots of work to change for little benefit to institution.

The ULI is a somewhat clear-cut issue. But others may not be.

Other Interesting Regulatory Developments

1. Changes Coming for Self-Employed Borrowers?

Sens. Warner (D-Virginia) and Rounds (R-South Dakota) introduced the “Self-Employed Mortgage Access Act” last week, with the goal of expanding access to mortgage funding for borrowers without traditional employment. The bill estimates that 30% of the American labor force (42 million people) may have limited or no access to traditional residential mortgages due to the interaction of QM mortgage rules with income documentation—a situation this bill aims to change.

While any change could take up to one year from passage for the CFPB to weigh in, as required by the proposed law, community bankers can benefit from being “first to market” in terms of promoting traditional mortgage products to these historically disadvantaged borrowers. Keep your eyes on this one.

 2. The Bipartisan Housing Finance Reform Act

Rep. Hensarling (R-Texas) introduced a bill (described by Housing Wire as a “hail mary”) to fundamentally rework the housing finance. In his own words, Rep. Hensarling stated the bill would:

Repeal the GSEs’ charters, permanently ending their monopoly, and transition to a system that allows qualified mortgages backed by an approved private credit enhancer with regulated, diversified capital resources to access the explicit, full government securitization guarantee provided by Ginnie Mae. I believe the plan will preserve much of what is demanded in the current system: liquidity, the TBA market, and the 30-year pre-payable fixed mortgage. And it will do so while dispersing risk and leveling the playing field for all entrants into mortgage finance.

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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.