How good is your organization's Home Mortgage Disclosure Act reporting process?
If it's like most, the data are collected and reviewed, and errors are found. Then files are scrubbed, changes are made, and the data are reviewed again. To say the least, the process is often an annual nightmare. What is especially frustrating is that the nightmare usually occurs just in time for the holidays.
Does your organization fit the description above? Take a few seconds to answer these simple questions:
Are internal control groups (e.g. audit, compliance, quality control) finding a high error rate in the files that they review?
Do the data normally have to be corrected before reporting?
Is there confusion about who "owns" the process and their roles and responsibilities?
Would mapping your organization's entire HMDA process be a difficult-or impossible - task?
If you answered "yes" to any of these questions, your organization fits the profile. Your Home Mortgage Disclosure Act program is in need of attention.
This scenario is not unusual. Since 1990, when the major overhaul to the act took effect, HMDA reporters have struggled to get the data right. The process is frustrating and tedious. The requirements are confusing and what was supposed to get easier has not.
This is why the data can be laden with errors, and why compliance officers and operations personnel spend their holidays in the office. December, January, and February have become HMDA data cleanup months.
Assessing the Process
Perhaps the HMDA process does not need to be so difficult. The problems might be all in the approach.
Rather than focusing only on correcting the end result, the data, management should think about assessing and correcting the entire process. A complete process assessment is the only way to identify and implement permanent solutions to HMDA-related problems.
The steps that follow may seem obvious, but many times the obvious is overlooked.
First, it is important to identify and understand the many areas of the organization that are a part of the Home Mortgage Disclosure Act process. Most likely these areas include branches, call centers, operations, loan processing, and lending.
In addition (and often overlooked), training and oversight play an important role. After all, the process begins with training and ends with oversight. Not only do you want to get it right in the beginning, but you also will want to be certain that the data are right at the end.
With so many different areas of the organization touching the Home Mortgage Disclosure Act process, the chance for error is high.
Next, create a process map. In doing so, you will be surprised by the findings. Not only will you find gaps, but also with so many hands touching HMDA an important byproduct of the mapping will be the discovery of inefficiencies. You'll be able to see things like how many times the same people are touching the data.
Inefficiencies cost money and money is still the bottom line. What an eye-opening experience this is for management and what an opportunity it becomes for creating a more efficient process.
Then, analyze the findings identified through your HMDA review procedures. Categorize the errors in order to identify trends. The categories might include training issues, systems issues, or control issues. They may even span categories. Then, find the sources of the problems and look for ways to create permanent fixes.
Keys to Effective HMDA Reporting
When looking for permanent solutions, a key element to consider is technology. Technology is by far the greatest resource available for meeting Home Mortgage Disclosure Act requirements and should not be understated.
System-related controls should be considered before manual controls. There should be as few people touching the process as practical.
Consider things like driving Home Mortgage Disclosure Act reporting according to loan purpose codes. This means that only those loan purpose codes established to identify HMDA-reportable applications would be subject to the requirements.
In these cases, the loan processing system could be modified to require that unless HMDA data are collected, the loan processing system will not allow the data entry person to continue with entering the loan.
This is just one example. The possibilities for technology solutions are practically endless. Use your imagination.
Keep in mind that although technology-driven edits are a highly effective method for reporting more accurate data, there is one fatal flaw that organizations make: They don't monitor system edits.
For example, when software upgrades are installed, it is not uncommon to find that formatting and preferences were not retained. Many organizations make the mistake of thinking that once the edit is in the system, it will always be there. Things seem to fall out. Sometimes there's no good explanation as to why or how it may have happened; it just happens.
Periodic monitoring is critical to ensure the continued success of the Home Mortgage Disclosure Act program.
While some may argue that enhancing technology is costly, an inefficient process or a large-scale cleanup effort can be much more so. Scrubbing files, year after year, is expensive and doesn't permanently fix the problems. Also, because HMDA reporting is full of hidden costs, most are difficult to quantify. In essence, there's no good way to know how much the inefficiencies really cost.
In assessing ways to maximize accuracy and efficiency in the HMDA process, don't stop with technology. Technology still can't solve all of your problems.
Make sure that there are adequate controls in place throughout the entire process. That means that all of the areas that touch HMDA need to have adequate training programs, comprehensive policies and procedures, and adequate oversight to ensure the success of the program and the accuracy of the data.
Also, in many organizations the roles and responsibilities of the areas that touch HMDA are unclear. Each employee involved must understand his or her role and how he or she will be held accountable if the process breaks down. Job descriptions as well as performance evaluations should reflect these responsibilities.
Another key element to effective HMDA reporting lies in the experience of the organization's compliance personnel.
When compliance officers (or others who are responsible for HMDA compliance) are able to understand the connection between the regulations and operations and view the HMDA reporting process holistically, they can help to ensure that adequate reporting is being carried out in the most logical, organized and efficient manner.
In other words, it's important that your compliance personnel can take the giant leap from regulation to reality.
Benefits of Effective Reporting
Why do all of this? Because it will save your organization time and effort as well as reduce the costs associated with Home Mortgage Disclosure Act reporting.
In addition, and certainly not to be understated, a more accurate reporting process will help mitigate risk for the organization. Not only will it help avoid potential fines if erroneous data are reported, it will also help ensure that reports falling into the hands of the public, especially community groups, accurately reflect your lending activity.
And finally, in this climate of heavy merger and acquisition activity, various regulatory agencies review HMDA reports as part of the approval process. Incorrect reports could negatively impact or even block a merger or acquisition. That wouldn't be good news for the board of directors.
This year, don't spend the holidays correcting HMDA data. Instead, maybe it's time to perform a complete process assessment and start implementing permanent solutions to the issues that are uncovered.