Regulators' silence on new HMDA rule is deafening
As banks prepare to comply with a Consumer Financial Protection Bureau rule adding new reporting requirements under the Home Mortgage Disclosure Act, much attention has been paid to how expanded data points such as “interest rate” and “credit score” will affect fair-lending compliance. But the impact does not stop there.
The CFPB noted in its 2015 rule, which takes effect Jan. 1, that “the new data will also help to assess certain financial institutions’ performance under the” Community Reinvestment Act. It seems likely that examiners conducting CRA reviews to evaluate a lender’s efforts meeting the credit needs of its community will utilize the updated reporting on mortgage activity.
Yet the CFPB does not enforce the CRA. The prudential regulators that do — the Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency — have yet to weigh in on how the revised mortgage reporting requirements will affect institutions’ performance on CRA exams.
The consumer bureau recently issued clarifications on implementing the new HMDA requirements, but they still offer no clarity on how regulators will use the new data to grade CRA compliance. Home mortgage lending is at the heart of many banks’ CRA efforts and HMDA reports are the primary tool used to assess the adequacy of a bank’s lending to lower-income individuals and communities.
The new reporting changes could have a significant impact on which loans on a bank’s balance sheet get CRA credit, and which do not. For example, while lenders will have to add reporting on home equity lines of credit, the new HMDA requirements eliminate reporting of unsecured home improvement loans. Assuming that the prudential regulators will use the HMDA report in CRA exams, for many banks the end result of this subtraction will be the appearance of a reduced proportion and smaller volume of mortgage-related loans to lower-income borrowers and neighborhoods.
Now, only home improvement loans secured by a dwelling will be reported, eliminating small, unsecured home improvement loans from the HMDA record. These unsecured loans are an important way some banks serve lower-income homeowners. This is especially true in many older urban neighborhoods where, because of low property values, prudential restrictions on loan-to-value ratios limit banks’ ability to make home improvement loans on a secured basis. Loans not secured by a dwelling are generally simpler to originate and more affordable. But they will no longer be reflected in a bank’s HMDA data.
Meanwhile, the addition of HELOCs may not have a positive impact on a CRA grade. It could be the opposite.
Currently, HMDA reporting of HELOCs is optional and most lenders do not report them. The CFPB estimates that, currently, only 1% of all open-end lines of credit are reported. Under the new rule, the CFPB says, “mandatory reporting of consumer-purpose open-end lines of credit and applications will increase HMDA-reportable transaction volumes for many financial institutions, and may increase these volumes significantly for some financial institutions.”
Then there is the impact of the additional data points intended to help identify discriminatory lending patterns. These additional fields will likely lead to greater fair-lending enforcement and contribute to the number of CRA rating downgrades based on evidence of discrimination.
The expanded data points will also provide detailed information on borrower credit characteristics and loan terms that CRA examiners may employ in their overall evaluation of how well a bank is serving community credit needs. For example, data on interest rates, fees and loan terms may be used to draw conclusions about the affordability of mortgages for lower-income borrowers. That data can be compared with corresponding data for higher-income borrowers in the same community, potentially fueling the debate over whether mortgage loans in lower-income neighborhoods actually help lower-income individuals or push them out of their homes due to gentrification. But this will depend on how CRA examiners interpret the new HMDA reporting.
The new rule will also require mortgage lenders with at least 60,000 transactions in the preceding calendar year to file quarterly HMDA reports, starting in 2020, versus just filing annually. Quarterly reporting is expected to cover approximately 30 institutions that originate about half of all mortgage loans. CRA examinations usually review all of a bank’s lending up to the examination date, but examiners cannot compare lending activity against concurrent market performance due to the lag in HMDA reporting.
Quarterly reporting presumably will allow CRA examiners to make a more precise comparison than they can with a single annual HMDA report. But, again, the regulators have not provided any guidance on how the new HMDA requirements will affect that market comparison. Will a bank’s lending activity be compared with the overall market in the most recent quarter, or an average of recent quarters or over an annualized basis?
Finally, the new rule mandates that each application or loan receive a permanent Uniform Loan Indicator, or ULI, “to track an application or loan over its life and to help in accurately identifying lending patterns across various markets.” Unlike the current HMDA reporting regime, where a loan gets a new identification number each time it changes hands, ULIs will allow a loan to be tracked in the HMDA dataset through multiple reporting events, including all sales, purchases and repurchases, even over two or more calendar years.
This ability to track loans could impact the market where banks buy lower-income mortgage loans to help satisfy their CRA requirements. Originated and purchased loans receive equivalent consideration in a CRA examination, based on the rationale that a bank buying a loan has provided liquidity to the originator to make another loan. Moreover, because of banks’ need to meet their CRA obligations, they often pay a premium for lower-income loans, which encourages the originator to make what might otherwise be an unprofitable loan, or allow it to make the loan at a lower rate.
However, sometimes a buyer resells the loan to another bank soon after acquiring it, so the same loan appears as a purchase on the HMDA reports of the original buyer and subsequent buyer or buyers, all of which receive CRA consideration for the same loan. Sorting by ULI will identify loans that were repeatedly bought and sold for CRA consideration, a practice which may be deemed to undermine the liquidity rationale and even violate the spirit of the CRA. Confronted with this, CRA examiners may question the CRA-eligibility of churned loans and may cause their agencies to address the matter.
CRA examinations typically occur every three to five years, meaning that most banks are already in examination periods where part of their performance will be assessed based on new HMDA reporting. So time is short for the prudential regulators to provide guidance on how the new HMDA rules will impact CRA compliance. Banks should be told how they can continue to receive appropriate consideration for unsecured home improvement loans that will no longer be part of their HMDA reports and whether additional caution is necessary in purchasing lower-income mortgage loans. Regulatory direction on the implications of mandatory HELOC reporting and expanded data points on CRA performance is similarly important.
Hopefully, the industry will not need to wait for the first exams to take place under the new HMDA rules before the impact of the rules on CRA compliance is fully understood.