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The CFPB recently released an interpretive and procedural rule to implement and clarify the partial exemption from the Home Mortgage Disclosure Act (HMDA) adopted in the Economic Growth, Regulatory Relief, and Consumer Protection Act (also known as S.2155).

As we reported previously, the Act amended HMDA to create an exemption applicable to the new data categories added by Dodd-Frank and the HMDA rule adopted by the CFPB for insured depository institutions and insured credit unions that originate mortgage loans below certain thresholds.  Additionally, depository institutions must meet certain Community Reinvestment Act rating criteria.

For closed-end mortgage loans, the partial exemption will apply if the institution or credit union originated fewer than 500 such loans in each of the preceding two calendar years.  For home equity lines of credit (HELOCs), the partial exemption will apply if the institution or credit union originated fewer than 500 HELOCs in each of the preceding two calendar years.  The HELOC change will not initially affect reporting because, for 2018 and 2019, the threshold to report HELOCs is 500 transactions in each of the preceding two calendar years under a temporary CFPB rule.

Even if a depository institution originates loans or HELOCS below the applicable threshold, the Act’s partial exemption from reporting the new HMDA data categories does not apply if the institution received a rating of “needs to improve record of meeting community credit needs” during each of its two most recent CRA examinations, or “substantial noncompliance in meeting community credit needs” on its most recent CRA examination.

In July 2018 the CFPB advised that the partial exemption will not affect the format of 2018 Loan Application Registers (LARs) and that:

  • LARs will be formatted according to the previously-released 2018 Filing Instructions Guide for HMDA Data Collected in 2018 (2018 FIG).
  • If an institution does not report information for a certain data field due to the partial exemption, the institution will enter an exemption code for the field specified in a revised 2018 FIG that the CFPB expects to release later this summer.
  • All LARs will be submitted to the same HMDA Platform.

The CFPB also advised that it expected later in the summer to provide further guidance on the applicability of the partial exemption to HMDA data collected in 2018.  The interpretive and procedural rule contains the further guidance.  As previously indicated, the CFPB also issued a revised FIG for 2018 data to account for the partial exemption.

The interpretive and procedural rule:

  • Clarifies the HMDA data points that are covered by the partial exemption.  A table in the rule reflects that 26 data points are covered by the partial exemption, and that 22 data points still must be reported by institutions or credit unions that qualify for the partial exemption.
  • Provides that institutions and credit unions that qualify for the partial exemption may elect to report the exempted data, provided that they report all data fields within any exempt data point for which they report data.  For example, if an institution or credit union elects to report a data field that is part of the property address, it must report all other data fields that are part of the property address data point.
  • Clarifies that only closed-end loans and open-end lines of credit that are otherwise reportable under HMDA count toward the 500 loan and 500 line of credit thresholds.
  • Provides that if an institution or credit union elects not to report a universal loan identifier for an application or loan, it must report a non-universal loan identifier that meets specified requirements and must be unique within the institution or credit union.
  • Clarifies the exception to the partial exemption for negative CRA history must be assessed as of December 31 of the preceding calendar year.

The interpretative and procedural rule will become effective upon publication in the Federal Register.  The CFPB advises that it expects to initiate a notice-and-comment rulemaking to incorporate the interpretations and procedures contained in the rule into Regulation C and to further implement the Act.

 

The CFPB recently released a File Format Verification Tool for 2018 Home Mortgage Disclosure Act (HMDA) data. As we reported, in October 2015, the CFPB adopted significant changes to the HMDA rules that significantly expanded the amount of information that must be collected and reported. Calendar year 2018 is the first year in which the expanded data must be collected.

The Tool can be used by HMDA filers to test whether their HMDA data file meets the following formatting requirements: (1) whether the file is in the pipe-delimited format, (2) whether the file has the proper number of data fields, and (3) whether the file has data fields that are formatted as integers, when applicable. The Tool cannot be used to file HMDA data. The CFPB advises that there are no login requirements to use the Tool, the Tool will not log identifying information about users or the files that they test using the Tool, and no federal agency will receive or be able to view the files that users test using the Tool.

The Consumer Financial Protection Bureau (CFPB) recently issued a statement regarding the partial exemption from Home Mortgage Disclosure Act (HMDA) reporting requirements for certain lower mortgage volume depository institution lenders that was adopted in the Economic Growth, Regulatory Relief, and Consumer Protection Act (Act).

As we reported previously, the Act exempts depository institutions and credit unions from the new reporting categories added by Dodd-Frank and the HMDA rule adopted by the CFPB with regard to (1) closed-end loans, if the institution or credit union originated fewer than 500 such loans in each of the preceding two calendar years, and (2) home equity lines of credit (HELOCs), if the institution or credit union originated fewer than 500 HELOCs in each of the preceding two calendar years. The HELOC change will not initially affect reporting because, for 2018 and 2019, the threshold to report HELOCs is 500 transactions in each of the preceding two calendar years under a temporary CFPB rule.

The Act’s partial exemption from reporting the new HMDA data does not apply if the institution received a rating of “needs to improve record of meeting community credit needs” during each of its two most recent Community Reinvestment Act (CRA) examinations, or “substantial noncompliance in meeting community credit needs” on its most recent CRA examination.

The CFPB advises in its recent statement that it expects later this summer to provide further guidance on the applicability of the partial exemption to HMDA data collected in 2018. The CFPB also advises that the partial exemption will not affect the format of 2018 Loan Application Registers (LARs) and that:

  • LARs will be formatted according to the previously-released 2018 Filing Instructions Guide for HMDA Data Collected in 2018 (2018 FIG).
  • If an institution does not report information for a certain data field due to the partial exemption, the institution will enter an exemption code for the field specified in a revised 2018 FIG that the CFPB expects to release later this summer.
  • All LARs will be submitted to the same HMDA Platform.

The CFPB also notes that a beta version of the HMDA Platform for submission of data collected in 2018 will be available later this year for filers to test.

In Financial Institution Letter FIL-36-2018 and in OCC Bulletin 2018-19 the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, respectively, issued similar guidance to institutions.

In a blog post entitled “How S.2155 (the Bank Lobbyist Act) Facilitates Discriminatory Lending” Professor Adam Levitin claimed that “This bill functionally exempts 85% of US banks and credit unions from fair lending laws in the mortgage market.”  The claim was set forth in bold and italic text.  If the intent was to draw attention to the claim, it worked.  Members of this firm saw the claim.  In short, the claim greatly mischaracterizes the limited implications of the amendment.

The Professor is referring to an amendment that S.2155 would make to the Home Mortgage Disclosure Act (HMDA) for insured banks and insured credit unions that satisfy certain conditions.  First, I will address what the amendment would not do.  The amendment:

  • Would not exempt any institution from the Equal Credit Opportunity Act, the Fair Housing Act or any other substantive fair lending law.
  • Would not exempt any institution from the mortgage loan data reporting requirements of HMDA that were in effect before January 1, 2018.
  • Would not prevent bank and credit union regulators from obtaining any information on the mortgage lending activity of institutions that they supervise.

What the amendment would do is exempt small volume mortgage lenders from the expanded HMDA data reporting requirements that became effective on January 1, 2018 if they met certain conditions.  The conditions are that:

  • To be exempt from the expanded data reporting requirements for closed-end mortgage loans, the bank or credit union would have to originate fewer than 500 of such loans in each of the preceding two calendars years
  • To be exempt from the expanded data reporting requirements for home equity lines of credit (HELOCs), the bank or credit union would have to originate fewer than 500 of such credit lines in each of the preceding two calendars years.
  • The bank or credit union could not receive a rating of (1) “needs to improve record of meeting community credit needs” during each of its two most recent Community Reinvestment Act (CRA) examinations or (2) “substantial noncompliance in meeting community credit needs” on its most recent CRA examination.

The exemption for HELOC reporting would have no implications initially, and perhaps longer.  For 2018 and 2019 the threshold to report HELOCs is 500 transactions in each of the preceding two calendar years.  The 500 HELOC threshold was implemented by a temporary rule adopted by the CFPB under former Director Cordray in August 2017, which amended the HMDA rule adopted by the CFPB in October 2015 to revise the HMDA reporting requirements.  The October 2015 rule for the first time mandated the reporting of HELOCs, and set the reporting threshold at 100 HELOCs in each of the two preceding calendar years.  The CFPB indicated in the preamble to the temporary rule that it had evidence that the number of smaller institutions that would need to report HELOCs under the 100 threshold may be higher than originally estimated, and that the costs on those institutions to implement reporting may be higher than originally estimated.  The temporary rule allows the CFPB time to further assess the appropriate threshold.

While Professor Levitin inaccurately claims that the S.2155 amendment creates a functional exemption from the fair lending laws for small volume lenders, the statement that 85% of banks and credit unions would be covered by the exemption mischaracterizes the scope of lending activity subject to HMDA reporting requirements.  Based on the data used by the CFPB to assess the 2015 rule, the change from the 100 to 500 threshold would reduce the number of institutions reporting HELOCs from 749 to 231, but would reduce the percentage of HELOCs reported only from 88% to 76%.  Additionally, 2016 HMDA data reflect that while credit unions and small banks comprised over 73% of HMDA reporting entities, the institutions received under 15% of the reported applications for the year.  While the CFPB now acknowledges it may have underestimated the number of institutions that would be covered at the 100 HELOC threshold, these statistics reflect that focusing on the percentage of institutions subject to reporting, and not the percentage of transactions subject to reporting, paints an inaccurate picture of lending activity subject to HMDA reporting requirements.

Even for institutions that would qualify for the exemption from reporting the expanded HMDA data, the CFPB and financial institution regulators will still receive the traditional HMDA data from these institutions.  And regulators can use that information to assess whether they should take a closer look at the mortgage lending activity of any institutions.  Of great significance, as noted above, the S.2155 amendment would not limit the amount of information on mortgage lending that bank or credit union regulators can obtain from institutions that they supervise.

While the expansion of the HMDA data is intended to permit regulators to better assess the mortgage lending of an institution before having to request additional information from the institution, even the expanded data does not provide for a conclusive assessment of whether or not a given institution has engaged in discrimination when evaluating mortgage loan applications.  In fact, even with data that is more comprehensive than the expanded HMDA data, a statistical analysis still does not provide for a conclusive determination regarding underwriting determinations.  You have to get your hands on the actual loan files.

The main impact from the S.2155 amendment would be the reduction of some HMDA information from small volume lenders that will be made available to the public.  With new leadership at the CFPB, we don’t know what parts of the expanded HMDA data will be released to the public.  However, even under Director Cordray, the CFPB did not plan to issue credit score information, which is an important item of information to conduct a fair lending analysis.  A significant concern of the mortgage industry regarding the expanded HMDA data is that members of the public will improperly use the data that is released to claim that the data conclusively show that the institutions engaged in discrimination.  Given that Professor Levitin paints an inaccurate picture of the impact of the HMDA amendment under S.2155, those concerns appear to be warranted.

The Federal Financial Institutions Examination Council (FFIEC) has just issued an updated version of The Guide to HMDA Reporting: Getting It Right!

The Guide reflects the extensive changes to the Home Mortgage Disclosure Act rules that were adopted in October 2015 and became effective January 1, 2018.  Until now, the most recent version of the Guide was the April 2013 edition.

As previously reported, in December 2017 the CFPB announced that it intends to engage in a rulemaking to reconsider various aspects of the revised HMDA rules, such as the institutions that are subject to the rules, including the related transactional coverage tests, and the discretionary data points that were added to the statutory data points by the CFPB.  Any HMDA rule changes may require revisions to the Guide.

On February 1, the CFPB announced the launch of the 2018 HMDA LAR Formatting Tool (the “Tool”). The Tool will help financial institutions create an electronic file to submit HMDA data collected in 2018 and reported in 2019.  The Tool is not needed if the financial institution uses vendor or loan origination software to format their HMDA data into a pipe delimited text file, so this Tool will be most useful to those with small volumes of covered loans and applications.

The CFPB also announced minor updates to its 2018 Filing Instructions Guide, such as providing explicit instructions not to include leading zeros in data fields, and allowing an additional AUS result code produced by the Guaranteed Underwriting System.

The CFPB has launched a new online “Digital Check Tool” to be used by companies reporting HMDA data starting January 1, 2018.

More specifically, the new tool supports the Universal Loan Identifier (ULI) requirements of the revised HMDA rule.  The CFPB states on its website that the new tool can be used for two functions.  The first function is to generate a two-character check digit when a company enters a Legal Entity Identifier and loan or application ID.  The second function is to validate that a check digit is calculated correctly for any complete ULI a company enters.

The CFPB also made its rate spread calculator available for use with applications on which the final action occurred on or after January 1, 2018.

In notices published in today’s Federal Register, the CFPB adjusted the thresholds of the asset-size exemptions for collecting HMDA data and establishing an escrow account for certain mortgage loans under TILA.

Pursuant to Regulation C, which implements HMDA, depository institutions with assets below an annually adjusted threshold are exempt from HMDA data collection requirements.  In its notice, the CFPB increased the 2017 threshold of $44 million to $45 million for 2018.  Thus, depository institutions with assets of $45 million or less as of  December 31, 2017 will be exempt from collecting HMDA data in 2018.  (An institution’s exemption from collecting data in 2018 does not affect its duty to report data it was required to collect in 2017.)

Regulation Z, which implements TILA, requires creditors to establish an escrow account to pay property taxes and insurance premiums for certain first-lien higher-priced mortgages.  The rule contains an exemption for creditors that operate predominantly in rural or underserved areas that meet certain other criteria, including an annually adjusted asset-size threshold.  In its notice, the CFPB increased the 2017 threshold from $2.069 billion to $2.112 billion for 2018.  Thus, loans made by creditors with assets of less than $2.112 billion on December 31, 2017 that operate predominantly in rural or underserved areas and meet the other exemption criteria will be exempt in 2018 from the TILA escrow account requirement for higher-priced mortgage loans.  The adjustment will increase the similar Regulation Z threshold for small-creditor portfolio and balloon-payment qualified mortgages.

The CFPB has announced that with regard to the collection in 2018 of the expanded data fields under the revised Home Mortgage Disclosure Act (HMDA) rules, the CFPB does not intend to require data resubmission unless data errors are material, and does not intend to assess penalties with respect to errors in the data collected in 2018.

As we reported previously, in October 2015 the CFPB adopted significant changes to the HMDA rules that significantly expanded the amount of information that must be collected and reported, and the institutions that are required to collect and report data. Most of the data collection changes are effective January 1, 2018. In announcing the approach to enforcement, the CFPB acknowledged the significant systems and operational challenges faced by the industry in implementing the changes.

The CFPB also noted that any examinations of 2018 HMDA data will be diagnostic to help institutions identify compliance weaknesses, and indicated that it will credit good faith compliance efforts. This approach was expected by the industry, as it is consistent with the approach taken by the CFPB with the implementation of other significant mortgage rules. The FDIC and OCC also issued similar statements.

Significantly, the CFPB also announced that it intends to engage in a rulemaking to reconsider various aspects of the revised HMDA rules, such as the institutions that are subject to the rules, including the related transactional coverage tests, and the discretionary data points that were added to the statutory data points by the CFPB.  While the industry has pressed for a reconsideration of various requirements, and the Trump administration has signaled it was receptive to considering changes, this is the first public announcement by the CFPB that it will reconsider the revisions made to the HMDA rules.

The FRB recently hosted a fair lending “hot topics” webinar in conjunction the DOJ, HUD, CFPB, FDIC, OCC, and NCUA. The seven agencies discussed fair lending developments, including the revised HMDA reporting requirements, compliance management for consumer loans, and various issues related to fair lending complaints, investigations, and enforcement.

HMDA and Revised Regulation C:

Eric Wang, Deputy Fair Lending Director of the CFPB’s Office of Fair Lending and Equal Opportunity, emphasized that the CFPB is currently updating its HMDA exam procedures and that the industry should be “on the lookout” for the revised “Getting it Right” guide. He noted that the new HMDA requirements expand reporting to include 48 data elements (from 23, of which 14 have been modified), and 110 data fields (from 39). Addressing industry outcry, Wang confirmed that file resubmission will not be required based upon overall error rates. Instead, resubmission will be required where the error rates of individual fields exceed applicable thresholds. The new data resubmission guidelines also include error tolerances for certain data fields.

Wang stated that the Bureau’s 2018 examinations will prioritize whether entities have made “good faith efforts” to comply with revised Regulation C. Good faith may be shown by the creation of an implementation plan or updates to policies and procedures. Wang reiterated that after the revised rule takes effect, the Bureau’s role will be “diagnostic and corrective, not punitive;” however, he refused to confirm whether the CFPB will use all HMDA data fields in its examinations. He stated that the CFPB has not prioritized “key fields” because it “would like to maintain the flexibility to examine all HMDA data fields [for] accuracy.” Vonda Eanes, Director for CRA and Fair Lending Policy at the OCC, confirmed that all agencies will have access to all HMDA data and, despite the OCC, FDIC and FRB joint guidance prioritizing 37 “key fields,” the OCC “expects to leverage all the additional HMDA data fields” in its fair lending risk analysis.

Notably, the panel failed to clarify the impact of Regulation C’s changes upon lenders’ CRA obligations. Although cautioning that no final decision has been made, Eanes confirmed that the OCC, FRB, and FDIC are considering the issuance of interagency guidance that recognizes the expanded mandatory reporting in revised Regulation C. In particular, for lenders with a sufficient number of originations, the reporting of open end lines of credit is no longer optional. Additionally, the definitions of dwelling, reverse mortgage, and manufactured home have changed. Reporting under the new HMDA data elements is required for applications on which final action is taken on or after January 1, 2018, except that for applicant demographic data the institution has the option to report under the requirements in effect at the time of application or under the 2018 rule requirements regardless of when the application was taken.

Indirect Auto Finance:

Matthew Nixon, Program Director of the NCUA’s Office of Consumer Financial Protection and Access, refused to state whether the NCUA will focus on any “hot topic” fair lending issues in 2018, but noted that it anticipates examinations will reflect the agency’s current focal points—45% related to specific concerns noted by district examiners or regional offices, 20% related to pricing disparities, 30% related to HMDA data integrity, and 5% related to follow-on work from the previous year. When prompted during the question and answer segment, NCUA noted that examinations are risk focused and indirect auto lending programs are reviewed on a case-by-case basis according to the entity’s risk profile (which includes compensation structure, complaints received, input from the district examiner, and oversight and monitoring practices). The NCUA noted that virtually all exams included cursory review of indirect auto lending programs, but only about 10% resulted in more intensive review.

Compliance Management for Consumer Loans:

Katrina Blodgett, Counsel in the FRB’s Fair Lending Enforcement Section of the Division of Consumer and Community Affairs, noted that the FRB engages in risk-focused supervision and expects that an entity’s CMS provide oversight commensurate with the level of pricing discretion provided by each consumer loan program. The FRB expects that an entity clearly communicate the basis for any exceptions offered to its loan officers, including waiving, reducing, or increasing fees. Blodgett encouraged the use of rate sheets to track all exception variables and advised that rate sheets should be reviewed as part of monthly compliance meetings. Moreover, loan officer training should include the proper use of rate sheets. Tara Oxley, Chief of Fair Lending and CRA Examinations at the FDIC, emphasized that fair lending monitoring programs should be conducted portfolio-wide and only limited to a branch-specific analysis where policies and procedures differ across branches. According to Oxley, an entity’s review must include an analysis of its lending data and its pricing exceptions and overrides, regardless of entity size or complexity.

Investigations and Enforcement:

Jacy Gaige, HUD’s Director of the Office of Systemic Investigations, reviewed the agency’s roughly 1,000 fair lending complaints in 2016. Gaige noted that the most common policy-related complaints involved requiring cosigners or unnecessary documentation for applicants with disability income, such as a doctor’s note that a disability is likely to continue. Gaige emphasized that lenders may face FHA liability where unclear policies and procedures create confusion or delay regarding application requirements or where extra help (friendlier service and quicker callback times) are provided for some individuals as compared with protected classes.

With parental leave, HUD has found that lenders have been impermissibly requiring a parent to return to work before income may be counted or impermissibly requiring a letter that an employer expects the employee to return to work. Lenders have also made statements that applicants may change their mind about returning to work or that many people do not return to work after having a baby. Gaige noted that in these situations, elevated damages may be available on account of the emotional distress associated with an early return to work.

Common complaints also included allegations that lender policies allow investor loans for small rental properties but not for group homes (which often include persons with disabilities), prohibit lending on Native American reservations, prohibit lending to those persons with less than $500,000 or more in collateral, or prohibit lending in a specific community based on the false perception of the prevalence of fraud. Novel complaints include lenders’ use of social media to target specific geographic areas or individuals (including use of a network’s parent/non-parent designation).

Marta Campos of the DOJ Civil Rights Division provided no indication of what new direction, if any, the DOJ will take in 2018. Her comments were limited to the BancorpSouth Bank joint investigation with the CFPB, which settled in June 2016. In response to a public question highlighting the dated settlement, Campos stated that there “may be” similar cases coming down the pike. She noted that lenders’ CMS programs should be able to detect similar redlining and underwriting red flags identified in Bancorp.