How Will New HMDA Reporting Requirements Change the Way we Think About Broader Issues?
A look ahead to the issues we'll face after the new HMDA Rule takes full effect.
We know that the number of HMDA fields that will be required now will soon significantly increase. We can all predict the struggles we'll have in simply reporting correctly. But what can we predict will happen once regulators actually receive all this additional information?
Well, let's consider one of the new fields in particular: Age. (And to give credit where credit is due, this is a question raised in last month's MMBA compliance committee meeting by Brian Bacci.)
Under the new reporting requirements, regulators will run statistical fair lending analyses using Age as a factor for the first time. Currently, if we make too few loans to African Americans, or Females, or Hispanic Americans, (data we currently report) regulators will use those statistical tools to make us face the music. In the future, will we be worrying more about serving different age groups?
Of course, some would say the CFPB itself doesn't have the best track record with age discrimination. But I'm sure that won't be a helpful response in our next audit.
I'll be the first to admit this does not feel like an imminent concern. But it seems interesting ... So I suppose we will have to look at age discrimination the same way we look at racial, gender, or other types of discrimination at some point in the future. What would that look like?
Now, I'm assuming your institution isn't openly and intentionally discriminating based on age (e.g., Bank policy discourages lending to "borrowers over 65 who are slow and clog up the teller line" or "borrowers ages 18-30 must meet higher underwriting standards due to the likelihood of their influence by the punk rock and video game subcultures") (a/k/a Overt Discrimination). When most people get in trouble, it's because they're applying a neutral policy equally to all consumers that happens to have an unintentionally discriminatory impact on a protected group of persons (the regulators call this Disparate Impact).
The classic example of a Disparate Impact is a minimum loan amount. Just because the Bank's policy not to lend under $100,000 at a time seems neutralon its face, and does apply equally to everyone, this is likely todisproportionately affect members of a protected class. Absent a legitimatebusiness reason why we'd limit lending to a minimum of $100k, this policydecision will violate fair lending laws.
Let's look at a little case study to imagine a question that will arise nowthat we report Age ...
Example - Assume 10% of loans are made to borrowers above 65 years ofage but that the population of our lending area is 40% persons over 65.Assume also that we do not offer any reverse mortgage products, whichwould increase lending to this over-65 category.
Question - Is the decision against offering reverse mortgage loans an otherwise neutral policy that applies equally to all consumers yet disproportionately burdens certain persons on a prohibited basis? In other words, does this decision have an unlawful disparate impact based on age?
Analysis - End of the day, I think we win this one. We will need to prove that the decision not to offer reverse mortgages is "justified by business necessity." Here we look at cost and profitability. I think we can legitimately say that reverse mortgage lending, done ethically, requires significant additional expertise and expense that very realistically might not be profitable.We're not required to lose money to avoid violating fair lending rules. If we can prove this, we can prove it's not a fair lending violation, even if it does happen to have a disparate impact on senior consumers.
**This is just an example of how increasing the number of HMDA fields will affect more than just our reporting requirements. Maybe this particular example is a stretch. But Age is just one of the approximately 25 new HMDA fields. So what else will change?**
In Other News:
Read Richard Cordray's response to community bankers here. "As I have expressed in the past, the Bureau recognizes that community banks and credit unions did not cause the financial crisis."
Rhode Island suing to get rid of an old Russian submarine removed from Providence waters after it sank in a storm in 2007 (previously used on the set of a Harrison Ford movie).
Yesterday some friends and I had a conversation regarding how to maintain profitability despite rising volume. Of course, you offer overtime, bring in temps (to the extent you can), and sometimes outsource services like SCA offers, such as appraisal and credit review. Naturally you've made permanent hires, although fewer than you would if you were in a more stable industry than mortgage banking (because the only thing worse than being under staffed is being over-staffed).
Nobody in this conversation was so naive as to think there's any kind of magic bullet. There's a dedication to training people, to a strong culture of team work, and an insane level of attention paid to efficient processes. I actually don't mean to help with any of these big topics, but this did lead to one smaller thought. How much time have you spent lately with compliance related matters?
Ad nausea um we hear of the "landslide" or "avalanche" or "never-ending"new regulations and how we need to comply with all of them. And fair enough. But how often do we make it harder for ourselves than we need to?How often do we have an e-mail chain with 10 executives dating back 2 months discussing one small issue within a set of huge new requirements?
Step 1 in being good at compliance is being compliant; but step 2 is doing it quickly. And Step #2 is almost as important; we need to provide clear and tangible guidance to employees in a timely manner - otherwise compliance requirements will slow our processes down dramatically.
"The United States is definitely ahead in the culture of innovation. If someone wants to accomplish great things, there is no better place than the U.S."
- Elon Musk
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful
- please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**