Practical Tips for HMDA Week 1
When regulatory requirements impact strategic or management action, our goal is to help business leaders make well-informed decisions.
New Year, New HMDA, What Now?
So we’ve started to collect 2018 HMDA data…or at least you should have. But all those hours preparing the front line for HMDA collection were only the beginning. 110 data points per application, flowing in from commercial, consumer, and residential departments on multiple loan types, often using multiple software systems. Now—what is your plan for verifying the accuracy of this data?
This is not only a question of ensuring the quality of HMDA data, but taking advantage of the influx of loan-level data to improve processes, procedures, and lending initiatives within the FI.
My dad always likes to joke “gravity isn’t just a good idea, it’s the LAW.” Well in this case, HMDA isn’t just the law, its also a good idea.
As with all compliance mandates, we are obviously required to meet the regulations set forth. In the never-ending search to increase profitability and efficiency, I view compliance not as a cost center, but as a good excuse to improve the business. We must internally evaluate operations for regulatory compliance—why not also evaluate procedure for efficiency? Two birds, one stone … pick your cliché.
HMDA Data is No Big Deal Anymore … (myth?)
After the CFPB announced it would not enforce penalties on HMDA for 2018, some might erroneously think HMDA has been effectively “de-risked” from a compliance standpoint. While it remains true that CFPB intends not to levy penalties, they did hedge against that point with the inclusion of “good faith efforts” in their Dec 22 announcement. (see last week’s blog for my thoughts on issue)
This may lead some to conclude that ongoing HMDA training, procedure review, and detailed HMDA scrubs are not worth the cost. After all, we just have to really try to be right, and we’ll be safe from penalties, right? Diagnostic exams mean the CFPB will help me fix my HMDA procedure … so shouldn’t we just coast on the work we’ve done already, and not spend time fixing HMDA in 2018?
For multiple reasons, NO!
Removing penalties for HMDA does not remove the key function of HMDA in enforcing fair lending principals. HMDA, particularly with the inclusion of the new fields for 2018, is a record keeping statute that creates data the government can use to demonstrate a failure of a FI to lend fairly.
My Advice: Have Fun and Get Creative
Ok, let’s be real—the pressure is somewhat off for HMDA. For those in compliance functions who “get it” (is there a handshake or something? Nobody filled me in, but I think we’re all here for the same party…) we can feel comfortable innovating with knowledge that a “good faith” safety net exists.
You need to put yourself in the position of regulators with regard to your HMDA data. How many different ways can you slice up your LAR to indicate discriminatory lending patterns (either rightly or wrongly)? On the other side of things, how can you use the data to identify under-served populations in your examination area and create targeted marketing for lending programs?
I don’t have a clear instruction on how to accomplish this; and if I did, would it truly be creative for you to employ it anyway? So I’ll just leave some thoughts, and hope to hear from you via email, or on Twitter @SCA_Spillane (I’m also working on getting our LinkedIn page more involved, so if anybody has tips send ‘em over). Commence Random Thought Paragraphs ("RTP", wonder if I'll ever use that again, kinda like it):
I’m interested in using HMDA data to identify flaws in training, procedure, or staffing issues. For example, the inclusion of NMLS # on HMDA files allows more detailed benchmarking of LOs. One metric that I assume (with no basis whatsoever) would indicate a re-training need would be variance in the percent of applicants reporting demographics depending on LO. There are plenty like this.
Spend time looking at those data points that are “interesting.” That changes depending on the day for me, and the role I try to put myself in. Points with increased discretion and/or judgement required by the LO are often the best indicators for re-training. They are also highest risk points in my opinion,
Follow the incentives. In this case, the incentive is time saved. Referring back to the first bullet, the most often cited reason (in my non-scientific survey) for an LO to have a higher percentage of her applicants “decline to provide” demographics is they simply didn’t ask the questions of the applicant, and marked it as such. There really isn’t a great safeguard against this, except to trust your culture, and monitor/audit/test appropriately. The LO doesn’t ask because a) it takes time, and/or b) it leads to awkward conversations, in which case see “a”.
Talk it out! This really is a chance to have some fun and use what seemed like a burden for the past few years as an opportunity to improve institution wide. Use the data in as many ways as you can, spend time discussing how you can use it, and don’t be afraid to get creative.
Bring in a consultant: shameless plug for the activity that keeps me employed. But seriously, many consultants spend hundreds of hours on one element of HMDA, time you don't have and could better spend elsewhere. Email me with questions, I'm happy to answer quick ones within a day or two on HMDA. goberg@scapartnering.com
Last Comment …
One key risk area that presents from the declination to enforce penalties comes from the fact that lenders will not be required to resubmit data unless errors are “material.” (that “good faith” safety net feels even stronger when backed up with “material”, huh?) The issue first is “what is material?” Does this lower or raise the bar for what we need to correct and resubmit? Can we see a scenario where data deemed ‘immaterial’ to HMDA for the purpose of resubmission gives rise to, in aggregate or individually, fair lending concerns? I honestly haven’t fallen down this rabbit hole yet, but there’s something interesting here. Reading FIL-36-2017 now.
… and an Off-Topic One.
He asked me not to make a big deal of it, but I’m sure some of you have noticed the absence of Mr. Ben Giumarra’s smiling face (and floating white veil—h/t Rich Jackmauh for pointing that out, I’d never seen it before somehow) at the top of this newsletter.
Well ... our friends at Embrace scooped him up, and they got a hell of a guy, and a great attorney to lead legal and regulatory efforts.
Congrats on the new position Ben, I know you’ll crush it. You’re a great mentor and friend to me, and I know we’ll be working together on some fun stuff soon.
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.