Still Reeling from New Disclosure Rule, Lenders Fear HMDA Reporting

WASHINGTON — Though the deadline for compliance is more than two years away, lenders are already warning that they do not have enough time to comply with a new rule that requires institutions to report additional data to regulators on home loans.

The Consumer Financial Protection Bureau finalized the Home Mortgage Disclosure Act rule last month, saying lenders do not have to begin gathering the additional data until January 2018. But observers said coming into compliance within two years is not as easy as it sounds, particularly after many lenders struggled to implement new integrated mortgage disclosures that took effect last month.

"Part of the bureau's initiative with HMDA was to modernize the submission of the data which, at least in my opinion, was called for. But that means, similar to [TILA-Respa integrated disclosures], that the old way of doing business on loan origination platform is going to be very different," said Donald Lampe, a partner in the financial services group at Morrison & Foerster. "The new HMDA rule requires system upgrades and changes in the use of a data-driven system. In that sense, it's TRID déjà vu."

The new HMDA rule adds 25 new data points and modifies 14 others in addition to the existing 9 data fields that were already required. Lenders must also begin reporting data on other types of loans like reverse mortgages and home equity lines of credit for the first time.

In the final rule, the CFPB gave an additional year than an earlier proposal for lenders to get in compliance with HMDA. The agency also reduced the number of small lenders required to report HMDA data, among other efforts to relieve the regulatory burden.

"The effective date for most provisions of the HMDA rule is January 2018, giving lenders 26 months of lead time for implementation, after the effective date of the other recent major changes," said Sam Gilford, an spokesman for the CFPB. "We also released some materials with the HMDA final rule to assist the industry in rapidly understanding the contours of the new rule, and are planning additional supportive material for the industry as it prepares to implement the changes in data collection."

Many in the industry said they were relieved by these changes in the final HMDA rule. But the timing of both the HMDA rule and Truth-in-Lending-Real Estate Procedures Act Integrated Disclosure rule, which took effect Oct. 3, is important because the disclosure forms in TRID are part of what's required to be reported in the new datasets for HMDA. Even though lenders have two years to comply with HMDA, the longer they take to comply with TRID, the shorter time they have to get their systems ready.

"It's really a matter of the timing and how many resources lenders have to deploy while banks are still trying to figure out how to close loans under the new TRID requirements," said Richard Horn, who runs his own law firm after having worked at the CFPB on the TRID rule. "I know some lenders and vendors are not prepared or haven't implemented TRID even though the deadline has passed."

Though the CFPB has repeatedly said it would be sensitive to lenders that made a "good faith effort" to get in compliance with TRID, industry representatives and some lawmakers continue to push the agency for a more formal extension.

On Oct. 28, several rural lenders encouraged lawmakers on the Senate Banking Committee to force the CFPB to extend a grace period for TRID because some of their vendors are not in full compliance. A bill to mandate a 5-month grace period has already passed the House.

"A three- to six-month delay would be phenomenal," said Terry Foster, chief executive of the $135 million-asset MCS Bank in Lewistown, Pa., during the hearing. "The vendor application is our biggest fear right now. We're so reliant on our vendors."

CFPB Director Richard Cordray has appeared sympathetic to lenders' problems with the TRID rule but came down hard on vendors during a speech Oct. 19 before the Mortgage Bankers Association.

"Quite frankly, I have been disturbed by reports I have been hearing about the vendors on whom so many of you rely. Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date," Cordray said. "It may well be that all of the financial regulators, including the Consumer Bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace."

Gilford said early reports on TRID's implementation "are promising" and the CFPB will continue to support implementation through written guides, webinars and other outreach. At the same time, the CFPB also tried to streamline the reporting process for HMDA in coordination with other regulators on the Federal Financial Institutions Examination Council (FFIEC) as well as the U.S. Department of Housing and Urban Development (HUD).

"As described in Director Cordray's remarks, we worked to find ways to reduce burden on industry and streamline and modify the reporting requirements," Gilford said. "This includes relieving, in 2017, an estimated 1,400 depository institutions from their current reporting requirements, and working with the FFIEC and HUD to modernize the data submission process."

Still, some observers questioned why the CFPB finalized HMDA before the TRID disclosures had time to work through systems and regulatory reporting.

"There's no statutory requirement that HMDA be issued by a certain date so the CFPB could have used these resources to ensure TRID, perhaps the single biggest change to the mortgage industry in decades, was being implemented correctly before finalizing HMDA ," Horn said. "This would have given industry some breathing room to deal with any CFPB TRID updates or interpretations, and software changes. It also would have helped the CFPB to identify some efficiencies by first learning about how TRID has affected the market."

But there is also a heightened pressure for the CFPB to get HMDA finalized sooner rather than later since the financial regulators use that data to spot mortgage trends and problems with lenders. Congress required a major overhaul of the HMDA data through the Dodd-Frank Act after the financial crisis.

To be sure, some said the system changes required by the HMDA rule are not as sweeping as those required by TRID. They said two years is enough time for lenders to comply. But that also depends on whether the lender has already been reporting HMDA data to the regulators or is a nonbank entity that must now report under the new rule for the first time.

The CFPB changed the threshold of mortgage loans that would require a lender to report the data annually. That reduced the number of banks that were reporting HMDA data, but it also increased the number of nonbank lenders that will have to report mortgage data.

The CFPB estimates there will be 75 to 450 nonbank lenders covered under the new HMDA rule that did not have to report the data before.

"From my perspective, TRID was larger than HMDA, so depending upon where you are at as a lender, it may or may not be as large of a change," said Richard Hill, vice president of industry technology at the Mortgage Bankers Association.

For entities that didn't have to report before, "that's a fairly significant effort," Hill said. "There are a good amount of changes; there's no question about that. But somebody who knows they have to report annually at least knows how to comply and typically will have had some experience with it. They will be in a better position to adapt to the new reporting requirements."

It also seems unlikely that the CFPB would further extend the HMDA compliance deadline as it has several times with TRID. Unlike TRID and most rules, HMDA requires a year of data gathering which means any further extension of the compliance deadline would push out the reporting deadline to regulators by another year.

"HMDA is a one-year cycle so the data has to be collected and submitted for annual reporting. So if the CFPB were to extend the effective date, the regulator would have to push off the date it receives the data for another year, which would be an issue," Lampe said.

While enforcement of the new HMDA rule is more likely to occur after 2019 when lenders begin reporting the additional data, Lampe said it is possible that examiners could scrutinize whether a lender was properly gathering the new data in the prior year.

"There may be instances from 2018 exams where examiners tell lenders that they don't have the proper tools in place to report the data correctly," Lampe said. "So getting ready by 2018 is very meaningful."