The Road To HMDA Implementation

HMDA is not the same as TRID; lots of testing and training will be needed.

Reprinted with permission from the October 2016 issue By Alice Alvey The need to collect accurate data for the Home Mortgage Disclosure Act (HMDA) is buried deep beneath the pressure to close loans on time. It’s a common afterthought and also a misconception that data can be fixed later if it isn’t right the first time.

Planning for an accurate HMDA re¬port with 26-plus new and changed data fields requires a plan with dead¬lines that are hard stops. There are three key differences between implementing HMDA and implementing the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rule. First, a TRID disclosure can be reissued or the lender can pay a cost to cure. These options, as well as the ability to bring the data back into compliance, are identified before the loan is closed because multiple people and systems are checking and comparing the data.

Comparing TRID and HMDA
When TRID took effect on Oct. 3, 2015, lenders realized the process didn’t completely disrupt their operations. They had time to cure and continue to adjust for the first 30 to 60 days while loans were in process.

The second difference is that one of the major pain points in TRID is getting the final disclosure to be in compliance with the initial disclosures. This major pain point didn’t apply to unclosed loans. HMDA applies to all loans.

The third and most important difference is that TRID rules are based on calculations, numbers, names and dates. These factors are not subject to nuances in a process. Accurate HM¬DA reporting goes well beyond these field-level facts and calculations. It includes an interpretation of a scenario by comparing a series of events.

These events include comments in emails and conversation trackers that require human understanding of a company’s specific practices.

What follows are the main factors that will impact HMDA reporting: The procedures used to trigger an Equal Credit Opportunity Act application when a TRID application is not triggered;
  • Whether the company has a pre-approval program as defined by Reg. C;
  • The company’s pipeline management procedures for loans not submitted to underwriting;
  • If any policies require a specific legal opinion as support;
  • Wholesale versus retail procedures; and
  • Company procedures for adverse action loans.

As of Jan. 1, 2018, every procedure must be conducted accurately to ensure all new fields are recording correctly, unless you are a fan of scrubbing data after the fact. The following charts offer a quick refresher of the key dates and their institutional impacts.

To put this into perspective, a firm needs to consider these milestones sooner rather than later based on the size of the organization, loan origination system provider support, current condition of HMDA reporting and lessons learned during TRID implementation.

How long should it take for final testing?
Testing to ensure one line of data makes it to the report correctly should be the easy part. Checking for all combinations of the data showing correctly on the report will take time.

Test one line of data against the actual loan documents to determine the baseline time required. Then, add up the number of possible scenarios based on the number of products, including types of purchasers, investors, “action taken” options and variables in the interest rate lock policy. Multiply the time required to complete one test by this total. Be sure to count each investor and purchaser as an independent scenario. Minutes add up quickly, compounding into days and weeks.

The testing must include a review of the team’s ability to follow the new procedures. It is reasonable to expect that follow-up training will be needed. Allow an additional 30 days for every 100 employees to make corrections. This assumes there are two trainers for every 100 employees and the training content is already available.

Based on the aforementioned milestones and general measuring techniques, the final testing and corrective action training components will take three to five months to complete for even the smallest companies.

What procedures should be considered in testing?
Data, as well as procedures, must be tested. Of course, every change must be tested. One new field to watch out for is interest rate. This should be a straightforward piece of data on a closed loan and no problem to add to the new report. However, it opens up a novel issue of checks and balances required for unclosed loans. The new rule requires reporting of the inter¬est rate at account opening when the closing did not occur.

This means prequalifications with a property address need to be very clear about the lock status from day one. This can be a grey area when a client chooses “lock” or “float” from a Web application and then changes his or her mind during the initial days of the loan process. In other cases, the paperwork may be lagging by days and changed by the applicant but the date of application still remains the same. Review the data, looking for gaps between the dates on the interest rate lock policy and other factors. Different scenarios need to be reviewed and considered, including the difference between the system and the documents and new construction loans.

datacollectiontableLoans that don’t close will need extra time to test the various adverse action possibilities, as well. These loans require checking multiple documents in the loan file, as well as conversation logs, plus other data and dates shown in the system. This can take as little as three minutes or as long as 30 minutes per loan, based on data collection practices today. Because there are new fields and new procedures impacting adverse actions, expect the time to double, per scenario, under the new rule.

These estimates assume a well-qualified group of people are handling the testing and understand everything that can go sideways during processing and pre-closing. This is not a job for temporary staffing or current associates from other departments.

When should training start, and how should it be delivered?
The first group to be trained should be the compliance team. It will need to “kick the tires” on every scenario. Then, it will need to develop the content and test it again. Training should not be provided so far in advance of the implementation date that the sales and operations team does not remember the original details.

Webinars are great to kick off the concepts and highlight the company’s rollout plan. The CFPB has started publishing webinars that are geared toward compliance officers. Lenders will need to redesign the content to streamline it for each job role. E-learning delivered via out-of-the-box solutions created by various education companies can cover the basics of the rule.

In all cases, lenders should add e-learning that is customized to match their procedures and systems.

The chance for errors is high
For every 100 loans, there are at least 2,700 fields where an error can occur. When 2018 reporting begins, this will increase to 5,000 fields per 100 loans. Compounding the number of fields are simple procedural mistakes that cause the number of loans to be incorrectly reported. This is solved by having solid pipeline management procedures to eliminate the risk of duplicate loans – or loans that miss the report or appear on the wrong report.

Lenders should get their procedures written this year and test current HMDA data against the new rules. This will create a solid road map for the changes needed to ensure everyone is ready at the starting gate on Jan. 1, 2018.