We are entering the last quarter of 2019, and now is a perfect time for compliance professionals to reflect on the changes we’ve seen so far. Here are five fair lending lessons learned this year.
As Q4 2019 approaches, now is perfect time to reflect on some of the lessons learned this year. In particular, we’ve seen lots of changes in Fair Lending compliance.
What are the takeaways? Here are the 5 Fair Lending lessons learned in 2019.
1. HMDA Data Collection and Transmittal Remain Challenging.
HMDA transmittal was a key Fair Lending compliance challenge in 2019, in part because so many of the systems and requirements were new.
Compliance officers reported challenges with collecting the HMDA data, scrubbing it, getting it into the HMDA LAR format necessary for transmittal, and actually submitting the data via the new HMDA Platform.
We also saw a $1.75M settlement between a mortgage company and the CFPB over the company’s HMDA data collection practices in 2019. This consent order alleged that the mortgage company filed false HMDA data, sometimes intentionally.
More specifically, the consent order said that the mortgage company "submitted mortgage-loan data for 2014, 2015, 2016, and 2017 that contained errors in violation of the Home Mortgage Disclosure Act (HMDA), 12 U.S.C. §§ 2801–2810, and its implementing regulation, Regulation C, 12 C.F.R. pt. 1003."
This $1.75M consent order for filing inaccurate HMDA data is one of the largest of its kind.
Did you know we offer a HMDA transmittal solution?
While we expect the HMDA transmittal process to be easier in 2020, there will also be some continuing challenges.
The so-called Good Faith Provision was in place in 2019, but it remains to be seen if that will be honored in 2020. This was the year for financial institutions to iron out the wrinkles in their HMDA data collection and submission process. If you have not yet made that a priority, now is the time to do so.
2. HMDA Data is Different, and Arguably More Important, Than Before.
With the new HMDA final rule in place, the entire landscape of HMDA compliance has changed. Some of the most important changes are related to the HMDA data.
First, there are many more data fields. In addition, lots of data is now public for anyone to look at. Finally, the ability to benchmark – this year and historically – has changed.
There are 48 new or expanded HMDA fields, which will allow for deeper analysis. The new data fields include: credit-related factors like LTV, DTI, and credit score; pricing-related factors including rate spread, lender credit, discount points, origination charges, interest rate, and total loan cost; HELOCs; NMLS IDs; and address.
While not all of this data is publicly disclosed, much of it is accessible to the regulators and will be used in prioritizing institutions for examinations.
In addition, some of this additional data is being released. That means that not only can regulators and your internal team analyze the HMDA data in more depth, but so can community activists and consumers. Check out this recent blog post to read more about the impact of HMDA data being public to community groups.
Finally, as mentioned above, the ability to benchmark HMDA data to peers and historical averages has changed. For one, the format of the 2018 HMDA data is slightly different than in years past. In addition, the actual data that is included in the 2018 HMDA LAR is different. That means that conducting year-over-year benchmarked analysis is more challenging.
As the FFIEC press release notes, “Caution should be used when comparing HMDA data across multiple years due to changes in HMDA definitions, values, and thresholds. Also, caution is required for certain geographic areas due to the changes in MSA and census tract boundaries and updates to the population and housing characteristics of census tracts, especially those that follow the decennial census and five-year updates based on the ACS data.”
3. Pricing and Underwriting Remain Key Areas of Risk.
Pricing and underwriting remain key areas of Fair Lending risk. Earlier this year a large bank was fined $25 million for alleged FHA violations related to pricing. The bank was also ordered to pay $24 million in remediation to impacted consumers.
We haven’t seen an underwriting-related enforcement activity this year, yet the CFPB is certainly focused on this area of Fair Lending compliance. In its 2018 Fair Lending report to Congress, released this summer, the CFPB noted it was paying particular attention to underwriting and pricing risk in student lending.
Meanwhile, expanded HMDA data creates opportunities for examiners and community groups to tell a story about your approach to pricing and underwriting—without a complete picture.
Access to credit is a hot topic in Fair Lending compliance, particularly Redlining. Redlining is one of the most high-profile topics in the conversation. It remains an area of constant scrutiny, from regulators, consumers, and community groups. If you aren’t already conducting data analysis to identify Redlining risk, it’s a good idea to consider it.
When looking into Redlining risk, examiners will consider:
CRA Assessment Area
Branch Network (including locations, hours, and ATMs)
Marketing and Outreach
Overt Statements of Discrimination
REMAs continue to be an area of confusion for compliance professionals. If you have REMA-related questions, you may want to check out this blog post.
In June, the CFPB settled with a regional bank over Redlining claims – the second Redlining-related settlement this year. While the settlement didn’t include a civil money penalty, it did include a long list of requirements, including spending hundreds of thousands of dollars in marketing and advertising to reach LMI communities, plus a $1.12M subsidy fund for predominantly African-American areas in their market.
Don’t forget to consider digital marketing and advertising practices, and how they may create digital Redlining risk.
5. Small Business Lending is in the Spotlight.
Small Business lending is back in the spotlight, after fading from view in recent months. More specifically, the CFPB is now re-considering the question of what data to ask for as it relates to small business lending to women- and minority-owned businesses.
The CFPB intends to begin work (again) on developing the rules necessary to implement section 1071 of the Dodd-Frank Wall Street Reform Act.
Are you still analyzing your Fair Lending data manually? If so, it’s time to consider a different approach. Here are the benefits of replacing a manual process with a software solution.
About Justin Smith
For 15+ years, I have worked one-on-one with more than 1,000 banks, credit unions, mortgage companies and auto finance organizations to implement and maintain compliance solutions. Today, I specialize in Fair Lending and CRA with data analysis, risk assessments, regression, and geospatial/dot density analysis. I'm the resident foodie in the TRUPOINT office. Something people might not know about me is that, before becoming a husband and father, I raced cars.