Proposed Changes to Mortgage Rules Require Financial Institutions to Disclose More
On February 7, 2014, the Consumer Financial Protection Bureau (CFPB) proposed a series of changes to improve the Home Mortgage Disclosure Act (HMDA). Rather than providing these changes outright, the CFPB announced that it will organize a Small Business Review Panel to give feedback on the most effective ways to improve HMDA reporting, and comments were accepted through October 22, 2014. In addition, the CFPB will be seeking similar feedback from industry and consumer groups that may be impacted by changes to HMDA regulations.
Enacted in 1975, HMDA requires financial institutions to disclose certain data regarding the loans they provide to borrowers. Although the original goal of HMDA was to ensure that financial institutions were providing access to credit and serving the needs of the public, over time the regulations became more focused on discovering and preventing patterns of lending that would discriminate against certain groups of borrowers.
As a result of the recent mortgage crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) assigned HMDA rulemaking authority to the CFPB.
While HMDA currently requires financial institutions to report information such as property location, loan purpose, and the race, ethnicity, and gender of borrowers, the Dodd-Frank Act requires the CFPB to expand HMDA reporting to collect additional data, such as total points and fees, and the difference between the APR and a benchmark rate, along with any other data the CFPB determines to be necessary. Through these changes, the CFPB hopes to help financial institutions provide more comprehensive information, which will allow regulators to more effectively monitor and improve the mortgage market.
The CFPB’s proposal would expand the types of transactions subject to HMDA, although unsecured home improvement loans would no longer need to be reported. Under the current rule, you must report home purchase, home improvement, and refinancing — home-equity lines of credit are optional.
The proposal would generally require financial institutions to report all closed-end loans, open-end lines of credit, and reverse mortgages secured by dwellings. Unsecured home improvement loans would no longer be reported. Loans on unimproved land and temporary financing would continue to be excluded from HMDA reporting.
The CFPB is seeking feedback on a variety of new HMDA reporting requirements that are mandated by the Dodd Frank Act:
- Capture and report certain total points and fees, and rate spreads for all loans. This requirement will help regulators get a better sense of how much borrowers are actually paying for their loans, as well as understand risk factors and pricing outcomes for borrowers.
- Report certain loan features that may be risky to borrowers. These include teaser rates, prepayment penalties, and non-amortizing features. This data will help regulators monitor any detrimental effects that result from these features.
- Report information that will help regulators keep track of the personnel involved in each transaction. Lenders will be required to report the unique identifier for the loan originator (and a unique identifier for each loan itself), and additionally report if a mortgage broker was involved in the transaction.
- Report property values. Because of the critical role that property values play in the decision to lend, this information will help regulators understand certain acceptance and denial decisions, and will create an overview of local markets.
- Report borrower age. This requirement will principally help identify and prevent unfair lending practices aimed at the elderly, to whom dishonest lenders may offer unfavorable loans.
- Track borrower credit scores. This information will help explain certain rate disparities, as well as denial decisions.
Additional data points under consideration
While the CFPB is required to add certain information to the HMDA reporting requirements, the Dodd Frank Act allows the CFPB the discretion to require the reporting of other relevant data as well. Although these additional points have yet to be determined, the CFPB is asking for comments from the Small Business Review Panel on a variety of possibilities.
One possible addition to HMDA is to have lenders report the reason for denial in all denied loans. Although certain lenders are currently required to provide this information, it is still optional for most institutions. The CFPB would like to make this requirement universally applicable to ensure that similarly situated applicants are treated in a consistent manner.
The CFPB is also proposing to add debt-to-income (DTI) ratios to HMDA data. Under current regulations, financial institutions must assess a borrower’s DTI when underwriting a loan and determining the borrower’s ability to repay, and a high DTI is a common reason for denial.
The CFPB believes that requiring DTI reporting would help regulators gain a better understanding of denial trends.
Another possible requirement is the disclosure of whether or not a lender determined that a loan was a “qualified mortgage,” which would have to comply with the CFPB’s Ability-to-Repay Rule.
The basic features of a qualified mortgage are:
- The total points and fees charged to the borrower are less than or equal to 3 percent of the loan amount (for loan amounts less than $100,000, higher percentage thresholds are allowed)
- There are no risky features such as negative amortization, interest-only, or balloon payments
- The maximum loan term is less than or equal to 30 years.
As this is a recent regulation, effective as of January 10, 2014, reporting qualified mortgage status would help regulators determine the effectiveness of the Qualified Mortgage Rule.
While the Dodd-Frank Act modified HMDA to mandate the reporting of each borrower’s loan-to-value ratio, the CFPB is considering whether to further require the reporting of combined loan-to-value ratios. These ratios are important in a lender’s decision to offer a loan, as they disclose more broadly the combined unpaid principal balance of multiple loans that the borrower holds against the value of the property.
Automatic underwriting systems
The results of automatic underwriting systems, which make loan decisions based on algorithms, are also a consideration for HMDA. Tracking the use and results of such systems could help detect errors, and could determine how they affect loan decisions as compared to manual underwriting.
As previously mentioned, the Dodd-Frank Act mandates that the total points and fees, as well as rate spreads, will become mandatory HMDA data. However, the CFPB is considering requiring the reporting of more detailed pricing information, in an effort to identify discriminatory lending patterns and reduce “false positives” when making comparisons.
For instance, it may require that lenders disclose their total origination charges, as will be calculated on the closing disclosure, which would include certain charges that would not be included in the total points and fees, such as bona fide discount points.
The CFPB is also considering a requirement for lenders to disclose each borrower’s pre-discounted interest rate. This information may be useful to allow a comparison between the base rate and discount points paid, to the final risk adjusted rate that the borrower actually receives.
Affordable housing programs are another area that is under consideration. For multiple unit dwellings, the CFPB believes it might be useful to require a disclosure of whether or not the property is deed restricted for affordable housing. This information would allow for an examination of disparities in access to credit among different communities, and could help to better direct public resources.
Finally, the CFPB is considering requiring lenders to report more detailed information about loans for manufactured housing. Currently, lenders must disclose whether a loan is for a manufactured home. The CFPB believes that additional data, such as the type of financing and whether the borrower will own or lease the land, will help identify the sources of disparities in denial rates, and will help regulators learn more in general about financing for manufactured housing.
The CFPB is reviewing current HMDA reporting requirements, and looking for ways to make it easier for lenders to record and report their data. It would like to standardize and streamline reporting. As many lenders are already collecting the same type of information in similar ways, the CFPB wants to create HMDA reporting requirements that closely resemble the standards used by the majority of the mortgage market. It believes that this would improve both consistency and the quality of the information reported.
Under current regulations, financial institutions that meet various criteria must submit HMDA data annually, regardless of how many loans they close. However, nonbank mortgage lenders are only required to report their data if they close 100 or more loans. Because of this discrepancy, the CFPB is considering a new standard that would require all financial institutions to report HMDA data if they close 25 or more loans in a given year.
Finally, the CFPB is considering developing online HMDA data entry software. By providing a simple and accessible uniform system of data collection, it wants to provide financial institutions with a more convenient and streamlined way of reporting of their data.
It is unknown when the final regulations will be issued for the proposed changes.