Revised HMDA Reporting Overview, Implementation and Planning March 2017 Kathy Keller, Managing Director, Regulatory Compliance, Newbold Advisors, LLC NewboldAdvisors.com
Agenda Overview of the New HMDA Reporting Requirements Implementation Considerations Planning for the Change Summary and Q&A NewboldAdvisors.com
Overview of the New HMDA Reporting Requirements NewboldAdvisors.com
Overview The Revised HMDA reporting changes impact more than data. It changes the who, what, how & when of HMDA reporting over the course of 4 years WHY? WHO? WHAT? HOW? WHEN? The change is significant. Your company should be well on its way to implementation by now. NewboldAdvisors.com 2
Overview Why and Who WHY? Avoid regulatory action and the bad press that comes with it. Dodd Frank dictates and CFPB desires more information around access to mortgage credit to create transparency for borrowers and accountability for lenders. Regulators will use the data to enforce fair lending laws such as the prohibition on disparate impact. WHO? 2017 - Scope of covered institutions has narrowed - A bank, savings association, or credit union will not report unless it meets the asset-size, location, federally related, and loan activity tests under current Regulation C and it originates at least 25 home purchase loans, including refinances, in both 2015 and 2016. 2018 - New standard test is primarily volume based. Must report if at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the two preceding calendar years. NewboldAdvisors.com 2
Overview What and How WHAT? Dwelling secured transactions In scope: Closed end loans, open ended equity lines of credit, reverse mortgages, chattel, multifamily. Out of scope: Unsecured home improvement loans and agricultural loans. Preapprovals Used to be optional in 2018, home purchase preapprovals not accepted will be required. Additional and Changed Data Legal Entity Indicator and Universal Loan Identifier. Demographic data Significant amount of additional new data beyond demographic including: credit score, AUS version, ULI, property value, application channel, points and fees, origination fees, MLO number etc. Changes to definition of some current data. HOW? CFPB implementing a new reporting tool that will use a new LAR file specification standard for reporting. Pipe-delimited versus comma-delimited. NewboldAdvisors.com 2
Overview - When WHEN? The rule is implemented over 4 years. It is critical to ensure that your plans consider these milestones. The plan must consider multiple deliveries of capability. There are 5 key milestones. Jan 2017 Jan 2018 Jan 2019 Jan 2020 Institutional Coverage Test Changes; Some small entities will no longer report 1 For loans that start in 2017 that have a Last Action Date in 2018, the new data set is reportable except for new demographic information (GMI). CFPB will allow for collection of the new demographic data, however, it is not required to be reported. Must have strategy for dual tracking for these loans as it will not be clear under which rule they will be reported. 2 Report Old Data to New Tool (new pipe delimited file format) 3 Begin Collection of New Data Set Including New Demographic Information 4 Report New Data to New Tool 5 Quarterly Reporting Starts for Larger Institutions NewboldAdvisors.com 7
Revised HMDA Data Application/ Loan Information Applicant Info Underwriting Information Loan Features/ Pricing Property Information Identifiers Existing Application Date, Loan Type Income HOEPA Status Property Location Modified Loan Purpose Preapproval Loan Amount Reason for Denial Action Taken/Date Ethnicity Race Sex Rate Spread Type of Purchaser Lien Status Construction Method, Occupancy Type Legal Entity Identifier Universal Loan Identifier New Application Channel Reverse Mortgage Open-end, Business Business or Commercial Purpose Age Credit Score DTI Ratio Combined LTV Ratio AUS (relied upon test) Loan Term Total Loan Costs or Points and Fees Origination Charges Discount Points Lender Credits Interest Rate Prepayment Penalty Term Introductory Rate Period Non-Amortizing Features Property Address Property Value Manufactured Home and Chattel Info (Property Type and Land Property Interest) Total Units Multifamily Affordable Units MLO Identifier NewboldAdvisors.com 8
General Data Considerations Evaluate every data point, even those noted as Not Changed Be wary of Updated data points. Does your organization use them for other purposes? It might necessitate creating a new data element for HMDA reporting. For New data points, do you already have them in your systems? Is your definition consistent with the HMDA definition? Conditionality creates implementation complexity. Ensure data required for conditionality is available and high quality. Understand any workarounds you have implemented in your environment and their impact to data. NewboldAdvisors.com 9
Implementation Considerations NewboldAdvisors.com
HMDA Implementation Considerations All regulatory changes require assessment across 4 domains: Process, Systems, Data, Organization. The new HMDA rule is no different. It is not just about data. Rule Analysis Analyze the rule to understand it and its impact on your institution s business model. PROCESS TECHNOLOGY DATA ORGANIZATION Transactional Business Process Transactional Business Process Quality Training HMDA Data Reporting Process HMDA Data Reporting Process Controls Fair Lending Trends Communication NewboldAdvisors.com
CONSIDERATIONS - PROCESS Not intended to be a complete list PROCESS Transactional Business Process How is data collected and modified through the business processes? Origination? Servicing? Secondary? What are the implications of a new definition of an existing data element to the business process? Are there additional data controls or QC required in the business processes? What 3 rd parties are creating/changing data? Brokers? Correspondents? Where is the credit decision made? What does the ULI mean for your business process? What are the downstream impacts on loan sales and purchased loans? How will data collection be managed during the dual tracking period when it is unclear how the loan will be reported? Will you collect the new demographic information early? If so, will you report it? What policy decisions are required? How will your firm define relied upon? HMDA Reporting Process What new data sourcing is required? What data scrubbing enhancements are needed? Where will those be done? How will the file format be created? 2017 2018? What 3 rd party vendors are involved? How are they planning to make the change? What policies and procedures will require updating? NewboldAdvisors.com 12
Considerations - Systems Not intended to be a complete list SYSTEMS Transactional Systems What are the data sources for the new data that are required? HELOCS? Do they have all the data needed? Does the modification of existing elements definition have an impact on how data will be managed in your systems? What is the impact on upstream and downstream systems? Will reports break? Are additional automated data controls needed? Are 3 rd party system vendor tools affected? How are they planning to handle specific issues like the free form entries and relied upon test? How will the ULI flow through systems? How does it affect purchased loans? HMDA Reporting System What system changes are required to aggregate new data? Where will that aggregation take place? Are there additional systems that need to be integrated into the data aggregation process? Is there a need for additional automated data scrubbing prior to submission? Where will that be done? How will the file format be created? 2017 2018? Will third party vendor tools require change? NewboldAdvisors.com 13
Considerations Data and Organization Not intended to be a complete list DATA Data Quality What is the quality of the current data that will be in the new data set? Does quality vary by product type by channel? Do you have a handle on the conditional data required to select the data set? What is it s quality? What additional controls might be needed either in transaction or data reporting process to control quality? Fair Lending Data Assessment Is there anything in your company s current data that when aggregated might raise a fair lending concern? Are there credit policy and/or process issues that need to be reviewed and/or changed? What needs to be done to remediate any issues? ORGANIZATION (COMMUNICATION & TRAINING IN THIS CASE) What communications are necessary? Internal/External? Publications? On line training? Webinars? Vendor supplied? Help desk? Loan Officer and other organizational training? NewboldAdvisors.com 14
NewboldAdvisors.com Planning for the Change
Prepare and Plan Process and System Assessment Current State Process, Transactional and Regulatory Reporting Processes Identification of Policy, Process and Procedure Changes Required for HMDA Data Collection and Reporting. Identify System Changes required to Support Process Identify communication and training needs Data Assessment Assess New Reportable Data for Data Quality, Controls and Lending Patterns Determine Data Remediation Activities Identify System Changes to Support Data Collection Program Planning Identify Work Streams and Create HMDA Implementation Roadmap Including Projects and Dependencies (Internal/External) Include all key milestones Assess Resource Needs Get Vendor Plans Stand up PMO HMDA Implementation Plan Planning is key to a successful implementation. It is important your plan consider all 5 key milestones NewboldAdvisors.com 16
HMDA Process and Systems Implications Across the Mortgage Process Impacts Needs to Assessed Across the Mortgage Value Chain. Transaction Processes HMDA Reporting Process ULI assignment Originations Secondary/Capital Markets Servicing Preapprovals not accepted for home purchases Policy for relied upon test Open ended lines of credit Modified definitions and impact on downstream systems and reports Where is data collected and change through process Data quality and controls QC process changes LOS Vendor Plans Loan Officer training HMDA data reporting tool and vendor plans for change ULI on loan sales Additional data elements on loan sales ULI assignment on loans purchased from a non-reporter or originated pre Jan 1, 2018, Collection of additional data on purchased loans for HMDA reporting HMDA Compliance and Reporting Will HMDA data reporting tool handle conditionality or will LOS handle it? Onboarding and storing ULI Validation of ULI for purchased loans Storage of data for purchased loans Assumptions Pricing data represents a significant portion of revised HMDA reporting? What are fair lending implications? Loan Officer s NMLS number is reportable? What are your lending patterns? NewboldAdvisors.com
Data Assessment Due to expansion of the data set, more systems will likely be involved. Perform as many data integrity and fair lending based assessments of your data as possible now. HMDA Pre-Implementation Data Analysis Retail POS Retail LOS HELOC LOS Mortgage HECM LOS LOS LOS Correspondent LOS Wholesale LOS Other Servicing System(s) Data Staging Tool Proxy revised HMDA data set for analysis HMDA Data Integrity Gaps High Level Fair Lending Analysis Remediation Activities NewboldAdvisors.com 18
Process and Data Complexities What to Report Example Loan Amount Conditionality Rules will need to be implemented to select the correct values for certain data elements. Product Closed End Loan Reverse Mortgage Open End Line of Credit Disposition (Last Action Taken) Purchased/ Repurchased Loan Loan Assumed Loan Originated Pre-approval or Application Denied Pre- approval or Application Not Accepted Application Withdrawn or Incomplete Loan Acquisition Actual UPB Amount Assumed Loan Amount Note Amount Reverse Initial Principal Limit Amount Borrower Requested Loan Amount HELOC Maximum Balance Amount Loan Amount on HMDA LAR NewboldAdvisors.com
High Level HMDA Plan and Milestones Through 2020 2016 2017 2018 2019 2020 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Scoping /Planning Data Management Policy Changes Process Assessment Technology Changes Procedure Changes Communication and Training Data Collection Data Reporting 1. Collect New Data Set with or without New Demographic Info 2. Collect With New Demographic Info 3. New Pipe Delimited File for 2017 HMDA 4. Full Data Set Reporting for 2018 HMDA 5. Quarterly Reporting for 2019 HMDA 20 NewboldAdvisors.com
Revised HMDA Reporting Project Plan Considerations Your plan should be detailed and clearly identify work streams, resources/stakeholders, milestones/tollgates, dependencies and deliverables. The more complex your business model, the more complex your plan. Establish work streams and teams Include deliverables Include multiple sub projects for each system Ensure adequate time is allowed for testing w/third party vendors Consider timeframe requirements for upstream & downstream parties NewboldAdvisors.com 21
Scoping and Planning Key Activities Rule Analysis and Impact Assessment 3rd Party Vendor Planning Plan Development and Resourcing ULI Structure Analysis Stand Up Project Organization The bulk of this work will be done upfront in your plan but will be adjusted for each milestone. Considerations Consider not only what products and business lines you currently have. Consider future products and business lines as well. Review end to end business process to assess impact. Include all process participants. Get your vendor s plans and align your milestones. Consider system customizations to determine if they create additional work. Plan for time of subject matter experts. Consider backfill for people who are diverted to implementation. Employ temporary help to either implement or backfill. Develop your ULI structure and ensure it meets the rule requirements. Identify policy decisions that will need to be made. Identify differences between HMDA and TRID (definition of application); HMDA and Agency rules (example Loan Purpose) Plan for dual tracking period. How will that be handled? Decide whether or not your organization will collect new demographic information early and, if so, will it be reported. Plan accordingly. NewboldAdvisors.com 22
Data Management Key Activities Gather Current Data (to extent possible) Data Quality Analysis Fair Lending Analysis Identify remediation work Assign to appropriate work stream Remediate This work will be ongoing for the entire HMDA implementation Considerations Ensure new data is assessed and issues remediate BEFORE the collection period starts. Remember that the collection period for all new data except for the new demographic information will start sometime in 2017 due to last action taken date. Determine your organization s data collection readiness date. Review data for all products and all channels. Understand the conditionality that drives what data is used for HMDA. Depends on product and point in process loan fell out, as well as, other criteria. Inspect the data required beyond the reportable data set. There is additional data required for conditionality. Remember that changing definitions of data may create complexity and could affect upstream and downstream processes. Ensure data is not being changed outside of the source of HMDA data. Test to ensure you know your systems of record. Consider using the MISMO HMDA standard for data aggregation. NewboldAdvisors.com 23
Process Assessment Key Activities Operational Process Assessment Originations Servicing HMDA Reporting Process Assessment Identify and Categorize Changes Needed Assign to appropriate work stream Considerations Must be an early activity to drive out changes needed as soon as possible. Changes will be need to be integrated into all work streams; policy, procedure, systems, data. HMDA Data Reporting process must consider dual pathing for transition period. Consider all channels, all products. Consider what changes your organization might be considering while HMDA is being implemented. Assess the impact of the URLA on your process. Watch the agencies schedules to determine which form you will be going live on the addendum or the URLA. Identify where business decisions are needed and likely policy statements to document them. For example, definition of agricultural property. Relied upon test. This work will be need to be reflected in the plan for each milestone though size and scope of work will vary per depending on the milestone. NewboldAdvisors.com 24
Policy and Procedure Updates Key Activities Policy Changes Policy Review and Impact Assessment Make Changes Approval Process Procedure Changes Policy Review and Impact Assessment Changes Approval Process Considerations Process work will drive some of this out but a bottom up review of policy and procedure will also be helpful to ensure everything has been caught. Ensure enough time is allowed for approval processes for policy and procedure revisions. Ensure the ULI is covered in your policies and procedures. Remember readiness for collection date is sometime in 2017 depending on your business model. System changes need to be done before procedures can be finalized Ensure your plans accommodate this. There are some items in the rule left to lender discretion. Work with your counsel to ensure that those decisions are clearly documented and reflected in policy and procedure. Do this early in your plan to allow time for procedures and systems changes to align. This work will be need to be reflected in the plan for each milestone though size and scope of work will vary per depending on the milestone. NewboldAdvisors.com 25
Technology Changes Key Activities Loan Origination Systems (for each LOS involved) Requirements Development (internal or 3rd party) User Acceptance Testing Deployment Servicing Systems Same System Development Lifecycle Look specifically at assumptions, purchased loans and ULI issues HMDA Reporting Systems Same System Development Lifecycle Understand where conditionality logic occurs. Plan for two integration tests to CFPB tool. End to End Integrated Test Considerations Must plan for each system impacted. Ensure enough time for UAT of all affected systems. Ensure time for end to end testing of process. Align development of new pipe-delimited file to January 1 st submission timeline for 2017 data. Decide whether leveraging MISMO makes sense for your organization. Get plans from your vendors as soon as possible. Ask for a review of their implementation approach to ensure it works with your business model. Consider impact of customization of systems your company has done. May need to unwind some customizations. Try not to implement new ones for HMDA. Plan for how ULI will flow through your systems. Don t forget about servicing systems If you don t use a HMDA reporting system, now is the time to think about using one. This work will be need to be reflected in the plan for each milestone though size and scope of work will vary per depending on the milestone. NewboldAdvisors.com 26
Communication and Training/Readiness Key Activities Communication and Training Identify Training Needs Create Training Approval Process Administer Training Develop Disclosure Notices Distribute Disclosure Notices Readiness Ensure everyone is ready to deploy when the time comes: Operations, Systems, Data, Vendors, Partners Go/No Go decision will occur at a few points in the plan. Plan for readiness reviews at each key implementation milestone Communication and Training Considerations Ensure Loan Officers are trained in new HMDA data collection rule and procedures. Ensure branch personnel understand new disclosure notices Plan time for approval of training and distribution processes. Consider privacy implications of the HMDA data and train appropriately. Readiness Ensure milestones are aligned with all involved. Ensure communication is provided to all who need to know both internal and external NewboldAdvisors.com 27
Summary Aggressive (Little resource contention, very limited integration, low complexity of environment) Conservative (Significant resource contention, higher level of integration and complexity) Number of Weeks 1/1/2018 is from 3/3/2017 Estimate of Elapsed Weeks 66 102 Contingency 6 6 Total Weeks Required 72 108 43 The elapsed totals assume concurrent work with appropriate staffing levels. Every company is different, however few companies will be able to support the aggressive estimate given other work and priorities. Plans should allow contingency time and not run right up to the rule implementation date. 3 rd Party Vendor plans should be vetted in detail up front and allow ample time for UAT. There are several interim milestones that are required & need to be planned in the detailed work plans. Is your organization well on its way to implementation? Is there a clear plan and communicated plan? NewboldAdvisors.com 28
Questions? My contact information: Kathleen Keller Managing Director, Regulatory Compliance Support kkeller@newboldadvisors.com 571-918-1011 NewboldAdvisors.com