When it comes to Home Mortgage Disclosure Act (HMDA) reporting, clean data is a must—but getting that data ready for transmittal isn’t an easy task. We spoke with Radhika Dholakia-Lipton, founder of RADD LLC, an internal audit and compliance consultancy, in Santa Ana, Calif., for insights and best practices for scrubbing HMDA data.
Here are the answers to your most frequently asked questions about HMDA data scrubbing.
Why does HMDA data need to be clean?
HMDA requires many financial institutions to maintain, report, and publicly disclose information about mortgages. That data needs to be submitted by March 1 each year.
Data must be clean. The Consumer Financial Protection Bureau’s (CFPB’s) online platform has built-in edit checks. If your file doesn’t pass the edit checks, your institution may end up submitting its data late. Inaccurate submission of HMDA data can result in legal violations and, if a pattern or practice of non-compliance is identified, in the assessment of Civil Money Penalties (CMPs).
It can also negatively impact your Fair Lending program. If bad data is going in, bad data will come out—resulting in a potentially inaccurate interpretation of your Fair Lending story.
Related: What Should I Do Before
How often should HMDA data be scrubbed?
Data needs to be scrubbed with any identified reporting errors and resolved before you submit LARs on March 1—but preparation should begin long before. Many lenders begin scrubbing at the start of the year while larger lenders may scrub quarterly to avoid making it too big of a task. Lenders with at least 60,000 applications and covered loans a year must submit quarterly and should be proactive with their scrubbing.
Like nearly everything in banking, it’s a decision based on risk. When determining scrub frequency consider application volume, number of lending units, residential real estate loan products offered, and the volume of recent HMDA-related internally identified errors, independent audit findings, and examination comments when making a decision.
What does an effective HMDA compliance management system look like?
A standardized and repeatable process is key to successful HMDA data gathering, reviewing, and reporting. When designing your process, it pays to think from an examiner’s or auditor’s perspective. Review the exam requirements from your regulator and have the source material used to support the data easily accessible.
Your financial institution should maintain an effective HMDA compliance management system. This includes but is not limited to:
- Board and management oversight
- Regular periodic training and education
- Policies and procedures
- Independent reviews
Everyone involved in the lending process should generally understand Regulation C and the institution’s policies and procedures. Lending staff should understand their respective duties with regard to the accurate and timely collection of data. A periodic HMDA scrub is a key component to avoid risk.
During your periodic HMDA data reviews (monthly or quarterly depending on your portfolio size, transaction and application volume, and risk assessments) make sure to compare the information in the loan file to the information in the Loan Origination System and the information in your HMDA software or manually created LAR.
Related: How HMDA Plus Data is Changing
How to scrub HMDA data
When it becomes necessary to scrub HMDA data, be sure to follow these steps for a thorough review.
1. Gather the source documents you will need to review. This includes the processed application. That’s typically a 1003 and the Government Monitoring Information located on page 4 of 5. Make sure your HMDA reporting procedures indicate the appropriate source document for each type of application.
2. Review the lender’s notes and communications regarding each application to make sure their information doesn’t conflict with the application. This includes, but isn’t limited to:
- Loan system logs
- Dated Credit Reports
- Handwritten notes
- Telephone call logs
3. Verify accurate reporting of fallouts (withdrawn, incomplete, and approved not accepted) are on the LAR.
4. Identify gaps in data capture, processing, and reporting using an internal control checklist that specifically addresses areas of risks. This should include but not be limited to:
- Omissions testing. Were all reportable applications entered into the LAR? It’s a best practice to circle back to lenders and have them check their bottom drawers etc. for fallouts that have not been submitted.
- Government Monitoring Information (GMI) accuracy. Is the data entered on the LAR consistent with the application? Many institutions have applicants submit handwritten applications that are then typed by lending staff. Do the original and typed information match?
- Geocoding accuracy. Verify geocode accuracy.
What are the most common errors in HMDA data?
Some reporters limit their data integrity testing to taking the Loan Application Register (LAR) and comparing the information to the HMDA data log or what was entered into the system. This creates a high risk of inaccurate reporting. Other common errors include:
- Reporting cash-out refinancing rather than refinancing for the loan purpose (Comment 4(a)(3)-2)
- Reporting Withdrawn rather than Approved Not Accepted (Comment 4(a)(8)(i)-5)
- Reporting the wrong score or not reporting one at all for loan approved but not accepted (Comment 4(a)(15))
- Reporting the total number of units for a loan secured by a multifamily property rather than the income-restricted units
- Reporting reasons for denial when not required to do so
What are best practices for HMDA data scrubbing?
- When scrubbing HMDA data, make sure to keep these best practices in mind.
- Use FFIEC HMDA guidance.
- Make HMDA data part of the loan file Quality Control Review.
- Remember to include commercial real estate (CRE) transactions in your review.
- Train all mortgage/real estate originators, processors, and underwriters on HMDA requirements.
- The HMDA submission should reflect the reality of the loan file. Therefore, review physical loan files, LOS data, HMDA software, and LAR no less frequently than quarterly. Correct errors throughout the year. Don’t wait until the last minute.
- Use internal or external compliance and audit professionals to regularly review the HMDA program and process, including staff training and submission procedures.
Can transmittal software clean the data?
Software like Ntransmittal identifies potential data errors and allows for your FI to correct them prior to submission. For example, it can tell you if geocoding doesn’t match or if an address doesn’t exist. This will allow for more seamless HMDA and CRA transmittal without worrying about common risks or delays, but a manual review and data scrubbing are still necessary.
Thank you to Radhika Dholakia-Lipton for sharing her insights into scrubbing HMDA data.