7 Essential Steps Now That You've Filed Your 2017 HMDA LAR
Now that your HMDA data has been filed, you can relax a little bit. Or can you? In this post, you'll find out what's on the compliance horizon, and what you need to do about it. In addition, you'll also get access to a free post-HMDA submission Fair Lending compliance checklist.
So far, this year has already been one for the books. For compliance professionals, everything seems to be changing quite quickly. This blog is designed to help you understand the changes taking place, and how to prepare.
We will first talk about some of the biggest factors that are shaping 2018, and then we'll get into what you should do next.
Here are some of the biggest trends that have shaped - and will continue to shape - 2018:
- We lived the reality of preparing for the new Home Mortgage Disclosure Act (HMDA) rules, submitting with the new online platform, are implementing the new data collection, and dealing with the challenges that come with it.
- We are hearing more talk of deregulation than we've ever heard before, and even as some form of regulatory relief seems likely, what it will actually mean for compliance professionals is up for debate.
- The Beneficial Ownership/Customer Due Diligence Rule will be effective in May. If you're not fully prepared for the Fifth Pillar of BSA/AML compliance, there's not much time left.
- The 2017 HMDA LAR will be published much sooner than usual. It is typically released in September, but we've heard that they are working to be able to release the data as early as April.
Now that HMDA has been filed (and is possibly two weeks away from being released), do you know what's next?
Here are a few steps you need to take to ensure that your Fair Lending and HMDA compliance program is strong enough to handle the changing regulatory currents.
1. Analyze Your HMDA Compared to Peers and Benchmarks
One of the most important things you can do is analyze your HMDA data for Fair Lending risk. Now that the new HMDA Plus data will be included in the analysis, you need to ensure that you're prepared to look at your analysis from new angles.
As you look at your analysis, make sure to do the following:
- Analyze the data you submitted to the CFPB for disparities.
- The regulators take a risk-based (read: disparity-driven) approach to prioritizing institutions for Fair Lending exams. It's important to take a proactive approach so that you're prepared to explain your story if and when the examiners arrive on-site.
- Make sure to look at how your prohibited basis groups compare to control groups for differences in application rates, product take rates, withdrawal rates, denial rates, pricing, and timing.
- Also analyze your 2017 HMDA data compared to peers and benchmarks to see how you're performing compared to others in your market.
- If you have disparities, but you're still outperforming others in your market, the regulators will likely perceive that you have less Fair Lending risk. However, if you don't know how you compare to peers, you won't be able to make that point to the examiners.
Using spreadsheets will not be enough to handle the challenges of the expanded HMDA data sets in your analysis. If your Fair Lending and HMDA analysis software is less-than-ideal, you owe it to yourself to check out the most user-friendly HMDA analysis software on the market: TRUPOINT Analytics. If you have 20 minutes, we will design a custom demo and walk you through how it can benefit you most.
We will discuss this more later, but if the public 2017 HMDA data does come out in April, you won't have as much time to respond to findings. You already have most, if not all, of the data the regulators will review when considering institutions to prioritize for exams. It's important to be proactive and realistic in evaluating your current risk exposure.
2. Evaluate Your HMDA Data Integrity
Your HMDA risk is an important part of your overall Fair Lending risk. Your HMDA data integrity will likely be considered in any evaluation of your Fair Lending risk.
Examiners are front-running Fair Lending exams by reviewing your HMDA data integrity. They will look into details like application and decisioning dates, loan type, loan amounts, and more. They will be looking for accurate data collection and coding throughout your applications. Did you have co-borrowers? Did you round up or round down, and if so, were you consistent?
3. Develop a Clear Picture of Your Lending Performance and Risk Over Time
If you file HMDA data, the new fields collected in your HMDA LAR may present additional Fair Lending risks to your financial institution. Therefore, your Fair Lending risk assessments will need to adjust to accommodate the new risks presented by the HMDA changes.
Your Fair Lending risk assessments should be conducted at least annually, or sooner if there are changes to your business, products, geography, or risk exposure. We will talk more about this in the next section, but for now, it's important to know that you don't want any repeat findings. Consider comparing your risk year-over-year so that you can determine how it's trending - and where you can improve.
4. Move Quickly in Addressing Fair Lending, HMDA, CRA, and Redlining Risk
The CFPB is targeting an April release date for the public 2017 HMDA data, after receiving it just one month prior. If they do release the public HMDA data so quickly, it will likely impact the management of your program. It also limits your potential to modify any processes you have in place for testing and review.
If this data is released in April, prudential regulators will of course have access, and so will community groups and media outlets like Reveal. Their recent coverage of Redlining initiated three new lawsuits, and hundreds of articles in national and local newspapers.
If your analysis, testing, and monitoring is scheduled for later in 2018, it's likely that you will want to consider moving it to earlier in the year. This way, you can be more proactive in adjustments to the program since they will have results sooner.
In addition, your HMDA risk is related to your Fair Lending and Redlining risk, and by extension, your CRA risk.
5. Conduct Fair Lending Training for All Employees, with Targeted Role-Specific Training as Applicable
If you have to comply with Fair Lending, it's important to offer general Fair Lending compliance training to all employees, including senior management, and Board members. Also consider role-specific training for those people who are involved in the lending process. If you file HMDA, make sure to discuss the importance and impact of the new HMDA fields within your Fair Lending training program.
Make sure to track attendance and measure comprehension, as well as noting repercussions for failing to attend training or pass the comprehension assessment. Make sure that your training also outlines what is permitted by your policies (i.e. rules for declining or file documentation requirements), and that your training aids are adequate.
Consider improving your Fair Lending training with sensitivity training to help prevent discrimination by employees who deal directly with applicants and customers. You may want to provide training aids that focus on potential examples of Fair Lending discrimination and tricky situations that could trip up your colleagues.
6. Review Your Policies & Procedures, and Make Improvements as Needed
You probably have already updated your policies, procedures, and practices to accommodate the HMDA requirements. If so, kudos! Strong policies and procedures provide clear guidelines to your employees for consistent internal practices. In compliance, consistency in your process is such an important ingredient.
If you file HMDA, it will make sense to update your policies and procedures to accommodate the analysis of the new HMDA data fields. This will include new methodologies and mitigation strategies.
7. Prepare for a Data-Driven Fair Lending Exam
The HMDA changes that have taken place over the past few years mean that we can expect HMDA exams to look at least a little different in the future. Examiners will likely be using new techniques, more sophisticated analysis (including even regression), and enhanced data to identify Fair Lending risk.
With additional HMDA data, examiners can conduct even more in-depth statistical analysis of your Fair Lending and HMDA data before they arrive onsite.
They may be able to build a clearer picture of what they think is happening based on the story your data tells. If they already have a narrative of what they think is happening, it will be up to your compliance team to help them understand the qualitative nuances they can't see in the data.
We envision that when you have a Fair Lending exam, it will be even more important that you have an in-depth understanding of the story your data tells, and be prepared to quickly and comprehensively answer the regulators' questions. If you have disparities in your data, you'll need to understand and be able to explain them.
Ncontracts Viewpoint: HMDA data analysis is one of the first (and most important) steps you should take in your Fair Lending compliance management. As we've mentioned above, the best way to approach analysis is with a compliance software and partner that you can truly rely on. Ncontracts is that partner for more than 500 financial institutions nationwide. If you'd like to learn more, please click here.
In the meantime, hang onto this free checklist to ensure you stay on track as you improve HMDA compliance post-submission.
Finally, remember that the team at Ncontracts is here for you. If you'd like to request that we talk about certain topics here on the blog, or would like to speak with an expert about your Fair Lending, CRA, Redlining, HMDA, BSA/AML or UDAAP compliance, or your growth plans, we can help.
Learn even more about Lending Compliance Management.