Home Mortgage Disclosure Act Requires Fast Start and Stamina
For mortgage professionals still recovering from clearing the latest compliance hurdle, it is time to lace up for the next challenge—the Home Mortgage Disclosure Act (HMDA) decathl…
For mortgage professionals still recovering from clearing the latest compliance hurdle, it is time to lace up for the next challenge—the Home Mortgage Disclosure Act (HMDA) decathlon. Less than two weeks after the compliance deadline for the TILA-RESPA Integrated Disclosure (TRID) rule, the CFPB issued its final rule revising HMDA (Regulation C). Expansive changes to the rule mean mortgage lenders don’t get much of a compliance breather, despite an effective date that for many is still nearly two years away.
Adopted in 1975, HMDA requires certain mortgage lenders to collect and report a wide array of home loan application information. This information was intended to help assess whether lenders were serving the housing needs of communities. In addition, HMDA data is an integral focus for the Department of Justice and Consumer Financial Protection Bureau (CFPB) in identifying red-lining and other fair lending violations.
The Dodd-Frank Act directed the CFPB to expand the data reported under HMDA and provided it with rulemaking authority. Consequently, the revised rule—some 797 pages with 560 footnotes—adds 25 new data points and modifies 14 others. And for the first time, it requires reporting data on other types of loans like reverse mortgages and home equity lines of credit. The new data that must be collected from each applicant includes total loan cost, interest rate, loan term, mortgage loan originator identity, property value and credit score.
HMDA mandates significant granularity around data collection. As an example, the revised rule not only requires the collection and reporting of “the credit score or scores relied on in making the credit decision,” but also “the name and version of the scoring model used to generate each credit score.” It is clear that the CFPB intends for these new requirements to provide both regulators and the public with greater insights. Much of the data collected under HMDA is and will continue to be made available to the public.
All lenders will require a sound HMDA implementation plan, most especially the 75–400 non-bank institutions that the CFPB estimates will be covered under the rule for the first time. The CFPB instituted a new threshold triggering coverage: the institution must report if it originates at least 25 closed-end mortgage loans or provides 100 covered open-end lines of credit in each of the two preceding calendar years. This exempts roughly 1,400 depository institutions. The CFPB was quick to add that the change will not compromise the HMDA database’s usefulness since the exempted lenders receive a low volume of applications and originate a low volume of mortgage loans.
There will also be changes in the method and frequency in which institutions report HMDA data to the federal government. The CFPB is developing a new web-based reporting tool that will be used by all “covered” institutions beginning in 2018. And in 2020, institutions with 60,000+ applications and covered loans in the preceding calendar year will be required to report on a quarterly basis.
Clearly, the compliance bar is being raised. Some industry analysts have noted that expanded data collection under the revised rule will now allow the CFPB to evaluate fair lending both on the basis of socioeconomic class, as well as on an individualized level. Furthermore, without having to initiate a formal investigation, the CFPB will be able to trace fair lending violations down to loan channel or even a specific originator.
The bulk of the revised rule will become effective January 1, 2018, with reporting commencing on March 1, 2019. Still, a number of legal experts have warned that compliance will put a strain on human and system resources, and if covered institutions have not yet commenced with implementation plans, they are behind.
It is, therefore, critical that mortgage lenders begin implementation work right away to be in championship form prior to the compliance deadline. Initial preparations should include a focus on data integrity and the development of an internal process with timelines that allow for a sufficient testing period to iron out the kinks. Keeping your favorite sports drinks and energy bars close by is also recommended.
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<p>FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores.</p> <p>As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>.</p> <p>But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores.</p> <p>In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li><strong>Balance and utilization.</strong> Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of <u>available</u> revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards<em>. </em>The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li><strong>Benchmarks.</strong> I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data.</p> <p>In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage.</p> <p>In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances.</p> <p>Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!</p>
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