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Handle HMDA With Care


In October 2015, the Consumer Financial Protection Bureau (CFPB) finalized the Home Mortgage Disclosure Act (HMDA) adding more to the data point requirements burden on lenders and vendors.

Michael Flynn, a partner in Goodwin Procter’s Financial Institutions Group sat down with MReport to explain how the HMDA rule is shaking up the mortgage industry and advises on how to cope with the changes.

MReport: How are lenders are held accountable for the actions of their vendors under the CFPB?

Flynn: There’s two different kinds of vendors to think about. First, there are the vendor who supply the platforms such as origination platforms or document platforms that lenders use to generate mortgages. To break that down further, you can look at how the lender relates to them and how the regulator relates to them. Clearly, if there is a problem with their system so that the data the lender needs to pull together can’t be pulled off of these third-party platform systems, the lenders are going to be looking at these vendors both in terms of any problems with regulators but also in terms of contractual obligations of those vendors to the lenders to fix their systems and fix them quickly. If any vendor is having a problem in that area, that vendor is going to have some real issues in the market—this would not be a good thing, obviously.

The regulators would probably potentially look at it in two different ways. First, looking directly at the vendor, regulators may think that certain vendors have serious problems and thereby put pressure perhaps on the vendors themselves or on the lending community to say if you use this vendor you may want to look out for these problems and hold them accountable. This then makes it the lender’s problem to pay attention to the problems and if the lender doesn’t then the lender has a vendor management issue with the regulator. The other, more direct, way they can look at the regulators is just to say whatever bad data is produced, by the vendor system that feeds into the lender’s data required by HMDA the lender is going to be roughly accountable for bad production and there’s no regulatory defense to say, “Oh my vendor did it” or “It was my vendors fault.” It may be in certain circumstances depending on how well you are managing you vendor be it litigating circumstance for the lender, if you’re doing good vendor management, it doesn’t relieve you of your obligation so the lenders are still going to find themselves under regulatory scrutiny for not having fulfilled their obligations.

The other type of vendors are third-party originators. If a lender is acquiring loans from a third-party originator, the regulators, particularly the CFPB, might have more direct contact and interest in those vendors as loan originators from the data they are producing. To the extent of them feeding what regulators consider problematic data up to the lender in terms fair lending issues, then it makes regulators focus on the lender and the originator, which is a totally different twist from the vendor management problem.

MReport: What institutions will be most affected by the HMDA regulation?

Flynn: It goes in two directions. It the affect the new players that will be under these rules for the first time and that would include a fair share of non-depository, non-bank lenders, who under the new rules, would have to start reporting. It’s not depository institutions that do 25 closed-end or 100 open-end mortgage-secured loans. Some of them have to report now but large numbers of them did not in the past, particularly the ones that were rerally open-end lending, they will not have to deal with this. If they are smaller institutions its obvioiusly a big cost issue for them relative to their income, so that’s an issue.

Other people that have a different kind of problem are the bigger originators. There are at least 25 new data points that are going to have to be reported on and at least 12 more of the exisiting data points are modified. Let’s just take the 25 new ones. If you are a lender doing 2 million loans per year, you’ve now got 50 million more opportunities to make a data mistake of entering a wrong number if your system is not right. The scale of the problem from just getting the system worked out and making sure it’s right is what is the bigger problem for big lenders in terms of the amount of time it takes to get the systems up and running, but it’s also a bigger problem because a glitch in the system could cause the number of affected loan to pile up. This would produce a lot of bad data. The other issue for larger lenders is if something needs to be fixed, the system could be much larger compared to a smaller institution. This could be a real strain on these lenders.

MReport: What types of vendors will most likely to face increased regulatory scrutiny in the near future?

Flynn: I think broker, correspondent lenders, and other third-party originators will certainly get more scrutiny partly because data identifying them is going to be more regularly gathered now as being an originator of loans, which will give regulators and other parties the opportunity to identify their lending patterns more regularly. In terms of strictly vendor liability, vendor whose platforms are used by lenders to originate loans or to gather data from originations to produce this information are going to face some pretty heavy scrutiny given the volume of data being produced. They are going to face contractual pressures from their customers, the lenders, to really get these systems right.

by Xhevrije West (

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