The update to HMDA reporting is just around the corner, and while most institutions are probably prepared for the data reporting changes, this does not mean those institutions are actually ready. In this series of articles on HMDA 2018, we’ll discuss the fair lending risk implications of the new data that will be made available to regulators and the public.
Since the title of this post could be considered somewhat provocative, it may be appropriate to provide a little background on our firm.
Premier Insights, Inc. has been serving the banking industry now for approaching 25 years. Over the last decade, our practice has been heavily focused in the fair lending space due to the increased level of scrutiny in the current environment.
My firm conducts dozens of analyses each week for institutions, most of which center around fair lending or other regulatory issues. We have assisted institutions facing regulatory and enforcement actions involving the regulatory agencies as well as the Department of Justice. Our work focuses on statistical methods and techniques to evaluate risk.
It is always interesting to me that when an upcoming change is announced in the regulatory world that there is typically an uproar accompanied by much discussion and hand-wringing. Things then die down; and as the time for implementation approaches, there is virtually no attention.
As we prepare to watch the required HMDA data reporting unfold, we are witnessing the same thing. I feel sure from a strictly reporting standpoint that most lenders and software venders have made the changes necessary to comply.
This is not to say there may not be a few “hiccups”; there always are. But by and large, I am sure the reporting will go as well as can be expected. What continues to be ignored, however, or at a minimum, seriously down-played, is the primary risk posed to financial institutions with the change. And that is, the fair lending risk.
The new requirements will result in lenders submitting detailed and critical data points about every HMDA loan application, including things such as credit score, DTI, and LTV. This will be available for public scrutiny, which will include regulatory and enforcement agencies as well as advocacy groups. The fair lending risk posed is potentially stark for a number of reasons, which I will detail in Part 2 of this post.
In summary, I firmly believe the HMDA reporting change greatly expands fair lending risk for financial institutions. This risk seems largely ignored, and many institutions may find themselves unprepared for what will follow when these data become available. (Those of us who have been operating in this space for sometime will recall the wave of pricing analyses launched by the agencies with the addition of the rate spread to the HMDA LAR in 2005.)
Regardless of whether this prognostication comes to fruition or not, lenders would be wise to heed the warning and begin taking steps now. This all can, however, be turned into a positive. Be sure to catch Part 2 of this post as well as our upcoming article, HMDA 2018 – How Statistics Can Be Our Friend, in the coming weeks.