This enforcement focus will only grow as the new HMDA reporting requirements under consideration by the CFPB are adopted.
3. Inaccurate Geocoding
The HMDA fields that are the product of geocoding (MSA, State, County and Census Tract) are crucial for any geographic-based analysis of lending patterns, such as CRA and redlining analyses. Based on our experience, assigning the correct Census Tract presents the greatest geocoding challenge to lenders. The geocoding fields are unique among HMDA reporting requirements for many lenders because they depend on third-party software or service that can result in occasional or systemic errors. These errors can raise doubts about an entire HMDA submission.
Whether you rely on a manual process or an automated process that integrates your system with a third party geocoding provider, several factors can lead to reporting errors. These include failing to audit externally sourced geocoding results, using the wrong base geocoding year, and using the wrong address, among others.
4. Incorrect Rate Spread Calculation
Calculating the rate spread for each HMDA-reported loan requires the incorporation of market interest rate data published by the FFIEC. While there are tools that are helpful in automating the calculation and recording of these data for HMDA, the underlying calculation relies on the accuracy of three variables: the rate lock date, the action date and the amortization type.
Errors in recording any of these three variables will yield incorrect calculations. In our experience, capturing the appropriate rate lock date is one field that presents challenges to some lenders due to the possibility of it changing during the application process from rate re-locking requests by the borrower. Loan origination systems, as they are implemented, may prevent lenders from changing the original rate lock date and/or from recording re-lock dates, resulting in miscalculations of the rate spread.
What You Can Do to Mitigate These Errors
Managing these errors requires a solid grasp of HMDA reporting requirements and how data points are identified, entered into your loan origination system, and preserved for eventual reporting. When assisting clients, ADI recommends several steps for assessing and correcting common HMDA errors, including:
- Review automated systems to ensure they are accurately identifying HMDA-reportable applications and loans;
- Analyze excluded transactions, such as leads, to ensure they do not meet the definition of an application under HMDA;
- Establish controls to minimize data entry errors;
- Review and analyze processes that transfer data between systems to ensure transferred data are accurate and correctly mapped for the HMDA submission;
- Perform an audit on a sample of applications to determine the accuracy of the recorded data based on source documentation; and
- Conduct a full HMDA data scrub if error rates are above thresholds established by the CFPB.
With new reporting requirements on the horizon and increased regulator use of HMDA data in supervisory and examination responsibilities, the risk of HMDA reporting errors will only grow. Moreover, HMDA data will increasingly reveal the broad characteristics of markets and customers each reporting lender serves. It is critical, then, that lenders implement strong controls and a culture of compliance with HMDA reporting requirements. This will help lenders overcome current and future compliance challenges and maximize the quality of internal data that can be leveraged to support their marketing and growth strategies.