Four More Common HMDA Reporting Errors and How to Mitigate Them

Four More Common HMDA Reporting Errors and How to Mitigate Them

In a recent Knowledge Center post, we discussed four common errors that lenders encounter when satisfying reporting requirements under the Home Mortgage Disclosure Act (HMDA). The four errors that we reviewed – failing to capture all HMDA-reportable transactions, documenting an incorrect loan amount, assigning the wrong geographies via geocoding, and making errors in calculating the rate spread – are just a few of several common errors identified by regulators and observed in our experience when assisting clients with their HMDA reporting. In this post, we will review four additional HMDA reporting errors that present challenges to many lenders.

If you have not already done so, now is the time to start your review of current year HMDA data.

1. Inaccurately Reporting Purchaser Type

We have assisted several clients that are active in selling their loans to various investors. This commonly presents at least three opportunities for errors with regard to reporting the correct code for purchaser type.

The first type of error arises in some instances when lenders originate a loan in Year 1 and sell that loan in Year 2. The error in this scenario is that the lender assigns a purchaser type in their HMDA LAR for Year 1. However, since the loan was sold in Year 2, not Year 1, the correct code for Year 1 is “0”. There was no purchaser in Year 1.

The second type of error arises due to inadequate maintenance and knowledge of the correct purchaser type code for each investor. A HMDA Compliance Management System that allows too much discretion in assigning the purchaser type codes can result in inconsistent and inaccurate coding of investors.

The third source of errors for this field is poor process planning and implementation. The final determination of the investor is not known until letters go out to borrowers about the sale of their loan. That information is the critical stage of the HMDA data compilation process, not any earlier and premature designation. When the purchaser type code is made after a loan has been closed, it is sometimes beyond the reach of employees who are collecting data for every other HMDA field. Without careful planning and HMDA training, these latter stage employees do not recognize the vital role they play in HMDA compliance and failures occur.

Minimizing the frequency of these and other HMDA reporting errors requires a deep understanding of reporting requirements…

2. Incorrectly Documenting Applicant Income

The recording of applicant income presents opportunities for errors due to the reliance on accurate data entry and the tendency for income to change throughout the application process.

Typographical errors, transposition of numbers and inaccurate rounding are common data entry mistakes that we observe for this data point. In addition, some loan origination systems allow discretion in recording weekly, bi-weekly, monthly or annual amounts, which adds a degree of complexity that lead to more opportunities for risk.

Reporting errors may also arise due to changes in reported income throughout the application process as additional sources of income are included and initially reported income is verified. If changes in income are not recorded correctly as they arise, then the income reported in final disclosures and HMDA submission data will be inaccurate.

3. Recording an Inaccurate Action Date

A common mistake that we see is the inaccurate recording of action date for non-originated applications. Lenders must be consistent in the date used to record the action date for applications that are coded as withdrawn or closed for incompleteness. In the former, it is the date the applicant notified the lender, whereas in the latter there is typically no notice from the applicant.

In our experience, most lenders use the date specified in the notice letter the lender sends to the customer to specify the missing items and the date by which they need to be submitted. Some lenders use automated processes to code withdrawn and incomplete applications in batches, which can result in the recording of dates that use the wrong data point or are system-generated that are sometimes well after last date of communication.

The new requirements…will increase the complexity of HMDA reporting and exposure to HMDA compliance issues.

4. Failing to Capture Government Monitoring Information (GMI)

The recording of GMI data (ethnicity, race and sex of applicants and co-applicants) can present substantial challenges for many lenders. While there are valid reasons for lenders to not record this information in some situations, such as for applications submitted via phone or the Internet or for applications withdrawn before the data could be collected, many lenders struggle with staff failing to comply with training and policies in the recording of these data points at the outset and validating them later on in the application process as more information becomes available.

What You Can Do to Mitigate These Errors

Minimizing the frequency of these and other HMDA reporting errors requires a deep understanding of reporting requirements and how reportable data points flow through your systems toward eventual HMDA reporting. When assisting clients, ADI recommends a number of steps to assess and correct common errors like the four discussed above, including:

  • Review HMDA policies and training for clarity in how to correctly record HMDA-reportable data, such as coding purchaser type and recording GMI;
  • Assess automated systems to ensure they are accurately recording HMDA-reportable data points;
  • Establish controls to minimize data entry errors;
  • Evaluate processes that transfer data between systems to ensure transferred data are accurate and correctly mapped for the HMDA submission;
  • Compare the frequency of reportable GMI to peer lenders and identify patterns that require attention, such as branch-level variances in reporting GMI;
  • Audit 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.

Staying Ahead for This Year and Beyond

As we enter the fourth quarter, the importance of periodic reviews of HMDA data, policies and practices will continue to grow as we get closer to the March 1st reporting deadline. If you have not already done so, now is the time to start your review of current year HMDA data. Starting now will provide a few months of cushion to correct any identified errors and to address systemic issues heading into next year. To accomplish this goal, ADI assists many lenders in reviewing, auditing and scrubbing HMDA data so that they are prepared to submit their data on time and with a high degree of data integrity.

In addition to preparing for the current year’s submission, you will want to consider what is on the horizon as the CFPB is expected to finalize the new HMDA reporting rule soon, perhaps by the end of 2015. The new requirements contained in this rule will increase the complexity of HMDA reporting and exposure to HMDA compliance issues. It is critical for lenders not only to get ahead of the current year’s submission but also to prepare for these impending requirements, which are expected to affect 2017 HMDA. To minimize this exposure to greater HMDA compliance risk, ADI will assist clients in evaluating and implementing these new requirements before they take effect, which is a proactive approach that we recommend for your organization to stay ahead of these new challenges.

About the Authors

Rebecca Escario

Rebecca is a Senior Consultant for ADI with expertise in HMDA compliance, BSA/AML compliance, Fair Lending compliance, and other financial regulatory compliance areas. You can contact Rebecca at rescario@adiconsulting.com or 703-574-7316.

Jonathon Neil

Jonathon is a Senior Consultant for ADI with expertise in Fair Lending compliance, CRA compliance, data mining, and geographic information systems. You can contact Jonathon at jneil@adiconsulting.com or 703.665.3707.

 

October 6th, 2015|