HMDA Refresher: Demographic Collection
Mortgage Industry Insight: One of the great things about SCA is the range of issues we get to see, and the wealth of knowledge we get to tap into while working with dozens of clients on a monthly basis. Today, we'll share some important information about HMDA.
By Gregg Oberg:
Our HMDA Refresher series continues with a look at persistent issues related to Demographic Collection, and how to address prevalent weaknesses in policy drafting and policy implementation.
Visual ID of applicants is one of the most confusing, and frankly awkward, elements of the HMDA rule. In our conversations leading to the 2018 Rule implementations, the most frequent concerns of front-line staff related to when they’re required to make a Visual ID, and when they’re prohibited from doing so.
Today’s blog takes a practical approach to developing compliance procedure aimed at not only meeting the rule, but making your staff more effective.
“Getting it WRONG”
I’m assuming some level of familiarity with the rule for this article—mainly because I’d be shocked if anybody reads about HMDA but-for being compensated to do so.
Approaching the topic from a 30,000-foot level, demographic collection violations generally flow from one of two cause: (1) lack of clear/accurate guidance; and (2) human action/inaction. I want to provide examples of each within the HMDA Demographics context.
Failures Due to Policy/Procedure Weakness
Instructive documents for front-line employees necessarily require an understanding of the rule’s mandate. A fair majority of the individual items required under the HMDA rule can, and are, understood broadly enough in the industry that providing inaccurate guidance is solely a failure of human action. Particularly in GMI (“or demographics”, as I prefer), if your staff can’t get it right it’s YOUR fault—on at least 90% of the issues, that is. Some, like the “Visual ID” requirement of “applications started via mail and subsequently completed in person”, are downright complicated and don’t have a clear “right/wrong” answer.
Do I REALLY Need Visual ID on This Internet Application?
Yes, you really do. But only if you really DON’T tailor procedure to your application flow appropriately. The default rule is that Visual ID is only a possible outcome in applications begun in person.
However, under Appendix B, number 12 (link- https://www.consumerfinance.gov/policy-compliance/rulemaking/regulations/1003/B/#10), a situation can arise where a non-face-to-face application requires Visual ID.
This occurs only when the applicant “does not provide [demographics] … but does not check or select the ‘I do not wish to provide this information’ box.” Once that condition is met, the applicant would additionally need to “meet in person with [the LO] to complete the application[.]”
If that happens, you now treat the interaction as if it was, essentially, a new face-to-face application for the limited purposes of demographic collection (to be direct, this guidance applies only to 12 C.F.R. 1003.4(a)(10)(i)).
When you find yourself find yourself in this situation, you follow normal face-to-face procedure. Ask questions, and either get answer or make Visual ID.
How Better Policy Cures the Issue
What the provision means to say is that “if the applicant doesn’t give you demographics, and also doesn’t tell you they’d prefer not to, then we ask the questions again IFwe meet them in person to complete the application.” We can’t control the latter in any reasonable way, but the former is quite easy to write procedure around.
Bluntly; prior to any “in person” meeting with an applicant, do whatever is reasonably necessary to ensure the applicant has either (a) provided demographics; or (b) affirmatively declined to provide demographics.
How you do this is specific to your business; procedure can’t be “tailored” to fit everyone. But in concept, what I’ve seen work is this:
Determine when/whether a follow up communication would occur with an applicant; Ideally a first “we got your application, we’ll need some more info” call.
Find the procedure/checklist/work-aid applicable to this communication;
Insert a line stating “IF the 1003 Addendum does not have at least one mark in each of the three demographic categories; THEN perform HMDA Demographics Phone Application Procedure.” Refresher within a Refresher-Read top paragraph on 1003 addendum, ask questions, record answers.
Document in the file that the following occurred.
The Human Side of Demographic Collection
LOs often simply avoid asking these questions and record that the applicant “declined to provide” the demographic information. The implications of this “manufactured” data are too broad to reasonably understand, but any HMDA issue must be understood as a red flag for future Fair Lending issues.
In community banking we often have the opportunity to communicate directly with our entire sales force on a regular basis. Don’t get fancy here, just take the time to communicate the importance of following procedure on demographics. After all, HMDA data is a core source of Fair Lending enforcement actions…and often makes for great investigative journalism.
We’ll certainly have more on this as we continue to recap HMDA and leading up to the 2018 data becoming public. You can be sure whatever comes of that data release will be the subject of countless blogs and articles, and potentially uncover Fair Lending issues we didn’t expect to see.
Spillane Consulting Associates has served the residential mortgage lending business since 1991. We have specialized in mortgage banking consulting services and provided quality control reviews, risk management and process consulting and employee training to credit unions, community banks and non-depository institutions. We are a thought leader on the strategic growth of residential mortgage lending. You can learn more by visiting our website, or scheduling a meeting with me or one of my colleagues.
SCA Compliance Hotline: Need a question answered quick?
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful - please keep contributing.