|Interpretive CommentsPerhaps HMDA data never hit your radar screen before because it was just a report that your company had to file. That was something Compliance took care of, and, short of a few speeches on making sure you put the right data into the LOS, you didn’t think any more about it. What you may not realize is that all of this about to change, and change dramatically! Beginning on January 1 of 2018 your LOS system will be expanded to collect more than twice the amount of loan file data than it used to for the HMDA report. Striking to most is that a lot of this data is tied directly to pricing and lender fees. The data collected is so granular that your license number is being tied to each set of loan file data, and that is where it changes for you!
Historically, HMDA was used to gauge a lender’s overall performance, not an individual’s performance. The regulators used this data to scope lenders for fair lending violations. The data set collected was relatively small, and the conclusions that one could draw from it were very theoretical. The data was generally highly inaccurate.
When the CFPB took this on, they put their finest Data Scientists on the project to build out the new requirements in such a way as to pinpoint pricing disparity, disparate treatment, redlining and other patterns of practice. They also took it one step further and connected the loan originator to the data set so that your individual loan practices could be evaluated. Now this is the new danger zone for mortgage loan originators. It is no longer just the company that can be held responsible, it is also your own pattern of practice. As a licensed individual, what you charge clients and who you do business with can be evaluated with this new data.
This revelation isn’t meant to make you worry more. The purpose of understanding what is being collected and how it can impact you is knowledge that you should have. After all, your career is your livelihood, and sticking your head in the sand over it will not make the evaluation of your practices go away. Instead, when you know it is coming, don’t fear it! Face it head on and do something about it!
Before we move onto the areas of your practice that you want to watch, let’s talk about Fair Lending. There are a lot of misconceptions out there about what it means, and I would like to clear a few of those up. I was a top-producing mortgage originator at one time, so I understand where you are coming from. Generally, the first thing I hear from someone is that that only color they care about is “green”. I suspect that at one time I said the same thing. I also get that almost everyone in our industry is on full commission so we seek out opportunity to maximize our profit where we can (legally). However, that is not what fair lending is about!
We all work in financial services, and because of that we have regulations that we have to follow. Most of this came down on us because enough (not all) people behaved badly – and so here we are. If you are going to be in financial services, then you have to play by the game rules. If you don’t play by the rules in sports, you get a fine or get kicked off the team. Same thing happens with our industry. When it comes to fair lending rules you are expected to give similarly situated clients the same sort of deal. Too much variance makes it look like you favor some borrowers over others. It really is that simple. Now some of you don’t like those rules and state that negotiation is just the way this game is played. This may have been the way the game was played before, but there is a new commissioner and the rules have changed. This is where we all have to make our own decisions as to whether we want to stay in the game under the new set of rules.
Here are some tips to help you understand what might cause a pattern of practice to appear problematic to a regulator.
- Are you allowed a large degree of discretion in pricing your loans? If so, that probably means that some of your clients that are financially similar are paying more than others because one negotiated with you and another did not. Remember, the greater degree of discretion you are allowed, the more risk that you have personally. It is far better to have your lender limit that discretion, as it protects you.
- Are you allowed to charge different lender fees and use that to negotiate? The lender’s fees charged will be looked at to see who you gave “deals” to and who did not get a deal.
- Are there different pricing schedules in your branch based on loan officer comp plans? If you happen to have a great compensation plan, but other originators in your office get better pricing because their comp plan is lower, this data will likely show that you charge more to borrowers than others. I know you are going to say you are more experienced and worth it, but the regulators don’t necessarily see it that way.
- Do you concentrate your origination efforts in high-end areas and offer little to no counsel to those in underserved areas?
- Do you not return calls to some borrowers because you believe their loan will take too much time or offer different levels of service based on who sent you the lead?
These are just a few of the minefields, but also the ones that are most egregious to an examiner.
Now is the time to reflect on how any of these practices could demonstrate that your consumers are not being treated “fairly” under regulation, and how you may be able to change your practices to stay off of the radar screen.
Loan Originator/Processor/Underwriter/Closer Interpretation
Take a further look into fair lending regulation and how it may impact your business. The data will tell a story about your business – and you want that story to be a good one!
Now is the time to take a strong look at your branch, region or company practices. As more data is collected and evaluated, it could highlight performance that is not in your best interest. Stay on top of what is being collected and think about how it could make your business look to a regulator. There is no time like the present to be proactive with this!