NEW HMDA REQUIREMENTS & HOW TO EXECUTE IN POINT

Calyx Software and Morrison Foerster LLP

October 17, 2017

Confidential

The information presented is confidential and proprietary to Calyx Technology, Inc., dba

Calyx Software (“Calyx”), and may not be disclosed without the permission of Calyx. The

purpose of this presentation is to provide information, rather than advice or opinion. It is

accurate to the speaker’s knowledge as of the date of the presentation. To the extent that

this presentation contains any examples, please note that they are for illustrative

purposes only and any similarity to actual individuals, entities, places or situations is

unintentional and purely coincidental. In addition, any examples are not intended to

serve as legal advice. No part of this presentation may be modified, printed, or presented

without the permission of Calyx.

© Calyx Technology, Inc. 2017. Calyx and Calyx Software are registered trademarks of

Calyx Technology, Inc. All rights reserved.

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Presenters

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Don Lampe, Partner at Morrison & Foerster LLP

Tate Kesner, Customer Services Director at Calyx Software

• General Principles • Covered Loans

• Who is responsible for reporting

• Demographic data

• The “Broker Rule”

• Pre-qualifications vs. pre-approvals

• Risk Mitigation

• Resources

• Point Demonstration

Agenda

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• First, HMDA reporters should be nearing a readiness state to report 2018 HMDA data

• Implementation, particularly in larger organizations, includes Compliance, IT/Operations, Vendor Management, QC/QA

• Implementation Plans are detailed, very process-driven

• Smaller organizations, as is the case today, will be more dependent on vendors, for gathering data (LOS), importing data into appropriate (revised) data fields, validation, and preparing to report (LAR)

• Data mapping challenges include multiple sources of granular data points, from Loan Applications, TRID/CD’s and Regulation B application decisioning and disposition

• Cooperation/coordination across multiple origination-side parties, including mortgage brokers, wholesale lenders and correspondents

Starting Point

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• General principles • Who must report (“Financial Institution”)?

• Which loans must be reported (“Covered Loans”)?

• Which loan transactions are excluded from Regulation C entirely?

• What must be reported?

• Loan purpose

• LEI and ULI

• Expanded Demographic Data (f/k/a GLI) & how to collect it from applicants

• Reporting “rules of the road” for multiple parties on the application & origination side: direct lender, mortgage broker, wholesale lender, correspondent

• A few other tips on reporting, but not a “deep dive” in data reporting requirements, technical specs, data validation and new FIG

• Potential penalties for failing to report accurate HMDA data

• Fair lending implications

• Resources for implementation and compliance

What We Will Cover

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• Only residential, consumer-purpose loans – we will not cover requirements for non-consumer purpose/commercial loans

• Requirements before 2018, under “old” Regulation C

• Detailed comparison of “old” Regulation C and “new” Regulation C • Will not compare “old” data fields with “new” data fields except for certain

compliance/implementation “hot spots”

• Technical reporting requirements, such as data validation and navigating the amended Financial Institutions Guide (FIG)

• Nuts & bolts of how to fill out & submit LAR

• Fair lending liability elements, such as “disparate impact”

• Different procedures for reporting in years after 2018

• We are not offering legal or compliance advice – this presentation is for informational purposes only

What We Will Not Cover . . .

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• Amended Regulation C does not replace the entire existing rule – still need to understand the Reg C as a whole, e.g, “Broker Rule”

• HMDA compliance these days is a “journey” not an event – there is no “big bang,” implementation and compliance is a PROCESS that has started and will continue for several years

• Webinars & presentations not a substitute for studying amended Reg C – but how?

• Start with the Rule amendments themselves, and be careful to consider amendments to original CFPB rule changes after Oct. 2015

• The Commentary (CFPB “Official Interpretations”) is key – much more detailed than Rule amendments, including specific examples

• For smaller players (such as mortgage brokers and non-bank lenders), studying the CFPB Small Entity Compliance Guide (Oct. 2017) (SECG) is a must

• Vendor resources – Calyx is here to help

Some Practical Tips for Compliance

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• For Applications, who reports and what is reported basically is dependent on Regulation B application acceptance, decisioning and disposition policies, procedures and processes

• A good time to review internally, to ensure that applications are handled in accordance with Reg B

• Reportable information for action taken on application by Financial Institution (§1003.4(a)(8)), i.e., whether:

• Application resulted in origination – report as an origination

• Application did not result in an origination, because (i) approved but not accepted, (ii) denied, (iii) withdrawn by the applicant, or (iv) closed for incompleteness

• Preapproval request did not result in an origination of a home purchase loan was denied or approved but not accepted – special rules

Regulation B Review

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• General rule: requirements to HMDA report originations of Covered Loans turn on which origination-side Financial Institution made the credit decision

• General rule: HMDA reporting of applications not resulting in originations depends on which Financial Institution took action on the application and what action was taken

• Good Reg B hygiene for loan applications = good HMDA reporting

• CFPB also harmonized Reg B and HMDA in other respects – final Reg B amendments October 2, 2017

• https://www.gpo.gov/fdsys/pkg/FR-2017-10-02/pdf/2017-20417.pdf [Rule]

• https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_regulation-b_executive-summary.pdf [CFPB Summary]

Reg B cont’d

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• Data collection for 2018 actually starts this year

• Data collection requirement for Financial Institution to report Covered Loans and Covered Loan applications as to which a final action is taken beginning on January 1, 2018

• Final action may take place months after application date

• EXCEPTION: collection of “Demographic Data” (the data formerly known as GMI)

• 2017 HMDA reporting will not slow down while 2018 reporting is being ramped up under amended Rule

Transition Note on Data Collection

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• Use of CFPB online compliance tools could not be more important: www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/hmda-implementation/ [HMDA implementation website]

• Start with: “CFPB Small Entity Compliance Guide” (October 2017): https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_hmda_small-entity-compliance-guide.pdf

• User tip: click on the live links inside this document for revised implementation tools – CFPB put out V.2’s of several on 9/28/17

• For entity coverage: “HMDA institutional coverage” [9/17 revision]: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_2018-hmda-institutional-coverage.pdf

Compliance & Implementation Resources

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• For transaction coverage (“Covered Loans”) [9/17 revision]: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_2018-hmda-transactional-coverage.pdf

• For reporting race & ethnicity: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201701_cfpb_HMDA-Ethnicity-and-Race-Collection.pdf

• “Key Dates Timeline” [9/17 revision]: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_hmda-key-dates-timeline.pdf

• For technical reporting requirements (FIG): https://www.consumerfinance.gov/data-research/hmda/for-filers

CFPB Online Implementation Tools cont’d

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• Resources for HMDA filers under separate HMDA Research tab: https://www.consumerfinance.gov/data-research/hmda/for-filers [including FIG]

• Simplified LAR for smaller entities: https://www.consumerfinance.gov/data-research/hmda/lar-formatting-tool

• Technology preview: https://www.consumerfinance.gov/data-research/hmda/tech-preview

• HMDA Loan Scenarios: https://www.consumerfinance.gov/data-research/hmda/static/for-filers/HMDA-Loan-Scenarios.pdf

• FAQ’s: https://www.consumerfinance.gov/data-research/hmda/faq

Reporting Tools from CFPB

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• Step 1: are you a “Financial Institution” under the Amended Rule? • Definitions have changed, both inclusionary and exclusionary

• Direct lenders, mortgage brokers & wholesale lenders may be FI’s

• Based on entity type and loan volume – different for banks v. nonbanks

• Look at this resource: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_2018-hmda-institutional-coverage.pdf

• Step 2: if you are an FI, you are to report “Covered Loans” • Definitions have changed – HELOC’s are now “in” (at 500 or more for either of

the previous 2 years)

• Look at this resource: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_2018-hmda-transactional-coverage.pdf

Two Types of Triggers for Reporters

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• Distinction between “Depository Institution” and “Non-Depository Institution”, for purposes of asset size and location tests

• DI: bank, credit union or savings association

• NDI: everyone else who originates or purchases Covered Loans

• The common definitional element – LOAN VOLUME

• In either one (2017 amendment) of two preceding calendar years, did you originate at least 25 home purchase loans, including refinancings of home purchase loans, or at least 500 open-end lines of credit (HELOC’s)?

• The 500 HELOC threshold goes down to 100 as of January 1, 2020

Step 1 Financial Institution Definition

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• Some institution-level exclusions are not covered in the Reg C amendments, so look at existing Reg C

• Non-profits like H4H excluded

• The amended Rule details new “exemptions” as exclusions based on types of loan transactions

• The list of loan exemptions also includes loan volume triggers for FI’s

• If you are reporting now, very likely that you will need to report 2018 HMDA data for Covered Loan origination and Covered Loan applications, but need to make the determination based on amended Rule to be certain

Financial Institution cont’d

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• With numerous elements of inclusion and exclusion, the definition of “Covered Loan” (CL) can be complicated

• To understand what is or isn’t a reportable CL, need to walk through several definitions (§1003.2) and exclusions (§1003.3)

• “Covered loan”: closed-end mortgage loan (CEML) or “open-end line of credit” (ELOC)

• ELOC = HELOC (defined in Reg Z) for consumer purpose loans

• CEML: extension of credit secured by a dwelling that is not an ELOC

• In general, lien position does not matter

• For CL definition, amount of credit (jumbo v. non-jumbo) doesn’t matter

• “Dwelling” defined as “a residential structure, whether or not attached to real property, including detached home, condo or coop unit, manufactured home or other factory-built home, or a multifamily residential structure or community”

• In general, not limited to 1-4 family

• Second homes/vacation homes covered

Covered Loans – Step 2

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• New list of loan transactions not subject to HMDA Regulation C, per §1003.3(c):

• Loan secured by unimproved land (land only loans)

• Temporary financings

• Purchases of interests in pools of loans

• Purchases of MSR’s

• Loans purchases from mergers and stock acquisitions

• Dollar amount less than $500 (very low threshold)

• Purchase of partial interest in loan (equitable participation)

• Loans primarily for agricultural purposes

• Commentary covers loans for RV’s, campers, travel trailers, houseboats and MH’s constructed before 6/15/1976 - generally, not HMDA reportable if collateral floats on water or travels over the road

• Technical note: Section 1003.3(c) means these loans are not covered by Reg C at all, not that these loans are not “Covered Loans”

HMDA Exclusions

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• Reporting of loan purpose (§1003.4(a)(3))

• For reporting, must distinguish between whether the CL or application for CL is for the purpose of:

• home purchase loan,

• home improvement loan,

• home improvement loan,

• refinancing,

• cash-out refinancing or,

• “other ”

• Reporting “purpose” terminology fleshed out in the definitions in §1003.2 and exclusions in §1003.3 - “dial back and forth” between subsecs. (4), (2) & (3) and corresponding Commentary

Terminology: Loan Purpose Reporting

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• For “purpose” reporting, “home purchase loans” include: • CEL or ELOC secured by one dwelling but used to purchase another dwelling

• Construction/perm loan

• Note: HPL is a “main” definition in subsec. (2) – see Commentary 1003.2(j)

• Construction-only loan not reportable if a “temporary loan” (see Commentary 1003.3(c)(3)) or if made to a person exclusively for constructing a dwelling for sale (excluded from HMDA)

• Mixed-use properties: if property used for both residential and commercial purposes, depends on “primary purpose” - see Commentary 1003.2-2(i)

• Home improvement loans – see Commentary 1003.2-2(i), CEL or ELOC for purpose, in whole or in part, for repairing, etc. dwelling & note changes to data point requirements

Terminology: Loan Purpose cont’d

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• “Refinancing” or “cash-out refinancing” – see Commentary 1003.4(a)(3) - 2

• Loan modification transactions require further analysis – example provided by CFPB says New York CEMA loan mods not reportable (but not same for similar loans in other states)

• Loan assumptions of HPL’s in general are reportable – see Commentary 1003.2(j)-5

• “Other” may include CL or CL application for paying educational expenses – see Commentary 1003.4(a)(3) – 4

• NOTE: there are some additional considerations for reporting loan purpose for commercial/ business loans (not covered here)

Terminology for “Purpose” – cont’d

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• HMDA reporter (FI) must assign and report a ULI for each CL, per §1003.4(a)(1) – see Commentary 1003.4(a)(1)(i)

• Unique multi-character LEI “code,” only for the transaction

• Reporter is responsible for generating it

• Must start with LEI, then “fill in” of up to 23 letters or numerical digits, which cannot be info that permits ID of borrower (e.g., no applicant names, SSN’s, DL numbers, passport numbers, DOB, Tax I.D. number, or loan or file numbers that will appear in the public records), and ends with 2-digit check code

• There are special rules if the ULI has already been reported, like purchases

• HMDA reporter must obtain an LEI, to include in every ULI • Common practice is to get LEI from MERS

• In effect, each reporter must have its own LEI if it reports HMDA data separately

Reporting ULI & LEI

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• “The data formerly known as GMI”

• Perhaps the most complex component of HMDA reporting but for CFPB probably the most important

• For natural person applicants & co-applicants must report applicant-level information on (i) ethnicity, (ii) race, and (iii) sex (ERS)

• As under existing HMDA, 2 components: (1) OBTAINING FROM APPLICANT, and (2) REPORTING

• Remember, step (1) occurs when Application taken, step (2) maybe months later – will be difficult to “back fill” this information into LAR later on

• Compliance questions center around step (1), which under the amended Rule is more complex than under existing rule

Reporting of Demographic Data

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• Stop and go back to the CFPB on-line implementation resources – see especially CFPB SECG at pp. 45-53, Appendix B to amended Rule and Commentary 1003.4(a)(10)(ii)

• Appendix B: practical, step-by-step guide for obtaining individual data – a “must read”

• Amended policies, procedures and processes for taking Applications are key, as are new Application forms

• Start with: application form itself – new layout for collecting this data (Addendum) • New model application forms are set up for required data collection – you

should not be “freelancing” outside of the approved forms themselves and compliant processes for collecting applicant’s Demographic Data

• CFPB provides approved “Sample Data Collection Form – Demographic Information of Applicant and C0-Applicant”

Obtaining & Reporting – cont’d

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• In taking Application, you must ask the applicant for the information, but (as today) you can’t require the information, including the detailed (disaggregated) individual data • Collection of data in person, over the phone or video requires observational

guidelines and proper scripting – as is the case today

• Terminology for data collection: “category” & “subcategory”

• Required to report ethnicity, race & sex (ERS) category of applicant AS PROVIDED BY THE APPLICANT – you must offer the applicant the option of selecting more than one ethnicity or race

• Only the applicant can self-identify as being in a subcategory – you should not “fill in” this information (and cannot require it)

• Specific reporting requirements deal with number of categories & subcategories the FI is be report – more or less, a “Rule of 5”

Obtaining Data from the Applicant

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• ESR consists of “categories” – top line

• Other data for RACE and ETHNICITY consists of “subcategories” – underneath the ESR categories on the Addendum

• For example, Ethnicity, Hispanic or Latino, includes checkboxes for Mexican, Puerto Rican, Cuban and (in free form) Other Hispanic or Latino

• For Other Hispanic or Latino, there are examples based on countries of origin

• Similarly, Race, familiar categories of American Indian/Alaska Native, Black or African American, Asian, Native Hawaiian or Other Pacific Islander and White, and numerous subcategories for each other than Black/African American and White, together with subcategory free form fields for every category other than White

• You cannot “reject” applicant-provided information in free form fields, even if inconsistent or nonsensical

• Note the number of categories/subcategories reported is limited

Demographic Data Terminology

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• Basic rule: the FI that makes the credit decision is required to report for applications that result in loan being made (origination)

• In general, if application results in loan not being made, then reporting obligation depends on who takes action on the Application

• Not required to report the Application if it resulted in an origination

• Start with the “easy case” – a retail lender FI takes an application for a CL & is responsible for processing, underwriting. closing & funding the CL with its own funds (portfolio or warehouse), & intends to sell the CL in a secondary market transaction in a few weeks

• “Simple” requirement: the FI approves the CL & the CL closes, it is an origination, and the FI reports the CL as an origination

Responsibilities of Reporting

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• Same set of assumptions, but the Application does not result in a reportable origination of the CL – what is reported?

• General rule: this FI reports the CL as Application, based on action it took on the Application (per Regulation B)

• FI denies the Application – FI reports the Application as denied

• Applicant does not want to proceed, withdraws his/her Application: FI reports the Application as withdrawn

• FI treats the Application as withdrawn – FI reports the Application as withdrawn

• FI closes the Application for incompleteness – FI reports the Application as incomplete

• Amended Rule: counteroffer not a new Application, instead takes place of prior Application & the FI reports action taken on c/o

• FI reports the Application data for the calendar year during which the Application was acted upon even if Application rec’d in previous year

Responsibilities of FI – cont’d

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• General rule: Preapprovals for Covered Loans must be reported under the amended Rule, but Prequalifications do not.

• The CFPB Official Interpretations say this about Pre-Quals: • “A prequalification request is a request (other than a preapproval request) by a

prospective loan applicant for a preliminary determination of whether the prospective loan applicant would likely qualify for credit under the Financial Institution’s standards, or for a determination of the amount of credit for which the prospective applicant would likely qualify.”

• The amended Rule does not require an FI to report prequalification requests, even though these requests may constitute “applications” under Regulation B.

• These are general rules – • Reporting compliance as among prequalification requests, preapproval requests

and Applications that are neither under the amended Rule should be mapped out through written policies and procedures

Pre-Quals & Pre-Approvals

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• The amended Rule requirement to report “preapprovals” as “applications” turns on the FI’s responsibility to properly characterize preapprovals as HMDA “applications” under documented policies and procedures (see §1003.2(a)(2))

• Important under the amended Rule to distinguish between the new descriptions of “prequalification” (generally, not reportable) and definition of “preapproval” as an application (reportable)

• Simply describing a borrower inquiry a request for a prequalification or a preapproval & the FI’s response a “prequalification” or “pre-approval” is not determinative for reporting purposes.

• In effect, for compliance purposes, preapprovals should be offered under documented “preapproval programs,” under the definition of “application” in §1003.2(a), which contains numerous elements

Reporting Pre-Approvals

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• Existing Regulation C (not amended) sets out the “broker rule” and related topics in the “scope” section (see Commentary 1003.1-2)

• More than one FI may need to report the CL or CL application

• The “broker rule” according to CFPB: • “An institution that takes and processes a loan application and arranges for

another institution to acquire the loan at or after closing is acting as a ‘broker,’ and an institution that acquires a loan from a broker at or after closing is acting as an ‘investor’”

• “If the broker makes a credit decision, it reports that decision; if it does not make a credit decision, it does not report. If an investor reviews an application and makes a credit decision prior to closing, the investor reports that decision. If the investor does not review the application prior to closing, it reports only the loans that it purchases; it does not report the loans it does not purchase. An institution that makes a credit decision on an application prior to closing reports that decision regardless of whose name the loan closes in.”

The “Broker Rule”

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• Broker’s use of underwriting criteria (from Commentary): • “If a broker makes a credit decision based on underwriting criteria set by an

investor [e.g., delegated underwriting], but without the investor's review prior to closing, the broker has made the credit decision. The broker reports as an origination a loan that it approves and closes, and reports as a denial an application that it turns down (either because the application does not meet the investor's underwriting guidelines or for some other reason). The investor reports as purchases only those loans it purchases.”

• Illustrations of the broker rule (from Commentary): • “Assume that, prior to closing, four investors receive the same application from a

broker; two deny it, one approves it, and one approves it and acquires the loan. In these circumstances, the first two report denials, the third reports the transaction as approved but not accepted, and the fourth reports an origination (whether the loan closes in the name of the broker or the investor). Alternatively, assume that the broker denies a loan before sending it to an investor; in this situation, the broker reports a denial.” [See CFPB Examples below]

Broker Rule cont’d

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• Multiple FI parties may be involved in application-taking, disposition of application and origination, which CFPB refers to as “multiple parties” – see also existing Broker Rule above

• CFPB guidance on how to determine reporting under amended Rule - SECG, pp. 41-43 & Commentary, including Examples

• General Reg C rules for originations, when more than one FI: • Origination: only one FI reports origination of a Covered Loan (CL)

• If more than one party involved in origination, the party that makes the credit decision approving the application before CL closing/account opening

• It doesn’t matter who’s name the CL closes in (e.g., tablefunding)

• If more than one FI approved the application of a CL & one of the FI’s purchased the loan (e.g., correspondent relationship), the purchasing FI reports but exceptions for loan purchasers do not apply

• If FI approves CL application based on delegated underwriting and funds the CL from its own money, that FI reports

Multiple Parties Reporting under Reg C

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• Reporting of Application data required if application does not result in a CL origination – but who reports?

• Depends on application disposition (see Reg B slide above) – the party (FI) that took action on the Application reports its action, and more than one FI may need to report its action

• The party (FI) that denies the Application must report, e.g., in who’s name is the denial letter/AAN sent out?

• If FI approves the Application but the borrower does not move forward on the loan (withdrawn application), that FI reports

• Otherwise, if FI considering the Application for approval when it is withdrawn by applicant or the FI treats it as withdrawn or closed for incompleteness, that FI reports the action

• Doesn’t matter the FI received the Application directly from the applicant or from another FI (mortgage broker)

• Doesn’t matter whether another FI reviewed the Application and reported its own action on the Application

Multiple Parties: Reporting Applications

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• Under these general rules, not always obvious which party has the reporting obligation – so, CFFB provided Examples in the Commentary and the SECG

• Example 1: Ficus Bank [a mortgage lender or a mortgage broker] receives an Application for a Covered Loan from an applicant and forwards that Application to Pine Bank, which reviews and approves the Application prior to closing. The loan closes in Ficus Bank’s name. Pine Bank purchases the loan from Ficus Bank after closing. Pine Bank is not acting as Ficus Bank’s agent when it reviews and approves the Application. Because Pine Bank made the credit decision prior to closing, Pine Bank reports the transaction as an originated Covered Loan, not as a purchased Covered Loan. Ficus Bank does not report the transaction.

• Example 2: Ficus Mortgage Company [a mortgage lender or a mortgage broker] receives an Application for a Covered Loan from an applicant and forwards that Application to Pine Bank, which reviews and denies the Application before the loan would have closed. Pine Bank is not acting as Ficus Mortgage Company’s agent when it reviews and denies the Application. [continued on next slide]

Multiple Parties: EXAMPLES

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• CFPB Examples for Multiple Parties cont’d • Example 2 [continued from previous slide] Because Pine Bank makes the credit

decision, Pine Bank reports the Application as denied. Ficus Mortgage Company does not report the Application. If, under the same facts, the Application is withdrawn before Pine Bank makes a credit decision, Pine Bank reports the Application as withdrawn, and Ficus Mortgage Company does not report the Application.

• Example 3: Ficus Bank [a mortgage lender or a mortgage broker] receives an Application for a Covered Loan from an applicant and approves the Application. Ficus Bank closes the loan in its name. Ficus Bank is not acting as Pine Bank’s agent when it approves the Application or closes the loan. Pine Bank does not review the Application before closing. Pine Bank purchases the Covered Loan from Ficus Bank. Ficus Bank reports the loan as an originated Covered Loan. Pine Bank reports the loan as a purchased Covered Loan.

EXAMPLES cont’d

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• CFPB Examples for Multiple Parties cont’d • Example 4: Ficus Bank [a mortgage lender or a mortgage broker] receives an

Application for a Covered Loan from an applicant and approves the Application. Ficus Bank closes the loan in its name. Ficus Bank is not acting as Pine Bank’s agent when it approves the Application or closes the loan. Pine Bank does not review the Application before closing. Pine Bank purchases the Covered Loan from Ficus Bank. Ficus Bank reports the loan as an originated Covered Loan. Pine Bank reports the loan as a purchased Covered Loan.

• Example 5: Pine Bank [a mortgage lender or a mortgage broker] reviews an Application and makes a credit decision to approve a Covered Loan using the underwriting criteria provided by Ficus Mortgage Company [delegated underwriting]. Pine Bank is not acting as Ficus Mortgage Company’s agent, and no one acting on behalf of Ficus Mortgage Company reviews the Application or makes a credit decision prior to closing. Pine Bank reports the Application or, if the Application results in a Covered Loan, it reports the loan as an originated Covered Loan. If the Application results in a Covered Loan and Ficus Mortgage Company purchases it after closing, Ficus Mortgage Company reports the loan as a purchased Covered Loan.

EXAMPLES cont’d

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• CFPB Examples for Multiple Parties cont’d • Example 6: [involves the Broker Rule] Ficus Bank [in this case, a mortgage

broker] receives an Application for a Covered Loan and forwards it to Aspen Bank and Pine Bank. Ficus Bank makes a credit decision, acting as Elm Bank’s agent, and approves the Application. Pine Bank makes a credit decision and denies the Application. Aspen Bank makes a credit decision approving the Application. The applicant does not accept the loan from Elm Bank. The applicant accepts the loan from Aspen Bank and credit is extended. Aspen Bank reports the loan as an originated Covered Loan. Pine Bank reports the Application as denied. Elm Bank reports the Application as approved but not accepted. Ficus Bank does not report the Application [because for its decision, it was acting as Pine Bank’s agent].

EXAMPLES cont’d

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• As it the case today, compliance with Regulation C collection and reporting requirements requires coordination among the parties on the 0rigination side of a Covered Loan transaction

• Common questions you may ask for determining reporting obligation – see next slide

• Basic questions: do you make the credit decision (approved or denied)? What are your responsibilities with respect to the Application?

• There still me be some “unanswered questions” and the parties can help each other with uncertainties

• Brokers and non-portfolio lenders should be getting guidance from investors and if not, ask for it now

Coordination

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• As it the case today, compliance with Regulation C collection and reporting requirements requires coordination among the parties on the 0rigination side of a Covered Loan transaction

• Common questions you may ask for determining reporting obligation – see next slide

• Basic questions: do you make the credit decision (approved or denied)? What are your responsibilities with respect to the Application?

• There still me be some “unanswered questions” and the parties can help each other with uncertainties

• Brokers and non-portfolio lenders should be getting guidance from investors and if not, ask for it now

Coordination

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• Common questions for determining reporting obligation for CL Applications and originations:

• Do you fund loans with your own money without anyone else having to approve the loan first?

• For denials, do you deny loan applications without sending them to anyone else for decisioning (such as a warehouse lender or correspondent purchaser “investor”)?

• Are you responsible for sending credit denial/adverse action notice in your own name?

• Do you have delegated underwriting authority from the investor (make the credit decision yourself)?

• In which channel is the application being processed? Retail? Wholesale? Correspondent? Who is responsible for credit decision?

• When is the loan purchased, i.e., funded by correspondent purchaser or wholesale lender in connection with closing or later by an investor?

Multiple Parties – Common Questions

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• Important distinction between compliance risks related to Regulation C REPORTING and fair lending/antidiscrimination risks that are sure to arise as detailed HMDA data is made public

• Under HMDA, there is not a private right of action per se for non-compliance with reporting requirements

• But private rights of action may be built on data reported in March 2019

• The main risk for failing to report in compliance with Reg C: required resubmission of LAR

• Reporting errors will be detected by CFPB through amended Examiner Transaction Testing Guidelines, which differ significantly from existing Guidelines

• Changes to thresholds and general approach, with some leniency on accuracy of some data points

Compliance & Compliance Risks

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• Issued by FFIEC in August 2017 & applies to data collected for 2018 and beyond

• Two stages of review: initial sample & total sample

• If number of errors exceeds the initial sample threshold, examiners are to review the total sample

• At this stage, examiners are to review all fields with 1 or more errors in the initial sample

• If the number of detected errors exceed the total sample threshold, the FI must correct & resubmit the LAR

• Resubmission threshold numbers are published in the Resubmission Guidelines

• Given the increased number of data points and elements of data points, resubmission will be more difficult than in the past

Revised Resubmission Guidelines

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• The CFPB’s reporting platform provides for validation checks, upon submission of LAR’s – but rule of thumb is that you should validate your LAR before it is submitted

• CFPB yet to issue its Geocoder, but there will be some “safe harbor” protections for errors if an FI uses it as opposed to another Geocoder

• Quarterly data recording & a “safe harbor” of sorts • Reporting FI is required to record HMDA data on a LAR within 30 calendar days

after the end of each calendar quarter in which final action is taken (§1003.4(f))

• If the FI makes a good faith effort to do this, and some data are nevertheless inaccurate or incomplete, this is not a violation of HMDA as long as the FI corrects or completes the data before submitting is annual LAR (§1003.6(c)

• This rule is separate from the amended rule requirement of quarterly reporting for FI’s based on loan volume (60,000 loans in the previous calendar year) starting in 2020

Risk Mitigation?

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• Data is to be published at an earlier time of the year than in the past – April 2019

• CFPB still working on how to publish the data in light of personal privacy of applicants and borrowers – proposal is pending and it is controversial

• FI reporters not required to provide data in response to inquiries – only to the CFPB

• It is expected that in 2019 the data will be widely distributed to consumer advocates, community groups, other regulators (state), other enforcement parties (USDOJ; state AG’s) and last but not least plaintiffs’ attorneys

• Some experts believe that new HMDA will not automatically show discrimination in the marketplace – there may be a good story to tell

Fair Lending Risks?

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• To manage and mitigate fair lending risks, it is more important than ever to “know your data,” as it is being recorded – e.g., at least quarterly testing of data and consideration of emerging risks

• Be aware that price discrimination will be much more evident from the data

• Larger entities (such as banks) have been doing periodic testing of HMDA data for years

• Going forward, be aware of CFPB’s authority to enforce not just fair lending, but “fairness”

• Much talk in Washington today about “economic justice” and expect more of it from the CFPB and elected officials

• HMDA data release in 2019 likely to kick off a “huge” public debate about fair lending but also fairness in the marketplace

• “Know your data and the story it tells” before someone else tells if for you

Know Your Data

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Point Demonstration

Demonstration

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A resource document can be downloaded from the handout section at the right side of your screen.

A recording of the webinar, slides and resources links will be made available after the webinar.

Calyx Software Customer Service for technical questions CustomerService@CalyxSoftware.com

800.342.2599

Kb.CalyxSupport.com

Resources

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