A practical look at new HMDA reporting requirements and what they mean for private lenders

If you are a lender engaged in consumer mortgages, then you are certainly familiar with the Home Mortgage Disclosure Act, or HMDA.

On the other hand, if you are a private lender engaged in business-purpose loans, then hopefully you
have heard of HMDA and figured out that it now applies to you.

Let’s look at the latest reporting requirements and what they mean for private lenders.

Background
In 1975, the U.S. Congress determined that some depository institutions sometimes contributed to the decline of certain geographic areas by failing to provide adequate home financing to qualified applicants on reasonable terms and conditions.  As a result, it adopted the Home Mortgage Disclosure Act, which requires certain banks, savings associations, credit unions and for-profit nondepository institutions to collect, report and disclose 22 pieces of mostly economic and locational data about originations as well as mortgage loan applications that are denied or withdrawn.

As originally enacted, the law mostly applied to owner-occupied home mortgage applications but not to business purpose loans.

In 1989, Congress expanded HMDA to assist in identifying possible discriminatory lending patterns. Financial institutions were required to report racial characteristics, gender and income information to help enforce antidiscrimination statutes.

After the mortgage meltdown in 2008 and the adoption of the Dodd-Frank Act in 2010, HMDA administration was transferred to the newly-formed Consumer Finance Protection Bureau (CFPB) together with the authority to mandate reporting of “such other information as the Bureau may require.” Predictably, more data points were added to HMDA, including a litany of specific loan terms, credit scores and the value of real estate pledged, to name a few.

Finally, in 2015, the CFPB issued a new rule that established new standards for who had to collect and report HMDA data. It also expanded the number of data fields to 110 items.

Under the new rule, most of which took effect Jan. 1, 2018, the distinction between consumer and business-purpose mortgages was erased. Instead, all lenders meeting minimum transactional volumes of 25 closed-end loans or 100 open-end lines of credit in each of the two preceding calendar years are required to report, regardless of the consumer or business-purpose nature of their loans.

Under pressure from small banks and credit unions that successfully argued a hardship case, the open-end loan threshold was subsequently increased from 100 to 500.

CFPB Cost Benefit Analysis Flawed
One area of the Dodd-Frank regulatory gymnastics that seems rational is Section 1022(b). This section requires the CFPB to conduct a cost-benefit analysis for consumers and covered persons that would result from adoption of any rule.   The analysis must include:

1. The potential reduction of access by consumers to financial products or services.
2. The impact on depository institutions and credit unions with $10 billion or less in total assets.
3. The impact on consumers in rural areas.

To measure projected costs and benefits of the proposed HMDA changes, the CFPB compared projected outcomes to a baseline consisting of “the state of the world before implementation” of the new rule.  However, the bureau also acknowledged that it does not have a reliable basis from which to estimate costs.

The CFPB concluded that “one-time costs to begin reporting could be substantial (as high as $100,000 for small, low complexity institutions) and ongoing annual reporting costs would be under $10,000 per year.”

For this reason, the bureau decided to avoid imposing the new reporting requirements on financial institutions that originate fewer than 100 open-end loans. By their calculus, this would eliminate reporting requirements for about 3,000 smaller-sized institutions with low volume and would require reporting by only about 749 financial institutions, all but 24 of which would also report on their closed-end mortgage lending.  Of course, their analysis focused on depository institutions and appears silent on the subject of nondepository institutions, which is the domain of hard money lenders.

The bureau’s analysis is what led to a final rule with the 25 closed-end or 100 open-end (subsequently amended to 500 open-end) threshold.

Amazingly, the bureau also somehow concluded: “In no event does the Bureau anticipate that consumers will experience reduced access to credit as a result of these changes” and “the Bureau believes that none of the changes is likely to have an adverse impact on consumers in rural areas.”

Cost-Benefit from a Hard Money Lender’s Perspective
In retrospect, it is mystifying how hard money lenders got grouped into 40 years of HMDA, or consumer, regulation. While the CFPB advertised the proposed rule changes and received 51 comments, none of them appear to have been submitted by hard money lenders.

In fact, it appears this entire class of “nondepository financial institution” was left out of the HMDA rule-changing process. If there were to be benefits for hard money borrowers, then presumably they would have been reported. But nowhere in the U.S. Federal Register will you find a single reference to benefits for hard money borrowers. Frankly, you won’t find cited sources of abuse in the business-purpose loan category either.

Conversely, you will find the bureau’s conclusion that it costs small financial institutions about $100,000 to set up HMDA reporting systems plus about $8,400 annually. Since the hard money industry consists of thousands of micro lenders that predominantly originate more than 25 closed-end loans annually, most are subject to all the expense of adoption, but none are afforded the 500 open-end loan threshold relief granted to multibillion-dollar depository institutions and credit unions.

It’s one thing to highlight an apparent lack of equity in how the new rules are applied, but the more absurd observation is that no one apparently benefits. More likely, it’s just a giant data crunch and part of a never-ending, escalating regulatory cycle.

Moreover, standard economic theory, which is quoted liberally in the bureau’s cost-benefit analysis, predicts that in a market where financial institutions are profit maximizers, lenders will pass on to consumers the increased costs imposed by added HMDA regulation.

If hard money lenders can pass on over $100,000 in costs, then the bureau’s conclusion that “none of the changes is likely to have an adverse impact on consumers in rural areas” is deeply flawed. And if they can’t pass on the costs, then some lenders will pull up stakes and quit the business, in which case the bureau’s other conclusion that “consumers will not experience reduced access to credit” is also deeply flawed.

Beyond the technical, there is the obvious. There doesn’t appear to be any regulatory fire, but this is a case where the hard money lending industry nevertheless got hosed.