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Improve the HMDA Process Now using Project Management Methods
As another HMDA season draws to a close, take some time to consider the HMDA process and how to make it better.
The HMDA LAR is an important document that is very labor intensive, with monetary penalties attached for inaccuracies. Take a project management approach and create a strong process to get it right.
I personally see financial institutions scrubbing LARs at year end, making changes to applications and loans that should have been made earlier in the year. Other than purchaser codes or reconsidered applications that change later in the year, the LAR is expected to be correct within 30 days of each quarter end. Waiting until year end to review and correct means that:
- The LAR was not correct with 30 days of each quarter end;
- The work to review and correct is all combined into one frenzied time period at a high cost in real money.
HMDA should be treated as a core financial institution process, with project management methods used to develop an efficient, cost effective way to report the data. A great deal of time, effort (and therefore money) is expended on HMDA. It should not be an orphan process relegated to one person or department to clean up after everyone to get it right.
New HMDA LAR Will Be Almost 3x Larger!
The time spent scrubbing HMDA logs will grow exponentially once the new HMDA rules are in place. The new HMDA LAR will have 110 fields compared to 39 fields today. (This includes Respondent ID, Record ID and Agency codes on the current LAR.)
Waiting until year end to review files will take immensely longer and create much higher stress levels. HMDA data should be reviewed as it is created and not left until quarter or year end for one person or department to clean up. Reviews and audits should identify inadvertent errors, not be the process to get the data right.
HMDA and Dual Controls
Dual controls have a place in HMDA management. Make HMDA data reviews part of the process as applications are handled and files go through booking and quality control. Scrubs and revisions are time consuming and costly. HMDA should not be handled more loosely than other processes that rely on accurate data.
HMDA has fair lending implications that cry out for accurate data. The new HMDA requirements require so much more data that will flag potential fair lending concerns. Don’t let inaccurate data cause unnecessary problems. Get your current process under control so that chaos will not ensue when the new rules come into play in less than 24 months.
Many Sets of Hands Touch a Loan File
As an application moves through the processing, underwriting, and booking processes, data should be reviewed for accuracy. The first accuracy review should not be Compliance conducting a periodic test or, worse yet, an audit or year end review.
What a lost opportunity to have so many employees touching a file and passing on incorrect data. Divide up specific sections of data responsibility to specific jobs that handle the applications as they move along. If a loan officer enters original data such as application date, amount, property address, purpose, and demographic data (race, ethnicity and gender), the next area to handle the file should check that information. Why process bad information and further pollute the HMDA pipeline? As more data is added (preapproval codes, geocoding, occupancy, etc.) it should be double checked by areas responsible for that information and reviewed by the next area handling the file.
When an application that does not result in an originated loan is closed out, the business unit should review the data at the time when an adverse action or other notice is issued or final status is assigned. Check the data, has it all been entered an and is it correct? Don’t put that file away until it has been reviewed and corrected.
Build in checks to ensure that all applications have been identified. Surprise applications should not be surfacing at year end. Those surprises are not just a problem for HMDA but also create Regulation B/ECOA risk. If the application process has not been automated, think about ways to recognize that an application is in house. Was a credit report ordered? Periodic reviews of the credit report billing can identify possible applications. Are there similar activities that can be used to identify these orphan applications? Consider the flow of data, where are the touch points that can flag applications? If there is an origination system, learn how to use it to review for open applications for HMDA and Regulation B and Z timeline issues.
Focus on Cost in Management Discussions
Discuss the process with management. Don’t focus on how it makes the life of the Compliance Officer or other staff member doing final checks difficult. Emphasize the hard dollar cost to the financial institution to pull people away from other work, work that also needs to be completed, to carry out an intensive rush to review files and scrub data at year end when that data has been handled by many employees throughout the year. Why process, file, scan, and protect files with bad data?
Spend the financial institution’s money wisely on sound processes that are efficient and effective. The new fields for the HMDA LAR as of 1/1/2018 can be found here at the FFIEC site. Review that document with management to get support for fixing the HMDA process now. HMDA is complex and is becoming more so; give it the respect it deserves.
If you need help understanding HMDA rules, or ways to improve your process, or if you need to get up to speed on the new HMDA rules which are going to take a lot of time to implement, consider The HMDA Academy.