Quality Assurance Conference
The Role of the Quality Assurance Team & HMDA Reporting
Rebecca Walzak, Walzak Risk Analysis LLP Kathleen Hollings, Federal Reserve Bank of New York Stephen Hicks, HSBC
Agenda
• Opening Remarks, Rebecca Walzak • Why HMDA is Important, Kathleen Hollings • Quality Assurance Program for HMDA Reporting, Stephen Hicks
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HMDA & Fair Lending Panel
Quality Assurance’s Responsibility “Getting HMDA Right”
What Is HMDA?
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“Home Mortgage Disclosure Act” Enacted in 1975 Requires lenders to collect and report data Housing- related lending activity Data is publicly available
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Purpose of HMDA
• Provide public with information to judge lender’s performance in serving credit needs of their communities
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Enhance enforcement of fair lending laws
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Provide private investors and public agencies with information to guide investment in housing
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HMDA Disclosures Prior to 2004
• Since inception, HMDA has required lenders to disclose information about the census tract location of their home lending. HMDA amended by Congress in 1989 to explicitly add a fair lending dimension by requiring disclosure of: Race, ethnicity and sex of applicants Borrower income Disposition of applications (approval, denial, etc.) NOTE: No pricing information included in the disclosure requirements. • Analysis revealed wide disparities in rates of approval of loan applications across racial and ethnic lines raising fair lending concerns.
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New HMDA Price Disclosures
• In response to the growing importance of the subprime market and concerns about such lending, the Board added pricing disclosures to HMDA in 2002. Under HMDA, price disclosure pertains to loans with prices above designated thresholds; such loans are referred to here as “higher-priced loans.” What is disclosed? Rate spread in percentage points Spread is difference between APR on loan and yield on Treasury security of comparable maturity Spread reported for first lien loans if above 3 percentage points Spread reported for subordinate lien loans if above 5 percentage points Lien status (first, subordinate, no lien)
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HMDA/Fair Lending Risk Management Challenges
Reputational and legal risk Ability to respond to regulators, community groups and the press Accuracy of data (CMPs)
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Key Fields To Worry About
• • • • • • • • Property Type Pre-approvals Action Taken Ethnicity Race Pricing Data Lien Status Type of Purchaser
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Errors
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HOEPA status not indicated Government Monitoring Information collection errors Lien status errors Other miscellaneous edits
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Useful Resources
• Higher-Priced Home Lending and the 2005 HMDA Data • http://www.federalreserve.gov/pubs/bulletin/2006/hmda/bull0 6hmda.pdf New Information Reported under HMDA and Its Application in Fair Lending Enforcement • http://www.federalreserve.gov/pubs/bulletin/2005/summer05 _hmda.pdf FAQs issued by regulators on 3/31/05 and 4/30/2006 • http://www.federalreserve.gov/boarddocs/press/bcreg/2005/2 0050331/default.htm • http://www.ffiec.gov/hmda/faq.htm FFIEC Web Site • http://www.ffiec.gov/hmda/ FFIEC “Guide to HMDA Reporting”- Getting it Right! • http://www.ffiec.gov/hmda/pdf/2004guide.pdf Federal Reserve Bank of St. Louis' web site on amendments to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA ) • http://www.stlouisfed.org/hmdaregcamendments/default.html
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Quality Assurance Program for HMDA Reporting
Internal Control Framework
• Internal Control Identification • Monitoring Programs To Test Internal Controls • Evaluating Error Rates • Corrective Action
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Internal Control Identification
• Know the Process • Identify What Could Go Wrong • Identify internal controls to prevent errors • Identify internal control gaps • Policies and procedures • Training
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Monitoring Programs To Test Internal Controls
• Quarterly Testing & Reporting • Minimum Sample Sizes • Timing Requirements of reporting • Quarterly Reconciliation to Source Systems • Monthly Dashboards & Sign-offs • Uncleared FFIEC Errors – aging • Error Tolerances • Remediation
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Example - Dashboard
HMDA Dashboard AnyBank USA Year to Date as of July 31, 2006 Purpose Purchase Home Improvement Refinancing TOTAL Lien Status Secured by first lien Secured by subordinate lien Unsecured NA (Purchased Loans) TOTAL Owner Occupancy Owner Occupied Non Owner Occupied NA TOTAL Property Type One-to-Four Family Manufactured Multifamily TOTAL Ethnicity* Hispanic Non-Hispanic Information Not Provided (mail, Internet, phone app) Not Applicable Null O TOTAL *Applicant is Hispanic or non-Hispanic Number 25,000 25,000 25,000 75,000 Number 35,000 25,000 12,500 2,500 75,000 Number 70,000 5,000 0 75,000 Number 68,000 7,000 0 75,000 Number 7,500 65,000 2,500 0 0 0 75,000 Percentage 33.33% 33.33% 33.33% 100.00% Percentage 46.67% 33.33% 16.67% 3.33% 100.00% Percentage 93.33% 6.67% 0.00% 100.00% Percentage 90.67% 9.33% 0.00% 100.00% Percentage 10.00% 86.67% 3.33% 0.00% 0.00% 0.00% 100.00% Action Originated Approved Not Accepted Denied Withdrawn Closed Incomplete Purchased Preapproval Denied Preapproval Not Accepted TOTAL HOEPA Status Yes No TOTAL Sex Male Female Information Not Provided (mail, Internet, phone app) Not Applicable Null or U TOTAL Race* American Indian or Alaska Native Asian Black or African American Native Hawaiian or Other Pacific Islander White Information Not Provided (mail, Internet, phone app) Not Applicable Null TOTAL Number 36,800 3,500 15,000 15,000 2,200 2,500 0 0 75,000 Number 14 74,986 75,000 Number 32,000 32,000 11,000 0 0 75,000 Number 1,600 1,600 15,000 750 51,000 5,049 0 1 75,000 Percentage 49.07% 4.67% 20.00% 20.00% 2.93% 3.33% 0.00% 0.00% 100.00% Percentage 0.02% 99.98% 100.00% Percentage 42.67% 42.67% 14.67% 0.00% 0.00% 100.00% Percentage 2.13% 2.13% 20.00% 1.00% 68.00% 0.00% 6.73% 0.00% 0.00% 100.00% Threshold Rates Originations Dwelling Secured Dwelling Secured Exceeding Thresholds Trigger Rate (Dwelling Secured and Unsecured) Trigger Rate (Dwelling Secured) Record Reconciliation* January February March April May June July August September October November December Number 10,700 10,700 10,700 10,700 10,700 10,700 10,800
36,800 32,500 1,400 3.80% 4.31% Cumulative 10,700 21,400 32,100 42,800 53,500 64,200 75,000
*Applicant Race 1 is one of the following: American Indian/Alaskan Native, Asian, African-American, Native Hawaiian/Pacific Islander or White
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Example - HMDA Data Source Guide
Field Application Num ber Application Date Loan Type Loan Purpose Property Type Occupancy
Originated Loans Unfunded Loans Primary Document Secondary Document Primary Document Secondary Document Field is hard coded and assigned when loan is entered into Loan System. The field is locked down and cannot be changed during the process. The date defaults to the date the loan is keyed into Loan System. The field is locked down and cannot be changed The Loan Type defaults to Conventional due to being the only type of loan offered ! Signed Application ! Funding Checksheet ! Broker Application ! Underwriter Worksheet ! Appraisal ! Broker Application Depending Upon Status ! Broker Application or ! Funding Checksheet ! Underwriter Worksheet ! Underwriter Worksheet Depending Upon Status ! Broker Application or ! Funding Checksheet ! Executed Note ! Underwriter Worksheet ! Broker Application ! Underwriter Approval ! Broker Application * A pre-approval is coded only if the underwriter approval is issued prior to a property being identified. Various documents in the file are reviewed to make this determination. Depending Upon Status ! Adverse Action Notice or ! Funding Checksheet N/A ! Underwriter Approval ! Funding Checksheet ! Executed Note ! Adverse Action Notice Not Applicable ! Adverse Action Notice ! Funding Checksheet ! FFIEC Web Site ! FFIEC Web Site ! FFIEC Web Site ! FFIEC Web Site ! Brokers Application ! Brokers Application ! Brokers Application ! Post Closing System ! TIL ! TIL ! Underwriter Approval ! Funding Checksheet ! Aprpaisal ! Flood Certification ! Flood Certification ! Flood Certification ! Flood Certification Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable ! Application ! Executed Note ! Broker Application ! FFIEC Web Site ! FFIEC Web Site ! FFIEC Web Site ! FFIEC Web Site ! Brokers Application ! Brokers Application Not Applicable Not Applicable Not Applicable Not Applicable ! Broker Application ! Broker Application ! Funding Checksheet ! Final Application ! Appraisal ! Funding Checksheet ! Underwriter Worksheet ! Underwriter Worksheet Depending Upon Status ! Broker Application or ! Underwriter Worksheet Depending Upon Status ! Broker Application or ! Underwriter Worksheet ! Underwriter Approval
Purchased Loans Primary Document Not Applicable on Purchased Loans. ! Signed Final Application ! Funding Checksheet ! Final Application ! Funding Checksheet ! Appraisal ! Underwriter Checksheet Secondary Document
Incom e
Not Applicable on Purchase Loans
Loan Am ount Pre-Approval
! Funding Checksheet
! Executed Note
Not Applicable on Purchase Loans Depending Upon Status ! Adverse Action Notice or ! Underwriter Approval ! Underwriter Worksheet ! Underwriter Worksheet ! Appraisal ! Flood Certification ! Flood Certification ! Flood Certification ! Flood Certification Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable ! Underwriter Worksheet ! Underwriter Worksheet
Action Taken Type Action Taken Date Decline Reason Street Address MSA State County Census Tract Race Ethnicity Gender Purchaser Type Rate Spread HOEPA Status Lien Status Loan Term
! Funding Checksheet ! Funding Checksheet Not Applicable ! Funding Checksheet ! FFIEC Web Site ! FFIEC Web Site ! FFIEC Web Site ! FFIEC Web Site ! Brokers Application ! Brokers Application ! Brokers Application ! Post Closing System Not Applicable on Purchase Loans Not Applicable on Purchase Loans Not Applicable on Purchase Loans ! Funding Checksheet
Not Applicable Not Applicable Not Applicable ! Appraisal ! Flood Certification ! Flood Certification ! Flood Certification ! Flood Certification Not Applicable Not Applicable Not Applicable Not Applicable
! Executed Note
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Example - Reconciliation
2005 HMDA Data (January 1, 2005 to October 31,2005) XYZ Mortgage Corporation (USA) Production Data Waterfall Gross Number of LoanQuest Records with Action Taken Types 1 through 8 Type and Number of Loans Excluded by category. Exclusion #1 - HELOC Transaction Exclusion #2 - Loans which a Consolidation, Modification, and Extension Agreement (CEMA) was utilized Exclusion #3 - Pre-Approval Action Taken = 8 Exclusion #4 - Refinances that are not Home Improvements nor discharge a mortgage lien Exclusion #5 - Loan Amounts less than $500 Exclusion #6 - Release of Liability and ARM Conversion Loans
100,303 27,786 2,300 3,380 2,853 2 50 32,543 67,760 8,253 59,507
Please note that a record may have been excluded for more than one exclusionary reason.
Total Exclusions Total Net Reportable HMDA Records - XYZ Mortgage Corporation (USA) 4Q2005 HMDA LAR Records Total Net Reportable HMDA Records through 3Q2005 - XYZ Mortgage Corporation (USA) XYZ Mortgage Corporation (USA) CRA LAR through 9/30/05 CRA Wiz Actual LAR Year-to-Date 2005 4Q2005 HMDA LAR Records Total CRA Wiz LAR Records through 3Q2005 - XYZ Mortgage Corporation (USA) Corrections in Process - Loans to be deleted from the LAR (Non-HMDA Reportable) Total Net Reportable HMDA Records through 3Q2005 - XYZ Mortgage Corporation (USA)
67,762 8,253 59,509 2 59,507
XYZ Mortgage Corporation (USA) LoanQuest Production Data to CRA LAR (Through 3Q2005) 59,507 Number of LAR Records that match 0 Number of LAR Records on LoanQuest Production Data but not on CRA LAR 0 Number of LAR Records on CRA LAR but not on LoanQuest Production Data 0 Number of un-reconcililed LAR records
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Monitoring Programs To Test Internal Controls
Areas Warranting Additional Attention: • Apps coded as debt consolidations • Voided applications • Home Improvement vs. Refinance • Proper action code • Denial reasons • Pre-approval programs • Loans Sold • Manufactured Housing
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Evaluating Error Rates
• Regulatory Expectations • Field vs. LAR Line • FRB and OCC Guidance • Error rates –
• Field-by-Field • LAR Line
• Risk Tolerance – what is considered a one-off versus a training or systemic issue
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Corrective Action
• Root Cause Analysis • Evaluating solutions – systemic vs. training • Correction Strategy:
• Long-term solution • Interim solution • Prospectively vs. Scrub
• Back-end Monitoring – did resolution work?
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Questions and Answers
Please join us for the Round Table Session On HMDA and Compliance
Thank you for your participation.
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