Don’t Lose Sleep Over Your HMDA LAR
It’s that time of year again. If you are responsible for filing your financial institution’s Home Mortgage Disclosure Act (HMDA) Loan Application Register (LAR), you just finished reviewing it for accuracy and correcting errors prior to submission. For some, it was an easy seamless process, but for others, year after year, it seems to take weeks away from other duties and leaves them worrying about what errors have gone undetected. While some institutions have a well-defined process and are normally close to error free, others struggle with this process annually, and like all of us, they resolve to do a better job the following year only to find themselves frantically correcting errors until submission.
Over the years, we’ve visited many financial institutions and studied their processes. While no one process fits all financial institutions, we have witnessed some processes that work better than others. Of course, the size of the financial institution may have an effect on the process used, but for the most part, we have not seen a large difference in controls between large and small institutions in this area.
First of all, written procedures on collecting HMDA data are in place. These procedures guide staff in determining where the information for each LAR field is consistently found in loan files for each loan type. For example, the application date in the mortgage area may consistently be the date the application is received by the lender as noted by the date the lender signed the 1003 application form; while for commercial loans, it might be the date listed on the loan presentation. These items vary by financial institution and delivery channel, so written procedures are a must. These procedures are then used in training all personnel responsible for collecting and reporting HMDA data.
Many financial institutions have a process in place requiring the lender or processor to complete a HMDA entry form based on the information found in the file. This doesn’t seem to vary between institutions; however, the amount of information on the form may vary. We’ve found that if there are directions on the form as to the criteria to use when selecting each HMDA code, it helps with accuracy. Tailoring the form for each loan type to correspond to written procedures also provides the needed directions to complete the input form accurately. Typically, the input on the entry form is compared to the file documentation by a HMDA expert within the financial institution to verify the codes selected by the person who originally completed the form are accurate. This reviewer has regular and ongoing training on HMDA and understands the various delivery channels and the file organization within the financial institution in order to quickly verify the entries are correct.
Once this form is verified as accurate, HMDA data can be input from the form into the HMDA software. Another individual then reviews the HMDA entries in the system for accuracy compared to the form. Quarterly, a sample of HMDA entries is compared to file documentation for accuracy to determine whether this process is working. If errors are found, the sample is expanded until there is assurance that HMDA data is accurately recorded each quarter. In addition, at least quarterly, a new loans report is obtained based on purpose and collateral codes to determine whether loans that appear to be HMDA reportable on the new loans report are reported on the LAR. Any loans on the new loans report that appear to be HMDA reportable and are not located on the LAR are reviewed to verify that they are, in fact, not HMDA reportable. In addition, nonoriginated applications are reviewed in the same manner. This process verifies the completeness of the LAR. An edit check for quality and validity errors should be conducted quarterly, if possible, to correct and verify any errors noted. Training is provided to applicable personnel based on errors noted throughout this process. Lastly, annually and prior to submission, an audit of the HMDA LAR is completed for accuracy. If the above listed controls are working properly, very few errors should be found. Remember, HMDA data must be accurate and complete within 30 days of each quarter end.
With the change in the submission process in 2018 for 2017 data and the expansion of HMDA data recorded for action taken dates after January 1, 2018, written procedures will need to be expanded and training needs to be ongoing. Hopefully, you’re working on these changes now and will be able to incorporate them into your risk management process. Remember, since the new fields are required for action taken dates after January 1, 2018, expanded data will need to be collected in late 2017.
If controls are working as intended, HMDA reporting will be a dream . . . or at least not a nightmare.