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Mike Flynn
Mike Flynn is a partner in Goodwin Procter’s Financial Institutions Group and is a member of the firm’s Banking, Consumer Financial Services and FinTech practices. Mr. Flynn focuses his practice on mortgage and other consumer financial services, including compliance and legal operational issues, secondary market and other transactions, and regulatory enforcement. He works on matters related to federal and state consumer protection laws (including TILA, RESPA, FACTA/FCRA and FDCPA), FHA and GSE issues, as well as matters involving fair lending and community reinvestment, and practice before federal and state regulatory agencies, including the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. Mr. Flynn is based in Washington, D.C.
Editor’s note: Earlier this month, the Consumer Financial Protection Bureau announced the finalization of a rule that will improve information about consumers’ access to residential mortgage credit by updating reporting requirements of the Home Mortgage Disclosure Act (HMDA), which was originally passed in 1975.
The CFPB says the HMDA dataset has not kept up with the evolution of the mortgage market. What are some of the major changes that the new rule has brought about?
The biggest change is the quantity of categories of information that have to be reported. It has broadened considerably both at the macro and micro level. It’s an operational issue, as any major changes in these kinds of structures are. And it also obviously changes the nature of the manner in which the CFPB and possibly other agencies interact with institutions when they’re doing examinations or investigations regarding HMDA data, fair lending, and those sorts of issues. It puts a lot more data on the table upfront, which creates processing issues, and this will require people engaging with the agencies at any given time to be working through a lot more data at any given time.
What are some of the categories being required to be reported under the new rule that weren’t required to be reported before?
By our count, they are modifying 12 existing data points and adding 25. Some of the modified data points include things like loan purpose, pre-approval, construction method, and at least nine others. Some of the new ones include applicant or borrower age, debt-to-income ratio, combined loan-to-value ratio, credit score, automated underwriting system information, unique loan identifiers, property value, application channel (which means was the application submitted directly to the institution or did it come through a third party). There are a lot of details about individual loans, which from the regulator’s perspective, has a salient purpose for what they want to achieve, but it obviously creates a lot more burden for the institutions doing the reporting.
What institutions are most affected by the new rule?
I think that goes in two directions. They changed the definition of what institutions are covered, so in some ways it’s a little broader than it was before, which will possibly hit some smaller non-depository institutions. For larger institutions, there is the volume question. If you’re doing half a million or a million loans, having to report 25 new data points is 25 million individual instances of having to report something. It’s automated, but it increases the likelihood of mistakes and it also increases the amount of time for maintaining and monitoring the systems and inputting information. So in that sense, the larger institutions are going to be most affected by this just because of the sheer volume they’re dealing with. Of course, all lenders will be affected by the fact that regulators and others will have much more data to use when looking at fair lending issues, which could increase risk for lenders in that area.
What types of vendors expect to face regulatory scrutiny as a result of the new rule?
Directly, when you talk about what channel a loan comes from, you’re talking about vendors such as brokers. When you’re looking at systems issues, the vendors who lenders use to build their information and reporting platforms will be under an indirect form of scrutiny. The regulators won’t necessarily be looking at whether or not these vendors are compliant with HMDA rules and connected fair lending rules, but these vendors are going to be under pressure from their institutional customers to make sure their systems are working correctly to generate accurate data to comply with this rule.
How are lenders going to be held accountable by the CFPB?
As a general rule, the Bureau’s view as a regulator is that the lenders are essentially responsible for the actions of their vendors, especially consumer-touching or consumer-facing vendors. Let’s say there were problems with a broker in regard to fair lending issues from this deepened set of data points, that could push up to the lender who is taking loans from that broker or at least create more scrutiny for that lender in regard to those issues. In regard to the vendors who provide the operation systems for this kind of reporting, obviously, if their systems aren’t working properly and the lenders end up generating incomplete or inaccurate data to deal with the reporting required under this rule, the lender is responsible for that. As a general rule, under any regulation, you can’t avoid or excuse your failure to provide accurate information by saying, “My system vendor has a system set up wrong.” That doesn’t help. It’s your job to have it working. There may be mitigating circumstances if you show how it happened and that you were acting diligently to work with the vendor, but it may not be a defense, per se.
With any of these rules, the inherent conflict of the rule is the regulator’s desire for more access, more information, and the people who are actually doing the work in the markets, who need to be able to function not just in terms of being efficient and having lower costs, but also in terms of being able to perform under a given set of rules in a way that can be done well and consistently. The more you require, the harder it is to have consistency. Systems are inherently fallible and occasionally break down, so the more of this kind of burden you create, the larger the likelihood that something can go awry down the road. Avoiding that problem or trying to keep an eye on that inherent issue is a big burden for these institutions.
How is your practice working with lenders to help them comply with the changes in the rule?
In advising our clients, Goodwin Procter is looking at helping clients to interpret the rule, and also advising them where there are gray areas as to what some appropriate responses could be or what appropriate approaches could be, and reminding them to stay conscious of the need for good systems buildouts, including oversight systems, such as QA systems or QC systems.
