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42 COUNSEL'S CORNER Heavy Regulatory Burden Comes With Updated HMDA Rule 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 regula- tory enforcement. Editor's note: In November, the Consumer Finan- cial Protection Bureau announced the finalization of a rule that will improve information about consumers' access to residential mortgage credit by updating report- ing 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 mort- gage market. What are some of the major changes that the new rule has brought about? e 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 institutions are most affected by the new rule? I think that goes in two directions. ey 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. e 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 account- able 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 ven- dors, 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 incom- plete 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." at doesn't help. It's your job to have it working. ere may be mitigat- ing 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. e 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 some- thing 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. MIKE FLYNN: PARTNER IN GOODWIN PROCTER'S FINANCIAL INSTITUTIONS GROUP

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