Are You a Mortgage Originator in the U.S.? LEI is a Mandate for Home Mortgage Disclosure Act (HMDA) Reporting

The LEI will play an important role in consumer protection enhancements within the U.S. mortgage market as new HMDA reporting rules were adopted by the Consumer Financial Protection Bureau (CFPB) under Regulation C

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To date, regulatory action related to the Legal Entity Identifier (LEI) has largely focused on initiatives relevant to legal entity identification in regulatory reporting and supervision for financial instrument transactions. With the U.S. Consumer Financial Protection Bureau’s (CFPB) final rule amending Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), use of the LEI expands beyond such transactions. Specifically, among the new data points required to be collected, recorded and reported under HMDA is the LEI of the home mortgage loan originator and the universal loan identifier, which also incorporates the LEI. As a result, the LEI is set to immediately and directly play a significant and valuable role in enhancing consumer protection in the U.S. mortgage market. In this blog post we take a closer look at how the LEI is incorporated into the new reporting rules adopted by the CFPB under HMDA.

Sources cited in this blog are included in the ‘related links’ below.

HMDA: A brief history

The HMDA was originally enacted by Congress in 1975 and is implemented by Regulation C. It requires financial institutions to maintain, report, and publicly disclose information about mortgages. The data collection associated with HMDA was originally enacted to help provide greater transparency into the home mortgage lending market. HMDA is intended to help determine whether financial institutions are serving their communities’ housing needs; assist public officials in distributing public investment; and assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.

When the boom and bust of the subprime mortgage market in the U.S. sparked the global financial crisis in 2008, the limited data points reported under HMDA presented several challenges for public officials. Steps were subsequently taken to address the content and quality of publicly-available mortgage market data. In 2010, Congress amended HMDA in the Dodd-Frank Act; the authority for HMDA rulemaking and other functions were also transferred from the Federal Reserve Board to the CFPB. A full history of HMDA is available at the CFPB dedicated webpage on HMDA (see ‘related links’ below).

2015 Final Rule, Regulation C: The introduction of LEI for the loan originator and as part of the universal loan identifier (ULI) in HMDA

Among other changes, the Dodd-Frank Act expands the scope of information relating to mortgage applications and loans that must be compiled, maintained and reported under HMDA. It authorizes the CFPB to require “as [it] may determine to be appropriate” a unique identifier that identifies the loan originator, a universal loan identifier, and the parcel number that corresponds to the real property pledged or proposed to be pledged as collateral for the mortgage loan.

As Ken Markison, vice president and regulatory counsel with the Mortgage Bankers Association observes within the Mortgage Bankers Association’s MBA Insights article in July 2017, “In 2015, the CFPB announced its intent to update HMDA, doing just that. […] The CFPB followed the stricture of Dodd-Frank and exercised its authority to create more data fields.”

The result was the CFPB’s publication, in October 2015, of the ‘Final Rule: Home Mortgage Disclosure (Regulation C)’. The final rule reflects the CFPB’s belief “that the HMDA data must be updated to address the informational shortcomings exposed by the financial crisis and to meet the needs of homeowners, potential homeowners, and neighborhoods throughout the nation.”

According to the final rule, the financial institution shall provide its LEI rather than the current reporter’s identification number (HMDA RID) when submitting its HMDA data. Additionally, the final rule introduces the concept of a universal loan identifier (ULI). The ULI is unique to each loan for the life of the loan. It begins with the financial institution’s LEI followed by up to 25 additional characters. The CFPB’s implementation and guidance website provides many useful documents to help implement and comply with Regulation C.

Benefits of implementing LEI for the loan originator and within the HMDA ULI

For the first time, HMDA reporting will rely on an open global identification system to identify the loan originator. This allows users of HMDA data to benefit from the key reference information connected to the LEI that is freely available via the Global LEI Index. Importantly, the CFPB notes in its final rule that access to the direct and ultimate parent information on who owns whom available in the Global LEI System opens new windows of opportunity. Specifically: "An LEI could improve the ability to identify financial institutions reporting the data and link it to its corporate family. Facilitating identification of a financial institution’s corporate family could help data users identify possible discriminatory lending patterns and assist in identifying market activity and risks by related companies.”

The introduction of the ULI and the embedding of the LEI within the HMDA ULI is also a new concept in HMDA reporting. The CFPB outlined that it believes that the introduction of the ULI offers several advantages. First, it ensures a unique loan identifier in the entire universe of HMDA loans and applications. Second, by requiring financial institutions that purchase loans to report the ULI that was previously reported, a single loan may be traced over its lifetime even when it is sold or transferred between financial institutions. Third, privacy concerns are taken into consideration as the content of the ULI cannot be used to directly identify the borrower or applicant.

Additionally, the Global Legal Entity Identifier Foundation (GLEIF) believes that using the LEI to identify the loan originator and the embedding of the LEI in the ULI introduces new consumer protection anaylsis possibilities. This next section provides several examples.

Both the ULI and the LEI are persistent codes. Meaning once assigned, the identifier is consistent throughout the life of the associated entity. Given the originator LEI is embedded in the ULI, data users can always trace the loan back to the originator regardless if the loan is subsequently sold. Additionally, thanks to the history of legal entity reference data available in the Global LEI System, the loan originator can be traced even if it subsequently merges or retires. This will improve the ability to assess whether financial institutions are meeting the housing needs of their communities regardless of changes to corporate structure over time.

With the gradual enhancement of the LEI data pool to include information on who owns whom, it is possible to understand the ownership and corporate hierarchies of loan originators. Information on direct and ultimate parents will help public users to understand differences in loan originators across group entities. For example, public users or even institutions themselves will be able to compare loans originated by different subsidiaries and investigate if there are anomalies for similary situated originators.

Lastly, the Global LEI System ensures access to LEI data free of charge to users. Any firm, such as fintechs, could leverage this information combined with the publicly available HMDA data to help consumers shop with more information on potential originating institutions. This could include a history of the particular lender via the Global LEI System history of legal entity reference data or the nature of originator's loans over time, regardless of corporate action changes.

CFPB pioneers the LEI to enhance consumer protection

The LEI initiative was launched in the wake of the 2008 financial crisis, when regulators worldwide acknowledged their inability to identify parties to transactions across markets, products, and regions. The Financial Stability Board (FSB) and the Group of 20 (G20), advocated developing a universal LEI applicable to any legal entity that engages in financial transactions.

To date, discussion related to the rollout of the LEI has largely focused on initiatives relevant to legal entity identification in regulatory reporting and supervision. This reflects the immediate objective pursued with the introduction of the LEI standard following the financial crisis: to increase the authorities’ ability to evaluate systemic and emerging risk, identify trends and take corrective steps.

As demonstrated with the current LEI population, these efforts have generated excellent results. At the end of September 2017, some 586,000 LEIs were assigned to legal entities active, primarily, in the derivatives markets. Most of these entities are based in the U.S. and the European Union (EU) where regulations require the use of LEIs to uniquely identify counterparties to transactions in regulatory reporting. These regulations include Dodd-Frank, the European Market Infrastructure Regulation and the forthcoming revised EU Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR). (For detailed information on the regulatory use of the LEI, refer to the ‘related links’ below.)

However with the imminent changes to HMDA that the final rule amending Regulation C will impose from January 1, 2018, the LEI is set to immediately and directly play a significant and valuable role in enhancing consumer protection in the U.S. mortgage market. This is an important milestone for the LEI; its value is now recognized and mandated within this segment to bring increased transparency and enhance consumer protection.

Yet GLEIF is hopeful that this is simply the first step. There is still enormous opportunity for the LEI’s application across a myriad of tangential services and operators, for example, mortgage backed security, title insurance and mortgage insurance etc. In addition, the CFPB’s high-level testimony to the significance of LEIs in the area of consumer protection within the U.S. mortgage market could - and should - serve as inspiration to regulators in other jurisdictions to consider the use of LEIs within any market segment that requires increased transparency and accountability.

Timelines

Ballard Spahr LLP indicates that the final rule “modifies the types of ‘Covered Institutions’ subject to Regulation C; the types of transactions subject to Regulation C; specific information that covered institutions are required to collect, record, and report; and processes for reporting and disclosing data. The majority of the provisions will be effective on January 1, 2018.  Covered institutions will collect the new HMDA information in 2018 and report it by March 1, 2019.”

In conclusion, GLEIF calls upon HMDA filers to mind relevant timelines. Given HMDA filers have never before been obligated to report an LEI or embed it in the ULI, GLEIF urges HMDA filers to be aware of the possible reportable activities that could occur early in 2018. As Camelia Martin, director of member integration with MERSCORP Holdings, notes in MBA Insights: “Although the new HMDA requirements don't go into effect until January 2018, loan applications or activities that are first initiated in late 2017 may have reportable activities that occur within the 2018 reporting timeframe. Organizations will also want to allow adequate time to incorporate ULI generation into its business processes, procedures and systems."

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