Mortgage lenders need more help implementing law’s abrupt changes

The Economic Growth, Regulatory Relief and Consumer Protection Act, signed into law in late May, addressed several important issues facing the mortgage industry. The legislation, however, may have created unexpected implementation challenges for mortgage lenders. Certain provisions of the legislation failed to provide implementation timelines, guidance and clear definitions, particularly regarding changes to Home Mortgage Disclosure Act (HMDA) reporting requirements and Ginnie Mae pooling criteria for refinanced loans guaranteed by the Department of Veterans Affairs (VA).

“Regulators are still working out some of the details of the legislation, leaving lenders waiting for further instruction,” said Tim Rood, Chairman of The Collingwood Group. “Our clients are particularly struggling with the abrupt rollout of the VA churning rule changes.”

HMDA Reporting

The legislation outlined changes to HMDA reporting requirements. The Bureau of Consumer Financial Protection (BCFP) has already issued guidance on partial exemptions for depository institutions and credit unions. While the legislation dictated a reduction in the amount of HMDA data collected, it did not specify which fields should be eliminated.

Roughly 85% of lenders fall under the umbrella of the new HMDA exemptions created by the legislation. There has been some confusion, however, about certain technical requirements of lenders that are exempt from HMDA reporting. Lenders are unsure of their requirements to collect HMDA data, despite not being required to report it. The Federal Deposit Insurance Corporation weighed in on the issue. Jonathan Miller, deputy director of deposit and consumer protection at the FDIC, said at a recent public agency meeting, “From our point of view, we do not think the law requires you to collect the data if you don’t have to report it.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, expanded HMDA reporting from nine data fields to 23 data fields. The BCFP further expanded reporting requirements, adding another 25 data fields under the leadership of former Director Richard Cordray. Acting Director Mick Mulvaney has suggested in previous remarks that he plans to eliminate the 25 fields added by Cordray, but the industry is still waiting for more formal guidance and/or rulemaking.

“We’ve seen a complete 180 on HMDA in the past year. There have been changes to everything from enforcement approach to exemptions and reporting requirements,” said Rood. “We are close to a final picture of what HMDA reporting will look like under the Trump administration, but additional regulatory guidance is needed to provide clarity to lenders and vendors.”

Ginnie Mae VA Pooling

Mandated by the legislation, Ginnie Mae changed pooling eligibility criteria for VA refinance loans in securities guaranteed on or after June 1, 2018. Now, in order to be eligible for a Ginnie Mae security, the note date of the refinance loans must be on or after 210 days after first monthly mortgage payment was made, or the date on which six full monthly payments have been made on the mortgage, whichever is later. Notably, however, the legislation provided no runway for lenders to transition VA refinance originations. A week after the legislation was signed into law, Ginnie Mae issued an All Participant Memorandum (APM) implementing the changes effective immediately.

“The abrupt implementation created a population of orphaned loans,” said Stephanie Schader, Vice President of The Collingwood Group. “Loans that were in pipeline or already guaranteed, but not yet securitized, that were compliant with the prevailing seasoning requirements at the time of origination were deemed ineligible and are essentially stranded.” Although a true source of pain for issuers, Ginnie Mae is advising issuers to look elsewhere for a solution to the orphaned loans.

The other concern raised by Ginnie Mae issuers is the pooling eligibility of re-performing VA refinance loans. Some discussions with Ginnie Mae suggest the agency expects issuers to perform reasonable due diligence to determine that the seasoning requirement on the prior loan was met. If an ineligible loan is discovered it will be treated the same as any other defective loan, and the remedy is a buyout. Unfortunately, the APM implementing the legislative changes is specific to ineligible loans in June 1, 2018, pools. Furthermore, the definition of a defective loan has not been updated to include VA refinances where the prior loan did not meet the respective seasoning requirement.

“Although Ginnie Mae appears to view the orphaned loans as a discrete population, re-performing loans are ongoing in nature. Written guidance or FAQs would at least provide clearer terms for the treatment of re-performing loans. Absent such guidance, future mortgage servicing rights (MSR) transfers could be adversely impacted,” Schader said.

The absence of implementation timelines and more specific guidance in the Act has been a source of frustration for mortgage lenders. Further regulatory advice in the near term would smooth over lingering anxieties over HMDA reporting expectations and the treatment of re-performing VA refinance loans. Other issues, however, such as loans orphaned by the immediate implementation of the VA churning restrictions, are likely to have a lasting impact on the applicable loans and their originators.