Ready to put down the coffee and get out the elbow grease? It’s time for a scrub. No, I am not talking about cleaning; I’m referring to a HMDA “scrub.” Now that we are almost half way through 2019, it’s important to understand if your HMDA data is accurate. For those of you tasked with submitting your institution’s Loan Application Register (LAR), you know that the March 1st due date, can be a date of panic. Although we are several months away from that date, since we are almost halfway through 2019, you should consider “scrubbing” the data you have collected so far. In addition, because you must ensure that the LAR is up-to-date with the previous quarter's data within 30 days of the end of each quarter, now is an ideal time to ensure that your data is accurate. Here are the recommended steps to consider when completing a HMDA scrub:
What’s your Risk Appetite? - Before you decide to look at every transaction reported on the LAR you will need to determine if that is feasible. If your LAR is fairly small, it may make sense to review 100% of the transactions. However, due to time and resources, you may only want to review a portion of the LAR; therefore, you should consider how many files should be reviewed to alleviate the potential for having errors when submitting the LAR. Consider determining what your risk appetite is by understanding your institutions internal and external risk factors. Consider asking yourself, how many errors are you allowed to still pass the exam? This will help you determine what your sample size should be.
Who is Going to Conduct the Scrub? - Next, you will want to determine whether you are going to hire a third party to conduct the scrub or if there is an employee at your institution who is separate from the LAR completion process and knowledgeable with the HMDA rules to conduct the scrub. If you are relying on an internal reviewer, be sure that the individual has an understanding of the HMDA rules, yet is separate from the HMDA collection and reporting process. For some institutions where employees wear multiple hats, this may involve hiring a third party audit firm.
Selecting a Sample - Once you have determined that a review or “scrub” needs to be completed and you have designated a reviewer, you will want to determine what an adequate sample will include. I recommend not only considering the percentage of files to be reviewed, but also ensure the sample is diverse. The reviewer should consider selecting the files that appear to be unusual. I recommend sorting and filtering the data to look for unusual combinations. For example, filter the data to determine if there was an application date and action taken date that doesn’t make sense. Another example would be if there were a higher loan amount with a lower income. Again, pick the unusual ones. In addition, consider originated versus non-originated files. In general, non-originated files tend to have more errors; therefore, a “scrub” might consist of reviewing a majority of non-originated files.
Conducting the Review - Now you have determined that a review or “scrub” needs to be completed, who is conducting the review, and the sample size. However, this is the tedious part of the process. The reviewer must ensure that all covered loans and applications being reviewed adhere to federal regulatory compliance requirements under Regulation C. With that being said, the reviewer should look at each file in detail and compare it to the data reported on the LAR. Keep in mind, the purpose of the “scrub” isn’t to assess penalties. The purpose is to identify and report errors for the preparer of the LAR to make the corrections prior to submission of the LAR. Although there is segregation between the reviewer and the preparer of the LAR, they should work together to agree on the correct reporting of each file.
Crosscheck your Data - Aside from reviewing the selected files for adherence to the regulatory requirements, I also recommend completing an overall review of your institutions LAR by sorting and filtering the data to ensure the LAR make sense for your institution. For example, let’s say your institution does not purchase or sell loans, but you have reported a code other than “0- Not applicable” in the type of purchaser data field. Another example to consider is whether you have a preapproval program or not. If you so, did you report code 1- Preapproval requested and code 2- Preapproval not requested in that data field. You can quickly determine potential errors without even reviewing a file when conducting a crosscheck review of the data.
Completion Test - Along with this would be a review to determine that you have not missed reporting a transaction on the LAR. I recommend running a report of all dwelling secured loans and comparing a sample of it back to the LAR to ensure you report all of the required files. Remember, it is important to ensure the data reported is accurate, but also that you reported all of the covered loans and applications.
Although these steps may seem overwhelming, consider the benefits. Don’t wait until last minute to determine your compliance with the collection and reporting requirements. The scrub can tell you now if you have reporting errors to be corrected for the second half of the year. Utilize the results of the scrub to correct any errors prior to submission and to train applicable employees. Overall, preparation and submission of a LAR can be stressful. In addition, violations can prompt penalties; therefore, I encourage you to follow these steps for conducting your HMDA “scrub” to avoid potential penalties and approach March 1st with ease.