The new data being collected for HMDA (Home Mortgage Disclosure Act) is extensive. One field in particular will vastly affect fair lending results for banks in particular, because of their CRA requirements. This new field is called the “Universal Loan Identifier” or ULI as most will probably refer to it. ULI will be an identifier that uniquely identifies a loan or loan application through its lifecycle.
Regulators count loans originated AND purchased as part of a bank’s CRA examination.
To date, many banks are in the market to purchase loans from other lenders that fall within their CRA assessment area. This practice is seen as easier, because the bank can boost their CRA ratings by purchasing these loans, instead of originating the loans directly.
CRA exams are scheduled so savvy bankers know what they need to buy in order to boost their CRA rating; and as a result seek to purchase loans that fit their needs.
What examiners started noticing is that the seemingly same loans made the rounds to multiple banks. Here is a simplistic example of how it works. One bank buys the loans, and then after their CRA exam sells those same loans to another bank, who uses those loans in their CRA examination. Then that bank sells those loans to another bank and the cycle continues.
The regulators decided they didn’t like that practice, because it was out of step with the basis behind the CRA laws.
My Predictions on how this will change the market
- Certainly the first thing a bank can expect, is a drop in their CRA rating if they are not the first to purchase the loans.
- Banks will likely look for new and innovative ways to serve their assessment area.
- Banks will need to originate more loans organically versus purchasing those loans.
- This will lead to strongly competitive rates/costs in certain areas to compete for those same loans.
- I suspect that we will also see new product development, as banks seek to align their lending requirements with the needs of the community.
- Stronger alliances will form at the local level with mortgage lenders that do a lot of business in the bank’s footprint, so that the bank can be the first to purchase those loans.
- Larger Banks that have been incenting mortgage lenders to send them under-served mortgage loans and then re-sell those same mortgages to smaller banks will be out of luck.
Now is the time for banks to consider alternative strategies to achieve a satisfactory CRA rating. This will require a formulated strategy that accommodates the needs of the bank’s bottom line and the needs of the community they serve. Strategies take time to formulate, go to market and eventually produce results, which is why today sounds like a great day to start!