Spotting Foundational Cracks: Frequent Supervisory Issues in Compliance Management Systems

Yep, that’s a crack in the corner of a wall. Houses settle, paint starts chipping ... no big deal, right? Cracks can indicate a sign of some type of weakness in the foundation and although small, eventually could lead to bigger issues. Compliance Management Systems are much like a house that requires regular maintenance and inspection to ensure stability. When weaknesses are uncovered, it is important to find and address the root cause before small issues lead to complete collapse.

For example, there have been recurring supervisory issues in Home Mortgage Disclosure Act (HMDA) data reporting, required for certain institutions as described in the Consumer Financial Protection Bureau’s Regulation C, during examinations over the last few years. Most of the issues were attributed to improperly listing the loan purpose code or failing to collect the ethnicity, race, sex, age and gross annual income of an applicant.

These weaknesses are a relatively easy fix on the surface — review the HMDA Loan Application Register (LAR) and make corrections to the data. In terms of home repair, that is the equivalent of applying spackle to a crack in the wall. It covers up an unsightly imperfection, but there should be more research into what caused the crack in the first place. When weaknesses in reporting data on the HMDA LAR occur, there are likely some larger, more serious causes than simply a typo. Let’s take a deeper look into the foundation of the compliance management program as it relates to HMDA data collection:

• Who is responsible for collecting and inputting data into the LAR?
• Have those individuals received proper training on the requirements and regulations?
• Are there secondary reviews of the data prior to submitting the LAR?
• Are there frequent compliance audits or reviews that cover proper data collection and submission?
• Are boards and senior management made aware of any weaknesses uncovered in reviews?

If the answers to any of those questions are unknown, it may be time to re-evaluate your compliance management program to address any foundational weaknesses. The Federal Reserve Bank of Richmond offers several resources that provide guidance on consumer compliance. The Consumer Compliance Outlook publication on HMDA data collection provides tips on effective data collection practices. The Federal Financial Institutions Examination Council (FFIEC) and the Consumer Financial Protection Bureau (CFPB) provide information on HMDA data collection and reporting requirements.

We at the Richmond Fed invite you to reach out to your consumer compliance central point of contact with any questions you may have on this topic. If you don’t know who that is for your organization, contact us at supervisionoutreach@rich.frb.org.