What is a consumer compliance program and why do you need one? James D. Russell, CPAregulatory compliance, consumer compliance, program development
Increasingly, mortgage originators are finding themselves on the
receiving end of regulatory examinations, inspections, audits or
whatever your state wants to call them. Almost all state regulators
have beefed up their examination programs. The U.S. Department of
Housing and Urban Development has increased resources to its
oversight programs. And, everyone knows that fair, predatory and
sub-prime lending issues continue to be at the top of state and the
federal governments' "To Do" lists. (Let's not even talk about the
plaintiff attorneys.)
However, we can placate regulators with a strong level
of consumer compliance, which is achieved by developing and
implementing a consumer compliance program.
What is consumer compliance?
Many originators mistake their existing investor-required and/or
FHA-required quality control program for a consumer compliance
program. If you have a quality control program, please look at it.
How many items on the list are remotely concerned with consumer
compliance? And, I bet those items that are concerned with consumer
compliance are very superficial. For example, "The originator will
comply with all laws and regulations including the Real Estate
Settlement Procedures Act, the Truth in Lending Act ..." I very
rarely see a quality control program that includes actual guidance
about when a specific disclosure is required, how to complete that
disclosure and when to deliver that disclosure. In short, most
quality control programs are designed to insure the investor has
soundly underwritten the mortgage rather than monitor whether the
consumer was misinformed or cheated. These programs are more
accurately called "Underwriting Compliance Programs" rather than
"Consumer Compliance Programs."
What goes into a consumer compliance
program?
Based on my 10 years of bank regulatory experience with the Federal
Deposit Insurance Corporation and 10 years as a bank and mortgage
originator consultant, I believe each mortgage originator needs a
five-phase consumer compliance program that includes policies,
procedures, training, quality control and audits. Each one of the
components is designed to help insure compliance with consumer laws
and regulations. It would floor the regulatory community (which
enforces consumer compliance laws) and Congress (which creates
consumer compliance laws) if they knew the number of times I have
heard, "I've been in this business for 10 years and I've never
heard of [fill in the blank]."
You can fill in the blank with any of the following:
1. The Special Information Booklet
2. The CHARM Booklet
3. ARM Program Disclosures
4. Prepaid finance charges
5. The Gramm-Leach-Bliley Act
6. State license regulations, etc.
Had a sound compliance program been in place, there would be no
ignorance of these simple issues. If you are an experienced
originator, quiz your new loan officers about these issues. You
might be surprised.
Phase one: Policies
Think of the policy as a manual for your staff, similar to a user's
guide for a car. The policy will provide the instructions necessary
for the staff to complete their work in a compliant manner while
not overburdening the staff with extraneous information. Perhaps
more importantly, the policy will be used to communicate the
company's expectations to the mortgage origination staff. If
employees do not follow the policy, they can be reprimanded or
terminated. This also helps protect the company from consumer
lawsuits and regulatory grief. Established policies can be used to
demonstrate a good faith attempt by a company to follow the law,
despite an errant employees refusal to follow policy.
Phase two: Procedures
Procedures are detailed instructions to help the user properly
perform a task. Procedures are typically more specific than
policies.
Software
Mortgage originators have it easy when it comes to procedures for
the creation and distribution of disclosures. The primary procedure
includes the proper use of origination software such as Calyx,
Encompass, Genesis or Byte. These programs are so sophisticated
that they can hold your hand during the entire origination process.
Properly configured, these programs can help insure:
++Correct disclosures are printed
++Disclosures are accurately completed
++Prepaid finance charges are correctly identified
++Annual percentage rates are correctly calculated and
disclosed
The biggest correctable mistake that originators make is not
properly configuring their origination software. Correctly
configuring the software can mean the difference between a clean
loan and a loan filled with violations. And, if that's not enough
incentive, correctly configuring the software can increase
efficiencies by reducing redundant keystrokes and reducing the time
the loan officer spends time trying to recall the proper compliance
requirements.
Taking and responding to applications
Procedures must also be developed to provide loan officers guidance
in how to take and respond to applications. Procedures should be
provided on issues such as:
++Where a loan officer can take applications
++The prohibition against discouraging applicants based on a
prohibited basis
++The requirement to request monitoring information on
applicants
++The prohibition against certain inquiries about age, income
sources, spouses, former spouses, marital status, gender,
childbearing plans, etc. unless certain requirements are met
++The requirement to provide notices regarding denied, withdrawn
and incomplete applications
++The requirement to log applications on the loan application
register, pipeline report or other listing of applications
Evidence of delivery
In addition to establishing software defaults, another procedure
that needs addressing is the method(s) of delivering disclosures to
the customers. Our catch phrase (and that of the regulators) is
"evidence of delivery." As an originator, your files must reflect
the evidence of delivery of the various required disclosures.
Twenty years ago, a mortgage applicant usually sat down with the
loan officer at three or more meetings to discuss the progress of
the loan, the applicant's financial condition, the disclosures,
etc. This was a very formal process. The advent and availability of
the fax machine and Internet have blurred the ability to provide
regulators with evidence of delivery. And, even if face-to-face
meetings are held, the informality of today's process has led to
consumers' laxness in regards to signing, forms and acknowledging
receipt of forms. As a result, the regulator is often miffed when
there is no evidence of delivery. We encourage one of several
methods to show the regulators evidence of delivery such as:
++Signature and date on the form
++Checklist in the file reflecting the date that each disclosure
was given with the loan officer's or processor's initials
++Dated cover letter indicating, "Please see the enclosed Good
Faith Estimate, Truth in Lending Statement, and Settlement Cost
Booklet, ..."
++Copy of the overnight or other mail receipt with copies of the
disclosure stapled to the receipt
++"Date Mailed" stamp on a hard copy of each disclosure
++Written or electronic conversation/activity log which
specifically mentions the delivery date and method of delivery of
each disclosure
++E-mail indicating, "Please see the attached Good Faith Estimate,
Truth in Lending Statement, and Settlement Cost Booklet, ..." (only
valid after consumer has proven the ability to receive
e-mails).
And, of course, all the methods of evidence of delivery require
a copy of the disclosure to be included in the applicant's file.
Hard copies are preferable; however, electronic copies can be
accepted in some circumstances.
Phase three: Training
Look at your training programs. Or, if your loan officers get their
training from outside commercial sources, look at the training
content. How much of it is concerned with consumer compliance? How
much of it is concerned with marketing and selling? And, how much
is just plain worthless?
Good training will include adequate coverage of consumer
compliance issues. When you talk to the class administrators, ask
them how much time is spent on the Truth in Lending Act, the
selection of items to be included as prepaid finance charges and
the calculation of the annual percentage rate. If the class does
not spend at least an hour on this topic alone, go elsewhere. I
believe most teachers are afraid to tackle consumer compliance
issues because they are afraid of really tough questionswhich they
will get. However, my teaching experience has been that the tough
questions can lead to colorful class discussions that ultimately
help everyone to learn more.
Phase four: Quality control
Quality control (QC) can be as simple as having the processor
perform a pre-closing checklist, or as complex as having a QC
department review all files before and after closing. But beware,
most closing checklists are concerned with one thingis everything
in the file so that the lender/investor will accept the loan. Look
at your checklist if you have one. I bet it will include items such
as the Good Faith Estimate, servicing transfer disclosure and date
of delivery. Rarely does it include reviewing the actual disclosure
to determine if it was completed accurately. We recommend taking a
hard look at your post-closing or QC process and make sure it
includes more than superficial compliance items.
Phase five: Audit
The primary reason to perform consumer compliance audits is to
identify issues so that your compliance program can be adjusted to
prevent future problems. I recommend that a third-party perform
this audit. Let's assume that the audit identifies annual
percentage rate errors as a result of improperly identifying
prepaid finance charges. With this information, management can make
adjustments to the first four phases of the compliance program,
including:
1. Refinements to policies
2. Adjustments to procedures in the form of new software
configuration settings
3. Focused training for loan officers and processors
4. A new line item on the quality control checklist
In summary, the audit has allowed the originator to efficiently
tackle the problem instead of fumbling around with how to provide a
more accurate annual percentage rate.
Efficiency
By now, you might be thinking that this five-phase consumer
compliance program will eat into your bottom line. Forget for a
moment that the failure to implement this program might cost you in
fines, investor relationships, licenses, regulatory grief and
lawsuits. Consider the efficiency of the following:
++A compliance policy that you can give to all new loan
officers. On-the-job training might be reduced from weeks to days
(phase one).
++Having established procedures in the form of proper software
settings. Pre-established settings mean that each redundant
"checkmark" will not need to be reconsidered for each loan document
prepared by each loan officer. Other procedures will similarly
streamline operations (phase two).
++An adequate training program. Why not provide loan originators
with focused training so they don't waste time on extraneous items
(phase three)?
++A simple but effective quality control program/checklist. If an
employee can quickly identify problems, then these issues can be
prevented in future loans (phase four).
++An audit program. A good auditor will efficiently point out
issues and will typically provide solutions to those issues (phase
five).
Still think you don't need a consumer compliance program? How
much do you expect to earn next year? Protect your future by
adopting a consumer compliance program now.
James D. Russell, CPA is a partner with Broker Compliance, a
firm specializing in compliance with new and existing regulatory
requirements. He may be reached at (512) 328-1777 or e-mail
[email protected].
