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Fannie Mae chooses AllRegs as exclusive provider of multifamily guides

National Mortgage Professional
Jan 27, 2005

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 james@brokercompliance.com.
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