2009 … The year of the regulation
The year 2009 may be remembered as the year of the regulation. Between the collapse of the mortgage market, the increase in foreclosures and the overall malaise in the economy, mortgage originators and bankers face more regulatory changes this year than any in recent memory. Not surprisingly, these regulations are causing lenders no small amount of stress. In a survey conducted by compliance provider QuestSoft, 74 percent of the lenders surveyed reported that upcoming changes to the Real Estate Settlement Procedures Act (RESPA) posed a high concern. More than half of the lenders also cited upcoming changes to the Home Mortgage Disclosure Act (HMDA), fraud laws and Red Flag Rules as a high concern.
Much of the concern stems from the complexity of the changes, conflicting information from different agencies and rapid changes to the laws. While the regulations will only become more complex in the coming months, lenders can ease the burden of proving compliance with a little education and taking advantage of automated tools to simplify the process of monitoring loans, compiling pertinent information and reporting results to regulatory agencies.
Full disclosure: Understanding RESPA
Lenders are most concerned about the changes to RESPA, because for the first time in 30 years, the regulation is requiring new procedures for disclosing the fees associated with closing a mortgage. The regulation not only changes which fees must be disclosed, but it spells out very specific time frames in which disclosures must be delivered.
Beginning in January, the U.S. Department of Housing & Urban Development (HUD) will require lenders and originators to provide borrowers with a standard Good Faith Estimate (GFE) that will clearly spell out the terms of loan, including interest rate details, possible penalties and total closing costs. These disclosures must be provided three days after the application is submitted.
RESPA also requires a new closing document that must make clear how the final closing costs correspond to the GFE, which will display the total estimated closing costs on the first page so the consumer can easily compare loan offers. HUD will also outline which closing costs can and cannot change prior to closing.
Even though these regulations will go into effect in January, lenders are preparing now to revamp their disclosure and closing procedures to comply with the rules. However, confusing the matter is the passage in the House of Representatives of HR 1728, the Mortgage Reform and Anti-Predatory Lending Act. HR 1728, if passed by the Senate, would force HUD to cancel the upcoming changes to RESPA until a combined, single GFE that matches the Federal Reserve Board’s Truth-in-Lending Act can be secured.
HMDA seeks to discourage higher cost loans
On Oct. 20, 2008, the Federal Reserve Board published final rules to amend HMDA’s reporting rules to include information on higher-priced loans. The HMDA rules will now conform to the definition of ''higher-priced mortgage loans'' adopted by the Board under Regulation Z (Truth-in-Lending) in July of 2008.
The final rule is effective Oct. 1, 2009, and lenders must ensure compliance on all loan applications taken after that date or any loans closing after Jan. 1, 2010. Under the final rule, a lender will have to report rate spreads on any loan with a difference equal to or greater than 1.5 percentage points for a first-lien loan (or 3.5 percentage points for a subordinate-lien loan) from a survey-based estimate of annual percentage rates (APRs) currently offered on prime mortgage loans of a comparable type.
One of the most prominent concerns with this change is that the 2009 HMDA data submission will contain loan data that spans two standards. Lenders will need a system in place that can document application dates and closing dates to ensure that all loans are properly reported. The agencies have made it very clear that lenders that have higher percentages of these loans are going to be under greater fair lending scrutiny.
Preventing identity theft with Red Flags Rules
Another new regulation lenders and originators must account for this year are the Red Flags rules, which were established by the Federal Trade Commission (FTC) to fight identity theft. The rules are designed to protect consumers’ sensitive personal data, such as Social Security Numbers or financial account numbers, and financial institutions are required to implement a program to detect and prevent identity theft by processes that verify identity and flag suspicious behavior.
These rules apply to any “creditor,” which the regulation defines as any person or company that regularly extends, renews or continues credit. It explicitly lists mortgage brokers as being subject to this law.
Beginning Nov. 1, lenders and brokers must develop a written plan that ensures that they are confirming an applicant’s identity. In addition, they will be required to report suspicious activity, such as unusual account activity, fraud alerts on a consumer report, or attempted use of suspicious account application documents. The good news is that most lenders already verify this information on every loan, and compliance can be as easy as documenting the process.
Making appraisals non-biased with HVCC
The Home Value Code of Conduct (HVCC) is a controversial regulation lenders are dealing with now. Implemented in May, HVCC outlines new processes that lenders and appraisers must comply with to order appraisals for loans being purchased by Fannie Mae and Freddie Mac.
In short, anyone originating a mortgage may not choose the appraiser to be used for loans they originate. Even more limiting, the originator may not engage in any communication with appraisers. Choosing appraisers and all communication with appraisers is delegated to lenders, which will typically partner with an appraisal management company (AMC) to handle the logistics of the appraisal orders.
The regulation has received criticism from many corners of the industry that it is raising costs for borrowers and unnecessarily delaying closings due to the enforced lack of communication between the appraiser and the originator. Legislation is pending, however, that would suspend the regulation for 18 months to enable regulators to rework the details to better fit the original intention of reducing appraisal fraud.
New agency on the horizon?
In June, President Barack Obama unveiled a blueprint for financial regulatory reform that included a proposed Consumer Financial Protection Agency (CFPA). This new agency, if created, would have authority over consumer-oriented financial products, including mortgages.
The new agency would have the power to write rules and levy fines based on a wide range of existing state and federal statutes. It would also be tasked with educating consumers about financial rights and responsibilities.
One of the most debated aspects of the proposed agency is giving it the authority to define standards for simple “plain vanilla” products, such as mortgages, which would have to be offered “prominently” by companies.
In late July, the House Financial Services Committee delayed consideration of the new agency until September. While it remains to be seen whether this agency will actually be created given other legislative priorities such as healthcare reform, or if the proposed responsibilities will fall to existing agencies, lenders can expect the federal government to remain very involved in the lending process for a long time.
The good news is that no matter what rules or regulations are passed, there are steps lenders and brokers can take to make compliance easier and less time-consuming.
How can lenders comply with these myriad of regulations, both federal and state, without losing their minds? A combination of automation and good faith efforts provides the easiest path to staying compliant and reducing the risk of fines or buyback requests from investors.
Hard data, such as preliminary disclosures and fee calculations required by HMDA and RESPA, can be automated by software that is integrated into loan origination systems (LOS). These applications contain features that flag incomplete applications and keep loans from closing if all the steps have not been followed.
For regulations with more subjective requirements, lenders must combine their best good faith efforts with documentation and reports from their automation tools. Lenders who use available software to analyze loan applications and document how and why decisions are made will be in a stronger position to defend their offerings on the market.
As regulations become more complex and require lenders to provide more analytical support to loans prior to underwriting, software has been developed that assists lenders in making accurate decisions. Lenders can use pre-funding compliance automation to review the underwriting process and ensure the quality of a loan prior to funding.
Lenders have the responsibility of ensuring that all loans that are compliant. It is much easier to discover problems before closing, so use automated reports and flags to discover and correct compliance issues prior to the closing table. An ounce of prevention now can save your company a pound of fines or refused loan purchases later.
Leonard Ryan is president of Laguna Hills, Calif.-based QuestSoft, a provider of automated compliance solutions and geocoding services to the mortgage industry. He can be reached at (800) 575-4632, ext. 211.
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