In January of 2014, the tidal waves of regulatory change will hit the shores of the mortgage business, rocking all boats from the cruisers to the skips. It was long-predicted and is still a surprise. When the new rules and procedures were announced, they shocked the institutions but most especially the people. Adapting to the regulatory changes requires discipline and process in compliance education—the discipline to understand rapidly evolving and novel business regulations as well as the process of embedding new written procedures into an efficient mortgage compliance education.
Perhaps, the creation of the Federal Housing Administration (FHA) and Fannie Mae in the 1930s saw such a challenge but otherwise there are few other analogous periods of operational change in mortgages. Many will remember the underwriting shift after the sub-prime collapse. Underwriting standards like the Automated Underwriting Systems (AUS) were able to tighten the criteria for loan approval in origination. The AUS provided a test with which a lender who had properly maintained mortgage data could expect some level of confidence that the loan met basic regulatory criteria.
Not too long afterward the Real Estate Settlement Procedures Act (RESPA) was added. The Good Faith Estimate (GFE) form, for example, provided basic information about the terms of a mortgage loan and estimates of the costs. It was implemented incrementally and allowed loan level cures to resolve mistakes found at closing. The loan remained saleable to the Agencies. Both the sub-prime and RESPA changes pale in comparison to the impact of these new regulations. Those operational changes occurred separately and over reasonable implementation time lines.
But the 2014 regulations are novel in another way. They shift the burden of proof with new underwriting standards to determine the borrower’s ability-to-repay. The determination will be left solely up to the lender. This intent, while dramatic, has been made perfectly clear by Fannie Mae and Freddie Mac in recent announcements. The new rules change the process and the liability. It simultaneously creates new paths of litigation and repurchases risks that last the life of the loan. The amount of change is compounded. Don’t forget the added fines and penalties under the Truth-in-Lending Act (TILA).
It all comes down to the person
The importance of employee training under the new regulations cannot be underestimated. It is not enough to recite the new rules and applicable procedures. An employee training plan must be designed and aligned with the written procedures, from application through delivery and quality control, in order to ensure everyone on the front lines knows, understands, and implements the procedures. This protects the company and the employee.
The “how to's”
Where do we start? Let’s assume we have a good loan origination system (LOS) and have worked with a technology provider to understand how the system will identify all of the new TILA and Qualified Mortgage (QM) requirements. The next step is to identify the gaps between a lawyer’s interpretation of the regulations, the LOS, and your company’s current processes.
Once a firm develops a manual or alternate process to fill the gap between the old and new regulations, changes to the procedures need to be written. This sounds simple but it takes a lot of time to get it in writing. Regulators have been clear that procedures must match what is actually taking place, which means, for example, that the new TILA procedures must be completed before any training can begin. Unfortunately, that’s not the typical mortgage banker’s way of implementation.
Generations of mortgage bankers have taken FHA loan applications long before they ever went to the training class. Processors everywhere got their start submitting a loan to an automated underwriting system wondering what happens next. Good Faith Estimates, which were out of compliance in the first part of 2010, provide an example not to be emulated. You get the picture.
Get a good plan
The right training plan will help ensure that your first loans of 2014 are in compliance and there is no doubt that good content is the place to start next year. Courses offered by third party providers will be a valuable time saver to get the foundation set, but customized training needs to be added to every program and every position. The customized course design includes content teaching the written procedures. When this is done, the procedure document itself should be referenced whenever possible in the training. It is an invaluable asset and visuals taken from it should be prominently displayed throughout the course.
A general course covering the ability to repay requirements will be especially useful to underwriters. After the general rules, the next level of training needs to pull the federal requirements together with various company specific items such as non-QM products and how QM loans are identified and marked in the LOS. Quality control (QC) staffs need the same basic components as the underwriters but in addition, they also need modules on the steps for handling loans later found to violate QM standards.
Small creditors face special challenges. They will need to determine the appropriateness of a training program that covers all aspects of the RESPA servicing regulations. A general training class like this may be poorly aligned with company procedures.
Completing the learning cycle
Once the content has been organized and aligned with the procedures, the employees need an effective and focused plan to complete their specific courses. The new rules are too dynamic to fit into excessively formal programs. The annual onslaught of 30 e-Learning compliance courses, to be completed by year-end, will interfere with the success of the new regulation training. Consider adjusting the usual schedule and setting realistic goals for each person to stay focused on what’s new. Perhaps the third repeat of the Home Mortgage Disclosure Act (HMDA) or flood zone lesson can be postponed. Employees should complete a test as a part of the training and their work analyzed through quality control reviews. Post-closing QC isn’t going to help here because of the lagging turnaround time.
Prior to closing, the data should be compared with documents in the file as well as the policy and procedures documents. External resources can check these documents for you and any errors can be caught before closing. Validation is a three-legged stool. The data in the LOS, the documents, and the final reports are each critical in supporting compliance.
Now the LMS
And of course, a flexible learning management system (LMS) to set controls that fit your firm needs to be implemented. It must give the right training to the right people at the right time. And once again written policies and training are part of the final tool. Having the written policy and procedure documents available in the LMS for reference will give the employees coordinated tools as they begin their new tasks. After the procedures have been in place, the QA results should be combined with a follow up survey of the employees. People on the front lines have great ideas that can makes things run more smoothly and still be in compliance. The surveys are a great way to collect feedback about the effectiveness of the training and the process itself.
Implementation of the new regulations will be a continuous process for months to come as the new regulatory waves hit our shores. Having policies and procedures aligned with well-designed training content and early quality checks is essential and can be very cost effective. There are many affordable solutions in the market. Building it yourself or partnering with a provider, keeping the LMS current, is the best insurance money can buy to protect against fines, penalties, or loans missing the QM safe harbor target.
Alice Alvey, Master CMB, is senior vice president of Indecomm-Mortgage U Inc. She is a national expert in mortgage training and compliance, with field experience from application through servicing. She co-founded Mortgage U with Jan Wetzel in 1996 and has designed hundreds of education programs. Alice is author of the FHA and VA Practical Guides used widely in the mortgage industry. She may be reached by e-mail [email protected]