The Consumer Financial Protection Bureau (CFPB) finalized rules to simplify mortgage points, fees and ultimately bring greater transparency to the mortgage loan origination market in January 2013. Full adoption of these rules by lenders, servicers, originators and borrowers are expected by January 2014. By the time you are seeing this article, your compliance team has less than 10 months to read, understand, implement and place these new rules into flawless practice.
Instead of panic, lenders should embrace 2013 as the year not to compromise compliance. By taking the time to do it right–whether internally or with the help of a compliance provider–a lender can turn compliance trends into increased productivity, less stressful regulatory exams, more confident loan sales to the secondary market, along with a decrease in the chances for regulatory fines.
2013: Enter the Rules
The CFPB’s rule announcement from January hopes to instill confidence for the consumer and strengthen the relationship between lender and borrower. The rules hold a great deal of potential for the changing mortgage lending landscape. Yet three of them, the Qualified Mortgage (QM), Ability-to-Repay and LO Comp Reform, have the most significant impact.
The hope of the QM rule is to reduce the number of foreclosures and provide the borrower with the ability to purchase and make payments on a loan they can afford. Compliance is more important than ever for a company to certify, for both its customers and to the CFPB. The Bureau will not hesitate to fine companies if their compliance standards–and the company's customer standards–are not met.
The redefining of the term “originator” hopes to halt wrongful steering and unlawful compensation of originators. The LO Comp Reform rule will regulate compensation practices within the industry to ease predatory lending and establish an open origination relationship. Now is the time for lenders to seek vendors that are proactive with pre-funding disclosures and corrections to ensure adherence with the CFPB’s top rule announcements.
The fine print of the CFPB’s outlined rules could leave lenders uncertain about which direction to take or how to adapt when faced with measures in which they–or their software–are not prepared.
The compliance process has evolved greatly since the days of auditors sampling random loans to ensure companies were adhering to investor and agency guidelines. Gone are the days where an error rate was built into the secondary pool purchase price. Today there is neither an examiner nor investor that will tolerate even a single loan being out compliance. This is because automated compliance has become standard and can now be achieved through one single system that is seamlessly integrated with the company’s loan origination system (LOS). If you want to be as informed about violations on your loans as well as your investors and regulators are, you should probably be considering 2013 as the year to use automated compliance systems.
Whatever your compliance process may be, lenders should utilize the remainder of 2013 as the time to enhance internal systems and processes. Determining software updates, proper staffing, and having a thorough understanding of the CFPB’s process is the key to figuring out how compliance managers are going to automate and achieve optimal compliance moving forward.
Fewer, more consolidated vendors
The handling of a loan is a delicate, and often complicated, process. It travels through many channels and computer systems, and is seen by many people before it makes the final journey home to the closing table (and then to the investor). To ensure the loan isn’t processed through disparate systems, a lender should seek a vendor that can provide their company with various review and calculation systems.
A growing trend as a result of the ever more complex compliance demands is towards vendor consolidation. Where once getting the lowest price or best product on each individual part of the operation was the original goal, many lenders are now using fewer vendors so that the data can be more easily consolidated. Look for vendors that can take on multiple compliance issues with single integrations.
Seamless, streamlined integration
An integrated compliance process that can instantly check for errors or exceptions within the Truth-in-Lending Act (TILA), Home Ownership and Equity Protection Act (HOEPA), Home Mortgage Disclosure Act (HMDA), Community Reinvestment Act (CRA) and state-level consumer credit laws, among others, will merge the necessary information enabling users to identify and correct mistakes prior to funding the loan.
Whereas yesterday’s goal was simple integration, today’s lenders need to team with vendors that think past the bits and bytes—the ones who address workflow efficiencies. Lenders and servicers will increase their data integrity and improve business efficiency if their system stops the loan process when there are unaddressed errors. The loan’s data integrity will become more efficient with the vendor’s improved accuracy of risk mitigation.
Vendor consolidation, working in tandem with workflow integration, will reduce the number of system of record issues in a document. This will also enable vendors and servicers to review files before submission deadlines to examiners, while increasing business profitability and meeting every regulatory demand in the process.
Pre-funding: Every loan, every time
Post-funding corrections are not possible or advisable with today’s regulations. Pre-funding corrections reduce time and expense, and can increase the quality of a loan portfolio. Doing anything post-closing is like doing tax planning after the year ends. You may feel better, but it won’t benefit your organization or reduce your liability.
Pre-funding data that is centralized will not only ensure compliance before the loan is funded, but will also reduce the stress associated with an audit and reduce the risk of a buyback from an investor. If a company sees an opportunity to lower the overall cost of compliance, they should take full advantage of that opportunity. Utilizing third party vendor expertise will ensure compliance procedures and standards are met.
A 100 percent pre-funding guarantee, on every loan, every time, can reduce the buybacks a company experiences. Adhering to investor and regulatory guidelines can be a successful step in the servicing process if routine checks for compliance errors are conducted before the loan closes. The buyback process is an expensive, time consuming ordeal that is preventable through the simple adoption of pre-funding.
The CFPB was conceived to protect the consumer and hold the mortgage industry accountable for its processes, actions and failures to mitigate risks. Technology and instant automation has enabled both regulators and investors to check the status of every single loan while in process and ensure the accuracy of these files.
Weighing the variances between borrower risk and the possibility of a buy-back is often a difficult consideration. If a lender is in violation of consumer advocacy laws and miscalculates a section of the loan, they potentially could face the wrath of the government and the investor. Since investors do not tolerate mistakes, lenders should not tolerate them either, whether they are internal, or from an outside vendor.
Protecting borrowers from predatory lending and establishing a zero-tolerance compliance error guideline will improve the accuracy and sellable quality of a loan. Loans must meet a plethora of party standards: lenders, vendors, servicers, investors and the borrower.
Although meeting these standards may seem like a daunting, inflexible task, compliance is now non-negotiable and should never be compromised.
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 by phone at (800) 575-4632 or e-mail [email protected]