The overwhelming flood of regulatory changes has made it impossible for lenders to keep up with compliance without technology. Since the passage of the Dodd-Frank Act, financial institutions have faced up to 400 new regulation proposals, seen more than 200 passed and struggled to work with a new enforcement agency, the Consumer Financial Protection Bureau (CFPB).
The attention put on compliance has resulted in a burden that cannot be maintained by manual processes or simple spreadsheets. The good news is that technology firms across the mortgage industry have embraced the need for strong compliance and built reports, analytics and tests into their DNA.
As 2014 takes off, there are two areas that technology will best assist lenders in holding back the flood waters of compliance—complying with the Qualified Mortgage (QM)/Ability-to-Repay (ATR) standards and document compliance for Truth-in-Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) disclosures.
Understanding QM/ATR
The QM/ATR rule establishes strict underwriting standards to ensure lenders are making loans that consumers can pay back. It requires lenders to make an assessment of a borrower’s ability to repay their mortgage loan, and also protects them from liability if they make “qualified mortgages” as stated in the rule.
As defined in January 2013, QM outlines a series of standards that a loan must meet. The QM rule seeks to:
►Establish a cap on borrower’s debt-to-income (DTI) ratio of 43 percent, unless approved by a government-sponsored enterprise (GSE) and/or homeownership stabilization program; and
►Implement a three percent limit on the fees and points lenders can charge.
The rule splits qualified mortgages into two categories of liability. The first category provides a “safe harbor” protection for qualified mortgages that are not categorized as “higher-priced” as defined by the 2008 Federal Reserve Board Truth-in-Lending amendments. This “safe harbor” will exempt lenders from litigation by the borrower and provide protections from buybacks.
“Higher-priced” qualified mortgages will receive a rebuttable presumption of compliance. Loans originated under the “higher-priced mortgage” definition will not exempt lenders from litigation; instead, they will be presumed to have reviewed the borrower’s ability to repay, which provides a stronger defense in the event litigation reaches the court.
A new disclosure hits the streets
The other key rules that technology will impact is the recently announced rule combining certain TILA and RESPA disclosures into a single document. The new rule, revealed in November 2013, provides the borrower with two integrated disclosure forms, The Loan Estimate and The Closing Disclosure, enabling them to compare loans and better understand their mortgage terms.
According to the CFPB, The Loan Estimate form must be sent to consumers within three business days after a loan application submission. The form satisfies the Truth-in-Lending (TIL) and Good Faith Estimate (GFE) mandate and is intended to give borrowers the information needed to compare costs and features across loan offers. The form’s features highlight risk factors, short-term and long-term costs and allows for better comparison shopping, which will ultimately decrease the number of issues between lenders and borrowers. The new disclosures must be implemented by Aug. 1, 2015.
Going digital to better comply
Using electronic documents provides lenders the best option to cost-effectively manage new industry regulations. Since lenders will have certain legal protections–or lack thereof–depending on the QM status of a loan, documentation is critical. From the initial disclosures to closing documents, every loan must be 100 percent accurate and defendable to regulators, investors and the courts.
In order to accomplish this, lenders must move away from static PDF-based documents. These first-generation electronic files are not flexible enough to meet the needs of today’s lenders, and the new disclosures will require a complete rebuild of all PDF-based documents.
Alternately, dynamic mortgage documents import XML data directly from the loan origination software (LOS) to populate fields. Based on the specific loan data, dynamic documents can change a word, line or paragraph at once. There are no fixed field lengths, no extra small fonts in order for information to fit and the necessary language and data are stated on the documents—nothing more, nothing less.
This approach also eliminates the need to maintain expensive document libraries or include excess documents in every loan package. Only those documents needed for each customer are generated and printed.
For many lenders, e-disclosures are another simple way to comply with both QM/ATR and the new TILA/GFE requirements. Electronic delivery ensures compliance with regulations, and it also saves time—since borrowers can receive electronic communications immediately.
In terms of complying with the regulations, the most significant benefit in using e-disclosures is that there is a reporting trail for the generation, distribution and receipt of all disclosures. Lenders can ensure that borrowers have opened the disclosures, and some systems will mail a back-up paper copy when the disclosure is not accepted in the required timeframe.
What to look for in paperless mortgage technology
When making the decision on how to implement electronic documents, there are a few considerations to keep in mind. The most important is compliance. All mortgage document systems—paper-based and electronic—must comply with federal, state, agency and investor requirements. In the case of electronic mortgages, lenders should make sure that the proper forms will be delivered in the correct format at the right time.
The best document providers will also have a reporting feature that enables lenders to track every stage of the mortgage process to guarantee each and every step is completed on time and in accordance with all regulations. The reporting function could also be tied to a mailing service that would send paper copies of the documents to borrowers automatically when the electronic communication is not completed in time.
Compliance will once again be the driving concern for lenders, but the technology is available to help manage the process without unnecessarily sacrificing excess time or expense. Begin with those areas where automation and paperless technology can smoothly implement into existing technology platforms. Documents are often one of the easiest pieces to begin to implement new compliance technologies, and the savings per loan can fuel more profits as loan volume continues to rise.
Scott K. Stucky is chief operating officer at Idaho Falls, Idaho-based DocuTech Corporation, a provider of compliance services and documentation technology for the mortgage industry. He may be reached by e-mail at
[email protected], online at www.docutechcorp.com or on Twitter at @DocuTech.
