By Xhevrije West
Since the creation of the Consumer Financial Protection Bureau (CFPB) shortly after the worst financial crisis since the Great Depression, compliance in the mortgage industry has become paramount for success.
Compliance obligations stemming from the CFPB, Office of the Comptroller of the Currency, Securities and Exchange Commission, Department of Justice, the National Mortgage Settlement, states’ Homeowner Bill of Rights, client audits, and individual investor guidelines can be a heavy burden to bear in the housing market, but with the right tools and employees, a company can ensure that they stay out of regulators’ way.
While the mortgage industry continues to navigate through the murky waters of compliance with state and federal regulations, their business practices have also completely changed. With regulatory oversight continuing to weigh heavier on the mortgage industry, compliance may be the only solution to avoid fines and penalties.
“Compliance is required by law,” said Chad Jampedro, President at GSF Mortgage Corp., a direct mortgage lender with 20 years’ lending experience. “Accordingly, compliance is important in order for a mortgage lending company to remain in good standing with state and federal authorities and to maintain a positive reputation within the mortgage industry and the local community. Mortgage companies can ensure compliance by instituting a quality control policy to be followed by company employees and affiliates.”
But there are some who believe the dominoes of compliance will not come crumbling down on their business—that is until federal entities hit them with penalties.
Mick Kless, CRVPM, President, and CEO of The Compliance Education Institute, said, “I think that the biggest issue with all of the financial services industry is thinking that nothing bad will ever happen and waiting for their examiner to tell them what to do instead of doing what they know they should do. It’s not a matter of if something bad will happen; it’s a matter of when. I have always believed that being compliant begins with a strong educational foundation, so introducing a compliance education training curriculum goes a very long way to understanding what needs to be done, how to do it, and what the benefits are.”
With all of the operational changes that compliance encompasses, rule obligations are often an added stress on mortgage companies.
“Given the multitude of things and processes that are touched as a result of these regulations, it adds a great deal of stress to the franchise to ensure that they’ve teed up to cover all of the potential implications within their processes. So it has a fairly extensive impact across the franchise,” said Jerry McCoy, Senior Advisor to The Collingwood Group.
Technology providers are focused on improving the automation of the mortgage lending process from start to end, improving and increasing the use of eSign technology, and transitioning to an eClosing process, said DocMagic’s Chief Compliance Officer Gavin Ales.
Between the Spaces
Oftentimes, when regulatory entities set forth new rules for the mortgage industry, there are typically a few blank spaces in the rule that leave companies questioning what exactly they are supposed to do to stay in compliance.
Ales explained that when the CFPB said that it would be sensitive to “good faith” efforts to comply with its TILA-RESPA Integrated Disclosure (TRID) rule, no further specifics were ever given as to what exactly that meant.
“That’s all they did, they just said they would have a system and wouldn’t provide any more guidance. The focus just shifted to what is it that the investors are going to accept. That has the more real implications for our lender clients, with regard to liquidity,” he said. “There definitely are some gray areas in the rule. I don’t know that it’s possible for them to have covered every situation, but of course that’s what we all want. It definitely does produce a bit more pain in this whole learning process that the entire industry is going through.”
Scott Alexander, Operations Manager at Assurance Financial, agreed that interpretations of regulations are not always given to the full extent. “We don’t always get interpretations of the regulation. I think sometimes the government or the agencies out there that write the regulations that we need to be compliant with can be more forthcoming in their interpretations of those regulations.”
The lack of consistency and clarity among the rules from federal agencies is a sentiment shared by many in the mortgage industry.
“The varying definitions of ‘business day’ interpretations, affiliate zero-tolerance fees, and which type of mortgage product each regulation applies to may cause mistakes. Not having clear guidance from the regulators on how to address certain scenarios can also lead to problems,” said Harmonie Taddeo, AVP, Compliance, Northwest Federal Credit Union.
Donna Gibson, President, Quality Control and Compliance at Inco-Check, said that she believes that the “agencies are trying to provide as much clarification as possible, however, the regulations are complicated and many different interpretations exist in the industry, especially surrounding TRID.
She continued, “There certainly is a struggle right now to comply and continue to be able to sell loans on the secondary market. It will be a huge benefit to all when the rules are further clarified and issues surrounding compliance are further broken down into actual areas of agency concern and/or enforcement actions.”
On the other end of the spectrum, there are those who believe that regulations are intended to be clear and are created and rolled out in a way that businesses will understand exactly what they need to do to comply.
“Regulations are not intended to be ambiguous by design,” said Nickalene Badalamenti-Kalas, President of Five Brothers. “A great deal of preparation and planning goes into the execution of new regulations. Further, regulatory agencies appear to be making every effort to be responsive to the industry as a whole, and are attempting to make sound and reasonable changes for the greater good.”
The Game of TRID
The TRID rule has been shaking up the mortgage industry since October 3, 2015, and in turn, causing lenders everywhere to completely alter their loan origination procedures.
The mortgage industry is still adjusting to the regulation, and although the dust has seemingly settled, financial institutions are still battling with the rule.
Moody’s Investors Service reported that TRID compliance violations are a widespread epidemic in mortgage originations. According to Moody’s analysts Yehudah Forster and Lima Ekram, a number of third-party firms reviewed recent residential mortgage loans for TRID compliance and found violations in over 90 percent of the loans. The report showed that many of the TRID violations were only technical, but still proves that lenders are struggling to comply with the new regulation.
“Many of the violations were reportedly technical in nature, such as the need to use the same spelling convention for counterparties or the absence of a required hyphen. However, the TPR firms still believed the violations were material because the extent to which a secondary market purchaser, such as a [residential mortgage-backed securities] trust, would bear damages or costs from delayed foreclosures is still unclear without further court or CFPB interpretation,” the analysts explained.
Gibson agreed that there is a trend in TRID compliance issues in today’s housing market, and nearly every TRID loan audited at Inco-Check has some type of finding.
“Some secondary market investors are afraid to buy a TRID loan that has any type of issue, no matter how small, due to uncertainty as to what the CFPB will focus on when it comes to TRID enforcement,” she said. “Historically, compliance issues were allowed to be cured or explained by lenders and then could be sold, however, that seems at this time to no longer be the case.”
Even with all of the preparation that went into TRID, which completely changed lender’s businesses, they are still running into roadblocks with the rule.
“We see many lenders struggling with TRID implementation–specifically around the pricing of services to the borrower,” said Vladimir Bien-Aime, CEO of Global DMS. “Services, like appraisals, had to be scrutinized to ensure the right vendor was being utilized so that the borrower didn’t incur any additional fees resulting in re-disclosures and ultimately causing delays in closing.”
Shortly after TRID was implemented, the CFPB announced the finalization of the Home Mortgage Disclosure Act (HMDA), which is intended to improve information about consumers’ access to residential mortgage credit by updating reporting requirements.
“Its’ a domino effect. If you look at each rule in a silo you will miss how they impact each other,” Taddeo noted. “The aggregate of all the rules can be pretty overwhelming. It’s important to understand how guidance and rules regarding one aspect of our operations impact another such as eSign and providing the required mortgage disclosures or fair lending and HMDA reporting.”
Leaning on Technology
The heavily regulated mortgage environment has caused technology innovation to become a new focal point of many businesses within this space. In the past, the housing industry has been slow to innovate, but recent years and additional regulation have brought about the need to streamline business operations.
“It’s a critical role. Think about the number of transactions that are happening daily, hourly, or every minute across this country,” Ales noted. “There’s absolutely no way that our current mortgage lending industry could do what it does now without technology. Technology is absolutely critical to day-to-day operations for any player in this industry.”
In the current regulatory environment, Bien-Aime said that companies are required to do more with less, but throwing bodies at compliance issues is very cost prohibitive.
“As the costs of origination grow, it is clear that leveraging technology with tools that leverage workflow and rules-based systems can alleviate an overburdened mortgage industry,” he said. “Innovation is the ability to creatively solve problems, and these compliance regulations, although onerous but often necessary, require innovation from technology vendors to assist lenders in foraging their way toward the future.”
Many mortgage companies are looking to cut costs and streamline processes, and therefore maximize profits, so more of them are turning to implementing new technologies to comply with regulations.
“Technology is an integral component to one’s ability to achieve compliance, and innovative technology allows for a higher degree of accuracy and improved profitability,” Badalamenti-Kalas explained. “To meet today’s demanding regulatory requirements, servicers and investors demand property information in a timely manner, which requires visibility and transparency into multiple data points throughout the preservation process.”
Kevin Lombardo, President of Centric Technology Solutions, explained the connection between compliance and valuations, noting that “using a tool that compels compliance prior to submittal of a valuation report will create more accurate reports at a lower cost in less than half the time. Marrying the agency guidelines with potential investor overlays, along with utilizing independent data to further validate the outcome, will provide stronger valuations and fewer buybacks.”
In order for a company to be successful, AllyConnect.com CEO Steve Salimbas noted that technology solutions will play a significant role in compliance management processes, but with new technology companies will incur more costs.
“Investing in the right technologies to automate the management of an organization’s compliance requirements is mission-critical to not only remain compliant as requirements change, but provide the most cost effective means to do so,” Salimbas explained. “Compliance can easily become a gigantic black hole that consumes an enormous amount of resources. The challenge is that you don’t want every company trying to re-invent the wheel and build their own custom in-house solutions. That tends to be an incredibly expensive path to take and typically yields mixed results. And the costs do not stop there.”
Rose Bogan, SVP, Governance, Risk, and Compliance at Digital Risk, added, “The balance of compliance and running effective processes can go hand in hand, but this requires a lot of work and that’s what we’re talking about with the compliance management system. You can be innovative, but I believe it requires that a lot of pieces be in place like technology, and ensuring your change control is in place. And as a result of that, what you’ll see is, obviously, the customer experience being a better one.”
When there’s more to do (overwhelming regulatory burden), not enough staff to get it done, and thin margins within the business, Kless says that “it’s a ripe opportunity for technology innovation whereby solutions emerge to help us do more with less.”
This year through 2019 is expected to be very compliance heavy with more regulatory changes to come. According to Taddeo, there will be changes to regulations Z, X, and C as well as the impact of movement in the prime rate and other federal financial agency rules that impact mortgage lending. “Once these rules are effective, with time for the dust to settle, I hope that the industry will be able to refocus energy on innovation and improving the borrower’s experience while remaining compliant through standard processes and programming,” he added.
Bogan believes companies will be solidifying their compliance management frameworks by ensuring that they’re able to absorb all of the changes that could be made in the regulatory environment and that their processes are buttoned down for that change control. She also noted, “As companies become comfortable with compliance, it actually becomes part of the overall process and embedded in their cultures instead of operating independently, and successful companies will learn to have that balance.”
From a compliance standpoint, moving forward, the goal is for mortgage companies to continue to stay abreast of developing regulations affecting the mortgage industry.
“Continued implementation of quality-control policies aimed at enforcing compliance among employees and affiliates, as well as participation in continuing education seminars and the utilization of compliance technology software, will remain at the forefront of the compliance sector in the mortgage industry,” Jampedro said.
Bien-Aime added, “I think everyone would agree that compliance will never go away and it will continue to be complicated. The presidential election will bring about inevitable change and the mortgage industry will feel the impact or repercussions of those changes.”
Editor's note: This select print feature appears in the March 2016 edition of MReport magazine, available now