What the Mortgage Industry Needs to Know About Regulatory Compliance

New regulatory requirements from government entities are completely changing the pace and manner in which the mortgage industry does business. Compliance has become the new focal point for lenders, servicers, and others in this space.

Ann Savage, SVP of Compliance at Mountain West Financial Inc., explains compliance trends in the mortgage industry, how mortgage companies can stay in compliance, and what the industry has to look forward to.

MReport: What compliance trends are you seeing currently in the mortgage industry?

Savage: The Know Before You Owe combined TILA/RESPA disclosures are still subject to varying interpretations by lenders, investors and due diligence firms; I had expected to have more industry norms in place by now. This means that many loans still require individual handling in some way, shape, or form and that translates into higher costs per loan, and in some cases, unsaleable loans. Beyond that, I think we will all have to focus on fair lending in a very sophisticated and thoughtful manner. It would behoove us in the industry to focus on this in advance of the HMDA data reporting changes.

MReport: Why is compliance important? How can mortgage companies ensure they are compliant?

Savage: Compliance is integral to loan quality and profitability. The lenders that can and do manufacture compliance loans with the least amount of human intervention will be the most successful now and in the future. The uncertainty in the market and difficulty in selling post-TRID loans has highlighted this reality. The best way to ensure compliance is to (1) ensure you have the right people on your compliance team that understand the rules & can work with production and operations to simplify processes and ensure systems are working properly, and (2) automation, automation, automation. Compliance requires consistency and correctness in its application on each and every loan. Eliminating human intervention in the process is critical to producing a compliant loan.

MReport: What new/upcoming regulations are out there that may affect compliance?

Savage: HMDA changes are the next big compliance challenge facing the mortgage lending industry. It is effective in 2018 for loans originated in 2017, so all of the new data points will have to be in place with the various loan origination systems used in our industry in 2016. Beyond that, regulatory enforcement by the CPFB continues to focus on fair lending concerns (the HMDA data collection and reporting changes are sure to make fair lending issues more transparent to regulators than ever), marketing service agreements, compliance with Know Before You Owe/TRID disclosure compliance, loan officer compensation and ability to repay. UDAAP considerations should continue to guide lenders when considering new products, processes, and advertising, basically everything that is consumer facing should be reviewed with an eye to potential for unfair, deceptive, or abusive effect.

MReport: What is the LEAST talked about issue with compliance in your opinion?

One area that I think need more attention are keeping written policies and procedures up to date. This requires a lot of cooperation between operations and compliance, as well as a lot of time. When we have big regulatory changes like we have with TRID, the tendency is to document initial P&Ps, then delay updating those policies and procedures until systems and processes ‘settle down’ after implementation. Not documenting what you did and when and why you did it during that interim period can be a big mistake. Having a good record of what changed, why it changed, and when it changed can be immensely helpful later, particularly in the event of a regulatory exam later. It can show the diligence of the company in finding and fixing problems and go a long way in showing regulators that there was a good process in place for finding and correcting problems, as well as show how limited a particular problem may be.

Another that is rarely discussed is potential personal liability for key compliance personnel–this is a growing risk that doesn’t seem to be getting a lot of press or notice in the board rooms, but is a critical factor for top compliance officers to consider in discussing compliance ‘gray areas’ and business decisions with the board and executive management.

MReport: What role does technology play in compliance? Do you think compliance is hindering innovation?

I think technology is key to compliance. It is hands down the best way to ensure the loans you produce are compliant. Compliance can be an opportunity for innovation–as I said before, the lenders that have the best technology focused on ensuring compliance have and will continue to have a competitive advantage.

Want to read more about compliance in the mortgage industry? Be sure to read the March 2016 issue of MReport, which focuses on all aspects of compliance.