The mortgage industry is no stranger to volatility. However, with a new presidential administration, a global pandemic, and record-high origination volumes, 2021 promises to bring more twists and turns than ever and will undeniably bring along with it new compliance challenges.
Successfully dealing with these challenges requires first identifying what they are. We are already aware of some, such as the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage (QM) rule changes. Others we’re not yet sure of—such as the impact the Biden Administration will have on the housing industry. Regardless of what happens, it’s important for originators and other industry participants to understand the potential risks and have a plan in place for addressing them.
More Modifications to QM Loans?
One of the biggest compliance changes originators will face this year began in December, when the CFPB issued final rules involving the Ability to Repay/Qualified Mortgage (ATR/QM) standard. In essence, the CFPB redefined what constitutes a QM loan and also created a new seasoned QM standard for portfolio loans that meet certain performance requirements. The distinctions will be important. For example, issuers of loan pools currently must retain 5 percent of the risk if any loans in the pool are non-QM. This prevents the co-mingling of a few non-QM loans into a securitization that is primarily comprised of QM loans.
The final CFPB rule will expire the GSE patch and expand the general QM definition by removing the 43% debt-to-income (DTI) threshold and the requirement to adhere to Appendix Q. (Currently, a significant number of loans are at the cusp of the 43% threshold.)
Originators have the option to comply with the new general QM standard starting in March, but compliance with the new standard will become mandatory on July 1, 2020, which corresponds with the GSE patch expiration. Ultimately, overcoming these challenges will require lenders to educate their loan officers, their realtor partners, as well as consumers on the new QM rules, particularly when it comes to DTI standards. As they adapt to these new definitions, however, lenders are likely to make early errors. Many lenders use multiple computing systems, which may also lead to some inaccuracies when testing loans.
Similarly, the QM rule will create a huge burden on document and loan origination system (LOS) providers. Most LOS providers will need to implement updates to ensure clients comply with the new QM rule. Everything lenders do is memorialized on their loan documents, but it is the LOS that will need the ability to determine and interpret the new data to perform APR to APOR comparisons and identify whether loans meet the safe harbor provision.
A New Administration and Housing Policy
While the CFPB’s rule has been in the works for some time, a new presidential administration could potentially make additional changes. Many believe that a new CFPB director will be satisfied with the new QM rule as written, as it is an improvement to existing standards. However, modifications could still be possible.
Another area where new administration policies may have an impact is with respect to the potential new down payment tax credit applicable to first-time homebuyers. The new administration may look to increase homeownership for first-time homeowners through this new policy, which may emulate prior policies under previous administrations—or it may go beyond a one-time tax credit and possibly allow a percentage of a borrower’s down payment to be forgiven up to a certain dollar amount.
If changes are made to encourage first-time buyer programs, lenders will need new policies and procedures in place to identify what criteria need to be met to qualify as a first-time buyer. However, this definition is often difficult to test and it may differ from guideline definitions. Lenders will need to be able to document the rationale that a buyer qualifies and provide evidence in the loan file or it will not hold up under regulatory scrutiny.
There could also be greater enforcement of fair lending rules and the Home Mortgage Disclosure Act (HMDA) compared to the past four years. Enforcement under Biden’s nominated CFPB Director Rohit Chopra may be more aggressive than it was under former Director Kathy Kraninger, but it is yet to be seen whether it will be as aggressive as it was under the Obama administration. Because of the booming refinance market, for instance, there have been instances in which borrowers pursuing lower balance loans who have poor credit may be neglected by lenders unwilling to spend the extra time to close their loans. From a regulatory standpoint, Canceled, Denied, or Withdrawn (CDW) loans can be early red flags that there has been a difference.
The Biden Administration is likely to be more focused on providing a more equitable lending landscape, in which borrowers are treated the same regardless of ethnicity, age, race and gender. Lenders must monitor to ensure borrowers under a protected class are not receiving less favorable loan terms than non-protected class borrowers. Lenders could run into fair lending issues if a lender lowers one borrower’s rate because the borrower observed a lower rate from a competitor, but another borrower had to jump through hoops to obtain the same rate reduction.
Additional Challenges Coming This Year
There are some good things happening this year. One major change will be the introduction of the new Uniform Residential Loan Application (URLA). While the implementation of the new form and explaining it to borrowers may create some issues, it is not likely to create compliance risk. Rather, it allows for greater visibility as it enables originators to capture more information from borrowers.
With the new URLA, lenders will no longer need to issue a separate taxpayer consent disclosure to the consumer. Prior to the new URLA, in addition to the 4506-T form to authorize the lender to obtain the borrower’s transcript from the IRS, the lender was required to have the consumer execute another form for the borrower to give consent to permit the lender to share the IRS issued tax transcript. The URLA now has the borrower’s consent language built into the form to permit the sharing of their tax transcripts. This will benefit lenders and subsequent purchasers or assignees of mortgage loans using the new URLA.
In the last 12 to 18 months, originators hired significant numbers of loan officers, underwriters, loan processors and other key roles. While the additional staff was needed to get through the period of significantly high volumes, at some point—either later this year or a couple of years from now—lenders will have to reduce staff again. This creates a potential risk of having a disgruntled former employee acting as a whistleblower and calling out perceived or actual issues with the originator.
To use one hypothetical example, like any business, originators need to remain compliant when compensating staff for overtime. A lender may have the expectation that underwriters are able to get through 8 to10 files per day. If one of their underwriters is only able to get through 5 to 7 loans a day, they may feel obligated to work a few extra hours per day to meet the originator’s production targets. This would result in the underwriter appearing to meet the productivity goals, but they are working overtime without compensation. The underwriter may be working the extra hours to avoid scrutiny for their productivity, but if the originator is not compensating the employee for the extra hours, this would present an issue.
Why New Tools Are Needed
Because originators face a plethora of compliance challenges, it is important to establish policies and procedures as early as possible to ensure their processes remain compliant and potential whistleblowers do not have anything they can blow their whistle on. For example, if lenders are having a certain number of CDW loans fall out every month, they’ll need to perform analysis to ascertain what transpired. If a certain number of loans were withdrawn because the borrower did not submit the required information, how aggressively did the lender or loan officer follow up?
Preparing to answer such questions is not an easy chore when lenders are at their busiest. However, they can get help. For example, there are automated compliance engines that are available that can help lenders follow the rules and identify positive trends that signal the lender is on the right path or spot negative trends that require a closer look for potential systemic issues.
Lenders will also need fair lending tools that capable of looking at peer HMDA data going back five to 10 years to conduct a cross-section analysis of how they compare to other lenders with similar product offerings. Of course, they must also be aware that discrepancies will exist, but they should examine the discrepancies to identify possible enhancements to minimize them. For example, a consumer submitting a loan application through the lender’s website may choose to not provide their race or ethnicity. If the lender’s applications are not obtaining this data consistent with their peers, additional scrutiny may be warranted to ensure the application process and screen flow is not contributing to this variance.
For this reason, most lenders will require newer, more robust technologies that both enhance the loan review process and are easily updated with new rules as they come into place. With new automated review technologies, lenders don’t have to wait until just before closing to gauge the quality of a loan file. They can monitor changes during the entire origination process and even conduct mock regulatory examinations so that issues or potential violations can be cured before their loan data is evaluated by regulators as part of an examination.
A key benefit to leveraging an automated compliance solution, such as the ComplianceEase ComplianceAnalyzer product, is that provides the lender with real-time feedback to aid in the origination of compliant loans. Such tools enable lenders to identify and act on loan file weaknesses as they occur, not after a loan has closed and is flagged as non-compliant by the potential investor or the lender’s regulators. Additionally, compliant loans spend less time on a warehouse line from closing to acquisition by an investor.
No one knows for sure what tomorrow will bring. But it is certain that lenders are going to need new strategies in order to remain compliant in the coming year. Regardless of how 2021 shakes out, those that think and plan ahead—and have the right tools in place—will be in the best position to succeed.