How Lenders, Regardless of Size, Can Successfully Originate Loans without Fear of RESPA Violations.
(TheNicheReport) -- Whether you’re a large lender with billions of dollars in assets or a small, local lending institution, you are feeling the impact of compliance requirements on your business. As the regulatory environment continues to evolve into one of “zero tolerance,” the threat of loan repurchase requests has lenders carefully evaluating their compliance capabilities.
When it comes to loan repurchase requests, the primary regulatory drivers are RESPA, MDIA and TILA, and violation of these (or any other disclosure agreement) can effectively void a loan. In the past it was the investor kicking back loans for repurchase, now it is the borrower. As an example, more and more lenders are hearing from borrowers, “My house is underwater and I received the disclosure, but you funded my loan prior to the seven-day rescission period.” The loan is still funded, yet the borrower now can claim a MDIA violation of an improperly executed document —leading to a loan repurchase. Once a loan is closed, there is no retroactive option for correcting the compliance violation.
Where it begins
The roots of a compliance volition can be traced to any number of processes or material changes that occur during the loan origination cycle -- depending on how an originator handles compliance verification. If, for example, there is an increase in the loan amount, a rate change due to a lock expiring or any undisclosed debt that increases the DTI late in the process, an additional disclosure must be sent to the borrower. Even if the borrower has seen the revised disclosure, the seven-day rescission period still applies and, if the lender funds the loan without the proper validation of the seven-day period, they now have a compliance violation, increasing their repurchase risk. It’s an issue of human error that is easily solved by employing the right technology which enforces policies and procedures. Furthermore, using validation rules as a form of checks and balances, prevents lenders from facing this problem in the eleventh hour of the origination process and reduces performing loan repurchase risk.
Lenders will tell you that the “disclosure obstacle” and failure to comply are the primary causes behind many repurchase requests. From a loan quality standpoint, non-compliant procedures reduce the overall profit margins and shareholder value and are extremely costly to institutions. The end result is either for the lender to take a penalty on the overall value of the loan, or to repurchase and carry the loan on its balance sheet. The pervasive issue of distressed properties is doing enough damage to lenders without the added internal risk associated with non-compliance. Rather than trying to find the right balance between over- and under-compliance, having an effective and preventative solution in place to manage the process is a more reliable deterrent.
The integration of a solution will not have the desired positive effect if the data a lender is managing does not fit into a workflow system with business rules and enforced policies in place. The data itself must integrate with the system for validation and identification of any issues. As many LOS vendors are performing integrations, they are simply providing a link to a report, but there still needs to be someone who can view that report and decide what action needs to be taken based on the results. There needs to be an industry-wide elimination of what can be called a “stare and compare”, where underwriters and processors are examining multiple reports outside of their systems to interpret and make a decision. Ideally, data should pass through a workflow with analytics enforcing hard stops using business rules that won’t allow the loan to progress if there is a violation of any business policy or regulatory requirement.– The key is to identify and prevent an issue before it can balloon into a costly problem down the road.
The ability for a lender to continue utilizing its proprietary workflow without changing their business process to fit a vendor’s fixed generic workflow is more pragmatic and cost effective in both the short- and long-term. Solutions should adapt to the customer, taking a lender’s processes and making a system fit around it, while providing controls and rules for MDIA, RESPA, TILA, and the host of other regulatory programs, regardless of retail, wholesale or correspondent channel. As institutions become more and more focused on cost-containment, a significant source of expenses can be greatly reduced by effectively applying a solution that reduces human error through hard stops, automated workflow, analytics and business rules. The loan origination process is one in which there is virtually no way to ensure that every step is completed correctly in every instance unless the system in place is prepared and well-equipped to handle it. We have seen it succeed in other consumer areas --much like a report can be issued in auto lending in the form of a “CarFax,” providing a history of the car, a well-developed LOS with validation rules and process controls should offer a “LoanFax,” where a lender and investor are provided a snapshot of every material change on a loan; reporting every instance of who, when and what changed on each specific loan.
One Size Should Fit All
LOS technology can be a lender’s most effective tool in mitigating non-compliance risk associated with the varying degrees of regulation. The enacted compliance rules from Dodd Frank, and newly enacted agencies to enforce them, do not give special consideration for lenders, big or small. Compliance is the biggest obstacle, so there should be equal accessibility to an LOS capable of originating and processing quality loans. Lenders can have multiple channels or system limitations, which depend on several platforms and often have difficulty in maintaining compliance across the enterprise. Disjointed solutions with disparate databases shift control from the lender, causing it to lose top-down enforcement and visibility throughout the process. Conversely, for community banks, which often fall in the “too small to comply” segment, managing compliance proves challenging as well, given the considerably lower number of loans they process. A bank in this situation often needs to employ a compliance team, as well as a technology infrastructure that includes testing sites, development sites, 3rd party integrations and a system implementation team. . An ideal LOS should have all of these components built into it, saving operating costs and maintaining compliance, while offering the flexibility for the business user to make changes quickly.
The fluctuating and unpredictable nature of the mortgage industry has forced many lenders to reevaluate their current technology. By selecting a solution that provides the flexibility to make changes quickly, they are able to reduce vendor costs and dependency and remain compliant with the evolving regulatory challenges. In addition to managing expenses along with the decreasing origination margins, lenders require different pricing models for solutions in today’s market. Failed implementations, or systems requiring never ending customizations in the “pay-per- user license” front loaded model can no longer be the status quo Lenders want to avoid paying a large amount upfront and sharing the implementation risk with their vendor, Just as the different regulatory programs have effectively evened the playing field for lenders of all sizes; a proper LOS solution should provide equal opportunity in terms of compliance and deployment for financial institutions as a whole. For any lender, smaller or large, the “pay-per-license” process can be inefficient and costly, driving vendors to create a “per-closed- loan” option. Additionally, not all originators have the resources or technology to develop and maintain policies and procedures to ensure that they stay compliant. A solution should provide a flexible model that does not require a lender to conform to a standardized workflow or to be dependent on the vendor for any changes, but still allows for unique or institution-specific business processes within an existing system the lender can develop or change on the fly. Some lenders may want a solution installed behind their firewall, but want to enjoy the advantages of the per closed loan pricing model, and other lenders may go for the licensed pricing – so a shared risk pricing model needs to offer something for everyone.
Loan quality and data integrity are the primary factors when dealing with loan repurchase requests. Identifying the problem at the source, pre funding, is the only way to truly avoid a single drop poisoning the entire body and ensure the validity of a loan. Lenders should not be focused on structuring processes around a solution; instead, the solution should integrate and work with whichever strategies an institution is using. Neither should the size of the lender exclude it from the accessibility of a solution, as compliance for all lenders in 2012 is necessary and should be as accessible as possible. Processing a mortgage is not an easy task, but it should not result in additional work on the back-end once the process has been completed. A diverse system that provides the ability to create workflow business rules, hard stops and analytics with a high level of integration, regardless of channel, will be the deciding factor in identifying only qualified loans and vetting compliance for a functioning LOS. This will allow the lender to focus on loans that need review, while the higher quality loans, validated with business rules, analytics and automated workflow, flow through the origination process.
By Umesh Verma, President, Commerce Velocity