Technological Therapy for the Compliance Blues

by 06 May 2013

One truth about sales and marketing is that customers buy for emotional reasons. For years, lenders bought mortgage technology solutions that allowed them to do business faster, more easily and at less cost. But at the core, these solutions made them feel empowered and more successful because they could do things faster, and do more with less. The technology also gave them comfort and convenience, because these solutions eventually became easier and easier to use.

 

Another truth about sales and marketing is that not everyone buys a product for the same reason. The desire for speed and efficiency drove many early adopters of mortgage technology, but today, there are new emotions pulling the cart. In an industry that faces increasing scrutiny from regulators and investors, lenders are responding to technology that offers security and protection, and ultimately helps them deal with the fear of not being able to stay compliant.

 

Never before have lenders faced such extraordinary changes in how their industry is regulated. If lenders want to stay in business, they need to stay compliant with new state and federal rules, including changes still being developed by the Consumer Financial Protection Bureau – and they need technology to do it.

 

Accuracy equals trust

 

One reason why technology is important is accuracy, both within a lender’s organization itself and to the consumer. More than ever, people shopping for homes are turning to the Internet, and borrowers expect the rates lenders advertise online to be truthful. When they call the lender and find out that the rate they saw online is not available, it feels to them like a bait and switch tactic. With the Internet and the availability of real-time rate sheets, there’s no reason for lenders to find themselves in this situation. The reputational risk alone isn’t worth it, let alone the risk of this leading to an audit by a state or regulatory agency such as the Consumer Financial Protection Bureau.

 

Lenders can prevent such risks and increase accuracy and transparency to borrowers by utilizing technology that can deliver real-time accurate rate and fee information directly into the consumer’s hands, whether in marketing campaigns, or on their websites. The technology already exists and requires very little work from lenders themselves, which means that the product and rate that the borrower sees online, the borrower can get.

 

There are other reasons why accuracy is important and why technology is the only way to ensure it. As most lenders will tell you, one of the reasons they may have trouble sleeping at night is the uncertainty of whether the appropriate process was in place to properly review a borrower’s characteristics, and accurately disclose to that borrower.  Any incorrect calculation could result in a lender having to absorb the monetary loss in order to originate the loan, and could result in funding a loan that is non-compliant, leading to a whole host of potential consequences.

 

But these risks generally all start upstream at the very beginning of the initial borrower pricing and application. By having loan officers and borrowers using technology that controls this upstream process and accurately performs functions with fewer manual calculations involved, lenders are mitigating a vast amount of compliance and financial risk.

 

Yet lenders can use technology to guarantee that when a loan officer inputs information into a 1003 form and clicks the submit button, they are then quoting the borrower accurately and disclosing properly, retrieving a loan scenario that they can live with. Even better, they can use technology that allows them to automatically maintain accurate loan characteristics and pricing, even when circumstances change such as a change in the borrower’s credit score or loan-to-value ratio.

 

Another aspect of accuracy involves the various technology a lender uses. Many companies will have a loan origination system, a pricing technology, a doc provider, an imaging provider, a lead management system and maybe even an automated dialer. If these systems cannot share data and therefore “talk” to each other, the lender has to manually input information from one system to another, which is how mistakes get made and loan accuracy slips.

 

Fortunately, that’s all changed. Today we have seamless data transfers taking place between pricing engines, LOS’s, lead management software and other solutions. These tools are helping lenders increase production and stay compliant, because they require less manual intervention and are therefore simply more accurate. They also allow a lender to choose a best-in-breed technology solution for each element of their business, with confidence that the systems can be configured to remain in sync.

 

Historical proof

 

If lenders are audited on one or more loan files, they are going to need to provide a historical record of the entire origination and underwriting process. With the right technology, however, that isn’t hard to do.

 

When lenders get audited, a huge amount of the focus is on how they offered a borrower the rate they did. From what I’ve seen, three-quarters of the audits revolve around the issue of fair lending, what rate the borrower was offered, etc. When that happens, lenders have to look at the entire transaction from day one.

 

The most current technology lets lenders pull up an archive of what the borrower was offered and how each loan was priced, including when and how and who. Anyone can go back at a later date and see when the lock request was made and when the lock desk confirmed, when pricing adjustments changed, and other details. They can also see any changes that were recorded in a borrower’s FICO score, or if any repricing requests were made and confirmed, or whether an extension was requested and by whom. If a rate sheet was suspended, or an originator’s compensation plan was changed, or an originator moved to another branch, that information is tracked and recorded, too. Vast amounts of data are now available to lenders of all sizes.

 

But lenders can also need technology to track other required processes. For example, loan officer compensation is often difficult to manage, particularly for companies with large numbers of originators and branches. It becomes even more difficult when lenders change their compensation plans or move loan officers between branches. And yet loan officer compensation directly affects loan pricing – indeed, a major reason why loan officers misquote products and rates to borrowers is because they are not factoring in their own compensation properly.

 

The last thing lenders want is a profitability issue because they can’t keep track of these details. Lenders who want to stay compliant must honor their loan officer compensation, even if it is misstated. What lenders need are controls that can systematically handle the pricing borrowers see and how the loan officer gets paid, automatically. They also need tools that allow them to generate loan officer compensation reports in case they get audited.

 

But as Qualified Mortgage, max premium, and other rules become more and more defined, new questions and challenges are bound to emerge. What is the maximum price lenders will be able to charge? What are the maximum number of points can they offer? What is the minimum credit score they can accept? All these issues have to do with the pricing of the loan.

 

To deal with them, lenders will need technology in place that allows different pricing scenarios to be run, regardless of the circumstances with which they are dealing.  Aligning with technology that is developing quickly to not only address but stay ahead of the curve is key, especially in an increasing rate environment where adapting quickly could mean the difference in a lender’s ability to compete in the marketplace.

 

Handling the unknown

 

For example, lenders currently have access to technology that allows them to not only manage to industry guidelines, but also place their own automated restrictions on the loans that can be quoted to a borrower (such as FICO or the number of financed properties a single borrower may have). Once they determine that parameter, their chosen technology can automatically rule out any scenarios beyond that limit. I point out this example in particular because this is exactly the sort of tool lenders frequently tell me they need. But with today’s technology, a lender doesn’t need technical sophistication to apply and manage these rules. Today’s technology is such that business users can manage their business, and technology does the hard work on the back end.

 

Of course, the mortgage industry is not wanting for options when it comes to technology. But there is a big difference out there between products that can provide some measure of compliance help and those that can’t.

 

To give an example, when a lender comes back from underwriting and finds out that the borrower’s FICO is actually lower than what is stated on the loan application, they need to submit a request of changed circumstances. What they don’t want to do is go back and calculate everything by hand—and yet that is what many pricing technologies still force lenders to do. Even if you do it correctly, you have still created a potential compliance issue because you won’t have an electronic record of what you did, why, when, and by whom.  When you’re audited, you’re then struggling to gather pieces of the puzzle if you don’t align with the right technology.

 

For lenders, the return on investment for selecting technology that also allows them to stay compliant is huge. Not only are they saving themselves untold expenses by preventing audits (or at least building up a solid defense) through accurate pricing, LO compensation controls, and historical records, they are also saving time and money by performing these tasks faster than they could have without the automated assistance.

 

To this day, many origination professionals think that all a pricing engine does is choose products and investors. While it is true that is this is how our industry started, this limited range of usefulness is just no longer good enough. In fact, even many originators that only price and originate to a single product or investor are now finding great benefits from a pricing engine that provides them with compliance security, efficiency and the peace of mind that comes with it.

 

As the industry continues marching towards an uncertain future with regards to new regulations and compliance requirements, I see no reason for lenders to panic. The pace of innovation in our industry has grown quickly in recent years, and there is a way for lenders to stay compliant, grow business, and save effort and money, all at the same time. Today’s lenders may have an emotional need for security and protection. But with the right tools, they can take the energy they spend on the worrisome compliance blues and direct it toward a far more rewarding activity: originating loans.

 

Mark Coupland is the vice president of business development for LoanSifter. He can be reached at mark@loansifter.com

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