Confronting the enormous compliance risks of working from home

by Clay Jarvis12 May 2020

There has been no shortage of digital ink spilled over the potential productivity boost some people get from working from home, but all the benefits of remote work can be erased in an instant if a lender’s staff is not in compliance with regulations that support fair lending, consumer protections and internal protocol procedures.

According to Richard Douglass, president of RDAssociates, compliance monitoring needs to be a continuous process for mortgage lenders.

“It’s one thing to properly train and educate one’s loan officers or account executives as to consumer-focused compliance,” Douglass says, “but quite another to ensure that training is being effectively utilized every day in the real world of mortgage lending.”

As COVID-19 has expanded that world to include bedroom, basement and backyard offices, lenders’ employees are now working without the built-in oversight that comes with working in an office environment.

“Any lack of control a lender has is going to give more opportunity for risk and make the compliance team more nervous,” says Jim Paolino, CEO of LodeStar Software Solutions.

Paolino’s list of possible compliance failures is long and frightening, from more policeable slip-ups like poorly secured phone lines or Wi-Fi networks to thornier issues such as a staff member’s lack of understanding of his company’s products – or the federal guidelines that govern them.

“What are they saying? What are they promising to borrowers? Are they quoting fees at a point where they shouldn’t be quoting fees? Are they saying, ‘Oh, you can definitely get a pre-approval’? Are they saying things that are flat-out wrong?” Paolino wonders.

If an employee gives a client the wrong information, the damage can be considerable, from loss of profit to loss of reputation. Paolino provides an example where a loan officer miscalculates a client’s closing costs, neglecting to include a $4,000 tax. In the case of such mistakes, it’s the lender who will be paying the difference.

“And lenders don’t make a whole lot more than $4,000 per loan in some cases, so that will really hurt that particular file if they have to pay a cure like that,” Paolino says.

The options for avoiding these kinds of mistakes – and the potential run-ins with the Consumer Financial Protection Bureau they can lead to – when employees are speaking one-on-one with clients are relatively few. Some companies attempt self-auditing, often by running their staff through role play exercises, but as anyone familiar with the financial world can attest, self-regulation is rarely the best path to stability.

“It’s like giving yourself a physical exam,” says Paolino. “You’re probably not going to do as good a job as a doctor would.”

Another option is to farm out the compliance checks to a third-party like Paolino’s company, which then acts as somewhat of a secret shopper, making calls to a company’s staff, reporting on the interactions and making specific recommendations regarding the areas where each employee needs to improve. This form of auditing, when completed before a loan officer delivers her estimates to a client, allows mortgage companies to remain compliant with Dodd-Frank and CFPB guidelines while also cutting down on the potential for misinformation, discrimination or pressure tactics on the behalf of unmonitored staff.

Ryan Grant says his employer, Fairway, has multiple checks and balances in place to ensure consistency, including a compliance check at the time of initial submission and an internal team that reviews all disclosures before they are sent out.

“I know this can be a challenge for smaller companies that may not have the resources to do this,” Grant says, “so I can see why there would be concerns there, but the larger mortgage banks should have safeguards in place to protect the consumer and to protect the originators from errors or omissions.”

Grant, for his part, thinks the secret shopper concept could help remedy the mortgage space’s biggest lingering problem: a lack of professionalism.

“The mortgage industry has needed more professional and ethical oversight for a long time,” he says.

“Unfortunately, that hasn’t happened in the way that it should have, even after the 2008 financial crisis. Secret shoppers should not only be looking for egregious compliance issues, they should be judging the financial guidance and ethical nature of the transaction as well.  My hope is that one day it will be much harder to get a mortgage license, but until then, secret shoppers should be utilized much more than they are today.”