The Dodd-Frank Wall Street Reform and Consumer Protection Act has forced the U.S. mortgage lending industry to act quickly.
This historic legislation, passed in 2010, established the Consumer Financial Protection Bureau (CFPB), which is tasked with writing the rules that will define our business in the future. By establishing penalties and fines for non-compliance, the government made clear its willingness to protect the consumer and make these improvements a permanent part of the lending process.
For its part, the industry has been adapting to the new environment and there is widespread realization that remaining competitive means ensuring efficiency and compliance. More and more, companies understand that compliance in the new mortgage industry is something that needs to become a regular part of everyday operations.
The stakes are now simply too high not to bake compliance into every aspect of the delivery of a financial product or service to American consumers.
Last June, the government finalized work on two provisions of the Dodd-Frank Act: revised requirements for mandatory escrow accounts for Higher-Priced Mortgage Loans and a prohibition on mandatory arbitration agreements. In January, the CFPB implemented its new Qualified Mortgage rule, new requirements for high-cost mortgages, and a change to the Equal Credit Opportunity Act rule for delivering copies of appraisals to consumers.
When this article went to press, mortgage loans with applications taken on or after Jan. 10 were still in the pipeline for most lenders and few had made it through to funding and sale on the secondary market.
It will be months before a significant number of loans made under the new rules are reviewed by investors and auditors, and so it may be too soon to know if lenders and brokers are successfully complying with the new requirements. We’re not likely to know how well the new rules are meeting the goals of the industry’s federal regulators until these loans are examined, which may be several months away, as well. It may be too early to judge, but not too early to give our first impression.
Nearly a month after the latest rules went into effect, the industry is quiet, perhaps strangely quiet. So far, implementation of the new rules is going more smoothly than I would have suspected. We are definitely receiving fewer questions and concerns from lenders than we had expected.
For the most part, lenders are hard at work. No one questions what regulators hope the ultimate impact of these changes will be. There is also little doubt that effective compliance will involve at least three elements: a correct understanding of both the letter and the spirit of the new rule, an updated process or set of processes to ensure compliance and, perhaps most importantly, a full understanding of the real impact of Dodd-Frank on the mortgage industry.
PROPERLY INTERPRETING A NEW SET OF RULES
Last summer, lenders were still struggling to make sense of the new rules. This is not a statement based on anecdotal information, but rather on our own experience in the industry.
Beginning last June, DocMagic’s Compliance Department hosted a series of Dodd-Frank implementation webinars aimed at helping institutions make sense of the new rules and providing a roadmap for implementation. We expected to attract hundreds of executives from among our existing client base. Instead, we were overwhelmed with more than 2,000 requests to join the webinar.
We have a lot of experience in providing online education and this was without a doubt the most popular online event the company has presented.
This can only be because lenders had a real need to better understand this material. Seeking out this information from trusted sources is the only way the industry can attain it. Now that lenders are into the work and responding daily to the new requirements, those questions seem to have gone away — at least, the questions we were getting last June.
Over the past month, the nature of the questions that lenders are bringing to our Compliance Department has changed from broad and general, designed to help them make sense of the regulatory landscape, to very detailed questions about specific compliance requirements that pertain to the particular loans they are working on at the moment.
Part of this is due to the fact that back in June, we were addressing an audience of implementation experts made up of compliance folks, management executives and some programmers.
This audience needed to understand how to set up policies and procedures that would allow their employees to meet the new compliance rules. Now, we’re fielding questions from the employees who are actually processing and funding these loans.
The good news is that they are asking the right questions as these loans move through their updated process. The challenge is that, even though lenders have been working for months to update the set of processes they are now using to comply with the new rules, that work is far from over.
CREATING ONGOING POLICIES AND PROCEDURES
The policies and procedures companies are now using to comply with the latest rules would likely have been introduced to employees back in November and December of last year. That’s when most lenders began training their teams to process loans under the rules that are in effect today.
Now, it’s time to close the loop. As these loans start to work through the pipeline, the best lenders are availing themselves of a detailed, electronic audit function. This audit function is watching everything that happens to the loan as it moves along to the closing table. This audit record will tell the lender whether or not its origination team actually understands the new procedures and if they can be followed easily and consistently.
Any problems will be identified and the training begins all over again.
NOT A NEW JOB FOR THE INDUSTRY
The Dodd-Frank rules are the basis for an industry-wide transformation. On the plus side, firms now have the chance to make their operations better. In addition to compliance, we now have the opportunity to reengineer and improve operations, build in cost and time savings to make us more efficient and offer consumer-friendly elements that will make us more effective at attracting business in the future.
The best lenders are doing the work it takes to ensure compliance while building-in additional design requirements that will serve to improve workflows and efficiencies for the long term.
In the end, leading institutions are taking full advantage of the implementation process to build not just compliant firms, but better companies.
In a best-case scenario, technology deployed across the enterprise will guide team members so that compliance is the automatic outcome. But regardless of how it is handled, this cannot be viewed as a new job for our industry. The home finance business has always been tasked with producing high quality loans.
The economics of the industry don’t work if loans are not of high quality. The change is only in who decides what “high quality” really means. In the past, the industry was able to make its own judgments about that. Lenders were able to tailor their lending practices to their communities and their borrowers and to respond to their local markets.
Now, every originator is tasked not only with tailoring its lending practices to those elements, but also to comply with very specific rules that are being promulgated at the federal level. That’s an adjustment.
Today, lenders find themselves balancing the needs of their banks and their borrowers against the need to meet the federal government’s mortgage rules. It changes the game.
CONCLUSION
The CFPB is doing its job under the Dodd-Frank Act. The bureau has done a good job of responding to questions from the industry and issuing guidance.
Ultimately, it’s the industry’s own responsibility to integrate all of the rules and guidance into daily lending practices and actionable plans. Each company bears this responsibility and will be held accountable by the government for the manner in which it discharges it.
To make things more difficult, compliance is definitely a moving target. Over the course of the next few years, these rules will be studied by federal and state lawmakers to determine whether they have had the intended effect.
Since consumer financial protection is a moving target in an ever-changing marketplace, it’s perfectly reasonable to expect that these rules will be fine-tuned and amended in the near future.
But this need not be a burden that destroys lenders, and it’s not one they must face alone. There are many vendors and consultants standing by to support the industry through this transition and the end results, at least for the best companies in this space, will be better and stronger financial institutions that are better able to compete for today’s mortgage borrower.
