The Real Estate Settlement Procedures Act - known as Respa - has certainly caused fear and loathing among a generation of community bankers.
Paperwork generated to comply with the 25-year-old law - which mandates that mortgage lenders make a series of disclosures to consumers - mushroomed in 1992 when the legislation was expanded. While Congress continues to contemplate making the law more palatable to consumers and lenders alike, there will not be any rest from Respa, at least for the immediate future.
That's not to say that community banks are incapable of building a structure to streamline the onerous compliance process. A handful of banks have managed to get a better grip on their Respa responsibilities. Basic requirements are attention to detail, close monitoring of lending staff procedures and a little help from technology.
Most violations are minor and mostly a matter of missed deadlines, according to regulatory sources. Some common missteps by banks are mailing out "good faith estimates" to mortgage applicants too late, a loan officer who forgets to disclose that a loan will be sold in the secondary market, or an annual escrow analysis that isn't sent out to the consumer.
Many community banks shoulder a relatively higher cost to comply with Respa than do larger banks. "They don't have the economy of scale," says John Rasmus, manager of regulatory and trust affairs at the American Bankers Association. "Larger banks tend to have a structure in place to grind this work out."
Regardless of a bank's size, there is no substitute for a strong compliance officer - an individual responsible for developing programs, monitoring regulatory change, training staff, and identifying compliance gaps .
Lisa Grant of Central Bank and Trust Co., Lexington, Ky.,a subsidiary of Central Bancshares, exemplifies the advantage of a dedicated compliance officer. Ms. Grant painstakingly created a printed compliance grid that outlines the requisite documentation associated with different mortgage loan types.
Where the $778 million-asset bank requires the borrower to use a particular provider of settlement services - such as flood certification, property appraisal, credit reporting, and mortgage insurance coverage - the grid denotes whether there is a relationship between the bank and that provider. This is a required disclosure.
Without the grid, Ms. Grant says, loan officers have too many relationships to track. "We utilize different credit bureaus, different flood certification vendors," she adds. "They might forget that one of them has to be on the disclosure form."
Central Bank and Trust also uses compliance software that automatically generates disclosure paperwork, but Ms. Grant says there are limitations. Loan officers still have to select the settlement providers designated for a particular loan type.
Respa's service-provider rules also caused snags in loan processing procedures at the $250 million-asset Kentucky Bank, Paris, Ky., a subsidiary of Bourbon Bancshares.
Occasionally, one or more of the bank's directors provide settlement services for borrowers. The directors' names now appear on a list used by loan officers to determine disclosure requirements.
Kentucky Bank's compliance officer, Jean Patton, has strengthened the bank's compliance procedures over the last few months with more training and regular employee communications.
Even when community banks conduct little or no mortgage lending activity, Respa has pitfalls. Without the volume to justify an in-house mortgage operation, many small banks refer customers to other lenders.
If a bank is not careful, warns Ann Grochala, director of bank operations at the Independent Bankers Association of America, the institution can be considered a mortgage broker and subject to scrutiny.
Under current rules, indirect compensation is allowed but the issue has created disgruntled consumers and spawned lawsuits, prompting the Department of Housing and Urban Development to start devising revisions that address the murkier side of the law.
"This may change the way banks do referrals," Ms. Grochala says. The HUD revisions to the disclosure rule are still in development.
Even the most thorough bank compliance program can run into inconsistent interpretations of Respa by bank examiners.
Rebecca Clark, senior consultant and general counsel with Professional Banking Services, Louisville, Ky., says this happens often. She recommends that banks get in touch with their regional Federal Deposit Insurance Corp. or HUD office to get a definitive answer as to how Respa is being interpreted.
"There doesn't seem to be any guidance from HUD on clarifying or making the regulations more detailed," Ms. Clark says. "It's sometimes left up to the individual examiner."
An often forgotten byproduct of Respa compliance is managing consumer confusion. The flood of paper can be overwhelming and raise questions, particularly for first-time homebuyers. And mishandled communication can hurt customer relationships.
"I encourage loan officers to be as explicit as they can with borrowers," Ms. Patton says.
Disclosing to consumers the possibility of a loan being sold on the secondary market particularly worries customers. "We emphasize that we are still the ones servicing the loan and if they have any questions, they would still come to us," she adds. "That gives the customer extra comfort."
The IBAA's Ms. Grochala says that some banks miscalculate settlement costs so that there is a big gap between good faith estimates and the final tally.
Customers need to be prepared beforehand, she adds, in the event of escalating costs related to a loan. They need to know where those higher costs may come from. "This is important because the community bank is not just doing a mortgage loan," Ms. Grochala says. "The bank is concerned with the whole relationship."
While banks struggle to find the answers to Respa compliance, the promise of legislative relief lingers. Federal lawmakers have for years been urged to iron out Respa's difficulties by combining it with the Truth- in-Lending Act.
The problem is finding consensus among the disparate interests that have been jockeying for the best proposal to suit their particular needs. But a shift may be under way.
"Right now there's a feeling of impending change," says Jeanne Peterson Erickson, a senior lawyer at Bankers System, a St. Cloud, Minn., company that advises bank on compliance issues such as Respa.
Ms. Erickson says she sees growing recognition in Congress that disclosure requirements for homebuying or refinancing consumers overburden the lender and are fail to give borrowers meaningful information.
On the other hand, the new chairman of the Senate Banking Committee, Phil Gramm, R-Tex., has shown more interest in rescinding Glass-Steagall than in overhauling mortgage disclosure.
"This lending reform may take a back seat," Ms. Erickson says.
Most hopes for streamlining mortgage disclosure rest on a joint proposal developed by the Federal Reserve and HUD. Ms. Erickson says the proposal received mixed reviews, and Congress is unlikely to act until there is greater accord.
"Congress wants everyone to agree on one good proposal," she adds, rather than having to consider competing bills.
Despite the burden, Central Bank and Trust's Ms. Grant says she recognizes the value of Respa to certain consumers, particularly those who want to better understand the cost of credit and whether their loan will be sold and serviced by another entity than the original lender. "But I think most of the time," she adds, "consumers are just concerned about the monthly payment amount and that's about it."