Delays in software upgrades are forcing many small banks to play a waiting game when it comes to complying with new regulation.
The idling has become particularly nerve-racking for bankers looking to meet the Consumer Financial Protection Bureau's Jan. 10 deadline for adhering to its qualified mortgage rules. Fortunately, there are steps bank executives can take to help prepare for the changes.
Management can use the lull to re-evaluate their bank's mortgage dealings, especially areas such as operations, products and expenses, industry experts say.
"It is a strategic issue," says Jim Adkins, managing member of Artisan Advisors, a consulting firm. "If you're dabbling in the mortgage business, you can't be a dabbler anymore. I think banks will go through some deep soul searching."
Small banks have complained technology delays have impeded progress in meeting the CFPB's new guidelines. Many tech providers are still updating or are testing software tied to the rules, says Robert Davis, executive vice president of mortgage markets, financial management public policy at the American Bankers Association.
Bankers will still need time after receiving the updates to train employees and adjust to the new products, Davis says.
"Banks are facing a serious operational issue," Davis says. "It appears most banks have a reason to be uncertain about the robustness of their compliance systems. The reaction will be conservative underwriting."
To quell concerns, CFPB Director Richard Cordray said the agency would be lenient on institutions working to meet the deadline. Oversight "will be sensitive to the progress made by those who have been squarely focused on making good-faith efforts to come into substantial compliance," Cordray said at a mortgage conference last week hosted by the North Carolina Bankers Association.
Still, bankers should not take this to mean they can use technology delays as an excuse, says Pam Perdue, chief compliance strategist at Continuity Control, a compliance software company. Regulators "will expect to see you have done everything under your control because you will have had 52 weeks to do the internal work," she says.
To do that, bankers must make sure that they understand the rules and implications, Perdue says. Though this may seem obvious, the rules have been in a state of flux, with the CFPB issuing changes as recently as last week. All of this has "muddied the waters," she says.
Bankers need to work with legal counsel and consultants to figure out where they fit in the regulatory scope, says Jonathan Green, a lawyer at Baker, Donelson, Bearman, Caldwell & Berkowitz. Once executives know "what portion of their business is impacted they need to seriously look at every area of their business and decide if this is an area that they want to be in," he says.
Managers should evaluate their mortgage operations, particularly dealings in nonqualified mortgages, industry observers say. This should include evaluating the costs of offering the products, though it can be difficult to calculate and executives often underestimate the cost of having the right expertise, Adkins says.
"Banks will need to ask themselves if they can make the leap strategically to be a professional mortgage company," Adkins says. "Many banks will say no. Going to your community bank to get a home loan is an American tradition, and the new compliance requirements will significantly alter that."
For banks that will stay in the mortgage business, executives should update written policies, monitoring and auditing to reflect the upcoming changes, even if they haven't received updates from their tech vendors, Perdue says. This will help prepare employees when the technology is ready.
Banks should form cross-functional teams that include top executives, such as the chief lending officer, and front-line employees, like loan officers, to discuss how to best implement upcoming changes, Perdue says.
Now is a good time for executives to review how they originate and service mortgages to identify inefficiencies, says Michael Croal, senior director at Cornerstone Advisors, a strategy and technology consulting firm. For instance, an inefficient bank needs twice as many employees, compared to a top performer, to close 50 mortgages, according to Cornerstone. With higher costs and tighter margins, efficiency has become critical, industry experts say.
"It is going to be a continual wave of regulatory refinement and additional requirements," Croal says. "Banks need a combination of effectively using good technology and having tight processes around their lending functions."
First Federal Savings Bank of Twin Falls, which uses three vendors for mortgage origination, does a "myriad of things manually," says Brenda Hughes, the Idaho bank's retail lending administrator. As it adjusts to the new rules, the $505 million-asset bank hopes to eliminate the manual process and use fewer vendors, she says.
Employees at First Federal have been proactive in trying to manage the upcoming regulatory changes, though it has been hard, Hughes says. The bank has closely followed guidance and news from regulators and trade groups, but it has held off on training staff because of the continuing changes.
An extended deadline, while unlikely, would be greatly beneficial to the bank, Hughes says. In January, the bank will err on the side of caution, if necessary, in how it conducts business, which could mean longer waits for applicants to get loan approvals.
"We want to comply with the regulations, and having the appropriate amount of time to train is paramount," Hughes says. "If we don't have that right, the cost of compliance is great, but the ability to serve the consumer may be constricted."