Unprecedented regulatory change is driving a full transformation of the mortgage finance business model, and regulatory compliance issues affect all lenders, whether they are depository institutions or independent mortgage companies. Executives face myriad challenges at a time when their compliance resources are stretched thin and their IT teams struggle to integrate compliance into existing systems.
Over the last 18 months the mortgage industry has had to grapple with a raft of new federal and state laws, and will continue to do so over the course of the next year and a half. In addition to significant changes to the Truth in Lending Act and the Real Estate Settlement and Procedures Act, the industry will continue to navigate its way through changes to the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the SAFE Act, appraisal independence rules (the Home Value Code of Conduct, and its replacement), plus a host of state laws.
These changes are in effect or have rapidly approaching effective dates, even as the industry awaits further clarification and final rules for many provisions of the Dodd-Frank Act.
Lenders cannot rely on manpower alone to meet compliance requirements. It is too costly in time and money. Lenders must leverage technology, integrating compliance issues into systems such that compliance is a natural part of the workflow from initial loan origination lead management up to and including secondary marketing. And not just any technology will do. The most desirable, effective technology solutions are those that have been designed by compliance experts working closely with IT teams to build superior rules engines and automated decisioning protocols that accurately, cost-effectively and seamlessly ensure compliance.
The concept of compliance and workflow integration facilitated by technology is gaining the attention of mortgage industry executives eager to bring regulatory compliance costs under control. In January of this year, the MORTECH 2010 study estimated that mortgage lenders expect to increase technology spending by 15%, which would be a $4.11 billion cumulative spend. Asked for their top reasons for IT investment, survey respondents indicated that they planned to invest in "making operations more flexible and responsive, reducing cost of operations, and integrating workflow across the enterprise." The study concluded that these investment plans are directly linked to the rising costs of regulatory compliance and the desire to improve operations.
While figures are not yet compiled for the time and money spent as an industry, thus far, to implement new regulations, it is safe to assume that number is already well into the hundreds of millions.
Anecdotal evidence suggests that, over the last 18 months' deluge of changes, the vast majority of lenders "patched" existing technology or purchased compliance modules that plugged into existing systems. While these adaptations may have made perfect sense as short-term solutions, it is clear that end-to-end, enterprise technology designed in partnership with compliance experts is a much wiser, cost-effective and cost-efficient solution.
We can turn to loan officer licensing, a compliance matter initially addressed in the SAFE Act, to illustrate this assertion. Today, technology available in the marketplace can assign a sales lead to a mortgage loan officer, based on automated confirmation that the loan officer is licensed or registered and has a unique identifier provided by the Nationwide Mortgage Licensing System Registry. But technology that delivers one-time ID confirmation is not sufficient; it solutions should also be able to routinely exchange information with the registry.
A superior, end-to-end solution goes even further, with automated licensing confirmation following the transaction at the loan level from application through funding.
For example, if a loan officer's license expires during loan application, an end-to-end solution would receive this information from the registry and note that there is a compliance problem, so that appropriate action can be taken, including reassignment of the loan file to a loan officer who is properly licensed/registered. Other features should include the ability to supply proof of licensing — both in real time and as historical data — when and where required, and in a manner or format requested by any number of federal and state entities.
Technology solutions designed in partnership with compliance experts are much more likely to be comprehensive: built with special knowledge of the array of regulations, the multiple regulatory bodies involved and an in-depth understanding of the need to access to loan-level data not only in real time, but also historically. Such enterprise solutions accurately store data so you can show how compliance was addressed in the past, giving your company the ability to show regulators a snapshot of what happened on a particular loan, on a particular day. In practice, regulators also may ask to see an image of virtually every document, correspondence and other communication, as well as pertinent information about the loan officer and others involved in each loan file.
With a patchwork of technology solutions, lenders may not be able to conduct such forensic analysis. Even cobbled-together systems that do produce full forensic data are likely to require far more man-hours to compile, report and present than an enterprise system. In short, demonstrating that your lending operation is compliant is made much easier and more thorough with an enterprise solution.
Historically, loan origination systems have been built in such a way that they are disjointed from compliance issues; rarely have they been designed with compliance experts as members of the overall design team. Even today's robust rules engines and automated decisioning capabilities often do not address compliance points at the loan level.
Now that virtually every element in a mortgage business's operations can be automated and recorded, the right enterprise technology can be a superior enabler, helping lenders guard against being out of compliance now and in the future.
Regulatory reform and compliance are transforming the mortgage finance business model. Without the right technology — technology designed in partnership with compliance experts — you could end up paying a bigger price: enforcement actions and/or litigation, either of which could ultimately spell the end for your company.
