By Pramod Karachur
Compliance in the mortgage industry is not a new topic. In fact, there are mortgage regulations on the books as old as the Truth in Lending Act of 1968, which was passed to ensure that borrowers are treated fairly by businesses and that they are informed about the true cost of credit. During the decades since then, more regulations have been implemented to accomplish the same thing — to provide an equitable setting for people to achieve the American dream of homeownership.
The number of rules governing how mortgage companies and originators operate and interact with borrowers has grown exponentially in recent years in particular, mainly because of the fallout from the financial crisis of 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, set the stage for drastic change in the industry on the regulatory front. Among other things, the act authorized the creation of the Consumer Financial Protection Bureau (CFPB), which became the newest agency charged with providing federal oversight of the mortgage industry.
Initially, mortgage companies were unclear about what the new changes and developments in the government regulatory arena would mean for their businesses. Many of them hired third-party vendors as consultants to provide insight into the implications of the new regulations. These vendors were experts in regulatory compliance and many also used technology to help them in their consulting capacity. As the new regulations resulting from Dodd Frank took hold in the industry, many mortgage companies decided to hire in-house compliance experts to give them more control over their compliance efforts.
In addition, to help mortgage companies better cope with the “hard rain” of regulations, a new crop of compliance-technology solutions sprang up on the mortgage landscape. Mortgage companies must leverage this technology properly to remain competitive, meet compliance requirements and provide acceptable customer service — all while not drastically increasing the cost of doing business.
Implementing new technology is much like getting in shape: You love the results, but you hate the process. With technology, companies love the efficiencies but hate the initial cost, the integration process, training and necessary maintenance. The benefits might not be seen immediately, much like working out, but technology provides companies with an opportunity to level the competitive playing field and remain compliant with regulations at the same time.
The mortgage industry must incorporate more technology, not less, to effectively keep up with complance requirements. The average age of a mortgage originator is 54, according to industry experts, but this group needs to be as comfortable with technology as young professionals in their 20s and 30s to get the job done. Otherwise, this older generation of mortgage professionals might find themselves outpaced. Increasing costs in the mortgage industry , in part, are driven by regulatory compliance efforts as well. This is another reason companies should embrace technology: to stabilize or reduce those costs.
Similar to the choice between relying on an in-house compliance staff versus using third-party vendors, mortgage companies today also have to address whether to build a compliance system from scratch or take advantage of a software-as-a-service (SaaS) model, which provides the necessary software — licensed from vendors on a subscription basis — through the cloud.
Regulatory-compliance demands on the mortgage industry
might very well increase if another financial downturn strikes.
Building a system from scratch that encompasses every aspect of the loan life-cycle is possible, but it requires a huge investment of resources — both financial and people — not to mention the long timeline from development and testing to deployment. In either case, mortgage originators have to optimize the use of the technology by automating tasks that not only meet their compliance needs but also improve their efficiency.
Out with the old
Some mortgage companies still use spreadsheets as a mainstay in their regulatory compliance efforts. This is like putting a small engine in a performance sports car. The reason many of these companies opt for this approach is to avoid the cost of investing in technology. The savings in that case, however, are likely short-lived — a case of being penny wise and pound foolish. These companies, if successful to any degree, will more than likely need to add more compliance staff to deal with manual processes.
An increase in business volume also creates a challenge in maintaining and updating all the required mortgage-process compliance data, a task made exponentially harder when using antiquated systems. During a federal audit, if the spreadsheets are inaccurate or an old-school technology fails, it could lead to hundreds of thousands of dollars in fines. Heavy fines can lead to red ink on a mortgage company’s financial statements or, in a worst-case scenario, they can force a company to file for bankruptcy protection. To avoid such a scenario, it is in the best interest of a company to adopt robust current technology to manage their compliance needs.
Adding technology to aid in compliance also puts in place a system that helps assure loan sales are carried out seamlessly. When a mortgage company is selling loans to a servicer or into the secondary market, it is imperative that the technology facilitates the accurate flow of information from one system into another system.
Having advanced technology in place that ensures the loans being sold are in compliance with regulations before they are purchased reduces the risks and liabilities for the acquiring investment or servicing company. Sound technology solutions also help mortgage servicers make better decisions when managing loan pools — making them less susceptible to fines when the loans are audited by the federal agencies.
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Regulatory-compliance demands on the mortgage industry might very well increase if another financial downturn strikes. We do not know what the cards hold right now. What we do know is that in the current regulatory climate, it is wise to fully employ the technology tools available to ensure proper business management. We have to get to the point where we focus on the love of technology and its benefits.
Whatever path mortgage companies take in coping with the expanding range of industry regulations, technology should be a critical piece of the compliance efforts. By adopting leading-edge technology-driven systems, this thorny issue of regulatory compliance will become less burdensome.