All industry participants continue to talk about and focus on regulatory compliance. Compliance is a simple expression — the act or process of doing what you have been asked or ordered to do — and is intended to offer reassurance to others. However, for many mortgage companies, it still elicits trepidation and financial concern. This anxiety is not typically caused from intentional misrepresentation or illicit business practices, but from the related prescribed procedures and complexities involved in demonstrating adherence to new, very specific guidelines and regulations.
The term compliance is now also tied to a financial burden for mortgage companies. This is one of the primary reasons for the word’s negative connotation, derived from lenders’ responsibilities to not only to conform, but to also offer transparency to all parties involved. The need to adopt new procedures and often technology to prove compliance and to remain within the guidelines inevitably results in increased costs — business’ largest concern and the real issue at hand for most.
The Cost of Compliance
Mortgage, like many other industries, is being reshaped by a heightened regulatory environment while simultaneously continuing to recover from the economic crisis. Bankrate.com conducted its annual closing cost survey and found that fees have grown by 6 percent since 2013. Mounting regulations are primarily to blame for rising costs of doing business, which have left lenders no choice but to pass the expense on to the consumer.
Lenders and servicers are still seeking the best ways to cope with today’s high level of regulatory scrutiny. A large part of the compliance accountability relies on the thorough documentation of each step in the product sale and delivery process. Mortgage lenders must closely monitor, track and record virtually every aspect and every stage of the process, which initially required many to hire additional personnel and often create entire departments devoted to compliance to ensure that all rules are followed.
With agencies like the Consumer Financial Protection Bureau (CFPB) putting the microscope over lenders, these companies are more accountable than ever for the products and services they provide. This is requiring increased non-revenue producing overhead, such as the cost of reconciling vague or overlapping regulations. Resources are now often reassigned to compliance-related activities, like managing examinations or answering resulting findings. Adapting to change is not a new concept for mortgage industry veterans who have long dealt with increasing regulatory oversight and market cycles. However, the compliance requirements encountered today are certainly different and more cumbersome due to the underlying velocity of program modifications and the increased burden to provide readily accessible process documentation. These companies have largely determined that manual and paper-driven methods for keeping documentation and presenting it to auditors and examiners will no longer suffice.
The Cost of Consumer Demand
Consumer preference is moving towards a digital process. Just as they have become increasingly comfortable shopping online and handling banking transactions through a mobile app, they expect to be able to receive mortgage documents electronically as well as to sign and return forms from any location and at any time. If consumers encounter a process that is perceived as burdensome, costly, or time-consuming, they simply research other available, easier options. Due to technological advancements, mobile accessibility and social connectivity, consumers have access to more choices, and the same is true when assessing the financial institution or other, non-financial institution lender they select.
From a consumer’s perspective, applying for a mortgage in today’s technology era should be like shopping for everyday items via their phones, tablets and computers. The availability of these modern services is crucial for attracting consumers who no longer want to have to step foot inside a financial institution for assistance or wait for a follow-up package to be delivered in the mail.
The Cost-Savings of Innovation
Keeping up with consumer demand for an electronic process not only provides a significantly better experience for the prospective borrower, but it also incorporates cost saving processes for the institution. As mortgage industry leaders, we must consider how the adoption of technology can help counter some of the unintended consequences of today’s complex environment, like the rising costs associated with compliance or potential consumer avoidance due to notoriously complicated procedures for obtaining a mortgage. Simplifying the process through the incorporation of electronic records and e-signature functionality is necessary from a business perspective, increasing overall efficiency while ensuring security and compliance. Electronic processes allow for increased transparency; when documents are routed from one party to the next through an automated workflow, every step is carefully tracked, maintaining an audit throughout the duration that remains ongoing throughout the life of the mortgage loan cycle.
The mortgage industry will always be document-centric; however, sharing and signing documents electronically allows for tighter controls by limiting the number of touch points through which documents pass, greatly reducing the risk of misplacing sensitive documents. Anyone who comes in contact with a paper file can remove pages, add entries or interfere with authentic entries. Electronic records are tamper evident, which makes it easier to detect fraud and mitigate the risk of forgery. These practices ultimately offer substantial security and cost saving measures in the midst of the mortgage crisis recovery while delivering the interaction and transparency consumers now demand.
Another efficiency gain, aside from regulatory and security standpoints, is the option to now merge separate conventional and non-conventional loan practices into a single platform, as the recent FHA policy change to accept e-signatures on mortgage documents now allows for a consistent approach to e-signed records. Previously, e-signatures were only accepted on select documents included in loan files; navigating separate process for various loan types was a major hindrance to the mainstream adoption of a fully electronic process. In addition to fulfilling origination program requirements, e-signed records will also maintain compliance and cope with other heightened regulatory scrutiny in the secondary market and the review of more documentation. The conversion to electronic records for data retention and securing the relevant data associated with a loan transaction at all stages of its lifecycle will support these obligations.
Value-added resource for e-signed records
At the Electronic Signature and Records Association (ESRA), it is our goal and mission to ensure professionals across any industry understand the benefits as well as the legislation involved in the use of e-signatures and documents. Strapped for resources and working to handle current, as well as future regulation changes, there is no industry in as great of a need for technology change and adoption as the mortgage business. A priority must be to deliver a mortgage shopping and application process borrowers find simple, expedient and secure — this simply cannot happen without progressive technology. Investing in technology is no longer a compliance headache; in some cases, it can contribute significantly to a company’s compliance objectives. Not to mention, it is an investment that pays itself off right away through the elimination of paper, postage, courier and labors costs. The use of electronic signatures and records provides new opportunities in today’s challenging environment to dramatically improve processes — the opportunity is one that, to see a business flourish, mortgage companies simply cannot pass up.
About The Author
Jeff Knott, winner of the 2014 Steve Fraser Visionary Award, is 2015 chairman for the Electronic Signature & Record Association (ESRA) and assistant vice president at Equifax. He is a recognized leader in driving business strategies, product innovation and industry adoption of e-signed records. Knott has vast experience guiding cross-functional teams and introducing creative business solutions as well as managing mergers and acquisition transitions. He is known throughout the industry for his contributions in reforming IRS policy to allow the acceptance of electronic signatures on Forms 4506-T. He is an “out-of-the-box” thinker who champions emerging technologies, promotes consumer engagement, advocates change and encourages the partnership between the private sector and government.