July 2014 marks the fourth anniversary of the Dodd-Frank Act and the third anniversary of the Consumer Financial Protection Bureau (CFPB). In some ways, not much has changed since July 2010 and 2011; the industry is still plagued by rule announcements with monthly adjustments until their effective date and even quicker implementation deadlines. Lenders and vendors are still scurrying to adopt and update procedures and quickly refocus on the next state or federal regulation. But the devil is in the details, which are always changing. These details continuously cause headaches for lenders and their vendors, and compliance concerns have only increased since the CFPB’s inception.
Since 2008, compliance software provider, Laguna Hills, Calif.-based QuestSoft, has surveyed lenders on their top compliance concerns. The cumulative results of the past seven years paint a picture in which lenders must focus solely on the next imposing deadline, pushing off other compliance needs and productivity processes just to meet a new rule.
The QuestSoft customer satisfaction survey has been conducted using the same methodology after each year’s Home Mortgage Disclosure Act (HMDA) reporting deadline since 2007. The company sends an email survey through Survey Monkey to each person authorized to download the company’s HMDA RELIEF or CRA RELIEF software. In 2014, the HMDA deadline fell on Monday, March 3. Therefore, the survey was conducted between Tuesday, March 4 and Friday, March 13, 2014. A total of 3,512 surveys were distributed and the company received 520 completed surveys (14.8 percent return rate).
Lenders’ Laments Change With Deadlines
According to QuestSoft’s 2014 survey, which surveyed credit unions, banks and non-bank lenders, an astounding 62.2 percent of respondents to the recent survey still cited the Qualified Mortgage (QM) as their most demanding concern due to the novelty of the regulation and internal adjustments to loan programs. Compare that to when the initial proposal for QM was released in 2012 and only 22.3 percent of lenders considered this year’s most pressing issue a significant compliance concern.
As regulations to protect consumers and provide industry transparency continue to expand, the one constant since 2010 is that the CFPB fuels the most pressing issues of the day. This year, 58 percent and 57 percent of lenders respectively, ranked upcoming Home Mortgage Disclosure Act (HMDA) changes and Ability-to-Repay (ATR) violations as significant concerns to round out the top three 2014 compliance anxieties.
Flash back to 2008, prior to the Dodd-Frank Act and the CFPB, and lenders were concerned with one regulation, the Real Estate Settlement Procedures Act (RESPA) fee tolerances and changes. With many years to handle the implementation under their belt, RESPA fee tolerances came in sixth place in the 2014 survey; with only 45 percent of lenders ranking it as a top concern.
Looming HMDA Changes a Growing Concern
Surprisingly, one exception to the “impending deadline” theory is the high number of lenders concerned with HMDA reform. With no implementation date set, the bureau’s changes to the reporting requirements under HMDA are already on lenders’ radars; fifty-eight percent claimed it as a high concern in 2014. Lenders have not cited HMDA as a major concern since 2009 when 54 percent of lenders regarded it as a future compliance burden.
What specifically about HMDA is stressing lenders? The CFPB is considering changes to the rule that will require lenders to report additional information, data that will be under greater scrutiny from regulators. Lenders will also face fair lending claims from not only regulators but also consumer groups with new data that allows them to more quickly sue lenders to fund their livelihoods. Additional data points in HMDA currently under consideration by the CFPB include: mandatory reporting of denial reasons, debt-to-income (DTI) ratio; QM status of loans; combined loan-to-value (CLTV) ratio; automatic underwriting systems results; total origination charges; discount points; interest rates; and risk-adjusted pre-discounted interest rates. Contingent upon the CFPB’s implementation date, vendors will soon need to update systems (again) and gather proposed new data points to address lenders’ HMDA concerns.
ATR Violations Keep Lenders Up at Night
Under the CFPB’s QM rule, lenders cannot originate a loan without making a reasonable and good faith determination that the borrower has a “reasonable ability” to repay the loan over the course of the mortgage. Lenders ranked ATR violations as the third highest issue facing them, with 57.2 percent expressing the regulation as a high concern. Chief among concerns is the fear that regulators will bring a heavy hammer of scrutiny and cause the bureau to make lessons out of violators, resulting in massive fines or loss of reputation.
All borrower information must be verified through third-party documentation and the creditor must consider a minimum of eight underwriting factors. ATR liabilities that creditors face will influence their decision to issue QM or non-QM loans, which may serve as a more significant compliance pain point in the future.
Disclosure Reform Remains High on the List
The bureau’s integrated “Know Before You Owe” disclosure forms do not face implementation until August 2015, however, lenders are already concerned about this specific regulatory overhaul. In the 2014 survey, 55 percent of lenders agreed that the combined Loan Estimate and Closing Disclosure documents will be a significant and expensive undertaking in an already burdensome regulatory environment. Lenders’ concerns about the upcoming disclosure change, date back to 2012 when 48 percent deemed the regulatory change a high concern, up to 59 percent in 2013. The consistency of this particular concern is unprecedented compared to other CFPB rulings: all mortgage lending participants are affected.
Where Do Past Compliance Concerns Stand Now?
The CFPB has only been scrutinizing lenders for three years, so what compliance concerns were at the top of lenders’ minds prior to 2011? The aforementioned RESPA fee tolerances were lender’s top compliance obstacle from 2008-2010 until Dodd-Frank changes bumped the regulation from the top spot in 2011. Lenders’ feelings toward RESPA only intensified over the years: 74 percent of lenders cited it as a top concern in 2008, followed by 75 percent in 2009 until it reached its peak in 2010 when 81 percent of lenders regarded the regulation as their top concern for the year.
According to the Federal Reserve, “tolerances” associated with the RESPA Reform Rule were implemented to limit the amount of actual settlement charges at loan closing; which subsequently made closing time stressful and somewhat of a gamble. Forty-five percent of lenders ranked RESPA fee tolerances as a top concern in 2014, with unannounced CFPB issues ranking higher than RESPA, OCC and state regulatory concerns.
The bureau’s regulatory announcements cause lenders’ other compliance challenges to take the proverbial backseat until compliance with the bureau’s alphabet soup of regulations is achieved. As more guidelines come through the pipeline, lenders are still struggling to rework decades-long processes and implement new solutions to meet compliance standards in a heightened regulatory environment. By leveraging outside compliance vendors and technology, lenders can cope with the influx of regulations and achieve compliance.
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