In 1915, Albert Einstein proposed the general theory of relativity, where he explains gravity as a consequence, rather than a force. Anything of mass, he theorizes, has an equivalent amount of energy. And, the greater the mass, the greater the energy. E=MC2. And like Einstein’s mass-energy equation, compliance is the consequence of regulation.
Nearly twenty years later in 1934, The New Deal emerged along with the Federal Housing Administration, the 30-year mortgage loan, and a number of regulations to fuel America’s economic recovery, protect consumers, and increase home ownership among middle income brackets. The mass of the regulatory system was relatively small then, and the force necessary to counteract regulation only needed a relatively small amount of energy.
Mortgage document preparation was a simple process thirty-plus years ago. Within 48 hours, you prepped a set of documents on an IBM Selectric typewriter, sent them to a title company with a note to close, and then shook the hands of a happy new homeowner.
In the same span of time that witnessed the typewriter’s evolution into a smartphone built for efficiency, the regulatory system grew more complex in equal opposition.
For every regulator action, there is an equal and opposite compliance solution.
The regulatory system of today is an expansive and complex environment embodied by a number of housing, finance, and regulation bureaus that dictate compliance for nearly every aspect of a loan. The mortgage industry alone supports an incredible variety of loan products and an immense amount of data, and a single document package can require nearly 60 compliance state and federal compliance checks.
Take one mortgage document set and multiply it across the total number of mortgages produced in one state, and then again over several – or all 50 – states’ regulatory policies. The result? A very expensive mortgage origination process. It should come as no surprise that by the end of 2016, production costs per originated mortgage was at an all time high.
It’s no question that a lender’s focus to maintain a profitable origination business can be slowed by the ever-changing and ever-growing regulatory landscape. As the pressure on the industry mounts, so does the need for an equal and opposing force to effectively – and profitably – navigate it.
The financial tech (FinTech) and regulatory tech (RegTech) sectors have risen to the occasion by building Software as a Solution (SaaS) products. Over the past decade, the industry has accumulated a number of analytics tools and services while compliance-related tasks are still primarily performed across a wide staff. But, an increase in the number of tools and people to learn, implement, oversee, and manage those tools can be tricky. Banking is still people doing a job, and mistakes are a natural result.
Technology alone is not a perfect solution, either. For all the ease and accuracy technology can provide, the rate at which technology solutions are rendered outdated is exhausting. Many best-in-class tools struggle to adapt fast enough in the ever-evolving regulatory landscape when maintained by companies with a primary expertise in software and not compliance.
The exposure of a lender is twofold: out-of-date software exposes potential security risks and out-of-date regulatory systems expose potential compliance risks. Both can result in millions of dollars of recovery costs.
For the documents space, this has taken the form of document prep programs that produce generic legal packages attuned to state regulations, but are not customized to a specific product or to a unique variability that may have specific state regulations. While there are many one-size-fits-all solutions, this can lead to challenges when it comes to maintaining compliance.
An Ecosystem of Mortgage Compliance. E=MC2.
The DIY solution to maintaining compliance would take any institution thousands of hours of research and manpower to implement policies that adhere to federal and state regulations, not including the technical know how to build a platform to manage it.
While the complexity facing the industry appears daunting, the answer exists at the intersection of regulatory, legal expertise and technical mastery: a holistic and advanced ecosystem of mortgage compliance (E=MC2). The true best-in-class solutions crossbreed software engineers with experts steeped in regulatory compliance knowledge. The result is a holistic compliance management systems (CMS) maintained on both fronts.
Effective compliance management ecosystems can and have served the financial services industry for the better, guiding institutions safely through any potential risk. Bonus: CMSs are supported – and even encouraged – by the federal government.
A well-run, wide range, and comprehensive system that includes policy, procedures, testing, controls, automation, and risk assessment lead to examiners reviewing banks more favorably. The Consumer FInancial Protection Bureau (CFPB) has been direct in saying that the more comprehensive a CMS, the more they will believe in a bank.
While still relatively new, there are integrated tech solutions built on the backbone of legal, financial, and regulatory ecosystems that produce compliant document packages on one end and proactively manage redlining and fair lending risk on the other. Compliance technology can minimize errors, automate processes, save time and resources.
With an all-inclusive approach, institutions can access an incredible number of compliance solutions including dynamic document preparation, data validation and testing with legal backing and HMDA, CRA, REMA, geocoding, and Fair Lending solutions. The right solution will improve the agility and speed of these diverse compliance platforms across an enterprise in a controlled, transparent, and organic way.
And while the industry might immediately view CMS a proactive and offensive approach, it is also a good defense. Think of it like a well-protected house: the more prepared you are for a break in, the less likely it is to happen.
For an industry that has been slow to innovate, the emergence of a sustainable, smart, and reliable compliance ecosystem fosters an incredibly pioneering environment in which to manage regulatory changes and deadlines.
These expertise-fueled compliance ecosystems can empower financial institutions to react to the ever-growing regulatory mass with equal force. The weight of the regulatory system is counteracted by the power of integrated compliance tech solutions. And by alleviating the burden of regulation, banks can focus on profitability knowing it is no longer a weight they need to carry alone.
About The Author
Michael L. Riddle is the managing director of Mortgage Resources Group, LLC., responsible for the overall operations of the firm. He guides the teams within the firm that develop and deliver “best in class” compliant disclosure and documentation systems to single family mortgage lenders throughout the country. Mr. Riddle is the co-founder and managing partner of the Middleberg Riddle Group, one of America’s preeminent mortgage banking law firms and, in that role, has spent much of his 40 plus year professional career providing advice and legal counsel concerning regulatory compliance, enforcement and litigation to clients including banks, mortgage lenders, insurers and related financial service entities.