Ensuring Compliance


Michael L. Riddle spearheaded MRG Document Technologies’ development of systems that efficiently provide “state-of-the art” disclosure and documentation services to national mortgage lenders via the Internet. Under his guidance, the firm’s mortgage services set the national standard for quality and compliance in the mortgage banking industry. Mr. Riddle is the co-founder and managing partner of the Middleberg Riddle Group, a preeminent mortgage banking law firm. So, if you have compliance questions, Mr. Riddle is the executive to go to for the answers. In discussing the mortgage regulatory landscape, he told our editor this:

QUESTION: This year looks to be another year of huge compliance burdens for the mortgage lending community, particularly considering the August 1, 2015 deadline for implementation of the Consumer Financial Protection Bureau’s Integrated Disclosures. What do you think are the most pressing issues related to the implementation of these new rules?

MICHAEL L. RIDDLE: On August 1, 2015, the forms previously known as the Good Faith Estimate and the Truth in Lending Disclosures will be combined into a new form called the Loan Estimate, which must be provided to consumers no later than the third business day following the submission of a loan application. In addition, the forms previously known as the HUD-1 and final Truth in Lending Disclosure will be combined into a new form, the Closing Disclosure, which must be provided to consumers three days before the loan is consummated.

This mandates massive programming change for multiple legacy software systems.

>> Biggest programming challenges are fees, which are changed and expanded by the new regulations.

>> Dynamic documents are required in order to meet the new timelines for delivery.

>> Constant review of regulations during the implementation period will be necessary in as much as they are continuing to evolve.

The regulations are very detailed, with very specific format and calculation requirements. For every lender, a serious allocation of IT and Compliance resources will be required. As a start, numerous resources exist on the Consumer Financial Protection Bureau’s website to assist affected parties in implementing the Integrated Disclosure rules, including guides and sample forms.

QUESTION: Is there any other Compliance issue that will be particularly important as we begin 2015?

MICHAEL L. RIDDLE: I don’t believe there is any single item that takes precedence; rather, it is the cumulative effect of compounding regulations that is the mortgage lending community’s greatest challenge. It used to be that new statutes and regulations would be issued piecemeal, with time available for implementation and adaptation. Now, it requires a huge effort, and an equally large expense to absorb, test, and implement the volume of new regulatory edicts. Besides dealing with the Integrated Disclosures by August, it is, for example, extraordinarily burdensome for a lender to implement best practices on Fair Lending matters, concurrently evaluate and implement best practices on Loan Officer Compensation, Vender Management rules, and so on. Just when you believe one compliance issue has been successfully absorbed within your organization, another one will get issued, sometimes on the same subject matter. While larger lenders may have an easier time because of the depth of their existing infrastructure, the daily compliance pressure on management of lenders of all sizes is heavy and, due to the increasing propensity of various state and federal regulators to impose large fines for violations, more and more stressful.

QUESTION: The issue of whether a lender can be held liable for discriminating on the basis of race or ethnicity, without any evidence that the lender actually intended to discriminate, is heading to the U.S. Supreme Court. What are your views on how Fair Lending laws will affect the mortgage community?

MICHAEL L. RIDDLE: On November 7, 2014, Judge Leon, of the U.S. District Court for the District of Columbia, issued a rather colorful opinion that vacated the HUD’s Disparate Impact Rule, under which a lender could be found liable for violations of the Fair Housing Act based on statistics alone. Casting HUD’s efforts to impose disparate effect liability as “wishful thinking on steroids,” the Court left no doubt that HUD’s Disparate Impact Rule was, in Judge Leon’s view, completely inconsistent with the Fair Housing Act.

The U.S. Supreme Court has accepted and had oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). Twice before, the Court granted certiorari on this issue, but in both cases the parties reached a settlement prior to oral arguments.

In their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions within the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether they should defer to HUD’s disparate impact rule.

Regardless of whether the Supreme Court accepts Judge Leon’s reasoning, or that of HUD, data drives the lender’s defense to a Fair Housing claim. That data includes a review of the “Three L’s,” namely “Loan Data Points” (core statistics concerning the loan obtained from the document preparation system and loan origination system), “Lender Data Points” (matching closed loan data with purchased loan data), and “Location Data Points” (superimposing geography upon the first two L’s to “trend” the data and look for outliers).

In other words, whichever way the U.S. Supreme Court rules will not materially affect the manner in which a lender will defend these claims – to offensively use client data points in a way to advocate that either no Fair Housing violation occurred or that the effect is different from that which is asserted by the government.

QUESTION: What is technology’s role in addressing today’s compliance challenges?

MICHAEL L. RIDDLE: Can technology make a lender’s compliance efforts any easier? Absolutely, but only to a point. A loan origination system (LOS) feeds data to a mortgage document preparation system, which should seamlessly ingest that data and run continuous, multiple, compliance tests, both on the document content and on the embedded calculations. But the greatest LOS and mortgage document system will always fail real world compliance tests if the underlying programming logic becomes out of date, even by hours. To illustrate, at MRG our attorneys and compliance staff constantly scrutinize newly issued state and federal statutes and regulations to ensure that the multiple, redundant tests that occur within our document preparation system are in-step with today’s regulation, not yesterday’s. Where appropriate, document changes are inserted in real time, which is critical in maintaining a dynamic compliance system.

In our view, accurate and compliant mortgage documents and calculations are our work product … we defend that output from the computer room to the courtroom. The quality of intellectual capital must match the quality of programming. Technology will aid in the compliance effort, but human intellect and continuous review by trained eyes remain essential.

QUESTION: What can we expect from MRG in 2015?

MICHAEL L. RIDDLE: Lending has significantly changed over the past couple of years. The pressure on today’s lenders is enormous. This lending environment creates dramatic loan document challenges and risks for lenders. Changing rules, regulations, and the ramifications of non-compliance, including fees, penalties and the possibility of buy-backs make the origination process an escalating challenge. Traditional “doc prep” is no longer the answer when lenders are trying to handle these complex and ever changing requirements.

Most lenders, quite frankly, don’t have the time or resources to staff a compliance department that can constantly monitor and accurately interpret the vast number of regulatory changes that are being implemented on a federal, state and local level. Unfortunately, the same is true for many traditional “doc prep” providers. Those providers that rely on an antiquated forms library to deliver static documents, with limited legal compliance analysts, are no longer a prudent choice. Relying on outdated, traditional “doc prep” is a risk that lenders simply cannot afford to take in an increasingly “compliance-centric” environment.

To this end, MRG Document Technologies (MRG) delivers complete, real time mortgage compliance directly into the document process – no static document templates for the lender to choose and manage internally. MRG attorneys constantly monitor the ever changing regulatory landscape and provide dynamic document compliance. MRG does not license any third party content or calculations, which allows MRG to fully rep, warrant, guarantee and defend its product. The product is backed by an E/O policy from full disclosure through closing packages, including calculations. No more need for an internal compliance staff to manually manage package content or selection for fear of inaccuracy.

With true, state of the art, dynamic document technology, all document and calculation updates are compliantly and automatically delivered in real time. Together with the lender’s chosen LOS for a seamless, “lights out” approach, disclosure packages are drawn within 30 seconds and closing packages in just a couple minutes. Throughout the package request process, loans are checked with industry leading automated loan compliance tests, thus eliminating the need for additional 3rd party vendor software. MRG takes the anxiety and risk from over burdened lenders so they can spend valuable time elsewhere in their organization. In addition, MRG attorneys are available for services regarding general compliance advice, which is built into the overall compliant document solution.

These comprehensive document compliance solutions provide lenders with the ability to enhance their compliance initiatives. It also gives lenders the tools they need to increase loan production, speed up turnaround times, while significantly mitigating risk. By providing a staff of mortgage banking attorneys to lenders, MRG also delivers the support and regulatory monitoring required to ensure loans are meeting the latest regulatory demands. These are value elements missing from traditional “doc prep” solutions.

Lending has changed forever. So, too, must the lenders document preparation solution. No longer can lenders rely on antiquated form libraries and technology from traditional “doc prep” providers that have limited legal expertise and experience. The risk and exposure is far too great!


Michael L. Riddle thinks:

1.) The big story for the year will be dramatic growth in origination, spurred by an improving economy (think job growth) and interest rates held abnormally low by various geo-political forces.

2.) The legal and regulatory pressure on lenders will continue, with further stress involving the Integrated Disclosure conversion, the expansion of fair lending litigation, and an emerging range of borrower defenses and challenges to the collection and foreclosure process.

3.) A lack of resolution to the question of how to end the GSE conservatorships will continue to leave lenders with long-term concerns about the stability of the secondary market.


Michael L. Riddle spearheaded MRG Document Technologies’ development of systems that efficiently provide “state-of-the art” disclosure and documentation services to national mortgage lenders via the Internet. Under his guidance, the firm’s mortgage services set the national standard for quality and compliance in the mortgage banking industry. Mr. Riddle is the co-founder and managing partner of the Middleberg Riddle Group, a preeminent mortgage banking law firm.

Getting Clarity


TME-TGarritanoI thought that I’d keep the industry predictions coming so I continued to seek out more industry visionaries to get their two cents on what to expect this year. I talked to Mike Hood, head of strategies and corporate development of Fay Servicing; Brian Lynch, president of Advantage Systems; Richard Cimino, senior vice president of LRES; Joey McDuffee, director at Wipro Gallagher Solutions; and Sanjeev Malaney, CEO of Capsilon Corp. Here’s what they told me:

QUESTION: Where do you see the industry going in 2015?

SANJEEV MALANEY: I believe the early part of 2015 will see lenders working to ensure that they will meet all compliance requirements, especially TILA-RESPA, by reevaluating their processes and re-engineering them to focus on loan quality and data integrity. We’ve seen loan production costs rise in 2014 as lenders grapple with compliance requirements, so I predict that 2015 will see the industry embracing technology that helps to ensure loan quality without increasing costs and chipping away at margins.

I also think that in 2015 the industry will begin to focus on areas that received little attention previously. For example, the Post-close function will get more attention, both internally and with regulators, because it is critical in identifying any quality issues that might put the lender at risk. In addition, regulators are pushing for independent 3rd-party audits of Post-closing QC rather than just internally performed QC. Post-close also plays an important role in ensuring that quality loans are being delivered to investors. Next year, lenders will begin adopting solutions that can automate much of the Post-close quality control function, thereby ensuring compliance while keeping loan production costs in check.

BRIAN LYNCH: We are moving toward a purchase market. There’s a lot of consolidation. Companies that did not have a retail presence are acquiring companies that do have retail.

MIKE HOOD: You’re going to see a lot more acquisitions this year. It is becoming more cost prohibitive to be a mortgage banker. Those that are tech savvy and ahead of the competition will grow. They’ll pick up other businesses and better people, as well.

JOEY MCDUFFEE: There’s been an uptick in examining the customer experience. You need to start with the customer experience and build technology out from there. Our clients want more intelligent sales tools. They want more predictive analysis and customer engagement.

BRIAN LYNCH: Budgeting has come to the forefront. There is more effort put into budgeting and the budgetary process.

MIKE HOOD: The good thing about the regulatory environment is that it has brought the borrower front and center.

RICHARD CIMINO: You are starting to see servicing migrate to the large houses. Customer communication is very important now. The originator will still be responsible for checking up on the sub-servicer and the borrower. It’s going to be an exciting year.

QUESTION: What should lenders’ top priorities be?

MIKE HOOD: We have a lending platform that we are building out. There are good originators that are doing clean paper. The numbers and volumes have fallen off. You need to differentiate yourself in the purchase retail market. Everyone is trying to understand the QM rules and how to originate non-QM. That’s the priority

RICHARD CIMINO: Customer service, technology to keep costs down, and cost management are big priorities. Lenders have to look at outsourcing vs. doing things in house. You will also see some refinancing because some of the HELOCs are coming due this year.

JOEY MCDUFFEE: We’ve seen quite a bit of focus on portals. Lenders want to use analytics to offer the right person the right product at the right time.

SANJEEV MALANEY: As I mentioned, the industry saw loan production costs rise dramatically over the past couple of years as lenders began devoting more resources to ensuring loan quality and complying with ever-increasing regulations. In fact, according to a survey we fielded at MBA’s Annual Convention in October, 39 percent of the mortgage executives surveyed said that they plan to spend even more on compliance in 2015 than they spent in 2014. And, 80 percent of those polled said they were ‘very concerned’ about loan quality. 80 percent also said that their loan production costs increased in 2014 vs. 2013.

These results make it clear that lenders are focusing on loan quality and on meeting compliance requirements, which I believe should be the industry’s top priorities, but this effort is pummeling margins. So, another top priority should be looking for ways to meet quality goals and compliance requirements while actually lowering total productions costs. Lenders need to prioritize technology solutions that enable data-centric loan processing that moves quality control to the front of the process. Technology can help to not only ensure better quality loans, but reduce total loan production costs as well.

QUESTION: What do you expect to be the changes in regulatory requirements next year?

RICHARD CIMINO: There will be clarity from the CFPB on how to originate and service. Both origination and servicing will be more costly. Folding new loan products into the regulatory piece will be challenging. The cost to comply will be a floating number this year.

MIKE HOOD: The regulatory bodies all have the best intentions. The industry has historically brought it on itself and now we have regulatory commitments to meet, which is fine. You have to fine tune new processes into each institution with a focus on the borrower and compliance. Nobody wants to fall down anywhere.

JOEY MCDUFFEE: Lenders are looking at vendors with a fine-tooth comb. We all know what’s going on with cyber security. Everyone needs to ensure that risk management is in place at their vendor shop.

RICHARD CIMINO: The other factor that is worthy of note is that the vendor is on the front line. It’s up to the mortgage companies to confirm with their providers that they will be compliant.

QUESTION: What is the state of innovation in our industry today?

BRIAN LYNCH: In the technology space it is develop or die. I think you’ll see vendors continue to innovate out of necessity.

JOEY MCDUFFEE: We’re all under pressure to comply, but innovation is also a must. 2015 will be the first year that Internet searches will be greater on a tablet vs. a traditional computer. Lenders themselves are spending more time to make sure that they are compliant instead of investing in new technology vs. what we see in typical low volume cycles.

RICHARD CIMINO: In good times or bad, the lesson is to constantly look for ways to keep costs down.

MIKE HOOD: The customer experience should drive your processes. We’ve seen cutting edge technology come through, but if you take your eye off the customer experience, that innovation will fall down. Innovation is good so long as it enhances the customer experience.

About The Author


Screen Pop Technology: An Overlooked Solution


We all know additional government regulations, especially from the Consumer Financial Protection Bureau (CFPB), call for a higher level of customer service for borrowers, be it at the point of origination or day-to-day servicing or even at default. These requirements have motivated servicers to improve the customer experience while simultaneously seeking greater efficiencies in their call centers. Enhanced call center technology has been one of the best tools for ensuring that regulatory requirements are adhered to and that borrowers are given the highest level of service.

One technology that can greatly enhance the experience and improve service levels exponentially is screen pops. Screen pops are a customizable solution that can give call center agents the edge they need to provide optimal service. The technology allows inbound customer service callers to reach an agent and not have to provide their account number because their account information is automatically be displayed on the agent’s workstation. This saves the agent time and eliminates frustration for the borrower.

Here’s how it works. The call first answered by an interactive voice response (IVR) system. After authenticating the borrower, the IVR system updates a CTI (Computer Telephony Integration) database, associating the loan number with the call. If the borrower later needs to be transferred to an agent, software loaded on the agent’s desktop and retrieves the call data from the CTI server. Using the borrower’s loan number, a defined screen with the caller’s information “pops” on the desktop as the agent’s phone rings.

In addition to adding a layer of convenience to the customer experience, the use of screen Pops can reduce the average call time 15 to 20 seconds. This time savings gives agents the opportunity to work with more customers each day, yielding significant savings for the all center. For example, let’s say a call center has 100 agents, each handling 100 calls a day; that’s a total of 10,000 calls per day. Saving 15 seconds per call represents total agent time of 2,500 minutes per day. Let’s assume 200 work days per year and an average loaded hourly cost of $25 per agent, the annual cost savings with Screen Pops is more than $300,000.

So why aren’t more call centers set up with Screen Pop technology? Most call centers use a variety of systems, typically from several different vendors. These systems include the telephone switch, ACD, IVR system, desktop phones and PC workstations that use local or hosted software applications. To have an effective Screen Pop deployment, it is imperative to communicate with these disparate systems and consistently link the correct caller account information with each call. In addition, each implementation must build on a call center’s existing infrastructure, interfacing with all of the aforementioned systems.

The solution is the use of CTI middleware that can communicate with all the various systems within the call center. A customized CTI solution will manage the behind-the-scenes communication, ensuring that borrower information is associated with the call for the entire life of the call. Once Screen Pop technology is in place it tends to be easy for IT groups to maintain. Just like with other servers, CTI Screen Pop servers should always be protected by anti-virus software as well as up-to-date operating system service packs. With Screen Pops implemented in call center, advanced CTI modules may be readily added which will build on the existing infrastructure and further increase call center efficiency and improve customer satisfaction.

As an industry, we can provide the improved levels of service that both customers and the government want. Continuing to embrace technology and its benefits will help every area of customer service when systems are implemented to supplement an agent’s efforts.

About The Author


Reducing Costs And Improving Compliance


2014 was another extremely challenging year for the mortgage industry. Lenders found themselves in an environment that required them to be competitive and compliant, as well as efficient and profitable. In consequence, while the pressure to produce remains constant, the cost to originate continues to skyrocket, requiring lenders to maintain compliance while trying to contain costs.

The mortgage industry has been overwhelmed with a flood of new rules and regulations while dealing with unpredictable origination volumes. This combination has put intense pressure on mortgage lenders to update compliance processes while producing new business volume. Violations can carry severe financial penalties or possible civil actions. Responsibility now falls squarely on the lenders’ shoulders. With the scope of regulation now reaching into all aspects of mortgage operations the days are long gone when a small to mid-sized mortgage lender can go it alone or with outdated technology. In this lending environment, this is simply too risky.

Increased compliance scrutiny and pain of non-compliance has been a multi-year trend that has continued to a point of exhausting lenders and the trend will likely continue. Lenders have made the easy corrections to their environment and now need to assess more thoughtful ways to meet the increased demands.

At the same time, as lenders are feeling greater scrutiny from CFPB and other agencies – at both the federal and state level, they are also experiencing increased demands on their IT infrastructure (security, cyber threats, hardware requirements etc.) and heightened competition with the need to produce sustainable results. So, not only must they ensure compliance throughout the origination process, they must also ensure their IT demands are met without an increase to their budgets.

These trends are getting worse and while many lenders may have made the simple process changes they must now take a more proactive approach to finding better resolutions if they plan to survive in the future.

Higher Costs Originating Loans

To meet these ever growing challenges, lenders’ overhead has increased significantly to support back-office compliance, which is driving up origination expenses to the point that lenders current practices are too expensive.

That’s on top of the record low production profit of $150 per loan the industry has experienced in 2014 according to Mortgage Bankers Association (MBA) data.

MBA chief economist Michael Fratantoni stated that “The losses are not a result of lenders aggressively pricing mortgages in order to make up for lower volume. Rather, it is due to higher expenses, especially because lenders have had to add back office staff to deal with new compliance requirements put in place after the mortgage crisis.”

These market conditions are putting intense pressure on all lenders, but especially small to mid-sized lenders trying to keep pace with their larger counterparts. With back office costs sky rocketing small and mid-sized lenders must find a way to contain these costs if they want to remain competitive and survive.

So what is the answer?

Can small and mid-sized lenders continue to compete, or are the larger lenders going to continue to throw resources and bodies at the challenges to gain more and more market share? The answer is clear, if small and mid-sized lenders continue to do business as usual and are constantly reacting to changing market conditions with outdated technology, they will not survive.

The good news is there is a way for these lenders to compliantly compete and be able to contain the rising costs to originate.

Automation the Great Equalizer for Small to Mid-sized Lenders

Small and mid-sized lenders need to realize that the right technology and automation can be the great equalizer. That sounds great but how can lenders benefit from automation while also containing their IT costs and infrastructure?

Advanced fully hosted mortgage Software as a Service (SaaS) allows lenders to reduce ownership and costly upgrades, simplify and accelerate system implementation, enjoy worry-free security, and benefit from a centralized data repository. For most lenders, technology ownership is a fixed cost for a resource that rarely reaches its expected return on investment. Further, loan origination systems are notorious for slow implementation and are subject to numerous annual upgrades that can be either expensive, time consuming, or both, to deploy. As a result, the right SaaS solution has become a prime candidate for outsourcing, especially for growing lenders.

Mortgage lenders should consider the following when assessing a SaaS LOS provider:

Does the vendor provide a “test drive” environment that allows access to the platform to validate that it will work for those lenders’ specific needs?

The key, especially for small to mid-sized lenders, is in an out-of-the-box solution with lending best practices already built into the solution versus a system that requires significant configuration and support by the lender just to originate a loan. The out-of-the-box solution minimizes the time needed for implementation and eases the burden for the lender to proactively address today’s most challenging market conditions.

Does the vendor have a transparent and collaborative culture that performs as the lenders IT partner?

Is the system based on the right technical infrastructure for stability and data access?

What is the vendor’s track record of uptime interruptions? Has the provider had costly outages in the past? Does the database run on MS SQL? Does the vendor’s system run on archaic Flat files vs. a truly Relational Database? Will you have easy Data Access? How robust is the network/data center?

Does the vendor support third party vendors in a best of breed model or promote internal inferior products?

Does the system support the industries best vendors with high levels of feature functionality with seamless integration? Does the LOS provider charge vendors with high “click fees that results in the lender paying for higher charges? How much effort is needed to configure the system for the lenders’ specific requirements?

Is the solution competitively priced?

In addition to meeting the IT infrastructure demands, small and mid-sized lenders must address the ever growing burden of compliance. Lenders of this size simply do not have the resources to constantly monitor, proactively address compliance changes, and interpret how these changes will impact their organization. Remember, it is not just the rising costs to comply, but also the significant ramifications for non compliance that lenders must be able to handle.

Therefore, lenders need to strategically partner with a technology provider that can handle these compliance mandates. The provider must have a compliance focus, one that proactively monitors the changing compliance landscape, follows best practice compliance standards, and streamlines application data security. The solution should provide lenders with the ability to ensure that compliance policies and procedures are adhered to while efficiently completing the lending process.

In today’s highly competitive marketplace just having a SaaS lending solution with compliance is no longer enough. It takes the right provider to be able to deliver a cost effective, highly compliant solution with the right IT footprint for small and mid-sized lenders to succeed.

The right solution needs to be delivered from a vendor that has an extensive mortgage banking background. This background is critical for the success of the small to mid-sized lender. Technology is only a great equalizer when it actually solves and adapts to specific market conditions within the mortgage industry, thus requiring extensive mortgage banking expertise from the provider. Providers who are just delivering SaaS technology and hope that the small and mid-sized lender has the staff, resources and knowledge to constantly customize the technology needed to realize that their product will not contain costs, nor level the playing field. That is why the provider’s extensive mortgage banking experience is so very important.

Another key aspect in leveraging the provider’s mortgage banking expertise is on the compliance front. It is not enough to know the new rules and regulations, new disclosure requirements, or the upcoming change to the TIL, but the provider must be able to interpret the new rules, be able to quickly incorporate changes into lending solution, and work with lender as a partner so that the lender understands the potential impact on their business.

In addition to extensive mortgage banking expertise, the provider needs to be nimble and able to quickly and cost effectively change with today’s constantly changing market conditions. It is not enough to just incorporate the latest regulatory change but your vendor must have the foresight to already be working on what’s next. Large, public vendors that have layers upon layers of management and elaborate chains of command often can’t change and adapt with market conditions as quickly as needed.

If small and mid-sized lenders are going to remain competitive and survive in these market conditions they need a vendor who can change direction on a dime and provide them the insight, IT infrastructure, and strict compliance needed. This all must to be done in the most cost effective manner possible if it is truly going to be the great equalizer for small and mid-sized lenders.

Small and mid-sized lenders can compete and succeed in today’s challenging mortgage environment. It comes down to partnering with the right provider to deliver the most advanced SaaS solutions that easily address compliance and contain IT costs. The time to explore all your lending solution options is now.

About The Author


Take Things To The Next Level


Sanjeev-MalaneyThe wake of the housing crisis bore an avalanche of regulatory changes, which has resulted in soaring compliance risks and operational costs. Lenders are increasingly concerned about data integrity and quality control during the loan process, and this focus on data integrity has significantly increased total loan production costs. Given the increased costs associated with complying with ever-changing regulatory requirements, total loan production costs are not only soaring, but in many cases rising compliance costs have made loan origination unprofitable.

As today’s lending environment becomes more complex, traditional document management models pose a significant hurdle for maintaining quality control and controlling costs throughout the lifecycle of a loan. Also, legacy LOSs have failed to keep pace with the amount of automation required to cope with the rising cost of loan origination. Increasingly, lenders are being forced to reevaluate their operations to ensure that their document and data management operations have sufficient automation and adequate data integrity controls to satisfy compliance requirements without increasing costs.

As lenders increasingly turn to technology to automate much of the loan life cycle, they are in fact moving toward a straight-through processing (STP) model. The concepts of straight-through processing (STP) were originally developed to describe debt and equity trading and payment transactions that are conducted electronically without the need for re-keying data or manual intervention. Although the goal of “same day settlement” that the STP model promised equity trading has not been realized, the concepts of STP are applied in financial markets today to improve the certainty of settlement, minimize operational costs, and reduce systemic and operational risk. The mortgage industry can realize similar benefits, and others, by applying the concepts of STP to the loan origination process. When the STP model is applied to mortgage loan origination, much of the loan process is automated, resulting in up to an 80 percent reduction in labor. With STP, loan turn times are reduced, costly labor is eliminated and compliance is easily managed.

Today, many key steps in the loan lifecycle are labor-intensive and error-prone. The practice of “stare and compare,” for example, in which a human being looks back and forth across two or more documents to verify that the information is consistent across document types, is time-consuming and costly – and errors are common. Since the STP model reduces up to 80 percent of manual labor, human intervention is required only when something that is flagged by an automation engine needs to be validated. Using this exception-based processing model not only speeds the loan lifecycle, but also helps lenders better optimize the time of their most knowledgeable staff members.

As another example, loan data could be extracted and put through a rules engine to automate pre-funding and post-close quality control. Only if the loan application has a data point outside of the rules parameters would it then be sent to a human for review. This standardizes the process, increases productivity, lowers cost and minimizes quality risks.

Historically, it’s been feasible for lenders to send only a small percentage of loans through a quality control process, despite the growing pressure from regulatory oversight for more control and thoroughness. Typically, quality control is performed by in-house staff or an outsourced third party late in the origination process, or even after a loan closes. This drastically reduces the ability to take cost-effective corrective actions, and leaves the lender vulnerable to compliance risks. With the STP model, quality control moves to the front of the loan process and it becomes feasible to perform quality control for 100 percent of loans.

As the mortgage industry continues to evolve, and data integrity and quality control move front and center, lenders need to rethink the traditional ways of doing business. In the past, a focus on quality control meant increasing total loan production costs to the point of unprofitability and slower loan turn times. However, with the adoption of STP as a way of introducing quality control throughout the loan lifecycle, lenders are able to shorten loan turn times and ensure data integrity by using technology to automate most of the loan process. This not only reduces labor costs, but also eliminates compliance risks and buy backs that result from data integrity issues. In today’s competitive and regulated environment, adopting an STP model gives lenders a sustainable competitive advantage.

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Will You Be Ready?


TME-RGudobbaOn August 1, 2015, the TILA-RESPA Integrated Mortgage Disclosure Rule takes effect. Widely considered the most significant regulatory overhaul to the mortgage disclosure process in recent memory, the Rule not only changes the documents consumers will receive in a mortgage transaction, it presents sweeping changes to the loan closing process.

The Consumer Financial Protection Bureau’s (CFPB) “Know Before You Owe” project was initiated in 2012 to simplify the existing forms and documents received by consumers. The intent was to make the documents easier for both consumers and the industry to understand, allow comparison shopping for consumers and avoid costly surprises for the consumers at the closing table.

The CFPB’s Final Rule, totaling 1,888 pages, was issued in November 2013, and resulted in two new forms: a Loan Estimate and a Closing Disclosure. The Loan Estimate replaces the early Truth in Lending statement and Good Faith Estimate, and it must be provided within three days of a lender’s receipt of a mortgage loan application. The three-page document will include terms and estimated costs that consumers can use to comparison shop. The new five-page Closing Disclosure’s format is modeled after the Loan Estimate to support direct comparison by the consumer between what was disclosed and what will be required at closing. This form must be given to borrowers three days before closing, and it replaces the final Truth in Lending Statement and the HUD-1 settlement statement.

The mortgage industry is no stranger to regulatory changes. So what’s the big deal? Well, it’s not just 2 disclosures! Let’s look at some of the technology challenges in creating the two new disclosures. The Model Forms must be followed exactly, and the Rule requires that many of the sections can be presented to borrower(s) only when certain features apply to the loan.

For example, the Adjustable Payment and Adjustable Interest Rate tables can only appear if the feature(s) apply to the transaction. There are several YES/NO questions that cannot be checkboxes. The Projected Payments table can have 1-4 columns depending on the number of payment changes, but cannot have blank columns. Normally, in templates, the variable data is simply white space, allowing for the maximum data length required. If the data is shorter there would be blank space, which again is not allowed by the CFPB. The bigger problem is when the data is larger than the allotted white space.

Again, focusing on the consumer, the CFPB added a number of visual enhancements to the formatting of the documents. These include bullet points, shading and rounded corners on the section headings and bold print and underscores to draw attention to critical data. The CFPB eliminated the line numbers and required the fees to be presented alphabetically.

There was some pushback to the CFPB as some perceived these requirements as a technology challenge or barriers to implementations. Some providers questioned if the requirements could be met at all. This is part of the overall problem in the mortgage industry. We are resistant to change. We don’t challenge ourselves. What the CFPB was asking for was a better visual representation of the information for the consumer. We see this type of enhancement everyday outside the mortgage industry. The questions should be: How can we resolve this conundrum? How can we accomplish this?

Resolve: As a noun, it means a firm determination to do something and as a verb it means to find a solution. Well it can’t be done with templates! One provider said they were going to limit the number of loan product offerings and they could accomplish this with about 70 templates for each of the disclosures. This is not a solution!

In any case, this is not a trivial task. Compliance Systems (CSi) has spent significant hours on this project in the last 2 years. To prepare for the TILA-RESPA changes, CSi’s legal staff has read and analyzed the entire 1,888-page Final Rule to identify the required changes to CSi’s warranted transaction risk management solution and evaluated how the rules will impact the industry. Our decision, some years back, to focus on the data to determine the documents required to perfect the transaction and then build the documents dynamically, allowed CSi to send the first TILA/RESPA beta version to our partners last August so they could start their implementation while we continued to enhance our solution. We don’t anticipate any obstacles.

CSi is also working directly with the CFPB to clarify the new requirements and the CFPB’s expectations for compliance. CSi has participated in CFPB technology vendor roundtables, sought guidance directly from the CFPB’s lead TILA-RESPA attorneys, and collaborated on implementation challenges to ensure compliant integration.

So, what will change? In the past, the lender was responsible for the collection of information and preparing all the documents, like the GFE and initial TILA, and prior to closing a preliminary HUD-1 and TILA. The Settlement Agent (SA) would then prepare the final HUD-1 and TILA. Typically, if there were differences, the consumer and/or the lender did not find out until sitting down at the closing table. Rarely was there the opportunity to change anything.

The closing process next August will be different. The Lender is ultimately responsible for ensuring that the data on the Loan Estimate and the Closing Disclosure is in sync within designated tolerance limits and correctly portrayed in the documents. I see 3 likely scenarios with some possible variations.

1.) The Lender produces both the Loan Estimate and the Closing Disclosure, internally or through a doc prep provider. This will require the SA to provide fee information, etc. and allow the Lender final approval.

2.) The Settlement Agent produces the Closing Disclosure, as well as other closing documents. But the Lender will require control over the final document.

3.) A third party provider, like eLynx, emerges that will provide a consumer portal and a collaborative platform between the Lender and the Settlement Agent. This platform would support e-signatures, e-delivery and e-vault; all the components for a true electronic mortgage.

An article in the M Report stated “Overall more lenders, large and small, now understand that no matter what the final rules look like, their experiences in 2010 prove that there is no reason to hold back on technology. Many are starting to finally acknowledge that they will grow more dependent on technology partnerships to maintain compliance.”

There are no provisions for a staggered implementation date, and after the final ruling the CFPB recommended that lenders not adopt them until August 2015. An extensive study conducted by the CFPB confirmed the benefits of the new forms.

There are distinct differences in the implementation of the Final Rule compared to previous rules. First, the CFPB allowed a significant amount of time, over 20 months, before adoption. Secondly, there was noteworthy dialogue between the CFPB and the industry. Finally, the e-closing Pilot is sure to present some additional dialogue. This all will result in clarifications and possible minor changes to the final ruling and will continue throughout the time leading up to implementation.

If you haven’t seriously addressed this problem until now, you have lost considerable time and probably will not make the deadline. The CFPB gave the industry 20 months to integrate. At this point, only 10 months remain. Compliance Systems is ready! Will you be ready?

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“Fad Power” And The Rise Of The Digital Mortgage


TME-DGreenMany things we take for granted every day began as a fad. Take eight-track tapes (yes, my car had one). Eight-track players made personal music collections portable, or, at least, automobile-portable, for the first time. With a player in your car — which was a big deal at the time — you were no longer limited to the farm report on AM radio. Naysayers viewed eight tracks as a fad, thinking of them as yet another short-term novelty no one really needed. They were partially right. Eight-tracks were a fad, but portable music was not. Many music-related technologies have come and gone since the 1960s, yet listening wherever and whenever is ubiquitous.

Internet mortgage lending was seen as a fad, too, when it first appeared in 2000. Pioneering lenders jumped into this fad, giving borrowers the keys to the origination process in the form of internet portals that let them (gasp!) originate their own loans. Self-originated mortgages rapidly evolved past the fad stage as the most avant-garde lenders plied the web frontier. At first, applying online was a novelty. Then it became a convenience. Soon borrowers came to expect it. A process that had previously been tethered to a lender’s office was now available anytime and anywhere. Mortgage loans, like music, became portable.

Using the Internet for loan origination had its naysayers. Low borrower acceptance, even lower borrower knowledge, poor loan quality, increased fraud and data security were all common reasons to avoid it. Supporters claimed the opposite. Some early internet lenders experienced remarkable borrower acceptance, with more than 50% of their loan applications arriving via portal. Self-originated loan quality turned out to be every bit as high as the lender-originated variety. From fad to phenomenon, the Internet and mortgage lending became what we now call “a thing”.

The internet did more than make mortgage lending portable. While self-origination blossomed, mortgage technologists began work on the industry’s thorniest problem. The fact is that  manufacturing loans is like producing honey: no one wants to go through the sometimes painful process, but everyone wants to enjoy the results. Moving a loan from application to closing consumed hours of time, chewed through reams of paper, used gallons of white-out, involved losing the same documents multiple times, was not always objective, and generally inflicted maximum stress on all involved.

Web portal self-origination led to what also looked like another mortgage technology fad: Software as a Service (SaaS). Mortgage technology, like other tech-based functions, had always been installed in-house and deployed and managed client-server style. The SaaS approach was initially troublesome to many for some of the same reasons as was internet origination. Having the equipment and the software in-house equaled control. Having it in the “cloud” – a term not then in use – created uncertainty.

The benefits of SaaS soon became obvious. Because they were in the cloud, these systems, for the first time, became available on an anywhere/anytime basis. They became portable, just like the online application process that fostered this new technology. Homebuyers, who typically shop on weekends, were now able to apply for loans on weekends, turning on their computers and firing up their modems after being inspired by Sunday’s round of open house visits. Before SaaS-based loan origination systems, lenders would have to wait until they got to the office on Monday to view the weekend’s new loans. For the first time, lenders could watch them as they came into the pipeline.

Cloud-delivered mortgage technology brought other benefits as well. In-house IT costs decreased as infrastructures became smaller. New software versions came out regularly and were installed as soon as they were available. This quickly became a welcome feature that helped deal with the mortgage industry’s constant state of change.

With origination firmly ensconced on the web, lenders and technology providers turned to the next question: Why not combine the three to five disparate client-server lending systems into one complete, comprehensive web-based system? As was the case with Internet applications and SaaS, cloud-based platforms that were able to originate, process, underwrite, close, and fund mortgages while also including document preparation and imaging may have seemed like the next fad. Again, however, early adopters saw real efficiency gains that resulted in lower origination costs and higher profitability.

Here, too, trailblazing lenders eager to abandon paper-based processing envisioned the benefits. For the first time, all loan data was available in one place in real-time, and was accurate, as well. There was no more wasting time determining which system held the most recent loan information. Data integrity was no longer an issue.

Self-originating borrowers also benefitted. The end of the line for them in the early days was receiving their loan approval and disclosures immediately upon completing their application. While this was a huge move forward, borrowers were used to waiting more than 30 days for a loan approval before the dawn of online lending. They wanted greater portability and a faster response. Lenders taking the one-system approach, however, were now able to take the experience further for their online borrower. Regular status updates — along with flood, title and appraisal reports — became both simple and possible. These lenders were readily able to fulfill the requirement to present the borrower with their appraisal within three days of its completion.

The benefits of SaaS-based mortgage lending technologies continued to accrue as this new approach took hold. The most intrepid lenders in this groundbreaking group used the technology to create completely paperless, fully-electronic manufacturing operations. Accumulating additional savings was the original driving force. While these savings were realized, this step also paved the way for electronic closing, electronic signing and electronic delivery. Electronic closing and electronic signing further enhanced the borrower experience. Borrowers received their closing documents early, which put these lenders in position to comply more easily Know Before You Owe’s (KBYO) August 1, 2015 RESPA-TILA regulation.

This leads to compliance, yet another benefit of SaaS-based mortgage technologies. Using technology for compliance purposes may have seemed like a fad in the early 2000s, before the housing crisis. The housing crisis and global recession led to many changes in all financial services, but in the retail sector, nowhere more than in mortgage lending. 2010’s RESPA reform made technology’s role in lending compliance abundantly clear. New disclosure forms, along with the introduction of new fee classifications (each with different tolerance sets) were clear indications that doing business the traditional disparate system/client-server way would no longer work.

If RESPA reform 2010 was an indicator of the need for integrated technology, Dodd-Frank spelled out that need clearly. The Qualified Mortgage and Ability to Repay Rules (QM/ATR) added complexity to what was already a complex business. While compliance with the QM Rules was optional, the rules offered lenders a heretofore unavailable safe harbor. Taking advantage of this protection required the ability to quickly and consistently test each loan throughout the origination cycle to determine QM versus non-QM status. This was easy with the right tools, but time-consuming and challenging without them.

Compliance with the Ability to Repay rules was not optional. Here, too, the right tools in the form of a comprehensive platform populated with reliable data made compliance relatively easy. Those lenders who had the right tools at the time the rules took effect were better prepared, and made the transition more easily, than those that did not.

QM/ATR and RESPA 2010 were both warm-ups for KBYO’s RESPA-TILA chapter. Widely accepted as the single largest change in mortgage lending history, this represents much more than simply swapping three legacy forms for two new disclosures. The closing disclosure, which replaces the HUD-1, is a big change in itself. An even bigger change is the requirement that it must be delivered three days before closing. Mortgage lending is one of the original just-in-time manufacturers, with closing documents often not appearing until parties gather at the closing table. As of August 1, this is no longer permissible. This is not only a major compliance change but a significant process change as well.

There’s plenty of incentive to get RESPA-TILA right, as the penalties for non-compliance are significant. All of RESPA-TILA moves under Regulation Z which imposes greater liability than when it resided under RESPA and Regulation X.

Those lenders who jumped on what we might now call the mortgage technology SaaS fads of the early 2000s have a competitive advantage moving into 2015. Setting RESPA-TILA – the big issue of the year – aside, there is an entirely new group of borrowers who will burst on the scene at any moment. With the economy improving and rates low, the millennial generation is now forming households and buying homes. Unlike the generation who bravely used the Internet a decade and half ago to originate their own loans, millennials cannot imagine it any other way. They expect to originate their own loans. They expect the portals they use to be information-rich on the subject of mortgage finance. They plan to use that same portal for regular updates throughout their loan’s assembly. They are also expecting to sign electronically — optimally via their phone or tablet — the same way they pay for lattes and espresso at their favorite coffee shops.

Eight-track tape player technology made music portable in the 1960s. In the 1990s, technology took a major leap forward, taking music digital. Since the 2000s, the internet has revolutionized technology as a whole, making both music and mortgage origination (among many other technologies) portable. Along with digital music, we are now on the verge of the true digital mortgage, proving that one should never underestimate the power of fads.

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Hitting Your Numbers


TME-MHammondHere’s a typical story for you: Feeling slammed? Let me guess. You’re under intense pressure to meet your monthly numbers. It’s impossible to keep up with all the reports. You’ve got an open territory, your new hire is struggling and all this new technology is overwhelming.

Your customers are changing too. Getting on their calendar is increasingly difficult. They sometimes disappear into black holes for months on end. They’ve upped their expectations, yet seem fixated on the bottom line.

Plus your salespeople keep complaining that it’s virtually impossible to stay on top of it all – and you feel exactly the same way. Trapped in a never-ending cycle of increasing demands and constant change, you wonder if your team even has the capacity to be successful. Or if you do.

I read that story in a white paper entitled “5 Strategies For Leading A Quota-Busting Sales Team” by Jill Konrath. It’s not directly about the mortgage industry, but it sounded spot on to me. Technology vendors are looking to get the attention of lenders that are preoccupied with compliance and other matters. And lenders want to get in front of new borrowers that may not feel all warm and fuzzy about homeownership right now.

So, how do lenders and vendors alike succeed? Here are 5 tips from that white paper that I mentioned:

Turn Problems Into Challenges

Leading a sales team is tough. When the 15th of the month comes around and forecasted orders aren’t rolling in, you have a problem. When new competitors emerge – and you don’t know how to fight them – you have a problem. When your company has a bad 3rd quarter, that’s a problem too.

Your reps face their own personal sales problems as well. Unresponsive prospects, lost orders, service issues, to name a few. And it scares them – just like it scares you.

Unfortunately, whenever the brain sees something as a “problem,” it releases cortisol (a stress hormone) to help you deal with it. While cortisol may help you flee a wooly mammoth, it’s terrible for solving sales issues. Cortisol degrades your memory, shrinks your ability to come up with creative options and makes success feel like it’s out of your control. Not good!

Agile sellers tackle problems differently. They transform them into challenges – something your brain loves. This strategy works especially well if you pose the challenge in the form of questions. For example, you might say, “Closing more deals by the end of the month is going to be a real challenge. We’ve got some bright people on this team. Everyone of us has tackled other issues successfully in the past.”

Also, don’t just ask one question. To stimulate your team’s thinking, look at the challenge from a variety of perspectives.

Turn Failures into VLEs

When you and your sales team are learning new things, failure is virtually guaranteed. It’s a natural part of the learning process. But so many of your salespeople will do whatever they can to avoid it. New sales reps want you to feel like you’ve made a good decision by hiring them, so their standards are perfection – which is clearly unachievable. Some may be afraid to pick up the phone or make calls. They’re also afraid of failing in their new position – which would embarrass them.

Sometimes, your more experienced pros are the worst at dealing with failure. They don’t like the anxiety they experience. They dislike feeling like a rookie again. After one or two unsuccessful attempts at trying something new, they’ll often say: “It’s a dumb idea” or “It’ll never work for our customers.”

To lead a quota-busting sales team, it’s imperative to get your people to think like an agile seller. You want them to stretch and try new things – even if they don’t do well at first. To make that happen, you need to eliminate failure from your vocabulary.

Your reps can never fail! They can only have valuable learning experiences (VLEs). You need to imbue the idea in your sales team that failure is inevitable – and that how they react to it is the most important thing.

Set Getting Better Goals

Since your objective is to lead a quota-busting sales team, clearly you want your people to set big goals – ones that are a real stretch from where they are today. It’s tempting to challenge them to reach 165% of quota or earn 50% more this year.

Unfortunately, doing this often creates unintended negative consequences. Research shows that your salespeople are LESS likely to achieve performance-based goals, especially if they have to learn new things to reach them.

Why’s that? Because a salesperson’s self-worth gets tied up in achieving them. To protect their ego, reps will likely blame everything BUT themselves if they fail to meet their goals. You’ll hear excuses like pricing, lack of product/service capabilities, lousy lead generation or a crappy website.

Instead, what works is to get salespeople focused on “getting better” goals. This is especially important if they need to acquire new skills, master new situations and strengthen their confidence. According to psychologist Don VandeWalle, salespeople with “getting better” goals actually set higher sales targets, worked harder, planned better and achieved significantly more.

If you want to lead a quota-busting sales team, you need to keep your reps focused on improving one step at a time. Have heart-to-heart conversations with each of them. Rather than pushing them to achieve stupendous goals, discuss what they can do in the upcoming quarter.

Increase Digital Perceptivity

It’s highly likely that your sales force is having fewer in-person meetings today than ever before. If you are leading an inside sales team, your reps may conduct all their business via phone and online. Sometimes it’s tough to gauge a person’s interest or decide what to do next when you can’t see how they’re reacting.

Today’s quota-busting sales teams track digital body language to get invaluable insights about their prospects. There are numerous sales tools available today that can give you this kind of visibility. Some of my favorite ones let you know when a prospect has opened your e-mail, from what type of device, and how often. Others add on capabilities that let you know how prospects interacted with attached content such as PDFs or PowerPoint presentations. You can find out if they looked at it, which pages they spent the most time on, if they forwarded to others, and more.

Experiment A Lot

This is my favorite strategy because it encapsulates all previous ones. It’s all about creating a culture of experimentation with your team, with a continual focus on getting better.

Step 1. Identify a specific sales challenge to work on.

Step 2. Research the topic.

Step 3. Analyze your current practices.

Step 4. Decide on the experiment.

Step 5. Establish metrics.

Step 6. Run the sales lab.

I found these tips to be really helpful. I hope they help you as well.

About The Author


Do We Need Social Media?


Still not convinced whether social media marketing is worth your company’s time, energy, and effort?

You’re not alone. The C-suite at half of brands isn’t convinced of social’s value, according to the following infographic by Outmarket.

Here’s a look at social media marketing’s pros and cons.

One reason in favor of it is that “more than 80% of consumers look at online reviews weekly before buying,” states Outmarket.

However, on the negative side, social media accounts for only 1.14% of all e-commerce traffic.

Another pro: “90% of the world’s data was created within the past two years, thanks to social media,” states Outmarket.

Yet social media programs aren’t high on the list of CMO’s concerns, ranking just sixth.

To find out more about the pros and cons of social media marketing, check out the infographic:

Automate Away Lending Risk


TME-Becky-BarbaraOne of the less frequently discussed requirements of the CFBP is that companies have in place a Compliance Management System. This has resulted in a lot of concern and confusion about what exactly they are requiring. Typically when discussions involve the term system, most often it is a discussion about technology. Yet it is commonly assumed that this is not a requirement to implement an entire new technology platform focused on meeting all the regulations. In fact, not all the regulations have been finalized. Therefore even though there is great concern about making sure the requirements are met, this requirement can’t be about technology. So what in fact is this requirement all about? Let’s break it down:

When it comes to understanding what the CFPB means when it requires a “management system” lenders must remember that the term system is far broader that just a technology platform. A system is a set of principles according to which something is done. In the business world it is the set of values and possibly a mission statement under which the business operates. Imbedded in this set of principles are the goals and objectives of the company. These typically revolve around the expected results of the company and generally focus on three sets of stakeholders. These include shareholders who are expecting a good return on their investment, customers who expect that the products and/or services promised will be produced and the members of the organization. Turning these principles into the expected results is the “system” under which the company operates.

While some business systems are relatively simplistic, most are very complex, having numerous functions operating together to produce the desired result. This complexity is addressed through operational functions such as marketing, production, financial management, risk management and regulatory compliance. In order to ensure that all functions are working in an effective manner, a coordinated monitoring and feedback system is put in place. Part of this system’s management responsibility is developing the goals and objectives for the organization. Flowing from these goals and objectives are the development of which products and/or services will be produced.

Designing the product/service that the company will produce is typically the responsibility of individuals with significant knowledge about the company’s goals and how such products/services are generated. In most manufacturing companies this is the work of the engineering team. In mortgage banking however, we look to credit policy and secondary marketing experts for this design work. Their work results in the specifications of what is going to be produced and is most frequently seen as policy statements and requirements.

Once the product and/or service policy has been designed, the operational units must produce the corresponding operational functions. For example, if the product policy statement contains requirements which include ensuring the integrity of the data, then the operational staff must incorporate a process to make this happen and document it through a procedure that is given to the operations staff to follow. An integral part of this development process is the identification, selection and implementation of the technology that will be used in conjunction with the production of the products.

In both of the systems involved in mortgage lending (production and servicing), there are numerous overlapping procedures that must also be incorporated into the final product. Operation management must ensure that these overlaps are clarified and consistent among all staff and are grounded in the organization’s policies and procedures. In other words, can management demonstrate how a policy is actually implemented in the procedures across all operational units used by the company? Among these overlapping functions are risk, accounting and regulatory compliance. Because of all these overlapping systems, mortgage lending and servicing is an extremely complex business and requires highly complex systems to make it work. It is also why a management system is an essential part of the business.

All business have some type of management system. They can be as simplistic as having one person deciding the goals of the business and then determining how those goals are to be met. This individual must also determine what risks the organization faces in meeting these objectives and how these risks will be addressed as well as monitor the output of the operational processes and direct any changes that are necessary to meet the goals and objectives. However in a business as complex as mortgage lending, it is impossible for one individual to accomplish this and most frequently there are several key members in the organization with specific responsibilities.

While not always recognized as a “system”, the interaction between these individuals is the leadership that successful companies require. If one of the functions within a leadership system overwhelms all other functions the result is typically an organization that fails to meet its overriding responsibilities for its shareholders, customers, regulators and/or employees.

Management systems have three basic responsibilities that, when effectively executed, assure that the founding principles are followed and goals and objectives met. These functions include governance, risk and control.

Governance refers to the system of structures, duties, and support by which corporations are directed and controlled. Governance provides the structure through which corporations set and pursue their objectives and monitor the actions, policies and decisions of the corporation. In other words, governance involves determining what the company will produce and putting in place all the elements that will ensure the production. This includes oversight of all the processes, people and technology and all facets of these operational requirements.

The second is risk management. Risk is commonly defined as the chance of something happening that will have an impact on the objectives of the company. Every organization contains numerous risks and a management system must have a means of identifying, evaluating and determining how these risks will be addressed. This includes ensuring that there are coordinated, delegated resources to minimize, monitor and control these risks. One such risk is, of course, complying with all regulatory requirements. This includes not just those related specifically to consumers, but comprehensive regulatory risks as well.

Finally management must maintain a strong control environment. A control environment is one in which there is a systemic approach by management to compare actual business performance to previously established standards and/or objectives to determine whether they are being met by the organization’s operational processes. Management must then determine if it is necessary to take any remedial action to see whether corrective actions including human and other corporate resources are required or are being used in the most effective and efficient way possible in achieving those objectives. It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in a desired manner.

So what does it mean to have a Compliance Management System? Do lenders have to have another management structure that focuses on nothing but regulatory compliance? Or does compliance in this sense mean conformance to all the company policies and procedures? If it does, does this mean lenders already have a compliance management system in place? There are several answers to these questions and several ways to establish that a lender is meeting this requirement.

First, management must have some type of methodology in place to provide governance, risk management and control of the organization. If this is not clearly defined and documented, it should be done. This documentation must show that management, or the management group, oversees how the organization is operating. While well established companies most likely have some approach to this, many times it is not formal nor the results of decisions documented. Management meetings should be held on a regular basis and the results recorded.

Within these meetings, issues concerning all areas of responsibility should be addressed. These may be organized around the stated goals and objectives of the company and include operational issues, risks to the organization, identification of the controls and the results of these monitoring functions.

Determining the approach to take in meeting this CFPB requirement most likely depends on the size of the company as well as its complexity. If a lender chooses to incorporate the compliance function into an existing system, it must make sure that the current policy statements include all regulatory requirements. The corresponding processes must clearly show how these regulatory requirements are implemented within the organization. Finally, the control functions, specifically the quality control and if separate, the regulatory review function must be reporting on a regular basis. If they are to be used to meet the regulatory requirements, the report should include more than lists of issues of the overall findings of the review. The results should clearly identify the level of non-compliance while isolating contributing factors if warranted. In other words, it is not enough to say I looked at 10% of the loans and of that 10%, 8% had a problem with disclosures. More specific information is necessary if management is going to address this issue.   Finally, the management team minutes should reflect any decisions about how any unacceptable level of risk is going to be addressed. This issue should then be part of the management meeting discussions until it is resolved.

The management system should also include general regulatory issues, such as Fair Lending, which should be incorporated into the policy, risk and control discussions and updates for the management committee meetings.

If the company decides to implement a separate compliance management system, the same requirements apply. One thing that must be kept in mind is that this system must involve the same people that are involved in the other management system if it is going to be effective. All too often compliance groups involve only legal staff and control units. As a result, the issues identified in this meeting are minimized in the larger management meeting. This management group must also incorporate the governance, risk and control elements that are found in all management systems. The group’s meetings must be documented and issues resolved.

Since the announcement of the requirement for a compliance management system, lenders have initiated various approaches. One of the most frequent is the development of a separate compliance group to manage all the new requirements. In many cases these groups are implemented at the urging of a consulting group that has been retained to assist companies. Unfortunately many of these have been delegated to “sub-committees” of the larger management committee and their output is no better than what was happening previously.

There are two main causes for this. The first is that the committee is most likely run by an attorney or someone in the organization more familiar with the requirements than the company’s policies and procedures. As a result they tend to focus on “How can I implement this requirement so that everybody does it.” And less on imbedding the requirement into the process. Many times there are no production people involved and the result is something that cannot be implemented.

Also, the control environment has not been updated to accurately determine the level of non-compliance risk. The same type of sampling and reviews are done that produce the same type of data leaving a gap in the level of information available to management. Take for example, Fair Lending. The HMDA data is reported once a year and is tested for accuracy and validity based on FFIEC standards. Once the report is generated, how many management systems include the requirement for the data to be analyzed against the data for other years. How many companies obtain the entire report when it is released and compare themselves to other lenders? Very few if any. As a result, these control findings are not effectively used to update policies and procedures to meet the compliance requirements. Furthermore, there is no evaluation of the entire operational system to determine if the Fair Lending Policy imbedded in the organization’s value system is actually working.

At the end of the day, despite the requirement for a Compliance Management System, the efforts to date have not met that objective. Only when we truly understand how a well-run management system can improve performance will we be focused on meeting the standards. The companies that take this seriously and makes the necessary changes in the functions required will be the ones who succeed and survive any future crises that come our way.

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