The Regulatory Risks Ahead


Get ready, because 2017 will bring a lot of new regulatory challenges. You can be sure that regulatory risk continues to weigh heavily on lenders’ minds. So, are there any specific regulatory rules coming up in 2017 that lenders should be preparing for? How about enforcement action? What hot button items do lenders need to stay away from next year?

You bet, answers Wade Hamby, national director of sales and marketing, Stonehill Group. “The new 1003 and HMDA change is going to be big next year. Servicing remains in the spotlight and will continue to be. With respect to TRID, in the fulfillment area we are seeing that it takes more time to clear stips.”

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Hamby has more than 25 years of executive experience in mortgage lending, outsourcing and quality control. He oversees The StoneHill Group’s nationwide sales and marketing activities and is responsible for expanding use of the company’s solutions in the mortgage industry.

“Further, the new 1003 will impact how you capture data,” he continued. “Lenders have to have partners that are effective when it comes to cyber security. You have to do the penetration testing and meet those compliance needs. Too many vendors don’t provide those services. There’s a lot to prepare for.”

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So, how do lenders get prepared? Many are turning to technology. One can argue that technology plays a far more significant role in today’s enforcement driven market. With so many regulatory landmines, lenders use technology to stay out of trouble, protect profitability and be as efficient as possible. That being said, how have lenders’ technology strategies evolved in the year or two? Why? In your opinion, what are the elements of an effective technology strategy in today’s market? And what is the single biggest mistake lenders make regarding technology?

“Technology is critical,” pointed out Brian Fitzpatrick, president and CEO of LoanLogics, Inc. “We are missing the boat to what technology should be doing to drive down cost, though. Technology has to embed all the rules. Technology has to take all of those rules and guidelines and embed them within the system and deploy as close to the point-of-sale as possible. Technology has to be dynamic so it can be easily changed as the rules change.”

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Fitzpatrick oversees all operations of LoanLogics. Mr. Fitzpatrick has raised industry-wide awareness of how technology plays a key role in the production and measurement of loan quality and performance.

The regulatory landmines ahead are many. “There are a number of new obstacles things coming up,” added Fitzpatrick. “For example, the required use of trended credit data will be mandated. Comments are due to the CFPB for updates to TRID. The changes will be impactful. There will be new HMDA fields that need to be captured. In 2017 we’ll see the optional use of the new 1003, which will be mandatory in 2018. All of this speaks to the need for more dynamic technology.”

“In addition, we are expecting UCD in the second half of 2017,” added Kelli Yarbrough, vice president of Loan Retention, Roundpoint Mortgage Servicing Corporation. “We are expecting a lot of guidance. In general, lenders need to resist the urge to rush into things like non-QM. You need to be well trained and have your technology in place before you wade in.”

Yarbrough is responsible for all aspects of customer contact in the loan retention process for RoundPoint’s MSR portfolio. Ms. Yarbrough is a veteran of the mortgage industry with more than 16 years of experience leading both sales and operations teams in wholesale, retail, and direct-to-consumer channels.

“As much as lenders rely on technology, often times we are catching things too late,” she noted. “A key point to a successful technology strategy is system integration. If the systems aren’t able to speak with each other they won’t last. Everyone needs to remain nimble, but we can’t forget to invest in training programs for the front line. The LOs have to understand how to use the technology and comply with the rules. I think we expect too much from our technology.”

A wild card in all of this could be the outcome of the Presidential Election. “With the election coming up, we should look at larger issues like a lack of new affordable housing,” said Fitzpatrick. “Also, rates are going to go up. So, how does all of that impact the market? The news coverage needs to focus on these issues relative to our industry, as well.”

Regardless of what happens, the smart lender has their eye on the future. “Next year will be the year that we crack open all the data,” said Brian Koss, EVP of Mortgage Network. “If you are forced to collect new data at the same time you have to deal with a new application, that should be a good thing for the space to digest. It will be a good opportunity for the industry to rethink the entire process.”

Brian Koss has more than 25 years of mortgage banking experience and has personally generated more than $1 billion in home loans. Mr. Koss has trained hundreds of loan officers over this career, including many top producers. For ten years, he served as the host for “Mortgage Mondays” on the nationally syndicated “Money Matters” radio show.

“Lenders are typically founded by sales guys that pay little attention to detail and just buy technology off the shelf,” Koss said. “It’s like self medicating. You have this ache so you take this medicine, then this other thing hurts so you pick up some medicine for that, but you aren’t aware of how those medicines work together. Lenders will some times buy something because it sounds good, but you have to look at how that new technology impacts your process and other technologies. That decision making process has to end.”

All of this change is making it more and expensive to originate a loan. “Everyone is talking about how the front end is changing and being digitized, but the real issue is that we have to figure out how to bring the cost of complying down,” concluded Fitzpatrick. “Lenders will not be effective if they are always scared of compliance enforcement. A lot of the technology on the market today is old technology that has been around for 20 or 30 years. It’s like building a new modern house on top of old knob and tube wiring system. It doesn’t work. Technology has to evolve to help lenders meet the challenges of complying.”

About The Author

Looking Forward To A Good Year

You can Download this article as a PDF HERE

All of the headlines these days touch on the new rules coming out of the Consumer Finance Protection Bureau. Lenders are asking: How do I comply? Will my compliance strategy be enough for the CFPB to leave me alone? How much should I rely on my technology vendor when it comes to compliance? Will I be ready in time? Can I originate non-QM loans? And if I do originate non-QM loans will I be able to sell them or will I have to portfolio them? And the list goes on and on. So, 2014 is surely starting with a bang. As a result, we at PROGRESS in Lending have brought together Barbara Perino (left) and Rebecca Walzak to look back at 2013 and ahead to what’s coming in 2014. Together these two women have over 50 years of lending experience. Here’s how they see our industry evolving:

Q: Explain how you first got in the mortgage industry.

REBECCA WALZAK: Accidentally. I had no background in finance or anything. I was tired of teaching and I was looking for something to do. I applied for a job in a mortgage company and 35 years later I’m still here.

BARBARA PERINO: I had recently relocated to California in 1990, and went on to apply for a job as an office manager for this brand new startup. The company was the first in the space to do appraisal review. I was hired employee No. 5. In two years we grew to 450 people and I evolved with them. I started off as office manager, went on to facilities administrator and ended up as regional sales manager. And at the same time I went to school and got certification in mortgage banking. Today I do coaching and some consulting.

Q: How has the industry changed over the years in your view?

BARBARA PERINO: I believe that it’s cyclical like a lot of different industries. I think what showed up—that happened in the 1990s and actually back in the 80s and again in the 2000s—is that greed and ambition, combined with opportunity, took over people’s thinking and created some avenues for them to do well financially for themselves and for companies, but they never took the time to step back and regroup. They missed the bigger picture.

REBECCA WALZAK: After 35 years a lot has changed. Technology, for example is everything these days. When I started technology was an electric typewriter, but today everything we do is impacted or involved in technology. From a business perspective, when I started mortgage companies themselves were small, and not very well known. Most of the banking done was done through S&Ls and portfolio runs. Once the securitization market opened up, the industry grew tremendously. It was at that point that we went from a Mom and Pop business to a huge industry that amounts to a critical part of the world economy.

Q: You both come from very different backgrounds, yet you collaborate each and every month to create a joint article with a lot of great ideas. How does that relationship work and why is it something that you think you do so well?

BARBARA PERINO: It works because, No. 1, we live three miles from each other and we’ve known each other for 16 years or more. We are very aligned in our personalities and we communicate well. We talk every month about what the topic could be that would be of benefit to others and then we figure out who’s going to be the lead in writing it, and then the other person takes a secondary role as far as editing the article. The idea usually comes out of either a conference or having a conversation with somebody or an article shows up that we feel that we need to respond to.

REBECCA WALZAK: Barbara’s specialty is coaching so she’s always focused on the people. I’ll offer up an idea from an organizational perspective or a news perspective and then she’ll come back and say, “Oh but what about the people involved in this?” From there our conversation as to what we’re going to write about really seesaws back and forth to decide if we want the article to be more people focused or more process focused. Barbara is really strong on leadership issues. We’ve had some of our more engaged conversations discussing what’s a good leader and how much of a leader’s time should be focused on people versus focused on the business attributes of the organization. We look at both sides of the coin.

Q: In looking back at 2013, what do you think were the high and low points? And looking ahead at 2014, what are your expectations?

REBECCA WALZAK: 2013 was a year of change. There was business being conducted, and because of the low interest rates the refi business continued to boom. But the focus was on the new CFPB requirements that go into effect this month. The industry had to take a real hard look at what it is we’re charging in totality and what kind of individual fees we’re charging because of the new rules. I think we have to take a look at how we manage these rules. In all this we have to remember that the meltdown was perpetrated by people that were totally focused on making as much money as they could. Well, those people are gone.

The good guys are left over, they’re struggling with these punitive measures and they’re trying to figure out how to go forward. In a lot of ways 2013 was a transitional year, but now we know what the regulations are. So, the industry is evaluating all its options to comply.

Going forward, I see a steady rising of the tide. The first few months of this year are really going to be a struggle, because people are going to be really focused on deciding who they are as a company. They’ll be asking themselves: How am I going to make these regulations work? Is this strategy going to work for me? But the CFPB has given us six months to work things through. Lenders are going to find that the adjustment becomes easier and easier and by the end of this year, we’re going to look back and say, “We had a good year.” I’m fairly upbeat about 2014.

BARBARA PERINO: I do believe that 2013 was a big year of change, as well. The high points of 2013 were the new technologies being developed and some new products. Correspondent lending came back in 2013. In terms of wholesale lending, as a new secondary market starts to put its toe into the water, wholesale will grow too. Also, there were a lot of mergers and acquisitions in 2013. Some companies just struggled and couldn’t stay in business.

There were also some low points in 2013. Some lenders were somewhat greedy or just sloppy in their lending practices, it affected them and they were fined. I see those types of lenders going away. Going into 2014, I agree that the first few months after the CFPB rules take effect will be a challenge. Let’s face it, there’s still some clarity needed around the rules from the agencies around what they really expect. People are in a grey area right now. I also think 2014 will be filled with mergers and acquisitions. Those that can manage change well will succeed. Lenders and vendors are going to have to take these new regulations to heart and understand that there is no more room for sloppy lending. I am excited. I think 2014 is going to be a good year.

REBECCA WALZAK: We are definitely going to see some shakeout in 2014 because there will be lenders who just can’t handle the change. Some lenders entered the market during the boom period and they are struggling because they don’t understand what constitutes good risk. They haven’t been trained about how to evaluate an appraisal and how to fully underwrite. There’s much more demand for what people call old-time underwriters who understood the whole underwriting process from front to back.

Q: As we talk about the new regulatory burden, do you think it’s actually facilitating innovation or do you think it’s hindering innovation?

REBECCA WALZAK: I don’t think it’s hindering or incenting innovation. We’re just going back to the way things used to be done. What frustrates me from both a process and a technology perspective is that we appear to be trying to just use technology to implement some of the processes that we’ve always had in place. I think technology has a much greater role and there’s a much greater opportunity for lenders to grow this year if we were to look outside of the way we do things today and say, “Oh, you know, there’s a better way to do it.”

Here’s a good example of what I mean: We’re seeing companies use OCR technology to look at data to meet new pre-funding quality control requirements. That’s great, but now lenders are manually handling data and images of documents. Lenders are not taking advantage of the huge amount of data that’s out there that could tell them so much about their business.

BARBARA PERINO: I don’t like the word burden. I see the new rules as the new normal. I don’t think the new rules are hindering innovation. There are some in our industry that are resistant to change, but they will have to adapt. Coming out of this I see a huge opportunity to innovate. Creative people will see this as an opportunity.

Q: The new rules are geared at creating a more consumer-focused mortgage space. Is that what’s happening?

REBECCA WALZAK: Only if the consumers do their part. Here’s what I mean: We’ve got new disclosures and the single point of contact, but when do we as lenders give out these disclosures and just because they’re simple to read doesn’t mean that borrowers will read them. And just because borrowers now have a single point of contact that doesn’t mean they’re going to call that single point of contact and ask questions when they don’t understand something. The regulators and the mortgage companies have fulfilled their half of the bargain by introducing and complying with these new rules, but I wonder if borrowers will take advantage of what’s been done on their behalf.

BARBARA PERINO: Clearly the point of everything coming out of Washington is to create a more consumer-focused mortgage industry. Now there are opportunities for lenders to innovate and technology vendors to innovate by creating a better process that makes it easier for borrowers to understand the mortgage flow. Borrowers are not going to read pages and pages of documents. But I think there’s opportunity for a technology company to create something for borrowers to get more educated about the best way to get a mortgage. For any of this to work you are going to need that education piece. You can’t just throw new rules at lenders and new documents at borrowers and expect everything to be simple and understandable.

REBECCA WALZAK: It would be wonderful if we had a national class about lending. We should have a class telling borrowers how to read the new disclosures and what to look for. That would be wonderful but part of the problem is that borrowers get a mortgage so infrequently that they still rely on the loan officer or the Realtor to guide them through the process.

BARBARA PERINO: Along those lines, we should also be better training and educating our loan officers and Realtors to be trusted advisors to borrowers. There are a lot of documents that borrowers have to go through so loan officers and Realtors should sympathize and help borrowers out.

Q: Lastly, describe what you think the mortgage lender of the future needs to be and do.

BARBARA PERINO: Lenders need to be open to change. These new rules are more borrower focused and that message needs to trickle down to everyone in a given lending institution. It shouldn’t just be about the leadership team, it should be about getting the whole company onboard. To do that lenders have to figure out what changes they need to implement in order to ensure compliance and better their process. From there, the lender of the future needs to clearly articulate and implement those changes throughout.

REBECCA WALZAK: In order for lenders to be successful, the leadership needs to stop acting like production managers. You need to have total structure and total control. The lender of the future also needs to look for new technology and do a better job of implementing it. If you’re going to be successful, you have to keep improving. Those lenders that continue to run their businesses like small Mom and Pops won’t cut it. You need a broader view to be successful. Our industry is going through a maturation process. Our industry used to be comprised of small Mom and Pops, but now we’re bigger. We’re a significant part of the world economy so we need to start acting like a true industry with a world view.

Insider Profile

rjbWalzak Consulting, Inc. was founded and is led by Rebecca Walzak, a leader in operational risk management programs in all areas of the consumer lending industry. In addition to consulting experience in mortgage banking, student lending and other types of consumer lending, she has hands on practical experience in these organizations as well as having held numerous positions from top to bottom of the consumer lending industry over the past 25 years.

Industry Predictions

Rebecca Walzak thinks:

1. Processing a loan will become similar to manufacturing a car or any other product.

2. Lenders will become more aware and knowledgeable about incorporating technology into their operational process.

3. Borrowers will prefer to interact with companies that can easily access and articulate valuable information.

Insider Profile

Barbara Perino is a Certified Professional Co-Active Coach guiding her clients who are executive leaders and their staff. Barbara has been trained through The Coach Training Institute (CTI) located in San Rafael, CA. She completed a Coaching Certification Program through CTI and the International Coaching Federation (ICF). Prior to becoming a coach, Barbara was a 16-year veteran of the residential mortgage industry in a national sales management capacity for property valuation and residential mortgage service providers.

Industry Predictions

Barbara Perino thinks:

1. The dust will settle by spring around what is really expected from the CFPB. We’ll get total clarity.

2. There will be more mergers and acquisitions among both technology companies and mortgage companies alike.

3. The independent mortgage bankers will have a stronger presence in the industry. It won’t be just about the big five banks.

Compliance Commentary: A Deeper Meaning In The Forms?

*A Deeper Meaning In The Forms?*
**By Chris Appie**

***The CFPB asks for your opinion of combined GFE and TIL disclosure forms; but what does their question tell us about them? For any of you who have seen the movie The Social Network, you’ll recall that Facebook founder Mark Zukerburg was nearly thrown out of Harvard for hacking into a series of databases and posting pictures of students to a website whereby the students would click on the ‘hotter’ of the two pictures; results were to be compiled so the ‘hottest’ student at Harvard would be crowned.

****Not to be left out of the action, on May 18th the Consumer Financial Protection Bureau (CFBB) published via its website two documents and asked the public to vote for the form they consider ‘hotter.’ It’s a tough decision; one has nice circles enclosing answers to questions while the other maintains a more traditional, almost dignified look. You can vote for which form you prefer at the Bureau’s new website,, but by merely voting you may be missing the bigger point. Here’s what I mean:

****Putting aside the fact that two of the most substantive and familiar documents in a mortgage transaction are going away and being merged into a combined, all-inclusive document does the publication of these forms give us any insight into the future actions of the Bureau? I believe it does.

****Throughout the legislative fight surrounding Dodd-Frank one of the major concerns advanced by financial institutions was the ability of one agency to almost universally regulate all consumer financial products in the United States. While Republican’s in the House have introduced numerous bills to strip the Bureau of various powers (including funding) it appears that these bills are dead on arrival in the Democratic-controlled Senate; the big question has moved from whether the CFPB should have this authority to how the CFPB will exercise the authority they have been granted.  So what does the publication of these forms do to inform our understanding of the Bureau and how it will exercise its powers? Are they doing what is required by law?

****Here’s what Frank-Dodd actually requires:

****(f) COMBINED MORTGAGE LOAN DISCLOSURE.—Not later than 1 year after the designated transfer date, the Bureau shall propose for public comment rules and model disclosures that combine the disclosures required under the Truth in Lending Act and sections 4 and 5 of the Real Estate Settlement Procedures Act of 1974, into a single, integrated disclosure for mortgage loan transactions covered by those laws, unless the Bureau determines that any proposal issued by the Board of Governors and the Secretary of Housing and Urban Development carries out the same purpose.

****The law does not require the CFPB to propose a model form until July 21, 2012. On its face and based on the pace of past major changes this seems like a reasonable deadline—and  look at what actually happened—over a full month before the powers of the Bureau even exist they have not only created one model form but two distinct model forms and submitted them for comments from consumers and the industry. The CFBP is well over a year ahead of what Dodd-Frank requires.

****One need not read too much into the tea leaves here. The CFPB is already progressing quickly towards reforming consumer financial markets. In a recent Article the Treasury Department interviewed Elizabeth Warren and she had this to say about the priorities of the CFPB: “Mortgages are the other top priority because they are the single most important financial decision that most families will make. We have learned from recent history that a bad mortgage can not only destabilize an entire family, but that enough of them can destabilize the entire economy.” It’s tough to say where the CFPB will lead us but if current behavior is in any way indicative of future behavior, the industry is going to be changing—rapidly.

****Which form do you like better? What are your concerns? Have some ideas to make them better? Shoot me an email: or give me a call: 800-968-8522 ext. 230. I’ll compile the results and share with you in a future column.