By Jennifer Harmon
In order to deal with ever-changing regulations at the local, state and federal levels, it is important that lenders be able to stay on top of the changes and, if necessary, to update their systems quickly and accurately to comply with applicable law on their effective dates. In this month's Q&A, Dominic Iannitti, president and CEO of Carson, Calif.-based DocMagic Inc., which does business as Document Systems Inc., talks about how robust technology, including compliance audits, helps ensure that lenders are in compliance with Dodd-Frank, specific FHA guidelines, the Texas cash-out fee limitation, RESPA 2010, the Mortgage Disclosure Improvement Act and many other laws.
MORTGAGE TECHNOLOGY: How can technology significantly help lenders with the latest compliance regulations such as the Dodd-Frank Act and RESPA?
DOMINIC IANNITTI: It is difficult to fully respond to the challenges the Dodd-Frank Act will present because the implementing regulations have not yet been adopted. I think it is safe to say that the scope and breadth of the act will in itself be challenging, affecting forms, software, calculations and more.
I can already foresee adding audits that address restrictions regarding mortgage originator compensation and the prohibition on YSP and other payments that are tied to the loan's interest rate, points, and/or other fees. And, of course, we will be modifying our high-cost tests to comply with the new "high cost mortgage" provisions of the act.
Lenders can look back to RESPA 2010 and ask how well their document preparation vendor did in ensuring that the GFE, HUD-1 and other RESPA-related forms were not only in place by Jan. 1, 2010, but programmed accurately given all of the regulatory guidance that was available at the time.
Where ambiguities existed in the implementation of RESPA 2010 (and there were many), how well did the document preparation vendor do to reconcile those ambiguities? Did the vendor make good judgment calls in those instances?
With respect to the compliance vendor, similar questions need to be asked, including whether or not comprehensive audits were in place by Jan. 1, 2010 to assist mortgage loan originators with staying in compliance with RESPA, especially with respect to not exceeding the zero tolerance and 10% thresholds referenced on page 3 of the HUD-1.
Technology can be used to build automated tolerance cures. In addition, it can be used to build the proper audits so that lenders, brokers and mortgage loan originators comply with RESPA 2010, such as with regard to making sure that the GFE is valid for a minimum of 10 business days, that lines 801-803 and transfer taxes do not increase, and that certain fees, when added together, do not increase by more than 10% of the total amount disclosed to the borrower on the GFE.
To leverage that technology, it is also important that the user understands in clear and simple terms (through the graphic user interface) the data that the user needs to provide so that the proper data is collected. Without user-friendly instructions to help the user understand what information needs to be provided, technology won't be able to be used at its optimum level.
MORTGAGE TECHNOLOGY: How have you adapted to different compliance issues along the way?
DOMINIC IANNITTI: More than five years ago, I saw the need for compliance. It was a natural evolution of our business to incorporate compliance into the production of the documents we produce. That vision has really materialized in the last two or three years because of RESPA 2010, the various higher-priced mortgage loan laws that states are adopting as well as Section 35, the federal higher priced mortgage loan law. Clients realize they are in compliance lending.
We are continually adding audits that will help our customers stay in compliance. They not only want the documents, they want to make sure their loan will be able to sell on the secondary market.
During the past five years, our customers are using loan origination systems more and more. It's a reflection of the market. The LOS systems don't have built into them compliance tests and audits.
For a lot of our LOS partners, and we do work with just about all of them, increasingly we have built a toolset that allows them to tap into our compliance auditing engine and incorporate our audits into various parts of their workflow process. We have a couple partners now and more on the horizon, which are actually utilizing our Web-based compliance services to test their loan transactions within their own systems.
Part of being a partner with DocMagic is much more than getting the documents, it's being able to utilize and leverage that compliance expertise in their own systems. We're seeing a lot more of that. We identified compliance as being important many, many years ago. Our auditing system is in its third generation at this point. The moment we prepared our first set of documents 23 years ago to be exact and a client came back to us and said, "Well, this needs to be improved," or "How come you didn't know that I was doing this wrong?" That was the beginning of our compliance auditing and we would build those audits in as the clients would give us that feedback. That's where it started and where it is today—every aspect of a transaction is analyzed.
We analyze fees. We compare those against previously disclosed fees and alert our users if they are doing something they can't do—changing of a fee outside the tolerance level or something like that.
It's grown into a very critical part of our operation. Over the past few years, we've put a lot of time and effort and a lot of new team members into the mix in terms of making sure we are on the leading edge. What differentiates us from companies like us is the fact we do that internally. These are our systems.
MORTGAGE TECHNOLOGY: Where do you see compliance headed?
DOMINIC IANNITTI: Compliance is going to be increasingly important not only at the lender or broker level, but at the vendor level as well. As a document preparation provider, I have seen first-hand how critical compliance has become to our business. It is a natural evolution of our business.
Sure, DocMagic can provide the documents needed in the loan origination process, but it is vitally important that our calculations are accurate and that the various blank fields on a form populate with the correct loan-specific information. Our customers expect nothing less. Furthermore, our customers have come to expect that DocMagic provide more and more compliance audits and tests. To that end, we have been including federal and state-specific high-cost tests with the processing of each loan transaction for years now. On top of that, we have numerous data validation and compliance audits that we have integrated into our DocMagic system. Compliance audits range from complying with specific FHA guidelines, the Texas cash-out fee limitation, RESPA 2010, MDIA, and many, many more.
I can only see the scope of DocMagic's compliance services increasing as implementing regulations for the Dodd-Frank Act are adopted and amendments to RESPA and TILA take place. I am also aware that state legislators will adopt their own amendments and regulations as well, some of which will be intended to reconcile various inconsistencies with federal law. I can already foresee that DocMagic's customers will look to us to help them navigate the myriad of laws and regulations to keep them in compliance so that they can ultimately sell or securitize their loan.
MORTGAGE TECHNOLOGY: Can a successful company survive on technology alone?
DOMINIC IANNITTI: We need to be in a position of listening to what clients want. Seven times out of 10, client feedback doesn't have anything to do with the actual technology we've used to deliver the products so much as its question is related to why a document does a certain thing. What are the timing elements of certain disclosures, questions of what types of fees can and can't be charged. Certain regulations are requiring fairly in-depth computations with respect to loan fees and different charges. It's about trying to normalize this information so that a comparison can be made to determine if a loan is in some sort of a category that we rather it not be in or if an APR is too high. Different things like that.
We leverage technology to assist us in providing and servicing up that information to our users in an efficient format so that they don't have to deal with the frustration of picking up the phone and calling. Not that that is a frustrating event, but it is something you have to do. It's always nicer from an information provider perspective to have everything at your fingertips. The foundation of the information is not based in technology. It's based in an analysis or our interpretation of a particular regulation.
Since day one in this industry, since I've been here, we've always had the computation of an APR. Since that time, clients have always had questions about what goes into that, and how does that get computed? Historically, we'd get a phone call saying, "Well, I think the APR seems a little bit high. Are you guys sure about that computation?" In the early days before technology was assisting us to a large extent, we would direct them to a regulatory section of Truth in Lending and say we are providing an APR consistent with what you will read in that regulation.
While a lot of companies similar to us have laid off employees and downsized significantly, we have not laid off anyone at this company. Our support departments have been maintained at the same levels they've been at for many years. We analyze every phone call coming in. There are computer systems noting how long people are on hold. That information is served to upper management to ensure that there are always enough people in the call queue to handle all the calls.
MORTGAGE TECHNOLOGY: How have you improved your company internally?
DOMINIC IANNITTI: More technology provides new options. We always have to look at those options.
A couple years ago we introduced our Webchat system, which enabled a client to get instant access to a technician or a customer service representative. We are working right now on analyzing a new call logging system. Every call that comes in is logged. We are tracking any information we provide to the clients. If anyone calls in and has a question to a particular regulatory change, we provide them with a document created by our legal compliance department. We are tracking that information. We know we have provided that document. There's a method we are working on that will allow the client to essentially grade that document so they can give us feedback on whether or not that document helped them with their question. That can help us further refine the information we are disseminating.
We have also been analyzing for quite some time the calls that are coming in with respect to the document package we provide. We have designed a new system when a set of documents is ordered, the system will detect it's one of the first few uses of a loan program. It will then send out a questionnaire that asks a client the very question that tends to make up 80% of the calls that we get after that set of documents. It's a very proactive system we are putting into place.
When we first started the business, adding and deleting documents was one of the most difficult things a customer service representative did during the day. Now, thanks to technology, a lot of what are now mundane tasks, we can empower the clients to do on their own. Searching the library to find a document, in the early days we might have had 1,000 documents. That number is up to 75,000, maybe 100,000 documents. It makes it very difficult, very tedious to find a document. We're working on ways to now to refine searches and get them more precise. In the near future, we see ourselves making a tool available where a client can type in a title and with one click the system will serve up results. In a few seconds, they can do it on their time schedule to accommodate the customization of their package. That's an example of where the technology is going to be able to enable us to take the service level of our company.
We're very excited about the e-disclosure delivery system. We've had it now for over five years. Of course, it's been refined and enhanced. With a lot of the regulations that have been changing, there's a real push to use it and it makes a lot of sense. In the old days, you used to see a 72-hour window of time to create a disclosure package after getting an application from a borrower. Then you put it in the mail. The reality is a borrower really doesn't see any tangible information until they receive that package. The original idea was to get that information and compare it with another lender. It took time and the process was slow, paper intensive and labor intensive.
We have streamlined the system where all of the invitations are brandable and you can change the colors. A lender can leverage the technology to the point where it doesn't say DocMagic anywhere. It looks as though it's that lender's technology.
Today there is a big difference providing information to a borrower in one second vs. five days. We found by giving them information in a second, our clients are noticing a higher level of pull-through on their transactions. A higher number of clients are staying with them and closing than in the past. I don't think anyone ever thought that simply getting that information to the borrower faster might solve that problem or create that benefit. The click sign addition enables a borrower to pick a signature type and literally click to sign the different documents. At the end of the process, the borrower feels they have further confirmed their acceptance of the transaction.
Dominic Iannitti is the president and CEO of DocMagic Inc., Carson, Calif.