By Melanie Feliciano
TODAY’S MORTGAGE MARKET has become so incredibly compliance-intensive that it’s on top of every originator’s list to ensure that they are adhering to the myriad and constantly changing statutory and regulatory requirements.
With the increase in statutory and regulatory changes, mortgages are subject to enhanced scrutiny from federal and state examiners and investors. This enhanced scrutiny can lead to more risk for the lender or broker in that noncompliance can result in the imposition of penalties and fines, borrower refunds, and/or the required repurchase of the loan from the investor. If any of these potential consequences were to become a reality, a lender or broker’s profit margin would be further diminished.
One way that lenders and brokers can manage the risk of noncompliance is to ensure that mortgage documents used during the origination process are compliant with applicable federal and state laws. Partnering with a loan document preparation company that also provides a compliance function is one way to achieve this objective. Selecting the right document preparation provider can effectively manage your risk while simultaneously cutting costs and creating efficiencies, but there are many considerations to take into account when selecting a provider.
To ensure a doc prep vendor provides compliant documents in its loan packages and has the ability to create and update documents quickly and on or in advance of the effective date, a well-staffed and experienced team of in-house lawyers, senior compliance specialists and support staff is essential.
Your vendor must have competent staff that can promptly analyze and synthesize legislative bills and adopted regulations and make required changes to its forms and documents. You should also consider the accessibility you have to members of the compliance department in case you have questions. Can you email them? Can you pick up the phone and speak with someone about a compliance change? Do the staff members seem competent? Are the responses you receive reliable and accurate? Check references to validate vendor claims and ask around about their reputation. Do they have a proven track record? Don’t just take a vendor’s word for it.
In addition to a competent compliance staff, it is equally important that a vendor’s customer service department is staffed with individuals who are professional, can understand and identify issues, effectively communicate how the provider’s software works to ensure accurate data entry and deliver the required task or service quickly.
Ask yourself whether you have confidence in the customer service specialist who is attending to your
needs. Is their answer comprehensive and accurate? Does he/she know when to escalate an issue to the compliance department or elsewhere? Are they helping move your workflow?
SAS 70-Type II Certified
A good document preparation provider will have obtained a SAS 70-Type II certification. Customers
should have the assurance that the customers’ and its borrowers’ sensitive information will be secure due to operational controls implemented by the provider to meet the rigorous regulations associated with the Sarbanes-Oxley Act.
Reps and Warrants, E&O
In case noncompliant documents are inadvertently provided by the document preparation provider, are
there effective representations and warranties and appropriate remedies in the event of a breach of those reps and warrants to mitigate the lender or broker’s potential liability? And, in case the lender or broker’s loss is significant, does the document preparation provider have a robust errors and omissions policy in place to compensate for noncompliant documents or a data security breach?
Predatory Lending and Compliance Tests
Not only should a good document preparation vendor be able to provide compliant loan documentation, its software should be equipped with robust predatory lending tests and compliance audits to ensure that the loan complies with other laws that are not related to mortgage documentation. For example, a document preparation provider should be able to audit loan data to determine, whether the loan passes the Real Estate Settlement Procedures Act tolerances.
Other checks include whether the loan is a “Section 32,” loan; whether it passes the Fannie Mae Points and Fees Test; whether the loan is a North Carolina rate spread loan and whether redisclosure is required, because the loan’s APR exceeds Mortgage Disclosure Improvement Act tolerance.
A good audit system will automatically analyze your loan data, itemize all of the applicable audits, and provide a detailed list of warning and fatal error messages in an easy-to-read report.
In addition, the audit system should take you directly to the relevant data in the worksheet to enable you to correct any warnings or fatal errors. (Fatal errors halt the processing of a loan package until an error is corrected.) Finally, a good auditing system will allow you to configure the document preparation provider’s system to add your own warnings and audits that are customized to your business practices.
When possible, document preparation providers should also have existing integrations with multiple major loan origination systems. In the absence of seamless integration, data reentry creates the potential for errors, causing a risk of noncompliance.
E-Disclosure and E-Signing
Another area that you may want to consider in selecting a document preparation provider is whether that vendor has the capability of delivering loan packages, including initial disclosures and redisclosures, electronically and whether the borrower has the ability to affix his/her e-signature to the documents, both in compliance with the ESIGN Act and the Uniform Electronic Transactions Act.
And, where wet signatures are required by policy, law or business practice, giving the borrower the ability to print, sign and return that document and include it automatically in the loan package is an necessary function.
Finally, if a borrower does not consent to the electronic delivery of loan documents within a certain time frame, one should inquire whether the vendor has in-house fulfillment services to ensure that initial disclosuresand redisclosures are mailed in compliance with RESPA and MDIA.
Note that some document preparation providers allow the lender or broker to upload their own custom documents and disclosures that are extraneous to the vendor’s inventory of forms. If this is of interest to you, you should also inquire about this functionality.
Enabling electronic delivery and electronic signing delivers efficiencies and time savings. The use of this functionality shortens the time frames required under RESPA and the MDIA, enabling the lender to impose other charges besides a credit report fee more quickly and facilitating the parties to get to the closing table sooner.
You should also determine whether robust reports to track electronic delivery, RESPA compliance, in-house fulfillment and electronic signatures are part of the document preparation provider’s repertoire of software features.
Ensuring that your mortgage documentation provider satisfies this critical criteria will manage your risk to non-compliant loan documentation and the risks associated with a failure to comply with applicable laws.
Melanie Feliciano is the chief legal officer of Carson, Calif.-based DocMagic.