By Tory Barringer
Finding the right technology partner for legislative compliance can help remedy any compliance headache.
To a person with the right set of tools, a problem is just an opportunity in disguise. That’s why it’s no surprise—as more and more guidelines come down from federal regulatory agencies—that mortgage servicers, lenders, and other professionals are expanding their toolboxes by turning to technology providers for their compliance needs. As January 10—the effective date for many of the Consumer Financial Protection Bureau’s (CFPB) new rules—approaches, mortgage and tech firms alike find themselves forced to adapt or fall by the wayside.
Which Issues Are Most Important?
If you asked that question to 10 different technology providers, you’d likely get 10 different answers, all depending on which services each offers. The common theme is the sheer amount of changes on the horizon—ranging from qualified mortgage (QM) guidelines to servicing criteria to loan officer compensation—and the confusion they bring.
“[Clients] know there are a lot of changes, [and] they know those changes are complex and interdependent. And they express concern about not feeling like they have a full understanding of everything that’s in all of those rules and concern that they missed something somehow or don’t understand something fully,” said Laurie Spira, chief compliance officer at document and compliance firm DocMagic. “it’s more of a general concern: ‘In addition to these 83 things I’ve asked you about, what’s out there that I don’ know about?”
At the root of these issues is the CFPB, the agency established by Dodd-Frank and championed by advocates as a “cop on the beat” for the consumer financial markets. The bureau has been something of a mixed blessing (though some may argue violently against the word blessing as a descriptor)—while it’s less confusing to have a single source behind most of today’s rulemaking, it’s also made it possible for government to issue sweeping changes, as we’ve seen so far this year.
“In the past, there hadn’t been a whole lot of changes on the federal side,” explained Richard Triplett, VP and director of compliance for AllRegs, an information provider and reference library for the mortgage industry. “So you didn’t have every rule that applies to mortgage lending being changed at the same time.”
Naturally, the “one size fits all” approach throws a wrench into the works of compliance professionals, who in the past have put most of their focus on regulations at the state level. For institutions already struggling to juggle varying stat requirements, a new set of federal rules may come as another headache.
“The big problem is you’ve got the federal guidelines and state guidelines not lining up. The federal supersedes state, and you’re trying to adapt to both, and they’re conflicting with each other”, said Robyn Arreola, chief business strategist for the Walz Group, a firm specializing in communication between servicers and borrowers.
For most servicers, Arreloa said, just staying in the loop is the biggest hurdle of all.“Servicers are acquiring loans all the time,” she said. “There are so many things that are required to electronically register, and a lot of times when servicers are acquiring loans they may not have the right information.”
And that’s just the beginning. As of the time of this writing, the housing finance industry is still anxiously awaiting the release of further clarifications regarding QM and other rules as well as amendments to and integration of disclosure rules in the Real Estate Settlement Procedures Act (RESPA) and the Truth in the Lending Act (TILA).
Weighing most heavily on everyone’s mind, however, is the imminent release of of finalized rule regarding qualified residential mortgages (QRM)—particularly given the overly restrictive nature of the initial proposal in 2011.
“I think the industry in general is really hoping against hope that it’s going to be very different than what was proposed,” Triplet said.
Some—such as Spira—believe the heavy lifting may already be over, however.
“I’m just an optimist, so I hope that the QRM rule will be reasonably well-aligned with the QM rul so that the changes in the way we’re doing business to comply with QM will get us part of the way or maybe even most of the way to complying with QRM,” she remarked.
Finally, there’s the issue of third-party compliance as the CFPB pushes for lenders to become more involved in the entire process.
“Something that is definitely on peoples’ minds in 2013 is about how a lender monitors the performance of its vendors. I think that they may have been—for some entities at some point in the past—the notion that if you had a third party doing it, it was sort of a ‘set and forget,’” Spira said. “I think that this is a great opportunity in our industry for creditors to have a good, healthy conversation with their third parties about how they partner… and identify if there are any gaps in understanding.”
Compliance Begins and Ends with the User
For all the conveniences technology companies can provide, it’s important to remember there’s no full-on replacement for an educated, vigilant team of employees.
“The downside is those programs are only as good as the people who develop them and the people who monitor them,” said Andrea Mitchell, a partner at legal advisory firm BuckleySandler.
In the last several years, the firm has had to handle crises from companies that relied too much on their technology and found later on there was some systematic issue gumming up the works.
According to Mitchell, many of those problems go undiscovered until a customer complaint, putting that company on the radar for regulators.
“Because they hadn’t been doing their audits and oversight, their monitoring, it went undetected for months or even years,” she said. “Now you have a significant and pervasive compliance issue that is not only resulting in substantive violations by the institutions, but it is a very negative commentary on that institutions’ compliance program. It’s not like the infomercial with the oven where you can set it and forget it.”
Spira echoed that warning with her own simple motto: “Trust, but verify”—a lesson she learned during her years working as a lender.
“Evaluating [our technology] periodically gave us an opportunity to address issues as they arose instead of after they were pointed out to us by an examiner or an investor. That was an upfront investment in compliance instead of a back end investment… after you found out you’ve had an issue,” she said.
Another problem that comes up sometimes is when lenders and servicers simply ignore certain software features—whether it’s by accident or deliberate. In that case, it would be the bank bringing itself out of compliance.
“A lot of these programs that they’re offering have features you can turn on or off,” Mitchell explained. “A vendor can make something as compliant as it needs to be with every provision of the law, but if the bank comes in behind them and some rogue businessperson says, ‘I don’t like this, it’s slowing my process,’ and turns off a key feature that can be customized, the bank has no recourse against the vendor.”
Turning Adversity into Opportunity
While lenders and servicers are faced with the arduous task of moving forward and trying to grow in a time marked by uncertainty, compliance technology companies have a far more complicated job: They must peer into the fog, anticipate the pitfalls, and design the tools their clients will need not only to survive, but thrive.
Keeping that in mind, what opportunities does the near future hold for these technology providers?
“The first thing that pops into my head from a technology standpoint is, ‘Wow, where do you begin?’” Triplet said. “From a compliance perspective, there’s no doubt that there’s going to have to be additional tracking systems. Compliance departments are not typically used to having to track education, having to track licensing, [or] having to track the level of consumer complaints. There’s a amount of opportunity there for tracking compliance.”
Going by Spira’s description, DocMagic’s mission in the days to come is a little more complicated:
“Our opportunity is to look at all the changes from a high level and figure out how we can assist our customers in streamlining their workflow to hit as many compliance points as possible as efficiently as possible,” she explained.
A tall order to be sure—but as always, it’s a matter of problems versus possibilities.
“The great fun of working for a technology company is that the more complex the problem is, for a technologist, the more fun it is to solve.
As featured by The M Report, September 2013
By Tory Barringer