Ever since Dodd-Frank was passed in 2010, many lenders have spent the past two and a half years with a proverbial cloud over their head. The cloud is built from the uncertainty of just how the major regulatory changes due in 2013 will play out and be enforced.
The litany of rule changes coming this year can be overwhelming: RESPA, QM, LO comp and HOEPA–the list goes on and on. The result of this uncertainty is inaction. Lenders do not want to innovate, adapt new tools or build new products for the consumer until they understand the rules of the game.
The Consumer Financial Protection Bureau (CFPB) has until January 21, 2013 to announce six of the most prominent regulation changes. Lenders are naturally uncertain how they will be implemented and how their businesses will be impacted.
But in that uncertainty, too many lenders are taking the wrong approach. The common approach is to start taking each rule individually and trying to figure out the details and patch up software systems, all without looking at the larger picture.
In order for lenders to be more confident among regulated uncertainty, they must instead develop and follow a consistent process that can absorb new regulations whenever they are announced that will serve as a roadmap for implementing any new regulation.
A smooth transition from announcement to implementation is achievable, with the adoption of a process that cohesively loops in lenders’ procedures, systems and third party vendors. The three steps to building a strong compliance process are to proactively work with your vendors, identify priorities for quality control and embrace continual refinement.
Third party vendors can be an important first line of defense in building a compliance process. A lender needs to understand how their vendors monitor and implement new compliance changes. Constant communication between a lender and vendors ensures regulation implementation will ultimately make life for a lender easier.
The other key to vendor communication is determining the level of compliance interconnectivity between loan origination software, compliance and document systems. All systems must operate correctly and be updated regularly with the newest loan requirements. The best processes ensure that the compliance software, document software and LOS are fully integrated, eliminating the need for multiple field updates and workarounds when new rules are implemented.
Many of the upcoming regulations are focused on loan quality to protect the consumer. For example, the proposed RESPA/TILA disclosure rules are designed to prevent “surprises” by providing consumers with transparent loan disclosures to help them understand the terms and costs of their loans.
When building a compliance process, lenders must make consistent choices on managing regulatory risk and how those risk management policies will be integrated within the regulatory compliance framework.
Lenders are also required to disclose additional items of information and provide more detailed payment information, for future and past payment activity. Borrowers must receive a disclosure 210 to 240 days before a rate change will take place on their mortgage. This disclosure will be accompanied by an explanation as to what the new interest rate and payment is, and how it was determined. These proposed practices are designed to open the lines of communication between the lender and borrower, making loan servicing a smooth, communicable process.
Compliance standards frequently change, leaving lenders uncertain if they are compliant with the newest changes. The key to facing uncertainty is to continually review, refine and update compliance policies and processes. Lenders must establish procedures to educate staff on new rules, determine legal interpretations and review new proposals.
Leveraging relationships with service providers can also make the conversion from one compliance standard to the next a seamless common occurrence. Service providers can provide the expertise needed to understand upcoming legislation. Compliance assurance from a document provider will ease the lender’s mind knowing that the software they operate on is up-to-date with regulatory deadlines. Routine checks on disclosure forms will ensure compliance and eliminate surprises. A lender should establish a compliance audit at various times of the year, based on their schedule, to monitor loan issues and address software issues with their service providers.
One of the most ominous rules lenders will have to implement in the coming year is the new disclosure form from combining disclosures currently required under RESPA and the Truth in Lending Act. If implemented correctly, the consolidation of these forms may provide lenders with a more efficient origination process, eliminating the redundancy of having two disclosure forms with overlapping and conflicting requirements.
A lender who has a strong compliance management process in place would already know how their software vendors will manage the RESPA/TILA changes. Ideally, vendors will build in new fields to the documentation system and clearly communicate the timelines to meet new standards to ensure the automation, distribution process, digital archiving, and reporting a thorough and effective practice.
With a clear training process in place, lenders can push out the information and workflow changes to loan officers, and the existing quality control guidelines generate the business rules that will adapt processes to meet the requirements of generating, sending and collecting signed disclosures.
2013 will be a year of unavoidable change. Take a little time now to implement a strong compliance management change process for regulatory updates and quit tackling each new rule as a separate, stand-alone problem.