For years, the main thrust of compliance has been the establishment and maintenance of proper policies and procedures. Under the new enforcement schemes of the CFPB, reliance on policies and procedures is not sufficient to achieve the level of compliance expected or required by regulators.
Now, regulators want to see more than the fact that a company has written policies and procedures in place. Indeed, regulators want to ensure that lending personnel have been trained and understand the policies and procedures. The rationale is simple: If the company has the proper rules in place but no one understands or follows them, the policies become nothing more than window dressing. Regulators are more than ever concerned about not simply making a showing of compliance, but demonstrating that every facet of a lenders production force, understands compliance rules and recognizes these rules are important.
Along these lines, it is imperative that once a company establishes proper policies and procedures, that it train and test employees’ knowledge of such policies. The CFPB and other regulators have specifically advised lenders that they intend to question lending personnel about knowledge of and adherence to company policies and procedures. Moreover, lenders are expected to consider knowledge of and adherence to compliance standards with regard to pay, promotion, and discipline. From the lenders’ perspective, such training is essential as it allows a lender to prevent compliance problems before they rise to the level of borrower complaints or liability. Moreover, a proactive approach is more effective since only a small percentage of files can be audited to discover deficiencies after the fact.Thus, if 10% of all closed files are audited, it means 90% of the potential mistakes or deficiencies are never discovered. While auditing is an important part of ever compliance plan, standing alone it is not sufficient to protect a company under today’s more rigorous standards.
Another important consideration is that not only regulators–but purchasers of loans on the secondary market–realize that compliance deficiencies can lead to foreclosure defenses and rescission rights. A bad audit result through a third party origination can have profound impact on the saleability of loans and thus investors are increasingly concerned about compliance as much as regulators are concerned. As such, compliance is becoming more than an issue needed to keep regulators off your back. It is becoming an issue very much tied to the continued profitability and viability of a lending institution.