"Some vendors are more proactive than others regarding new regulations, and the ones that aren't are losing customers," says John Schulte, senior vice president and chief information officer at Mercantile Bank in Michigan.
The Consumer Financial Protection Bureau's qualified mortgage rules mandate, among other things, a limit on points and fees of 3% of the total loan amount and a maximum 43% debt-to-income ratio.
Regulators have suggested they will be vigilant about enforcing the new rules. At an American Bankers Association conference held this week, CFPB Director Richard Cordray said mortgage vendors are expected to be compliance ready.
Once lenders tweak their underwriting procedures to meet the rules' standards or take on more risk, mortgage origination software, which is often customized, can help offset some of the burden of defending their loan decisions.
The American Bankers Association published a summer survey suggesting software updates yet to come will make it harder for lenders to meet the compliance deadline, and arguably restrict lending.
"It's a lot to do in a short timeframe, especially if banks are receiving the systems in late October and November," says Robert Davis, executive vice president of mortgage markets, financial management and public policy at ABA. "Most banks say they need a minimum of two to three months to test and train the systems."
Even as vendors release updated software, customers may not be able to install it right away. "Scheduling the latest release is a challenge in and of itself," says Davis, adding the upgrades will slam up against other yearend projects required of banks.
To be sure, vendors had good reason to wait until autumn to code. Regulators kept whipping around the rules, with the latest update hitting in September. "Vendors have been understandably reluctant to program in areas that need reprogramming," Davis says. Reticence also lies in the somewhat ambiguous nuances of the rules, such as those regarding fees.
"I don't think lenders will hear what they want to hear," says Keith Kemph, senior consultant at CC Pace Systems Inc. "They are looking for a silver bullet and vendors are frustrated. There's been a moving target that no one can define."
Plus, vendors must receive lender-dictated business rules in order to modify customized solutions, points out Amanda Jolly, industry solutions architect for financial services at mortgage vendor Kofax.
"The tech piece will be unique to each one," says Jolly. "Everything a vendor does is specified by the client. It comes down to the bank developing policies and procedures and then coordinating with the vendors."
Generally, software vendors can ease compliance by making their base products include an intuitive user experience for managing fees and redisclosures; the ability to capture and retain required documentation to prove lenders are making good-faith efforts to underwrite borrowers who can repay their mortgage loans; and pushing automated alerts of required user activities based on dates and timelines.
"There are a couple of pieces delivered but it's not all done yet," says Michael Croal, senior director at Cornerstone Advisors.
Like any system enhancement, updating mortgage software takes time: Vendors must recode software to meet the lenders' needs, test it, debug and roll out the updated versions. Plus, QM is only one set of mortgage-related rules hitting in January.
Ellie Mae, for one, is readying a November Encompass360 software update that includes tools to test QM calculations, alerts that identify conflicts between loan data and the new standards, and features to let underwriters demonstrate they have considered, verified and documented a consumer's employment, income, assets and obligations.
To help comply with new rules, City Bank Texas is in the midst of converting to Ellie Mae Encompass360, says Tony McGriff, project management professional and technical solutions engineer at the Lubbock-based bank. The implementation lets the bank set up a test environment that integrates systems, vendors and service providers within its production environment.
"This level of integration, both in-house and with third parties, will afford us the opportunity to test our loan origination system on a much deeper level," says McGriff. "We feel that the key to successfully implementing change is preparation. When large compliance or regulatory changes are made, we now have the best opportunity to test and resolve any issues given our extensive test environment architecture."
Ellie Mae isn't the only one cooking up updates. Many software companies are working on support for the QM rules.
Interthinx started to plan for its QM software surgery in January. "We knew it was a looming crisis for the lending community," says Roger Fendelman, vice president of compliance of Interthinx, a Verisk Analytics subsidiary.
The software company, which planned to launch its QM testing at least 90 days before enforcement date, met its goal on Oct 1. "It hasn't been easy," says Fendelman. "There were too many loose ends and undefined caveats that prohibited us. It's been one of the biggest changes in years. My educated guess is we are not done rewriting."
Among the changes made to the software was added flexibility. "We expanded the universe of data and made it more flexible [to determine loan fees]," says Fendelman. "It sounds simple but required a bunch of code work."
And even then, the product isn't a compliance linchpin.
"There is a lot of confusion around nuanced issues," says Fendelman. To that end, he encourages lenders nationwide to connect with their vendors to discuss software upgrades.
Some vendors are driving conversations with their bank clients. Mortgage Flex Systems, a boutique provider of LOS platforms, started a workgroup of about eight customers to hammer out general revisions months ago.
"We broke down regulation requirements into function sets," says Craig Bechtle, chief operating officer at MortgageFlex.
The vendor has been modifying its software since April, with the bulk of the time spent on making business decisions, rather than recoding. General modifications include adding in new tests and reordering sequencing. The debt-to-income ratio, for example, has renewed importance, which is why the system now asks for income at registration. "There are a lot of new calculations. We have to do to determine whether the loan falls within the guidelines of QM," says Bechtle.
When MortgageFlex customers receive the software updates in November (within two weeks of general release and including customization rollouts), they will get access to instructional videos. "Our intent is to let customers test and lay their hands on the codes so they understand what it looks like," he says.
The updated user experience will come with some visual changes, but many updates will go undetected. "A lot of what we did is in the background," Bechtle says.
The updates are all part of a larger goal of doing away with manual processes and investing in digitally documenting loans to gain better efficiencies and accuracy.
"As a provider of technology, customers look at us as an engine to [help] enforce compliance," Bechtle says. "We are the mechanism to allow lenders to … produce high quality loans in an efficient manner. Underwriters who are pulling out calculators and yellow pads and running their numbers...it's easy to see how to make a mistake when doing it."
Still, the origination process will likely continue to be very data intensive as the rules require lenders to verify, confirm and prove borrowers can pay, which could lead to errors if keyed in manually. "Despite advances in technology, this is still a very manual process in particular when inputting data from borrower documents and transferring data from one system to another," says Jolly.
A possible silver lining: the newer regulations are pressuring lenders, servicers and their vendors on a goal they have been working on for years: paperless mortgages that offer an audit trail for examiners. The shift has required siloed systems like imaging and online applications to come under a single offering.
"It's all about record keeping," says Cornerstone's Croal. "I think the regulatory environment is forcing people away from fields and manual checklists and Excel spreadsheets."