Cause and Effect of Regulatory Pressures

Regulatory pressures have given the mortgage industry headaches along with a renewed motivation to create more efficient solutions.

Today mortgage banks are using a wide variety of hybrid products that better fit their loan processing needs, says Joe Dombrowski, chief mortgage strategist at Fiserv. Rather than using new software technology, he says, banks that have invested in their core systems in the recent past and are satisfied with their products are now looking to upgrade them.

“Most banks are migrating towards” more specialized servicing systems, especially for their loss mitigation and special servicing needs. And key to any system are the components that ensure a lender or servicer remains compliant with federal and state regulations, he adds, so especially large systems used by larger shops focus on all these services. Meanwhile, many of the asymmetrical mortgage servicing system providers that consisted of separate components have exited the marketplace. There is a continuous movement in that same direction, he says.

A few years ago mortgage software developers were in a rush to develop new tools that often were not compatible with existing systems and programs already in use by banks. Over time new tools were designed to avoid that problem allowing users be more creative with the existing technology.

Jacquie Doty, VP of collateral management at CoreLogic who leads CoreLogic’s efforts to create new strategies and products that help lenders and servicers stay compliant, agrees.

“There’s two main goals that a servicer tries to achieve when they’re selecting software technology. No. 1, they want programs that perform best in class. No. 2, they want plug-and-play. And if it fails in either one of those categories, they won’t use the product.”

Vendors and technology providers have taken note of that. Automation is key as regulation and requirements imposed by the Dodd-Frank Act and specialized agencies such as the CFPB push the mortgage industry to develop new regulatory compliance solutions that facilitate their implementation.

Plus, some regulation may be more effective than others, Dombrowski says. For example, the impact of HARP 2.0 implementation as a loss-mitigation tool that aims to mediate negative equity and prevent strategic default can be significant. In his view HARP 2.0 has the potential to generate nearly three million refinances and can help eliminate a potential default wave. If that happens, more mortgage banks will rely on automated tools.

Regulation keeps generating specific demand. Take Section 14-20 of Dodd-Frank, which requires periodic statements from servicers, he says, it promoted new demand for technology solutions from over 20 Fiserv clients.

Servicers are creating compliance support systems that can readily respond to various audits and compliance related examinations. Yet another challenge is language ambiguity. Regulators who draft and pass regulation often are unclear, so banks “have to make sure all makes sense.”

According to Dombrowski these concerns have mobilized mortgage bankers large and small. They are seeking clarity about the regulation and sending feedback to legislators more than ever before. “More servicers are getting together,” he says, even small companies with 5,000 loans that normally would not have a voice are more active both independently and through the Mortgage Bankers Association, which has seen an increase in the membership rate of small banks.