New York-based attorney Michael Barone said originators today have to worry about a lot more than they had to in the past.
In the not-so-distant past, it was OK for the originator just to make sure the file was done correctly. If the regulator looked at the file, all they were concerned about is was the information accurate.
“Now having accurate files is only half of the picture,” he said.
“The people who are left in the lending arena are being forced to pay for the crimes of those who are no longer in the industry. The people who did it right and survived are now forced to comply with all of this additional regulation because of the guys who got thrown out of the industry.”
Lenders have to have procedures in place and they have to document that those procedures were followed. Originators need to have policies on Real Estate Settlement Procedures Act compliance, appraiser independence rule compliance, SAFE Act, fair lending, advertising, even anti-money laundering, among others.
Even for a one-person shop, there are some 20 different policies they would have to account for, Barone said, and that is an expense because they typically purchase them to ensure they meet the rules.
In the pre-bust days, regulators were only concerned that the required policies existed. Now examiners are checking to make sure the originator is actually following the policies. If a shop has employees, regulators want to see that those employees have been trained on those policies and that the company is doing testing to make sure the policies are being followed.
If there is a problem, regulators want to see that the person has been notified of the issue and retrained (and that it has been documenting the company did this). Regulators will punish you for a mistake, he said. What they will get originators on is not taking the steps to ensure that the mistake will not happen again.
The end result is that it costs originators time and money, Barone said. But on the other hand, many smaller originators do not have the funds to pay for procedures from an outside vendor or hiring someone to do testing to make sure they are in compliance.
And it is not just the regulators that are asking for these policies. Mortgage lenders who purchase loans from other originators, either through the correspondent or wholesale channels, are also asking the companies they buy from to show them their procedures.
This is a result of the Consumer Financial Protection Bureau’s statement that it would hold lenders responsible for the acts of their third party vendors. So Barone said the lenders are asking for those policies and if the originator does not come up without something, they can be dropped from the approved list.
As a result, needing to deal with compliance functions is impacting the smaller originators ability to make money.
Advertising compliance is an easy one for regulators to spot because the ads can be seen in newspapers or appear on television or radio, he notes. Even now, with the Internet and social media, the regulators are looking at those media for compliance with advertising rules as well.
And many mortgage originators don’t understand that postings on things like Facebook or LinkedIn could contain violations of mortgage advertising laws. “They don’t think they are creating an advertisement on Facebook or Twitter, but anything that is promoting residential financing in any way [can be considered] an advertisement,” Barone warned.
Annemaria Allen, president and CEO of The Compliance Group, added that one of the hot buttons for CFPB is having a compliance management system in place. It is something that should have been everybody’s shop all along. If a company is not big enough to have a compliance officer in place or for backup and support, it can be outsourced.
Originators must have “an effective platform that they can roll out into the different departments” to make sure all the rules and regulations are adhered to and followed, she said.
Like Barone, she said policies and procedures should be written and there are internal audits and checks to make sure those are being followed. Those should not be collecting dust on the shelf, but they have to be updated as needed.
“Training is critical. Regulators are making sure that the different departments are being trained,” Allen said, adding that everybody in the shop, not just the compliance officer, needs to understand the regulations.
Mortgage company executives, especially for the small and midsized shop, have realized they have to embrace compliance more than they ever thought they had to. On top of which, she warned that the smaller shops now have to budget for the compliance function, because if this area is not paid attention to, “you’re not going to be in business for long.”
But it does drive up the cost to originate a loan, and that usually gets passed on to the consumer, Allen said.
She said one of the things her company runs into all the time is that originators do not realize what policies they need to have in their shops in the first place. In the smaller organizations, where the compliance role falls typically on the owner, the only way they can stay on top is by going to compliance meetings put on by industry organizations or by attending webinars.
While they might not have to learn “all the nitty-gritty details, just being informed enough,” Allen said. These people need to know enough where they can outsource for items which might pose the highest risk, or if they can possibly afford having a part-time compliance officer on staff.
Some of the companies The Compliance Group works with are able to have on staff a part-time compliance liaison. The liaison reaches out to Allen’s firm and receives guidance as needed.
“They are taking the steps to build their organizations with compliance in mind,” she said.
For some executives that means a shift in mentality when it comes to growing from sales to compliance, but Allen noted “if you don’t have sales, you don’t have compliance.” So it does become a bit of a Catch-22, she continued.
Still, those small to midsized companies don’t have a problem spending the money on marketing, “but they also have to keep compliance in the forefront, too,” she said. If they don’t have any compliance function in place, they need to consider taking some of their advertising or marketing budget and reallocate it towards the compliance and quality control functions.