Lenders Prepare for Increased Regulation
For 2009, one thing is very clear - there is more regulation coming to the mortgage industry and most of it revolves around the idea of watching out for the consumer's best interests.
As a result of the increasingly high numbers of foreclosures and REO, many states have implemented or are pushing legislation for net tangible benefit analysis in order to avoid predatory lending.
I spoke with Adrian Nazari, chief executive officer, Financial Crossing, Palo Alto, Calif., who said if a borrower wants to do a refinance or restructuring then the broker or lender has to identify the benefit of this switch. The other guidance his company has seen is that lenders have to describe not only the benefit of the options presented to the client, but also the relative risk. "Regulators don't want lenders to show these risks and benefits when consumers are going to sign the papers. That is too late. They are specifically saying it should be discussed at the point-of-sale where consumers are making a decision rather than the last minute when the consumer is ready to sign the papers and you show them all of these disclosures."
Under Financial Crossing's umbrella of managing liability, lenders can do a suitability analysis to make sure the client can afford the risk and the loan itself going forward. "You can't rely on the individual experience of the people who are providing these loans. The analysis requires looking at hard facts, the numbers, and being able to evaluate these options going forward. That's where technology comes into play," said Mr. Nazari.
"Lenders have to make sure they have controls in place. That's where you can't rely on verbal communication to document and show what was said. Technology captures the discussions and communications in writing in the form of plans generated," he said.
"They are archived and then discussed. It clearly shows benefits, risks, suitability and explanation of the programs. Anyone can go back to look at the documents and make sure the right advice was given."
More and more lenders are telling me that they need to be proactive in order to successfully navigate the regulatory environment in 2009. Companies are using the words "preparation" and "prevention" in order to describe their desire to be in compliance with the myriad of legislation out there rather than later dealing with repercussions of risky behavior.
Courtney Guyton McBurney, a partner with Alston & Bird LLP, Atlanta, says regulators have a real interest looking for manipulation of reporting and to audit foreclosures and defaults. She stresses the importance of maintaining a reliable code of conduct. "Fix internal processes and procedures and reporting problems."
Going forward, if there is a problem, what corrective measures are being taken to fit it? This includes disciplinary actions. Lenders must make sure due diligence is done. All of this affects a company's credibility.
2009 will most likely see a mix of complicated cases. Ordinary people on a jury will be listening to disputes over HUD regulations and criminal liability. There will also be clear-cut cases. Regulators are looking at systematic issues, bad decisions on loan after loan on a companywide basis. They are looking for concrete violations of the law.
Quite often multiple disclosures are copied several times in a loan file. That doesn't bode well either if a company has to hand over a file to a regulator or auditor that is in disarray. Companies like Fairway Independent Mortgage say it is especially important for the loan file to represent all aspects of the actual transaction. The company is investing to upgrade its managing systems to better capture and sort documents as well as store and retrieve them since more and more regulators are asking for documents in electronic form.