Do you need a Compliance Management System?
Today we'd like to start a discussion on compliance management systems--best practice? Unnecessary? Good for business? And also a quick look into QM's Appendix Q and solving gaps by looking to Agency or GSE guidelines.
Are you regulated by the CFPB? Then the easy answer is yes, you absolutely need a compliance management system (CMS). But other regulators--such as the FDIC--have been encouraging this practice for years. What does it take to set up a CMS? More importantly, what does it take to monitor a CMS?
The key words to remember are "detailed" and "monitoring." Most institutions will profess to "being compliant" and "having a QC focus" but the need for a very detailed CMS is a real-life concern. When the regulators come-a-knocking and ask for your compliance plan, that won't be a problem for many organizations. But what about when the regulators ask for detailed evidence of how you are ensuring that plan is being followed (i.e. your CMS!)? We're not sure that the same number of organizations will be as comfortable here. Your CMS should do the following--
- Explain how your compliance plan is implemented and what steps have been taken to ensure it is carried out correctly
- Explain any problems or concerns that have been identified
- Detail how any such findings have been addressed--are there changes in progress? Additional training for certain employees? Reporting?
A CMS will mitigate the risks of regulatory compliance by organizing and establishing policies, marrying policies to procedures, assigning accountability, identifying issues that arise, and detailing the steps necessary for corrective action.
Why have a CMS?
First, this is good for regulatory compliance reasons. The regulators will look favorably on your institution for taking this step and it will probably be mandatory in the future anyway.
Second, from a business perspective, a good CMS will alleviate regulatory compliance concerns and let you get back to the business of increasing profits. There is an undeniable trend upwards in the complexity and significance of regulatory compliance in lending. If you run lending, how much time are you spending on compliance, as opposed to actually making loans? Set up a CMS and assign people to handle it and report regularly to you. Treat this as any other cost and work to increase efficiency and minimize cost. You don't try to do everything else yourself, why try to tackle all these compliance issues on an ad hoc basis?
Note on QM's Appendix Q
A quick note on QM's Appendix Q, as underwriters have been slogging through this since January 10, and our phones have been ringing. Appendix Q has been criticized as too subjective and impossible to interpret. For example, how do you determine when income "varies significantly" year-to- year (and therefore can't be used to calculate DTI)? This vagueness undermines the certainty presumably tied to QM safe harbor status. Well-just don't forget about Agency and GSE guidelines ... they might be a helpful resource in applying Appendix Q. Where Appendix Q is silent on an issue, you have two choices: (1) take the safe road and exclude the income or include the debt, or (2) rely on GSE or Agency (HUD, VA, etc.) guidance to resolve the ambiguity to the extent it is not in conflict with Appendix Q.
For example, if you have a borrower with income earned overseas, Appendix Q is silent on the documentation/verification requirements and you should resort to Agency or GSE guidance on the additional steps necessary.
Anyone else having interpretation problems with Appendix Q? Please share them with us! So far we've seen issues such as a borrower with Flood insurance expected to increase dramatically, but the increase was currently delayed, a borrower who will be obligated by divorce decree to pay for school tuition for three children, and a borrower expecting to be divorced in the near future with unknown increases in alimony, child support, and other expenses. Remember--Appendix Q is supposed to be a strict regulation ... not a set of flexible underwriting standards. Just because the ATR rule requires you to consider a future debt/change in circumstances, does not necessarily mean it will affect DTI for QM purposes under Appendix Q.
Busy? Stressed? Probably not so much as your co-worker or friend raising four kids and juggling three jobs. When times get tough, we tend to focus more heavily on our own problems--when the opposite approach should be taken. John Spillane coaches us here at SCA to focus on helping and creating value for others, especially when times get tough. According to John, if you forget about yourself and focus on others, you won't need to worry about your own situation for much longer.
After all, "[t]he only way to have a friend is to be one."
- Ralph Waldo Emerson.
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful - please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**