Top Mortgage Compliance Trends: Fall 2016 Edition
Here are the regulatory issues you should have down cold as the leaves change this year.
So there are a million, or more, compliance issues that a mortgage lender might dream up in the next compliance committee meeting. (Sensing a trend?) But there's only so much time in any given workweek, so what are some of the things regulators are actually keying in on?
CFPB Warning:
First, I would focus on the four topics that the CFPB warned back in 2015 that it would focus on in 2016 examinations. (Expect other Federal and state regulators to generally follow suit).
LO Compensation Plans
ATR/QM Rule
TRID
Marketing Service Arrangements
A summary of that announcement is available here
Interestingly, we have not seen tough enforcement of these issues just yet. Despite an incredible amount of national attention to these, especially to the fourth, our internal audits still seem to be much tougher on these areas. If your examination starts tomorrow, I would expect a regulator to ask for your policies and procedures, but for that to raise minimal or no concerns. I would not expect a robust loan-level review, for example, of the Ability-to-Repay requirements just yet.
So why do these four still make this list? Well these are still big issues-high potential for consumer harm and high risk of making mistakes with all new regulatory requirements. While your every-day regulatory examination (so far) hasn't been heavy-handed in these areas, we predict they will soon. Of course, when this eventually happens later (whether it's next month or next year) the loans reviewed will be those we're originating now and those procedures we currently have in place.
CFPB Highlights (Summer 2016):
Second, look to the issues that the CFPB announced in its Summer 2016 examination highlights. Available here. Here are the top six (in my book):
Incorrect Calculation of Amount Financed.
RESPA Section 8 Violations (in general, not just MSAs). Make sure your affiliated business disclosures are accurate and you are not requiring borrowers to use services from an affiliate. (These RESPA Section 8 violations are more common than the highly-publicized issues with MSAs).
Failure to Provide FCRA Adverse Action Notices.
Incorrect Disclosure of Interest-Only Loans. Turns out the CFPB has found a good number of instances (enough to make the top 6 list) where the interest- only portion of a loan wasn't disclosed separately, but rather just included in a standard P&I.
Weak Compliance Management System. Remember that your CMS is just generally the process by which you manage compliance risk, not really any different than how the Red Sox have a process for managing the risk of player injuries. How strong is your oversight, your policies/procedures, training, monitoring, independent audit, etc.? The only specific examples given were related to poor monitoring of automated systems, for example "I didn't know the APR was wrong because the LOS automatically calculates that!"
HMDA. The CFPB's summer report noted HMDA "remains a top priority" (huge surprise). Two specific findings included (direct quote):
For example, examiners found where one or more institutions issued a conditional approval subject to the applicants meeting underwriting conditions, and then the applicants withdrew their applications before the institutions made a credit decision, the institutions incorrectly coded the action taken as "Application denied" (Code 3) or "File closed for incompleteness" (Code 5) instead of "Application withdrawn" (Code 4).
In other instances, examiners found that one or more institutions incorrectly coded the action taken as "Application approved but not accepted" (Code 2) instead of "Application denied" (Code 3) after the applicants failed to respond to a conditional approval subject to the applicants meeting underwriting conditions, and did not send the applicants either a written notice of incompleteness or an adverse action notice as required by Regulation B.
Other Exam Trends:
The CFPB isn't the only one out there! Although the FDIC, Federal Reserve, and stage agencies aren't quite as public about their exam trends, pay attention to these other issues that seem to be popular lately:
Force-placed flood insurance. Lenders must force-place flood insurance where insurance becomes inadequate. First, a notice is required. Where the borrower fails to respond in 45 days, the lender can charge the borrower for the force-placed insurance. While this should become less of an issue now that new loans (and some others) are subject to mandatory escrow requirements, there are still issues with refunding borrowers when there is an overlap and identifying that force-placed insurance is needed in the first place.
Pricing discrimination. Nothing on the books actually prohibits allowing loan officers the discretion to price mortgage loans. Nonetheless, regulators are increasingly using statistical tools to show that this practice causes fair lending problems.
Unearned fees. The prohibition against unearned fees is one of the RESPA "twin towers." While this has been around forever (unlike everything else in mortgage compliance, it was not created in 2014), it seems popular this year. A common situation might go like this: In March the lender negotiated a better price for credit reports. Nice negotiation! But no one changed the amount in the LOS, so borrowers continued paying a higher rate for a month. This is an unearned fee in violation of RESPA and something getting a good amount of attention lately.
In Other News:
If you missed this WSJ article from the Spring ... the Big Banks paid $110 billion in fines related to the mortgage crisis - where did that money actually go?
Did you see the recent Ocwen jury settlement of $2.5 million plus? Here's one Miami blog summary
McAfee stock plummeting yesterday - what happened?
Everyone have fun last week in Newport? Maybe make some deals or learn something interesting? You know I heard a point of view that had an impact on me. The statement went that, with all this regulatory talk in the past few years, it's suddenly dawning on us that we've neglected some of our actual obligations. How do we increase processing speed? Where can we get more efficiency out of our LOS? How can we get better market penetration for new products? Are we adequately serving the needs of our community? Well maybe it's time to act like mortgage bankers again. To all those that put the hard work in over the past few years, they can go forward armed with a comfortable understanding of the new rules in place. You know John's been saying forever that, "We can't forget who our customers are. They are borrowers, not the regulators. We're working for people who hope to buy a home and close before school starts, or refinance to lower monthly payments. We might be working with regulators, but not for them."
"Correlation doesn't imply causation, but it does waggle its eyebrows suggestively and gesture furtively while mouthing 'look over there.'"
- Randall Munroe
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