By Sharif Mahdavian
In the wake of the last decade’s mortgage crisis, state and federal regulators looked to technology to help address the need for more comprehensive mortgage loan reviews. Determining whether an individual loan or a lender’s total production complied with applicable laws and regulations was no small feat. Examiners had to sift through piles of documents to extract data points relevant to various rules. Without technology, reviewing 100 percent of a lender’s production was clearly impractical.
The creation of the National Cooperative Agreement for Mortgage Supervision a decade ago was a major step in improving cooperation and coordination among state regulators. Model examination guidelines developed by the cooperative allowed the use of automated technology for examiners to enable comprehensive loan audits, rather than sample-based manual reviews.
Automated Compliance Tools Regulators Are Using
The electronic examination (e-Exam) process is now being used for both single and multi-jurisdictional examinations. Today, the vast majority of jurisdictions have utilized the e-Exam process.
This platform and the e-Exam format provides users with comprehensive reporting far beyond what is available through manual processes. In addition to federal and state high-cost tests, tests for TRID and QM status can be returned virtually instantaneously. Tests are tailored not only to specific lending guidelines, such as those for the government sponsored entities (GSEs), but also for originator license type.
The Compliance Evolution
Recent announcements from the Consumer Financial Protection Bureau (CFPB) suggest “regulation by enforcement” is going away in favor of a more collaborative environment in which there will be formal rulemaking on which financial institutions can rely. And it acknowledges the current state of play: lenders do not want to violate applicable rules, and regulators want to foster compliant lending.
For regulators, the results of e-Exams can uncover systematic difficulties that lenders face and provide guidance as to which regulations need greater clarification. The existing (and hopefully soon to be corrected) TRID “black hole” is a prime example. In the current rule, well-intentioned lenders cannot amend closing disclosures when acting in good faith if the initial closing disclosure was issued too early. Last August, the CFPB proposed an amendment that will allow creditors to reset tolerances by providing a closing disclosure, including any corrected disclosures, within three business days of receiving information sufficient to establish that a reason for revision applies. The CFPB has sought extensive comments on the proposed fix, but, at the time of this writing, a finalized amendment has yet to be issued.
Another prime example is per diem interest regulations. In California, four of the top 10 non-bank lenders were fined more than $13 million in the last year and a half for violating the state’s per diem interest rule. Today, the automated compliance tool can not only allow regulators to test for such violations, but also enables lenders to test for permissible per diem limits and correct any variances before they become violations.
In addition, automated compliance testing with advanced tools can provide information not only on what limits have been exceeded, but what specific fees, disclosures, or delivery timing sequencing have caused a potential violation. This testing translates into lenders being able to make complaint restitution when appropriate and alter processes to avoid future problems.