MReport October 2020

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M R EP O RT | 37 QUICK TAKE When It Comes to Compliance, Tech Isn't Always Enough The potential for a new wave of regulatory scrutiny should have mortgage firms double-checking their compliance strategies. By Jim Paolino T he collective attention of the mortgage industry has been focused on sales and revenue for the better part of the last three years. Fresh off a period of heightened regula- tory and enforcement activity, most lenders were overjoyed to see historic refinance volume replacing compliance in the trade headlines. However, as the economic impact of the lingering COVID- 19 pandemic continues to spawn uncertainty for the future—even as origination volume continues to march forward—we have to consider that compliance may find its way back into board room dis- cussions sooner rather than later. The recent forbearance surge alone opens the door to the possibility of increased foreclosure activity in the not-too-distant future, and as we have learned, default spikes always lead to greater regulatory scrutiny. Simultaneously, the mortgage industry is going through a bit of a technology revolution. While the vague concept of "eMortgage" has been around for a while, many firms took the plunge in recent years, investing quite a bit more than in the past on new solutions. However, it appears that much of that investment went toward sales or consumer-focused technologies. We're starting to see new interest in production- focused tech now, including new forms of Artificial Intelligence (AI), but compliance tech is all but absent from the general conversation. That tech is out there—we're just not talking about it much in the C-suite. One reason for this is that most technological solutions available in our industry right now are business-rules dominant. That works well for loan origination, for example, but it leaves gaps when it comes to something like monitoring the day-to-day interactions of loan officers with borrowers for potential fair lend- ing or similar violations. Even the earliest iterations of AI in our industry are still fairly deaf to the nuances of human speech and conversation. In short, when it comes to keeping up or upgrading their compliance and QA programs, mortgage lenders and related firms need to find ways to supplement their technologies with common- sense approaches. The first and most obvious layer combines the human touch with technology. While this might seem coun- terintuitive, the fact is that most technology suits a very specific purpose or role. Compliance and quality control, however, is not a single-faceted matter. Rules and regulations, as well as how they are enforced, are ever-changing. Plus, the rules can vary from state to state—or even city to city. So, if you are using technology to protect yourself from expensive violations, be sure there's an adequate human factor included. This is, and will always be, a transaction that requires a human touch. That could be as simple as ensuring you have a full-time and qualified compliance executive; trained staff supple- menting your data and analytics or "boots on the ground" at the point where infractions are most likely to occur, such as during the consumer/lender interaction. A second common sense ap- proach to ensuring your firm is ready for any new wave of increased regulatory scrutiny is a simple matter of Business 101. Whatever your compliance or QA program looks like, be sure it's monitored and implemented in layers. It may be ironic that technology is often employed to reduce redundancy, but the op- portunity for regulatory violations to slip through the safety net is decreased when you layer your oversight mechanisms. Whether you're using tech or people (or a combination of both), it can't hurt to have, for example, a third party review your protocols or even survey your compliance program in action from time to time. Our third common sense approach to fine-tuning your compliance program is no rein- vention of the wheel: continuous improvement. New laws or new enforcement directors come onto the scene all the time, changing the compliance landscape and potentially making our existing compliance programs obsolete. By having a full-time compliance (or QA) officer whose job descrip- tion includes staying current on threats to your compliance, you have a great start on having a proactive program. Continuous and updated training for any team members with the potential to commit infractions is another must. And, again, consider utiliz- ing a third party from time to time to provide a fresh set of eyes to your program. Finally, keep in mind that com- pliance, while never a sexy topic, can be a real reputation builder and a boon to sales, especially for direct lenders. Consumers know which banks and lenders have been in the news for major violations and it can impact their choice. It's always important to have an effective, updated, and proactive compliance strategy. It may not be a sales center for you, but it's necessary to avoid the painful losses that can come with regula- tory violations. While most of us would much prefer to employ a one-off or once-and-for-all solution to the issue (such as a simple technology), those who do that are gambling. The fact is that a complete, continuously improving compliance program is a neces- sary cost of doing business in our industry. . JIM PAOLINO is the CEO of LodeStar Software Solutions, which partners with RDAssociates to deliver Mortgage Sentinel, a first of its kind "secret shopper" service for the mortgage industry. The service utilizes proprietary research techniques, in-depth analysis, and hands-on training to improve the interactions between mortgage originators and potential borrowers. Paolino also sets the strategic direction and manages the day to day operations of LodeStar, which develops loan estimator, sales manage- ment, and closing portal technology. He has a decade of experience developing software solutions specifically for the mortgage and title insurance space. Paolino speaks frequently on technology trends as they relate to compliance, operational efficiency, and sales growth. He can be reached at jpaolino@

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