TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1463706
20 | M R EP O RT EXPERT INSIGHTS The State of Compliance & Digital Technologies Steve Schachter, President of Sourcepoint, addresses some of the top compliance and regulatory risks for lenders in 2022 and beyond. A s President of Sourcepoint, Steve Schachter assists the company with deep- ening relationships with existing clients, adding new clients, and building Sourcepoint's brand in the marketplace. He joined Sourcepoint in 2008, and has played a pivotal role in expanding Sourcepoint's relation- ships with existing clients, con- sistently growing the client roster and exceeding revenue targets. Prior to joining Sourcepoint, Schachter was Partner, COO, and CFO of Richmond Title Services LP, a national title agency. He was also a successful entrepre- neur, having been part of leader- ship teams that launched two successful start-ups. What are some of the top com- pliance and regulatory risks for lenders in 2022? Schachter // Perhaps the biggest and most obvious risk is the market shift from refinances to purchase loans, and the elevated scrutiny that comes with pur- chase originations. The demand for non-QM, jumbo, and bank statement loans, which are inher- ently riskier, are poised to grow as well. Lenders were spoiled for a while with vanilla loans and rate-and-term refis, and both are going to comprise a much smaller subset of volume this year. Meanwhile, you have a new administration in Washington and a Consumer Financial Protection Bureau (CFPB) Director who has already taken steps to scrutinize compliance and control on the servicing side of the industry, and we expect them to follow closely on the origination side. Most companies received a pass in years one and two of the pandemic, but as we enter year three, that laxity will be gone, and scrutiny will rise. Unfortunately, the CFPB typically does not regulate the industry by publishing rules—they regulate by enforcement. Yet another risk that's brew- ing is the growing popularity of artificial intelligence (AI) and automated technologies. There is a lot of excitement about these tools, but the big question is how to use them without inadver- tently introducing discrimination in the loan decisioning process. The industry has the opportunity now to collaborate and ensure that fair lending standards are maintained. Why do you believe 2022 is going to be the year for QC and due diligence? Schachter // With the refi party drawing to a close, I think we will see a hangover effect among lenders which will reveal itself in loan defects. You also have millions of borrowers coming off forbearance plans, and not all of them are going to be able to resume payments, which means we are going to see some level of nonperforming loans. According to a recent CoreLogic Loan Performance Report, there were approximately 500,000 more loans in serious de- linquency this past October than at the start of the pandemic. The major challenge for lenders will be managing costs without impacting their ability to remain in compliance. The government sponsored entities (GSEs) are going to be looking closely at originators. I also think we will see sig- nificant demand for servicing QC because of the timeline risk with foreclosures. Another wrinkle in all of this is the Wall Street trading firms and banks wanting to invest in mortgage-backed se- curities (MBS) as demand grows for nonagency loans, especially mortgages for self-employed bor- rowers, which is also going to create a different spin on due diligence activity. We expect to see a greater need for an experienced due diligence partner to validate the work originators do. In fact, that is a big reason why we acquired The StoneHill Group, one of the largest domestic providers of out- sourced loan quality control (QC) and due diligence services. What are mortgage lenders going to need operationally to avoid repurchase risk? Schachter // The good news is that, right now, lenders are doing a reasonable job with critical defects. But when you get lax on the manufacturing side, minor issues can quickly turn into criti- cal ones. Keep in mind that 85% or more of the defects associated with loan manufacturing are errors of convenience. In other words, problems occur when someone is trying to do too many things at once, and is not taking care to cross their T's and dot their I's. This has discernably grown worse. In fact, I would say 18 months ago, only 20% of the errors were errors of convenience. Operationally, lenders need to focus more attention on inline QC and pre-closing QC, whether