TheMReport — News and strategies for the evolving mortgage marketplace.
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20 | Th e M Rep o RT Feature into one comprehensive system or maintaining a data warehouse that pulls data from multiple LOSs and is the system of record. Nearly all mortgage lenders to- day have a technology application for automated compliance testing. These applications need to be in- tegrated into the LOS to eliminate duplication of data entry, mini- mize errors, enhance controls, and reduce costs. Automated triggers within the LOS are also critical to ensure compliance, but lenders need to take care that the right risk thresholds are set or excessive alerts will occur, hindering pro- ductivity and reducing efficiencies. Compliance Audits A utomated and integrated compliance testing applications do not eliminate the need for lenders to perform compliance audits on a representative sample of transactions. Some lenders separate their loan-level compliance audits from their required credit and collateral quality control (QC) audits. An effective QC program should integrate compliance with credit and collateral in random and discretionary audits. This is especially important as loans are reviewed for qualified mortgage (QM) and ability-to-repay compliance. If a lender has multiple pro- duction channels, senior man- agement needs to see executive summary reports that cover all business channels to help identify enterprise risks. Targeted compli- ance audits are appropriate when new regulations are implemented or for high compliance alert areas. This ensures that effective compliance risk management tools are in place and corrective action steps for technology fixes are working properly. SAFE Act A nother area where compliance costs have significantly increased over the past few years is SAFE Act compliance for non- banks. Loan originators working for independent mortgage bankers were not required to be licensed or tested in most states until 2008. Today, non-bankers incur the costs of mandatory pre-licensing and continuing education requirements, as well as extensive criminal and financial background checks by state agencies. Loan officers employed by banks must only register with the Nationwide Mortgage Licensing System (NMLS) and undergo criminal and financial background reviews conducted by their employer. There is a movement within the mortgage industry to standardize the SAFE Act requirements for banks and non-banks, and to build consensus among the states regarding their licensing requirements, which often vary from state to state. Mortgage bankers retain in-house licensing specialists to keep their company in compli- ance with the SAFE Act and the multitude of state licensing requirements. The work effort to obtain and maintain corporate and individual mortgage loan originator (MLO) licenses can be daunting for many lenders, espe- cially during the peak periods for annual corporate filing deadlines and MLO renewals. The industry has qualified third-party service providers that can perform licens- ing services for non-banks on an outsourced basis. Lenders should perform a cost-benefit analysis to determine if outsourcing their licensing functions will reduce overall costs and move fixed staff- ing costs to variable costs. Non-banks that originate in a large regional area or across the country should also look at the cost-benefit of operating in all of the states where they are currently licensed or are considering licens- ing. For example, if your company operates a direct-to-consumer retail channel and only originated a handful of loans in the state of North Dakota last year, does it make financial sense to renew those corporate and MLO licenses? taying in Business Requires a Focus on Compliance Efficiencies E ven though it may be difficult for lenders to fully quantify the costs of new mortgage regula- tions, we do know that the flood of regulations has impacted loan profitability. This has resulted in a reduction in products and services offered by many lenders. Many smaller financial institu- tions are also consolidating to stay in business by achieving greater economies of scale. The impact of new mortgage regulations will ultimately be felt by consumers. Therefore, it is critical for regulators to work closely with financial institutions to establish the right balance between regulations designed to protect consumers and the unintended consequences of higher costs and limited access to credit for consumers. As financial institutions continue to adapt to increasing regulations, there must be a focus on finding the most efficient ap- proaches to plan for new regula- tions, implement them, establish controls, and monitor for compli- ance. By building cost-effective efficiencies, lenders can minimize the duplication of activities through smart technology ap- plications and maximize the use of qualified third-party service providers to move fixed costs to variable costs. At the same time, performing cost-benefit analyses when considering new prod- ucts and services, new business channels, or the expansion of geographical service areas is more important than ever in the new regulatory environment. Judy Wheatley, CMB, SVP of compliance at Indecomm Global Services, is a recognized expert in consulting and fulfillment services to residential mortgage lending clients. She has actively served the mortgage banking industry as a governor on several Mortgage Bankers Association boards. Wheatley received her designation of Certified Mortgage Banker (CMB) in 2003 and the designation of Accredited Residential Underwriter (ARU) in 1993 from the Mortgage Bankers Association of America. She has a master's degree in sociology from Johns Hopkins University and a bachelor's degree in history from Bethany College. Lenders should perform a cost-benefit analysis to determine if outsourcing their licensing functions will reduce overall costs and move fixed staffing costs to variable costs.