Maybe it’s the proximity to Disney’s Magic Kingdom, but at the Mortgage Bankers Association National Technology in Mortgage Banking Conference & Expo in Orlando this week I couldn’t help remembering futurist Arthur C. Clark’s third law of technology that says, ‘‘Any sufficiently advanced technology is indistinguishable from magic.”
But can technology magically solve the industry’s compliance challenges?
Most of the presenters at the conference sounded as if they think so, and based on our recent discussions with market participants, many lenders want to believe them.
Over the past few days, loan origination systems, document providers, pricing engines and compliance companies, including ours, have been saying publicly and privately that they’ll be ready for the new TILA-RESPA Integrated Disclosure (TRID) rules well before the effective date this August. And, in some form or another, they will be. However, just because the vendors will be ready, doesn’t mean that their clients, particularly the smaller ones, will be.
That’s because while technology is a big part of the compliance solution, TRID will also require extensive work-flow redesign as well as loan officer and settlement services provider training and realtor and borrower outreach and education.
While larger lenders have been working on their TRID solutions for more than two years, a fair number of mid-sized and smaller lenders are still waiting to see what their tech providers will deliver before they begin the workflow redesign and training. This could be a mistake, and possibly an expensive one, if the Consumer Financial Protection Bureau doesn’t extend the deadline or offer a grace period.
These lenders may also come to learn that some TRID solutions will be more complete than others. In fact, several LOSs are moving away from compliance, because they don’t want the liability or the cost of continually updating their systems. Their solution is to connect clients with compliance companies, doc providers and pricing engines.
In addition, most LOSs are still using MISMO 2.6, which was not designed for the multi-disclosure schema that TRID will demand. So the initial solutions may be far from seamless or ideal.
Then there’s the challenge of last-minute changes at the closing table for purchase transactions, which will require real-time coordination between lenders and closing agents. Unless vendors are able to integrate their technology with settlement service providers’ systems, there may be gaps in the process that could create errors. While some of these errors would probably be absorbed by the lender,others have the potential of triggering re-disclosures that could delay closings. (To create a tighter integration with closing agents, on Monday, our company acquired ProClose, a leading doc prep and closing software.)
Why More “Magic” Is Needed
TRID, of course, is only the most recent compliance challenge that technology is trying to address. One law, Dodd-Frank, created a “cascade” of changes that, by our count, has affected 23 different federal lending laws and regulations. In addition to TRID, other rules include Qualified Mortgage (QM)/Ability to Repay (ATR), loan officer compensation, HOEPA, and several in loan servicing. The next few significant changes will be the reporting requirements of HMDA which may create new fair lending risks for both banks and non-bank mortgage companies, and the mandatory requirement of the uniform closing dataset (UCD) from the GSEs.
Yesterday afternoon, I participated in a panel at the conference called “Compliance on a Budget.” The other participants were Lisa Weaver of ISGN, Nick Larson of LexisNexis and Richard Peek of The Mortgage Firm. As a group, we took a 360-degree view of all the aspects of compliance: operational, transactional and vendor management.
The panel began with a recitation of the dramatic numbers that we are all too familiar with: the cost of originating a loan has gone from $2,291 per loan in 2008 to $6,769 in 2014, according to the MBA. In a recent Fannie Mae survey, 83% of mortgage bank respondents said their cost of compliance had increased year-over-year from 2013 to 2014. The median increase: 33%.
Last fall, when Fannie Mae asked bankers what their biggest risks were, 81% of respondents said compliance risk. Their next biggest concern, they said, was risk of volume decrease, and that was in a year where volumes dropped by 40%+.
Pay Now or Pay More Later
Although the title of the panel seemed to suggest we’d be covering ways that lenders could save money on compliance, we really didn’t. Because the reality is that, when it comes to compliance, the same two choices always apply: You pay for it now (by investing in technology) or pay more later (in loan buy backs, fines and consumer reimbursements).
In fairness, however, there was a great deal of good advice on how outsourcing and technology can reduce costs and risks versus manual attempts to manage compliance and vendors.
Interestingly, while lenders are still wrestling with the decision whether or not to use technology to assure compliance, regulators have already made it. More than 30 states are using compliance technology to do compliance testing, and they are reviewing 100% of products, not just a 5% or 10% sampling.
At the end of the day, technology is the only logical and prudent way for lenders to cope with their broad compliance challenges.
But it still only a tool, not a magic wand.