Leonard Ryan is founder and president of Laguna Hills, Calif.-based QuestSoft Corp., a provider of automated compliance review software to the mortgage industry. Ryan oversees day-to-day efforts for the company including, but not limited to, business and software development, strategic partnerships, sales and pricing.
For this episode of In This Corner, Leonard discusses the major obstacles of Real Estate Settlement Procedures Act (RESPA) and how lenders can cut costs with automation.
HW: What law or regulation is giving lenders the most headaches and why?
Leonard: In any other year this would be an easy question. But in our view, all of the 2009 changes cause problems, and for different reasons.
Mortgage Disclosure Improvement Act (MDIA) is causing issues because most loan software products keep track of only the latest disclosure dates due to the complexity of the calculations. S.A.F.E. Act is causing the most internal personnel problems due to education and registration requirements that differ from state to state. Higher Priced Mortgage Loans (HPML) with the Home Mortgage Disclosure Act (HMDA) changes as of October 1 are becoming an out and out nightmare without automation because every time an Annual Percentage Rate (APR) changes or the note rate adjusts, the loan must be completely recalculated and possibly re-underwritten.
Home Valuation Code of Conduct (HVCC) issues have been widely reported, but the industry is slowing adapting to more calming comments from the regulators. There is substantial anxiety over upcoming RESPA rules to the point that lenders are being forced to consider on many loans whether they will violate Truth in Lending Act (TILA) or RESPA because of rule conflicts. Finally, there are more than 40 states that have changed or are in the process of changing their state high cost and consumer protection rules to far more stringent parameters due to the MDIA and HPML changes.
HW: How do HPMLs affect lenders? Have they slipped under the radar?
Leonard: Higher Priced Mortgage Loans (HPML) which is often referred to as the HMDA Rate Spread, is much more serious than most people believe. Since 2004, the HMDA Rate Spread calculations have been used to provide a general dividing line to determine subprime lending. However, other than HMDA reporting and possible fair lending implications, there was little that was affected before now. In addition, the indices changed monthly so the possibility of an error was far more remote.
However, with the new rules, there is a built-in trigger for stricter underwriting, and almost all states are changing their high-cost laws to match the new HPML benchmarks. The Note Rate and APR triggers are potentially different as Note Rate determines the week of the index and then APR determines the qualification. So if a borrower asks for a last-minute adjustment in the note rate, without any change in the APR, a lender could be in violation of a high-cost rule by simply helping the borrower secure a more appropriate loan. As a result, I don’t see how lenders in the future fund loans without constantly rechecking HPML throughout the entire loan process.
HW: When someone, such as a lender, switches to automation software, on what time line can they anticipate a change to their bottom line?
Leonard: The vast majority of our customers report back that sometime within the first two months of use, they have identified and prevented enough errors, obtained favorable pricing or saved enough in training time to justify the entire set of provided services for a full year. This does not include unknowns in terms of buybacks, fines or litigation expense a lender might have received from funding a non-compliance loan.
Automation software produces both substantial direct and indirect savings. We have found direct savings especially in reduction of training that would have been necessary without automation. This can amount to two to three additional staff members depending on the size of the institution. Direct savings are those from reduced hiring. Lenders are hiring more compliance and training staff today to cover the myriad of new regulations of this past year. Whereas in the past, a 10% standard was acceptable, today you must review 100% of the loans due to investor push backs and more stringent requirements. Automation software allows this to be done without any additional staff and also pushes “on the job” training while doing it.
You review all loans and the underwriters and compliance personnel are alerted to loans that have potential problems rather than needing to sift through loans randomly. In addition, staff training is far easier because a system like Compliance EAGLE both identifies a violation and provides the cure. Indirect savings are fines, penalties, press, reputation, litigation and buybacks that would be there if an error was not detected and corrected before funding. Our customers typically find about 15% of loans in violation of a rule pre-underwriting. The first-time reviews we run post underwriting show 3-5% rates. Reviews we run compared to competitive systems typically catch 1-2% of loans with additional violations. Our systems are completely paid for if only half of 1% of loans have errors. Therefore, the return on investment is tremendous with an automated compliance software product.
HW: How are you helping lenders gear up for RESPA? What are the major obstacles?
Leonard: QuestSoft is helping lenders with RESPA in three ways. First, we are checking the fees between disclosures to detect any violations of the rules where fees have no variance and others that have a strict 10% variance even through a third party provider. Second, we provide a database of vendors nationwide that are willing to lock in their fees to lenders to ensure they do not violate the provisions of the law. Lastly, we also allow lenders to more easily comply with the alternative vendor listings and provisions to reduce the possibility that the lender will be responsible for extra fees just for trying to comply with the intent of the new disclosures.
The major obstacles of the new form are the sections that list multiple alternatives and the comparable program area at the end of the form. But, perhaps that largest obstacle is that lenders are very scared because the TILA and RESPA rules do not align and many are worried that they may be fined, penalized or have borrowers use legal representation to use these conflicts of the new regulation to create an unprofitable lending environment for honest lenders.