MORTGAGE COMPLIANCE & COMPETITIVE ADVANTAGE. Manage compliance so you can focus on the game instead of the rules

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Compliance. that one word stirs up plenty of reactions: uncertainty, stress, distraction, confusion, and opportunity. Seize the opportunity. once compliance is effectively managed, the smart lender can focus solely on the game and move ahead of the competition. Focusing on the game means delivering quality loans, generating new leads and building business. lenders who don’t have an efficient way to manage compliance are distracted from those essential business practices. opportunity arises as the game-focused lenders separate from those bogged down by compliance management. the gamers grow their market share, while the distracted are left behind.

today’s compliance requirements often feel like overwhelming burdens, but the truth is regulatory challenges can be mitigated through awareness, automation, flexibility, and uniformity.

Awareness means being on top of change, and being ahead of the regulatory game. the regulatory

landscape is amorphous, and each twist adds another

double-edged opportunity. Yes, lenders can get tripped up, which leads to fines and penalties. Yes, it can distract you from your true business. But top-performing lenders know when they streamline compliance, risk management and loan quality processes, they gain an advantage over competitors. they stay ahead.

Automation gives lenders the practical power to manage awareness and stay on top of changes in real time. it’s no longer practical to deal with compliance using manual processes. Sophisticated technology is needed to create compliance checks throughout every stage of origination, so loans don’t get hung up at closing and lenders don’t take on additional risk. leading-edge lenders use an automated compliance solution to realign their management process. this allows them to navigate the sudden, rapid shifts in this new regulatory

environment and provides a better overall view of the loan quality throughout the entire pipeline. when automated solutions help manage compliance, lenders can focus on delivering the highest quality loans.

Focusing on the

regulatory game

means delivering

quality loans,

generating new

leads, and building



Flexibility and scalability are essential—without them, automation becomes outdated and awareness is compromised. the frequency of regulatory changes, especially at the state level, creates additional complexity when trying to ensure all systems and processes are aligned and compliant. adding staff, managing multiple locations and interactions with external partners complicates things even further. lenders’ compliance systems need to be agile and scalable. this is one reason why Software-as-a-Service (SaaS) models are becoming more popular. SaaS solutions give leading lenders the ability to manage process changes quickly and cost-effectively—without losing production. SaaS also provides quicker and more economical ways to update a single automated solution. there’s no longer a need to update multiple systems that are separately hosted and


Uniformity is a key to successful compliance, and it’s achieved when awareness, automation and flexibility unite. regulators want to see compliance reviews applied to all loans in the same way. including compliance reports in loan files demonstrates a diligent adherence to

regulatory challenges, and shows regulators that compliant lending practices are being applied to every loan. the lender builds trust with regulators, customers and investors. matching up with secondary market investor compliance rules is key to a successful lending operation’s ability to fund loans. providing a uniform compliance review makes investors more comfortable, streamlines secondary market sales and gives trusted companies an edge.


Rather than trying to cover the compliance issues facing today’s lenders, this eBook offers an overview of six high-impact issues and why they’re important. Web links are provided at the end of each overview to facilitate a deeper understanding of the issue discussed.

It’s a lot to deal with, but remember: Today’s complex regulatory environment creates uncertainty. Uncertainty creates opportunity. Lenders who handle compliance challenges better than their competitors seize the lead.




changing the game

the dodd–Frank wall Street reform and consumer protection act is a federal statute signed into law on July 21, 2010. the Financial regulatory reform act ushered in sweeping regulatory changes for lenders. the act creates numerous regulatory agencies and affects nearly every aspect of mortgage origination.

dodd-Frank changes the way every residential lender does business. it’s more than 2,300 pages long. it’s an

amorphous, slippery body of work that requires constant attention, and delivers serious potential to trip up even the most conscientious lenders. as new regulatory agencies are created to monitor compliance, the full impact of dodd-Frank will begin to emerge, but it will emerge in such fits and starts that it can easily lead to confusion and errors.

it’s intimidating, but dodd-Frank shouldn’t strike fear— just some re-evaluation. Financial institutions will need to navigate through the various regulations and integrate effective, reliable systems into their core operations. these systems need to be adaptable and scalable in order to match dodd-Frank’s twists and turns and ensure compliance.

the days of manually checking and managing compliance are over. manual processes are time consuming, error-prone and create a non-scalable fixed cost. Spot-checking only a percentage of loans opens the door for errors. many lenders have hired new staff or outside contractors specifically to focus on compliance.

Some lenders have realized the limitations of risk management when connecting multiple vendors to their legacy loan origination systems, but others aren’t ready to give up their old systems or they may not believe an automated solution is truly cost-effective in the long term. However, automated systems that can check loans against various complex federal and state laws and regulations throughout the origination process can minimize the need for additional staff or business process changes.


Mortgage Bankers Association (MBA) Regulatory Reform Resource Center

MBA Dodd-Frank Summary (PDF) U.S. Senate Committee on Banking, housing, and Urban Affairs Comprehensive Dodd-Frank Summary (PDF)

Consumer Financial Protection Bureau (CFPB)Outline of Proposals Under Consideration and

Alternatives Considered for TILA-RESPA Integration Rule making (PDF)




the State of the Union

there are two new acronyms in the regulatory alphabet soup. nmlS (nationwide mortgage licensing System) is the legal system of record for licensing and registration of companies and loan originators in all participating states, including the district of columbia and U.S. territories. in 2008, the multi-state exam program was introduced to simplify the auditing of lenders regulated by multiple states.

leF (licensee examination File) is the standardized data format used to upload loan files for examination. leF enables lenders to format loan data for electronic examination. this minimizes the possibility of technical problems during data upload. leF-formatted files are uploaded and retrieved by the examiner in charge and each participating state.

why are nmlS and leF important? in January 2011, state regulatory agencies began enforcing the expectation that lenders provide loan portfolio data in leF format. all state regulators will require lenders to provide electronic leF files for electronic examinations (e-exams) before on-site audit and review. to comply, lenders must submit all loan information to state regulators in the leF format.

the leF data format helps lenders use their existing systems to export loans for e-exams. Since the leF is a 100 percent electronic process, lenders need to select the appropriate technology to prepare for e-exams and monitor the loan compliance before those loans are submitted to a regulator.

the bottom line is lenders must ensure that 100 percent of their loans are compliant with federal and state requirements. are there risks? Yes, but this is more about managing processes. if lenders follow the rules and adhere to the methods required to follow them, they can mitigate risk.

manual processes are no longer practical, and automated solutions are the most—if not only—efficient way to check loan files for possible issues and generate the standardized leF-formatted files for auditing.


NMLS Resource Center

Multi-State Mortgage Committee Mortgage Exam Manual (DOC)




license & registration, please

the Secure and Fair enforcement for mortgage licensing (SaFe) act requires each state to have a loan originator licensing and registration system.

the intent is to provide lenders with a “Unique identifier,” a means of monitoring that will keep unethical lenders out of the industry. Under the SaFe act, a state-licensed loan originator needs to complete at least 20 hours of education focusing on federal laws and regulations, ethics, fair lending policies, and issues regarding the non-traditional mortgage marketplace.

the SaFe act isn’t only important for regulatory purposes. it’s also a way to build consumer confidence that the industry is vigilant about keeping “bad actors” out of the lending industry, so there’s no sequel to the 2008

mortgage industry meltdown. it’s also important because lenders need a means of complying with the SaFe act without affecting productivity.

lenders can manage risk by asking some key questions:

• are you a mortgage loan originator?

• are you licensed or registered?

• are your required employees licensed or registered?

• are you clear on what constitutes a “residential mortgage loan”?

• Have you met applicable training requirements?

• where do compliance checkpoints come in during the loan process?

Smart lenders know the answers. they shouldn’t be too hard come by. But, as is often the case, the devil is in the details.

it’s helpful to have automated systems to monitor the checkpoints, particularly if you have staff that needs to meet the requirements as well. automated and web-based solutions are often more reliable, because they’re focused on managing issues step-by-step and minimizing the potential for human error.


Mortgage Bankers Association (MBA) Safe Act Issue Brief (PDF) NMLS State Licensing Page NMLS Policy Guidebook for Licensees (PDF)

CFPB SAFE Act Examination Procedures (PDF)




Skin in the game

Simply put, the provision requires mortgage lenders maintain five percent of the risk of non-qualifying loans thought to be higher-risk than traditional loans. this is the Qualified residential mortgage (Qrm) skin-in-the-game factor, and it’s just part of the Qrm provision.

exactly which loans are qualifying and which aren’t is the crux of the debate. the answer will play a big role in determining the volume of available mortgage credit, and who can and can’t get a mortgage in the future.

to many, Qrm may just be more regulatory alphabet soup, but this dodd-Frank requirement could be a game-changer. the intent of Qrm is to provide lenders with a financial incentive to carefully evaluate borrowers’ credit worthiness on every loan, especially with higher-risk, non-traditional loans. lenders, congress and other industry groups oppose the current definition of Qrm because they fear credit will be limited and more expensive to obtain, which could damage confidence in the industry. as part of a paper calling for a broader definition of Qrm, mark Zandi, chief economist at moody’s analytics said, “i don’t think anyone has a good grip on all the potential unintended

consequences of this.”

So how do smart lenders stay ahead of the game and effectively manage Qrm? it’s difficult to answer right now, as the precise definition of a Qrm is still shaking out. Some lenders feel a good idea would be to combine Qrm rules with Qualified mortgage (Qm) rules into a single standard to avoid having put the same loan through different filters. Qm is also a dodd-Frank requirement. it states that lenders make a reasonable determination that borrowers can repay their mortgage loans. mortgage lenders hope that if they have satisfied the ability-to-repay requirement, they will receive some protection from liability when originating a Qm.

the Qrm/Qm quagmire highlights the importance of adaptable, automated, shift-on-the-fly compliance management systems. awareness is essential, as is the flexibility to meet and manage these new regulations. when Qrm definitions hit the fan, having systems in place that can adapt gives leading-edge lenders further

opportunity to widen the gap between themselves and their competition.


Mortgage Bankers Association (MBA) Dodd-Frank Summary (PDF) Compliance Commentary: Proposed Alternative Definitions for Qualified Mortgage

Dodd-Frank QRM – Proposed Rules for Credit Risk Retention




it’s about getting paid

why is loan originator (lo) compensation important? Because it affects how loan originators are paid, and it’s a major shift away from old business models. the penalties for non-compliance could prove ruinous for a small or medium-sized lender’s business.

the regulation itself may seem simple, but managing it requires an eagle eye, particularly when it’s necessary to manage a staff of originators. if an originator is worried about—and losing time due to—managing this new rule, profits can shrink.

the truth in lending (til) rule that went into effect in 2011 changed the way compensation may be paid to the loan originator, which includes mortgage brokers and loan officers. the rule contains three general prohibitions:

1.No dual compensation. if the loan originator receives any compensation directly from the consumer, the rule prohibits the originator from receiving compensation from any other person, and it prohibits any person other than the consumer from paying the loan originator. However, loan company employees often can’t receive compensation directly, so this second prohibition generally applies only to individuals and companies brokering a loan.

2.No payment based on loan terms/conditions.

this means the lo can’t receive compensation based on terms or conditions if the loan originator is being compensated by someone other than the consumer. However, the amount of credit extended is usually not considered a term or condition if compensation is based on a fixed percentage, subject to a minimum or maximum amount of the credit extended. this rule doesn’t apply to a transaction in which the consumer pays the loan originator directly.

3.No steering. a lender can’t steer a customer toward a particular loan transaction just because they’ll receive greater compensation from the creditor than they would for the other transactions, unless it’s in the consumer’s interest to choose that loan.

while the provisions may seem simple, each has potential pitfalls. awareness is essential for each and every loan, but such vigilance can prove distracting, if not exhausting. now throw in a wild card—managing staff. monitoring 100 or more employees can be nearly impossible, even when they’re held to the highest ethical standards. this is where automation becomes so important. automation allows real-time monitoring of every loan to catch violations in-house before they reach the regulatory


Mortgage Bankers Association (MBA) Dodd-Frank Summary (PDF)

Regulation Z and Loan Officer Compensation: An In-depth Look into Upcoming Changes

CFPB Bulletin 2012-02 Payments to LOs Based on Mortgage Transaction Terms or Conditions (PDF)

CFPB Outline of Proposals Under

Consideration and Alternatives Considered for Residential Mortgage Loan Origination Standards Rule making (PDF)




Juggling for Fannie & Freddie

there’s been plenty of speculation on the future of Fannie mae and Freddie mac, but for now they remain crucial to most every lender’s business. their introduction of the Uniform appraisal dataset (Uad) and Uniform collateral data portal (Ucdp) is intended to standardize the

appraisal process and improve the quality and consistency of the loan appraisal data they receive.

managing the Uad and Ucdp effectively means free time to focus on delivering quality loans, and separates lenders from competitors.

the Uad standardizes all fields for specific appraisal forms, and standardizes definitions and responses for a key subset of those fields. the gSe requirements for submitting appraisal data are clearly spelled out for lenders.

it’s the lender’s job to make sure they’re adhering to the new rules of the game. there are five “hard stops” that can trigger rejection of an appraisal by the gSes:

1. the appraiser isn’t licensed, the license is expired, or there’s a finding against the appraiser in the Federal aSc database.

2. Standardized address isn’t recognized.

3. the appraisal value is under $5,000.

4. Uad compliance check.

5. Uad file format issues.

like the Uad, Fannie and Freddie developed the Ucdp to facilitate standardized electronic submission of appraisal data.

the portal performs checks to validate that data is complete and in compliance with the Uad requirements, and returns error messages for non-conforming data. lenders need to make sure their origination solution supports electronic appraisal report submission that meets the gSe requirements, including Uad compliance checks. lenders are ultimately responsible for reviewing appraisal reports. it can be difficult to juggle this responsibility with borrower demands, loan quality, turnaround time and costs. lenders need to keep their eye on:

• goals and business requirements—cash flow, staff, expansion and loan quality.

• appraisal processes and partners.

• the plan to manage the quality and consistency of the appraisal process.

• process shifts and adding staff to monitor and execute them.

the time and money Uad and Ucdp could require may not seem like much at the outset, but once the juggling begins, resources get taxed. automated solutions— particularly ones that can handle the entire spectrum of loan management—can add tremendous value.

lenders are ultimately

responsible for

reviewing appraisal

reports to enure

appraisers have

provided all required



Mortgage Bankers Association (MBA) Dodd-Frank Summary (PDF) Fannie Mae UAD Resource and Information Site



the shifting regulatory landscape can be a mine field. it can also be a gold mine.

leading lenders see regulatory hurdles—and there are many more than the six previously outlined—as

opportunities to build business when managed correctly. while the rules change, the game doesn’t.

Quality loans, customer service, client care, and achieving success are the big-picture goals. this is the game. the shifting regulatory landscape, federal and state compliance management. these are the rules.

play the game, not the rules. this is the way to win. But how can the rules be managed so the focus can stay on success? with awareness, automation, flexibility and scalability and uniformity.

• Awareness means being on top of change, and ahead of the rules.

• Automation is the practical power to manage awareness in real time.

• Flexibility and scalability keep automation current and awareness sharp.

• Uniformity is awareness, automation and flexibility working harmoniously.

creating a proactive compliance strategy enables lenders to manage regulatory challenges so they can focus on what matters most : profitability and growth.

manual processes are error-prone, and require expensive staffing. Smart lenders find and use solutions that are thorough and cost-efficient.

an automated process employing leading-edge

technologies is clearly the most effective way to safely and securely handle compliance management. technology automatically simplifies the awareness component, can grow and shift as needed, and uniformly integrates across each aspect of the loan process—cradle to close.

leading lenders embrace technology and use it to manage the complex, shifting rules and regulations, so they can focus on the game and stay ahead of the competition.



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