As we've entered into a new year, it's very clear that mortgage businesses have experienced significant changes to their processes, technologies, and best practices. The most significant change, however, is the recalibration of mortgage businesses to ensure a more holistic risk management approach. From TRID implementation to vendor management and data security, compliance is not just a requirement, it is the new norm. To thrive in this compliance-driven environment, mortgage industry participants must remain aware and adaptable to regulatory change and ensure that compliance isn’t just a series of tasks but an organized strategy embedded into your overall operation.
Below we’ve provided 5 practical tips to help build an effective compliance strategy and embrace the new culture of compliance.
Centralizing a Risk Management Approach
Compliance is often perceived as something that businesses are required to do in order to avoid fines. However, if there is one thing we’ve learned about regulatory compliance in 2015 it is that it is more than series of singular functions to be managed individually. Today, regulation is complex and impacts every aspect of an operation. This requires a comprehensive, structured approach to identifying, managing and mitigating regulatory requirements. Fragmentation amongst compliance managers, teams, and business units can lead to business-wide risk and hinder the ability to take prompt corrective action. To ensure proper compliance management, lenders should consolidate and manage all the moving pieces. A centralized approach to risk management will prevent unnecessary headaches and provide a single view of all compliance initiatives.
You are Your First Line of Defense
Financial institutions concerned that their operating structure is not optimized or at risk for non-adherence to regulation or service level agreements (SLAs) should procure an audit from a third party due diligence provider or consultant with an expertise in the mortgage space. Obtaining an objective audit of best practices, processes, procedures, management, training and technology, will enable corrective action before regulators have an opportunity to dig in. Being armed with that knowledge upfront may save a business from dishing out thousands in fines and fees and being placed on the regulators’ radars.
Drill Down to Remain Profitable
While the big picture is very important defects at the loan level can be just as costly as operational mishaps. There are still notable loan level challenges such as data integrity, missing documentation, and fraud that may cost you an arm. In addition, problems continue to abound with TRID implementation both technologically and procedurally and these problems may impact saleability to the point of potential liquidity issues. Lenders are complaining of excessive closed loan audit fail rates from investors due to items as trivial as formatting and rounding errors. An in-depth review of portfolio and loan quality can help identify those issues and prevent problems during servicing or secondary marketing execution.
As we’ve seen in the last several years, rules and regulation (specifically CFPB) are often altered at the 11th hour. This is driven in part by a lack of guidance concerning rule interpretation. That said, the Consumer Financial Protection Bureau (CFPB) has taken measures to alleviate concerns. They have stressed that the early TRID regulatory environment will primarily result in corrective versus punitive action, provided good faith measures have been taken. Whether this will lead to increased investor pull-through has yet to be determined. Regardless, 2016 will require continued learning and adjustment. We can expect constant adaptation to be the norm as regulations are clarified and investors begin to move toward a more reliable standard. While regulation at its core is designed to increase standards and accountability, the unknowns that occur during implementation means businesses must remain adaptable to change and opportunistic in the face of compliance.
Choose Your Partners Wisely
Compliance is no longer an isolated function. In the current mortgage environment, the quality and trustworthiness of a title, technology or compliance partner will fall back on the shoulders of the lender or the servicer. Despite decades of experience, there may still be underlying risk in your partner’s processes or approach. Virtually all of your partners’ technological components – be it the origination systems, business logic, or data storage— are subject to system upgrades or modifications as a result of new regulation. Has your partner made the necessary investments? While most business partners will meet base compliance requirements it is not clear whether all will do so in an efficient manner. Vet your partners to ensure that their standards are aligned with your standards and they are invested in the long term (no cutting corners). The new culture of compliance may seem overwhelming to financial institutions operating in the mortgage space, however a proactive and holistic approach to managing risk will minimize headaches and hassle, and prevent financial loss on multiple fronts. Lenders, servicers and vendor partners can gain a competitive advantage by remaining adaptable and strategic in the years to come.
I propose a toast to the 2016 and the new culture of compliance. Cheers!