by Lotstein Legal PLLC
Just when you thought your technology was finally up to date, there is a whole new round of changes headed your way. Unfortunately, rolling out new technology in the mortgage industry is not as simple as a consumer upgrading a cell phone or downloading an app for that.
Effort: Recognize the monumental efforts involved in changing technology. There are hundreds of millions of dollars being spent on re-engineering loan origination systems, the industry is trying to design systems that respond better to regulatory changes, but the holy grail of scalable, fast and highly configurable technology is elusive. The industry needs time to get it right and needs certainty and guidance from regulators early in the process.
Back to the Future: If you have been in this industry long, you have probably changed software vendors at least once. In large companies it seems there is always some next generation software being implemented to solve the future’s problems. Factors like contract renewal on hosted services greatly affect whether and more importantly when a change in software can occur. Hosted services may be the best choice, but do not overlook the need to assess the next transition when the same hosted service becomes the old system. With licensed on-site software, the maintenance is no longer paid but the software still runs on your server to access the old data if required, with hosted systems you could be left with no access and no data if you do not plan accordingly.
Date: When the effective date of new regulations is January 1, be prepared well in advance. Everyone has been out for the November and December holidays, is forced to be paid for lost vacation time or is working overtime to get year-end reporting, licensing renewals and HMDA reporting completed.
Details: When evaluating the effort to comply, consider the granularity of the data. The recently proposed escrow disclosure form requires lenders to indicate whether there is or is not an escrow account, but what if only the taxes are escrowed and not insurance? Compare that with the GFE required disclosure of principal, interest and mortgage insurance with a separate disclosure of escrowed taxes and hazard insurance, while other forms, including the 1003 already have principal and interest calculations separate from taxes, hazard insurance and mortgage insurance. Constant realignment of these calculations causes testing efforts to become exponentially greater. Note, the latest CFPB draft forms itemize P&I and MI in the payment section… that way a consumer will be able to find the P&I from the 1003 and the promissory note on the GFE. It would be nice if all disclosures contained consistent data granularity, but with so many regulators, the CFPB’s consolidated authority is the industry’s best hope. Perhaps someday Fannie, Freddie, FHA and VA along with state regulators will adopt more consistent granularity.
KISS Does Not Translate: Making a form simpler for consumers means making technology more complex for lenders. Hopefully the CFPB will be prepared to answer a lot of questions about how to use their new forms with various loan program “features.” Lenders are not the only source of questions for regulators. State examiners also have to understand the many nuances created by product variations. Uniformity is critical to the industry’s ability to comply. Large banks are not immune to state regulators’ interpretation of federal laws. The loans they buy from correspondents and brokers are still examined by the state regulators with respect to the correspondent or brokers’ activities and appropriate disclosures and practices must still be audited.
Data Entry: Despite the reliance on technology, the people trying to enter the data are not perfect. Data entry errors can be costly mistakes and lenders and vendors must always be aware of the users’ proclivity to reproduce those mistakes. Minor errors can turn systems of mass production into systems of mass destruction.
Technology and compliance are converging, software is the source of business rules which are predominantly related to compliance practices.