Backroom Ready

Upcoming CFPB mortgage regulatory deadlines prompt quick technology planning and adjustments

By Elizabeth Judd

The hefty series of mortgage lending regulations issued by the Consumer Financial Protection Bureau is presenting some daunting challenges for community banks rushing to meet upcoming January compliance deadlines. Not to be overlooked, however, are the technological changes the regulations are prompting for front- and back-end loan processes.

Those system adjustments should and will play a central role in the preparations community banks are making for the new mortgage standards, several IT loan system providers agree. Starting earlier rather than later to prepare for loan system changes will be an important part of meeting the compliance deadlines, they say. And having older systems can further complicate the compliance process, points out Deana Elkins, vice president of technology solutions for ISGN Corp., a mortgage process services provider in Palm Bay, Fla.

Sai Huda, a vice president and general manager with core processor FIS in Jacksonville, Fla., points out that the CFPB regulations will not affect all community banks equally. Community banks need to step back and do a business impact and risk assessment of their mortgage lending systems, he says.

“Unfortunately, many aren’t doing that because they’re overwhelmed with all these rules,” Huda adds. “They’re scratching their heads and asking: ‘How do I comply?’ Many are contemplating not doing any mortgage lending, and that would be a real mistake.”

Huda’s advice to community bankers: Take a deep breath. Then begin designing a roadmap with your bank’s current service providers to first identify and then complete the IT system changes that will be necessary.

Not all decisions affecting loan systems can be made now, technology system providers say. But with the hard compliance deadlines fast approaching, community banks starting whatever they can do now, if they haven’t done so already, could become important later on.

Front-end changes

When it comes to handling loan originations, perhaps the biggest upcoming change is the integrated disclosures the new regulations will require. John Liston, origination products director for Associated Software Consultants in Middleburg Heights, Ohio, which provides a loan origination and processing system, points out that two new disclosure documents—a new loan cost estimate and a closing disclosure—will replace three current ones—the Truth in Lending disclosure, the HUD-1 settlement statement and the good faith estimate.

But other disclosure form changes are getting less attention than perhaps they should, says Melissa Kozicki, director of compliance for Mortgage Builder Software Inc. in Southfield, Mich. She is convinced that too many banks are overlooking the high-cost mortgage rules because they currently don’t plan to issue those types of loans. Yet there are provisions within the high-cost mortgage rules that apply to all loan types, she says.

Kozicki also urges community banks to focus attention on areas such as tests for qualified mortgages, high-cost mortgages and high-cost loans even though all the necessary clarification in these areas has not yet been established. Even if banks don’t completely understand how costs and fees will be calculated under these new tests, they can decide now who will run the tests and how to document that the tests were done properly.

Huda says that even though the CFPB regulations are hundreds of pages long, many of the changes—such as text changes to notices—are quite straightforward. Preparations for system changes related to those disclosures should be underway. What’s more complex, he says, are the issues surrounding loan origination compensation.

Community banks calculate compensation to originators differently depending on their policies and programs. So the task of adapting compensation systems is going to be more complex for a bank’s technology vendor, Huda explains. For compensation changes, he says, many community banks are wisely turning to their IT vendors to set up those formulas properly.

The servicing side

For community banks that do their own mortgage-loan servicing, making sure their systems will meet new regulatory notifications and procedures required in handling delinquent borrowers will be particularly critical, Huda says. The new regulations, for example, dictate when and how borrowers must be informed of their loss-mitigation options.

For community banks that have outsourced their back-end mortgage processes, the central issue may very well be vendor management. “How do you know the vendor is not asleep at the switch? You need to make sure there’s evidence that the vendor has a roadmap,” Huda says.

He adds, “If the vendor messes up, it’s ultimately the bank’s black eye.”

When it comes to quizzing technology vendors, the greatest back-end challenges presented by the CFPB regulations are updating existing forms, workflow management and contact management, advises Dave Vida, president of correspondent lending and loan servicing at the LenderLive Network Inc. in Glendale, Colo., the systems service provider for the ICBA Mortgage program for community banks.

For example, Vida notes that service providers must make sure that the upfront disclosure forms that their systems generate will properly show loan payment information to borrowers, particularly for the more complicated notices involved with adjustable-rate mortgage notices. The new regulations, he continues, also will affect mortgage workflow management from start to finish, including issues such as how frequently borrowers should be contacted, especially for delinquent loans and foreclosure processes.

Finally, Vida says that the new regulations require that banks designate a single point of contact for their borrowers to ensure they’re speaking with the right individual. A bank’s systems have to be organized properly to handle the recordkeeping and information sharing that will be required.

R. David Whitaker, an attorney with the law firm BuckleySandler LLP in Washington, D.C., points out that the financial regulators are increasingly concerned with how carefully financial institutions are supervising their technology vendors. This responsibility could become complicated, as some vendors promise to provide completely compliant mortgage solutions while others expect the banks to pick up different degrees of the compliance slack.

“A key for all community bankers is to understand very clearly what are their responsibilities and what are the vendors’ responsibilities,” says Whitaker. Carefully reviewing IT vendor contracts—and asking probing questions—could be a valuable first step.

Because these questions are increasingly thorny, a whole industry has popped up to help banks monitor and test the compliance of their technology vendors. ISGN’s Elkins points out that her company unveiled CFPB Mock Audit evaluation so banks can “figure out where their gaps are.” She points out that one of the first questions asked during any regulatory audit is whether the bank has a strong compliance management system in place.

Any silver linings?

In preparation for their compliance deadlines, community banks should also take a sweeping look at their entire mortgage process. Opportunities could arise to save money or pursue new opportunities, Kozicki says. “You have to redo your procedures anyway, so go whole hog,” she urges. “Look at your procedures, document your workflow—and do it across the board.”

Some of the proverbial low-hanging fruit may lie in the realm of electronic delivery of mortgage statements, Whitaker points out. “One of the silver linings is that if you are in the mortgage servicing business, the new rules provide a pretty clear path to electronic periodic statements to a significant number of your customers,” he says.

Huda agrees that approaching the new regulations in a strategic fashion will identify opportunities within their IT loan processes to cut costs or streamline functions. “If you don’t understand the rules and you see the glass as half empty, you’re not going to be efficient and smart about things,” he suggests. “But if you understand the rules of the game and do it right, you can build strategies to win by gaining customers and noninterest income.”

Elizabeth Judd is a writer in Washington, D.C.