Regulatory Issues: Mortgage Regulations, Ready or Not?

Encountering costs, complexities, distractions and uncertainties in implementing new mortgage lending rules

By Karen Epper Hoffman

As almost any home buyer will tell you, it’s a stressful and complicated process to get a mortgage.

Moreover, as almost any community banker will tell you, lately the process of offering mortgages has gotten much more stressful and complicated as well as institutions struggle with preparing to meet the new mortgage lending rules laid out by the Consumer Financial Protection Bureau.

For nearly a year community banks have been racing to understand and meet the multifaceted demands of various new Dodd-Frank Wall Street Reform Act mortgage lender regulations by this month’s deadline. Complex and voluminous, the rules span the CFPB’s ability-to-repay rule, including the definition of “qualified mortgage” loans, which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay underwriting standards.

But those complex rules just scratch the surface. This month’s compliance deadline is also scheduled to ring in new regulations on mortgage servicing, mortgage loan originator compensation and qualification standards, appraisals and escrow requirements for “higher-priced mortgage loans,” “high-cost” mortgage loans and mortgage-servicing requirements. The rules also affect, or potentially affect, a host of other existing federal and state regulations.

As a result of these numerous changes, community banks have been tackling multiple challenges to respond internally to adapt to the CFPB mortgage standards with policy writing, staff training, information technology systems and working with their outside service and IT vendors as well. According to many community bankers, the pressure to respond to all these rules, particularly for community banks, is proving highly expensive, distracting and onerous.

“I can’t recall a time when so many rules and regulations went into effect at one time,” says Ron Haynie, ICBA’s senior vice president for mortgage finance policy. “There’s a lot of confusion on the CFPB’s mortgage rules still. And we have been active in trying to get information out to our bankers.”

ICBA has, as Haynie points out, developed information resources, including an information Web page, and hosted a number of conference calls, webinars and industry events to help inform members about these rules, which “will touch a big part of the bank’s operation.”

Though prominent and far-reaching, the mortgage rules also represent a high-profile example of the costs, resources, energy and complications that Main Street community banks have faced dealing with a series of accumulating regulatory burdens in recent years, most of which were spawned in reaction to the misdeeds or blunders of the very largest Wall Street financial institutions. The CFPB rules, for which at press time ICBA and a coalition of 41 state and regional community banking associations were continuing to seek an extension of nine to 12 months for community banks, also represent part of why ICBA has made reducing the regulatory burden for community banks its top policy priority.

Alice Frazier, executive vice president and chief operating officer for Cardinal Bank of McLean, Va., points out that while community banks are in the business of risk management, “managing compliance risk has become the looming dark cloud that is distracting to our business. To attend a board meeting of the ICBA and have the top concern of the industry to be consistently regulatory burden is sad.”

Community bankers say they have spent thousands of dollars and dozens, if not hundreds, of man-hours in preparation for the mortgage rules alone. Like many other community bankers, Jack Hopkins, president and CEO of CorTrust Bank of Sioux Falls, S.D., says the $725 million-asset community bank has been working on some of the changes since as early as spring of 2013. “But we were lacking any final rules or guidance until the middle of September,” he points out.

Hopkins estimates that CorTrust Bank’s staff has already committed “thousands of hours so far … and we are looking into approximately another 400 to 500 hours being spent prior to implementation.” CorTrust Bank’s audit department alone has spent at least 200 hours preparing for audits of the systems, loan administration and loan review departments. “I would estimate [we’ve alone spent] $15,000, working with our attorneys, our compliance consultant and our system vendors to make sure we are going to be in compliance,” he says.

“We are spending so much time on these and other similar issues that it is hard to find time to run the business and provide financial products and services to our customers.”

—Tim Zimmerman, Standard Bank

Diana Meadows, the director of mortgage lending for The American National Bank of Texas, headquartered in Terrell, Texas, says the community bank’s compliance officer alone has spent 200 hours on preparing for these mortgage lending regulatory changes. The staff hours and the financial investment are “hard to quantify” in part, she says, because the new regulations bleed into other regulatory areas as well. Managers and supervisors at the $2.2 billion-asset community bank have participated in management triage sessions to prepare themselves.

“Keeping all these rules straight is hard, even for seasoned mortgage people,” Meadows adds.

As Tim Zimmerman, president and CEO of Standard Bank in Monroeville, Pa., points out, “Being a community bank, we have small staffs, who wear lots of hats, engaged in this project. We have spent a large number of hours already and will be required to spend even more as January 10th approaches,” he says. “Working on the new mortgage rules has taken valuable time from some of our most talented staff members, and it has also been a distraction from their core duties and responsibilities.”

Complexities and processes

Community bank executives point to different aspects of the CFPB mortgage rules that they say are proving the most difficulty thus far. Several community bankers cite as a major burden requirements to update new notices and policies and procedures to conform not just to the CFPB rules but also to state laws. Other community bankers simply point to the extraordinary amount of time and energy they spent fully understanding and sorting through the ones for which they do and do not have to make changes. Simply determining what constitutes a qualified mortgage, a basic standard in the CFPB mortgage rules, involves many variables and potential variables, points out Jack Hartings, president and CEO of the $390 million-asset Peoples Bank Co. in Coldwater, Ohio.

For Peoples Bank, the changing rules regarding mortgage loan officer compensation have certainly been challenging, Hartings says. For Standard Bank, the mortgage servicing rules have been among the hardest requirements to implement, Zimmerman says, in particular new core software system changes to record new information to maintain mortgages originated in the past. “We also see challenges in documenting and reproducing customer contact history,” he says.

Meanwhile, on the loan production side, Zimmerman says the complex ability-to-repay requirements will require hard decisions about whether to continue making certain types of loans that the rules now consider more problematic “non-qualified” mortgage loans. “We are frustrated,” he adds, “because we will not be able to treat our customers as individuals but rather have to try to fit them into a predefined bucket.”

“Keeping all these rules straight is hard, even for seasoned mortgage people.”

—Diana Meadows, The American
National Bank of Texas

Community bankers cite a number of new rules that are likely to be the toughest to implement in the future. Those include complex criteria to handle delinquent mortgages in foreclosure and bankruptcy, including notification requirements, gathering loss-mitigation information and providing referrals to housing counseling agencies. First foreclosure notices that have to be sent to all delinquent borrowers, including new denial letters educating mortgage borrowers on every reason the loss mitigation option may have been denied, could be highly difficult to manage. Handling force-place hazard and flood insurance requirements will also impose significant new administrative burdens for community banks.
However, community bankers stress the accumulation of so many complex new mortgage lending rules—as they do for their increasing overall regulatory burdens—as their biggest problem with the CFPB standards. As Frazier says, “There is probably not one rule that is easier or harder to implement; each comes with its own set of repercussions.”

Working with outside consultants and service providers has been a mixed basket. Compliance policy consultants have also been late in providing key advice, partly because the final rules were not posted until September. While many community bankers say their software service providers are making every effort to work with them, many vendors have been drowning in the complexities of the rules, which in turn have affected their community bank customers’ preparedness. For example, vendors for The American National Bank of Texas were only able to provide key software updates to the bank in mid-November, says Meadows, giving the bank fewer than 60 work days to understand and load the upgrade and perform testing. Other banks’ vendors had only provided promises to provide updates.

“It’s just impossible logistically,” Meadows says.
The biggest challenge working with outside providers, according to Zimmerman, is not being able to monitor progress, or lack thereof, as they work to comply with the new mortgage rules. “We know our key providers, like our core data processing provider, are working on their software and other necessary changes, but we don’t get detailed reports on how it is going,” he says.

“The stress involved is unbelievable as we race to be prepared for something as major and important as this with very little time … .”

—Jack Hopkins,
CorTrust Bank

Another area of concern, Zimmerman says, is “vendors working with other vendors” that depend on each other to produce the software needed to comply with the new rules. “It is all based on trust and faith that they will be ready and will have what we need to comply,” he adds. “They are signaling that they will be ready, but we haven’t been able to test any of the new software or reports. Based on the information we do have, we are proceeding with a ‘no news is good news’ outlook.”

But, unfortunately, community banks may not know the net result of these changes until it’s too late. “There will be unintended consequences that we haven’t seen yet and won’t see until … the first bank is affected with a ruling of non-compliance,” says Frazier.

Chilling effect

It’s fair to say there is still a lot of fear, uncertainty and doubt surrounding the implementation and repercussions of the new regulations. After attending eight community bank conventions around the country this year, Hartings, who also serves as ICBA’s vice chairman, says he sees an “apprehensive community banking group ” as more and more regulations are layered on. “We just don’t know how this will fall down on community banks,” he says.

Mortgage Rules ResourceICBA offers lots of information and resources on the Consumer Financial Protection Bureau’s new rules on mortgage lending online. The association’s Mortgage Rules Resource Center, an ICBA Web page, includes summaries of the final rules and links to the rules themselves. ICBA will continue to update the page, located under the Advocacy section of the association’s website,, as new information and resources become available.

ICBA policy experts are also available to answer questions. Email questions to ICBA’s Ron Haynie (, Elizabeth Eurgubian ( or Ann Grochala (

Zimmerman agrees that it is not just the mortgage lending rules taken in isolation, but alongside other regulatory guidance, they are creating a significant burden. “The cumulative effect of all of the new rules—not just from the CFPB, but also from the FDIC, our primary regulator, Freddie Mac and the Federal Home Loan Bank of Pittsburgh’s Mortgage Partnership Finance program, our secondary market conduits, new capital requirements coming from Basel III and proposed new loan-loss calculation requirements from the Financial Accounting Standards Board—all take precious time and effort on our part,” says Zimmerman. “We are spending so much time on these and other similar issues that it is hard to find time to run the business and provide financial products and services to our customers.”

As an example, Zimmerman says that even though Standard Bank will initially qualify for the CFPB mortgage rules’ Small Portfolio Lender Exemption, which will make collections and modifications easier, “Freddie Mac does not have a similar exemption for small servicers of loans for them.” In addition, he points out that it is a “big training challenge in a short period of time,” to train an entire lending staff on all of the aspects that relate to their job.

Hopkins says CorTrust Bank’s staff has been carving out specific periods to handle the time of training and implementing part of the new rules, which includes on average around five hours of overtime per person in the bank’s servicing department per week since the rules were released. “The stress involved is unbelievable as we race to be prepared for something as major and important as this with very little time since the final rules affect our capabilities of focusing on our primary job, which is servicing our borrowers and other duties that are necessary,” Hopkins says.

In Hopkins’s opinion, the only advantage that customers will see on the servicing side is that the big money center banks will have to do business closer to the way community banks have always done business. “Customers will have the opportunity to speak to specific individuals instead of the call center mentality where they are only a number,” he says. “Customers will have more than enough information regarding their loans in the future. There will be more information on statements and other documents.”

However, he adds, “the problem is that now small servicers are required to document, document, document the practices that they have always used at a huge cost due to the time requirements.”

While most community bankers see some constructive outcomes from the mortgage rules, largely to put pressure on reckless lenders, some believe the rules may ultimately have a chilling effect on the ability of community lenders to continue to provide mortgages home buyers need and want. “We have had to take a hard look at our business model and do some soul-searching about what makes sense and what doesn’t for us going forward,” Zimmerman says.

“We know that we have to be more efficient and be willing to quickly reconsider all lines of business and services we offer as the rules change.”

Karen Epper Hoffman is a financial writer currently based in Europe.