Quality is the name of the game for a bank’s mortgage operations. Ever since the passing of the Dodd-Frank Act in 2010, regulators and the Consumer Financial Protection Bureau (CFPB) have put an incredible amount of time and energy into defining what makes a loan high quality. In addition, the new laws mandate certain attributes in an attempt to ensure quality loans in order to better protect consumers.
In the past few months, the CFPB has announced formal definitions for Qualified Mortgage (QM)/Ability-to-Repay standards that outline what makes a qualified loan and the conditions that banks can lend within those standards. The increased liability for banks to generate compliant mortgages puts pressure on them to keep up with the cumbersome amount of new laws, regulations and the application of those rules into their existing workload.
How can banks ensure they can meet the expectations of consumers, investors and regulators? One key is to leverage technology to automate disclosures, satisfy internal and external risk management procedures and provides pristine documentation.
QM: Defining the Playing Field of the Future
The Qualified Mortgage (QM)/Ability-to-Repay standards warrant certain underwriting standards to ensure lenders are making loans that consumers can pay back. It requires lenders to make an assessment of a borrower’s ability to repay their mortgage loan, and also protects them from liability if they make “qualified mortgages” as stated in the rule.
As defined in January, QM outlines a series of standards that a loan must meet. The QM rule seeks to:
• Cap a borrower’s debt-to-income (DTI) ratio at 43 percent, unless approved by a Government-Sponsored Enterprise (GSE) and/or homeownership stabilization program;
• Implement a 3 percent limit on the fees and points lenders can charge; and
• Open up more lines of credit opportunities for credit-worthy borrowers
The rule splits qualified mortgages into two categories of liability. The first provides a “safe harbor” protection for qualified mortgages that are not categorized as “higher-priced” – defined by the 2008 Federal Reserve Board Truth-in-Lending amendments. This “safe harbor” will exempt lenders who have originated loans according to the QM/Ability-to-Repay standards from litigation by the borrower.
“Higher-priced” qualified mortgages will receive a rebuttable presumption of compliance. Loans originated under the “higher priced mortgage” definition will not exempt lenders from litigation; instead they will be presumed to have reviewed the borrower’s ability to repay, which is a significant legal difference.
Digital Documents Will Become the Gold Standard
Since banks will have certain legal protections – or lack thereof – depending on the QM status of a loan, documentation is critical. From the initial disclosures to closing documents, every loan must be 100 percent accurate and defendable to regulators, investors and the courts.
In order to accomplish this, the first step is to move away from static documents. PDF-based documents, while technically digital, are not flexible enough to meet the needs of today’s bankers. Dynamic mortgage documents import XML data directly from the loan origination software (LOS) to populate fields. Based on the specific loan data, dynamic documents can change a word, line or paragraph at once. There are no fixed field lengths, no extra small fonts in order for information to fit and the necessary language and data are stated on the documents – nothing more, nothing less.
This approach also eliminates the need to maintain expensive document libraries or include excess documents in every loan package. Only those documents needed for each customer are generated and printed.
Defending Compliance with Disclosures
Automated documentation will prove itself to be even more important for the upcoming rule combining the Truth in Lending Act (TILA) and Good Faith Estimate (GFE) disclosures into one document. During the underwriting and closing process, a satisfying document solution should ensure all data is tested to catch any Mortgage Disclosure Improvement Act (MDIA) tolerance failures allowing the lender to re-disclose.
Banks should also image and store all closing documents and disclosures. Electronic filing helps banks track cases involving re-disclosures and changes to the closing documents; ensuring they can establish which forms borrowers signed and when. This type of technology allows a full audit trail of every set of documents generated for every loan; eliminating the need to send boxes of paper loan documents to an offsite storage facility. On a regular basis – annually or quarterly – banks should also run regression analyses to catch and correct any statistical variations that could indicate discrimination and may be occurring unintentionally.
As the CFPB and other regulators continue to refine their QM requirements, banks can expect a myriad of compliance audits in order to establish a strong documentation of closing documents and disclosures. By utilizing automated systems that check for compliance on the front end and enable lenders to electronically file and store documents on the back end, lenders can eliminate much of the manual labor and cost needed to analyze loan files for compliance with new laws.
Scott K. Stucky is chief operating officer of DocuTech Corporation, a provider of mortgage loan documents, compliance services and technology solutions for the mortgage industry.