New CFPB Rules
However, the problem Faughnan and mortgage bankers around the country face is having to allocate an increased portion of their budgets to comply with new regulatory statutes, which means that investing in innovation may have to take a back seat for the time being.
Among the major regulatory standards set to take effect in 2014 is the Consumer Financial Protection Bureau’s “qualified mortgage” rules, which the agency says is designed to limit an institution’s ability to lend to consumers who may be unable to repay the loan — which was the case during the subprime mortgage meltdown that preceded the financial crisis. The rule requires creditors “to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for ‘qualified mortgages,’ ” according to the CFPB.
Also, the rule requires banks to “retain evidence of compliance with the rule” for three years after a covered loan is consummated.
Scott Hansen, executive VP, business development for technology vendor Harland Financial Solutions, which was acquired by Davis + Henderson Corp. earlier this year, says the new mortgage rules “are the biggest challenge facing the mortgage industry in the coming year. These rules affect everything from the application and underwriting stage through loan servicing, loss mitigation, and foreclosure. There is not one aspect of the mortgage process that will not be impacted by the CFPB’s new rules.”
Among other things, Hansen says, the CFPB’s new rules will affect what types of products mortgage lenders can offer and also could tighten access to credit for some consumers, as well as place an additional burden on IT providers and servicing systems.
He believes one way for banks to deal with the new compliance standards is to prepare their staffs thoroughly for them.
“Knowledge of the rules’ requirements will be required at every level of the organization — from senior management to call center representatives,” Hansen adds. “Servicers will have to go to great lengths to ensure that staff members are adequately trained to deal with at-risk borrowers, in particular. Mistakes in the handling of loss-mitigation applications and other inquiries could carry serious consequences.”
Amy Brachio, a partner in the advisory services practice of Ernst & Young, says these new regulations are not surprising, as they are a continuation of the federal government’s focus on “fair and responsible lending and enhancing transparency in the mortgage process in general.”
“The big thing [about the new mortgage rules] for banks is being able to demonstrate the process that they followed, not just from a broader process perspective, but on a transaction-by-transaction basis,” she says.
Faughnan says First Niagara has between 20 and 25 employees dedicated to helping the bank comply with new mortgage-related regulations next year, including the new qualified mortgage rule. As such, noncompliance-related technology investments he’d like to make “aren’t probably all going to get done right away.” In particular, the new requirement that lenders retain documentation of each loan for three years will take up resources, he says. Still, Faughnan acknowledges this regulatory environment is the “new normal” and believes the extra steps regulators are requiring banks put into the mortgage process will ultimately make “the end product much better.”
The Mortgage Banker’s Association’s Brinkmann says the group is trying to help member banks navigate these new regulatory waters through its Mortgage Industry Standards Maintenance Organization. MISMO is a technology standards development body intended to maintain voluntary electronic commerce procedures and standards that allow mortgage lenders, investors in real estate and mortgages, servicers, industry vendors, borrowers, and other parties to exchange real estate finance-related information “more securely, efficiently, and economically.”
MISMO “is working jointly with almost all of the significant government agencies to make sure we’re all speaking the same language,” Brinkmann says. He hopes MISMO also can result in cost savings for its members by following the same technology standards.
The specific initiatives that MISMO is pursuing include developing an XML architecture that encompasses data origination, secondary market, and servicing data, and creating a data dictionary to provide business definitions and corresponding architecture data element tag names.
First Niagara’s Faughnan believes industry cooperation such as the MBA’s MISMO efforts are helpful, but he doesn’t sugarcoat what is likely to be a difficult outlook for the mortgage industry in 2014. “It’s more costly to write mortgages, there’s less opportunity to do so, and at the same time we’re still trying to attract a quality sales force, so it’s a bit challenging,” he says.
Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio