Every few years, the mortgage industry is faced with an unprecedented crisis that threatens several negative consequences for all stakeholders. Often, the effects of such a crisis are felt in the lending landscape for quite some time and it’s usually the federal government that has to rush to support homeowners and protect their interests. As a response to the risks posed by such predicaments, the US federal government and the industry regulatory bodies usually resort to fundamental changes in the compliance requirements to protect the interests of both the lender and the borrower.
Mortgage lenders are going to have a busy year ahead as they try to gain their lost ground in 2021. They would be faced with a barrage of compliance challenges as they strive to service loans. These challenges, if not negotiated adequately, could pose significant regulatory and litigation risks in mortgage processing to lenders.
Common Violation Trends Lenders Must Avoid
Limitations on Compensation
Loan originations cannot be compensated based on the term of a transaction. Loan originators are prohibited by Regulation Z (also called the Truth in Lending Act) from receiving any compensation based, either directly or indirectly, on the terms and conditions of any consumer credit transaction that’s secured by a dwelling.
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Improper Use of Lender Credit
Regulation X (the Real Estate Settlement Procedures Act) requires a loan originator to be bound to the settlement terms and charges, within the applicable tolerances.
Improper Use of Advertisements
Regulation Z prohibits the improper use of advertisements with triggering terms but without the necessary additional disclosures. Advertisements must include disclosures whenever certain triggering terms are advertised.
Adverse Action Notice Deficiencies
This is regarding adverse action notice deficiencies and the lender’s inability to provide the notice on time. Regulation B (Equal Credit Opportunity Act) makes it mandatory for the lender to inform an applicant of the action taken within 30 days of receiving the application regarding the creditor’s action on the application.
Deficiencies in Compliance Management Systems
A robust compliance management system is critical to ensure compliance with the federal consumer financial law and prevent associated risks of harm to consumers.
Critical Compliance Areas Calling for Special Attention in 2021
As we are already into the fifth month of the year, the mortgage industry looks ahead to the issues and opportunities shaping the compliance agenda for financial services in 2021. The following is a compilation of the most pressing challenges that lenders must bear in mind in order to address the burning issues the U.S. financial services providers are faced with today.
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Fair Lending
With the new federal government coming into office, there would be a renewed focus on improving the scene of fair lending. This would be of particular interest to the new government as it was one of the areas that received the least attention during the tenure of the previous government as the overall CFPB enforcement activity dropped.
While fair lending would be a steady state operation in the compliance departments of banks, it’s in the best interest of lending compliance professionals to practice a thorough review of this area. On the flip side, since it’s taking lenders some time to gear back up to their full speed, they have enough time to refresh their lending program, examine their lending data, and check for any outliers that pop out in their programs. They must strive to spot any bias in their artificial intelligence or data analytics tools that they may be using and stay in tune with the evolution of alternative treatments for those with no or thin credit files.
UDAAP
During the tenure of the previous government, the number of UDAAP enforcement actions was shockingly low, and now the bureau is expected to gear up for the supervision under the new leadership. It’s the right time for lenders to take a serious look at how they advertise their products vis-à-vis what they actually deliver. It’s critical to analyze and evaluate complaint data to spot what might be lurking beneath the surface.
Given the competitive landscape, lenders must be aware of the status of controls around fees, accountholder access to funds, and ACH debits. While introducing new products is a great way to delight consumers, glitches in how the products are operationalized can spawn UDAAP issues. Thus lenders must ensure that their infrastructure for UDAAP compliance is robust. They must work with their AML partners as the new rules impact account opening processes.
CARES Act Review and Other risks
This year, Congress appears to be more interested in the way the CARES Act PPP Loans were administered. Journalists have already publicized many of their incongruous observations pertaining to loan recipients, lenders, and even frauds. Multiple news organizations have an FOIA lawsuit pending seeking specific information about the recipients of loans and other loan details.
The compliance departments of lenders should look at how loan decisions were made, the processes put in place to prevent fraud, the way of handling any fraudulent or suspicious activity – including the filing of SARs, and the working of the forgiveness mechanisms. The operational risks of lenders have been heightened as they have restructured their processes to include third-party providers and technologies that make ‘work from home’ possible, elevating the compliance risks of the banks.
For lending institutions, the present market signs portend a challenging environment in the coming days as lenders try to negotiate the business risks posed by the current uncertainties. For the new federal government, protecting the interest of the borrowers in the coming days is seen as one of its top priorities. Both the government and the industry regulators are ready to use every weapon in its armory to accomplish that, be it via enforcement, supervision, or new rulemaking. This makes it mandatory for mortgage servicers to plan and prepare for the wave of loss mitigation requests coming their way so that they comply with all the requirements of the industry.
Who We Are and Why Our Expertise Matters
At Expert Mortgage Assistance (EMA), we have the right resources and well-trained staff to help our mortgage clients throughout their end-to-end lending lifecycle. We offer special services in mortgage compliance through our time-tested compliance management systems that are adequate to meet the present and coming demands of our clients. Our compliance services include identifying at-risk borrowers and we help our clients with an omnichannel plan to communicate with such borrowers in a way that consistent in approach and includes all appropriate regulatory disclosures.
