While some changes are made to regulations every year, the final quarter of 2009 and first quarter of 2010 will bring one of the largest overhauls of mortgage lending-related regulations in recent memory.
Not surprisingly, these regulations are causing bankers a bit of stress. In a survey of more than 350 bankers, lenders and credit unions conducted by compliance provider QuestSoft, 74 percent of the lenders surveyed reported that upcoming changes to the Real Estate Settlement Procedures Act posed a high concern. Respondents also cited upcoming changes to the Home Mortgage Disclosure Act, fraud laws and Community Reinvestment Act as a concern.
HMDA Redefines Higher Cost Loan Standards
Beginning Oct. 1, 2009, HMDA is adjusting its reporting requirements to bring the guidelines in line with the Truth in Lending Act (Regulation Z). The HMDA rules will now conform to the definition of ‘’higher-priced mortgage loans’’ adopted by TILA in July 2008.
Under the new requirements, community banks must ensure compliance on all offered prime mortgage loans of a comparable type. This applies to all loan applications taken after Oct. 1, or any loans closing after Jan. 1, 2010. Banks will have to report rate spreads on any loan with a difference equal to or greater than 1.5 percentage points for a first-lien loan (or 3.5 percentage points for a subordinate-lien loan) from a survey-based estimate of APRs. While this could significantly increase the number of loans subject to rate spread reporting (especially with adjustable rate mortgages), the main effect will be on underwriting and fair lending compliance. With a new category of higher-priced loans, lenders must prove a borrower’s ability to repay. You are not allowed to offer a no income-qualified loan if the loan is subject to rate spread reporting. Secondly, regulators and community groups have already expressed that they intend to use the new rate spread as an initial barometer to fair lending compliance.
One of the other main concerns with this change is that the 2009 HMDA data submission will contain loan data that spans two reporting standards. Banks will need a system in place that can document application dates and closing dates to ensure that all loans are properly reported.
RESPA Requiring More Disclosures
According to QuestSoft’s survey, lenders are most concerned about changes to RESPA, because for the first time in 30 years, the regulation is requiring new procedures for disclosing the fees associated with closing a mortgage. The regulation changes which fees must be disclosed, as well as outlining new timelines for delivering disclosures to borrowers.
Beginning in January, the Department of Housing and Urban Development will require lenders and originators to provide borrowers with a standard good faith estimate that will clearly spell out the terms of loan, including interest rate details, possible penalties and total closing costs. These disclosures must be provided three days after the application is submitted.
One of the most significant changes involves amending closing documents to better explain how included closing costs coincide with the GFE. RESPA requires a new closing document that must make clear how the final closing costs correspond to the GFE, which will display the total estimated closing costs on the first page so the consumer can easily compare loan offers.
CRA Moving to All Lenders?
CRA establishes compliance standards requiring banks to prove due diligence in serving the needs of all potential borrowers. Designed to combat redlining and other biases in low to moderate income zones, the CRA set no specific criteria for determining complete compliance, but rather takes a situational approach. Bank audits from federal and state agencies seek to answer the question: “Is capital readily available for everyone in the community?”
One of the biggest issues banks have with CRA is that non-bank lenders are not required to follow the regulation. In addition, the rule has been blamed for some of the current problems in the industry for encouraging loans to lower-credit borrowers. In March, HR 1479, the Community Reinvestment Modernization Act of 2009, was introduced in the House Committee on Financial Services. The bill proposes several changes to CRA, including the expansion of the rule to non-bank lenders and applying consistent oversight to lenders of all sizes.
If it passes, community banks should be prepared to adjust the frequency of CRA reviews and level of detail required by examiners in the future.
Prepare for a New Agency
In June, President Barack Obama unveiled a blueprint for financial regulatory reform that included a proposed Consumer Financial Protection Agency.
One of the most debated aspects of the proposed agency is giving it the authority to define standards for simple “plain vanilla” products. One proposal would include dictating terms for standard mortgages, which would have to be prominently offered by banks.
Automation Eases the Burden of Compliance
How can lenders comply with these new regulations without wasting time or money? The best approach is to combine smart, good faith efforts with automation. This provides the easiest path to staying compliant and reducing the risk of fines or buyback requests from investors.
Some regulations, such as preliminary disclosures and fee calculations required by HMDA and RESPA, can be automated by software. These applications contain features that flag incomplete applications and keep loans from closing if all the steps have not been followed. Unfortunately, many loan origination systems may not have these changes implemented by the start dates, so banks should look to compliance specialists for the most up-to-date information and updates.
For regulations with more subjective requirements, such as CRA, lenders must combine their best good faith efforts with documentation and reports from their automation tools.
Community banks, like all mortgage lenders, have the responsibility to ensure that loans are compliant. It is much easier to discover problems before closing, so they should use automated reports and flags to discover — and correct — compliance issues prior to the closing table. A little oversight and prevention now can save your financial institution significant fines or refused loan purchases later.
Leonard Ryan is president of Laguna Hills, Calif.-based QuestSoft. He can be reached at 800-575-4632 ext. 211 or leonard.ryan(at)questsoft.com.
Copyright © October 2009 BankNews Publications