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Lining Up the Compliance Targets

By: Leonard Ryan

When the Dodd-Frank bill passed into law two years ago, bankers and lenders knew it would take time to propose, write, evaluate and pass the nearly 400 individual rules established by the law. But progress has been painfully slow, leaving many bankers unsure of exactly what the new regulations will require. As of April 30, only 108 of the required 398 rules have been finalized, meaning the Consumer Financial Protection Bureau and other regulators still have nearly three-quarters of the law to finalize.

Not surprisingly, the shadow cast by these pending regulations is causing bankers a bit of stress. In a survey of nearly 400 bankers, lenders and credit unions conducted by QuestSoft, 81 percent of the lenders surveyed reported that upcoming changes to mortgage disclosures were a medium or high concern. Respondents also cited other Dodd-Frank requirements, such as upcoming changes to the Home Mortgage Disclosure Act, qualified mortgages and other rulemaking as top concerns.

Click on chart to view larger version.

The best way to take aim at regulatory changes is a combination of education, preparation and automation. Let’s start with the CFPB.

The CFPB has drawn up a set of targets for the remainder of 2012 and of particular interest are a handful of mortgage-focused regulations due to be finalized or proposed before year-end. The most urgent of these also coincides with lenders’ most significant concerns in the survey: Truth in Lending Act/Real Estate Settlement Protection Act mortgage disclosure integration; qualified mortgage definition; and loan originator compensation, mortgage servicing, appraisal revisions, all with final rules by Jan. 21, 2013.

One of the first major regulations to be finalized within the next two months will be new disclosure forms that combine the requirements of RESPA and TILA. The CFPB has been testing various prototype disclosures, making the forms available for public comment on its website. The challenge facing the CFPB is that Dodd-Frank requires the new disclosure forms to integrate RESPA and TILA — two related, but different steps in the process.

RESPA was designed to ensure consumers receive helpful and accurate information about the cost of closing the mortgage. This disclosure currently provides transparency into closing and settlement fees, such as mortgage insurance, homeowners insurance and appraisals. When these fees are obscured, there is a higher risk of abuse that could result in unnecessarily high settlement charges.

TILA, on the other hand, is designed to disclose the cost of the actual mortgage credit being offered — interest rate, terms of payment and points paid down, among other items. Except for certain high-cost mortgage loans, TILA does not regulate the costs that may be charged for the mortgage, but requires a standardized disclosure of fees so that consumers can compare terms with those of other lenders.

The new disclosure rule must be finalized by July 21. Once done, lenders will have until the implementation date to build the new forms into their disclosure workflows. Depending on the specifics, compliance checks may also need to be revised to ensure all fees, interest rates and other payments fall within the standards set by the regulations. Lenders can review the current draft of the disclosure forms at


One of the most urgent items the CFPB is currently working on is a definition of the qualified mortgage. Required as part of the Dodd-Frank law, the CFPB must define a rule that would identify characteristics for QM, ensuring a borrower has a reasonable ability to repay the loan. The goal is to eliminate the complex, deceptive and fraudulent loans that were key contributors to the mortgage crisis. To be legally protected by QM, a lender would have to meet underwriting standards such as verifying income and assets. QM loans would also ban terms such as interest-only payments, balloon payments or fees and points totaling more than 3 percent of the loan amount.

Closely related to QM is the requirement that lenders retain a larger portion of their assets as a hedge against defaults. The QM definition will set the safe harbor, and loans that fall within the safe harbor are exempt from the more-stringent retention rules.

While the qualified mortgage rule is due in January 2013, the CFPB has committed, and is expected, to make its ruling during the summer. QM has the potential to have the largest impact on compliance processes, because the rules and guidelines for what make a compliant loan under QM could be drastically different than what is acceptable today. Additionally, lenders would be allowed to fund loans outside QM, but there would be fewer legal protections and the costs would be much higher.

Other Rules

The CFPB has indicated that the QM rule was needed earlier than later because of the effect it might have on the rest of the rule-making for the year. This is especially true of loan officer compensation. The CFPB stated that the compensation rules only need tweaking, but recent announcements suggest that their opinions toward a fixed-fee amount regardless of loan size might end up substantially favoring banks and eliminate low loan amount loans (under $100,000) from being offered by non-banks.

Regardless of the release dates, there is a great deal of concern among people associated with compliance and litigation that the firm deadlines mandated by Dodd-Frank will result in rushed regulation with a number of unintended consequences. Additionally, the regulation may allow litigants whose very financial existence depends on technical violations to thrive as confusion mounts between the rule implementations and congressional correction or court rulings.

Since 2010, the Federal Financial Institutions Examination Council has been busy working to expand the scope of HMDA reporting. Dodd-Frank transferred the responsibility for these reforms from the Federal Reserve Board to the CFPB, which has indicated that these will not be taken up until the Dodd-Frank mandated rules are finalized.

The CFPB has, however, already indicated they will immediately enforce more rigorous fair lending testing in their exams. New fields are already being requested that, for the most part, mimic the new requirements. These fields include credit score provider, applicant’s credit score, total lender fees, LTV, DTI, prepayment penalty months and appraised value. Regulators and consumer advocates plan to use these fields to further assess the fair lending efforts of lenders.

How can banks keep up and comply with these regulations without wasting time or money? The best approach is to combine automation with strong policies and procedures that provide for regular testing, analyzing and reporting of mortgage data. This provides the easiest path to staying compliant and reducing the risk of fines or buyback requests from investors.

Some regulations, such as HMDA reporting and checking loan terms against QM standards, 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. Banks should carefully consider how their loan origination software plans to implement these changes, and when they will be ready for use. Specialized compliance software is available — through integrations with most loan originations systems — that can automatically import loan data, apply tests and verify data prior to the closing table.

Leonard Ryan is president of Laguna Hills, Calif.-based QuestSoft. He can be reached at 800-575-4632 ext. 211 or leonard.ryan(at)

Copyright (c) July 2012 by BankNews Media