Mortgage Compliance Archives - Page 2 of 3 - Cogent QC: Award-Winning Loan Quality Control & Compliance Software

CFPB Director vs. Congressman: What is the Likely Impact of QM?

October 30, 2013 By James Robinson

drama

Recent posts in Housing Wire’s REwired blog, from reporters attending the Mortgage Bankers Association 100th Annual Convention & Expo in Washington, D.C., discuss two vastly different forecasts of the impact the new qualified mortgage (QM) rules are likely to have on the mortgage market.

Kerri Ann Panchuk reports that CFPB Director Richard Cordray “cited data from Mark Zandi, chief economist for Moody’s Analytics, noting that 95% of the mortgages made today fall within the qualified mortgage standard.” Cordray also said that loans not covered by QM can still be generated as long as lenders use “sound underwriting standards and routinely perform well over time.”

On the other hand, Jacob Gaffney reports that Congressman Paul Ryan of Wisconsin claimed: “In my state, up to 75% of mortgages won’t qualify under QM. Community banks, they all think they’ll get sued.”

According to Gaffney: “Some felt Ryan’s estimation of 75% was way too high and placed for dramatic impact.”

Readers can decide for themselves which figure is more realistic.

Lenders’ Dilemma: Invest in Tech or Exit Mortgage Business

October 28, 2013 By Kaan Etem

Here’s a timely article (registration required) highlighting how the new regulatory environment for lenders is forcing a stark choice: either invest in technology to streamline and automate loan origination and servicing processes – or exit the business.

Some choice excerpts:

“Origination costs are expected to rise 11% this year from a year ago, to nearly $5,900 per loan, as lenders scramble to meet tough new requirements from the Consumer Financial Protection Bureau, the Federal Housing Administration and Fannie Mae and Freddie Mac that take effect in January.”

“Large banks can justify investments in technology and can hire more staff because they spread the costs across more loans. But small banks with fewer than 100 employees may only have a handful of employees doing the work, which means relying even more on technology…”

“…921 compliance changes [have been documented] from various agencies since the housing market crashed in 2008. Particularly challenging for small lenders are new requirements from Fannie and Freddie that require lenders to deliver loans with as few defects as possible.”

“The government-sponsored enterprises are now electronically validating 100% of the loans they purchase as part of a broader initiative to improve loan quality. The Federal Housing Administration has proposed similar changes and may set a maximum threshold for the percent of loans it will allow to have defects.”

“Survival is dependent on improving quality control standards otherwise [lenders] won’t be able to compete or to sell loans that the GSEs will be willing to buy,” says Craig Focardi, CEB TowerGroup’s senior research director.”

“Everybody is extremely nervous because if you don’t dot your i’s and cross your t’s in compliance, you’re going to get a lot of repurchases and will be out of business. Everything in a loan file has to follow the letter of the law.”

“Many lenders don’t want to invest in the labor and technology that it takes for [quality control] and compliance,” says [Annemaria Allen, president and CEO of The Compliance Group in Carlsbad, Calif.], noting that such requirements have never really been enforced to the degree that they are now. “You have to be able to slice the data and we know that business units are screaming about this. But if you’re going to sell to Fannie and Freddie and you do a [lousy] job…they will be in your house nonstop and make sure you have the processes in place and embrace quality.”

Forewarned is forearmed. It’s a very different industry now than it was in 2007.

Secondary Review Options in Cogent QC Systems

October 14, 2013 By Kaan Etem

In the most recent issue of American Banker, the CEO of Cape Cod Savings had this to say about the burden of regulatory compliance:

“…Because of HMDA and RESPA, we have checkers who check the checkers. Then we actually have another third layer of checkers who check the checkers who check the checkers. Then we have two outside consulting firms that check again.”

Sound familiar? All too familiar for some Cogent clients, who have multiple layers of QC and compliance operations – often at the corporate level, at the business unit level, and on an outsourced basis. And they invest so much in quality control and compliance because the alternative is painful. To cite just one instance, the Mortgage Bankers Association (MBA) sent this around last week:

“CFPB Assesses Civil Money Penalties For HDMA Data Errors
The CFPB has announced that it assessed civil money penalties against Mortgage Master, Inc., a non-bank, and Washington Federal, a bank, after examinations identified significant data errors in mortgage loans reported pursuant to the Home Mortgage Disclosure Act (HMDA). CFPB followed the announcement with a bulletin outlining the elements of an effective HMDA compliance management system and the resubmission thresholds, as well as other factors that the Bureau uses to determine if they will pursue a public HMDA enforcement action and associated civil penalties.”

Among other things, that bulletin states that “effective HMDA compliance management systems frequently include … comprehensive and regular internal, pre-submission HMDA audits.”

Aside from under-scoring the sheer scope of today’s regulatory compliance requirements, this reality also highlights the need for efficiency in performing secondary and tertiary audit reviews. This is why Cogent has been introducing more extensive secondary audit review options. The latest Supervisor Override functionality was covered in our recent ‘Version 4 Overview’ webinar (clients may contact support@cogentqc.com for a link to the recording.) With that, the possibilities now include:

Revert a completed loan audit and make changes to the original loan audit.
Use Supervisor Review to conduct a parallel supervisor audit, while preserving the original auditor’s work as the official audit of record.
Use Supervisor Override to override individual findings, thereby modifying the official audit of record but preserving a record of the original auditor’s findings.

These different approaches can be combined with appropriate pending and completion of loan reviews to tailor different secondary reviews to different situations. When all eyes are on you, it’s always good to have options.

Categorize Audit Questions for Streamlined Reporting of Regulatory Data

September 30, 2013 By Kaan Etem

Sometimes it makes sense to organize audit questions by regulation. Compliance audits are often organized this way, with names of regulations comprising audit category names and audit questions clustering within those categories. This organization can be reinforced by audit category codes such as TIL, ECOA, CLA, FCRA and so on (hence, question number ‘TIL-012a’). This approach makes it quick and easy to report on regulation-specific audits using Cogent.

But frequently, audit questions are organized by category of defect, such as Assets, Credit, Liabilities, and Income. Traditional post-closing audits continue to be organized this way, as confirmed by FNMA recently (see recent blog post) In such a case, how do you report on specific regulations when a regulator comes in for an audit? The answer is via Categories.

Cogent’s loan audit software allows any audit question to be tagged with one or more Categories. Standard Categories include ‘area tested’, ‘regulation’, and ‘federal/state’. Additional Categories may also be created. With Category tagging, it is a simple matter to include in a report only those audit questions that are relevant to a regulatory audit. Access Category tables via your system’s Audit Lookup Table Manager under Administrator Tools.

MBA and FHA and Statistical Sampling in Quality Control

September 25, 2013 By Kaan Etem

We are pleased to see the FHA proposing to introduce more statistical sophistication into its Quality Assurance Process (QAP) and to see the MBA responding with reasonable critiques. There are a number of items under discussion which have been long-standing issues in the industry, including what defines a loan manufacturing defect, what are appropriate tolerance and severity levels for defects, and what are appropriate remedies. “Loan quality” must have a standardized definition to be useful. But the item that caught our attention was the discussion of statistical sampling.

FHA is proposing the following in its solicitation of information:

“Statistical sampling. FHA is also considering whether to establish a process to review a statistically significant random sample of loans for each mortgagee within a prescribed time frame after loan endorsement. Lenders would receive feedback on findings within an established timeframe. FHA would use the statistical sample, to estimate the defect rate on each lender’s overall FHA portfolio and then extrapolate the origination defect rate to all lender originations during the sampled time period, and thus have the lender compensate FHA for the estimated total risk to FHA resulting from the lender’s origination processes.The purpose of this process would be to increase the efficiency of FHA’s post-endorsement review process. HUD invites comment on the use of and optimal methodology for a statistically significant random sample, including the nature of the loans that should be included or excluded from the sample.”

The MBA has responded with this:

“Most importantly, MBA has serious concerns about the impact of a sampling methodology on independent mortgage bankers and community banks and the number of lenders participating in the FHA program. While larger lenders may be able to originate enough loans to generate statistically significant sample sizes, many smaller lenders would be challenged in this regard. It is unclear how HUD would address this situation and what, if any, allowances would be made for small lenders. Moreover, depending on the structure of the penalty system, paying an upfront percentage could have a much greater impact on smaller lenders than larger lenders. The possibility of sampling bias that results in “overpaying” for smaller lenders has potentially devastating consequences reducing competition and increasing the price for consumers. Companies could be forced out of business or cease originating FHA loans.”

Given the number of lenders we have seen who report only on the number of “findings” in their reviews, with no mention of defect rates or sampling method or population counts, it is encouraging to hear influential industry players talking about sample sizes and valid inferences to populations and statistical significance (albeit in a slightly different context.) If nothing else, it reminds us that the loan audits that take up so much of our time represent a small fraction of the loans we originate (or service). And that what matters is the quality of the entire origination (or servicing) pool, not just the samples we draw (which are simply proxies for the population.)

We say let the discussion continue. The more informed lenders are about what constitutes loan quality, the better they can do their jobs.