(Allen Pollack is CTO with NYLX, Mount Arlington, N.J., where he oversees software development for the firms’ products; he is also responsible for its technology infrastructure and development of new technologies. The company’s web site is http://www.nylx.com/.)
Lenders and service providers face some of the most dramatic changes in the mortgage industry’s history--a result of new regulations from the Consumer Financial Protection Bureau.
Coming to grips with these rules will not be easy, quick, or straightforward--but will force lenders to determine if their workflow and technology provider are ready for the CFPB’s regulatory changes.
The CFPB supervises many lenders that outsource and rely on vendors to ensure that their firms run smoothly. Moreover, the bureau requires that both lenders and service providers prepare for the rules and comply with them. Unfortunately, because the regulations have changed so radically, a majority of these firms are not prepared. Many do not realize the extent of the changes or the difficulty to become compliant and maintain that status.
Success requires new skills and a new “compliance first” method of doing business. Releases that simply enhance features, deliver new capabilities, save money and time will simply not be satisfactory. To resonate with the mortgage industry they require an equally strong compliance component.
To thrive in the new regulatory environment, necessitates a degree of compliance expertise that relatively few lenders and technology providers can muster. Lenders focused on origination, and servicing and technology providers focused on their next product or enhancement have not historically had those skills.
In stark contrast to the past, large lenders and small lenders are responsible for incorporating the bureau’s new decree into their operations. For instance, a lender that closes 150 loans each month is held just as accountable as a top-20 originator.
A regulatory hammer is about to collide with existing business practices; that has forced lenders to turn to their technology providers to ensure that the new rules are reflected in systems and procedures. Expectations are changing and technology providers will have to devote resources and unfailingly support lenders in new ways.
Without the collaboration of service providers, it’s far less likely that lenders will be prepared before the January 2014 compliance deadline.
Nonetheless, service providers that capitalize on the chance to develop services and technology that are as robust as they are CFPB-compliant will have the opportunity to increase market share and thrive. Unfortunately, many organizations will find the goal difficult to attain.
To upgrade their compliance capabilities before the new regulations take effect requires a commitment of dollars, personnel and expertise. Many vendors will simply be unable to rally the resources they need to interpret and implement the new regulations. They will also have to develop innovative ways of doing business. At the same time, they will need to identify how the mortgage business will change, stay current on the regulations, and satisfy rule makers. It’s a challenge for 2013, and lenders and technology providers will have to monitor compliance going forward.
Firms that see themselves as solely technology service providers, and not as a vehicle through which lenders can ensure compliance, place their clients’ and their firms at a competitive disadvantage. Ideally, they need to begin to add the expertise and perspective to address compliance and risk. Success requires these firms take initiative and assume a leadership role by recruiting experienced, tested chief compliance officers and chief risk officers.
That decision creates a long-term competitive advantage for those forward-thinking service and technology providers. Relationships with lenders will be deeper and broader because they reflect technology and regulatory know-how.
Under the rules, it will be more difficult than in the past for lenders to escape regulatory responsibility by hiring a third party. The CFPB will scrutinize lenders and their service providers for compliance with the regulations. Those that are shown not to be familiar with the regulations or that do not implement them correctly can be held legally responsible.
Most mortgage executives would agree that the loan origination and qualification requirements and new regulations that govern loan originator compensation have caused lenders and service providers to make considerable changes, and there are more to come. Service providers with a CCO or a CRO that can offer expertise on complex regulations and offer advice on complying will be able to work closer with lenders and more effectively implement changes than those that don’t. Smaller lenders, without question, will benefit most from this expertise.
The gains derived from this expertise will be realized on the servicing side as well. Expect to see new data fields, extended tracking of data fields for new disclosures and periodic statement requirements that necessitate new levels of coordination, expertise, and compliance oversight.
There is no doubt that bankers will have to spend time to customize systems, implement changes and to test, audit, and oversee service providers. As an alternative, it will not be unusual for lenders to opt to select a new vendor rather than rely on existing platforms in a bid to ensure compliance. For these decisions, there are several important considerations.
In response to more stringent due diligence standards, project managers will have to review the offerings from three or four vendors and assess their financial condition, knowledge of laws and regulations and the effectiveness of their operations and controls among other factors.
Compliance will also require some cross training. Before a vendor can train a client, the lender will have to educate the vendor on its products, services, and processes. Implementation of a solution will need to address legal and regulatory issues, as well as align with a lender’s existing business practices.
Under the new regulatory scheme, lenders will expect service providers to understand the new rules, to dedicate the necessary resources to compliance, and to commit themselves to a level of expertise that ensures lenders have the resources they require.
(The views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Mike Sorohan, editor, at email@example.com.)