PERSON OF THE WEEK: The first quarter was a relatively quiet one, from a regulatory perspective, so what should mortgage lenders be preparing for in the second half of 2018?
To find out, MortgageOrb recently interviewed Justin Cole, director of compliance support at Continuity, a provider of compliance management solutions to the mortgage industry.
Q: Compared to previous first quarters, regulatory activity in Washington was low during the first quarter. What should lenders make of this and what should they be prepared for?
Cole: Certainly, the current leadership in the executive and legislative branches of government has set a “pro-business” tone that favors limiting regulations, which is reflected in first quarter rules. But other underlying factors include many changes in leadership and staffing at the regulatory agencies, and the fact that the first quarter is always a slow one, following a slew of year-end actions.
Lenders should be cautiously optimistic about lower burden, but also aware that this regulatory attitude is subject to political whims and may not last, especially with midterm elections on the horizon. With regulatory relief a reality now that S. 2155 has become law, it will be important for lenders to closely follow these developments and institute strong planning process to address the dozens of modified requirements.
It’s also important for lenders to understand that any change – whether adding or taking away regulations – means extra work inside their organizations. Even when there’s a long-term benefit to deregulation, the short-term impact is high.
A change means a lender must re-evaluate its risks, develop new policies and procedures, and upgrade its technology systems. There’s also a significant effort to retrain staff and make other operational changes. Even when rules are toned down or eliminated, significant adjustments follow, therefore lenders will have to closely monitor the efforts of their vendors and regtech partners to properly interpret and respond to these changes.
Q: When preparing for regulatory change, what’s more important – culture or technology? What role does each play in lenders’ compliance management strategy?
Cole: An organization’s culture is definitely more important, because it’s a prerequisite for the successful deployment of technology. A healthy compliance culture starts at the top with the board and management expressing the mandate and setting clear expectations concerning compliance. Those guidelines are supported by allocating appropriate resources and tools toward compliance efforts.
With a strong cultural foundation, lenders can develop the right technology strategy. Before deploying any technology, lenders need to have a clear sense of what they want the technology to accomplish. Even the most sophisticated “whiz-bang” technology can fail to produce benefits if it’s not properly used by stakeholders. Operational weaknesses will only be magnified by technology if they are not addressed prior to the deployment.
With the volume, velocity, and complexity of today’s regulatory environment, it has become impossible for lenders to manage regulatory changes solely through manual effort. Organizations that leverage technology to their advantage can remain agile and informed about regulatory changes, and better position themselves to cope with an ever-changing regulatory environment.
Q: What are best practices or considerations for lenders who want to enhance their compliance management strategies?
Cole: The most effective compliance strategies incorporate a holistic approach. That means the lender understands the interconnectedness of each element of compliance, and that compliance occurs at the point of the transaction, not in a back office or quality control unit. The lender will begin with first deciding its compliance goals: how compliant do they want to be and what’s their appetite for risk (and error)? With that in mind, they design an effective, unified compliance management system (UCMS) that meets the organization’s specific needs.
The typical UCMS model includes an eight-step cycle: risk, policies, procedures, system upgrades, training monitoring, audit programs and corrective action. This model is repeatable, establishes a structure, and ensures all parties within the organization are on the same page. The more that this unified compliance framework can be executed on a single, unified platform the better, and that technology is increasingly available in the marketplace.
We are seeing lenders trend toward deploying transactional compliance technology that helps make sure a specific transaction is compliant, in tandem with compliance management technology that makes sure the governance structures around the business processes are effective and executed timely and accurately. This pairing makes the most sense.
In my experience, I commonly see organizations lacking efficiencies in their detective controls. Specifically, their quality control, monitoring or auditing functions are misunderstood or misapplied. These controls represent a hierarchy: quality control at the front line, periodic monitoring by a risk or compliance group, then independent audits performed according to a defined schedule based upon the lender’s risk profile.
If organizations rely on audit alone, errors may go unnoticed for long periods of time due to the gaps between audits. Monitoring, on the other hand, is applied more frequently so that lenders can quickly address problems that may arise in the normal course of business.
Finally, quality control should happen for each and every transaction, to reduce the risk of errors at the front line. All of these components are critical for a successful compliance management strategy.
Q: With changes to TRID scheduled for this fall, how can lenders best prepare? What questions or concerns are you hearing most often?
Cole: First and foremost, lenders should develop a strong understanding of the regulation and impending changes associated with TRID 2.0. Candidly, plenty of lenders are still struggling with the implementation of the first set of TRID rules.
For example, concerns remain around the settlement provider lists and clarifications from the Bureau of Consumer Financial Protection. With TRID 2.0, it becomes clear that the list should be more specific and correspond precisely to the Loan Estimate. That’s just one of many examples.
To be honest, the questions surrounding the fall 2018 changes haven’t started reaching us en masse yet. I am hearing from many lenders that they’ve begun taking “wait-and-see” approaches and doing “just-in-time” implementations because of how frequently rules seem to come and go or change before their final effective dates.
This more cautious approach signals a new era in regulatory change management. The typical compliance posture has been to be ready for compliance well ahead of time; the shifts in the regulatory environment have forced organizations to become more nimble as well as more reactionary.
Lenders can best prepare by collaborating with their regtech partners and their third-party vendors to understand how these changes will impact their organization’s business. And don’t forget to initiate communications with loan operating systems and documentation providers to monitor and understand their progress, ensuring that they remain capable of delivering compliant outcomes.
Ultimately, it’s the lenders who work closely and proactively with their compliance and regtech partners that will be well positioned to navigate and appropriately respond to these changes.