BLOG VIEW: We hear a lot about the constant changes in the mortgage industry. During the last few years, most of the changes have been due to new regulations and the need to be compliant with them. Companies have used technology to help with those efforts.
Along with new regulations, companies have to adjust to another feature of this new normal: audits. To some, that is a scary word; however, again, technology comes to the rescue. With the proper technology and process in place, companies can be audit-ready at any time.
Federal agencies conduct audits to ensure companies are adhering to existing regulations. Essentially, as we are told, the goal is to ensure consumers are protected from unscrupulous mortgage lenders and servicers. Although necessary, audits can disrupt a company’s day-to-day activities and cause it to pull resources from other areas. Some firms have added staff to specifically manage compliance efforts and ensure that audits go smoothly. This “new normal” has made it imperative for companies to be proactive regarding preparation for audits, which includes using systems to gather and manage processes and information in a way that is easily available to auditors when needed.
Traditionally, to prevent any nasty surprises that result in fines, mortgage servicers have worked with third-party experts to perform occasional internal audits on their portfolios. Some of the regulations, such as guidelines by Fannie Mae, expected a sample of 10% of loans originated to be manually reviewed by an auditor. Lenders and servicers are used to this and are, for the most part, able to work through this requirement. Now that most of the anticipated regulations from the Dodd-Frank Act have become law and the dust is settling around them, servicers and lenders are taking their auditing prep efforts in-house. There are three reasons they are choosing this route: it is easier to train and retain people with auditing skills, since it has become a new cost of doing business; it is less expensive to manage auditing efforts in-house; and it gives companies complete control of the prep for auditing.
As mentioned, technology, in addition to the staff, plays a large role in preparation and is used to help minimize the added costs of auditing. And companies face that age-old decision of either building the technology or buying existing technology. This is driven solely by the level of investment each company is comfortable with and the time frame in which they want to use the technology. Lenders and servicers also need to be cognizant of the constant regulations changes, which mean companies will need to invest in training staff on the new requirements and possibly modify systems.
Another reality that companies have had to adjust to is the additional cost of audits. Lenders and servicers are still adjusting to the additional cost of doing business, thanks to regulations. This is additional cost they either have to subtract from their bottom line or pass along to consumers. Companies have streamlined originations and servicing as much as possible to maximize their profits. However, they can only do so much to trim cost when regulatory changes, such as the Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosures rule, increase the average origination time by 10 days. Servicing a loan has also increased from $55 to $208 per loan, according to Accenture, a global professional services company that provides a range of services and solutions in strategy, consulting, digital, technology and operations. Although this cost will decrease over time, it will still be an additional cost.
Government agencies increased the types of audits to protect the homeowners from the ill practices in the mortgage industry. The irony is the cost of such protections are passed along to consumers, one way or another. That is just how it seems to be.
Pramod Karachur manages compliance efforts at IndiSoft, which offers a range of software solutions for the financial services industry, including its RxOffice Compliance solution, a full re-underwriting platform that can be used by lenders for pre-funding and post-funding quality control, by aggregators to perform due diligence on loans being purchased from their correspondent networks, by investors to mitigate portfolio credit losses, and by mortgage insurers to manage the claims process.