The collapse of the U.S. housing market has been attributed to a combination of factors: overly lenient or predatory lending practices, poor judgment by consumers, the recession and the unwarranted belief that home prices would increase steadily. As a result of the mortgage crisis, foreclosures increased a record 81 percent from 2007 to 2008. Stringent new rules on lending have made compliance a much more complex process.
In mid-January, the Consumer Financial Protection Bureau (CFPB) announced new regulations banning so called "no-doc" loans and interest-only loans, as well as limits on teaser rates and balloon payments. In addition, new rules were issued requiring verification of borrowers' incomes and debts; those are aimed at limiting debt to 43 percent or less of income.
Software products intended to ensure that mortgages are compliant have been available for many years, but their importance has increased along with the number and complexity of regulations. Lenders are finding that using such tools increases the number of loans they can process, while providing accountability in compliance.
The State Bank & Trust Company, which was founded in Ohio more than 100 years ago, has grown to 18 community banking centers and three loan production offices. About six years ago, the bank decided to expand its mortgage services. To scale up, the bank needed to enhance its loan delivery process, including document preparation, with a strong compliance capability.
"We wanted support that integrated well with our loan application software and underwriting engine," says Pamela Benedict, senior VP and mortgage sales manager at State Bank. After looking into several options, the bank selected Miracle Software for document preparation and Compliance Plus from MRG Document Technologies.
MRG Document Technologies is a practice group within Middleberg Riddle & Gianna, a law firm specializing in representation of residential mortgage lenders. That representation has focused on compliance, document preparation and litigation. The firm has developed software to support the document preparation function. Benedict explains, "Their products support compliance in all 50 states, which was important to us because we operate in multiple states. In addition, they have a group of very knowledgeable attorneys."
The typical workflow in lending is for the borrower to complete an online form with information that enters a loan origination software (LOS) product. The information is then processed by an underwriting engine that verifies customer qualifications for the loan. At that point, the MRG software provides the required disclosures and documents, which are sent directly to the title company for the closing.
Since State Bank has always been conservative in its mortgage lending policies, it has not suffered the impact that many banks did during the mortgage crisis. Nevertheless, the MRG compliance product provides a level of assurance that protects the bank, according to Benedict. "If the bank complies with the regulations and can demonstrate that it has done so, then it is not vulnerable to allegations of predatory lending practices or other detrimental activities," she says.
Due to the rapid rate of changes resulting from Dodd-Frank and other regulatory initiatives, it is important that compliance products be current. "We monitor 60 regulatory agencies at the federal, state and local level," says Kathy Mantych, senior marketing director at MRG. "We warrant our products and embed that knowledge in the technology, as well as having the attorney's services behind it." The rules are updated dynamically, as regulations change.
Streamlining the process
Hometrust Mortgage Company, based in Houston, serves residential markets in Texas, New Mexico and Missouri. Several years ago, its investors encouraged the company to automate and streamline the compliance process. Hometrust was already using HMDA RELIEF from QuestSoft, and decided to deploy its complete compliance product, Compliance EAGLE. The ability of Compliance EAGLE to integrate with Hometrust's loan origination software and with Mavent Expert System, a compliance product used by Hometrust's investors, made it a good match for the company's needs.
With the implementation of Compliance EAGLE, Hometrust is able to process many more loans efficiently, and to ensure compliance with increasingly rigorous regulations. In addition, Compliance EAGLE can identify potential issues early in the loan process, which allows Hometrust to take steps to prevent buyback requests. That occurs when investors become concerned about the quality of a loan and request that the originating institution repurchase the loan. Buybacks force the lender to use its lending capital and result in a much lower value and losses as the lender looks for a new purchaser.
QuestSoft's suite of compliance products began with the Home Mortgage Disclosure Act (HMDA, see sidebar at end of online article or page 13, KMWorld, March 2013, Vol. 22, Issue 3) and expanded over the years. "HMDA requires lenders to submit information about their loans on an annual basis," says Leonard Ryan, president of QuestSoft. "We saw issues with data integrity such as errors in data entry and lack of reconciliation with information from different vendors." Over time, QuestSoft was able to provide operational efficiencies for its customers by adding other information relevant to the mortgage process, sometimes before they were compelled by regulation.
Because much of the information required for one area of compliance is the same for others, the incremental provisions for adding new functionality were minor. "Adding a fraud detection component took only nine additional fields," Ryan explains. Using a service-oriented architecture (SOA) also makes the expansion reasonably straightforward. "If we need results from an external product such as Mavent," he adds, "we can get those results, aggregate them and put them back into the QuestSoft format for a unified presentation of data." In addition, QuestSoft provides ad hoc and scheduled reporting for compliance-related data, such as how many loans of the total portfolio failed within a certain timeframe.
QuestSoft also has expertise in geocoding, which identifies the precise location of properties. Geocoding is an essential component of many real estate compliance requirements, and presents some challenges, because 2010 census data must now be used in Community Reinvestment Act (CRA) and HMDA reporting. "Companies get penalized if their data is inaccurate," explains Ryan, "so their information needs to be up to date."