Software-as-a-service technology could help lenders and originators share compliance risks

Lionel Urban, president and CEO, PCLender.com

As published in Scotsman Guide's Residential Edition, November 2008.

Significant changes in government oversight of mortgage lending have brought compliance to the forefront of broker-banker relationships. Brokers and bankers must work together to avoid penalties that result from noncompliance.

This has become a more complex and risk-laden proposition in the past 12 months as compliance regulations now closely scrutinize origination processes.

Broker-facing origination tools that lenders provide, including software-as-a-service (SaaS) technology, can help track those processes and may become critical watchdogs for all concerned.

The evolution of broker portals

From 2000 to 2006, an unprecedented proliferation of mortgage products reflected an unprecedented proliferation of private investors. Many wholesale lenders, having adopted automated loan-origination-system tools, began to ask vendors to create broker portals to allow closer management of their originators.

Some lenders even developed their own broker portals to mixed reviews. Lesson learned: Originations are only as good as the systems and procedures through which they are made.

New lending-compliance regulations focusing mortgage bankers' attention on the earliest stages of origination emerged when the Federal Reserve Board approved revisions to the Truth in Lending Act and the Home Ownership and Equity Protection Act this past July. Both are aimed at protecting consumers from unfair lending and servicing practices. Revised Real Estate Settlement Procedures Act requirements also are waiting in the wings.

These have created a heightened need to track applications, initial disclosures and state broker licenses, placing a burden on bankers to monitor specific information about each origination, even those denied.

Recent regulatory changes not only explicitly reset the nexus of compliance enforcement with the Federal Reserve Board, but they also eliminate the need to prove a "pattern" of noncompliance before enforcement. Therefore, a single instance of noncompliance is enforceable and creates significant risk for lenders and brokers.

Mortgage professionals must manage practices closely to comply. To protect their role as a channel of qualified borrowers to wholesale banks, brokers must submit high-quality loan files in compliance with government mandates.

Further, banks will be required to demonstrate compliance safeguards. Brokers should expect lenders to leverage loan-origination technology to monitor third-party originations. Ideally, solutions should help brokers meet compliance benchmarks and create reports that will satisfy regulators.

Practical SaaS

An outsourced option, the SaaS model, could be a practical business-process-automation solution. For lenders and originators, SaaS is compelling because it shifts management of market-driven details to a more reliable and cost-effective model.

There can be hundreds of tables and forms related to loan programs, state disclosures, licensing, data checks and loan limits to ensure accurate data entry. Failing to work from updated information is a looming compliance risk.

Further, SaaS lending platforms with broker-facing portals can minimize risk for wholesale lenders and originators by minimizing the chances of processing noncompliant loans. For many, that is a fundamental business practice to ensure they meet the challenges of today's market.

Lionel Urban, president and CEO of PCLender.com, is a 20-year mortgage industry and technology veteran. He has been responsible for loan production, operations, secondary marketing and supervised lending-department compliance. PCLender.com is an enterprise-class mortgage-technology company that supports more than 50 banks, credit unions and mortgage companies. Reach him at Lurban@pclender.com.