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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2007

Navigating Regulatory Waters

Technological tools can help brokers stay afloat

Residential mortgage lending is a highly regulated industry. New laws — covering everything from predatory lending to prepayment-penalty restrictions to nontraditional mortgages — are enacted and existing laws changed at an astounding pace.

Considering that many brokers do business in multiple states, it can be difficult to stay abreast of legislative changes and trends that affect the industry. But it is important to do so from both a business and a compliance perspective.

Additionally, branch and personnel changes are common, making it even more difficult to ensure consistent and continued compliance with new and existing laws. Therefore, it is imperative that brokers be aware of and use tools that can help ensure compliance. Many such solutions are entirely technology-based or work with existing technological tools.

Staying on top of regulatory and legislative efforts and knowing how to navigate them using the tools available to them is key for today’s mortgage brokers.

Current laws and issues

Certainly, everyone in the mortgage industry should be aware of the effects of anti-predatory-lending laws. Such laws are enacted to protect consumers from predatory brokers or lenders that charge high interest rates and excessive points and fees; that make refinances that offer little or no benefit to consumers; or that seek to strip the equity from consumers’ homes by saddling them with a loan they cannot afford.

Currently, there is a federal anti-predatory-lending law on the books — often referred to as “Section 32,” which is part of the Truth in Lending Act. Also, more than two dozen state and local anti-predatory-lending laws are either on the books or pending. Most of these laws set forth points and fees and interest-rate triggers known as “high-cost triggers.” If these triggers are exceeded, brokers and lenders face additional requirements and restrictions.

For example, if the total of points and fees on a loan exceed 5 percent of the loan amount, the broker or lender may need to provide additional disclosures to the consumer or may be prohibited from making a loan that includes certain features such as a prepayment penalty. Most industry players choose not to exceed these triggers.

Another common feature of these laws is a requirement that there be a tangible net benefit to consumers in a refinance situation. It can include a lower monthly payment, a lower interest rate or a move from an adjustable-rate mortgage to a fixed-rate mortgage.

Clearly, having so many different state and local laws creates a confusing patchwork of regulatory requirements with variations among states, counties and sometimes cities. In the absence of an across-the-board standard, it is difficult to keep up with what’s permissible and what’s not permissible for a particular loan.

Also, with the recent problems in the nonprime market, Washington, D.C., has its eye on the mortgage industry. Congress is holding hearings that include mortgage-banking regulators and industry leaders and that could result in more-stringent federal anti-predatory-lending legislation. Most people in the industry hope for a national standard that will allow brokers and lenders to apply the same requirements and restrictions to all loan transactions regardless of jurisdiction. This would provide consumers nationwide with consistent and continued protection.

Anti-predatory-lending compliance

Technology can help brokers stay in compliance with anti-predatory-lending laws. For example, a broker’s or lender’s loan-tracking system can be automated to ensure that high-cost triggers are not exceeded. Points and fees calculations can be programmed to run before closing to ensure that the total of points and fees does not exceed applicable high-cost triggers.

It is particularly helpful to automate the interest-rate triggers because they usually fluctuate monthly based on comparable Treasury yields. If compliance is handled manually, these calculations are subject to human error.

Understanding the triggers and performing the calculations to ensure compliance is especially critical in connection with second-lien loans, which often carry high interest rates. By using a loan-tracking system to ensure that high-cost triggers are not exceeded before closing, brokers and lenders can comply with applicable laws. They also can avoid situations in which points and fees or interest rates must be lowered at the time of closing.

Brokers who value their reputations and who don’t wish to be associated with predatory-lending practices — or to be labeled “predatory” by consumers, advocacy groups, industry insiders or regulators — must maximize the benefits that technology offers. Automated loan-tracking systems that employ such methods can help brokers maintain a spotless reputation.

Prepayment penalties

Another regulatory concern for brokers is that many states restrict or prohibit prepayment penalties on some or all types of loans. Although prepayment penalties are restricted in many states, they can save consumers, brokers and lenders time and money if consumers who understand their ramifications and benefits use them properly.

Brokers must understand and adhere to state prepayment-penalty restrictions. Lenders won’t approve loans with prepayment penalties that don’t comply with state laws. Further, regulators levy hefty fines for violations, and consumers may sue for damages.

For these reasons, lenders often employ technology-based solutions within the loan-locking process to ensure compliance. Some lenders have programmed the applicable restrictions into their systems so that brokers’ lock requests are automatically reviewed before lock confirmation to ensure compliance. Loans that do not adhere to state restrictions cannot be locked, and brokers are immediately made aware of the infraction. Thus brokers can be sure that the loans they lock with that particular lender include allowable prepayment penalties under state laws.

Managing nontraditional mortgages

Another area of the legislative landscape that has received much press and recent regulatory scrutiny — but that has proved difficult to manage using technology — is the set of laws that govern nontraditional mortgages. Compliance with these laws begins with honest and thorough solicitations and advertising. It is crucial that consumers be given enough information to evaluate a loan offered in an ad or solicitation and that brokers honor the terms set forth.

Upfront disclosures are also vital. Consumers must understand the terms of the loan for which they are applying, the interest rate they will receive and the fees they will be charged. Accurate and thorough upfront disclosures can help consumers shop for the best loans and prices. Many terms of nontraditional mortgages, such as the possibility of negative amortization or the existence of a fluctuating interest rate, must be explained and disclosed upfront. It also is imperative that consumers be offered loans that meet their needs and that they can afford based on their income, assets, credit history and other factors.

To assist brokers in understanding the nontraditional mortgage products they offer, lenders can provide product training. Additionally, most lenders make upfront consumer disclosures and product-specific disclosures that explain the features of nontraditional mortgages available for free on their Web sites.

It’s likely that the future will bring continued regulatory investigation into the use and perceived abuse of no-doc and low-doc loans. As such, there’s no doubt that lenders will continue to employ advanced technology-based solutions that combat the fraudulent activity associated with these loan types.

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The ever-changing regulatory environment keeps brokers on their toes. Lenders using technology in new and better ways can assist brokers in navigating the regulatory waters. Brokers can ensure compliance by relying on technology along with training and sound business practices. By doing so, they can create a strong foundation, increased growth and success. 


 


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