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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2011

Prepare for More Dodd-Frank Regulations

This sweeping legislation is touching nearly every corner of the mortgage industry. Are you ready?

Prepare for More Dodd-Frank Regulations

If there’s one thing mortgage professionals can count on, it’s regulatory change. Although the financial-services industry has accommodated incremental regulatory change, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which celebrated its first birthday this past July, presents the greatest legislative changes to financial supervision since the 1930s. As a result, mortgage companies must plan now to comply with the act’s requirements for a stricter, more complicated and expensive regulatory framework.

The Dodd-Frank financial-reform legislation affects every financial institution that operates in the U.S. and virtually every part of the mortgage process, from origination through servicing. Designed to take effect in stages, those changes that impact the mortgage-servicing industry most significantly, like the qualified written request (QWR), take effect in January 2013. Although that date may seem far off, meeting these requirements will be a significant undertaking that demands planning and developing strategies today to achieve full compliance by the deadline.

Mortgage servicers must re-examine their business processes and technology infrastructure to ensure they can adapt to changing conditions and effectively comply with ongoing, evolving and additional proposed regulations.

With the regulations and newly established government agencies set forth by the act, businesses that fail to meet requirements will face legal and financial liability. Organizations must begin reviewing their strategies now to examine current procedures and to evaluate solutions that improve operational efficiency to ensure compliance.

Preparing for 2013

The Dodd-Frank legislation sets new standards for enforcement that will require the mortgage industry to follow established and forthcoming regulations more closely. The act gives the state attorneys general the power to enforce certain provisions of the law in court, placing greater legal and financial responsibility on the financial-services sector, increasing the powers of the Office of the Comptroller of the Currency (OCC), and transferring certain functions of the Office of Thrift Supervision to the OCC.

Setting new standards for transparency and placing greater focus on communicating with and protecting borrowers, the act requires more-complete and simplified processes for underwriting, good-faith estimates and Truth in Lending disclosures. Dodd-Frank also established the Consumer Financial Protection Bureau (CFPB), which now has oversight of mortgage lenders and other financial-services institutions. With the administration of many regulations crucial to mortgage, real estate and title industries officially transferring to the CFPB this past July, the bureau’s jurisdiction not only includes enforcement of the Dodd-Frank Act’s established regulatory changes but also the power to draft new regulations moving forward.

Perhaps the most significant Dodd-Frank Act regulation to impact loan servicers involves the acknowledgement of a QWR. Under the Real Estate Settlement Procedures Act, which the CFPB now enforces, servicers currently have 20 days to respond to written requests from borrowers related to their loans. Under the provisions of the Dodd-Frank Act, they will have just five days to respond to QWRs. Additionally, although loan servicers currently are granted 60 days to resolve noted issues, they will have only 30 days under the new legislation.

Facilitating compliance with this change will be nearly impossible for companies that do not have the operational capabilities to convert paper to a digital image and employ the proper technology to enable an electronic work flow, which will provide the necessary audit trail and serve as evidence of QWR receipt, acknowledgement and resolution.

In the next few months, mortgage servicers and other market participants must plan for compliance, or they may face costly consequences, particularly with stricter enforcement of existing rules along with new regulations. As individual and class-action liability are included in the Dodd-Frank Act, companies that are not fully compliant by the deadline put their businesses at risk.

Additional proposals 

This past March, additional legislation was proposed by the newly empowered attorneys general. The 27-page term sheet, sent to the top five mortgage servicers, proposes new standards for mortgage servicing and identifies some of the processes related to the multistate foreclosure probe. With new proposed changes surfacing, mortgage servicers face even greater pressure to streamline work-flow processes and enhance visibility and reporting capabilities.

The proposed standards cover several different areas but focus mainly on increased document-management requirements and most greatly affect loan modifications and foreclosure proceedings. Stemming from consumer complaints regarding lost documents and fraudulent practices, these proposed regulations hold mortgage servicers responsible for developing and executing well-defined and timely business processes for documenting and certifying specific events, including loan modifications and foreclosure proceedings.

At press time, talks regarding the attorneys general proposal are still ongoing. The term sheet may create new obstacles and challenges for loan servicers, however. They will be responsible for managing and processing high volumes of documentation in short periods of time. They also must implement defined and measurable processes to meet forthcoming regulator demands to:

  • Verify the accuracy of foreclosure documentation;
  • Implement standards of training and supervision of employees and agents who prepare affidavits and other documentation;
  • Develop a direct-to-borrower loan portal;
  • Prohibit dual-track foreclosures;
  • Monitor compliance activities by independent third parties;
  • Enhance tracking of documentation and provide a direct borrower link to loss-mitigation information through loan-servicing technology; and
  • Participate in the funding of a nationwide loan-portal system.

Under the proposed regulations, servicers are challenged to respond to requests in a more expedient, thorough way. For example, if a loan modification is denied, servicers will be obligated to notify borrowers within 10 days, implement a 30-day waiting period and initiate an internal review before foreclosure proceedings can begin.

They also will be responsible for monitoring and tracking all requests and activity and must document each stage of the process. All documentation would then be subject to audit for accuracy and completeness.

Although it is unclear exactly how many of the proposed requirements will actually be agreed upon in the final version, with the increased powers of the attorneys general and the CFPB, loan servicers can be sure that there will continue to be more regulation and tighter controls in document management.

How you can prepare

Because the changes required by the Dodd-Frank Act are fairly complex, those who delay the re-architecting of processes increase their risk of errors in execution, noncompliance, and legal and financial liability.

Loan servicers can mitigate these risks by partnering with an experienced business-process-outsourcing (BPO) provider that has the necessary resources and technology to tackle the transition and facilitate compliance. The right BPO vendor will understand the regulations and help financial institutions meet business needs and legislative requirements strategically. Using standardized practices that meet compliance requirements, organizations can define a more efficient process while enhancing service delivery to borrowers.

When combined with a Software-as-a-Service (SaaS) technology delivery model, BPO services alleviate the need for large capital expenditures and offer a reduced information-technology burden, enhanced operational efficiencies and a quicker return on investment. With Web-based document management, image repositories and easy-to-use portals, a SaaS-based solution helps organizations meet time and audit requirements while offering greater transparency. Further ensuring mortgage servicers remain compliant, SaaS-based BPO services also reduce the risk associated with attempting to execute a highly complex solution on their own.

When working with a BPO provider, organizations also can better support additional business processes and requirements, including mailroom services, scanning and indexing, data extraction and auditing, as well as user-friendly Web-based portals that provide borrowers with direct links to their loan servicer. By improving these areas, businesses can further enhance service delivery and facilitate communication with borrowers, ensuring interactions are documented and timely. Taking these measures now will not only help prepare businesses for any new regulations as they are passed but also will reduce costs and improve the customer experience.

Although the Dodd-Frank Act is the biggest regulatory change in recent history, it also serves as a catalyst for process and service-delivery improvement. Mortgage servicers should prepare for more regulations and tighter enforcement moving forward. A BPO provider and a SaaS-based solution may provide flexibility and efficiency to help support compliance with current and future government regulations. Through outsourcing, organizations can not only facilitate compliance, mitigate risk and develop an auditable validation and reporting process, but they also can improve processes, enhance visibility and communicate more effectively with borrowers.


 


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