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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2014

Keep Track of Your Self-Policing

Mortgage banks and brokerages should proactively report violations

The past few years have delivered sweeping changes to the mortgage industry. Like it or not, the Dodd-Frank Wall Street Reform and Consumer Protection Act has implemented considerable accountability and consequence for an industry that was previously lax in enforcing its own regulations. Dodd-Frank established the Consumer Financial Protection Bureau (CFPB), which in July 2011 assumed the responsibility of overseeing the mortgage industry and enforcing regulatory compliance. Since becoming the industry’s unfettered watchdog, the CFPB has pursued countless regulatory violators, individual and corporate, holding them accountable for their actions.

Monitoring the regulatory climate, keeping up with new guidance, and enforcing every rule and regulation can certainly prove to be a daunting task for mortgage banks and brokerages. With that in mind, the CFPB issued Bulletin 2013-06 in June 2013, which established guidelines on responsible business conduct. Through this bulletin, the CFPB announced its expectations by encouraging mortgage entities to regularly police themselves and report discovered misconduct.

Although self-policing and reporting the findings may seem self-defeating, the CFPB has indicated that it would generally react far less severely to self-reported violations than it would in response to an issue discovered through a consumer complaint or an independent CFPB audit or inspection. The bulletin stated, “The Bureau considers many factors in the exercise of its enforcement discretion,” going on to specify four considerations in specific:

  1. The nature, extent and severity of the violations identified;
  2. The actual or potential harm from those violations;
  3. Whether there is a history of past violations; and
  4. A party’s effectiveness in addressing violations

Again, in its quest to protect and benefit the public, the CFPB has indicated that it will pursue and sanction violators who do not self-report with far greater zeal than it will against those who do. By self-reporting, a mortgage company demonstrates its commitment to appropriately addressing the issue or issues at hand. Furthermore, a company reporting few-to-no issues could trigger CFPB scrutiny because it would be rare for any entity to consistently maintain absolute compliance to all regulations.

Self-policing and monitoring encourages mortgage companies to proactively identify and eliminate inappropriate activities and behaviors, thereby demonstrating the company’s commitment to proper conduct.

Of course, voluntarily raising an inappropriate action to the CFPB’s attention may seem self-defeating, but when considering the consequences of not doing so and having a CFPB examiner find out that you did not self-report, the benefits of self-policing and self-reporting far outweigh any other alternative.

Assessing compliance

When it comes to accessing your own company’s compliance, “secret shoppers” can pay big dividends. Secret shoppers are individuals hired by a company to present themselves as customers in order to survey the business’ customer-service practices, processes, pricing or whatever it is that the company wishes to test.

Mortgage companies can employ this tactic to test their loan originators’ and customer-service representatives’ adherence to fair-credit laws and other regulations. These secret shoppers can test the company’s processes and practices by documenting employees’ actions, perhaps even baiting an employee toward violating a financial regulation. For example, a secret shopper may report a loan originator who does not properly address the required Home Mortgage Disclosure Act questions appearing on the Uniform Residential Loan Application or a loan originator who attempts to steer a prospective borrower to a less beneficial but more profitable loan option.

Anything that an employee may do in violation of federal financial laws is subject to a secret shopper’s scrutiny. In this respect, secret shoppers can be a useful tool to see what is being said to your consumers and whether or not your originators and other personnel are following the scripts and rules that you have given them.

Quality-control audits

The use of routine and in-depth quality-control audits also can help your company ascertain its level of compliance for a targeted review selection. Although quality-control audits will not catch every error, they will point the way to areas that may require further review.

An integral part of a quality-control audit is the identification of errors and, when those errors exceed a predetermined maximum percentage, to set an action plan into motion to prevent future errors of that sort. High percentages of errors revealed in quality-control audits may indicate issues that should be considered for self-reporting.

Internal audits

In addition to employing testers and quality-control audits, mortgage companies should frequently conduct internal audits to ensure that they remain compliant with accepted accounting and pricing practices. These audits should seek to identify patterns and deviations from standard practices that could represent disparate or unfair treatment.

Because the CFPB is simultaneously conducting similar activities, it’s crucial for companies to take appropriate corrective action if and when they discover they’re not acting compliantly. This involves reporting the incidence and the actions before a federal examiner or auditor discovers the impropriety through a consumer complaint or other means.

Remediation

When violations are discovered and ultimately reported to the CFPB, the bureau will consider it a priority to redeem those consumers identified as being adversely affected by the company’s actions. Per its June 2013 bulletin, in deter-mining what sanctions to levy against an offender, the CFPB will explore the following four considerations, among others:

  1. What steps did the party take upon learning of the misconduct?
  2. Were consequences imposed on the violators?
  3. Did the party take prompt and effective steps to preserve information, identify the extent of consumer harm and appropriately compensate anyone adversely affected?
  4. What processes did the party implement to render the misconduct unlikely to recur?

The CFPB will perceive an entity that proactively employs significant efforts to remedy violations of federal financial laws far more favorably and sanction it less severely than an entity that doesn’t. The bureau will consider an entity cooperative when it demonstrates significant dedication to compliance by reacting above and beyond what the law requires to resolve misconduct. Mortgage organizations should consider the possibility of the mere act of not self-reporting being deemed to be “not cooperating,” a possibility that makes the act of self-policing all the more important.

•  •  •

Whether potentially subject to a quality-control audit, an internal audit or a secret shopper testing scenario, every-one engaged in the mortgage profession should maintain constant vigilance when it comes to compliance. Staying abreast of the regulatory requirements and updates necessary for compliant conduct is nothing short of critical because ignorance is never an acceptable excuse for violating a financial regulation. Your company will be well-served by proactively staying up-to-date on all industry developments and taking all appropriate steps to ensure that compliance remains paramount in all activities. 

The authors would like to thank Karen Meister, vice president of Texas Capital Bank, for providing them with the topic for this article.


 


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