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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2014

Hitting the Books for Your Big Test

A robust compliance-monitoring program can help your company ace any regulatory exam

Hitting the Books for Your Big Test

In recent years, the regulatory environment for the mortgage-lending industry has dramatically changed. Much of this resulted from the creation of the Consumer Financial Protection Bureau (CFPB), a regulatory agency that was authorized in 2010 as part of the legislative response to the financial crisis.

To exercise its authority and ensure that entities operating under its jurisdiction are in compliance with federal consumer-protection laws, the CFBP is authorized to conduct periodic exams. Although a number of mortgage banks and brokerages have already experienced one of these CFBP exams, a large number of origination companies still have not yet encountered this experience. If your organization is among these companies, are you set to pass the test?

Before experiencing your first CFPB exam, there are a few factors you should consider. First, you should know that the CFPB’s examiners are not walking in blind. Before they arrive at your office, they will have done their homework on your company. They’ll know if your company has a compliance-monitoring program, the number of people who staff the program, and the experience level of that staff.

If you are a state-regulated mortgage lender, the examiners probably will have spoken with the regulators in all of the states in which you are licensed to get information on your operation and any complaint information along with the results of any examinations conducted by the state. In addition, they will have searched the Internet to gather information on your company.

Finally, despite common perception, originators should realize that the CFPB’s examiners are not out to get them. They are not looking to put your company out of business. Instead, many originators would agree that the CFPB’s examiners are respectful and fair in going about their business.

It helps to understand the areas of focus for the CFPB exam. The agency’s initial focus will be on a review of your recent Home Mortgage Disclosure Act (HMDA) data and fair-lending compliance. Examiners are looking at HMDA data to determine its accuracy as compared to your loan data. The accuracy of this data will tell the CFPB examiners not only how closely you scrutinize your HMDA reporting, but also whether they can confidently rely on the accuracy of the data that you have prepared for the examination. Data integrity is a key for the examination and will play a role in how the examination is administered.

Another area of focus for the examiners will be on customer complaints. In the eyes of the CFPB, the number of customer complaints received — and how they are addressed — is an indicator of how well-managed the company may be, as well as how focused its management team is on customer service. The CFBP wants to see the number of customer complaints and how they were tracked, all the way from receipt to resolution.

The examiners also will want to see how much communication about customer complaints is shared with top-level executives and board members. Examiners will be looking at trends from customer feedback and how the management team is responding to those trends. For instance, examiners may want to see if your company has identified trends in complaints against a particular loan officer or a branch, and will want to see how your management team addressed the issue.

It’s especially important for top-level executives and members of your
board of directors to be engaged in compliance oversight.

One way to help ensure a successful outcome from the CFPB exam is to establish a compliance-monitoring program. This may initially seem costly, but when you look at the possible fines and costs of lost productivity associated with the CPFB’s penalties, the cost of a monitoring program becomes much easier to swallow.

After all, the CFPB does not always assess fines when errors are identified. Mistakes will happen in this business, and the CFPB recognizes that. The bureau looks at the entire situation before assessing penalties, including whether or not the company has a compliance-monitoring program.

With this in mind, what should banks and brokerages stress while establishing or revising their compliance-monitoring programs? Consider the following six elements, all of which are essential for creating a solid compliance program.

1. Assign the right people

Experience counts. It’s that simple. No company would allow someone with no underwriting experience to make underwriting decisions on its loans, and the same philosophy applies to compliance monitoring.

Your compliance personnel should be experienced. The core foundation of a compliance-monitoring program is having a team of knowledgeable, experienced people who work independently of other areas of the organization. Without a doubt, there could be a great deal of cost involved in the recruitment and retention of regulatory compliance experts. As mentioned earlier, however, the costs you may incur could be even greater if you don’t have talented, competent compliance professionals in place.

Some organizations decide not to invest in creating a team or department that is dedicated entirely to compliance. Instead, these companies assign it as an additional function to an existing position, such as having the operations manager or closing manager also wear the company’s compliance hat.

Make no mistake, however: Companies that try to pass this off as proactive compliance monitoring will not pass muster with the CFPB. Instead, the bureau will see right through this, and the company will take a hit during the exam.

2. Identify compliance risks

Because the CFPB places a great deal of emphasis on fair-lending practices in mortgage-banking-industry exams, it’s easy to make the assumption that compliance monitoring should focus on loan origination. Originators should realize, however, that there are a number of risks in every department that must be assessed, monitored and addressed.

For instance, CFPB regulators will ask to see advertising materials, such as flyers and websites, produced by the marketing department or individual loan originators to make sure that they meet the long list of federal requirements. Among these are requirements that ads do not promote rates and terms the company cannot honor. In addition, ads must meet federal standards for truthfulness and accuracy. They can in no way be deemed discriminatory, unfair or deceptive.

3. Monitor changes

Navigating through the CFBP exam successfully hinges on your company’s awareness of and compliance with the ongoing stream of regulatory changes, and because of this it’s critical to find ways to learn about the industry’s latest updates. A good source for this information is through membership in professional associations.

In this regard, the Mortgage Bankers Association (MBA) can be an invaluable resource for regulatory updates, as well as strategies for implementing changes within your company and interpretations on how they’ll impact the mortgage industry. If you are not already active in the MBA on the state, local or national level, consider becoming more involved.

Another good source of information is through paid subscriptions to various monitoring services. For mortgage bankers, AllRegs is widely considered the industry standard for new lending guidelines, underwriting guidelines, training and education requirements, and federal and state compliance updates. Other subscriber-based services are available for mortgage bankers and a wider range of industries like health care, accounting and legal.

4. Scale your program

When it comes to compliance, one size does not fit all. Inadequate staffing for a compliance-monitoring program is among the most common mistakes made by mortgage banks and brokerages. The CFPB understands that nonbank mortgage lenders will not have compliance staffs that rival those of the big banks.

Considering that, a compliance department should be staffed according to the size of the company and the scope of its compliance-monitoring needs. For instance, while two dedicated compliance personnel may be enough for a small, regional mortgage bank, this certainly will not be adequate for monitoring a mortgage-banking company with 100 or more offices and more than 700 employees who also service loans.

5. Focus on clarity

Creating clear and comprehensive regulatory policies and procedures is another necessary element for having an effective compliance-monitoring program. Having clearly written policies and procedures opens the channels of communication so that everyone fully understands what is expected of them.

Likewise, your policies and procedures should be comprehensive enough so that staff members are clear on how to handle situations without resorting to individual interpretation. Comprehensive policies and procedures will help ensure consistent execution across your entire company, while reducing the instances of mistakes that may result in regulatory action.

6. Engage senior staff

The development and long-term maintenance of compliance-monitoring programs must be embraced from the top down. To that end, it’s especially important for top-level executives and members of your board of directors to be engaged in some parts of your organization’s compliance oversight. In their roles, they have varying levels of liability for noncompliance, so it is in everyone’s best interest for these senior staff members to play an active role in compliance monitoring.

The CFPB will expect to see that policies and procedures are reviewed and approved by your board of directors on a regular basis.

Expectations about this process will vary based on the size of the organization and the scope of the procedure, but ultimately, the CFPB will want to see that your board of directors is aware of changes in the company’s policies and procedures.

Another way to engage executives and board members is to make sure that they’re aware of regulatory updates. Executives and board members also should be apprised of results from audits, inspections and exams. By doing so, top-level company representatives have a better understanding of how regulators view your company.

•  •  •

As Benjamin Franklin once said, “An ounce of prevention is worth a pound of cure.” By taking the preventative measure of creating an effective compliance program, mortgage banks and brokerages are taking a preventive action to reduce their chances of incurring costly fines by the CFPB. In turn, this becomes a situation in which the company, the customers and the regulatory agency end up better off in the long run. 


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