Residential Magazine

Sidestep This Trap

It’s tempting but reckless to overrely on technology for compliance

By Jim Paolino

As the mortgage industry faces overwhelming demand for refinances amid historic market uncertainty, it can be easy to lose focus on staying compliant. If your quality-assurance (QA) program lacks human oversight and monitoring, it won’t suffice as your company tries to conform with a complex web of regulations.

The country has recently experienced some of the strangest days in its history and the mortgage industry is not immune to this upheaval. The obvious culprit has been the COVID-19 pandemic and corresponding economic shutdown.

Even had there been no pandemic, mortgage-related businesses have been rolling with and adapting to tremendous change for a few years. One trend at the forefront has been the digitizing of the customer experience and automation of as much of the production process as possible. 

What’s not to love about leaning more on technology? When the right systems are identified and implemented — and they’re used appropriately — technology in general makes things faster, easier to do and more effective. Done well, technology results in consistency and transparency, which is always good for the bottom line. It also generates better documentation, which can be crucial for a complete compliance program.

As is the case with many things, however, an overreliance on technology can lead to its own challenges and pitfalls. Although this is not a call to rely less on technology, it is a reminder that the mortgage industry still requires a human touch and common sense, as well as business rules and system protocols. This point can be demonstrated clearly when it comes to quality assurance on the front lines of the transaction.

Human endeavor

Let’s admit it: Without a loan officer or independent originator (as well as a borrower), there are no home-purchase transactions, with the exception of the occasional cash buyer. The borrower-originator interaction is at the core of the mortgage industry, no matter what some people might say. 

Even if mortgages someday become almost fully automated and are overseen by some modern permutation of artificial intelligence (AI), the typical consumer doesn’t completely understand how the process works and needs someone who does to guide them through it. Yes, this can occasionally be a Realtor or another type of trusted adviser. It can even possibly be a web-based video. For most borrowers, however, an FAQ does not bring to the table what an originator can.

Ultimately, the mortgage process is a sales process, even if the originator is seeking to be the go-to professional for the borrower’s next home purchase or refinance. No two people sell the exact same way. The process is governed by complex and ever-changing rules. So, it’s not a reach to suggest that loan officers and originators sometimes bump into compliance issues. Yes, there is technology out there to help with that. Is there truly effective automation of the quality-assurance process for originator-borrower interactions? Many of the technology solutions that have become prevalent in the industry are governed by business rules, data analysis and ratios — all of which can be easily skirted by a loan officer or broker willing to cross regulatory lines to make a sale. 

Training is necessary and useful. But even the most robust training programs
can be ignored or misunderstood by an originator looking to make a sale on a
whatever-it-takes basis. Unfortunately, when an originator commits a violation, his or her lender usually doesn’t find out until regulators arrive and a penalty is prescribed.

Even the most robust training programs
can be ignored or misunderstood by an originator looking
to make a sale on a whatever-it-takes basis.

Necessary oversight 

There isn’t a truly comprehensive technology that can understand the nuances of human conversation, which is often where an infraction at the originator level will happen. Quite simply, AI is not yet at a level where it can detect sarcasm, hints, analogies and so forth. There are a million ways to violate the myriad state and federal laws, rules and regulations that govern how an originator sells a mortgage (or explains it) to a consumer, and AI isn’t yet ready to replace people for these tasks.

When it comes to a tech-only QA approach, there also is no truly cost-effective way to monitor and oversee every conversation being had in the industry, and that’s a real problem. Too often, even a lender that has made significant efforts to implement a QA process for its originators finds out that it fell short when a letter from an enforcement agency arrives. 

“Many of our clients are usually stunned when they actually hear what some of their loan officers are saying to prospects or clients,” said Richard Douglass, president of RDAssociates Inc., a competitive intelligence, market research and business development company based in Philadelphia. “Even during the best of times, it’s not easy to be sure one’s associates, specialists and sales personnel are minding their p’s and q’s as they fight for new business, not to mention underwriting and support personnel.”

Although many mortgage businesses are understandably focused on other matters at the moment, now is exactly the time to not let down one’s guard, Douglass said. Instead, having a comprehensive and continuous QA program in place at the origination level is optimal for times like these — when top executives are focused on sales, crisis management or the like. Douglass also points out that simply having a system in place is strong incentive for loan officers and originators to be more compliance-minded.

“It’s during times of disruption, such as the COVID-19 shutdown, that originators get more anxious about closing sales no matter what it takes, and executives are not truly focused on QA, that having a robust QA system earns its keep,” he said. “Even on autopilot, a good QA process combines technology with human common sense, and originators know that the firm is not taking a break from compliance.”

Good-faith effort 

Even the best compliance programs have the occasional hiccup. Many regulators will allow for mitigation of an infraction if the company committing it can prove that it has methodical, overlapping and redundant systems in place to prove they’ve made a good-faith effort to stop and/or catch compliance violations. 

Nobody can monitor their compliance efforts at the granular level with 100% effectiveness. But, faced with a violation, which lender stands the better chance of solving the problem in the long run: the lender that has a multitiered QA program in place or the one that doesn’t? 

An executive can provide hours of testimony and mounds of affidavits certifying that their company’s management team did all it could to educate and train its loan officers. An active monitoring program, with human involvement, is the only truly effective way to ensure that loan officers and originators follow this training. ●


  • Jim Paolino

    Jim Paolino is CEO of LodeStar Software Solutions, which develops loan estimator, sales-management and closing-portal technologies. In this role, Paolino manages the company’s day-to-day operations, and oversees business development and long-term strategic direction. He has a decade of experience developing software solutions specifically for the mortgage and title-insurance spaces. Paolino speaks frequently about technology trends as they relate to compliance, operational efficiency and sales growth.

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