Keeping Ahead of Costly Financial Reform Legislation

As the Senate takes up Sen. Christopher Dodd’s financial regulatory reform bill, the mortgage industry needs to prepare for the very real possibility of additional regulations and increased oversight by regulatory agencies. With health care reform in play, President Barack Obama has identified financial regulatory reform as his top legislative priority. While amendments to Dodd’s bill are expected, some of its key provisions would have far-reaching impacts for the industry. Among them, the bill would create a new consumer financial protection bureau responsible for writing rules for mortgages and other financial products. Housed in the Federal Reserve, the agency would examine and enforce regulations for banks and credit unions with assets over $10bn and all mortgage-related businesses. Regardless of what the final legislation looks like, lenders are already beginning to experience tougher oversight by regulators. State regulators recently assessed fines exceeding $1m for violations of the Home Mortgage Disclosure Act. The Department of Justice has been stepping up fair lending enforcement efforts, evidenced by the recent launch of a new unit within its Civil Rights Division to investigate mortgage lending and servicing practices. One of the division’s cases was recently settled for more than $6m, and it has a slew of fair lending investigations pending. Through a proactive approach to compliance, however, mortgage lenders, servicers and brokers can keep enforcement efforts and new regulations from slowing them down. Ahead of more rigorous standards and oversight, financial institutions need to create a culture of compliance throughout their organizations – from senior management down to the representatives who have initial contact with clients. As a first step, a thorough self-assessment will help identify risks in underwriting and origination activities. An internal examination of fair and non-discriminatory lending practices should focus specifically on areas where lenders allow for discretion – markups and overages by mortgage brokers and other third parties, for instance. To prevent compliance violations, policies and procedures may need to be clarified or revised, and staff members, brokers and other third parties may need to be retrained. Beyond the self-assessment, it is critical that financial institutions take an integrated approach to implementing a program, rather than making compliance a separate initiative. Doing so can promote operational efficiencies, cost savings and a timely response to problems. Those problems can be identified by conducting a fair lending risk review — a statistical analysis of the lending portfolio with an emphasis on aggregate measures covering all potential areas of fair lending risk. These risks include marketing, redlining, denial rates, above-threshold pricing, difference of means for pricing, steering, and overrides. The primary goal of a fair lending risk review is to allow the lender to focus its efforts on only the risky areas identified during the review, saving time and money in the process. In conjunction, implementing an automated monitoring system can help ensure compliance with federal and state laws at all stages of the loan cycle. This is true particularly for larger financial institutions because of the higher volume of loans processed, which makes manual review time consuming and costly. Among the advantages of an automated system, it can alert lenders of predatory or discriminatory pricing to prevent overpriced loans before they are funded, and it can simplify the process of documentation. In addition, as new laws are passed and revisions to existing laws or regulations take effect, many automated systems are continually updated to reflect these legislative changes and help the lenders comply with them. Automated systems also generate regular compliance reports that financial institutions can use to correct compliance errors and to demonstrate to regulators a good faith effort toward meeting fair and anti-predatory lending requirements. As mortgage lenders, originators and servicers try to do more with less in an increasingly regulated environment, they can rely on these analytics to drive compliance and performance. While it is still too early to tell what financial regulatory reform will look like, it is clear that participants in the mortgage industry are going to have to be more thoroughly prepared for their next regulatory examination. By conducting a self-assessment and instituting a comprehensive compliance monitoring program now, they can position themselves more positively with regulators and equip their organizations for a more challenging market. Edward Kramer is executive vice president of regulatory programs for Wolters Kluwer Financial Services.