Loan Originator Compensation: The Regulatory Examination The Easy Part is Over … Now the Real Fun Begins By Jonathan Foxx
Implementing Quality Control with Automated and Manual Review Processes By David Rasmussen
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In today’s consistently evolving mortgage environment, thorough quality control (QC) procedures surrounding valuation management are extremely important for safe and successful lending practices. Any organization that has not taken a long and hard look at their own procedures is certain to face regulatory scrutiny, not to mention future challenges in maintaining a profitable business. Even for those that have recently redefined QC procedures, it is important to periodically re-evaluate and compare them against current industry best practices. Whether funding a loan, making a refinance decision or investing in a loan/pool of loans, the most prudent QC examination requires a combined use of a valuation management platform and a manual review approach.
NOVEMBER 2011
PENNSYLVANIA MORTGAGE PROFESSIONAL MAGAZINE
NationalMortgageProfessional.com
Automated quality control Highly competitive companies in the mortgage industry are utilizing valuation management tools to automatically route base decisions. For example, when an incomplete appraisal lands on the desk of a reviewer for manual processing, significant time is wasted assessing the insufficient report and additional time is lost coordinating with the appraisal provider for resubmission. Time and energy is maximized when an automated system immediately examines the appraisal before it hits the desk of the reviewer. Valuation management platforms can ensure essential compliance standards, such as conformance with the Uniform Appraisal Dataset (UAD) standards, the Uniform Collateral Data Portal (UCDP) hard stops and essential underwriting standards. These automated platforms offer client-defined criteria that provide the ability to modify rule sets and adjust to changes in internal/external regulations. Additional benefits include the assurance against arbitrary or subjective decisions as well as protection against human error. All valuations thereby achieve a “minimum standard” that is set by the organization before valuations are routed to a reviewer for a manual examination (if necessary). High-performance systems will also provide the automated rule functionality to order and compare side-by-side alternative products such as automated valuation models (AVMs), data and analytic risk products. Thresholds can be set such that these products are only ordered when deemed appropriate and can be linked together under a single loan transaction for easy reference. Additional automation of product completeness, compliance and the data creditability allow organizations already strapped for resources to make prompt decisions.
Manual quality control As valuable as automated platforms are, they cannot entirely replace the human element in making qualitative decisions applicable to mortgage transactions. The task of manually reviewing an appraisal report should be done by a trained professional with a keen eye and the ability to quickly perform as continued on page 12
SPONSORED EDITORIAL
Since April 6, 2011, the mortgage industry has been required to implement the new loan originator (LO) compensation rules (Rule). The Rule applies to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 6, 2011.1 The Rule placed restrictions on residential mortgage loan transactions in order to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person and prohibits “steering” consumers to loans to receive greater compensation. I have extensively explored the features of this Rule, unraveling its complexity in articles, newsletters, presentations, and panels.2 Indeed, I have even published a compendium of analysis, called the FAQs Outline–Loan Originator Compensation, which, as of this writing, consists of more than 400 Frequently Asked Questions and reaches in excess of 130 pages.3 These are deep and narrow waters, and considerable caution is needed in order to navigate their many demanding twists and turns. The development of these rules, from a regulatory perspective, stretches back to August 26, 2009, when the Federal Reserve Board (FRB) published a Proposed Rule in the Federal Register pertaining to closed-end credit; to July 21, 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)4 enacted Title XIV into law, which amended the Truth-inLending Act (TILA) to establish certain mortgage loan origination standards; then to Aug. 16, 2010, when the FRB published its Final Rules amending Regulation Z (TILA’s implementing regulation); on through Sept. 24, 2010, as the FRB issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and antisteering provisions (Rule); and finally coming to a virtual full stop on Jan. 26, 2011, when the FRB issued its “Compliance Guide for Small Entities on Loan Originator Compensation and Steering.”5 After that, the FRB offered some conference calls, a Webinar—which cleared up some confusion, while causing still other confusion—and occasional
updates of the oral, rather than the written, official variety.6 When April 6, 2011 arrived, the mortgage industry was still scrambling to understand the Rule, how to implement it across various origination channels, and, most importantly, how to integrate it into operational, logistical, and financial components. Vendors provided considerable updates and integration features. Nevertheless, for months afterward the Rule continued to perplex and frustrate, particularly with respect to properly implementing disclosures and compensation plans. It still causes considerable consternation. As we all know, generally there is no regulation issued—whether the statutes are at the federal or state level—that does not have a corresponding regulatory examination to assure enforcement. And so it goes: on Oct. 6, 2011—exactly six months to the day when the Rule became effective—the first examination guidelines for loan originator compensation were promulgated.7 In the “State Non-Depository Examiner Guidelines for Regulation Z—Loan Originator Compensation Rule,” hereinafter “Examiner Guidelines,” issued by the Multi-State Mortgage Committee (MMC), we now have a pretty good idea of the direction that federal and state regulators will be taking in their regulatory examinations for loan originator compensation. The MMC is a 10-state representative body created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR).8 Are these examination guidelines perfectly worked through? Not really. Not yet. After some field testing, we should expect revisions. But as a first stab at a complex issue, they are helpful in giving a sense of the kind of information and documentation that examiners will be reviewing. These are revised procedures and they supersede the Regulation Z Interagency examination procedures. The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) has approved interagency examination procedures for Regulation Z—Truth-in-Lending, including the Rule. The Examiner Guidelines supplement the Interagency procedures and are intended to assist state regulators of non-depository mortgage loan originators and creditors in standardized and uniform reviews of the Rule. When the aforementioned Examiner Guidelines were issued, my firm re-set our audit and due diligence reviews for the Rule to accord with them, even in continued on page 15