Compliance Officers Face New Era of Home Lending Risks

[I am away from the computer on a daily basis, and my access to e-mail is sporadic and not timely. In my place are daily commentaries from a series of very knowledgeable mortgage industry people with different backgrounds, and they have been given very little direction about what to write about - the latest is below. Our views may or may not coincide, but I thank them for their time in volunteering and helping out.]

Today's contribution comes from:

Beth De George
SVP/Operations, Credit and Compliance
Opes Advisors, Inc.

It's a lovely Sat morning ... I settle in with a good cup of coffee and a variety of reading materials ... looking to keep my mind off the mortgage business for a few precious moments ... when I come upon a very intriguing article in the Economist magazine. It's about the "Anthropocene" period - the new age of man. This is a proposed geological interpretation that recognizes a shift in the impact of humankind's activities on the earth. It appears we are moving from being peripheral observers of our surroundings to being central operators of the planet's mechanisms; that 7 billion people (and climbing) actually matters to the earth's workings. And it's not just about adding more people it's about fundamentally changing the way the earth works. Do we embrace or ignore this (maybe obvious) phenomenon? Do we care if the planetary ecosystems are being homogenized through domestication - of everything? Can we support 10+ billion reasonably rich people? How did we get this far this fast, that in 1% of 1% of the earth's total history we grew from very few to very many and are now producing fundamental change in our host? And what about that financial services industry ... and more specifically the mortgage banking business? What era, period, epoch are we in? In earth science astronomy handles the "here" (where) of things and geology handles the "now" (when) of things. For mortgage bankers our "here" is the post-meltdown financial services environment and our "now" is the new age of technology-driven regulation.

Did you know we are at a 16 year low point in loan-to-deposit ratios for most banks? Are we at the lowest point or are we going lower? What about those non-depository lenders (like us mortgage bankers) ... what does this mean to us? What's this buzz about manufacturing quality ... in the lending business? And this thing called QRM - what happened to plain old credit quality ("this borrower is golden, low LTV, OK credit score, he'll definitely make the payments!"). Has mortgage lending changed in ways we don't yet see? I suggest the collective "common sense" has shifted; don't get caught thinking with the old one!

Back at the ranch ... oops, I mean the office ... the proliferation of change continues. Exactly where are we going, how are we getting there?? As humans who fundamentally resist change (especially compensation changes!) we don't often stop to ponder the piecemeal changes that have occurred over the last 3 years, and what the re-stabilized sum of those changes will mean to how we do business. After many years in this business (and I do mean many!) it appears to me that the recent changes, including the pace of those changes, exceed the sum and pace of changes during previous mortgage banking epochs (aka: business and economic cycles). Some of the changes are obvious, many are very subtle. I am questioning everything I thought I knew! Here is some of my thinking about the new era.

NMLS LICENSE MAINTENANCE:

Make sure you maintain your profile, know what it says, make sure it is right. QC departments everywhere are checking! Don't get caught with license changes/updates that are not reflected in the NMLS system. If it's not in the system it doesn't count!

And watch for more about this ... not sure what but as soon as we have a clear window into the next generation of regulatory control you can bet there will be refinements. Big Brother may be watching but now everyone else is watching too - like never before, and it's getting very easy to watch!

NMLS CALL REPORT:

This is a quarterly report of all mortgage origination activities - including funded, declined, canceled and the active pipeline as of the end of the reporting period. It includes loans you originate internally and those you broker out. It includes ALL your production!

None of us are sure how this information will be compiled and used but as the new era unfolds you can bet we'll be hearing about it. Why does it matter how many loans you do??? What does this have to do with manufacturing quality?

FANNIE/FREDDIE - THE UPCOMING DIGITAL ERA:

The new era of manufacturing quality in the loan business is just beginning to unfold. Yes, we've had loan origination systems; and more investigative/validation tools show up on the market every day. But I suggest there is a fundamental shift taking place that will change the way we must do business. This newest, and more basic shift, began with the LQI (Loan Quality Initiative) directive that was launched late last year. That was the narrative version, relatively benign in appearance but a harbinger of things to come. The digital version is the UMDP (Uniform Mortgage Data Program). It specifies common requirements for electronic submission of appraisal and loan delivery data, uniform datasets and file format that every lender will be required to adopt. This will force increasingly greater accuracy. It will also shift control in ways we don't yet see or understand. Implementation of the appraisal elements of the protocol is scheduled for Sep 2011; the loan delivery portions are scheduled for early 2012. It's time to get ready; this is a big deal!

(Did I mention "homogenized through domestication" - see above??)

A COMPLETE AND ACCURATE 1003:

This may sound mundane but it is so often incomplete and/or inaccurate. Every single field on that form is required - and watch those declarations and the government monitoring section.

Take care that there are no material differences between the initial 1003 and final 1003. What used to be accepted lapses of inattention in the preparation of the initial 1003 are quickly becoming accusations of fraud and misrepresentation. Check your default settings - they'll get you if you are not reviewing your final output. And don't forget the NMLS license #s and your signature!

Manufacturing quality starts here; the 1003 forms the foundation of the dataset referenced above, along with DU/LP validations and findings. When a field is missing or inaccurate, or doesn't match the DU/LP file that supports the transaction, the loan delivery transmission will be interrupted. The "Early Check" system that supports the LQI/UMDP was released earlier in the year; it can stop a file in its tracks. As UMDP becomes common practice more lenders will use it earlier in the process. That makes complete and accurate prep of the initial 1003, as well as accurate everything that supports the application assertions (like DU/LP) more necessary than ever; at some point it will be unavoidable. We are already seeing evidence of the results; when the major transition occurs there will be no looking back. Don't think "but he'll make his payments" will be an argument for approval and sale; that is a given, it is no longer the primary reason for purchasing a loan.

FULL DOC:

Documentation requirements have clearly gone overboard but most of us suspect we will not return to days of old. I suggest the documentation of today is the enhanced dataset of tomorrow (and in some cases already is in nascent form). As data feeds are sent to central repositories and edit checks can be done electronically with complementary systems we will see the next generation of 1003 - an electronic statement of condition, with an e-signature, that is electronically checked with employers, banks and others. We have been crawling in this direction for a while; we are now seeing a leap forward. The upcoming appraisal changes are the next step on the continuum of technological advances in our business; that is just another beginning. There will be next generation LOS, DU/LP, secondary marketing systems, servicing systems and other supporting technologies. What we are using today, what we see as the process and the outcome will be different. This is called evolution!

And of course the internet just keeps enhancing investigative possibilities. UWs and QC folks already use a plethora of internet-based tools and internet-navigation expertise to validate underwriting assumptions. I continue to be amazed at what our UWs discover while underwriting a file - and it doesn't take much time or effort. This investigation will likely get even easier over the next few years as technology linkages get built and become more integrated into the core lending systems. The practices we develop today about complete/accurate will make it easier, less frustrating, to plug into tomorrow.

GFE / TIL / MDIA / DODD-FRANK - A MYRIAD OF REGULATION:

Auditing refinements and additional technology support will make these rules and regulations even more fundamental to the definition of quality; and there are more regulations to come. QRM auditors and savvy attorneys will make the financial risks of error greater than ever; downstream investors will not want to hold this risk - which means faulty files will be pushed back as repurchases without question. In many cases the cure will be much worse than the disease! We all need to know this stuff really well, and we all need to do it right the first time.

"Humans have changed (and are changing) the way the world works. Now they have to change the way they think about it too." So goes the mortgage banking business ... things have changed, we made them change ... is our thinking changing?