Quality control. Regulatory compliance. Risk management.
For some people in the mortgage industry, these terms are near synonymous. For others, they have very distinct definitions.
As Phil McCall, chief operating officer for ACES Risk Management (ARMCO), told MortgageOrb during a recent interview, “risk management” is really an umbrella term for “quality control” and “regulatory compliance” because, ultimately, all a lender (or any business, for that matter) is trying to do is manage its risk.
“If we look at these terms as an inverted pyramid, the global overarching category is ‘risk management,'” McCall said. “That is what everything else falls under – because it’s all about how your organization manages risk. To me, risk equals loss or potential loss.
“So, when you’re managing risk for your organization, a key question becomes, ‘What is our organization’s tolerance for risk, and more importantly, how are we associating risk with loss? We’re going to make mistakes – as no one is perfect – so, how do we manage that risk?’” he continued. “One key area is quality control [QC]. So, if I am a lender, I may ask myself, ‘What are the steps within my manufacturing process that I can insert checkpoints to ensure that I am originating quality loans?’ And when I do this, I need to assess this risk based on the actual potential loss. ‘Again, how much risk are we prepared to handle as an organization?’ That’s what your chief risk officers are looking at.”
Today, the only way lenders can effectively assess and manage their risk is by utilizing a potent mix of software, data and analytics. The ACES Audit Technology platform is a loan auditing solution that uses a lender’s own data to help monitor and manage loan quality, improve processes, meet regulatory compliance, and reduce risk. Using this Web-based system, lenders can also automate tasks such as the comparison of key documents and data in the mortgage process, thus eliminating manual “stare and compare” processes. The software also plays a central role in lenders’ reporting activities and aids in another important aspect of compliance – transparency.
ARMCO recently upgraded its ACES system with new features and functionality to support lenders and originators struggling to comply with the Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosures rule (TRID), which took effect last October.
“Our whole methodology in building this new functionality has been about solving the lending community’s pain points when it comes to reviewing these disclosures,” McCall said. “And as it comes to our actual analytics, that we’re providing within our ACES Analytics industry report, we’re tracking defects and compiling data to establish industry benchmarks so lenders have another way of gauging how they are performing in relation to their peers. That’s what ARMCO does – we don’t audit loans, and we’re not a lender – we provide software that helps the lending community complete risk assessments more efficiently, be more transparent, and be more systemic versus the manual processes that are being used. By replacing those manual processes with system-driven methods, lenders can improve their overall loan quality.”
What’s interesting, however, is how the type of risk that lenders face today has changed compared with even just a few years ago. As McCall explained, when the bureau’s ability-to-repay/qualified mortgage rules took effect in 2013, the leading risk that lenders were facing was the risk of nonperforming loans. Fast forward to the present, and the primary risk lenders are facing does not stem from loan performance; in fact, roughly 97% of all loans are now performing. Rather, they are facing a slew of what McCall calls “regulatory compliance risks” that arise from regulations such as TRID and the expanded reporting requirements under the Home Mortgage Disclosure Act (HMDA).
“It used to be that your risk was tied to default: bad loans,” McCall said. “A few years ago, a lending exec might have said to himself, ‘If we make bad loans, the loans will default, we will lose money, and/or we will face repurchases.’ But today, a lender can have a beautiful pool of loans, all performing, with a delinquency rate under one percent – but, the regulators come in and say, ‘You’re not doing this properly, you’re not following your own policies and procedures, you’re not providing the proper HMDA data, etc., and you know what? I’m going to fine you’ – and it’s really tough when so many of these fines today contain two commas.
“So, you can have a quality pool of performing loans but still have risk in the millions of dollars because you didn’t follow the rules in the eyes of the regulators,” he added. “I feel that’s today’s risk that is keeping executives awake at night – is ‘regulatory compliance risk.’ This is where ACES Risk Management comes in. ACES is an enterprise-level risk management tool where you can manage your quality control, quality assurance and your regulatory compliance. We aim to help organizations manage all of their risk via one system.”
McCall pointed out that “a vast majority of lenders today are running pretty clean shops compared to what we were seeing a decade ago. Those were some pretty sloppy times – and today, loan quality is no longer a façade. Today, there is real attention to quality. Lenders truly care about loan quality, and they’re doing all they can to improve quality, both proactively, as well as reactively, to get to the root cause of their loan defects.”
And the industry has needed to absorb the additional cost required to manage this risk. “How do organizations staff-up for this challenge? The mortgage banking community never before had this level of oversight. It’s now become part of how they run their business – they must have chief compliance officers with added support staff. There are hidden risks, and the only way to deal with those risks is to follow the enforcement patterns and be extremely diligent.”
Acknowledging that smaller lenders may not have the internal resources to set up and manage a QC platform, ARMCO has developed a specialized implementation and service package, ACESXPRESS. The package includes full system set-up and customization, as well as a dedicated ARMCO support contact to manage the system on an ongoing basis. This way, McCall pointed out, smaller lenders can leverage the same QC platform as their larger peers without the need to staff-up to manage the system.
With interpretation issues still surrounding TRID – and new reporting requirements under HMDA taking effect in 2018 – there’s no question that lenders’ “regulatory compliance risk” is only going to increase. The only thing they can really do, McCall said, is implement the proper systems, hire and provide training for their staff, and test their processes over and over and over.
“It’s all about the diligence,” he said. “As long as you can show that you have established policies and procedures, you’re testing those policies and procedures, you can report on the results (good, bad or indifferent), and when you have bad results, you’re taking corrective action that is reportable. These steps will provide the foundation for a much better response from the regulatory agencies. That’s the path the regulatory agencies want everyone headed down.”
McCall said from his firm’s perspective, many lenders that still have legacy systems in place “are having a much tougher time adapting to these new regulations. They’re having a tougher time making system changes, and their IT teams don’t always have the necessary resources to make the needed changes in a timely manner.”
It’s for this reason that many lenders are turning to the ACES system, which, with its new TRIDCompare tool, can be used to compare the multiple versions of the loan estimate (LE) and closing disclosure (CD) forms that lenders are required to send to borrowers and update as they proceed through the loan origination process.
McCall said currently, TRIDCompare is driving a new adoption of the ACES platform, directed toward the utilization of optical character recognition technology to reduce manual processes. He said when TRIDCompare was first introduced in fall 2015, it was “primarily geared towards data validation, allowing lenders to upload different documents from different systems and extracting key data fields to be used for comparison.” Earlier this year, however, ARMCO added new functionality that allows lenders to compare the different versions of the LE and CD that were sent out to the borrower for accuracy.
“A lot of lenders thought that they would have just one or two loan estimates and just one final closing disclosure,” McCall said. “They thought that there wouldn’t be the regular need for reviewing so many variations of the LEs and CDs. After implementation of TRID, lenders quickly realized, ‘The loan fees and terms are changing multiple times through the origination process, and the typical loan file has over four TRID-related documents.’
“So, suppose you’re a lender and you’ve got one or two LEs and two or three CDs,” he continued. “Now, with all those documents that were issued, you need to track all those fees and make sure that any changes that occurred were properly communicated to the consumer. You also have to confirm, ‘Were the fee changes allowable? Did they meet tolerance levels?’ That was a huge pain point for our customers. They were telling us, ‘It’s taking us an hour or more to complete one TRID compliance review.’ The lenders were going through files with multiple disclosures and were forced to either rekey data from all these documents into a central system or attempt a ‘stare and compare’ tactic across hundreds of possible data points to identify the changes that occurred along the origination process – neither option providing efficiency or a high degree of accuracy.”
The recently released version 2.0 of TRIDCompare, he said, “is now successfully extracting all the fee data from both the LEs and CDs and providing the analyst [with] an easy-to-digest comparison matrix outlining all changes in circumstances from multiple documents in chronological order. We felt we were very forward-thinking in bringing the ACES TRIDCompare to market for both pre-funding and post-closing reviews. [Although] lenders were primarily focused, and deservingly so, on the implementation process of TRID, ARMCO focused on providing solutions for managing the risk,” McCall said.
“With ACES, ARMCO provides a system where an organization can bring in the personnel and wherewithal to evaluate risk and be supported by a system-driven platform that allows the organization to properly manage risk at an enterprise level.”