PERSON OF THE WEEK: Leonard Ryan is founder and president of QuestSoft, a provider of automated compliance software to the mortgage banking industry. MortgageOrb recently interviewed Ryan to get his perspective on what lenders should focus on as we move into 2015 – including how they can meet the challenge of complying with the newly expanded Home Mortgage Disclosure Act (HMDA).
Q: What issues should lenders focus their attention on as we head into 2015?
Ryan: The deadline for the new Real Estate Settlement Procedures Act and Truth in Lending Act (RESPA/TILA) disclosures, Aug. 1, 2015, will be here quickly and is by far the biggest issue that should attract lender focus. Lenders must start preparing now by turning their attention to creating internal procedures that deliver disclosures and loan documents in order to sync with the changes to the regulations. Shifting gears by creating and reevaluating internal procedures around the new three-day disclosure before closing rule creates a competitive advantage, and it is important to ensure that your vendors (especially document and compliance vendors) are ready to test the new Loan Estimate disclosures prior to March 2015.
QuestSoft's annual lender compliance concerns survey supports our company's stance that disclosure reform will be the biggest issue facing lenders this year. The survey indicated that 58% of lenders expressed high concern in regards to the upcoming HMDA reporting requirements, and 57.2% cited regulation as the highest issue facing their company.
The second regulation to elevate concern will be the HMDA changes. The importance here is to comment on the preliminary rules (deadline is Oct. 22) because it will be lenders' last chance to influence the final rules. The proposal represents a substantial increase of HMDA data reporting requirements and will make your fair lending data instantly available for lawyers and community groups. However, there's no need to panic. HMDA compliance under the new rules won't begin until at least Jan. 1, 2016. This should allow most lenders to focus on the RESPA/TILA disclosures first and address HMDA in mid-to-late 2015.
Q: In looking back at the implementation of the Consumer Financial Protection Bureau's (CFPB) qualified mortgage (QM) rule, are there some lessons learned that lenders could take with them moving forward?
Ryan: The QM standards resulted in many last-minute CFPB changes that created several problems for vendors. Additionally, many lenders assumed that everything would run smoothly on Jan. 10, 2014 and did not properly prepare by offering enough advanced training.
Lenders should take care not to repeat the same mistakes with RESPA/TILA. While changes to the regulations may look very inviting to consumers, there are more than 2,000 data value combinations that the new set of forms display, depending on the loan characteristics.
Additionally, there is now a three-day waiting period requirement for loan documents and a seven-day advanced notice for material changes in the Loan Estimate required for all loans. Realtors and borrowers will be upset after Aug. 2015 if lenders continue to operate in the panic/crisis mode that exists in today's loan closing environment. Lenders and vendors will not survive the purchase market if they do not consider advanced planning on loan files in relation to closing, disclosure and document dates.
Q: The CFPB recently proposed relaxing its rule imposing a 3% cap for mortgage points and fees by creating a limited, post-consummation cure mechanism for mortgage loans thought to be QMs at origination but that actually exceed the 3% cap. In effect, the lender can compensate the borrower for the amount in excess of the cap. What's your opinion of this new rule? Could it create a loophole for lenders to regularly exceed points and fees? Does this require any new functionality to be added to mortgage management systems?
Ryan: I applaud the CFPB for recognizing that inadvertent errors can be made throughout the lending process. We are currently handling situations where the QM rules conflict with other rules, and calculations have to be made before lenders can reevaluate amounts paid to brokers or calculate the final cap tolerances. This conundrum has created a situation where many lenders have produced overlays to roll back fees to 2.75 or less as a safety precaution. The issue has not been as much about the CFPB as it has been with [government-sponsored enterprise] acceptance. If a mistake takes a loan out of QM and there is no way to solve the issue, lenders will have to portfolio the loan. Recognizing a solution to the problem will continue to allow loans to be sold when unintentional mistakes occur and complicated calculations are made throughout the process.
Personally, I don't believe it creates a loophole because the cure has to be made with the borrower. The borrower still has to be made fully aware of the rules in all cases. If a wholesale lender regularly engaged in exceeding the cap so brokers could receive more, it would result in a significant financial loss for that lender.
Q: More recently, the CFPB issued a proposed rule that aims to simplify the HMDA reporting requirements by exempting lenders that originate fewer than 25 mortgages a year. In addition, financial institutions with a large amount of reported transactions would be required to submit HMDA data on a quarterly basis, rather than an annual basis. Perhaps more important, the CFPB is proposing ways to align HMDA data requirements with well-established industry data standards and improve the quality of the information reported. What's your opinion of these new measures?
Ryan: The proposed HMDA changes are a mixed bag for strong reforms and potential problems. I am an advocate of eliminating the lower volume lenders from submitting due to lack of statistical relevance. My personal preference for the cutoff number has always been 100 loans or less, both to protect privacy and account for the statistical irrelevance of low volume loan data.
The quarterly reporting requirement is not nearly as extensive as expected it would be. Quarterly reporting only applies to lenders with 75,000 loans or more, which only affects 23 lenders, based on 2012 LAR submissions. This is a major concession to the mortgage industry from earlier proposals at HMDA hearings where the call was for all originators with more than 100 loans to submit quarterly. The forward movement toward adopting Mortgage Industry Standards Maintenance Organization (MISMO) datasets has also been a bonus. This allows for accurate reporting and also the exchanging of data back to loan origination software (LOS) from systems such as HMDA RELIEF.
Although obtaining accurate data is a step in the right direction, much work remains to ensure accurate submissions that will pass the muster of automated fair lending analysis by regulators. Moving forward, loans will be tracked from the originator all the way through each purchaser throughout the life of the loan; using a new, very long and unique HMDA loan number.
Q: What do you see as the biggest challenges in the development and implementation of HMDA moving forward? What are the advantages/disadvantages/risks of the new HMDA reporting requirements for lenders?
Ryan: For the past four years, we have worked with LOS vendors to include specific fields in software exports in order to ensure that the impact on our development for the new HMDA rules will be minimal. The impact for lenders with proprietary or heavily customized systems could be substantial. Truth be told, I rarely see the advantage of sending additional information to regulators other than eliminating the request for an audit. Over-sharing can be dangerous! On the other hand, many states and the NMLS Mortgage Call Report could adopt these standards and make the reporting process far easier for non-depositories.Â Â
Q: What can we expect to see from QuestSoft through the rest of 2014 and into 2015?
Ryan: QuestSoft is constantly expanding the number of LOS interfaces available in our Compliance EAGLE software to improve pre-funding compliance. We will have all of the necessary updates for our LOS partners by the end of the year, and we will begin testing environments for RESPA/TILA by February 2015.
In addition, we will provide ample opportunities for customers to attend webinars and training sessions in conjunction with our LOS partners and individually. We are also conducting a proposed rule webinar on HMDA in conjunction with the BuckleySandler law firm so lenders will have the opportunity to make constructive comments to the CFPB before the rules are finalized. Furthermore, we will provide extensive training sessions on the new HMDA rules starting in September 2015 and the ability to test 2014 data using the new rules to find areas where lenders need to adjust their policies. We believe this will give lenders an opportunity to settle into the RESPA/TILA requirements.