Loan Origination Systems

Loan Origination Systems: Missing the Right Information Can Lead To Costly Fines!

ByNick Graham

Mortgage brokers are aware of the necessity to comply with all federal and state laws and regulations. However, the ever-changing nature of these rules and the complexities of compliance and risk management can sometimes make it feel like a full-time job. Staying updated on these regulations is not just a task, but a strategic move that keeps you informed and prepared.

According to Wolters Kluwer’s 2022 Regulatory & Risk Management Indicator survey, this is the second consecutive year that managing regulatory change and compliance effectively is considered the top challenge for institutions of all sizes.

“Unquestionably, this year’s survey findings point to the critical role that a robust regulatory change management program—particularly one featuring an up-to-date regulatory library—plays in helping to ensure compliance and address risk across a lending organization,” said Timothy R. Burniston, Senior Advisor for Regulatory Strategy with Wolters Kluwer Compliance Solutions.

Without a robust regulatory compliance and risk management plan, your organization becomes more vulnerable to new and updated changes within the system. A well-structured plan, incorporating current policies and enabling quick adaptation to any changes, is not just a recommendation but a necessity that ensures your organization’s security and control.

The Current System

One only has to look at its complexities to understand how challenging the system is. It starts by understanding the role Government-Sponsored Enterprises (GSEs) play in the mortgage industry. It continues by getting a firm grasp of the significant institutional laws in place, such as the Real Estate Settlement and Procedures Act (RESPA) and the Truth in Lending Act (TILA).

How GSEs Work

Government-sponsored enterprises are private, quasi-government agencies established to improve credit flow throughout the United States economy. In the mortgage sector, GSEs include:

  • Federal Home Loan Banks (FHLBank) – founded in 1932 by various banking and lending institutions as a support system for mortgage lending and community investment.
  • Federal National Mortgage Association (FNMA or Fannie Mae) – founded in 1938 to provide mortgage funding by buying loans from large commercial banks and selling them to investors
  • Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) – founded in 1970 to operate similarly to FNMA, focusing on buying loans from smaller banks and lenders.

The Role of Mortgage Laws

Both federal and state governments have passed laws to protect the relationship between consumers and lenders. These laws are designed to ensure borrowers seeking financing to purchase a home are treated fairly and equally throughout the process. These laws clarify the role and relationship of both parties, ensuring lenders make clear, truthful disclosures about their products.

The Truth in Lending Act (TILA) was passed to require lenders to provide easy-to-understand loan information to all borrowers so they can easily compare loan terms and interest rates when shopping for a loan.

The Real Estate Settlement Procedures Act (RESPA) requires lenders, mortgage brokers, and mortgage servicers to provide a complete breakdown of settlement costs with written disclosures. This also applies to home refinances and lines of credit.

The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE) mandates a nationwide licensing and registration system for all residential mortgage loan originators. Its purpose is to increase accountability and provide more consumer protection.

These are just a few of the many major laws within the mortgage industry. Each offers complexities that directly impact how a mortgage broker must conduct business.

The further you move into any regulation, the more disclosures and compliance obligations you’ll find, such as:

  • The Ability to Repay/Qualified Mortgage Rule (ATR/QM)
  • The Home Ownership and Equity Protection Act (HOEPA)
  • The Loan Originator Compensation Rule (LOComp)
  • The TILA-RESPA Integrated Disclosure Rule (TRID)

The TILA-RESPA rule alone is 279 pages long.

Regularly Occurring Changes

The real estate market always fluctuates. The pandemic, inflation, economic downturn, and changing interest rates have all created huge adjustments in every industry.

That brings more policy adjustments by the GSEs.

Fannie Mae and Freddie Mac both provide ongoing updates to help mortgage brokers stay on top of the latest news.

For example, a recent lender letter spelled out updates to all Fannie Mae single-family servicers about Fannie Mae HAMP Modification Termination related to the Making Home Affordable Supplemental Directive 22-01 issued by the US Department of the Treasury. It changed the program end date, which was set to expire on December 29, 2023, to April 28, 2023. Servicers must successfully complete all reporting activity by the March 2023 reporting cycle, including corrections, and meet the following requirements:

  • The mortgage loan must be in good standing without being paid in full
  • The borrower must submit an executed “Dodd-Frank Certification” or Real Estate Fraud Certification Form 720

This is just one example of many updates made to mortgage regulations this past year. By creating a compliance and risk management plan, you can avoid the risks associated with non-compliance, including client backlash, potential legal action, and damage to your professional reputation.

How To Create a Compliance and Risk Management Plan

Creating a loan origination process means different things to different people. For some, it may mean automating certain portions of the loan process. Others branch out full circle to include every aspect of operating as a mortgage broker.

Your overall strategy will only be as powerful as the thought you put into it. The structure is essential from the beginning to ensure full compliance.

Starting with a plan

Every mortgage broker begins by becoming licensed in their state of operation. If you’re expanding to multiple states, it requires learning the mortgage broker license and maintenance requirements associated with that location. Having guidance to help you through the process can give you the necessary guidelines for that geographical location.

However, keep in mind that things are constantly changing. We don’t know what we don’t know. Knowledge gained even a few short years ago may be outdated and steer you in the wrong direction.

Hiring a compliance manager is an excellent way to stay on top of changing regulations. A compliance manager is responsible for monitoring and implementing regulatory changes, ensuring the company’s policies and procedures are up to date, and training staff on compliance issues. However, even with a compliance manager, it’s important to automate your plan to ensure it stays on top of all federal and state regulation changes wherever possible. Using third-party systems for regular updates and license maintenance can lighten your load and give compliance managers more time to do what’s important.

Make Changes Immediately

GSEs regularly adjust policies and regulations. It’s up to you to learn when these adjustments occur and ensure the details are executed and in place. The ability to make these changes quickly is crucial in the mortgage industry, as it can affect your competitiveness and reputation. Do you have the tools and resources to make these changes immediately? It may require a support staff to handle the internal efforts that go along with implementation. It can also include finding partners who will give you knowledge and support, allowing you to shorten the time between awareness and performance.

Partners should have deep-seated knowledge of the mortgage industry and provide you with tools and solutions that make your job easier to stay in compliance. They should provide a consistent and reliable way to fully support you every step of the way.

Create a Long-Term Structure

The mortgage business is an ever-evolving industry. Remaining in compliance requires due diligence every step of the way. It’s up to you to recognize and adapt to new rules as they appear and do so in a way that doesn’t hold you back from building your business your way.

The key to efficiency in today’s world is to rely on third-party vendors and automation whenever possible. Think of these tools as partners, not as expenditures. They allow you to do what you do best.

Instead of needing the formula to monitor daily happenings, you establish a system that works for you. It alerts you to items that need your attention. It clears the things you don’t need to worry about.

That’s productivity and organization at its finest.

It’s Time To Build Your Own Compliance and Risk Management Plan Into Your Mortgage Business

Staying in compliance is essential for many businesses, especially in the mortgage industry. Having a plan in place is crucial for staying on top of any regulatory modifications and recognizing how they will impact your business.

  • What is your current approach to monitoring policy changes to ensure your business stays up to date?
  • How much time do you spend navigating and implementing updates within your business?
  • Is there a responsible party to ensure updates occur quickly?
  • Have you considered partnering with other organizations to improve efficiency?

The mortgage business is a fast-paced, highly demanding industry that requires consistent filtering to ensure you stay on top of current changes. By automating what you can and partnering with vendors who can reduce time spent on the most mundane tasks, you’ll free up your schedule to do more of what’s truly important.