January 2014 grows closer and closer. What should you be doing now? And how will you get everything done in time?
Don’t let panic set in. Instead, this is the time to take a step back and put things in perspective.
With perspective, something important becomes clear: The new mortgage regulations, while numerous and detailed, really only address the types of loans that led to all the problems. The rules affect and restrict the use of “toxic” loan features, such as negative amortization; rapidly rising rates and payment amounts; or interest-only structures. Plain-vanilla loans aren’t really affected. So complying with these new rules isn’t as overwhelming as it seems.
But there is still a lot to do.
Figure out the “must do’s”
If you don’t have one already, now is really your last chance to set up and implement an action plan. In this last-minute action plan, you will have to set priorities. There are things that absolutely must happen before January. But there also are things you can put off. How to decide depends on your products and what procedures and products need to change.
For example, if you offer negative amortization mortgages, get ready to either shut down that product or jump through the hoops—all of them. On the other hand, if you primarily make plain-vanilla loans at market rates, you won’t have to make many, if any, changes to your product line.
Servicing loans is another matter. These new rules will affect all lenders, regardless of the types of loans they make. Periodic statements; responsiveness to questions and requests; and responsiveness to complaints from borrowers will be basic requirements. The new servicing rules place more attention on loan administration than ever before.
Finally, there are the loan officers. Their compensation and registration should already be in place, but now is a very good time to check for compliance in this area. Annual renewals of S.A.F.E. Act registrations are due by the end of the year and should be submitted in November.
Any action plan must include a review of lending policies, procedures, and forms. Make sure your policies address the types of loans and loan features that trigger special requirements under the new regulations. If your bank will make these loans, the policy statement also should address the circumstances under which the loans will be available or not.
Next come procedures. Someone needs to go through mortgage lending procedures with microscope. To get a little ahead of the game, this review also may anticipate the TILA/RESPA combined disclosures and flag where to address the new forms in the procedures.
There also are things you don’t need to work on right now. Most involve disclosure forms. Don’t bother making changes to existing loan disclosure forms right now because we know they will change very soon. The disclosures that will be required in January can be provided using special insertions or additions to existing disclosure forms.
You also can save time by keeping procedural changes to a minimum, because you will have to change them again when the Consumer Financial Protection Bureau issues its final rule on merging TILA and RESPA mortgage disclosures.
Getting started on your plan
What to do first? Get a few things off the table. Loan originator compensation and registration are not really new. Both of those issues have been in effect, in some form, for several years. Do a review of the loan officer compensation plan to be sure it complies with the new rule. Then make sure the S.A.F.E. Act registration renewal process is in place.
Next, look at the types of loans you make. If your bank has never made—and never plans to make—a higher-priced mortgage loan or a high-cost mortgage, the new rules should not give you much pain. All you have to do is make sure no one steps over the line and makes one in the future. This instruction belongs in both policies and procedures. Make sure it is there.
If you do make HPMLs and high-cost loans, it is time to work through the rules. This means a review of the disclosure process to be sure all disclosures are timely and include required information. It also means looking very carefully at pricing and fees for any service. Then review loan contracts to be sure contracts don’t contain any prohibited terms.
Do not leave this up to your vendor. You need to know exactly what your mortgage contracts say. You could be surprised.
ATR: the big one
Now for what may be the most important rule: Ability to Repay (ATR). Ironically, this also may be the easiest rule to comply with. It simply requires good underwriting practices. In the rush to compete, underwriting standards fell by the wayside. Lenders often waived requirements for verifications of employment and proof of income.
ATR means that these practices, as well as documenting the fact that they were done, are back on the table. If, among your loan originators, there are one or more who were lending in the 1970s and 1980s, this will be like old home week for them. In fact, they may be the people to put to work on revising procedures and training other lenders.
If you always meet the ATR standards, you are most of the way home on Qualified Mortgages. Basically, with a few extra steps involving the applicant’s debt-to-income ratio, the property, and prohibited loan features, a loan that meets the ATR standards is likely to also be a QM. Ironically, the way the rule is set up is that if the loan is a QM, it is presumed to meet the ATR standards. The process is easier to manage if you line up your compliance considerations with ATR first and QM second. Otherwise, you will be dealing with ATR issues twice.
What if loans don’t meet the QM standard? Don’t panic. The QM rules provide only a very limited form of protection, based on problems lenders faced after the 2008 crash. If the loan is a QM, the defaulting borrower cannot claim in court that you failed to consider their ability to repay. Without QM status, you have to prove that you did. Well-documented, sound underwriting should be enough proof. And that’s the primary reason to meet the QM standard.
As a subset of QM, smaller banks should determine whether or not they can be treated as “small banks” under the definition in the QM rule. If so, there is additional leeway for compliance, such as the ability to make specific types of balloon loans and to make loans without required escrow accounts.
When you establish compliance with the ATR and QM rules, you should be able to see where the appraisal rules fit in. These changes are not as significant as they may seem—unless you make HPMLs. The change is providing both notice and a copy, instead of having a choice. Beginning in 2014, for all mortgages secured by a first lien, regardless of type, the borrower must be given a notice informing them of their right to a copy of the appraisal. Add this notice to the application packet, and compliance is complete. Then you just have to always send copies of the appraisals or valuations to the mortgage loan applicants.
Looking at servicing changes
More change is called for on the servicing side than anywhere. There are two big components to be addressed.
One is providing periodic statements. If you (or your servicer)already do this, your work can be limited to adjusting the content. This is the place to be thorough, because this is not likely to undergo more change. And it is the most visible part of the new servicing rules.
The other change to the servicing side is the requirement for responding to requests for balance information and other queries from borrowers. This can no longer be managed loosely. There are time limits for researching and responding. If your process has been informal, it must now be formalized, with clearly assigned responsibilities.
Also new is the requirement for home-ownership counseling. Ensuring that homebuyers know what they are doing has never before been the lender’s responsibility. Up until these rules, the lender has been able to make loans without quizzing loan applicants.
The new rules for servicing and homeowner counseling are not product dependent. They apply across the board and are driven by consumer needs, rather than by lender products. That makes these areas the most exposed and the most vulnerable.
Responding to borrower requests is the other side of compliance from the up-front disclosure process. As such, it is driven by the customer, rather than by the bank. Responsiveness is the key.
That means that training of servicing and customer contact staff is critical to ensure compliance. Procedures are vital, but nothing will work without training.
The common denominator of all these rules is the quality of lending and service. Decide what kind of lender to be and the rules fall into place. Maintain sound underwriting practices and require documentation of the application, underwriting, and lending process. That’s what these rules are all about.