Creating a Culture of Compliance

Everywhere we turn, there is compliance, compliance,
and more compliance required across the board.[i]
Donald J. Frommeyer, CRMS
President of NAMB

The ancient Greek philosophers knew the fundamental distinction between theory and practice. For them “theory” (or theoria) differed from “practice” (or praxis) in that the former meant examining things and the latter meant doing things! In other words, theory was a sort of spectators’ sport, while practice was playing the sport itself. Advanced mathematics is somewhat similar: there is pure (or theoretical) mathematics and then there is applied mathematics. Some theories remain theories forever, and others are extrapolated into practice. So, as it happens, some cogent theories simply do not need to have applied applications to be cohesive theories. Practical applications, however, must be experimentally valid all of the time.

The requirements of implementing a theory can be daunting, especially when the consequences of its practical applications are not sufficiently understood. To put a fine point on this observation: what may seem perfectly acceptable in theory can be entirely unacceptable in practice. Thus, some things are possible theoretically and other things are not possible practically. In compliance, I have learned to approach the notion of something being ‘theoretically possible’ with extreme caution!

So, given the challenges of regulations (theories) and compliance requirements (practices), (1) how should a financial institution accomplish evaluations of its loan origination risks and, most importantly, (2) how to go about embedding such assessments into a culture of compliance? In this article, I am going to provide ways and means by which the management of a financial institution will be able to create a culture of compliance that serves as the foundation upon which to manage risk associated with mortgage loan originations. I will provide an extensive set of questions, the answers to which should call forth the ways and means to establish compliance solutions.*

If you have ten thousand regulations,
you destroy all respect for the law.
Winston Churchill

So, how to create a culture of compliance?

Begin at the beginning!

When was the last time that a risk assessment was performed to identify all the loan products, which departments were affected in originating them, and what staff are responsible to effectuate the origination? That is where to begin. Residential mortgage lenders and originators may offer some, or all, of the loan products subject to the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rule promulgated by the Consumer Financial Protection Bureau (Bureau). But originating those loan products starts with identifying the loan flow process itself.

Furthermore, any new origination requirements will affect a number of parts of business systems and processes. For instance, a very short list of affected areas are the forms and processes used to communicate internally and externally that are subject to verification requirements; systems and processes used to underwrite loans must be considered; secondary marketing and servicing processes and systems need risk evaluation metrics, especially with respect to ATR provisions related to the refinancing of non-standard loans into a standard loans.

Specifically, are the various integrated processes and procedures set up to identify loans on the transaction systems with their definitional status under such regulations as the ATR and QM rule, which may involve creating new data element(s) within those very processing systems? Likewise, if the loan is a QM, is a formal consideration undertaken to determine levels of liability exposure and liability protection that a loan is receiving as it moves through the origination process?

To insure peace of mind
ignore the rules and regulations.  

George Ade

The American humorist, George Ade, may have found a way to peace of mind by ignoring rules and regulations. Perhaps he intuitively knew something about the stress involved in originating residential mortgage loans! If you have problems with rules and regulations, I suggest you choose another line of work, for happiness will forever elude you.

Consider this: the ATR and QM rule is just one component of the Bureau’s Dodd-Frank Act Title XIV rulemakings! Here are a few other rules that are now the law of the land:

• 2013 HOEPA Rule
• ECOA Valuations Rule
• TILA Higher-Priced Mortgage Loans Appraisal Rule
• Loan Originator Rule
• RESPA and TILA Mortgage Servicing Rules
• TILA Higher-Priced Mortgage Loans Escrow Rule

Some of these rules are directly and indirectly intersected, interlocked, overlapped, interfaced, and cross-tabulated; they are correlated, tabularized and re-tabularized, re-ordered, enumerated and re-enumerated, re-codified, and, generally, comprehensively systematized.[ii] Each of these rules affects one or more aspects of the loan origination process, organizational structure, and risk exposure. So maybe the great American humorist was on to something!

Nevertheless, if we are going to play, we will have to play within the rules. This means not only considering the compliance implications internally but also the interaction between the financial institution and third-parties upon which the institution relies for verifications, credit and other borrower information, disclosures, underwriting software, compliance and quality-control systems and processes, records management. Notwithstanding the foregoing third-parties, also to be considered are software providers, various vendors, and business partners. Training may also be necessary for these service providers and agents!

All the starting-point reviews in the world will lead to little or no action throughout an organization where certain training needs are not being met. Therefore, from the outset, it is critical to consider what training will be necessary for loan officers, secondary marketing, processing, compliance, and quality control personnel. Any staff involved at critical junctures in the loan flow process should receive training, certainly anyone who approves, processes, or monitors credit transactions.

For the remainder of this article, I will outline the key questions that should be asked, the answers to which will determine the extent, depth, and integrity of a culture of compliance. I am going to take you through a set of questions that will form the basis of a self-assessment. This type of internal review should be undertaken in order to set a baseline and determine progress towards compliance with mortgage acts and practices, and certainly the new mortgage rules.[iii] During any such evaluation, keep in mind that this is a due diligence process which is subject to an institution’s size, products offered, risk mitigation, complexity, and overall strength of the existing compliance management system.

Webinar: New Year, New Rules

Brokers Compliance Group is the Exclusive Compliance Provider of the National Association of Mortgage Brokers (NAMB) and an affiliate of Lenders Compliance Group.

In cooperation with NAMB, we will be providing a quarterly webinar series in 2014.

Each webinar will be devoted to an intense review of important regulatory compliance matters.

• If you are a client of the Lenders Compliance Group of companies, you are entitled to register for FREE.
• Each attendee must individually register.
• NAMB members receive special pricing.
• Non-members of NAMB and non-clients of ours may also register for a small fee.

Our first webinar in the series will be presented on January 30, 2014, at 2PM-EST. Because space is filling up quickly, due to announcements by NAMB and media organizations, we suggest you register as soon as possible.

We are pleased to offer this webinar to our valued clients and colleagues!

Regards,
Jonathan Foxx
President & Managing Director

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WEBINAR OVERVIEW

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DESCRIPTION

New Year, New Rules - Understanding and Implementing

Thursday, January 30, 2014 at 2PM-EST

Webinar Topics:

• How do the Ability-to-Repay (ATR) requirements affect my business?
  

• Qualified Mortgage (QM) and the inconsistent impact on lenders, brokers, and mortgage loan originators
  

• Obstacles and opportunities in Loan Officer Compensation amendments
  

• Lending in the new HOEPA requirements
  

• Appraisals: Latest rules affecting ECOA and Higher-Priced Mortgage Loans
  

In this 90-minute session, we'll discuss the regulatory compliance requirements that you need to implement right away.

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Yield Spread Premium: Excluded from HOEPA

By Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

As you may know, I have lectured extensively and written many articles relating to the Yield Spread Premium (YSP).

And I will continue to track issues involving the YSP.

Here are some of my recent articles:

• Service Release Premium vs Yield Spread Premium: Match or Mismatch?

• Saving the Yield Spread Premium

• Yield Spread Premiums: Compensation or Kickback?

During the course of this multi-year, ongoing review, I have been following litigation that affects the YSP.

Just such litigation that has national implications is the recent decision on November 30, 2010 by the Louisiana Supreme Court, which held that the YSP is excludable from the Home Ownership and Equity Protection Act (HOEPA) calculation.

On one side was The Bank of New York (Bank) and on the other side was Kathleen Johnson Parnell (Parnell) along with amici curiae such as the National Consumer Law Center, Center for Responsible Lending, and the Southeastern Louisiana Legal Services.

At risk was the interpretation of the FRB's Official Staff Commentary to the Truth in Lending Act as well as a public attempt to portray the lender in the worse possible light.

I thought you might find this recent decision of interest.

Best wishes,
Jonathan

Overview

The Louisiana Supreme Court held that a YSP paid by a lender to a mortgage broker is not part of the "total points and fees payable by the consumer at or before closing," within the meaning of 15 U.S.C. § 1602(aa)(1)(B) of HOEPA.

To quote the ruling itself: "Because the YSP in this case was paid by the lender not the borrower/consumer, the YSP is not included in the calculation for determining the applicability of HOEPA."

The Court used the Truth In Lending Act as its source and relied on a provision in the Federal Reserve Board's Official Staff Commentary of Regulation Z to find that mortgage broker fees which are not paid by the consumer are not included in the HOEPA "points and fees" calculation.

Indeed, the Court cited the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) in its amending of 15 U.S.C. § 1602(aa)(1) replacing "points and fees payable by the consumer at or before closing" with "points and fees payable in connection with the transaction."

The Court decided that "the YSP in this case was not payable [by the consumer] at or before closing as required by the applicable version of 15 U.S.C. § 1602(aa)(1)(B)."

Some Case Facts

Fact Pattern
1) 2001: Kathleen Johnson Parnell (Parnell) executed an adjustable rate promissory note secured by her home.
2) Loan was originated through a mortgage broker.
3) HUD-1 Settlement Statement stated that the lender paid the mortgage broker a YSP in the amount of $1,264, which was paid outside closing.
4) 2003: Parnell attempted to rescind the security interest under the Truth In Lending Act claiming:
4-A) that her loan was governed by HOEPA (because points and fees exceeded 8% of the total loan amount), and
4-B) that she had not been given the requisite disclosures.

Dispute
1) Parnell's rescission demand was denied because the threshold requirement of HOEPA was not met, being the total amount of points and fees of only 6.7%.
2) The difference between these calculations rested on the inclusion of the YSP.

Litigation
1) Parnell defaulted on her note.
2) The Bank filed a petition for executory process seeking to seize and sell her home.
3) Parnell filed a petition to suspend the seizure and sale of her home, alleging, among other things, a violation of HOEPA for failing to provide statutorily-required disclosures.
4) The Bank filed a motion for summary judgment, seeking the dismissal of all claims asserted by Parnell primarily on the basis that Parnell's loan was not subject to HOEPA because a YSP paid by a lender is not included in the points and fees calculation.
5) Parnell opposed the Bank's motion arguing that the YSP was ultimately paid by her over the life of the loan and that "all compensation paid to mortgage brokers" constitute "points and fees" under HOEPA.
6) The trial court granted the Bank's motion for summary judgment.
7) Louisiana Court of Appeal for the Fifth Circuit reversed on appeal.
8) Louisiana Supreme Court decided that those portions of the appellate court decision that reversed the trial court's granting of summary judgment in favor of the Bank as to Parnell's HOEPA and wrongful seizure claims are reversed. And, with respect to these two claims, the judgment of the trial court was reinstated.

Visit Library for Issuance

The Bank of New York, Acting Solely in Its Capacity As Trustee for
EQCC Trust 2001-2 v. Kathleen Johnson Parnell
No. 2010-C-0435 (LA: 11/30/2010)

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.