Monthly Mortgage Compliance - Semi-Annual Opportunity

Message from Jonathan Foxx, Ph.D., MBA 
Chairman & Managing Director
Lenders Compliance Group.

________________________________

Twice each year, we open our doors to new clients to join our family of clientele that use our monthly mortgage compliance support. 

During this discount enrollment period, we discount our already low monthly flat fee. The timeframe to take advantage of this offer ends on March 31st. 

We offer the discount as an expression of our mission. Let me explain.

When I started Lenders Compliance Group in 2006, there were virtually no other mortgage compliance and risk management companies around. My idea was to offer a team of the top compliance experts at a fraction of the cost it would be to retain any of them individually. At first, it was rough going, because companies had become grudgingly dependent on high fees and high payroll costs. One by one, they joined us and in time Lenders Compliance Group became the preeminent compliance firm in the country.

Of course, soon the copycats popped up, jumping onto what they thought was a big money-making bandwagon. But I said then, as I say now, 'I welcome competition.' The hybridization of compliance firms mystified me at first, such as firms that offered boilerplate policies and procedures for next to nothing but slammed lenders with excessive monthly fees, law firms that previously had no mortgage compliance departments all of a sudden sprung up with their various "compliance divisions," and quality control firms that had no real mortgage compliance experience except for providing QC auditing yet parleyed their client list. Unfortunately, and inevitably, many lenders were chiseled, chastened, but happily came to us. 

Believe it or not - and I have said this many times - we choose our clients as much as they choose us. Not every client is a good fit, and just because they have a lot of money or clout does not mean they are right for us. We seek lenders that are serious about implementing compliance, not trying to find a way to twist a regulation into an unrecognizable shape. We'll sometimes modestly push the compliance envelope, but only so much! If you conduct compliance on the basis of a cost/benefit ratio, you're probably not a good fit for us.

I'm proud of what we've accomplished, and it all began with monthly compliance support. In effect, we become an extension of your office!

We now provide the largest range of compliance services - all of it hands-on, personal, and direct! But we will always stick by our vision to provide a safe and sound approach to monthly compliance.

So, what do you get as a monthly mortgage compliance client? This -

Low Monthly Flat Fee

On-going Compliance Support

Supervised by Directors

Subject Matter Experts

Unlimited Questions

Most Policy Documents

Secure Record Storage

Dedicated Team

If you are a lender that needs cost-effective regulatory compliance guidance relating to mortgage acts, rules, regulations, and Best Practices, and you are committed to safety and soundness, you should contact us. We'll provide independent, reliable, low cost, on-going support to your compliance team!

If you miss out on this opportunity for a reduced fee, we'll be providing the offer again later this year. The deadline is March 31st. But why wait? 

Just contact us and we'll send you a one-page presentation, and you can also speak with me or one of our Directors to discuss your compliance needs. 

If you're interested, we'll give you a simple form to complete that lets us know a little about your organization, so that we can send you an engagement proposal with appropriate pricing, staffing, and scope. We're usually able to get started immediately!

Click the sidebar button or feel free to contact us at your convenience via email, phone, or even leaving a voicemail. 

Email: Compliance@LendersComplianceGroup.com
Phone: 866-602-6660
Voicemail: 866-255-6466

Wishing you all the best!

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.

The Hedgehog and the Fox: A Regulatory Parable

The 7^th century BCE Greek lyric poet, Archilochus, observed: "the fox knows many things, but the hedgehog knows one big thing.”[i] Twenty-two centuries later, Erasmus transliterated Archilochus’s dictum by precisely rendering it into the Latin aphorism: “multa novit vulpes, verum echinus unum magnum.”[ii] When it comes to these two ways of thinking and acting, things didn’t change much between the 7^th century BCE and the 16^th century CE, when Erasmus penned his elucidation.

Isaiah Berlin, the British political philosopher, whose life span stretched nearly the whole 20^th century,[iii] wrote a well-known essay in 1953, inspired by Archilochus’s apothegm. It was entitled “The Hedgehog and the Fox: An Essay on Tolstoy's View of History.”[iv]

Of Berlin’s essay, Arnold Toynbee, one of the great historians of our time, wrote:

“This fragment of verse by the Greek poet Archilochus describes the central thesis of Isaiah Berlin's masterly essay on Tolstoy, in which he underlines a fundamental distinction between those people (foxes) who are fascinated by the infinite variety of things and those (hedgehogs) who relate everything to a central, all embracing system.”[v] 

Since its inception, it seemed clear to me that the Consumer Financial Protection Bureau (the “Bureau”) is a hedgehog. It tends to view the world through the lens of a single defining idea: consumer financial protection. In accordance with this idea, the Bureau exercises this vision through a single, predominant, and coherent framework of regulations. As a hedgehog, the Bureau stays focused on this one foundational principle and repeatedly, unvaryingly, and rigidly seeks to implement that overriding proposition by applying the same methods and solutions, usually to the exclusion of other possible remedies.

This predilection is not simply a matter of judgment or style. Hedgehogs actually have one grand theory which they seek to extend into many domains, furthering their rule through a fervent belief in the guiding principle. They express their views with confidence; assurance; coolness; obstinacy; unrelenting drive; generally rigid adherence to an impliable mission; unwavering obedience and devotion to a regnant objective; a proclivity to roll results up into an aggregate value; and, a tendency to express themselves with such idiomatic phrases as “mission critical,” “the ends justify the means,” “by and large,” “ball-park figure,” “jack-of-all-trades,” “grand strategy,” “seeing the larger picture,” and “the system is the solution.” Usually, hedgehogs have a unique vision that gives rise to the ability to notice complex circumstances and discern the underlying patterns. In effect, their reach exceeds their grasp. Examples of hedgehogs are Plato, Dante, Proust and Nietzsche.

Residential lenders and originators (the “RMLOs”) are, as a group, foxes - they draw on a wide variety of experiences and do not believe for a second that the world can be boiled down to a single idea, evinced through an all-embracing framework, howsoever cogent it appears to be.

Foxes are skeptical about grand theories. They are constrained in their forecasts, and adaptive to actual events. They tend to be more accurate in their predictions than hedgehogs, since they are more agile in assigning probabilities to their expectations. While hedgehogs see the larger picture, thereby missing opportunities, foxes notice each and every pixel contributing to it, and thus quickly find opportunities. Because the fox is acutely aware of each part of the whole, it devises complex strategies to gain an advantage on the hedgehog. Often, it succeeds in its plans due to this advantage.

The kinds of idiomatic expressions that foxes use are “zero in on something,” “devil's in the details,” “under construction,” “mixed feelings,” “barking up the wrong tree,” “at this stage,” “first in class”, “trying something new,” and “let’s get another pair of eyes on this matter.” Foxes are centrifugal: they pursue divergent ends and usually possess a sense of reality, which keeps them from designing a logistical framework that purports to contain all possibilities. They instinctively know that complexity does not conduce to a unitary structure. Although foxes may have a broad vision and much agility in complex interactions, often their grasp exceeds their reach. Examples of foxes are Montaigne, Balzac, Goethe and Shakespeare.

Foxes pursue many ends at the same time, with much energy and cunning. They see the world in all its complexity. Hedgehogs simplify a complex world into a basic principle or concept that unifies and guides everything. Foxes tend to be scattered, diffused, and inconsistent. For hedgehogs, the world is reductive; that is, all challenges and dilemmas are reduced to simple hedgehog ideas, and anything that does not correlate to the hedgehog idea is without relevance. Hedgehogs see what is essential and ignore the rest.

Generally, the fox’s style is often deprived of rigorous models, specific goals, and global metrics. Foxes learn incrementally, over many iterations of experience. The foxy RMLO has a succinct advantage in swaying the hedgehog Bureau, because it nimbly responds to new information, constantly reconfiguring its market knowledge in reaction to changing circumstances. Such vital information leads to greater performance and the ability to provide solutions that open up new ways for the Bureau to fine tune its single overarching vision.

The Bureau has set compliance effective dates in January 2014 for many new rules that will affect RMLOs. As these rules go into effect, we enter the New Year noting a rather obvious example of the hedgehog’s vision and the fox’s hastening to fulfill it. Their relationship is bound by the unwavering path of the Bureau and the serpentine path of the RMLO. The Bureau’s grand vision presents a broad plan of action that must be implemented. In complying with the Bureau’s rules, the RMLO must bestir itself to be particularly attuned to working with the minutiae of details that are a part of the practical experience of actually originating and servicing residential mortgage loans.

In 2014, here are three questions to keep in mind about the relationship between the Bureau and the RMLO:

1) How prepared is your financial institution to comply with the Bureau’s expectations?

2) Are you ready to implement the Bureau’s complex requirements?

3) Does your company act like the visionary hedgehog or the nimble fox?

Foxes are cunning and have the advantage of knowing how reality works, poking holes in the hedgehog’s grand scheme of things, even as the many spindled hedgehog rolls into a big bulky ball. But beware of that ball! The hedgehog and the fox have learned never to underestimate each other. Although the fox is clever, swift, skilled in action, and knows many tricks, the hedgehog knows one big decisive trick: it can roll itself into a ball of sharp and painful spikes!

__________________________________________________________

 Jonathan Foxx
President & Managing Director
Lenders Compliance Group
Brokers Compliance Group

National Mortgage Professional Magazine - December 2013

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[i] Archilochos (c. 680–c. 645 BC) was a Greek lyric poet from the island of Paros in the Archaic period.

[ii] Adagia, ("Erasmus") Desiderius Erasmus Roterodamus (October 27, 1466-July 12, 1536), Paris, 1500, from Robert Bland, Proverbs, Chiefly Taken from the Adagia of Erasmus, with Explanations; and Further Illustrated by Corresponding Examples from the Spanish, Italian, French & English Languages, Volumes 1-2, London, 1814

[iii] Sir Isaiah Berlin, (June 6, 1909-November 5, 1997), British social and political theorist, philosopher and historian of ideas.

[iv] Berlin, Isaiah, The Hedgehog and the Fox: An Essay on Tolstoy's View of History, Weidenfeld & Nicolson, London, 1953.

[v] Idem

The Cost of Consumer Financial Protection

Recently, I met with several accomplished compliance professionals for lunch. There was considerable discussion about the continuing growth of the regulatory frameworks, the bureaucracies to maintain them, and economic burden on financial institutions. *

One individual expressed the importance of financial protection of the consumer, while recognizing that such protection causes incremental compliance requirements; another individual agreed that such protection was needed, but worried that the costs to provide that protection would ultimately be borne by the consumer through increased pricing. 

In a way, these views reflect an ethical dilemma, and I would like to explore this seeming conundrum and offer a resolution.

IN THIS ARTICLE

An Unfettered Market
Pricing
Framework
Regulations
Protecting the Consumer
"Remember that credit is money."
Ethical Dilemma
Discussion Forum

An Unfettered Market

There is no political economy that we know of, since the dawn of recorded history, in which an unfettered market has existed.

Theories abound about how such a market might function. Whether we term such markets as "unfettered" or use the more emotionally appealing word "free," these markets are nonetheless only theories, howsoever popular in the public mind, and have virtually no extrapolation into economic reality. Better to call such theoretical legerdemain "utopian markets" and leave them to their rightful place in speculative philosophy and treatises on metaphysics.

Of course, utopias are attractive and always will be, even if we instinctively know that their viability is inherently unsupported by human experience and their imagined structure is ultimately dissolved in the unsentimental crucible of human history.

Pricing

All markets are a remunerative way of exchanging information, which we call goods and services. Pricing is that information means by which markets communicate value relative to goods and services. And pricing is communicated through the conveyance of planning.

Markets contain an element of planning - some in extreme, others much less so. The plan, or the framework, is often in control of market participants by virtue of the very act of pricing. It is not possible to remove pricing from a market. Even a market predicated on bartering utilizes the "quid pro quo" as its informational pricing signal.

Framework

In the absence of a framework there is no market. It is not the framework that encourages commerce; rather, it is the commerce itself that encourages the formation of the framework. Innovative commerce often bleeds through and beyond an old framework, thus creating the need for a new framework.

And there is often reactionary resistance to the new framework. Those market participants who are paying attention to the informational signals of a new market are already finding ways and means to act in the new framework, while those whose commerce has not kept pace with innovation tend to resist the change mightily, hopelessly trying to preserve what they have by "fighting the tape."

Regulations

Over the years I have found that the word "regulations" has become a euphemism for all manner of mischief perpetrated by politicians and market participants. Notice I differentiate the two: while some politicians may be market participants, most market participants are not politicians. Yet politicians spend quite a bit of their time crafting regulations! The mischief takes the form of viewing regulations as not only coercive (which they are) but also capricious (which they are not).

Both the politicians and the market participants rail on and on between and amongst each other about the coercion and the capriciousness of regulations, yet none of them ever really defines what actually is an efficient regulation. That is because, often, neither side has any idea how best to define such a thing.

But I'll define an "efficient regulation" right here and now:

An efficient regulation is the means by which the framework is preserved. Nothing more.

An inefficient regulation is the means by which the framework is destroyed. QED.