Mortgage compliance. What do those words bring to mind?
Alphabet soup, confusion, or regulations might be at the top of the list. All these things and more are a part of mortgage compliance’s connotations, but is compliance as negative and foggy as it sounds?
Unless you’re a mortgage compliance expert, chances are, compliance is a bit of a question mark in the loan process. You follow the necessary steps and you might even have a compliance team at your company. Some LOs even pay compliance companies or software platforms for support with their regulatory needs.
However, it’s important to have a basic understanding of what’s going on behind the scenes.
What is mortgage compliance?
Mortgage compliance is the industry’s general term that refers to the rules and regulations that control the mortgage process. Not only is following mortgage compliance legally required, it’s also a key to being a successful loan originator.
Why does mortgage compliance exist?
1. Stay on the up and up with regulations
The first reason that mortgage compliance exists is the most obvious: in order to keep mortgage professionals following regulatory laws.
2. Solve problems involving unconventional borrowers
Another reason that compliance exists is for LOs as they help less conventional borrowers. Part of a loan officer’s job is to act as a problem-solver for their borrowers. After all, not every loan is the same, and LOs will face unique challenges with various borrower’s applications. Mortgage compliance helps guide loan officers in the dos and don’ts of mortgages.
3. Act as a safety net against suspicious behavior
Unfortunately, suspicious customers will probably present themselves during your career. Being well-versed in mortgage compliance will help you recognize possible issues before they develop further. In these situations, it’s important to bring the issue to your compliance team or superior.
What are the major facets of mortgage compliance?
The amount of regulatory mortgage forms can make anyone’s head spin. However, there are a few major compliance regulations to be familiar with.
TILA-RESPA Integrated Disclosure Audits (TRID)
TRID is one of the most recent regulatory changes added to the mortgage landscape. TRID was created in an attempt to condense some of the various regulatory documents.
In summary, the TRID streamlines some loan disclosures, and changes the timing involved in specific mortgage processes.
For the consumer, TRID allows for more clarity when it comes to the costs and fees involved in obtaining a mortgage. These loan documents must be sent to the borrower within three days of receiving the loan application.
Home Ownership Protection Equity Act (HOPEA)
Home buyers are protected from overpaying for Private Mortgage Insurance (PMI) through the Home Ownership Protection Equity Act. Borrowers who have a down payment below a certain percentage (normally below 20%), are required to pay for PMI. PMI protects the lender in the case that a borrower stops paying for their mortgage.
With HOPEA, borrowers have the chance to cancel their PMI payments at a certain point in the life of a loan. This is beneficial to the consumer, because if they take the proper steps, they have the chance to stop paying for PMI.
Home Mortgage Disclosure Act (HMDA)
Credit unions are required to collect, maintain, and report loan-level details under HDMA. Additionally, HMDA is in place in order to track whether or not lending institutions are serving their community’s needs.
This is also important to the consumer because HMDA reveals possible discriminatory lending patterns. The data from HMDA is then anonymized and turned into data tables to track lending patterns and possible discrimination.
Flood Zone Determination
Flood Zone Determination requires financial institutions to no longer make or renew any loan for a property that is located in a special flood hazard area (SFHA).
Additionally, borrowers who are looking to buy a property in a flood zone must buy flood insurance. This is important for consumers to consider because insurance rates in flood zones can be very high.
Why should LOs care about compliance?
Beyond the obvious answer (because they are legally required to), there are many other reasons that a loan officer should care about compliance.
First, compliance exists in order to protect the consumer. And minimizing a borrower’s risk, after all, should be a LO’s top priority. This may look like you being up front about closing costs and fees. Or helping your borrower to determine if they need special types of insurance. Compliance protects the buyer.
Next, compliance protects the lender. There are federal and state level mortgage compliance rules to minimize a financial institution’s risk.
Lastly, compliance regulations are in place to track and improve the loan process. The only way to make the mortgage process better is by tracking what we’re doing now. Collecting data through regulatory measures is one of the best ways to make the process better for all parties involved.
What are mortgage compliance best practices?
You may have an in-house compliance team or pay for compliance software. You may even utilize regulation checking within your existing software stack. No matter how you pursue compliance, there are some best practices that LOs can always keep in mind.
The first thing to remember is that maintaining compliance should be a consistent process. It’s not an emergency measure taken when you realize it’s nearly too late! Sticking to regulation practices throughout the entire loan process means less costly mistakes overall.
Living by a standard of transparency is a large part of remaining compliant. Offering honest and up front information will keep both the clients and regulators happy. This may mean providing prompt pricing information, or accurate closing costs. Choosing the route of honesty is one of the most straightforward ways to stay compliant.
Compliance can be a big, undefined mess of acronyms and legal speak, but it’s a critical part of being a top producer. One of the ways to rethink compliance is to view it as benefit to loan officers instead of a burden. In fact, compliance exists to protect LOs just as much as borrowers or lenders. So, take the time to decode it!
Complying with mortgage regulations can be a time-consuming, expensive, and frustrating process at times. However, it is a foundational portion of the loan system. The mortgage process is better, fairer, and more transparent thanks to compliance.
How should loan officers be learning to thrive within compliance, not just survive?