The Nightmare of Compliance

Article excerpt

How did mortgage industry compliance become such a nightmare? How can it be tamed? Active political involvement is one answer.

YOUR MISSION, SHOULD YOU CHOOSE to accept it, is to identify all federal, state and local laws and rules pertaining to mortgage lending and achieve 100 percent compliance in each and every jurisdiction for every loan type, lender type and license.

You will be faced with overwhelming odds. This mission is more like your worst nightmare, to be honest.

More than 60 federal laws and related regulations, 11 federal agencies, 50 states with various state laws and local ordinances are involved. Some of the federal, state and local laws will be in conflict. Some will be confusing, contradictory and convoluted. Some will require interpretational skills that few possess.

Should you or any member of your loan department be charged, your associates will disavow any knowledge of your existence. Even your attorney will become impossible to reach. This message, along with your noncompliant loan, will self-destruct in five seconds. Good luck.

OK, so things aren't quite that extreme in the world of mortgage compliance. But some days they might feel like it. The odds certainly seem stacked against lenders and their compliance shops.

No lender can claim with complete confidence that 100 percent of its loans are 100 percent compliant with all federal, state and local laws and regulations. Not only are these laws amended frequently, but laws and regulations in the mortgage lending industry are often poorly drafted and difficult to understand. Beyond that, various government agencies also promulgate regulations that can appear to contradict one another.

One example is Minnesota Statutes Annotated sec. 47.59, sec. 9, which prohibits all prepayment penalties; and Minnesota Statutes Annotated 58.137 sec. 2, which has a 2 percent limit on prepayment penalties.

States battle the Feds for autonomy in regulating lending laws within their jurisdiction. The Office of the Comptroller of the Currency (OCC) has vigorously pre-empted states from interfering with national bank supervision. In September 2003, the OTS pre-empted the New Mexico Home Loan Protection Act as it applied to federal savings and loan institutions. In july 2003, it pre-empted the New Jersey Home Ownership security Act of 2002. On Oct. 6, 2003, it preempted the New York Escrow Account law, and on January 21, 2003, it preempted the Georgia Fair Lending Act.

The Office of the Comptroller of the Currency (OCC) issued a final rule on Jan. 7, 2004 that broadly impacted the current regulatory and supervisory scheme for national banks. As a response, the National Governors Association (NGA), the National Association of Attorneys General and the National Conference of State Legislatures all opposed the proposal.

With the maze of regulatory requirements that apply to mortgage lending, it is not surprising that compliance divisions must struggle to get clear answers on just what rules apply.

A big problem centers on the closing package itself. At closing, borrowers already receive, and are asked to sign, an unprecedented number of confusing documents. Policymakers continually add new ones to the package. The challenge of keeping up with compliance requirements is daunting. Borrowers must blindly trust that their lender is keeping up with the requirements and will guide them through the resulting red tape.

As an industry, we must be well-informed because we owe it to our borrowers. As business professionals, we must be informed in order to protect our businesses and our customers from mistakes. As individuals, we must be informed in order to provide each customer with the assurance that their trust is well placed.

Let's look at why these laws were deemed necessary and what prompted the maze of mortgage regulation the industry lives with today.

Example of misappropriation

There was a time when being a mortgage professional did not include complying with direct oversight or regulations. …