Magazine article The RMA Journal

Dodd-Frank, the New Regulatory Environment, and the Implications for Mortgage Lending: As the Dodd-Frank Act and Other New Regulatory Standards Go into Effect, Financial Institutions Must Consider What Impact These Initiatives Will Have on Their Mortgage Lending Operations

Magazine article The RMA Journal

Dodd-Frank, the New Regulatory Environment, and the Implications for Mortgage Lending: As the Dodd-Frank Act and Other New Regulatory Standards Go into Effect, Financial Institutions Must Consider What Impact These Initiatives Will Have on Their Mortgage Lending Operations

Article excerpt

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THE IMPACT of the Dodd-Frank Wall Street Reform and Consumer Protection Act on risk management practices is likely to be considerable, even if some of the provisions are muted by the current political debate.

The consequences are particularly significant for large, complex institutions and for financial services firms not accustomed to robust supervision. Given the high rate of post-crisis change and newly added regulatory enhancements from other quarters, the longer-term consequences, beneficial or not, remain unclear.

The full impact of the act will not be known until the requirements and regulations are formalized and implemented and the industry achieves a new steady state over the next few years. However, the investment needed by the industry to meet the many prescriptive requirements, both in implementation and in compliance monitoring and training, can be expected to be substantial, even allowing for some modification in the requirements.

In addition to the new requirements, Dodd-Frank adds formality, specificity, and disclosure requirements to existing operational rules. Accordingly, operational risks (1) are likely to take the brunt of the act's evolving implementation. During the current transitional stage, new operational risks should be considered additive to existing operational risk exposures owing to a high level of uncertainty, as some requirements could be rolled back while others are prescriptive and could prove more onerous than anticipated.

Meanwhile, the regulatory landscape remains in flux, and business managers must grow or right-size their businesses with a higher-than-normal level of ambiguity. Bank managers will be expected to appropriately plan for and "risk manage" their regulatory exposures through this transformative period. In accordance with well-established risk management principles, this effort will necessitate sound risk identification, measurement, and assessment, as well as monitoring, control, and reporting. These principles will require more precision and transparent implementation to meet higher or more intensive examination standards.

This article reviews the mortgage lending standards to be enforced by the new Consumer Financial Protection Bureau (CFPB), as well as other mortgage lending requirements imposed by Dodd-Frank that will be enforced by the prudential regulators. Also considered will be those prudential standards and guidelines applicable to mortgage lending recently issued by the banking agencies but not specifically mandated by Dodd-Frank.

The CFPB's scope of responsibility will include a number of consumer protection laws, such as the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Home Ownership and Equity Protection Act, and the Home Mortgage Disclosure Act. Standards and regulations from the CFPB, combined with new regulations from the prudential regulators, will have a significant impact on the type, quantity, and severity of an institution's operational risks.

* Qualified Mortgage Originators: Dodd-Frank requires loan originators to be qualified, licensed, and registered, and to include on all loan documents an identifier of the mortgage originator provided by the Nationwide Mortgage Licensing System and Registry. To this end, the regulatory agencies for banks, thrifts, and credit unions and the Farm Credit Agency announced a registration period for loan originators. (2) This registry will also provide consumers with standardized information about their mortgage provider.

* Possible Impact: This prescriptive requirement will mean the introduction of another operational node in the loan origination process--to provide information to and retrieve information from the registry--yet another procedural, process, and technology modification.

* Original Compensation and Prohibition on Steering:

Under Regulation Z, loan originators are expected to maintain compensation processes for loan origination that do not disadvantage the borrower. …

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