Covering the Bases: Today's Compliance Departments Have Their Hands Full Juggling a Rash of New Laws and Regulations. A Review of Lenders' Top Compliance Concerns Shows How Tough It Is to Keep a Winning Record
Ryan, Leonard, Mortgage Banking
Every year, hope springs eternal for baseball fans across the country. No matter how well or poorly the previous season finished, die-hard fans think this is the year their home team will finally pull through and win the World Series.
Lately the mortgage industry has taken on a similar feel. This is the year the market will begin to rebound. This is the year that electronic mortgages will take off. This is the year that defaults will slow down.
In baseball, many fans will try to break down the reasons why a particular team will succeed or fail. Some say a team is only as good as the quality of its pitching. Other fans will point to the hitting ability of a team's lineup.
One factor that is also important, but that doesn't get as much attention, is defense. "Covering the bases" without giving up errors or allowing extra bases to the other team is critical to a team's success.
Likewise, when lenders are evaluating ways to make mortgage lending prosperous, a lot of attention is placed on the loan-closing process and the secondary market. These are the two general areas that drive cash flow, so they rightly deserve a lot of attention when ensuring a profitable business.
However, just as a baseball team that can't cover the bases will fail in the long run, lenders must be able to cover their bases when it comes to compliance or face fines and buybacks.
Due to the attention paid by investors, regulatory agencies and consumer groups to the quality of loans being closed, mortgage lenders must take steps now to ensure their compliance bases are covered. To do this, lenders must understand the three key areas of compliance risk and set up the tools and processes needed to do the job.
First base: civil litigation
One of the side effects from the bursting of the housing bubble and rapid rise of foreclosures is that consumer groups have become very interested in the actions of mortgage lenders. The emotional impact of images of families around the country losing their homes prompted local, state and federal government bodies, as well as consumer groups--and class action lawyers--to seek ways to slow the rate of foreclosures.
In the process, lenders became targets for fraud and high-cost lending lawsuits.
In a Feb. 18, 2009, speech at Dob son High School in Mesa, Arizona, President Barack Obama outlined the beginnings of the Home Afford able Modification Program (HAMP): The plan I'm announcing focuses on rescuing families who've played by the rules and acted responsibly, by refinancing loans for millions of families in traditional mortgages who are underwater or close to it," Obama said. "But I want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. ... It will not help dishonest lenders who acted irresponsibly, distorting the facts and dismissing the fine print at the expense of buyers who didn't know better."
While the government sought to put the focus on unscrupulous lenders who funded predatory or high-cost loans, even legitimate companies found themselves under heightened scrutiny. New pressure was put on all lenders to be more transparent and document the fact that all loans were funded in compliance with the law.
Consumer groups are increasingly using the court system to extract a financial penalty for a whole variety of seeming infractions.
Some lenders are even facing class-action lawsuits. On March 31, the U.S. District Court for the District of Idaho ordered Credit Suisse Securities USA--a unit of Zurich, Switzerland-based Credit Suisse Group AG--to stand trial on allegations of conspiracy, breach of fiduciary duty and tortious interference (L.J. Gibson et al. v. Credit Suisse Securities USA LLC et al). This ruling clears the way for a class-action certification for the plaintiffs, who are seeking more than $24 billion in the lawsuit. …