Following the 2008 financial collapse, Dodd-Frank granted the newly formed Consumer Financial Protection Bureau (CFPB) enforcement authority over mortgage lending at the federal level. As a mortgage lender – including banks and credit unions that sell mortgages or mortgage-related products – you’re already familiar with the Truth in Lending Act (TILA), the Home Mortgage Disclosure Act (HDMA), and the Equal Opportunity Credit Act (ECOA). Mortgage lenders have had ample opportunity to familiarize themselves with the regulatory agency and Department of Justice interpretation of these laws – some dating back to the 1960s – along with additional regulations on borrowers’ Ability to Repay and Qualified Mortgages. However, mortgage lending is regulated by state laws as well – and that’s where things get complicated. Mortgage lenders expanding into other states must adhere to state-specific regulations. This article will address the potential regulatory pitfalls mortgage lenders encounter when they grow their business in other states and ways to overcome them. These include: Tracking mortgage laws and regulations at the state level is an enormous task. Let’s take a familiar example – prepayment penalties. Most states allow lenders to impose a fee if borrowers pay off mortgages before a specific date – typically in the first three years after taking out a mortgage. While Alaska, Virginia, Iowa, Maryland, New Mexico, and Vermont have banned prepayment penalties, other states allow them with certain conditions.Mortgage laws and regulations vary widely by state
Some states ban prepayment penalties on adjustable-rate mortgages (ARMs) and those above a particular dollar threshold.
Not only do you need to understand the different state regulations regarding prepayment penalties fully, you also need to know if any of these state-level rules changes.
And that’s just one example of a specific rule. There are countless others, making it critical that you can easily identify mortgage lending laws as you expand your operations into other states.
Manually tracking state mortgage laws is an inefficient and dangerous proposition
As your mortgage lending operations expand into new states or offer new mortgage-related products, you must prepare for what-if scenarios.
What if a new regulation on mortgage lending comes to pass? Do you have a regulatory change management process to deal with its compliance implications?
Take the Community Reinvestment Act (CRA) as an example – CRA only applies to banks, right? You don’t need to worry about CRA if you're a nonbank lender.
Only not so fast. Several states have adopted community investment obligations similar to the CRA and don’t limit the rule to just banks. In Illinois, credit unions incorporated under the Illinois Credit Union Act and entities licensed under the Illinois RMLA of 1987 that lent or originated 50 or more residential mortgage loans in the previous calendar year are subject to the state CRA law.
Related: What Does the New Illinois CRA Law Mean?
With the recent release of the final rule for CRA modernization, some states may show an inclination to demand more community investment data – specifically from nonbank lenders.
As the CFPB Director, Rohit Chopra, recently pointed out in an agency bulletin: “States have responded by creating reinvestment obligations for mortgage companies and have tailored state reinvestment opportunities to meet the needs of their local communities.”
As federal CRA law has been amended to account for changes in institutions offering mortgage products, so may states' community reinvestment laws.
Whether or not certain states place a greater emphasis on community investment for mortgage lenders remains to be seen. But mortgage lenders must appreciate the work of tracking changing state regulations when they decide to expand loan offerings in another state or introduce a new product.
Building a sustainable program for mortgage lending compliance
With constant regulatory change across multiple state and federal regulations, mortgage lenders need an efficient way to keep pace. It’s not just about tracking regulations. It’s having a process to implement those changes.
Relying on spreadsheets and endless email chains for mortgage lending compliance isn’t cutting it anymore. There are too many moving parts. Processes need to be clearly defined and the results carefully documented. Without structure, mistakes are common.
For example, some nonbank mortgage lenders have legal teams review new state regulations only to discover that these were never shared with compliance.
You need a centralized system for tracking state regulatory changes to stay ahead of noncompliance.
Mortgage lenders must embrace a viable compliance solution. The critical features of this solution should include the following:
A library of state (and federal) regulations updated regularly
Knowing various state regulations – especially any revisions or amendments to existing laws – is the first step in the process. Don’t be surprised by changing regulations.
A complaint management system that works
Having an effective complaint management system is essential for mortgage lenders. What does that have to do with compliance? Having a system that documents issues that can warn you of potential compliance violations – whether it’s missing disclosures or a fair lending issue. It also helps ensure consumer concerns are addressed.
Successful complaint management also makes good business sense. Lenders that excel in addressing borrower issues retain more current consumers and attractive prospective ones.
A regulatory requirements builder
Understanding new and current regulatory and legal requirements is fantastic, but you also must ensure that you have a process and system for building templates for easy reference. As state laws surrounding mortgage lending change, you need a systematic way to review your compliance controls and adherence to existing laws.
Again, if you depend on a mishmash of documents and emails from various departments and sources, your legal and regulatory risks increase considerably.
Centralize your regulatory documents
Switching from a manual process for managing state and federal regulations and laws saves mortgage lenders time and money. Documenting changes and sharing them across departments helps your lending institution build a culture of regulatory compliance.
Regulatory technology is the future of mortgage lending compliance
As more mortgage lenders offer services across a wider geographic area – all with specific regulations and laws – embracing regulatory technology will be essential for compliance and reducing legal liability.
Regulatory technology streamlines compliance by automating tasks, such as monitoring and interpreting regulatory changes, documentation management and centralization, and ensuring adherence to applicable laws and regulations.
Automation with regulatory technology saves time and money, reduces human error, and enhances accuracy, enabling lenders to stay compliant with an evolving and expanding regulatory landscape – regardless of how their operations grow.
Ncontracts solutions can help you grow your mortgage business.
