Mortgage Compliance Service Providers Using Scare Tactics

Why do they use Scare Tactics? They get the phone ringing.

But they also  create a lot of unnecessary disruption for companies that are trying to comply. For instance, one e-mail we saw recently, sent from a compliance company, warned Florida mortgage brokers over license suspension issues for non-compliance. As you know, we always try to shed light on issues that confuse participants, and there are some misleading problems with this solicitation. The first one is that the enforcement action WASN'T IN FLORIDA, it was in North Carolina, so Florida brokers can stop worrying about why they weren't aware they needed certain disclosures that don't exist in Florida.

Beyond this misleading alarm, there are other elements to consider.

First, let's just clarify one thing: you have to do something egregious to receive a cease and desist order. In the case of the broker who was the subject of this cautionary tale (whose name was redacted in the marketing piece), the egregious act involved charging borrowers fees which they did not agree to in writing. When a regulator cites you for this type of behavior, if it was unintentional and not systematic,  you can usually negotiate to correct the activity by making restitution for the unearned portion of fees. As we all know, most investors WON'T LET US collect more than we are legally entitled to, so one can conclude that this particular broker didn't have that type of oversight.

Second, in this case the broker surrendered his or her license, rather than deal with compliance. In this case, the broker likely didn't submit or negotiate any required policies and procedures. For regulators, this is standard procedure. If you cite an entity for one element, you cite them for everything that they lacked. Certainly, the lack of a compliance system was not the primary violation.

That said, brokers do need to have a compliance system in place. Regulators generally require policies to cover the elements for which they cited the broker:

1. Lack of control and supervision over its operations and staff; (a quality control plan should provide supervisory guidelines for staff - part of our broker pack)
2. Failure to have a written information security plan;  (Information Security is a requirement of FACTA - part of our broker pack)
3. Failure to have a written Anti-Money Laundering Program and policies and procedures for reporting and maintaining Suspicious Activity Reports; (AML required by FinCEN, is a fraud detection plan - your Quality Control plan doesn't have legs if there isn't a reporting structure - we provide a plug-in)
4. Good Faith Estimates that did not comport with state and federal laws and regulations pertaining to mortgage lending; (Compliance policies and procedures address how to properly disclose - clearly this action is also pre-10/3, due to the GFE reference)
5. Improper charging or collecting of third party fees for loan-related goods, products, and services; (A quality control plan should address the completion of a loan agreement, retention of documents and financial audit to avoid these types of findings)
6. Failure to maintain required records; (you should conduct a Quality Control Compliance audit on each loan you close. This procedure, which is part of Quality Control, identifies documents you must keep and any deficiencies)
7. Failure to provide required disclosures to borrowers (Your production quality control should include a checklist that identifies all required disclosures - this way you can prove you sent and checked for them, even if the borrower doesn't return a signed copy)

Laundry Lists Don't Help you Identify What's Needed

Regulators and investors often provide lists of specific policies or procedures they want to see. Complying with the laundry list creates a false impression that you have satisfied all concerns when in reality much risk remains in the uncertainty of how your procedure gets implemented. The individual responsibility for compliance starts at the function level; the person who actually does the work. If you map out a person's job duties, and provide a detailed rubric for how it gets completed, you ensure compliance. 

There exists a panoply of policy solutions for mortgage industry participants, but only those which specifically spell out HOW you comply will eliminate the risk of non-compliance. 

TRID - Process Management - From Scratch

GFE/HUD-1 Are NOT Extinct - merely deprecated

Of the many TRID change challenges, one curve ball that continues to confuse: GFE and HUD-1 still remain in use! TRID doesn't apply to all transaction - some retain the the GFE/HUD-1 process. Ensuring the correct disclosures at the right part of the process is an important component of compliance.

2010 GFE Process REMAINS IN PLACE

Your old GFE Process doesn't get deleted, it gets denigrated from a primary to a secondary process (depending on your business model). If your business focuses primarily on reverse mortgages, home equity lines of credit or mobile homes, your business continues as usual; the TRID process applies as secondary in the event you pick up a customer to which it applies. Also, business loans, farm loans, temporary financing, such as construction only loans, lot loans and conversions remain exempt.

Loan Estimate Process and Closing Disclosure Process

The procedures remain relatively unchanged. The major difference causing concern among the industry, revolves around the idea that any changes to the Closing Disclosure result in a 3 day closing delay. This will only happen if 

1. The APR (annual percentage rate) increases by more than 1/8 of a percent for fixed-rate loans or 1/4 of a percent for adjustable loans. A decrease in APR will not require a new 3-day review if it is based on changes to interest rate or other fees.
2. A prepayment penalty is added, making it expensive to refinance or sell.
3. The basic loan product changes, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.

Theoretically, if we strip out all of the day-to-day processing time frames for documents, appraisals, title work and other time-consuming verification, a loan could still close within 7 Precise Regulatory days of application (because the customer must receive the initial disclosure at least 7 Precise Regulatory business days - in lieu of Actual Business Days - prior to closing.) 

Don't Forget the Home Loan Toolkit!!

The Home Loan Tool Kit replaces the "Settlement Costs Booklet" that we have been busy not giving to customers for the last 40 years. This is a foundational piece of the Know Before You Owe process. We have some problems with the information disseminated within the Tool Kit - specifically some mis-information with regard to locking in, but it generally represents a more customer friendly read and it references all of the other TRID material.

Your FREE Know Before You Owe Policy

Of course, remember we have been providing you with a FREE TRID policy since the beginning of the year. Now is the time to examine the easy way to manage your compliance policies and procedures with our Compliance VP Document Management System. 

Processor Boot Camp: Training Processors no Longer Means Re-Inventing the Wheel!

A goldmine of pre-developed training by industry leaders means you no longer have to pay to train new processors

Beginning in 1996 we ran Loan Processor Boot Camp classes as an answer to the fact that there was no real training in the area of processing. Over the last 20 years, the industry grew so much, and so many resources were deployed to use training as a sales tool, we can now benefit from vast libraries of pre-developed material when designing a training program. And the best news is that you can now use these tools to deploy your own pre-developed training program for new processors that you do not have to pay for.

We have often called processing the "life blood" of the industry. We live and die on the quality of our customer service, and so much of that service delivery depends on the processor doing his or her job well. While the processor must have some key skills - attention to detail, ability to multi-task - the industry has a very steep, though not long, learning curve to understand the business. Once a processor has achieved basic competency, the tasks become routine. The individual can start to rely on intuition and internal procedures to smoothly manage a pipeline. Once in place, companies almost forget that they have this critical resource in place. Like a finger, you don't realize how much you depend on processing until it's gone.

It takes some sort of upheaval, like a surge in volume or a raid from a departing manager, to cause the company to initiate the search for new processors. That's when you discover there aren't any. This presents the next choice - training one from scratch. But you don't have a training program. 

Fortunately, we have developed the template for you. But this remains a good opportunity to refine the way your company works. Going through the process of developing the program can really help you understand where the weaknesses in your production system are.

Step 1: Take Inventory of Necessary Skills

The first step in designing a training program involves making a detailed inventory of the key skills it should deliver. In the case of processing, looking at the duties as defined in a job description should provide the key components. If you or your company doesn't have a detailed job description, this may be at the heart of your processing problem.  We have provided a sample overview, but you really should have the detailed step-by-step for the job function, such as we provide here in your processing policies and procedures. 

Step 2: Assess the Training Needs

The training needs involving matching the specific skill with a deliverable, or a topic, that can be quantified in a training program. Sometimes these needs really don't need a whole training program because it's really a step-by-step process performed uniquely in your environment. But then there are elements which everyone in the industry needs to know which require some explanation. These form the core of your training program.

• Introduction to the business
• Basic Skills - Loan Origination System
• Basic Skills - Loan File Set Up
• Basic Skills - Credit Reports
• Basic Skills - Income/Assets
• Basic Skills - Income Calculation
• Basic Skills - Appraisals
• Basic Skills - Purchase Contract Review
• Basic Skills - Submission
• Workflow Management
• Advanced Skills

When you look at this, you realize this represents the core "boot camp" with a focus on all of the general knowledge a processor needs to effectively do the job anywhere. The only thing left is to identify the courses that meet these requirements and assign the individual to take them.

Step 3: The No-Cost Curriculum Assembled

When we began updating our processing courses, we started having the distinct feeling that we were reinventing the wheel. In fact, it was true. Most of the core material in our boot camp was available in the public domain. We just needed to pull it together.

This template covers all of the content in the standard New Loan Processor Initiation Course

You can download the curriculum here as a template, and feel free to edit and share as you see fit.

Other Training Resources - Behind the Registered User Login

Many other training resources exist to supplement your training program for mortgage processors, but many of these are hidden behind password protected areas of a company's site. All of your vendors, however, offer training as part of their bundle of services; some is a value-added service, but some has a cost associated with it.

• LOS provider - Calyx is the only provider that offers open source training to the public, but all of the LOS providers have training of some sort, much of it hidden behind the login screen. Ask your provider for access.
• Investors and wholesalers - Many account executives will provide live on-site training. Utilize this to augment your training. But for each of your wholesalers, ensure someone goes through their offerings to determine if there is a catalog of past on-line webinars that can be added to your library.
• Associations and Agencies - for advanced training, in particular, the agencies and associations often provide needs based training. The associations use this as a tool to drum up membership, so while it may be no-cost, it may be limited to members only.

The Practical Guide to Loan Processing - Still Relevant

Despite this, we still think our Practical Guide to Loan Processing is relevant as a foundational tool that allows an individual to independently learn all of the keys to the loan processing position. We offer hundreds of "job-based" tips and tools that cannot necessarily be provided in a service providers training. In addition, no one addresses the issue of role management and career advancement.

In addition, for companies, the detailed work of identifying process flow, synchronizing forms to ensure that the myriad compliance, quality control, agency and investor rules do integrate into the process mean that a detailed policy and procedure is much more important than the general knowledge that is in the public domain. 

"I Need Income Computation Training" means I don't understand self-employment

Changes to FNMA 1084 and Rental Income Computation Create Frustration

4 Months After SEL-2014-16, Confusion Persists

When a processor with more than 2 years of experience reports that he or she needs help computing income, fight the instinct to say "we need more training on income computation" and break out the elementary initial training material. What his or her statement expresses reflects the frustration of submitting a case to an underwriter after 45 days of processing only to have the file rejected for insufficient income. Clearly a bad day.

While you might expect this result from a rookie loan officer or processor, income computation worksheets have all but eliminated the problem for hourly or salaried borrowers; what remains is the self-employed and the uncertainty of rental income computation. This is because many processors and underwriters have not begun using the new forms. This may be due to the fact that Freddie Mac hasn't changed its online Form 91. In addition, internal policy may dictate the use of specific calculations that are MORE conservative that Fannie Mae's forms allow.

Please note that the changes required in SEL-2014-16 were effective 4/1, but then tabled until further notice by Selling Notice 3/24.  This article is not about the FNMA guidelines specifically but to point out the tools which are available for use in analyzing self-employed borrowers. 

FNMA 1084 Changes Not Fully Appreciated

The reality is that FNMA made major changes to the self-employment computation in its 1084 process. FNMA, as of January, no longer really endorses the Adjusted Gross Income Method of income computation, and has morphed the Schedule Analysis Method (1084) into a "Cash Flow Analysis Method." What's more, once you complete that analysis, you now need to evaluate the stability of that income using a "Comparative Income Analysis" form which reviews income over a period of time. According to Michael Whitbeck of Uber-Writer.com, the new process significantly changes qualifying for 1065 Partnership and S-Corporation principals.

The good news is that the underwriting industry has provided some free tools to help with this process.  You simply need to understand the variations.

FNMA 1084

The Fannie Mae form doesn't provide a form filler or calculator mode, so you stand the chance of making a math error on top of perhaps incorrectly attributing income.

You should include the income computation in each file. This serves as the basis for discussion as to what an underwriter feels he or she must change.

"Standardized" 1084 Format Provided by Radian MI

Radian has taken the time to provide the Fannie Mae form in Excel format. This means that it will make the calculations for you. You can also see the impact of "what if" scenarios.

In addition to doing the math, the Radian Form provides prompts for sourcing the information from the tax return. 

The Radian form also provides a simple Rental Income Worksheet which takes into consideration new rules for subject property and other property rental calculations meeting FNMA guidelines.

MGIC Worksheet Provides Augmented Instruction

MGIC lists two different worksheets - an AGI (Adjusted Gross Income) method and SAM (Schedule Analysis Method). However, they refer to both as a "Cash Flow Analysis." This can confuse the individual trying to source a FNMA Cash Flow Analysis.  The AGI version seems to be closer to the FNMA 1084.

Freddie Mac is still an Option

Loans which do not meet the new criteria for Fannie Mae should be scrubbed against Freddie Mac's guidelines to determine if they are eligible as FHLMC still uses form 91 which still uses traditional calculations.

Fannie Mae Comparative Income Analysis

In addition to the income calculations required by the Cash Flow Analysis, the underwriter must perform a second analysis of the stability of the income.  If the income is decreasing, underwriting may require that the lower of two years be utilized, or may disallow the self-employment income entirely.

Recent Fine Points to the Need for a Documented Training Policy

New Day Financial received a $5.2 million dollar fine from the Conference of State Banking Supervisors (CSBS) for systemic violations in its licensing training program. Although the CSBS's condemnation of New Day Financial's training program management system stopped short of using the word "fraud," it's astonishing to see the scope of misrepresentation perpetrated by compliance personnel and company leadership.  This incident reminds us that we often have to state the obvious, because in a high paced environment you can often lose perspective in the interest of expediency. But what happened at New Day caused a gasp at the audacity and scope; specifically the practice of having others take your training for you.

SAFE Act Training - It's Here... Deal With It

It's true that most mortgage professionals consider Nationwide Mortgage Licensing System approved pre-licensing and continuing education a fruitless, nuisance exercise. Much of the 8 or 20 hours of mandated material could easily be covered in 1 hour. Compliance training in all fields gets characterized in this way, whether it's nurses, plumbers, real estate agents, insurance agents and all of the rest of the regulated industries. But as mortgage professionals we usually buck it up and take our medicine as the price of admission. That's why no one in the industry has much sympathy for the New Day perpetrators. But the case raises some other interesting issues.

Compliance training isn't real learning. But that is by design. It advances a certain regulatory agenda, namely the idea that days spent mulling countless pages of federal law (much of it obfuscated by lawyerly wordsmithing) will make a commissioned salesperson (loan originator) an ethical and law-abiding industry participant. The New Day case provides more evidence that more compliance training doesn't mean more compliance. Loan originators especially dread the continuing education and pre-licensing training is perceived as largely useless with new entrants requiring weeks or months of vocational training to learn the job. Delivering it with more "engagement" simply means more "work" for the students. Because the material has such a low perceived value, participants naturally minimize the amount of time and effort expended.

While it doesn't excuse the actions of the individuals who cut class, it's likely the class cutters already knew the material being delivered in the "mandatory" continuing education. Like any long time industry professional, one is aware of the regulatory compliance requirements; many long-timers could teach the course (and do!). So, in part, the fault for the fact that people go to such extremes to avoid taking courses on the same old federal regs - the same regs that we talk about ad nauseum all day long - can be laid at the foot of the regulators who constrict the course materials. The Nationwide Mortgage Licensing System (NMLS), a subsidiary of the Conference of State Banking Supervisors (CSBS), mandates the content. It micromanages the approval of licensed training as if it were the holy grail of compliance. If you want professionalism and continuing education, we recommend the regulator de-regulate continuing education training. This will allow individuals to acquire learning in an area which they have some motivation and some diversity of topics.

Pre-Licensing Education and Testing - A Different Paradigm

Again, the intent of requiring pre-licensing education is good. But the idea that a new entrant can sit in a class for 20 hours and understand the mortgage industry is disingenuous. Similarly, the NMLS' recent statement that the 20 hour class cannot simply contain test-preparation material is also disingenuous; the focus of these classes clearly is preparing for the licensing test.

It's Fraud, Though, Isn't It?...

The New Day personnel who allowed others to take licensing courses and tests clearly crossed a line. How that misrepresentation is not fraud on an individual level is not clear. Perhaps there is another suit to follow.

Oddly, NMLS Worried About the Wrong Thing

The action provides more insight into the peculiar mindset of the CSBS and the NMLS. What provoked the Multi-State Mortgage Committee (MMC) most was the so-called "cheating" on the test by the copying of exam questions and sharing them with others. For anyone who has taken the tests, knowing the questions and answers really doesn't provide any advantage. The NMLS believes that the questions have real value, where a test-taker has to really parse each question to understand what the question is asking. The questions on the NMLS exam do not really test knowledge, but more the test taker's cognition and skill at multiple choice. Remember, multiple choice tests PROVIDE YOU WITH THE CORRECT ANSWER. The test taker has to choose which answer is the most correct.

This belies the issue. The test questions - the content matter - scope is so narrow that the same questions get asked again and again in different forms. Learning management specialists tinker with a battery of approximately 600 potential multiple choice questions and provide a range of partially correct answers, with enough "distractors" (technical learning specialist term where a seemingly correct answer incorrect answer is presented) to throw off a seasoned compliance officer. The board reviews the tests result macro data, and if too many people are failing or passing the test, they tweak the questions to make them slightly easier or harder, until they get into the 20% fail rate area. The idea that the questions themselves have any value at all simply reflects the regulator's misunderstanding of the user experience.

Still, the questions are NMLS property. The MMC does have everyone who logs into the NMLS sign a code of conduct that says they won't copy questions and reveal details about the test. We can complain about the absurd nature of the questions and the subjectivity of the "Best" right answer, but rules are rules.

The Need for a Training Policy and Procedure

The pinnacle of shame in the New Day debacle remains the statement of the COO who asserted he had no idea that his employees were taking his CE for him. That he didn't know he was not exempt from the hours is a tribute to willful ignorance, or a level of isolation reserved for reclusive terrorists.

This draws attention to the need for clear policies and procedures with respect to training. What makes a good policy and procedure? This example taught us that we needed to amend our SAFE Act policy to state the obvious - that each licensed or registered (covered) employee must take his or her own CE; that sharing answers and questions on tests is a prohibited practice.

NMLS has to Acknowledge its Part

The mortgage training industry needs to get honest about the problem of redundant training. Here is an opportunity to get creative. Be willing to step outside the box and challenge the NMLS' education department to approve more wide-ranging topics. Understand that compliance training in a vacuum doesn't help anyone except the regulators. De-regulate topics and provide a more dynamic system where the discussion can change based on the headlines of the day and the needs of the current market.

By creating an environment which stifles innovation in favor of conformity, the NMLS' system has condemned the industry to lowest common denominator, homogeneous training. The poor quality and low value of the NMLS content means that people participate ONLY because they have to. The format and content mean that people essentially check in and check out - Zombie Training - present in body but not in mind. If people can find a way around it, they will, as the New Day incident proves. If the NMLS believes that this is the only incidence of short cuts in the CE process, I am certain they are mistaken.

In order to FORCE engagement, the NMLS has mandated that individuals must take a quiz at the end of the class. Originally, these quizzes were not graded, so it was part of the training process. Now, these quizzes are graded as a way of gauging how much the student paid attention. REALLY? Why not have a really good class, where students participate and put their hands on something, question, fail and learn? Socrates would shoot himself if he saw what we were doing.

As further evidence of the difficulty the NLMS creates for students, it recently announced a mandate that SAFE Act CE had to be taken all at once - in one day - instead of the possibility of spreading the training out over a year.  How does this benefit anyone except the NMLS? What could the exception to ongoing training possibly be? Did they just want to avoid clogging up the database with multiple partial credits?

Whoops - How Much is that Whistle-blower's Payday?

Of course, you never know how much a whistle-blower gets paid, unless he or she files a lawsuit to collect. According to various law firms, the payday for a whistle-blower in a government action can be anywhere from 5 to 35% of the fine or recovery. 10% of $5.28 MM is $520,000 - not a bad payday.

Training Policy Sample Here

MortgageManuals customers already have a training policy embedded in their Policies and Procedures manuals. For instance, Originator training is in the Origination Manual; Processor training is in the Processing Module; Compliance training is in the Mortgage Regulatory Compliance Module.

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