Were now under the five-month mark from the most significant regulatory changes about to hit the mortgage industry in the last decadeQM, Ability to Repay (ATR) and changes to HOEPA, just to name a few. Already, mortgage professionals are bracing themselves for the onslaught of process changes, internal checks, system upgrades, general headaches and the confusion the new regulations are already bringing.
As the industry works feverishly to interpret new guidelines pouring out from the CFPB, there are a large number of changes that must get done between now and the end of this year. One issue that has been consistently overlooked coming is technical changes to many state high-cost loan laws.
Many state high-cost loan statutes specifically reference the federal HOEPA standard to some extent. Therefore, as the federal standard changes beginning with loan applications taken on January 10, several state standards will change as well. Research into these laws has uncovered 18 states that specifically reference HOEPA in their high cost loan regulations. Each of these must be updated with the new rate and/or fee thresholds as applicable. The problem is nobody seems to be really aware of this, including the states themselves!
What happens if you dont have these rules updated in your systems in time for the Jan. 10, 2014 changeover? Well, you will still be largely covered by calculations contained in the new HOEPA rule and, indirectly, the QM rule. However, the results of your compliance checks, which are likely placed in each loan file, will be wrong; and additional state-level consumer protections may be inadvertently missed. Finally, the ugly issue of assignee liability may well raise its ugly head once more, causing additional headaches from the loan salability standpoint.
Other problems persist. Take Maryland for example, whose high cost rate and fee tests are written so that they must be exactly 1% less than the HOEPA standard. That means that the maximum amount of points and fees charged on a loan will now be an ultra-low 4%, unless the state legislature decides to do something about it, or the state banking department issues a declaration to the contrary.
Most states likely wont take action until after the dust settles in Washington. Who knowsmaybe some will even come up with their own versions of Ability to Repay! So much for one national standard
Regardless, its critical for lenders to add state high cost law changes to the ever-growing list of action items on their plates for the rest of this year. If youre feeling lost or overwhelmed on how to prepare for all this change, review the following checklist for the compliance do-it-yourselfer:
- Plan, plan, plan. Make sure you have an iron-clad design plan and analysis no later than the end of this month. It should outline, in great detail, the granular calculations and touch points contained in QM and new HOEPA, along with ability-to-repay, servicing and other new rules.
- Hire a new development team. Your existing development resources are already maxed out, dont make their lives that much worse. If you do, quality will suffer and important milestones will be missed.
- Make sure all new tests and updated requirements are being built into your loan origination systems and processes ASAP. You will need to allow time for troubleshooting so the sooner, the better.
- Test, test, test. Make sure everything works, down to bona-fide discount point exclusion calculations and proper treatment of lender credits. Dont forget about special calculations for fees charged by affiliates.
- Remember that some things cannot be adequately planned for in advance. Although January 10 you may be making only safe harbor QM loans, as the months go by you may begin originating rebuttable presumption QMs and loans with no QM status. Without knowing the fallout from the new QM and ATR rules, there will be contingencies that we just cannot yet adequately plan for. Train, train, train. Train your team on the new technology. Let them know well in advancewhat to expect, and then make sure they can properly apply it.
Throughout all of this, involve your senior leadership and capital markets teams so they can appropriately budget for risk and other issues, and develop new products and pricing that will satisfy regulators.
In time, the new regulations both at the federal and state levels will become standard industry practice. However, that requires many originators to change their standard operating procedures to ensure quality, transparency and uniformity. In addition to the tactical steps outlined here, lenders are well advised to adopt the age-old survival strategy of Adapt, Adapt, Adapt in order to be prepared adequately for the coming changes.
Roger Fendelman is vice president, compliance, for Interthinx.