Ben Giumarra

Directors on bank board are held responsible if things go wrong. That’s why they have to keep a finger on the pulse of the bank’s practices. Here are some questions to expect from the board as it relates to regulatory lending compliance risk at this moment in time. (These may also be a good questions for the president or the owner of a nonbank lender.)

Picture this – you are the head of residential lending at a mid-sized community lender. The board calls you in to review recent audit reports and ask how well you’re handling these massive regulatory changes. And you’re peppered by the following questions:

Qualified Mortgage

Are we considered a “small creditor?” If so, are we taking advantage of that exemption?

This is a common problem we see. A lender tries to “overcomply” and “play it safe” by ignoring this regulatory exemption. But there’s no strategic advantage to doing so. Actually, it’s safer to use the small creditor exemption.

This could be a big operational boost. It could help you make a few more loans and provide a better customer experience (less bureaucracy). Some underwriters report saving a half hour per loan by switching to small creditor status!

Since more lenders than ever qualify as “small creditors” (the annual limit was recently raised from 500 to 2,000 mortgages), this is a good time to ask this question.

Federal Servicing Regulations

Do we qualify as a small servicer? If so, are we taking advantage of this regulator exemption?

This is a very similar analysis to the point above. How much do we complain about compliance? Why aren’t we taking advantage of the few regulatory exemptions that we do have? If you’re servicing 5,000 loans or fewer, you will qualify (so long as you don’t service even a single loan that you neither currently own or initially originated).

Is this a forgotten area that might bite us later? What have we done to prepare for these?

The CFPB rewrote these rules substantially in 2014. We really feel the pain from servicing rules when the economy takes a nosedive, and since these new rules were put in place, things have been going pretty well. Any potential issues may be hidden (as opposed to origination rules that are more visible). If you heard lots about TRID, and nothing about the new servicing regulations, that may in fact be the case. Those servicing rules were comparable to TRID in terms of complexity, so don’t ignore it.

Federal MLO Compensation Regulations

Convince me that we are compliant with the Federal MLO Rule. Has our compliance officer reviewed the plan and policy?

This rule was originally written in 2010, but was substantially overhauled in 2014. Hating to go through all the work (and expense) of reviewing policies so quickly, it slipped by some financial institutions, but having an illegal compensation plan risks tainting every single loan that is originated while that plan is in place.

TILA-RESPA Integrated Disclosure

Obviously this is getting a lot of attention. So many of those issues raised are relatively insignificant. What are some important issues that the board of directors would be keying in on?

Are we preparing the closing disclosure (or allowing settlement agents)?

I don’t want to step on a political landmine here, so let me first say that there are plenty of settlement agents who lenders can trust to deliver the final disclosures. But there are plenty of settlement agents who cannot do so responsibly and so far, the worst closing disclosures we see are from settlement agents. How about a $1 million construction loan at a rate of 3 percent intentionally disclosed as a fixed-rate (instead of a 3/1 ARM)?

How many closing disclosures have we reissued post-closing within the 60-day period?

One good thing from TRID is that we have somewhat of a get-out-of-jail-free card if we catch a mistake and fix it by issuing a revised disclosure within 60 days of closing. At least several New England lenders went through a phase of having to revise 100 percent of disclosures in this 60-day period. Never having taken advantage of this 60-day window since October raises some eyebrows.

Is TRID hurting our ability to introduce new loan products (that will be profitable and serve community needs), such as bi-weekly mortgages or a single-close construction loan?

You don’t want your lending department to sacrifice a good product mix for fear of compliance issues. For example, many lenders shut down construction lending because of TRID. In some cases, institutions could have maintained a very profitable loan product, even if more resources were necessary (perhaps with a premium for any additional risk).

Can we deliver disclosures to borrowers electronically?

A big advantage with closing speed (and compliance risk) is the ability to deliver documents electronically. Has your lending department invested the time necessary to have this capability? If not, why?

Home Mortgage Disclosure Act

What are you doing to prepare for the 2017 HMDA changes?

This is the last major regulatory change stemming from the Dodd-Frank Act, and it is quickly approaching. Is a committee meeting on this? Has anyone attended training? Do we have the right systems in place?

If you don’t feel comfortable with these questions – or if you don’t think your directors will be comfortable with them – it’s time to start looking for the answers.

Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@SCAPartnering.com.