Michael Steer: A New Year, A New Regulatory Attitude?
Michael Steer is president of Mortgage Quality Management & Research LLC (MQMR), Sherman Oaks, Calif. Contact him at msteer@mqmresearch.com.
As the clock struck midnight on December 31 and we hopefully ushered in a new year, many households across the U.S. participated in the traditional singing of “Auld Lang Syne.” To paraphrase the opening lines, should the pandemic regulatory attitude be forgot and never brought to mind? Not exactly. However, lenders can adapt the current pandemic regulatory attitude into one that pays equal mind to both the pandemic and the importance of compliance.
There was an unprecedented amount of content written in 2020 about COVID-19 and adapting to a “new normal” for the foreseeable future. At the beginning of the pandemic, the mortgage industry quickly shifted its operations to accommodate, among other things, working from home, virtual inspections and “drive-thru” closings. Not only did lenders and vendors have to adjust their operations, regulators did as well. Regulators passed emergency regulations to account for remote working operations, which were originally thought to be short-term measures. Those emergency regulations are currently still in effect and in many cases had to be extended, but lenders and their vendors should assume they will not stay in effect indefinitely. Notwithstanding, the pandemic forced regulators to evaluate office locations requirements and remote work flexibility for licensees and we should expect more permanent changes in this area down – at least by some – the road.
A Cup of Kindness
With the passage of emergency regulations, regulators essentially offered a cup of kindness in areas such as license applications, appraisals, verification of employment and origination activities. The ways in which this flexibility manifested itself include additional time for meeting certain licensing requirements, such as fingerprinting when fingerprinting companies were deemed non-essential and closed for a period of time, enabling virtual inspections, appraisal relief and allowing origination activities to take place at non-licensed locations (a.k.a employees’ homes) when companies transitioned to a remote workforce.
Additionally, the Consumer Financial Protection Bureau suspended the requirement that lenders who received over 60,000 applications during 2019 submit quarterly Loan Application Registers to comply with the Home Mortgage Disclosure Act. They instead were allowed to collect the data to report annually by March 31. The CFPB also worked with financial institutions to either postpone Supervisory Examinations or conduct them remotely. Lenders certainly appreciated this latitude and grace as they grappled with overcoming the operational challenges presented by the pandemic while managing record origination volume.
Days of Auld Lang Syne
In the past nine months, the mortgage industry, like so many others, has adapted to social distancing and other pandemic safety requirements. However, now lenders must look backwards to days of auld lang syne, or days gone by, and remind themselves of what life looked like pre-COVID. The flexibility regulators and investors provided in 2020 cannot and will not last forever, and as a result, lenders need to be prepared to show best efforts to comply with compliance regulations in 2021.
For example, ACES Quality Management’s recently released QC Trends Report not only notes that the overall critical defect rate for Q2 2020 was 188%, its highest quarterly rate since 2018,, but the data also shows early payment defaults (EPD) increased 197% through September 2020 compared to 2019. FHA provided a temporary waiver of for EPD reviews for May-July 2020 given the expectation that the large numbers of forbearance requests triggered by the CARES Act would increase the number of EPDs lenders experienced in early 2020. However, FHA did not extend its waiver of EPD reviews as part of its overall QC requirements despite the continued increase of EPDs in 2020. While these spikes are both unsurprising and not unexpected, regulators are not going to turn a blind eye. Instead, lenders can expect to see a greater amount of scrutiny from regulators in 2021.
To meet the increased regulatory scrutiny, lenders need to have a compliance plan in place for 2021 while keeping in mind pandemic safety precautions are not going to vanish overnight. This plan needs to include not only considerations for operational functions, but also budgetary needs to meet both compliance requirements and a more stringent regulatory attitude. To show best efforts to comply, lenders may need to consider increasing internal staffing or engaging a third party.
Pay for Your Pint
Yes, the world is still in the midst of a pandemic, but the mortgage industry cannot operate in a state of emergency forever. The regulators extended a cup of kindness in 2020, but lenders must be prepared to pay for their pints in the future. Just as the onset of this pandemic shined a light on the need to have an emergency operation plan in place, the continuance of the pandemic makes clear that lenders should also have a plan for levels of pre-COVID compliance after the implementation of said emergency operations. Furthermore, operating in a state of emergency does not negate the need for compliance. The COVID-19 pandemic and many of its effects, such as working remotely, are rolling over into 2021, but that does not mean regulatory flexibility will follow. Much like the onset of the pandemic, it is near impossible to predict when the emergency regulations will come to an end. The industry must simply be ready to react when they do and know that action must be taken now to prepare for that time.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)
