Ncontracts’ Rafael DeLeon: How to Navigate Mortgage Lending Compliance Challenges

Prior to joining Ncontracts, Rafael E. DeLeon served as the Director for Banking Relations in the Office of the Comptroller of the Currency (OCC), as well as an OCC National Bank Examiner, trainer, and industry analyst for over 30 years. As Senior Vice President of Industry Engagement, Mr. DeLeon is responsible for outreach to regulators, industry leaders, and association partners, training and educational initiatives, and thought leadership.

Compliance violations continue to be a major concern for mortgage lenders. According to the Consumer Financial Protection Bureau, the Department of Justice has seen a 175% increase in Equal Credit Opportunity Act violation referrals since 2020. And ECOA is just one of many critical regulations affecting mortgage lenders.

To stay on top of these regulations, mortgage lenders rely on their compliance management system. The problem: most compliance management systems aren’t automated. As a result, many mortgage lenders don’t have the resources and processes to efficiently and seamlessly address new and emerging compliance risks.

Let’s delve into some of the most common compliance challenges mortgage lenders face and how automated compliance management processes can streamline risk mitigation.

Critical Regulations Impacting Mortgage Lenders

Mortgage lenders are subject to a wide range of regulations on the state and federal levels, and with those regulations comes compliance risk. Compliance risk can quickly snowball from regulatory action to civil penalties, reputational risks and beyond.

Let’s explore some of these regulations in more detail:

Real Estate Settlement Procedures Act. RESPA mandates that mortgage lenders give homebuyers proper disclosures and safeguard them against abusive practices, such as kickbacks and inflated fees. Failure to comply with RESPA can lead to regulatory consequences, which one mortgage company learned after being forced to pay nearly $2 million to the CFPB’s victim relief fund after providing illegal incentives to real estate brokers and agents for mortgage loan referrals.

Home Mortgage Disclosure Act. HMDA requires mortgage lenders to accurately collect and report data on loan applications, approvals, and denials to avoid penalties. In the last year, the CFPB has taken action against two major lenders for failing to report complete and accurate data, resulting in over $15 million in civil penalties.

Fair lending regulations. Various regulations fall under fair lending, including ECOA and the Fair Housing Act. The Justice Department’s Combatting Redlining Initiative has furthered heightened scrutiny in this area. In 2022, a Delaware-based mortgage company faced the second-largest redlining settlement in DOJ history for $24.4 million after being found to have violated ECOA by avoiding loans in majority-minority neighborhoods, resulting in significantly fewer home loans and applications compared to similar lenders.

Unfair, Deceptive, or Abusive Acts and Practices. UDAAP prohibits actions that mislead, exploit, or otherwise harm consumers through unclear terms, deceptive marketing, or unfair treatment. In 2024, the CFPB fined a mortgage company $2.25 million for misrepresenting payment terms on required borrower worksheets for VA cash-out refinance loans.

Truth in Lending Act. TILA mandates that lenders provide clear and accurate information about credit terms and costs. Violations often stem from misleading marketing practices. In 2023, the CFPB fined a mortgage company $1 million and banned it from mortgage lending for misleading advertisements targeting military families, suggesting a government affiliation. Additionally, in 2020, a California mortgage company was fined $150,000 for sending deceptive mailers about VA-guaranteed loans to over 700,000 consumers, including service members and veterans.

How a Compliance Management System (CMS) Can Help

The mortgage lending space’s regulatory environment is always evolving, forcing lenders to keep up. While a daunting task for lenders of all sizes, a compliance management system can streamline the process by leveraging tools, methods and internal controls to help companies better understand compliance risk and how to comply with rules, regulations, and internal policies.

Too often, mortgage lenders face challenges because their compliance management process is not centralized and organized. An inefficient process makes it challenging to address inefficiencies, which costs valuable time, money, and other resources.

Let’s explore how an automated, streamlined, and simplified approach to compliance management, along with the right CMS, can solve common challenges:

Tracking regulatory updates. Compliance teams can spend weeks and even months finding and implementing new rules. In addition to managing existing regulations, these teams must develop and verify compliance plans. A robust CMS simplifies this process by centralizing regulations in one location, identifying applicable new and existing rules, and providing implementation plans.

Scalability issues. As a mortgage lender grows, its compliance responsibilities increase, and its manual systems can no longer manage larger volumes of data and company’s growth, ensuring efficient compliance processes regardless of size.

Responding to regulators. Automation through a CMS is key to managing documentation and workflows, which is crucial to addressing compliance and regulatory questions quickly and efficiently. Disorganized documentation, data reporting errors, and missed deadlines can result in regulatory problems.

Failure to identify opportunities. Automating compliance management tasks enables team members to focus on providing insights and guidance rather than getting bogged down by manual processes. This enhances their ability to respond to inquiries related to state laws or loan officer questions.

The cost of non-compliance. Compliance issues can lead to regulatory penalties and reputational risks, among other risks. Compliance software helps mitigate risks by centralizing policy management, task management, regulatory monitoring, and different priorities.

Automating the Future of Mortgage Lending Compliance

Shifting away from manual processes is crucial to reducing risk, improving efficiency, and staying on top of the most important regulatory updates.

As you revisit your compliance system, ensure your automated CMS is the right fit for your needs, regulatory requirements, and size. The right CMS is crucial to ensuring your institution maximizes your resources and prioritizes the regulations specific to your lending services.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)