Article By: Gregg Oberg, Spillane Consulting Associates, Inc.
Quality Control as a “Detective” Compliance Control
I’ll skip the obligatory “compliance is hard and expensive” explanation; you’re already aware of that fact. The process—regardless of the regulation being complied with—begins with identifying and assessing risks. Policies, procedures and other controls are then implemented, and we hope we’ve met our obligations. But unless we continually monitor and test our programs, improving them as we find flaws, we haven’t done our jobs.
The purpose of a “Detective” control is to uncover violations of policy and procedure. This should not be taken as adversarial in tone, as a flaw in our current CMS today is tomorrow’s improvement. By identifying why we fail to meet our obligations (either internal or external), we are able to ultimately correct the shortcomings of policy or procedure. In shot, the things we catch in QC (or don’t catch) both prove and improve the compliance process.
From a lending perspective, monthly Quality Control (QC) is both a necessary factor for ensuring eligibility of loans on the secondary market, and a sufficient tool for evaluating the success of our controls. Don’t hope and pray your staff is originating loans in compliance with the multitude of overlapping regulations—instead identify and correct errors before they become major issues.
How to Leverage Data in QC
SCA performs QC Audits on hundreds of loans monthly for over 60 financial institutions in the New England market. Some clients will have dozens of loans a month to be reviewed under GSE guidelines; some will have two or three.
While the individual institution may not have found a certain trending problem in their small QC sample, SCA is able to see what issues other institutions are having trouble with, and suggest area’s of improvement before you know there is a problem.
Recent Critical Errors in E-Sign Consent Process: Why It Matters
E-sign is somewhat of a misnomer, as an effective E-Sign program can be most useful not in obtaining signatures, but shortening disclosure windows. For example, TRID CD requirements demand lenders show evidence that borrowers/applicants received the CD at least three days prior to consummation. In practice, delivery may take longer as the borrower is deemed to have received a mailed CD 3 business days after mailing, potentially stretching the process to six days.
E-sign can be thought of similarly to sending the mail certified overnight, but faster. A functional E-Sign program will allow borrowers to receive the disclosures almost instantly on their home computers or mobile devices and will document the receipt of disclosures at the exact moment of opening.
Lenders will benefit from this shortened timeline, but an improperly applied E-Sign program can result in failure to meet TRID timelines for borrower review of CD.
TRID violations could be a burden for lenders who will fear sanctions from the CFPB, rejection from investors, or even worse, litigation from consumers that may tie up their loan portfolios indefinitely.
Each week, we receive a wide range of questions from our clients on the Compliance Hotline. We want to share one example with you each week (with permission, of course).
I heard the following story from a client on our Compliance Hotline recently:
QUESTION “For HMDA, we have to report months until the interest rate may change. Our LOS says a 7-1 ARM product is 86 months until first change, is that right for HMDA?”
A: The “Simple Answer” No, it isn’t. A 7-1 ARM, (as Lance knows) is an adjustable rate mortgage where the interest fluctuates with an index, (i.e. prime, 10YR Treasury, etc.). It remains fixed for the initial seven years, and then the rate is recalculated each year thereafter. Seven years is 84 months, not 86.
The Whole Story: So, is the system just bad at math? My best guess at the time—and since confirmed—is the system is reading “months until interest change” to include the 1.5 months between closing and first payment, thus adding a rounded two months to each calculation.
Rather than simply tell the client “manually fix those in your system,” I was able to engage one of our systems experts, who is now developing a business rule within their system to fix this.
Need a Compliance Question Answered ASAP?
Give us a call or email us! One of our consultants will get back to acknowledging the receipt of the question, and most answers can be provided within 2 business days, at most. We’ll keep you in the loop on expected hours to complete, and follow up with any questions we need to solve the issue.
**These are our opinions. We’re not authorized, or willing, to express those of others.**
Thank you to Gregg Oberg, Spillane Consulting Associates, Inc., who with the support of other experts at SCA have put together this newsletter.