In response to the subprime lending and economic crises, federal banking regulators and the U.S. Department of Housing and Urban Development (HUD) have proposed and/or finalized several significant amendments to U.S. mortgage lending regulations, including the Federal Reserve Board’s (FRB) Regulation Z (which implements the Truth in Lending Act, or TILA) and HUD’s Regulation X (which implements the Real Estate Settlement Procedures Act, or RESPA).
These new requirements apply substantially to all lenders that originate and service consumer mortgage loans. The finalized changes are effective in stages, as follows:
- Changes to Regulation X early disclosure requirements and the use of “average charges” on the Uniform Settlement Statement (HUD-1/1A) became effective on January 16, 2009.
- Changes to Regulation Z early disclosure requirements became effective on July 30, 2009.
- Enhancements to Regulation Z prohibitions on unfair and deceptive mortgage lending-related practices, particularly for “high-cost” mortgage loans, are effective on October 1, 2009 (escrow changes are effective on April 1, 2010).
- Enhancements to the Good Faith Estimate (GFE) and the HUD-1/1A required under Regulation X are effective on January 1, 2010.
In addition, on July 23, 2009, the FRB proposed further changes to disclosures for mortgage loans and home equity lines of credit (HELOC) and announced its intent to work closely with HUD to coordinate further enhancements to mortgage loan disclosures.
Challenges and Opportunities
The finalized regulations impose several new compliance requirements, including:
- Lenders must provide an early truth-in-lending disclosure to all closed-end mortgage loan applicants before assessing fees, and observe new waiting periods based upon the timing of this disclosure prior to consummating the loan.
- Lenders must demonstrate borrowers’ ability to repay “high-cost” loans. In addition, the regulation establishes and imposes specific rules related to a new category of “higher-priced mortgage loans.”
- Originators must comply with significant changes to GFE and HUD-1/1A disclosure requirements.
- Lenders are required to “re-disclose” GFEs if estimated fees change by amounts in excess of newly established thresholds.
In light of increased regulatory scrutiny and expanded penalties for noncompliance, effective implementation of these requirements is a top priority for mortgage lenders. However, many are struggling to implement these changes due to:
- Fewer resources available (as a result of financial crisis-related headcount reductions) to assess the impact of and implement regulatory changes
- Limited guidance from regulatory agencies regarding specific details necessary to implement the new requirements
- Complexity of enhancements required to systems, processes and procedures
- Time and effort needed to coordinate changes with multiple departments and third-party vendors
Our Point of View
We believe the keys to the effective implementation of these new requirements include the following activities:
- Establish a cross-functional implementation team as early as possible, including representation from sales, operations, compliance and legal personnel.
- Assess changes collectively to develop implementation plans that address the various requirements efficiently.
- Develop effective user acceptance testing (UAT) plans that mandate participation of individuals responsible for complying with the new requirements.
- Conduct robust training on the new requirements and processes, focusing on customer delivery and service.
- On a timely basis, establish and execute enhanced compliance monitoring and internal auditing procedures to detect and resolve any implementation irregularities.
How We Help Companies Succeed
Our Regulatory Consulting professionals can help your institution meet the challenges of complying with the new mortgage lending-related rules in a number of different ways, including:
Implementation Project Management – We can assist your implementation efforts by:
- Assessing the impact of new requirements on the organization’s operating environment
- Assisting with the development of an efficient implementation project plan
- Enhancing existing policies, procedures and internal monitoring programs
- Developing and delivering training materials
Pre-implementation Assessment – We can review your implementation project plans to evaluate:
- The comprehensiveness of the plans and compliance with regulatory requirements
- The sufficiency of UAT scenarios
- The institution’s progress as measured against its established milestone dates
Internal Audit Services – We can provide your institution with outsourced or co-sourced internal audit support to perform internal audits related to the new mortgage lending requirements, including an assessment of your institution’s compliance management program as well as a transaction-level compliance assessment, with a focus on providing recommendations to enhance your program.
A multinational financial institution sought to convert the deposits and lending activities of a U.S.-based banking subsidiary to its own “home country” systems, requiring significant policy, procedural and systemic changes to comply with existing U.S. laws and regulations.
We assisted the institution by participating in implementation team meetings and providing both training and practical guidance to the team. We reviewed the systems implementation specifications, model disclosures, and revised policies and procedures for adherence to applicable regulatory requirements. Finally, we conducted an on-site, post-implementation review of deposit and consumer loan transactions for compliance with regulatory requirements and internal procedures. Through our efforts, the institution was able to convert the servicing of existing and origination of new deposit and loan accounts to its home country systems in a timely manner while remaining compliant with
U.S. laws and regulations.