With lenders competing for every purchase transaction, some may be dusting off products they haven’t used in years or expanding their credit box to accommodate more borrowers and increase access to homeownership. Ensuring that creativity doesn’t compromise compliance takes serious research and constant QC system updating. We’ve asked Phillip McCall, president and chief operating officer at ACES Quality Management, how lenders can keep up with new and upcoming regulations to maintain loan quality in this very competitive environment.
HousingWire: We took a look at your most recent QC Trends Report, and noted that defects are on the rise, particularly in the areas related to underwriting and eligibility. Why do you think that is?
Phillip McCall: While there are many potential reasons for this, among them may be that some lenders are getting more aggressive in expanding the credit box to qualify every borrower possible and help them get into homes. In addition, many may be offering products they haven’t offered in some time, such as buydowns and ARMs, to broaden their portfolio and open new revenue streams.
With lenders stretching the credit box and originating unfamiliar products, all in a rising rate environment, the potential of originating high-cost mortgages and higher-priced mortgage loans becomes more prevalent as well. Both are highly regulated at both the state and federal level. For instance, with higher-priced mortgages, lenders need to verify the consumer’s ability to repay, ensure there is no prepayment penalty and make sure escrow taxes and insurance payments are paid each month along with the loan’s principal and interest.
High-cost mortgages have the same requirements plus a few other limitations like no balloon payment, a maximum late fee of no more than 4%, no points or fees can be financed into the loan, among others. That’s a lot of calculations and obligations just for federal compliance. Many states and localities have additional, and in some cases, even stricter laws. That’s where lenders may fall into trouble.
HW: What steps should lenders be taking with these loans and how can they make sure their systems are up to date as far as new regulations?
PM: In this highly regulated and highly competitive lending environment, it’s important to make sure the loans coming through your pipeline are as pristine as possible. You need to avoid unnecessary errors like TRID miscalculations, and make sure you’ve dotted your i’s, and crossed your t’s for each product type. For instance, when trying to avoid originating a high-cost mortgage you’ll need to test the rate spread to ensure the APR doesn’t exceed the benchmark rate by certain amounts, and the points and fees to be sure the total “points and fees” don’t exceed a certain percentage of the total loan amount.
HW: What does that kind of QC and system update look like for lenders?
PM: ACES Quality Management is the leading provider of mortgage quality control and auditing software, and we are a trusted expert when it comes to compliance at every level. Our team has literally gone through the alphabet soup of lending regulations to fully apply them within our technology. And not just at the federal level. We’ve delved deep into state, county and city regulations to make sure you’re always in compliance.
Keeping up with regulatory requirements at all levels is a full-time job. At ACES, we know this because we have teams of compliance experts working full-time at a very granular level. They are the team behind ACES PROTECT, a suite of compliance tests that you can use as-is or configure to meet your needs and interpretation.
ACES PROTECT has allowed USAA to automate several of their manual fee compliance tests using a fully supported application, giving them greater efficiency, improved accuracy and better reporting. They are able to test using the parameters they set in ACES PROTECT and, if needed, change them on the fly. All of this ensures improved confidence when sharing results with management, auditors and regulators.
HW: How does ACES help lenders safeguard compliance?
PM: We are fully transparent with our customers in explaining how this technology works and how it changes their business dynamic. But especially if you’re originating innovative or new products, ACES PROTECT will lower your risk in accordance with your own thresholds and business practices.
Because we’ve automated compliance testing in accordance with your business practices and overlays, you can originate, quality check and close loans with more confidence. You can rest assured we’ll stay abreast of new regulations, so you’ll never be caught off guard or have to unexpectedly interrupt production to update QC systems.
We know 2023 will be a tough year for many lenders. We want to make sure our customers have the technology they need to test loan quality, repeatedly if needed, without leaving the QC environment, and in a cost-effective way. We want our customers not only ready to compete, but to thrive in the years to come.
