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Mortgage Compliance Checklist


Loan originators must comply with nearly a dozen mortgage or real estate industry rules and regulations. In larger teams, compliance tasks easily slip through the cracks when application steps are split up. Mortgage compliance checklists prevent this problem. In this article, we’ll cover the main mortgage compliance checks to include in your list to reduce risk.


Blue checklist


Two Ways to Implement a Mortgage Compliance Checklist

The rudimentary way to implement a mortgage compliance checklist is to attach a template document to each mortgage application. Using a worksheet, loan officers fill in columns highlighting which compliance checks are needed, who performed a check, when the check started, and when a check ended. However, there's a better way that builds compliance directly into your workflow.

Most mortgage firms integrate compliance checks into their loan origination software (LOS). With good LOS, you're building the compliance checklist directly into your workflow. The LOS does all the tracking automatically for you without the need to manually process a worksheet. Integrating compliance into LOS also means you get the bonus of tracking which checks are creating bottlenecks in your workflow. Next, take a look at the core compliance checks that belong in your loan application workflow.


The Mortgage Compliance Checks Lenders Need to Perform

This list will help you to begin building a checklist for full compliance beyond just standard HUD and FHA regulations by highlighting the regulations that commonly "get" lenders. Always be aware that state-specific lending laws may apply for your mortgage company. A scalable LOS system will allow you to add all applicable compliance regulations to your workflow.


Truth in Lending Act (TILA)

TILA promotes fair lending by requiring lenders to provide customers with loan cost information that allows them to comparison shop for certain types of loans. TILA also gives borrowers something called a right of recession that permits them to back out of a loan decision within three days without losing money. The purpose of this lending compliance regulation is to prevent customers from feeling pressured to complete a loan application when a loan originator is using high-pressure sales tactics.

There's a lot at stake for lenders that don't follow TILA regulations. TILA applies strict liability to any creditor found to be in violation. What's more, intent is not considered relevant when an error is made. Some common pitfalls that lenders can encounter include providing improper disclosure for the amount financed, finance charges, payment schedule, percentage rates, payment totals, and security interest.


Regulation Z

Part of the Truth in Lending Act, Regulation Z requires lenders to provide borrowers with disclosures for all interest rates, fees, and finance charges in writing. Regulation Z also requires lenders to provide monthly billing statements, ensure fair and timely responses to billing issues, and notify borrowers whenever changes to rates on variable loans occur. Regulation Z also requires lenders to use fair practices that don't create conflicts of interest between lenders and brokers.

Any bit of disorganization within a mortgage lender's pipeline makes it easy for the extensive disclosure requirements of Regulation Z to slip through the cracks. In fact, a routine compliance review looking at all tiers of this regulatory compliance rule is recommended. LOS should ideally automate all lender-client correspondence to ensure that notifications are being sent when required.


Home Mortgage Disclosure Act (HMDA)

HMDA was created to dismantle credit discrimination practices within the mortgage industry. HMDA requires mortgage lenders to publicly disclose mortgage data. This includes information linked to the race, gender, ethnicity, and income of applicants and borrowers. HMDA also compels lenders to report information regarding loan pricing.

The stakes are high with HMDA because it's used to sniff out what the government refers to as predatory lending practices. HMDA is challenging for mortgage lenders because it requires impeccable documentation. In addition to disclosing information, lenders are responsible for maintaining records that will be used for accurate reporting.


Real Estate Settlement Procedures Act (RESPA)

RESPA is intended to reduce unnecessarily high settlement costs by requiring disclosures to buyers and sellers. It is also considered an anti-kickback regulation. Under RESPA, loan servicers are prohibited from demanding excessively large escrow accounts. RESPA also restricts sellers from mandating specific title insurance companies.

RESPA compliance is challenging because it involves many moving parts. In order to prove compliance, lenders must keep impeccable records regarding fee justifications. They must also have clear receipts for any gifts exchanged with third-party providers to combat kickback accusations.


TILA-RESPA Integrated Disclosures (TRID)

TRID refers to a series of guidelines enforced by the Consumer Financial Protection Bureau (CFPB) designed to close common loopholes used by unethical lenders. TRID rules lay out both informational types and informational deadlines that need to be provided by lenders. TRID rules also regulate fees that can be charged both at origination and maturation.

TRID puts lenders on the hook for several big responsibilities that can easily get overlooked if a good system isn't in place. The first is quick delivery of the loan estimate within three days after an application is received. Next, lenders are required by law to keep copies of loan estimates for at least three years after mortgage papers are signed. Disclosure agreements must be kept on file for five years. In addition, disclosure agreements must be provided at least three days before a loan is signed.


Regulation B of the Equal Credit Opportunity Act (ECOA)

Regulation B was created by the Federal Reserve to prohibit discrimination based on race, color, religion, national origin, sex, marital status, age, parental status, or use of public aid. Under Regulation B, lenders are prohibited from making lending decisions using any of the prohibited factors outlined in ECOA. Regulation B also requires lenders to provide written notice of all actions taken on a request for credit within 30 days of receiving an application.

Failing to implement the necessary controls under ECOA poses compliance risks. Mortgage lenders must ensure that all application correspondence avoids the collection of specific personal information about an applicant that has no bearing on an applicant's ability to repay the loan requested. This covers all activities before, during, and after a loan is offered.


Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)

UDAAP is a newer regulation that was introduced under the Dodd-Frank Wall Street Reform Act of 2010 as a way to protect consumers from unfair, deceptive, or abusive tactics in banking. It puts lenders on the hook for any information that may be either misleading or harmful. Roughly 90% of UDAAP regulatory actions are focused on deception.

The challenge with UDAAP is its vagueness. The broad scope of this regulation leaves a lot open for interoperation. Picking standardized enforcement implemented through your LOS over individualized loan officer interpretation can help to reduce liability.


Robot automation


Tips for Automating Mortgage Compliance at Scale

It can feel like the entire weight of every government agency is breathing down your neck when you're a lender. Luckily, you can align all regulations into a single scaled process using automated software. Automation means that every lender in your office is working within the same set of standards. Fundmore helps mortgage firms of all sizes stay compliant to shield against both regulatory and reputational risks.


Final Thoughts on Building a Mortgage Compliance Checklist

Mortgage compliance is too bulky to handle on a case-by-case basis. Lenders need an automated system that catches compliance bottlenecks, lapses, and all of the other pitfalls that make lending firms liable. However, you need to balance compliance with the agenda of protecting your business against mortgage fraud. Don't spend another day fumbling through compliance without a rock-solid checklist.