By Michael Detwiler
Compliance challenges require flexible document preparation technology

For all the talk across the industry suggesting that the preparation and delivery of mortgage closing packages has become a commodity, there has never been a time in our business when these documents—and the data behind them—are more important. Borrowers are seeing documents earlier in the process, and regulators are watching them long past closing to verify their accuracy through loan closing and disbursement. In addition, investors are requiring the loan level data before and after it hits the printed documents. In the war to control the home finance industry, the documents are the battlefield.

Unfortunately, many vendors in the space have not evolved to meet these heightened demands. These firms continue to provide static libraries of mortgage document forms, updating only when necessary, in an attempt to remain compliant with the new and changing regulations. By not taking their businesses beyond a print form and into the world of electronic data, these document vendors are competing for market share in an industry that will soon leave them behind. I understand how, from the outside, commoditization of documents has resulted in a sense of complacency. However, lenders who accept that at face value will do so at their own risk.

I believe that there are at least three reasons that document preparation, the documents themselves and the data behind the documents are more important today than ever before.

For vendors, these reasons present opportunities that could lead them to develop offerings well above the level of a commodity. Acknowledging this opportunity is what led to my own company spinning out the document service we developed for our enterprise lending system into its own standalone technology offering.

Due to the disparity between services offered by different vendors, lenders must carefully consider the partnerships they form in the days ahead.

The first reason that documents can no longer be commoditized, nor will be in the future, has to do with changes to the way the government monitors and regulates compliance with mortgage industry regulations.

In the past, regulators have used the mortgage loan documents as a compass to determine compliance on the part of the lender and its partners. Furthermore, when legislators wanted to impact the way that the industry operated, it was usually through the addition of paper-based document disclosures. Failure to comply with a government regulator’s mandate was generally visible in the final documents that the borrower was asked to sign at the closing table.

In today’s lending environment, failure to comply with government regulations can spell the end of a business. The new Consumer Financial Protection Bureau has already promised to levy penalties and fines against lenders as high as $1 million per day. At that rate, it will not take long to drain a company of operating funds.

The CFPB recently transferred its agency powers and has already published its Supervision and Examination Manual. As of this moment, lenders must be sure that every loan file that the new bureau inspects is complete and compliant. This is not something that lenders can be expected to handle on their own.

As we all eagerly anticipate the final regulations for the Dodd–Frank Wall Street Reform and Consumer Protection Act, lenders must begin to forge strong partnerships with their document preparation vendors in order to permit them to focus on their loan origination business.

All compliance requirements and document content management should be completely managed by the lender’s document vendor. Reallocating such document services will help to reduce the overbearing in-house compliance and content management costs while ensuring compliance. Many of the traditional doc prep vendors are not ready to take on this responsibility. However, those that are ready will provide various levels of services, thereby repelling the notion of commoditizing the mortgage document business.

The weakest document players will—at best—provide a fair level of compliance protection, perhaps backed by an insurance policy. But the superior vendors will provide many services in addition to the above—such as in-house compliance counsel, a guarantee to remain ahead of changes and current with investor, agency, GSE, state and federal compliance requirements.

These players will make themselves available for discussion with clients again leaving the lender able to focus on its core operation and how to grow its origination business.

With the new CFPB coming online earlier this year and even now, continuing to staff up, it’s only a matter of time before the government begins to inspect every document in the lender’s files. In fact, given the way the government-controlled former GSEs are advancing, they may not even have to look all the way to the loan file documents—they’ll already have access to the data.

All compliance requirements and document content management should be completely managed by the lender’s document vendor.

We also expect to see heightened demands for data; these demands will be made by investors, issuers and underwriters in the new secondary market, which is another reason that the document cannot become commoditized. This is a real opportunity for the vendor to provide protection for the lender.

Some lenders may still harbor a false sense of comfort and believe that they will not face the risk of buybacks since they have not had to repurchase a loan in recent memory. They are ignoring the fact that the risk of repurchase requests due to missing documents or failure to meet strict delivery requirements has been rising.

Without control over the initial disclosure packages of third-party originators, lenders run the risk of missing investor deadlines, resulting in a buyback request. If a regulator learns of this failure, it could result in fines and/or loss of license resulting from a regulator’s audit finding noncompliant closing document packages based on the originating institutions’ specific regulatory obligations.

The second reason that documents are not likely to become commoditized in our business has to do with the ability to quickly roll out new loan programs. Many who have been in our business for only a short time may not remember the myriad of loan programs that existed just a few years ago. If the government is successful in reducing its participation in the home finance industry, through its’ sponsored enterprises, it will open the door to many new investors. With this influx, lenders will want a document solution capable of dynamically generating relevant document packages.

Lenders will need these packages to automatically populate with the extracted data in order to quickly launch new products and build the document packages they need.

We’re already seeing one example of this in the jumbo lending market. It now appears that the federal government will not extend the higher loan limits for conforming loans. This opens the door to more lenders who are eager to satisfy the demand at the high end of the market. Competitors that are nimble enough will be able to reach this market first.

Additionally, as new investors enter the market, it seems certain that the CFPB will be monitoring these companies closely. It will be important that the documents used are acceptable to the CFPB. Creating such documents individually will slow down the process, making it harder to bring new offerings to market and rendering firms that rely on old-style doc prep vendors at a disadvantage.

This evolution of the industry illustrates that the heavy reliance on static forms and one-size-fits-all document packages, which are full of improper and irrelevant documentation, will no longer be enough to offer lenders a competitive advantage and remain compliant with regulations.

The final reason that mortgage documents will not become commoditized is related to risk mitigation. Over-and under-disclosure is a continued concern in the industry. Without a dynamic document solution, errors are likely to occur because companies are relying on manual intervention as opposed to smart technology.

A true document preparation and delivery provider should offer document management and risk mitigation services in a manner that allows the vendor to truly “partner” with the customer by offering services with superior technology. In addition, lenders should expect that their vendors’ documents are supported by representations and warranties of compliance with all agency guidelines and federal and state requirements.

Only an ever-evolving document preparation and delivery platform will allow lenders to quickly adapt to changes, capitalize on new business opportunities, and still remain in full compliance, all while gauging the eventual realization of e-mortgages. Lenders should be able to leverage their document vendor in order to mitigate risk, while simultaneously pursuing growth opportunities.

This all points to the fact that both lenders and servicers need to recognize the major differences between vendors. Additionally, they ought to shift their sights upward to a truly dynamic document provider capable of providing relevant and accurate packages, boasting world-class customer service. Vendors like this deliver more than documents—they can become a lender’s entire risk mitigation arm.

It is true that many technology vendors have not evolved their offerings. Instead of providing analytical tools to help lenders make sense of the data they collect, they’ve been satisfied to merely offer a static forms library with no additional services. This unfortunate truth has led to misguided conclusions about the mortgage document business becoming commoditized.

However, as long as there are document preparation vendors who understand that the data behind the documents is the key to surviving in an intense regulatory environment and are able to keep a firm hand on risk mitigation, a new standard can be set.