DENVER-The start of the year ushered in the most substantial changes seen in a long time in the two key federal laws that govern mortgage lending, the Real Estate Settlement Procedures Act and the Truth-in-Lending Act. Mortgage originators of all types, large and small, spent the end of 2009 adjusting their systems so they remain in compliance.

The changes in the rules, noted John Levonick, who recently joined Mortgage Cadence here as chief legal and compliance officer, had a large effect on one of the areas that had been in the past taken for granted by originators, the initial disclosure documents.

"For many, many years, institutions sent out early disclosures, trying to get these documents into the borrower's hands but these documents had no material relationship to the ultimate product that the borrower ended up with. The initial disclosures would show a 5% fixed-rate loan for 30 years and the borrower would end up in an adjustable-rate hybrid product," he noted.

The changes in the laws are designed for the borrower to receive the disclosures to have ample time to shop around and see what products they truly qualify for. Furthermore, the initial disclosure is now supposed to resemble the product the consumer receives at closing.

With these changes, information about the loan has become paramount. Now the settlement charges quoted to the borrower have to be accurate as of the time when that good-faith estimate is issued. No longer can lenders tell the borrower this is roughly what the closing costs and fees will be.

Mr. Levonick added the changes in the laws represent a shift in banking in general in this country, that the government is putting a higher priority on making certain institutions are responsible in their lending practices.

The changes are a result of institutions not having the necessary controls in place in their lending practices especially during the high-volume periods and they ended up sacrificing quality for quantity.

Institutions are now focusing on building internal compliance controls for their internal platforms as well as their wholesale lending platforms, he said, noting that there is starting to be a return to the third-party channel among lenders.

And institutions that are participating in the TPO channel, Mr. Levonick said, want to make certain those who are originating paper on their behalf (either correspondent or broker) are following the new government rules and producing quality loans.

In the loan origination process, there are a lot of manual steps that could expose a lender to a number of risks. Mortgage Cadence provides a set of controls, he said, that helps lenders reduce the compliance risk in originations.

But key to minimizing risk is the institution's ability to create those controls to ensure that the loan originated are meeting the guideline aspects for compliance, collateral and credit quality, he said.

There is an "inherent risk" in managing multiple vendors. Firms are relying on their information technology department to properly integrate those systems. Mortgage Cadence, he said, provides a unified system, and allows users to customize controls to their own risk profile.

With the multiple vendors and the need for accuracy as mandated by the new laws, there is a lot of risk in making sure all the information matches up. Among the risks are incorrect data being entered on one system or for the systems not to marry up properly to transmit data.

It is not only regulatory costs, but lenders will bear "the costs to redisclose a loan in a volatile rate environment," Mr. Levonick. "If a loan has to be redisclosed and the borrower has to wait several days to close, the rate environment could be significantly different" than what it was when the inaccurate disclosure was provided. "So there is a dollar value associate with the accuracy (of the disclosure)," so if in a single loan, the inaccuracy could cost several hundred dollars, across an entire production channel, the cost could be significant, he continued.

As for the future, Mr. Levonick warns that compliance is ever evolving and going forward there will be changes whether tweaks or big revisions. So originators should pay close attention to what's happening to remain a fully compliant institution.