Microsoft word - exp-fsi-regulatorycomplianceupdate_final_02282011.docx

Experis Finance – Financial Services Industry Compliance Update
February 28, 2011
This communication is designed to provide you with quick snapshots and perspective on timely
regulatory developments.

MDIA Changes Challenge Banks
Changes to Truth in Lending Act disclosures under the Mortgage Disclosure Improvement Act
(MDIA) are bringing significant challenges to banks for non-conforming loan products. MDIA
requirements involve both the timing and content of disclosures for dwelling-secured loans, whether
or not the collateral property is the borrower’s principal dwelling. Those banks whose strategic
objectives include offering specialized mortgage products are finding that changes under MDIA have
limited their loan product offerings, either because their loan origination systems do not support
some consumer mortgage loans or because their loan system parameters have not been
appropriately adjusted for the requirements. This is especially true for the following:
 Adjustable rate mortgages, where systems are unable to accurately determine the impact of the highest possible rate on the APR or reflect the worst case scenario in the payment streams;  Reverse mortgages, especially where loan documentation reflects a balloon payment in an amount inconsistent with periodic payments (causing the balloon payment to increase as a result);  Single-pay notes that carry a variable rate feature because these products can result in a higher final payment than originally disclosed; and  Construction-to-permanent loans with periodic payments that differ in frequency (e.g., quarterly, monthly, or end-of-term) during each of the two phases. One answer to the challenges is to stop offering the products altogether. However, where Boards of Directors and strategic leadership teams have determined those products are viable for the bank and offer benefit to the communities they serve, such a shift seems counterintuitive. For banks that wish to continue offering these products, we recommend the following steps:  Closely review files for all specialized mortgage products, re-testing disclosures and calculations to confirm they are accurate (and they’re on the right forms);  Where disclosures are found to be incorrect, first determine whether the inaccuracies require reimbursement and handle them accordingly;  Document results of the review and provide targeted training to staff responsible for  If appropriate, add a step to the pre-closing process to double-check interest rate inputs for adjustable rate mortgages. This will ensure payment streams are accurate and avoid reimbursements later;  Lock down loan data entry fields to avoid changes in balloon payments;  Carefully review policies and procedures for loans that allow skipped payments. These are especially thorny because skipped payments increase the final payment amount or Experis Finance is not a certified public accounting firm. 2011 ManpowerGroup. All rights reserved. negatively affect the term (making it longer). Consider performing historical payment analysis to support disclosure practices, such as presuming two skipped payments during the term of the loan and preparing disclosures accordingly. construction-to-permanent financing, disclose only the end-financing payment stream on the TIL summary table and include a statement that interest must be paid during the construction phase. The statement should include the timing of those payments and the balance on which they are calculated (i.e., 50 percent drawn, actual balance drawn, etc.).
Whatever your strategy, taking appropriate steps to meet compliance challenges proactively will help
identify process weaknesses and improve alignment between management’s strategic objectives
and the bank’s compliance program.
UDAP Rules for Mortgage Loan Originations Take Effect
The Federal Reserve Board’s latest amendments to Regulation Z, which implements the Truth in
Lending Act and Home Ownership and Equity Protection Act, prohibit certain payments to loan
originators (i.e., yield spread premiums). In an effort to protect consumers in the mortgage market
from unfair or abusive lending practices, the Board is requiring that the connection between
mortgage loan originator compensation and loan pricing be severed. The final rule prohibits
payments to loan originators based on the terms or conditions of the transaction other than the
amount of credit extended. The final rule further prohibits any person other than the consumer from
paying compensation to a loan originator in a transaction where the consumer pays the loan
originator directly.
Mortgage loan originators who are bank employees typically are compensated on a basis other than
loan pricing. Banks should confirm their compensation practices comply. However, another facet of
the amendments will have a broader impact. The Board also finalized a rule that prohibits loan
originators from steering consumers to consummate a loan based on the fact that the loan originator
will receive greater compensation for such a loan when that loan is not in the consumer’s best
interest. For banks, this means taking extra care in underwriting credit requests and documenting
borrowers’ ability to repay. Loan approval practices should be carefully reviewed to ensure credit
standards are established, clearly communicated, and consistently applied.
The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a
loan application on or after April 1, 2011.
Compliance Function Overburdened with Regulatory Changes
A new survey (available with a subscription to Compliance Week) from Thomson Reuters has found
compliance departments at financial firms are struggling to keep up with new regulatory demands.
While that news will not surprise anyone who is responsible for compliance, the depth and extent of
the challenges are forcing the hands of even the most effective compliance managers to find better,
more efficient ways to comply with the wave of regulatory changes.
More than a quarter of those surveyed spend more than one day every week tracking and analyzing
regulatory developments. Another 15 percent said they spend even more time ensuring the Board is
informed of changes affecting their institutions.
What that means for many banks – particularly smaller and intermediate-sized institutions – is the
compliance officer must have aptitudes for research, analysis, project management and
communication in addition to the skills required for managing the compliance program, keeping
policies and procedures updated, training employees, and managing the risks associated with
And while financial organization compliance departments press for more (or better) resources to help
cope with the unprecedented changes, they understand the significant cost of compliance pales in
Experis Finance is not a certified public accounting firm. 2011 ManpowerGroup. All rights reserved. comparison to the cost of non-compliance. A recent study by Tripwire and the Ponemon Institute shows the cost of non-compliance in financial organizations can be 25 percent higher than the cost of compliance. One strategy financial institutions are finding effective is making a shift in how they view the compliance function. Rather than viewing compliance as a necessary evil, banks managing compliance most effectively have taken these steps: 1. Begin with the Board: Establish a compliance program that reflects the institution’s strategic objectives, considering not only the current state of products, services and management but also initiatives the Board sees in the future of the institution. 2. Focus on risk: Perform a compliance risk assessment that informs and drives compliance management change, including shared responsibility and accountability among business lines and resources, which can maximize the time spent on compliance related activities. 3. Minimize surprises: Connect with peers and monitor industry resources and regulatory agencies to stay ahead of regulatory changes. 4. Be proactive: Build a forward-looking compliance management system to assess the impact of regulatory changes before they take effect so appropriate steps can be taken and adjustments to the compliance program can be made. Forming a Compliance Committee can be invaluable in the current regulatory environment. 5. Leverage existing processes: Internal audit, operational business lines, senior management and sales can help to support the compliance management system and assess the impact of regulatory change. 6. Communicate effectively: The compliance management system should be an evolutionary process, not a one-time task. Open lines of communication between the Board, the compliance function and business lines should continually help to shape the CMS, and adjustments – weighed and executed carefully – should be assessed continually for effectiveness.
The bottom line: Financial organizations that have adopted a view of compliance as a process rather
than a task achieve better control over change. A solid compliance management system will
facilitate that control and help those who manage compliance programs deal with the most
extraordinary regulatory environment.
If you have specific questions regarding the regulatory content and commentary of this message, please
visit and click on Contact Us.

About Experis Finance

At Experis Finance, we’ve built a reputation for results-driven, innovative workforce solutions that help
companies create competitive advantage. From basic to complex, we custom tailor our services to fit our
clients’ needs – from interim and permanent professional talent resourcing to complete project solutions
in the areas of risk advisory, tax and finance & accounting. Our professionals provide specialized industry
and technical experience and expertise to our clients, enabling them to accelerate their business
performance. We serve clients, including Fortune 500 and Global 1000 companies, from offices
worldwide leveraging the workforce capabilities of the ManpowerGroup.
Experis Finance is not a certified public accounting firm. 2011 ManpowerGroup. All rights reserved.


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