(3Cs)+(2Cs) = 5Cs
Tuesday, 08 June 2010 08:50
As mortgage professionals and consumers, most of us are well aware of the underwriting formula of the 3 Cs of Credit – character, capital and capacity.
More simply stated, the role of the Underwriter is to determine the Borrower(s) ability and willingness to repay, and the sufficiency of collateral presented to protect the interests of the Lender.
Yes, this authority to approve has been traditionally supported by policy, procedure, investor guidelines, insurability standards, mandated state, federal and regulatory guidelines, and company determined risk considerations.
But, what happens when state, federal and regulatory mandates collide with the interests of the lender and consumer to effectively transact?
For months (and months), as an industry we have re-tooled our systems, re-trained our personnel, re-educated the Borrower(s) and re-designed our workflows to address the perceived inconsistencies and failures in the “old” RESPA protections afforded the consumer.
Consider the dilemma currently in mortgage origination, arising when individual legislation and regulatory mandates now publicly add to the confusion. The Colorado Division of Real Estate approved a new rule (4CCR 7253: 5-1-2 Mortgage Loan Originator Disclosures) effective June 14, 2010. Section 5-3(a) of the rule requires that all mortgage loan originators create and implement a form that itemizes the disclosure of all third-party fees and costs:
“a. Due to the 2010 changes to the HUD Good Faith Estimate Disclosure form, the Director has determined this form no longer meets the requirements set forth in § 12-61-914(2)(b), C.R.S. As a result, the Director requires that all mortgage loan originators create and implement a form that itemizes the disclosure of all third-party fees and costs. The disclosure shall include mortgage loan originator and borrower signatures and dates in which the disclosure was completed and signed. A completed disclosure form shall be completed according to the following timelines…..”
To my knowledge, no actual final form or document was attached to evidence compliance with this requirement.
While I agree, the perception and reality of the new RESPA guidelines have, in my opinion, (in some cases) reduced the amount of detailed information the Borrower(s) can review. The new guidelines have also created timing and information issues, which may create barriers for some Borrowers to transact.
Call it déjà vu (or a senior moment!) - did we not just recently do away with this form of disclosure practice?
Perhaps it is time to amend the time honored underwriting formula. No longer are the 3 Cs enough to lead to a successful transaction approval. In some cases, failure to properly provide information and the subsequent acknowledgement are impacting the Borrower(s) ability to transact on a timely basis.
Maybe the new formula should be (3Cs) + (2Cs) = 5Cs, where the 2 additional Cs equal compliance and checklist – if it doesn’t comply or you missed the item on your checklist, the transaction is probably faulted.
Compliance underwriting has become a highly specialized component of the overall underwriting process. The key to successful approvals with limited risk of transaction failure or repurchase risk to the originating company, is to take the time to implement and train a compliance procedure and checklist methodology at the Company level prior to submission of the file for underwriting.
Primary to this task is to know the what, when and why of origination compliance; the creation of a compliance checklist specific to the Company origination activities. The best starting place for these tasks is a discussion with your legal/compliance counsel.
Additionally, once you have determined the required disclosures and compliance procedure, there are many checklist resources available to assist you in building and maintaining your checklist. Make sure to speak with your investor representative for an updated version of their compliance procedures and checklist.
Too often, we put off for tomorrow what should be done today. In the case of compliance, it is critical to contemplate this action from the very beginning of the transaction.
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