When it comes to regulatory compliance issues in the financial services industry, there are considerable efficiencies to be brought about through technology — and a considerable way to go, industry-wide, on adopting such technology, notes John Vong.
“I talked to some of the major consulting firms, and they say that a processing robot (costing) about $10,000 to $20,000 that can do up to 80 percent of what a human loan processor can do. So it’s kind of mind-boggling that we’re still not moving to, or even considering, that type of technology,” Vong said. “But that’s the industry.”
Vong hopes to offer at least part of the solution. He’s co-founder and executive chairman of Silicon Valley-based ComplianceEase, a company offering software that analyzes, audits and monitors compliance with federal, state and local rules and regulations. Everything from ID verification to anti-predatory law regs to Qualified Mortgage (QM) eligibility — across multiple jurisdictions. Vong spoke with Mortgage Media’s Dave Matthews at the MBA’s Technology Solutions Conference & Expo 2019 in late March.
According to Vong, month in and month out, his company’s system sees a 10 to 15 percent error rate in the way originators calculate APR. And nearly four years after TRID took effect, there are substantial error rates. This is forcing investors and aggregators to spend a lot of time and labor checking out loan estimate (LE) and closing disclosure (CD) documents before they purchase a loan, Vong said.
“Talk to due diligence firms. Talk to QC companies,” he said. “They often times have to recreate or dig through the entire file to find that change in circumstance so that they can really validate the changes.”
This, Vong and Matthews agreed, is a place where AI could come in handy if the data from documents were to be converted into a digital format. Of course, Vong noted, people have been talking about smart documents for a couple of decades now. He, in fact, remembers skepticism and foot-dragging on the industry’s part all the way back to when Fannie Mae and Freddie Mac introduced Loan Prospector and Desktop Underwriter — technology that has helped considerably with handling data. And AI has only improved and gotten more sophisticated over the years—though any new technology takes some time to work out all the details it needs to recognize and process.
At ComplianceEase, Vong said, “We, as a company, have evolved to the next generation of automated compliance: we now have the capability to not only to identify common compliance errors, but to automatically recommend how to resolve them. In this marketplace, where speed-to-closing is the number-one priority for many lenders, this can be a big advantage for lenders.” For common errors and defects this means those loans no longer have to go to the “hospital” to have an expert look it over.
The new tool, known as DecisionMonitor, incorporates the lender’s compliance policies, detects any defects and reduces the number of problems that have to be escalated to a lender’s compliance department. “Each institution is different, and we overlay (their) compliance policy into our system so they can go in and tell the user how to fix the errors on the spot, in real-time,” Vong said. The user can feed their own internal rules and regulations — and any exceptions —into the tool, he noted.
As an example: “DecisionMonitor can really monitor the flow and tell you that the fee you charge with this change circumstance, doesn’t make logical sense — and alert the user in real-time that they need to really take a look at the loan,” Vong said. An originator or processor can get the information and fix the problem before the loan proceeds too far down the pipeline.
“We’re monitoring compliance throughout a loan origination life cycle,” Vong said. “Improving pre-close quality control is less expensive than fixing problems post-close and it prevents loans from being kicked out of pools and placed in the scratch and dent category.”
Other issues that arose in the conversation:
- Data privacy is an issue to watch, Vong said. He noted much of the industry in the U.S. tends to follow Europe’s lead, where the General Data Protection Regulation (GDPR) aims to give EU citizens control over their personal data. Watch data-privacy legislation as it begins to arise in the States, Vong said. “I would say that the legislation may be similar or even beyond what the GDPR is requiring.” And it’s just a matter of time, he believes, before we see such legislation standardized on the federal level as opposed to piecemeal, state by state. This would be easier from a compliance perspective and better for the industry, he noted. Regardless, vendors and lenders need to be following the issue and working with their tech partners to see where they stand and finally gave a plan, especially in jurisdictions like New York and California.
- Blockchain is potentially an excellent tool given the number of parties involved in the loan-origination life cycle, Vong noted. “And if we all subscribe to the same ledger, both in the process and also the contract, and everyone participates, it would really cut down the cost associated with the originations. Also, we see verification activities repeated during due diligence,” he said. Blockchain can satisfy everyone’s needs at every step — origination, secondary aggregation, regulatory examination, and investor delivery.