Risk profiling of mortgage license holders was one of the focuses of 2012 activity by the Multi-State Mortgage Committee (MMC) of the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.  The committee issued a report on Friday detailing its 2012 activities which also included participation in work leading up to the $25 billion National Mortgage Servicing Settlement.  

Committee Chairman Charlie Fields, Director of Non-Depository Entities at the North Carolina Office of the Commissioner of Banks said the MMC's Risk Profiling Group (RPG) has been working on a risk profiling tool designed to assess an institution's risk against its peer group based on an analysis of Mortgage Call Report (MCR) data.  A risk analysis of 281 companies holding licenses in more than 15 states resulted in an unexpected result.  Only 10 of the 281 companies had data integrity high enough to be considered acceptable for profiling purposes.  These data quality concerns warranted notice to those companies informing them that they needed to rectify their filings, as they were in violation of state laws implementing the federal SAFE Act. The MMC also sent a letter to each mortgage regulator informing them of the issue.  The majority of the companies immediately responded and ultimately filed amended call reports of improved quality.  The RPG also concluded that the metric scheme it developed to identify effective risk weights appears to be quite accurate. 

This tool will assist in the scheduling of mortgage companies identified as having an elevated level of lending risk.  Current plans are for the tool to be available to state regulators in 2013.

Fifteen Limited Scope Electronic Examinations were conducted during the year.  These focused on using compliance software to determine what degree of compliance violations exist within a loan portfolio.  Nine of the 15 examinations were completed; six were closed satisfactorily; one was closed satisfactorily pending compliance with violations of state law, one company elected to surrender its licenses and dissolve and a third was recommended for a full scope examination.  Resolution of the remaining six examinations are pending, delayed for multiple reasons but examiners concluded that many companies do not follow through with accurate data input after the loan is closed and that some data was inaccurate, . 

The examinations found that finance charges tended to be an area that had substantive inaccuracies.   The LSE routinely exposed mistakes in this area and refunds were quite substantial for many borrowers, ranging from several hundred dollars to several thousand, up to $6500.00 at one mortgage company.  Charging prohibited fees was another area that showed significant violations, resulting in one company refunding many borrowers on average over $500.00.  Other typical operational deficiencies and violations identified in this group of examinations were excessive credit reporting fees and the failure to itemize HUD 1 charges, re-disclose the APR, meet minimum records requirements, provide rate lock agreements or RESPA disclosures within the legal timeframe

Some of the LSE examinations have or will move to full scope examinations where it is anticipated examiners will depend on technology to assist them in determining the compliance posture of the companies they review.  The MMC feels strongly that the sampling techniques used in the past are insufficient to examine large loan portfolios and that through technological advancements a complete review of a lender's loan portfolio is the most effective way to ensure a strong and vibrant lending industry.

The report says that MMC devoted a considerable amount of time and resources to the mortgage loan servicing area including participation in the examinations and notifications that led to the National Mortgage Settlement.  Now several additional loan servicing companies have been examined by state regulators and found to have essentially the same degree of operational deficiencies as the large servicers involved in the national settlement.  These companies do not have the same financial size or scope of the larger servicers, and so any plan to correct their deficiencies will need to be substantively different.  Currently the MMC is leading negotiations that will attempt to incorporate most of the servicing standards included in the National settlement, while attempting to bring relief to as many borrowers as possible. 

Other activities of the MCC over the course of 2012 include:

• Continuing to refine the processes that enable many states to come together and complete examinations of the mortgage companies that bridge state borders.
• Assembling a working group to create a program to assist in the examination of residential mortgage loan originators' controls, policies, and procedures to comply with the Bank Secrecy Act and Anti-Money Laundering requirements that became effective in August 2012.
• Acting as the primary point of contact with the Consumer Financial Protection Bureau (CFPB) for state mortgage regulators. The MMC and the CFPB are coordinating the scheduling of examinations to eliminate excessive burdens on the entities under review.

Here is the full report.