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How Regulations are Driving Opportunity in the Marketplace

By John Guzzo

There continues to be a rapid shift in the marketplace to meet regulatory compliance policies. Many industry participants are seeking economies of scale, critical mass, and additional product offerings to enhance their competitive advantage. Some of the main areas of focus include improvements in quality control in the appraisal area, comprehensive automated marketing solutions, and responding to regulations in the foreclosure market.

Quality Control (QC) in the Appraisal Area

There are several key trends and new regulations driving growth in the QC market. The ongoing shortage of experienced loan appraisers nationwide combined with a more stringent regulatory environment within the banking and loan-originating markets has led to a rapid increase in the demand for companies to provide an integrated “one-stop-shop” suite of independent residential and commercial appraisal services.

Meanwhile, the average age of a real estate appraiser is estimated to be between 52 and 55 due to a lack of younger appraisers entering the industry. This is primarily attributable to delayed retirements, fewer new people entering the appraisal profession, economic factors, government regulation, and the greater use of data analysis technologies.

New funding sources and the expansion of product menus have driven volume growth in lending. However, many small and mid-sized lenders are expanding into additional geographies and products/services without proper risk assessment. Regulatory compliance requirements are having an impact as well. One example is Consumer Financial Protection Bureau (CFPB) mandates for loan originators to maintain comprehensive QC programs, both pre-funding and post-closing, to detect and correct underwriting violations. Federal, state, and local rules and penalties governing loan origination and servicing continue to grow. The charge of predatory lending in lender’s sub-prime originations has increased compliance risk.

Also worth noting, the new administration recently issued an executive order that instructs agencies throughout the executive branch to review existing regulations on financial institutions and report back with suggested changes within 120 days. There is a particular emphasis on reviewing Dodd-Frank, the Volcker Rule, and the CFPB. The U.S. finance, insurance, and real estate (FIRE) sector represented about one-fifth of GDP in 2016, so any changes being considered will be watched closely.

Looking further at existing legislation, the impact from Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) is coming into focus. This renewed scrutiny on independence to the lending organization (i.e. ordering, reviewing, and accepting of appraisals) places additional responsibility on the lenders to ensure the appraisal supports the final appraised value. Lenders must now implement an effective appraisal and evaluation program. Consequently, in order to ensure independence, more lenders are using Appraisal Management Companies (AMC) for the appraisal process.

At the same time, there has been a boom in outsourcing. The mortgage industry is outsourcing its non-core QC functions to drive efficiency and reduce costs. This entails engaging firms with nationwide coverage and well-established internal quality controls to outsource their internal non-core QC function. As a number of origination processes have become automated, the quality of data input into systems is of paramount importance.

What are some of the benefits of QC and review appraisal services? Some of the more prominent examples include enhanced risk-mitigation; quicker turn-around times; higher quality by using QC-focused firms; service in all US states rather than having to find a local provider in every market; placing appraisal orders on customer’s behalf; tracking orders from beginning to end; and frequent updates on order status and timelines.

Sales of Comprehensive Automated Marketing Solutions

Given the heightened state of regulatory compliance in the banking markets, sales of marketing solutions are increasingly being driven by banks and lenders seeking enterprise-wide compliant solutions where marketing communications can be reviewed and approved before distribution. An integrated CRM and marketing automation solution also frees loan officers from the repetitive, manual, costly, and time-consuming tasks of sales and marketing, allowing them to focus on origination. “One-on-One” solutions, as opposed to “enterprise” solutions,” are often manual, time-consuming processes, lack stringent compliance oversight across the platform and processes, and take the team away from its core competencies, which reduces revenue.

“All-in-One” enterprise-wide solutions enable vertical integration and robust compliance controls. Solutions that are built on single code and multi-tenancy principles drive platform scalability, modular flexibility, and configurability of the product based on customer needs.

There are many different areas of compliance risk, which necessitates a need for businesses that provide comprehensive offerings. Content risk occurs from ever-changing jurisdictional rulebooks that are not synchronized into content messaging to successfully and dynamically generate penalty-free business development initiatives. To combat this issue, corporate compliance should be fully incorporated into all approval workflows. Moreover, there needs to be content review for triggering terms and other non-compliant issues. Highly standardized content with designated areas of personalization can reduce compliance risks.

With privacy risk, the security of customer information can be compromised. One possible solution involves Service Organization Control (SOC) 2 certified solutions, ensuring high level internal controls over security, availability, processing integrity, and confidentiality of all data and systems. There should also be a complete audit history of all customer interactions, in addition to privacy controls for do-not-contact lists.

Licensing risk occurs when loan officers misrepresent their qualifications and roles within the organization and the industry. Internal role-based security that prevents loan officers from launching campaigns outside their jurisdiction has the potential to mitigate this problem. An automated approval process for loan officer-generated content can also be helpful.

There are numerous benefits of a CRM and integrated marketing automation platform from lead to post-closing. Obviously, it helps to nurture leads and develop better relationships with customers before they talk to the sales team. Customers are more likely to be informed and inclined to make a bigger purchase, all at a lower cost for the bank or lender.

Leads are prioritized by assigning scores based on their recorded activities, then gauging their level of interest and intent to buy. As a result, the sales process is shortened by automatically sending leads the most relevant information at the best possible time. Previous leads that have gone inactive are revitalized by automatically making contact through retargeting email campaigns. Time is saved by only sending sales-ready leads to the sales team, allowing effort to be more effectively allocated between the teams. Lastly, there is the ability to analyze results in a thorough manner, identifying reasons for success and awarding credit where it is due.

Regulations in the Foreclosure Market

The mortgage sector generally trends on a 10-year cycle. Consistent with past cycles, the consumer lending market tends to enjoy long periods of growth between recessions. Consumer lending is back to an all-time high since the 2009-2011 recession.

The average time to foreclose is trending down as per national foreclosure trends. Most foreclosures being completed now are relatively recent defaults that are more efficiently progressing through the foreclosure pipeline. The decrease in the average foreclosure timeline indicates that banks have worked through the bulk of the legacy foreclosure backlog.

However, rising interest rates exert pressure on home prices, which has previously led to increases in delinquencies and foreclosures. Since the 1970s, household income has always grown faster than home prices except during the housing recession and right now.

Foreclosures may also eventually rise due to the volume of FHA loans and future changes to regulatory programs. As an example, the Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) were designed to help those borrowers with high LTVs from defaulting on their mortgage. Without a replacement to these programs, the latter of which is currently set to expire on September 30, 2017, millions of borrowers may become at risk of default.

For borrowers who sought mortgage relief under HAMP in 2009, the re-default rate was nearly 53%. Overall, more than a third of people who have participated in the program over its lifetime have re-defaulted. Rising interest rates, which may lower housing prices, can lead to FHA borrowers becoming underwater with their loans. If home prices fall, these FHA loans may become at risk of default due to the high LTV of these mortgages.


With all of the factors discussed above, there are several significant drivers impacting the evolution of mortgage technology. This includes restoring consumer confidence, decreasing the volume of delinquent loans, stabilizing the debt markets, and adhering to new regulatory guidelines. Lenders, vendors, and servicers are continuing to embrace tactical acquisitions to shore up product lines, capture customers, increase market share, and ensure they are prepared for the next wave of mortgage originations.


John Guzzo is a managing director in the Financial Technology & Services Group at Berkery Noyes. He can be reached at John.Guzzo@BerkeryNoyes.com.


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